Part 21

Members are those who borrow from the bank. They are generally responsible in all their property, not merely for their own borrowings, but for the debts of the society to the outside public. But in some cases only the property pledged to the society is responsible; in others they are bound, in case of need, to pay a sum proportionate to the amount of their own borrowing. There are no shares to be paid up except in two societies. These two resemble coöperative societies, for the shares are personal and nontransferable, are of unlimited number, varying with the number of members, and their value is claimable by a withdrawing member. The share seems to be demanded simply to provide a first working capital and the nucleus of a reserve. The amount of the share is frequently a certain percentage of the amount of the loan required. Some societies demand an entrance fee of a few cents, which goes to the reserve. This reserve will be dealt with below.

The societies in general, having no share capital, do not lend their own funds. The candidate for a loan asks that debentures may be issued against a mortgage of his property. This is then examined. If the security is approved the candidate executes a mortgage deed to the society, which thereupon issues debentures which are placed on the market and, being sold, provide the funds for the loan. In the old banks the debentures are simply handed to the borrower, who sells them for himself. In the new land banks either this is done or the bank sells them and pays the borrower the value if below par, or if they sell above par then the face value, the surplus going to the reserve; or they simply issue debentures on the market and pay the borrower the amount of the loan as settled. It will be seen, then, that the banks have no capital and no need for it.

The debentures are for the usual class, secured not by the particular mortgage on which they are issued, but by the whole mass of mortgages held by the bank and by all its proper forms of security, viz., the property of the members, the reserve or guaranty fund, and even the sinking funds. In some banks a debenture holder has the right (never needed, however) of requiring a court to assign a particular mortgage against his debenture as a specific security in case the bank should fail to pay him his interest or capital due. A debenture holder cannot demand payment of his debenture, except when it is drawn for payment. But the bank can call in any at six months' notice, besides withdrawing them by lot in the usual way. These debentures enjoy an excellent position, the 4 per cents selling usually at or above par. Since cheapness of loans is the sole object of the bank, it is customary to call in debentures selling at a premium and issue a fresh series at a lower rate.

Loans are usually applied for to the district committee which each bank has, with a statement of the property, the amount required, and all documents necessary to prove title and freedom from encumbrance. Properties may be valued by a special valuation, or a multiple of the net income as assessed to the land tax may be taken. In both cases, however, an inspection of the property is necessary unless under a special rule. Half to two-thirds of the estimated value is allowable as a loan. The interest paid by the borrower on the loans is that paid by the bank on the debentures, the bank being merely an intermediary between the borrower and the actual lending public. But where the bank pays the loan in cash it charges such interest as it thinks proper, in order to make up any loss should the debentures sell below par. Loans are repayable almost entirely by amortization, usually in about fifty-three years. Some short-term loans are granted, with corresponding debentures. The bank cannot demand repayment of a loan except in case of waste, deterioration, or the like. On the other hand, the borrower is at liberty to repay in whole or in part whenever he pleases, but must pay the entire interest for the half year in which he repays. The loan is repaid by an annuity consisting of the interest, sinking fund (usually beginning at one-half of 1 per cent), with a contribution to the reserve or guaranty fund, and another for the expenses of administration. The annuities have totaled 6 per cent, but they now average around 4 per cent or lower; e.g., interest being 3 per cent, sinking fund one-half of 1 per cent, guaranty fund one-fourth of 1 per cent, and expenses one-fourth of 1 per cent. Some of the banks also require a lump payment on the grant of the loan of 1 or 2 per cent, to be credited either to the working or to the guaranty fund. The working fund is formed by the contribution made for the expenses of management and any special sources.

Hungary is the only nation outside of Germany that has a true Landschaft of the original type. But modified forms exist in Russia, Austria, Switzerland, Denmark and Roumania, where they have been useful in supplying agriculture with cheap capital. There is no older principle in land credit than the Landschaften idea. It has been tested and proved by over one hundred and thirty years of success, and could undoubtedly be employed to advantage by water users' associations in the irrigated regions of the West and in other parts of the United States where landowners might unite to raise funds for drainage or other improvements for their common good. Some of the banks of Switzerland and the credit associations of Denmark, with the laws governing them, perhaps furnish the best models, as appears from the reports of the American ministers to those countries that have been forwarded to the Secretary of State.

The most noticeable fact revealed by the investigation of the European land-credit institution is the all-pervading presence of the state in every nation. Most of the older joint-stock corporations have a public character equal to that of the German Landschaften. Every one that dates back to 1850 or 1860 was directly organized by the state or brought into existence by a Government fiat or favoring legislation, subsidized in some way or other and granted special privileges. The supervision now exercised over them all is most stringent, going into the minutest details and varying from direct control to surveillance by state officials, usually by special laws that impose heavy penalties for malfeasance or even neglect of regulations. Continental Europe is accustomed to state intervention. Commercial credit was organized by means of central banks connected with the Government, and so this régime was naturally followed in organizing the land credit. For this reason the results obtained, at least in some instances, cannot be used by way of comparison to illustrate the possibilities of organization along the lines of private and independent endeavor.

But whatever may be the opinion entertained for the State intervention in the land-credit system of the Continent, there can be no doubt that the working principles and business methods of the European land-mortgage banks are the best ever devised, and that they will have to be introduced into the United States if it be hoped to make the farm mortgage a fluid and popular form of investment and direct a flow of capital in sufficient volume to agriculture to enable it to keep pace with the progress of the Nation. The main features of this system are the limitation of the interest rate that can be charged, the amortization of the debt, and wise and equitable regulations and restrictions relative to loans and the issuance of debentures which protect the farmer from extortion and thriftless borrowing, and at the same time bring safety and a feeling of confidence to the investing public. These features, with modifications and additions, appear in all European land banks, whether they be semipublic, as they are in France, Spain and Russia, or of a private character, as with some cases in Germany, or of the mixed type of Switzerland and Italy, but are best exemplified in the great Crédit Foncier of France--the largest and most successful land bank in the world.

But Germany has progressed very decidedly beyond the so-called Landschaften as exemplified by her great mortgage banks which, though of comparatively recent operation, largely exceed in business that of the Landschaften type, and it is here that we find many vital suggestions for our guidance. Germany has general laws under which these mortgage banks operate, but the rules of operation and supervision are of the strictest kind. The mortgage banks of Europe may be classified generally as public or semipublic, and as strictly private institutions. The first have just been described. The latter are all those which, whether they consist of lenders or only of borrowers, operate under general laws and have absolutely no privileges. The State, however, does not leave these companies entirely to their own devices. They are limited in the conduct of their business by strict rules and regulations, and are subject to the most scrutinous supervision. The best law of this kind is that enacted in Germany in 1899. It is the last word in legislation for private joint-stock mortgage banks, and with slight modifications could be easily adapted to the United States, as it was framed to overcome the troubles occasioned by the conflict of authority between the sovereign Provinces of which the Empire is composed. Remarkable as it may seem, these companies in Germany have outstripped the old established and specially privileged public banks. They now have $2,618,000,000 loaned out on mortgage, or over five times more than the Landschaften. The capital is $170,563,000, the smallest being $238,000 and the largest $14,000,000. The bonds in circulation amount to $2,548,009,000, with interest at 3-1/2 or 4 per cent per annum, while the average returns on mortgage loans are 4.22 to 4.33 per cent per annum. As 6 per cent and even 14 per cent dividends are yearly declared, the figures again furnish a favorable comparison with the Landschaften and Crédit Foncier. The provincial head, however, selects the president of one of these newer German banks, while the Imperial Government watches over them all. The supervision is carried out by royal commissioners and extends to the minutest detail. These inspecting officials have the right to verify the securities and cash on hand, and demand information regarding every separate transaction. They may also send a representative to general meetings of stockholders and to sittings of boards of directors and take all measures that may seem fit to enforce the proper conduct of business. They also approve the appointment of the auditor and assistant auditor, who are charged in each bank with the duty of seeing that debentures are issued only upon the conditions and within the limits legally prescribed.

It will be observed that the mortgage business in Germany, as carried on today, is an evolution. The same fact is evident in the changes that have taken place in the Crédit Foncier, the greatest mortgage bank in the world. The history of this great institution is as follows:

It was formed in 1852 under the law enacted that year for organizing land credit and improving agricultural credit facilities. It was immediately placed under Government control, given a subsidy, and granted a monopoly for twenty-five years. The monopoly was not renewed, but all its original special privileges remain, which perhaps accounts for its being the only land bank in France. Its relation with the State is very close, and many of its most important features were taken bodily from the Landschaften. Inasmuch as the institution has been the model for all Europe and is now being widely discussed in the American press, I will describe it at length.

The governor and two subgovernors of the Crédit Foncier are appointed for life by the President of the Republic. It is subject to the surveillance of the Treasury Department of the Government, and three of its directors must be high officers of the department. It may use the Government treasuries for the receipt of its dues and the deposit of its surplus funds and enjoys a reduction in stamp and registration duties.

Its debentures are registered or payable to bearer, and the claim of a third party to them cannot be made in court except in case of theft or loss. Trust and public funds may be invested in them. Its mortgages are exempt from the decennial registration and consequent charges required of other mortgages. It has a cheap and speedy method of "purging" the title of real estate in case of disputes. In the event of default the courts cannot grant the debtor any delay and payments due it upon loans cannot be garnished or attached. It is allowed summary proceedings for attaching mortgage property in case of violation of contracts. If dues are not paid or if the property deteriorates it may attach and sell the property simply upon notice and publication. During attachment proceedings it has a right to all returns from the estate. The sale may be by auction in a civil court or at a notary public's office, if the court permits, and no adverse claim to the proceeds of the sale can be allowed until its claims are fully satisfied.

The regulations under which the Crédit Foncier transacts its business are very strict. The mortgage loans must be first liens. The property must have a clear and unencumbered title and yield a certain and durable income. Loans and theaters, mines, and quarries are not accepted. The amount loaned on any property must not exceed half its value, or one-third the value for vine-yards, woods, orchards, and plantations. Factory buildings are estimated without regard to their value for particular purposes. A borrower cannot bind himself to pay a greater annuity than the total annual income of the property mortgaged, while on the other hand the society is not allowed to charge borrowers 0.6 per cent over the rate at which it obtains money on its debentures issued at the time of the loans. An excess of only 0.45 per cent is allowed on loans to municipalities. The outstanding loans and debentures issued must exactly correspond in amounts.

After paying a 5 per cent dividend the Crédit Foncier must set aside between 5 and 20 per cent of the balance of the profits each year for the obligatory reserve, and continue to do so as long as the same does not equal one-half of the capital stock. The investment of this reserve is left to the board of directors. The capital stock of the society must be always maintained at the ratio of one-twentieth or more of the debentures in circulation and is the primary guaranty of its obligations, especially the debentures. The capital at present is $40,000,000, divided into 400,000 shares of $100 each; but authority has been obtained to increase the same to $50,000,000, represented by 500,000 shares, which will be done before the debentures in circulation pass the legal limit. One-fourth of the capital must be invested in French rentes or other treasury bonds; one-fourth in office buildings of the society, or by loans to French colonies, or in securities deposited with the Bank of France as a guaranty for advances. Shares cannot be issued at a price below par. They are nonassessable. The surplus may be loaned on mortgages or to municipalities or may be used in other mortgage business allowed by the statutes; and for buying its own debentures, making advances to borrowers in arrears, or purchasing mortgaged property in foreclosure; and for acquiring commercial paper acceptable by the Bank of France or securities to be deposited with that bank.

The governor of the Crédit Foncier most be the owner of at least two hundred shares of stock of the society. He receives a salary of $8,000. The subgovernors must hold one hundred shares each. Their salaries are $4,000. They perform such functions as are delegated to them by the governor, and in order of their nomination fulfill his duties during his absence on account of illness or other causes. The governor appoints and dismisses all agents of the society and superintends the organization of the service in Paris and elsewhere. He countersigns the debentures and signs the share certificates and all other papers and documents and must strive to promote the interests of the society in every way. The governor is the head of the board of directors, which is composed of himself, the two subgovernors, the auditors, and twenty to twenty-three directors. This body possesses the administrative powers of the society and is beholden only to the laws and the general assembly of the stockholders for the proper exercise of the same. The three auditors are the guardians of the society. Their duties are to watch, investigate, and make reports. The only power they have is to call extraordinary general meetings of the shareholders.

The general assembly of the stockholders meets regularly once a year. It consists only of the two hundred largest stockholders, of whom forty make a quorum if they hold one-tenth of the stock of the society. Each member has one vote for every forty shares of stock held, but cannot cast more than five votes in his own name, nor more than ten in his own name or by proxy. He has, however, a right to one vote even though his shares be less than forty in number. The general assembly receives the report of the governor, and also of the auditors, if any. It elects the directors and auditors and decides on all resolutions or proposals for the increase of capital, the amendment of the by-laws and constitution, and generally on all matters not otherwise specifically provided for.

The only places outside of France where the Crédit Foncier can do business are Algiers and Tunis. Under a clause in its charter which allows it, with the sanction of the Government, to enter into projects for improving the soil, developing agriculture, and to extinguish existing debts on real estate, etc., the society has been authorized to finance drainage projects and to advance money on the paper of the Sous-Comptoir des Entrepreneurs, an incorporated association of builders. It may also receive deposits up to $20,000,000, one-fourth of which must be kept in the Government treasury and the balance invested in Government paper, treasury bonds, or high-class bankable commercial notes and securities. In connection with its banking house it has large deposit vaults.

The Crédit Foncier is permitted to take short-term mortgages and does a big business in that line. But the true purpose of its existence and the greatest part of its operations are the granting of long time loans. These are made on mortgages to individuals and without mortgage to municipalities and public establishments. The periods run from ten to seventy-five years. The annuities required to be paid for amortizing the loan for the average period used are so small as to appear insignificant. The success achieved by the Crédit Foncier in popularizing the amortization principle for real estate loans is the chief cause of its great renown. At present its interest rate for mortgage loans is 4.3 per cent per annum, for public establishments 4.1 per cent, and 3.85 per cent for municipalities. The total annuity, including both interest and amortization sum, for a twenty-five year mortgage loan is a little over 6.5 per cent. With this small annual payment the debt is gradually wiped out, and nothing is left to be paid at the end of the term. The longer the term the smaller the annuity, and vice versa. The loans now exceed $870,000,000. Here is an amortization table of the Crédit Foncier:

_Annuity of a capital of $100, interest at 4.3 per cent, payable semiannually._

Duration. Annuities. 5 years $22.440405 10 years 12.409111 15 years 9.115217 20 years 7.504843 25 years 6.566976 30 years 5.964436 35 years 5.552593 40 years 5.259040 45 years 5.043495 50 years 4.881753 55 years 4.758395 60 years 4.663140 65 years 4.588881 70 years 4.530558 75 years 4.484483

The Crédit Foncier is obliged to keep the interest and amortization payments in separate accounts, the latter going to create a sinking fund for the retirement of outstanding debentures. As stated above, the amounts of the loans and debentures must balance each other; consequently, as loans are paid up debentures must be paid off. Borrowers have the right to pay in advance, which they frequently exercise, so the proper adjustment of the balance is beyond the control of the society. It is for this reason that the debentures, although calculated to be redeemed synchronously with the loans they represent, have no fixed time for maturity and are recallable at option. In each issue a certain number are repayable by lots, with prizes for the lucky holders. A bond last year drew a prize of $40,000. The right to give prizes at the lottery drawings is one of the special privileges of the society. The debentures are of two kinds--those representing the mortgages are called "foncières" and those representing the loans to municipalities and public establishments are called "communales." They are issued in series. The smallest denomination is $20. They may be bought by installments and are the most popular form of investment in France, being held largely by farmers and poor people in the cities. The issue of 1912 for $100,000,000 at 3 per cent, payable within seventy years, was oversubscribed eighteen times. The total land mortgages and municipal indebtedness in France is figured at $2,800,000,000. Nearly one-third of this is represented by the loans of the society.

Such is the Crédit Foncier of France. The control exercised over it by the State through the appointment of its head officers, the simplified foreclosure proceedings, and the other judicial, administrative, and fiscal privileges accorded to it are common practices in continental Europe. As mentioned above, all the older banks are specially privileged, and consequently have a practical monopoly of the mortgage-bond business in some of the nations.

Now, gentlemen, I have gone into these details not to be slavishly copied, because I think we would make a very great mistake to load down our legislation with so much detail. It will be far better to allow the managers to work out a system of operation that will he suited to our conditions. In this way we will not be handicapped by red tape that is ill adapted to our situation. The same penal laws that are in force with respect to our national banks with any additions that the peculiarities of this business call for ought, it seems to me, to suffice.

My suggestion would be a comparatively simple organization with broad powers to the board of directors. In this way we will soon have an American system of Land Credit Banks superior to any in the world, even though we do start after all others have begun. Indeed, if we are wise, this is the very reason why we should surpass all others.

Now, if you will recall with me the points of change and progress made, you will find that the tendency is away from unlimited liability, as originally provided, and now toward a dependence upon capital and reserves solely for protection to the debenture holders.

In my judgment we should adopt the following as the basis of our Land Credit Bank:

_First_: We should confine the business to loans upon improved agricultural lands.

_Second_: We should make the institution strictly coöperative, but with a limited liability to the amount of the paid-up capital.