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Real estate record and builders' guide: v. 17, no. 408: January 8, 1876

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Real Estate Record AND BUILDERS' GUIDE. Vol. XVn. NEW YOKE, SATUEDAY, JANUARY 8, 1876. No. 408. I^Wished Weekly by THE REAL ESTATE RECORD ASSOCIATION 0. W. SWEET...............Peesident and Tbeasdeeb PRESTON I. SWEET...........Seceetart. L. ISRAELS.........................Business Manages TERMS. OSTE TS^AR, iu advance....$10 00. Cc»nmunications should be addressed to Nos. 345 AND 34ff Beoadwat. THE CEISIS IN EEAL ESTATE. VI. We continue our analysis of the existing situa¬ tion in real estate, and exposition of its causes. BONDS AND MOBTGAGES. The credit system, as applied to real estate in¬ terests, is peculiar and intricate; almost wholly unknown or incomprehensible to the outside public. Bonds and mortgages, those familiar but mystical terms, are the only forms of credit known in the world of real estate transactions. A careful and thoughtful perusal of the printed blanks will famish some insight into their char acteristies; though their real effects may best be studied in times of panic through the decrees of courts and the proceedings at the Exchange Salesrooms. "Hundreds have executed and de¬ livered these instruments with only superficial knowledge of their contents and the faintest glimmering of their far-reaching and oppressive legal consequences. The delusion that usually obscures men's minds when thus involving themselves is that these obligations reprssent a debt more than amply secured by the pledge of the property mortgaged, forgetting that the security lies in the abstract question of values, and that the future weal or woe of the confiding mortgagor and bondsman de¬ pends upon the stability or increase of those values. Panics and the shrinkage of deprecia¬ tion suddenly convert these amply secured obli¬ gations into pressing personal debts, wholly ir¬ respective of the intrinsic or supposed value of the land pledged; the bond which accompanies the mortgage, and which is separate and distinct from it, binds the bondsman personally, by its conditions, to the extent of his whole estate, so long as the bond has a legal existence. The genesis of some of these instruments maybe easily traced. The original owners of land are usually corporations, estates, and indi¬ viduals of ample fortunes; and the tendency, es¬ pecially during the recurring panics, is for property to revert to such ownership by the pro¬ cess of foreclosure. In such strong hands it rests securely while the storms of disaster rage and the long shadows of depression fall athwart the financial landscape. With the first dawn of prosperity, the whole tribe of speculators is on the-alert to catch the flying profits. Some ■ of them have wealth and. ready money to back them, but the majority are cursed with moderate bank accounts. . The first move in the game of speculation is to induce the land-owner to accept in payment of his stipulated price the smallest possible amount of cash aud the largest possible amount of mortgage. In this way the complacent land-owner too often connives at the risks of speculation. The customary pro¬ portions are 30 per cent, cash and 70 per cent, mortgage, sometimes assuming the risky ratios of 10 per cent, cash and 90 per cent, mortgage. Cases have occurred where land has been sold wholly on mortgage. The easy terms thus af¬ forded for speculative ventures in real estate mean in reality the contraction of debt in its harshest and most concrete form—a debt, too, carrying interest, failure to pay v/hich involves the gravest penalties. With the aid of these paper devices, bonds and mortgages, the game of speculation is fostered and promoted. In times of rampant inflation these obligations are Hghily regarded, being construed to represent only a fraction of total value. The speculator concerns himself principally about the so- called equity of redemption, being the sur¬ plusage of value over the mortgage-sum. This is the real subject-matter of specu¬ lation. To augment, to expand, to enlarge, to magnify this mere remnant of value until its colossal proportions quite overtop the purchase- money mortgage, and render a so-called second and third mortgage not only easily attainable, but necessary to the proper expression of the lot value, is deemed the high function and pre¬ rogative of the professional operator. For this he toils and strives; in this his energies are speat, until credulity has exhausted its last dollar, or the land groans with the weight of mortgage laid upon it. At length overstimu- lated values obey a natural law, reaction sets in, undue tension demands relaxation, disaster looms its grim visage, public confidence in values is withdrawn and the finale is reached. Equity of redemption gradually dwindles, and at last is extinguished. The lot value runs a scrub race with the face of the purchase money mortgage; and being handicapped with taxes, assessments, interest . account, lawyers aud brokers' fees, it finally succumbs and the land falls an easy prey to the mortgagee. Persons not familiar with real estate finance can form no conception- of the aggravated em¬ barrassment resulting from its peculiar forms of obligation, given usually under the buoyancy of speculative hope, the settlement of them be¬ ing often enforced in times of depreciation, dis¬ aster a;nd panic. Unlike the insolvent merchant, or the failed speculator in stocke, cotton or prod¬ uce, whose difficulties culminate in a day and are adjusted on the following day, the victim of a collapsed real estate speculation is held in the iron vice of his personal bond, his creditor— proyerbiiallysremorseless—ready to pursue him to the ends of the earth with a.grotesque claim called a judgment for deficiency, even though the property pledged for the payment of the original debt has been confiscated and absorbed. We will not dwell on the details of a situation, at the present time, too real and tiue in the experience of many a man, who has awoke from his dreams and delusions to confront not only loss of fortune and property, but recorded judgments, the terror of which may haunt him all his days. The time must come when sellers of property and lenders of money on real estate will be compelled to accept mortgages without bonds and look for their security to the land value only. Instead of buyer beware, we need the maxim, seller or lender beware, to infuse a proper conservatism into our real estate values. Shrewd operators adopt the plan of letting men of straw—a coachman, a porter or a clerk—take the title to property purchased and give the nec¬ essary bonds and mortgages, and subsequently convey, subject to the mortgages, to the real owner. A purchaser of property already mort¬ gaged, by agreeing to assume the payment of the existtag mortgage, becomes thereby a co-obligor with the original bondsman, and, in law, liable to similar penalties. The purchasing of second mortgages assumes the proportions of a business to which many capitalists and some small investors addict themselves in"the halcyon days of speculation— a business, however, which is fraught with im¬ minent peril, and laden with risks altogether disproportioned to the profits likely to be real¬ ized therefrom. The second mortgage consti¬ tutes a dyke between the first mortgage and the biUowy surges of land values, and the holders of such securities incur a responsibility next to that of ownership. During panics and revulsions they have the choice of but two altemalives, either to become owners of the property mortgaged by foreclosure, or to strike colors and sink their investment in the mael¬ strom of disaster. The long periods over which mortgages gen¬ erally extend, covering terms of one, three, five, or ten years, render the question of resumption or non-resumption of specie payments a vitally interesting one to both mortgagors and mort¬ gagees. Unless special provision is made by Congress to cover such cases, the mortgagor runs the risk of having to pay in gold a loan contracted in depreciated paper money, and, vice versa, the mortgagee takes the chance of hav¬ ing to accept the repayment of his capital in a currency still more depreciated than the one in which the loan was made. In this view and connection, it will be seen that continued agita¬ tion and prolonged delay in settling this ques-