Columbia University Libraries Digital Collections: The Real Estate Record

Real estate record and builders' guide: v. 20, no. 506: November 24, 1877

Text version:

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,