Estate   Record





AND BUILDERS' GUIDE.





YoL. -XX.





NEW YORK, SATURDAY, NOYEMBEE 24, 1877.





No.  506.





Published Weekly by

C^^ Seal ^Bhit Mttsxla %Bsatmixan.

TERMS.
ONE YBAR, in advance....$10.00.
Communications should be addressed to

■    C.  W.   SWEET,

Nos. 345 ANn 347 Broadway.





THE  CANONS  OF  MORTGAGE  INVEST¬
MENT.

At a time -when real estate interests are under¬
going the crucial test of a momentous and un-
paraUeled revulsion, -when mortgage loans are
being more than adversely criticised, -when their
integrity and reUabiUty as suitable investments
for trust fvmds are openly challenged and ques¬
tioned, amid occurrences, too, that seem to afford
an ample justification, it behooves us to inquire
into the true conception of the mortgage loan,
the proper basis upon which it shoiUd stand, and
the principles and I'ules which should govern the
selection of such investments.          ■

In the first place, we may separate aU mort¬
gages into two classes—the speculative and the
legitimate.

It would be easy to estabUsh rules and stan¬
dards for unwise and speculative investments of
funds in mortgages. This simply involves the in¬
curring pf risks, almost, or quite, tantamount to
actual ownership oi property, without any regard
to ultimate consequences. Such investments
may be acquired thoughtlessly, recklessly, or
with more or less of a fraudulent element in their
inception. When undertaken by principals, they
may have an eye to the securing of property at
a trifle less than its actual value, the acquisition
of title through ultimate foreclosure being r'eUed
upon as a condition precedent to the reaUzation
of a resultant profit in some future disposal of it.
When the principals are innocent parties to such
transactions, and are made to participate through
the negligence or corruption of agents, the profit
or benefit usually accrues to the agent, be he
counsel or broker, andgenerally takes the form
of excessive fees, bonuses or percentages, which,
under the action of strong- cupidity, are aUowed
to bUnd and warp the intelUgent judgment, and
foreclosures in these cases are almost certain to
entaU loss upon the principal. Speculative mort¬
gages, however, are not always fraudulent.
There is a class of lenders who cheerf uUy under¬
take risks of such investments, relying upon their
shrewdness and watchfulness to escape loss, and
possibly to attain a more than compensating bene¬
fit. Under the head of speculative mortgages
we may class all those which represent more than
sixty per cent, of a fair appraisement value, as
weU as mortgages upon leaseholdj and second
mprtgages upon fee. InaU these cases an ele¬
ment of risk. ejiters, which safe and cautious
lenders would be loath to assume. The riUes for
this class of lending are so patent and well under¬
stood by adepts, as hardly to call for any special
mention here. We purpose to concern ourselves
exclusively with what we caU the legitimate
mortgage loan.   We propose to treat of this^ in

^.jpfwij- geparate categorieg a§ wUl eBp.bl§. us.





fairly to exhaust  the  subject.   The  principles
which we conceive to be involved in the judi- j
cious lending of money upon mortgage wiU be
set forth seriatim, and'under the following heads: |

'Falualions.—The gist of wholesome and bene- .
ficial mortgage loans is necessarUy included with- i
in the subject of valuations. This is the initial j
point in aU matters relating to the lending of
money on real estate. If the valuation is erron¬
eous the loan is apt to be prejudiced. The mort¬
gage loan valuation is a weU recognized and de¬
fined calculation in the estimates of real estate.
It is, or should be, more akin to the tax valuation
than any other, although, under our present con¬
fused and arbitrary methods of valmng property
for taxation, the benefit is altogether lost of
any assistance that might be derived from the
assessors books. The mortgage loan valuation
and the tax -valuation have at least one import¬
ant element in common; they contemplate the
■value of property remote from contingencies of
speculation, inflation or disaster, in a word, they
aim to define a standard of value, which, through
a series of years, would be least liable to fluctu-.
ation or change. Mortgages are usually given
for terms of years, extending from one to five or
ten. In like manner the tax valuations, although
assessed yearly, are intended to be, and practi¬
cally are, when established, the ruUng ones for
a term nearly as prolonged. The unanimity of
all leading appraisers for mortgage loans, in
determining this specific value of property, is a
complete demonstration of how clearly and
plainly the requirements, and how accurately de¬
fined the standards of such valuations must pre¬
sent themselves to their minds. With a starting
point of accurate, reUable and judicious valua¬
tion of property, the work of mortgage invest¬
ment becomes exceedingly simple and easy,
i-esolvingitselfintoamatter of taste or individ¬
ual predilection.

Fercentages.—The percentage of an accurately
defined valuation which it is safe and prudent to
lend, becomes a matter of election -with individ¬
ual lenders. Sixty per cent, is considered the
maximum standard of reUabUity, and, we might
gay, the exceptional standard. Fifty per cent.
Is the rule most commonly adopted by the most
Experienced lenders, and the mortgage which
conforms to this standard may be relied upon as
possessing the largest merit. In times of great
inflation timid lenders are apt to exact larger
margins and adopt a standard as low as thirty-
five or forty per cent. In a normal condition of
things the nUe may be said to range from forty-
five to fifty-five per cent. The apparently ex¬
cessive margins thus demanded for security on
mortgage loans may seem unaccountable and
inconsistent to those not versed in the business.
A sUght examination, however, wiU determine
the wisdom and propriety of this rule. In the
first place, the loan becomes a fixed and unalter¬
able contract for the term of years specified,
recoverable only through default of the borrower,
and the margin exacted is an indemnity for any
-Vicissitudes which may happen to the property or
the borrower during this length of time. The
lender is also subject to the neglect or disabiUty
of tti© borrower m ^b§. payment q| taxes, .au^





interest; though usuaUy the payment of these
becomes incumbent upon the borrower as a con¬
dition of the loan. Experience teaches that no
smair number of the owners of property are
dilatory and neglectful in this respect. If assured
of their continued solvency, the ultimate payment
of any arrears would reUeve the lender from Uabil-
ity. Neglect in the payment of interest is a serious
contingency which may sweU the claim of the
lender upon the property, and although such de¬
fault gives him a privilege to enforce his reserved
rights of foreclosure and sale of the property,
the accrued interesfc of the mortgage not- unfre-
quently amounts, in cases of foreclosure, to five,
ten or fifteen per cent, of the original loan. The
expenses of the foreclosure prooceedings enter
in as no smaU item in the aggregate of' Uens in
cases of defaulted mortgages. Safe mortgages
on which the interest is promptly paid, are free
whUe they continue so from these drawbacks, and
the .margin resei-ved by the lender seems ample, i
even to excess. But a mortgage of fifty per cent.
■writh the occurrence of the contingencies just enu¬
merated, and any depreciation of inarket value
yhich may ensue, together furnish a sound ra¬
tionale for the exaction of a margin of fifty per
cent, as necessary to constitute a good and accept¬
able mortgage loan.

I Mate of Interest.—Very Uttle may be M upon
this topic, inasmuch as the possible fli/ -ia.tions of
the interest rate are limited to one^..j two per
cent. The legal rate pf seven is deemed the max-
ipum, and the exceptional rate, which is now
ruling, of six per cent, is the lowest that has been
EstabUshed for any great number of loans, during
any considerable period, although.five.per cent.
PccasionaUy appears as the rate in some
sipecial transactions. In mortgage loans, as in
^very other class of investments, high interest
usuaUy impUes poor secm-ity, and low interest,
^ood secnrity. In aU cases the nUe governing is,
that the rate of interest shaU be a secondary mat¬
ter in the selection, of these investments, and this
-vforUd certainly seem to be no hard condition to
Enforce, where the variations of rate are so in-
tioiLsiderable. Under no circumstances would a
gain of one per cent, per annum; justify a trustee
i^ assuming the smaUestrisk in the investment of
J^ds committed to his charge.
: Ici-m of Years.—Less stUl need be said upon
the subject of the duration of ruortgage Ipans, a»
this consideration is apt to be personal and pecu¬
liar to the case in hand. Some institutions, such
ds Life Insurance companies and Savings Banks
4re restricted to lending their fimds for one year
only; although upon the expiration of such term
they have the right to extend it for another year,
4nd when caUed upon to do so ar$ apt to offer no
cibjections. Individuals, however, usually seek in-
-v[estments of longer, rather than shorter duration;
the established and preferable time being five
years. The object in view is to avoid the res-
ponsibUity of reinvestment, as weU as possible
loss of interest through the idleness of fimds
^ivhich are awaiting a satisfactory investment.
At the present time there are property owners
^hdjseek to reap the fuU advantage of the cheap¬
ness of money by taking loans for a term as lon§
L as-t§ft Qr fifteen years,