725-9M TEXAS AGRICULTURAL EXPERIMENT STATIIIN AGRICULTURAL AND MECHANICAL COLLEGE OF TEXAS W. B. BIZZELL, President I BULLETIN NO. 330 April, 1925 DIVISION OF FARM AND RANCH ECONOMICS FARM MORTGAGRE FINANCING IN TEXAS B. YOUNGBLOOD, DIRECTOR COLLEGE STATION, BRAZOS COUNTY, TEXAS I-IORTICULTURE STAFF ADMINISTRATION B. YOUNGBLOOD, M. S., Ph. D., Direcor A. B. CONNER, M. S., Vice-Director A. H; LEIDIGH, M. S,. Asst. Director. CHAS. A. FELKER, Chief Clerk A. S. WARE, Secretary M. P. HOLLEMAN, JR., Asst. Chief Clerk J. M. SCHAEDEL, Executive Assistant C. B. NEBLETTE, Technical Assistant VETERINARY SCIENCE *M. FRANCIS, D. V. M., Chief H. SCHMIDT, D. V. M., Acting for Chief V. J. BRAUNER, D. V. M., Veterinarian CHEMISTRY G. S. FRAPS, Ph. D., Chief of Division, State Chemist S. E. ASBURY, M. S., Asst. Chemist WALDO H. WALKER, Asst. Chemist J. K. BLUM, B. S., Asst. Chemist J. E. TEAGUE, B. S., Asst. Chemist. VELMA GRAHAM, Asst. Chemist HANVEY STANFORD, B. S., Asst. Chemist K. KITSUTA, M. S., Asst. Chemist. ADAH E. PROCTOR, B. S., Asst. Chemist N. J. VOLK, M. S., Asst. Chemist A. T. POTTS, M. S., M. S. C., Chief of Division; Citriculturist H. NESS, M. S., Berry Breeder RANGE ANIMAL I-IUSBANDRY J. M. JONES, A. M., Chief of Division; Sheep and Goats JAY L. LUSH, Ph. D., Animal Breeder (genetics) J. J. HUNT, Wool Grader ENTOMOLOGY F. L. THOMAS, Ph. D., Chief of Division State Entomologist **H. J. REINHARD,B. S., Entomologist E. HOBBS, B. S., Asst. Entomologist C. S. RUDE, B. S., Chief Foul Brood Inspector H. S. CAVITT, B. S., Apiary Inspector AGRONOMY E. B. REYNOLDS, M. S., Chief (As of March 1, A 1 92 5) , . H. LEIDIGH, M. S., Agronomist, Small Grain Research G. NJSTROMAN, Ph. D., Agronomist, Cotton Breeding C. H. MAHONEY, B. S., Asst. in Cotton Breeding R. H. STANSEL, B. S., Asst. in Crops PLANT PATHOLOGY AND PHYSIOLOGY J. J. TAUBENHAUS Ph. D., Chief FARM AND RANCH ECONOMICS L. P. GABBARD, M. S., Chief B. YOUNGBLOOD, M. S., Ph. D., Farm and Ranch Economist V. L. CORY, M. S., Grazing Research Botanist (Sonora) ***T. L. GASTON, JR., B. S., Assistant, Farm Records and Accounts ***A. S. BRIENT, B. S., Assistant, Ranch Records and Accounts ***B. P. HARRISON, B. S., Collaborator SOIL SURVEY ***W. T. CARTER, B. S., Chief H. W. HAWKER, Soil Surveyor E. H. TEMPLIN, B. S.,Soil Surveyor BOTANY H. NESS, M. S., Chief PUBLICATIONS A. D. JACKSON, Chief SWINE HUSBANDRY FRED HALE, B. S., Swine Husbandman DAIRY HUSBCQNIJRY ———-——, ie POULTRY HUSBANDRY R. M. SHERWOOD, M. S., Chief MAIN STATION FARM D. T. KILLOUGH, B. S., Superintendent STATE APICULTURAL RESEARCH LAB- ORATORY (San Antonio) H. B. PARKS, B. S., Apiculturist in Charge A. H. ALEX, B. S., Queen Breeder FEED CONTROL SERVICE F. D. FULLER, M. S., Chief S. D. PEARCE, Secretary J. H. ROGERS, Feed Inspector W. H. WOOD, Feed Inspector G. M. MORRIS, B. S., Feed Inspector A. B. CONNER, M. S., Agronomist, Grain W. C. GAINEY, B. S., Feed Inspector Sorghum Research C. D. WHITMAN, B. S., Feed Inspector SUBSTATIONS No. 1, Beeville, Bee County, R. A. HALL, B. S., Superintendent No. 2, Troup, Smith County W. S. HOT HKISS, Superintendent No. 3, Angleton, Brazoria County V. E. HAFNER, B. S., Superintendent No. 4, Beaumont, Jefferson County R. H. WYCHE, B. S., Superintendent No. 5, Temple, Bell County A. B. CRON, B. S., Superintendent No. 6, Denton, Denton, County P. B. DUNKLE, B. S., Superintendent No. 7, Spur, Dickens County R. E. DICKSON, B. S., Superintendent No. 8, Lubbock, Lubbock County R. E. KARPER, B. S., Superintendent No. 9, Balmorhea, Reeves County J. J. BAYLES, B. S., Superintendent No. l0, College Station, Brazos County (Feeding and Breeding Station) R. M. SHERWOOD, M. S., Animal Husband- man in Charge of Farm L. J. McCALL, Farm Superintendent No. 11, Nacogdoches, Nacogdoches County G. T. McNESS, Superintendent ***No. 12, Chillicothe, Hardeman County D. L. JONES, Superintendent No. 14, Sonora, Sutton-Edwards Counties E. M. PETERS, B. S., Superintendent D. H. BENNETT, D. V. M., Veterinarian V. L. COREY, M. S., Grazing Research Botanist ' ***O. G. BABCOCK, B. S., Collaborating Entomologist‘ O. L. CARPENTER, Shepherd No. 15, Weslaco-Mercedes, Hidalgo County W. H. FRIEND, B. S., Superintendent A. T. POTTS, M. S., M. S. C.,Citriculturist No. 16, Wichita Falls, Wichita County E. J. WILSON, B. S., Superintendent Members of Teaching Staff in the School of Agriculture Carrying Cooperative Projects S. W. BILSING, Ph. D., Professor of Entomology o. P. GROUT, M. s., Husbandry Professor of Dairy W. L. STANGEL, M. S., Professor Animal R. C. WHITE, M. A., Associate Professor of Husbandry (Swine) F. A. BUECHEL, Ph. D., Professor of Agri- cultural Economics G. W. ADRIANCE, M. S., Associate Profes- sor of Horticulture Rural Sociology H. V. GEIB, B. S., Assistant Professor of Agronomy E. O. POLLOCK, A. M., Assistant Professor of Agronomy W. E. GARNET, Ph. D., Professor of Rural V. P. LEE, Ph. D., Professor of Agricultural Sociology *Dean, School of Veterinary Medicine **On leave for one year "“‘*In cooperation with United States Depart Economics ment of Agriculture SYNOPSIS This Bulletin oontains analyses 0f information supplied by 177 financial institutions and insurance companies which make farm mortgage loans in Texas. , It was found that loans are made (1) directly to the farmer through local and district agents, (2) to farmers through local farm loan associa- tions, (3) to farm mortgage institutions who in turn loan to farmers. _ Certain institutions sell mortgages to the investing public, others sell bonds based on a collection of mortgages, and still others keep the amort- gages as investments. The 177 banks and companies investigated have a total of $252,448,122 in first mortgages on Texas farms and $1,727,382 in second mortgages. This probably represents one-half of all the farm mortgages in the state. = Farms mortgaged as security for these loans are in most cases valued at more than twice the amount of the loans. ' The average interest rates charged on first mortgages by these in- stitutions range from 5.5 per cent by the Federal Land Bank to 8.45 per cent by commercial banks. i Mortgage loans made by commercial banks run one to .five years, by farm mortgage, insurance, and trust companies five and ten years, and by Federal and joint stock land banks more than thirty years. ~ A very large part of the loans made by farm mortgage, insurance, and trust companies, as well as by the commercial banks, are paid olf in a lump sum at the end of the given period of the loan. All loans of Federal and joint stock land banks are paid on the amortization plan, or at the will of the borrower after five years. Fifteen per cent of the loans of farm mortgage companies are made on the amortization plan. . . . More than half the loans of farm mortgage and trust companies are used for the immediate purpose of purchasing land and making improve- ments. But in the case of insurance campanies and the Federal and joint stock land banks 53 to 78 per cent of the durrent loans are used to pay off old land mortgages. a a -.- It seems to be the opinion of a large number of these farm mortgage financing institutions that the Texas Homestead Exemption Law should either be abolished or modified, since it tends to increase the interest rates paid by farmers and often prevents borrowing when funds could be used to the economic advantage of the borrower. (3) CONTENTS Page Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Sources of information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6 Amount of mortgages held . . . . . . . . . . . . . . . . . .s . . . . . . . . . . . . . . . . . . . . . .. 7 Ratio of loans to value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Length of term of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Methods of repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Purpose of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 The Texas Homestead Exemption Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Detailed analysis of farm mortgage business by institutions . . . . . . . . . . . . 17 Farm mortgage companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Joint stock land banks . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . 30 The Federal Land Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Insurance companies . . . .A . . . . . .~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Trust companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Commercial banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 51 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 (4) Bulletin No. 330 A April, 192s FARM MORTGAGE FINANCING IN TEXAS . V. P. Lee INTRODUCTION Approximately one-half billion dollars is loaned to Texas farmers’ with land and improvements mortgaged as security, an amount equal to about 10 per cent of the total value of farm property in the state’. Interest on this amount, not to mention the payment of the principal, for one year at 6 per cent is thirty millions of dollars, which amounts to 6 per cent of the total value of a four-million-bale cotton crop at 25 cents a pound. Farm mortgage financing has come to be an enormous business, and the efficiency with which this business is handled should be of vital in- terest to all those interested in the Welfare of agriculture in the State as well as to the loaning institutions and the borrowing farmers. The problem of financing agriculture is involved in all farm production and marketing operations, and its full significance should be recognized. Re- cently, much more attention has been directed to marketing problems as being equally as important as farm production problems. Likewise, the methods and costs of farm financing are being analyzed as never before in the history of the country. ' Borrowing capital for productive purposes is a normal practice and is‘ followed in all business enterprises. The farmer who has the ability to use productively more capital than he owns should borrow, and cer- tain institutions have been developed to meet his needs. The ultimate source of funds loaned is the surplus scattered here and there over the country—a surplus which, instead of being needed and applied by the owner, is loaned at interest. l Banks, insurance, trust, and farm loan companies serve to collect these bits of surplus funds from the individuals who do not desire to use them directly in businesses of their own. By far the greater part of the banks’ loans are made with depositors’ funds, and the farm loan company is a connecting link between the farmer and some individual or organiza- tion having surplus funds——a supervisor of the transaction. The trust company, or trustee, is a collector of surplus funds, which are passed on to those who are in position to use them in production. The insurance company has funds at all times collected from a very wide distribution of policy holders, and, rather than permit these savings in the form of pre- miums to lie idle, the costs of running the company are reduced by passing them on to some one who is in position to pay for their use. It is very important to all concerned—the owner of the surplus funds, the farmer in need of capital, and the business agency which negotiates and supervises the transfer—that the business of placing capital where it is needed be done with maximum efficiency, and that methods be used 1U". S. D. A., Department Bulletin No. 1047, issued in 1921 estimated farm mortgage indebtedness in Texas at $442,600,000. 2Census, 1920, on value of farm property. 6; _ _ BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION which are most satisfactory to investors and borrowers. The financing in- stitution which is designed to serve the needs of agriculture should meet the requirements of the farmer's business._ If the productivity of farmers is such that they can pay off their mortgages within five years, loans should be made available for exactly that period of time. If a period of 30 years is required, loans should be made for that term. If the farmer's business is adapted to annual payments of the loan, it is most economical for the loan to be made in this manner, and it is the function of the financing institution to ‘find appropriate re-investments for the incoming payments. If the purpose for which the borrowing farmer wants money is not productive and there is no substantial prospect of the ability of the borrower to make it remunerative, the loan should not be made. ‘ An analysis of farm mortgage financing in Texas should be of direct and vital interest to the investors in farm mortgages, borrowing farmers, and all farm mortgage financing institutions. The data on the following pages were collected chiefly by correspondence with banks and insurance, trust, and farm mortgage companies making loans on Texas farm lands. An attempt is made here to describe the situation as of January 1, 1924. Not all the facts are at hand, but a very substantial sample from which it seems conclusions can safely be drawn has been made available by the courtesy of the corresponding business concerns. Summaries and averages for all institutions are presented together in the first part of this Bulletin, and these are followed by a more in- tensive analysis of the business of each of the different types of insti- tutions. SOURCES OF INFORMATION Letters were written to all state and national banks and all joint stock land banks in Texas. A complete list of insurance companies, in and out TABLE 1 ' _ Number of Letters Mailed to the Various Loaning Institutions, and Number Re- turned; Also Number Having Loans in Texas and Number Actually Filling out Schedules. Number of i . . Number Number These Having _N_“mber Irmntutwns Mailed Returned Loans in ‘ Fmmg 0m‘ l Texas l Schedule I Total . . . . . . . . . . . . . . . . . . . . 1902 597 190 1'77 Farm Mortgage Companies . . . 50 18 17 14 Joint Stock Land Banks . . . . 5 5 5 4 Federal Land Bank* . . . . . . . . 0 Insurance Companies . . . . . . . 274 143 39 31 Trust Companies . . . . . . . . . . 15 6 4 3 National Banks . . . . . . . . . . . 5T3 l 182 60 60 State Banks . . . . . . . . . . . . . . 985 243 65 65 *Annual Reports of the Federal Farm Loan Board were used for information on the loans of the Federal Land Bank. FARM MORTGAGE FINANCING IN TEXAS 7 of the state, having real estate loans in Texas was obtained. The farm mortgage companies doing business in Texas could not all be located, but there is good reason to believe that the fifty indicated in Table 1 include most of the companies. Of the 1902 companies of all kinds to whom letters were written, 597, or 31 per cent, answered. The great variation between the number an- swering and the number making farm mortgage loans in Texas is due to the fact that state and national banks in most cases do not make such loans and many of the insurance companies addressed had mortgages only on city real estate. Only four of the five joint stock land banks in the state answered in full, but additional information was obtained from the Annual Reports of the Federal Farm Loan Board. AMOUNT OF FIRST AND SECOND MORTGAGES OUTSTANDING The total, $254,175,504, indicated in Table 2 below, probably represents over one-half of all the farm mortgage loans in the State. Previous investi- gations‘ covering other sections of the country as well as Texas have shown that a very large percentage of farm mortgages, particularly second mortgages, is held by former owners of the land mortgaged, and other individual lenders. Hence, these figures should be accepted as highly rep- resentative of loans by all organized loaning agencies. TABLE 2 Total and Average Amount of Texas Farm Mortgages Outstanding January 1, 1924: By Reporting Institutions. I I Average ‘ . I I Amount Held Institutions = Flrst I second I by Each Total Mortgages 1 Mortgages Institution V . Reporting _ I’ Wfimfim WiiflI ___ I I I Total . . . . . . . . . . . . . . . . . . $254,175,504 I $252,448,122 I $1,727,382 I I I I I Farm Mortgage Companies I 57,577,408 56,683,769 I 893,639 $4,112,672 Joint Stock Land Banks*. 33,892,271 I 33,892,271 I 6,778,454 Federal Land Bank* . . . . . .I 90,093,950 I 90,093,950 I 90,093,950 I - . I Insurance Companies . . . . .! 53,112,568 53,112,568 ‘I 1,713,308 I Trust Companies . . . . . . . .I 17,387,951 17,387,951 I 5,795,984 I National Banks . . . . . . . . . 1,100,708 704,708 I 396,000 I 18,346 I I I I 15,358 I State Banks . . . . . . . . . . 1,010,648 I 572,905 1| 437,743 _ _*I'n_form_ati0n on the amount of loans of these banks is complete. That of all other institutions 1s incomplete, since replies were received from only 25 to 50 per cent of the letters written them. The striking features of Table 2 are: 1) the small proportion of sec- ond mortgages, the local banks holding far more than farm mortgage com- lSee Bulletin, North Carolina Department of Agriculture, May, 1923; Wisconsin Ag- ricultural Experiment Station Bulletin No. 247; U. S. D. A., Department Bulltein No. 1047; and University of Kansas Bulletin Vol. XVII, No. 18. 8 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION panics in proportion to their loans; 2) the small amount of loans by local or commercial banks; 3) the enormous amount of loans made by the Fed- eral Land Bank and the joint stock land banks, considering the fact that none of these were organized prior to 1917. It should be stated that there are doubtless some duplications in the reports of farm mortgage companies and insurance companies, since some of the mortgages held by the latter are secured from farm mortgage companies doing business in the State. This duplication, however, is not very great, since the insurance com- panies do much of their lending by direct dealing with the farmers. More- over, a few insurance companies designated certain farm mortgage com- panies through which their mortgages were secured‘. A large part of the farm mortgages held by the state and national banks is held as security for previously contracted short-time loans’. RATIO OF LOANS TO VALUE The question arises as to how much can properly be loaned on a piece of land, that is, the ratio of the loan to the value of the property mort- gaged. From the standpoint of the investor in farm mortgages it is im- portant that ample security be required, and on the other hand the farmer should not attempt to borrow all his capital. The history of the farm mortgage business in this country furnishes many good examples of too liberal loans and the resulting failure of the loan companies. Moreover, something should be accumulated by the farmer before an attempt is made to buy a farm. TABLE 3 Ratio of Loans to Value of Land and Buildings Ligilegergcn Per Cent Per Cent Institutions Total Value Loaned on Loaned on of Farm Land Buildings Farm Mortgage Companies . . . . . .. 50 Joint Stock Land Banks . . . . . . . .. 49.1 17.6 Federal Land Bank . . . . . . . . . . . .. 40 Insurance Companies . . . . . . . . . .. 44.5 38.3 Trust Companies . . . . . . . . . . . . . .. 50 National Banks . . . . . . . . . . . . . . .. 50 State Banks . . . . . . . . . . . . . . . . . . . 50 It seems to be the practice of the commercial banks, farm mortgage, and trust companies to place valuations upon farms as a whole, while in- surance companies, joint stock land banks, and the Federal Land Bank make appraisals of land and buildings separately. The Federal Land Bank lDiiplication was avoided by using the data only once in these cases. 2The Reoort of the Comptroller of the Currency for 1923 shows thatonly about 15 per cent of the mortgages held by national banks represent original loans on land. FARM MORTGAGE FINANCING IN TEXAS 9 and the joint stock land banks appraise land and improvements separately and are allowed by law to loan up to 50 per cent of the value of land and 20 per cent of the insured value of buildings and improvements. It will be observed that the Federal Land Bank has loaned an amount equal to 40 per cent of the total value of the farms mortgaged. Appraisals are made separately, but the annual reports give the ratio of loans to combined value. INTEREST RATES The interest rate set on the farm mortgage represents the annual price paid for the use of borrowed capital. It should truly reflect the ef- ficiency of the financing institution and the character of the security of- fered by the farmer. Few farmers seem to appreciate fully the importance of interest rates. A $1,000 loan at 10 per cent for 10 years actually amounts to $2,000 at the end of the period, without compounding interest, while the same loan at 5 per cent amounts to $500 less at the end of the same period. Interest rates, whether so regarded or not, are just as significant as the amount of the principal. Table 4 presents a summary of the average interest rates charged by the different financing institutions. TABLE 4 Weighted Average Interest Rates; Highest, Lowest, and Prevailing Interest Rates Highest Lowest Prevailing Institutions g] i’ g g g) g) w "c! "o s? 5%’ 1.3%’ 2%’ at’ s? b ° ° ° s .2 ° ° ° b ° ° ° I m2 35s l as <52 m2 $2 ' u Farm Mortgage Companies... 8.12 I 8.37 6.76 7 00 6.94 7.53 Joint Stock Land Banks .. . . . 6.00 i 6.00 6.00 Federal Land Bank . . . . . . . . . . 5 . 50 I 5.50 5 . 50 Insurance Companies . . . . . 7 . 42 I 6 . 07 6 . 47 Trust Companies . . . . . . . . . . . 9.00 | 6.00 | 7.00 National and State Banks.. . 9.22 9.15 I 8.03 8.25 8.45 8.99 The interest rate charged by the bank or mortgage company varies from time to time, or even at a given time. An attempt has, therefore, been made to determine the range of this variation—-the highest and lowest —as well as the prevailing rate. Each rate in the table above is weighted according to the amount of loans held by the company reporting such rate. To illustrate: if only two companies are reporting, and one with one mil- lion dollars in farm mortgages reports its highest interest rates on these loans to be 10 per cent and the other with two millions in mortgages _ 1Q BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION AVERAGE P/ZEVAILING INTEREST BATES PERCENT 0lZ345578 NATIONAL A170 Snare BANxgQAS Tao/s? 601-1491611158 7.00 Faun Moarcacs CoMPAn/ES 6.94 lnsuznncs Comnnnlss 6.47 Jonwr Sroex Lana Ban/A's 6.00 Fence/u. Lane Bar/A's 5.60 l Figure 1. The average prevailing interest rate was obtained for each of the six types of loaning institutions by averaging the prevailing rates reported by each bank or company. The rate reported by any individual bank or company was given weight according to the total amount of mortgages held. reports highest rates to be 9 per cent, the weighted average highest interest rate would be 9 1/3, not 9 1/2 per cent. The prevailing interest is the rate most commonly charged and is, therefore, the most significant here. It represents the average‘. It should be remembered that the Federal Land Bank and the joint stock land banks have strict minimum interest rates set by law and, further, that bonds issued by these institutions are exempt from taxation. The latter feature has given these institutions a distinct advantage over the other farm mortgage financing institutions. THE LENGTH OF TERM OF LOANS These loans represent capital investment, not operating expenses, and should be considered as such. A considerable period of time is required to pay the principal in addition to the yearly interest charges. In case the loan is made for a term of years which is too short the farmer is compelled either to renew his note or liquidate his business. Re- newals are expensive, uncertain, and troublesome. To be forced to sell the land to pay off the mortgage on account of inadequate time is ruinous to the individual farmer and lends to the instability of agriculture in general. The length of the loan has, therefore, a direct influence on the cost of financing and must be considered in addition to the interest rate. ‘Any commissions or bonus charges made should of course be added to this average. No very satisfactory information was obtained as to the amount of such charges. It was estimated by C. W. Thompson in Hearings before the Subcommittee of the Committee on Rural Credits, 64th Congress, that in 1915 commissions and bonuses on farm mortgage loans in Texas amounted to six-tenths of one per cent annually when distributed over the period of the loan. The indications are that this figure is too high now, since there has been a tendency to reduce interest rates on farm mortgages in the state during the past ten years. 11 FARM MORTGAGE FINANCING IN TEXAS" dauoh oH ow m 50am £52 @3250» 25¢ o5. was 6.3m» oH o» fi 50$ wfimcwa 2E2 woqionw; use ins?» 2 now mcuofl Sm wwaaono» .3383 ocO 63g“??- H.o 7m € MTNN 5o mg. Q4. 5g mviwm 88m 9° _ ma _ _ w...“ 9S in T3 N43 miwm Eiafiwz 93 93 =4: 93 92 93 ..$E.3Eoo 035R 3:. . S... $4; m... 2.2 $5 Nd $4 34 mwciafioo vu=95wn~ 2: . .......#=wm 12nd fiahowua o: _ . . . ixcsm 33A xuoaw flash m5 w o 93 fin _? q mm flu Na S... S... dBGQQEQO vwwwtaz 8.5m 3 .$>O am 3 0H v m w m m ~ m=¢s8s@=~ 959W E 5.8m. 939W MO mEaoB afloawwtfi 0&9 HOW Gofl-Sfiwmfim Q0 oamm. £03m ~AQ miQOJH wO omuunoouum m HQMABH 12 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION It will be observed that approximately 60 per cent of the farm mort- gages held by commercial banks run for only one year. This high percentage of short-time mortgages can be accounted for largely by the fact that in the majority of cases these mortgages on land are taken as additional se- curity for short-time loans previously contracted. Almost one-half of the total amount of loans made by farm mortgage companies is made for a term of ten years, while about one-third of the amount runs five years. Insurance companies concentrated ninety per cent of their loans in the five- and ten-year periods with a slightly higher percentage running for . five years. The Federal Farm Loan Act requires that the Federal Land Bank and joint stock land banks loan for a much longer period.‘ METHODS OF REPAYMENT OF LOANS Closely related to the question of the length of term of loans is that of the method of repayment. It Was indicated above that a farm mortgage should run for a period of time sufficiently long for the farmer to pay it by the operation of the farm. Likewise, methods of paying ofi‘ the loan should be adapted to the farmer’s income periods; that is, a part of the mortgage should be paid off at the end of each year. Otherwise, the farmer either fails to save for the time the mortgage falls due or, if he does save, he has a-rather diificult problem of finding a suitable invest- ment for his savings. The investment of his savings should be in the elimination of part of the principal of the loan, thereby reducing his an- nual interest bill. TABLE 6 Percentage of Total Loans by Each Method of Repayment Per Cent by Each Method of Repayment C Institutions u, E l *5 ‘53- i3 x -- ,_. r; -.- e 1 5 E 2 E? E s a 5E % i: a s. e a s Aw ‘ 4m mam‘ <1‘ O a Farm Mortgage Companies... . 38.3 23.2 18.1 15.5 4.9 100 Joint Stock Land Banks . . . . . .. 100.0 100 Federal Land Bank . . . . . . . . . . _ 100 . 0 100 l Insurance Companies . . . . . . . . . 45 . 7 26.2 i 19 . 3 6 .4 2 4 100 Trust Companies . . . . . . . . . . . . 92.0 8.0 100 National and State Banks . . . . .. 61.9 26.4 10.5 1.1 0.1 100 Table 6 indicates that a large percentage of the loans made by farm- mortgage, insurance, and trust companies, as well as by those of commer- cial banks, is required to be paid in a lump sum at the end of the period, while only about one-fourth of the loans call for regular annual payments. FARM MORTGAGE FINANCING IN TEXAS 13 Certain banks, insurance, and mortgage companies provide for partial pay- ment of the loan in any amount and at any interest payment date, while others give this privilege after the loan has run a definite period of time, say three or five years. The amortization plan of repayment of mortgage loans is growing in popularity both among the financing concerns and the borrowers. The Federal Farm Loan Act requires the Federal Land Bank and the joint stock o land banks to use this method. Briefly, it consists of the repayment of a fixed sum annually or semi-annually. This sum includes both the interest payment and part of the principal, and as time goes on a larger and larger portion of this fixed sum goes to the payment of the principal and, obviously, less and less is required for interest. PURPOSES OF FARM MORTGAGE LOANS The purp-ose for which a loan is. made should determine the type of the loan. If the capital is to be used to buy landor to make permanent im- provements it should be for a long period of time, while if it is to pay off short-time debts or to buy supplies for yearly operations it should be of short-time duration. An attempt was made in the letters sent out to the loaning companies to find out the purposes for which farmers obtain mortgage loans. The percentages in Table 7 are made up partly from esti- mates made by the companies and partly from definite information which was contained in their records. TABLE 7 Percentage of Loans for Various Purposes* Per Cent for Each Purpose by Institutions P m fa” A: m u: urposes a J “l a OJ am q o: a E3 D4 423g Qrq H Q ‘f; Q: is ‘B? 5 35 85 3% 2% mEo £511 lm-l 5o so Land Purchase . . . . . . . . . . . . . . .. 42.1 10.0 12.0 22.9 53.0 Pay Mortgages . . . . . . . . . . . . . . . . 33.5 78 0 68.0 53.3 33.0 Pay Short-Time Debts . . . . . . . . . . . 6.6 6 0 9.0 7.4 9.0 Improvements . . . . . . . . . . . . . . . . . . . 15 . 3 2 0 3 . 0 5 . 1 2 . 5 Supplies . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0 0 5.5 2.5 Other Purposes . . . . . . . . . . . . . . . . 2.1 4.0 8.0 5.8 0 I Total . . . . . . . . . . . . . . . . . . .. 100.0 100.0 100.0 100 0 100.0 ‘Commercial banks were not questioned on this point. Table 7 requires some explanation. The most noticeable feature of the figures in this table is the high percentages of loans indicated as being used to pay off old mortgages. The high proportion of loans for this pur- 14 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION pose is particularly evident in the case of the Federal and joint stock land banks and the insurance companies. These are chiefly land mortgages. As a matter of fact these old mortgages, which are being paid off by ob- taining new loans, were made originally chiefly for the purpose of buying land and making improvements. It was not possible to learn the exact pur- poses for which the old mortgages were made, but it is only reasonable to suppose that the portion of the loans used to purchase land had about the same relation to the portion used for improvements, supplies, and to pay ofi’ short-time indebtedness, as that indicated in the present loans of these institutions. Further, it is obvious that the old mortgages were made chiefly to buy land and to make improvements since the Texas homestead exemption law forbids a homestead of 200 acres, or less, to be mortgaged for any other purposes. And it is reasonable to assume that a very large percentage of these old mortgages were made by farmers who did not have more than 200 acres. In order to show the ultimate purposes for which the loans of these institutions were made the percentages represented in Table 7 as going to pay off old mortgages should be distributed among the other purposes; e. g., land purchase would include a large proportion of it and improve- ments would probably include the second largest portion and the remaining portion would be included under supplies, paying off short-time debts, and other purposes. A loan obtained to pay ofi’ an old mortgage indicates one of two things: 1) the old loan, being made for a term too short for the borrower to be able to pay it off at maturity, is due and must be settled; or, 2) the borrower is refunding his debt in order to obtain a lower interest rate or some other advantage. The amount of mortgage loans for the funding of short-time indebt- edness is higher than might be expected, while buildings and improve- ments come in for a proportionately smaller amount than would be ex- pected. The “Other Purposes” includes the purchase of fertilizer, live- stock, improvements, and the payment of taxes. Also, in the case of the Federal Land Bank, five per cent of the loan goes to purchase stock in the farm loan association. THE TEXAS HOMESTEAD EXEMPTION LAW There has been a great deal of discussion concerning the advisability of amending our homestead exemption law. It is considered by many as out- of-date and ill-adapted to present conditions. The law prevents the mort- gaging of a two-hundred-acre homestead, except for the purpose of paying the purchase price and for improvements. That is, if a Texas farmer has two hundred acres of land paid for he cannot mortgage it for any pur- pose except for improvements, and this is restricted to a mechanic’s lien. The law is the strictest homestead law in the United States, and many con- 15- FARM MORTGAGE‘ FINANCING IN TEXAS duwwnflw ws» no wwflomawonu poi ma? xiwn mEB... _ _ A 93 H.2?.w~__s.m@ __ 9m __s.$ i: was wQl f3 .. . fissmsafim M.fi@ _ __ msm _ .... s . .-.... .. ...... wvihfim fiwflnOmfiflz NM N NH . . . . . . . . . . . . . . . . . mQwCNQEOQ Jwfihmw wm w w s . . s s . . . . . . . . . . . MQMHQNQEOO QU-Hfisnimnma _ a .. .. .. .... .. .1755 wflmflfinawwwh 5 mm % K __ 2: 3 3s .. .. . . . . . . .. mxcwm YEA xoouw “than N. flu mm _ 2. _ 3 mm % pm om 3 .3 2s 3 . . . . .. . . . . .. . .. wwEmQEoO swswisz 5.5% Wm m m u Wm m M q was, w. Wm w m u s p s s , h s m é s s M w _ M e a M n s m m. m P N , msssfismsH W . _. wwmg wopmfi sssfisfiss sm scsssm E5 wnwoA mo aonfisz wwuswwm 3nd E wmwwnonH mo anzocfiw mofinfi Qmwpwfirfi wwwafiocw BwsH Ehflrm co Bud cofinfiwxfi wmwamwiofl 233E mo 33mm“ us“ no w mqmfi. miuiwcmrm wwmwuao E wnofiwosfi o» nawimn< mnof8> @530 mcomfizzuwcw mo “~30 3M 16 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION sider it, in its present form, a great handicap rather than a benefit to the farmers of the State. The opinions of the bankers, loan, and insurance companies on this question are summarized in Table 8. A These farm financing institutions were asked: 1) Does the homestead exemption law of ‘Texas tend to increase the general rate of interest on the farm mortgages in the state? 2) If it does increase the interest rate, how much? 3) Does the law reduce the number of mortgage loans made? 4) Should the law be abolished, or should it ‘be modified, or should it re- main as it is? It will be observed from the above table that the majority of the institutions refrained from answering this question. The failure of the insurance companies to answer questions on the homestead exemp- tion law was due in many cases to their unfamiliarity with conditions in the State as affected by the law, since the majority of these companies are not located in Texas. Of the national banks answering the question as to whether the law _ increases interest rates, more than half answered in the affirmative, while exactly one-half of the farm mortgage companies held this view. The majority of the other banks and companies said interest rates were not actually increased. It should be observed that over two-thirds of the state and national banks think the law should be abolished. Over two-thirds of the mort- gage companies which answered at all, think the law should either be abolished entirely or modified. A very considerable number of these banks and companies discussed this question at some length and in the great majority of these cases it was pointed out that the law in its present form is obsolete. These discus- sions may be summarized as follows: 1) the acreage exempted is too large, the law having been passed originally at a time when larger farms were more common; 2) a large equity which should be available as security for loans to improve the farm is tied up;‘ 3) since the law is impracticable there is a vast amount of evasion: ‘It was pointed out in this connection that the very farmers who have shown enough initiative and industry to acquire a farm are penalized by the law, being com- pelled in many cases to sell the land at a sacrifice. FARM MORTGAGE FINANCING IN TEXAS 17 DETAILED ANALYSIS OF FARM MORTGAGEFINANCING BY INSTITUTIONS ' It is hoped that a survey of the preceding pages of this Bulletin is sufficient to give a bird’s-eye view of the Texas farm mortgage business as a whole. The object here is to give a more detailed picture of the bus- iness done by each of the different types of institutions. Statements made in the brief summary which are not thoroughly clear may be clari- fied in the following more detailed discussions. FARM MORTGAGE COMPANIES The farm mortgage bankers have rendered a great service in the de- velopment of agriculture in this State. They represent the one type of in- stitution organized strictly by private initiative for the purpose of making loans on farm lands. A description of the business of these companies af- fords an opportunity to analyze: 1) their functions; 2) the location of the companies and the investors; 3) the amount of their loans; 4) the sys- tems of land appraisal; 5) the interest rates which farmers pay, and the rates paid to investors; 6) the purpose of the loans; 7) the length of term for which they run, and the method of repayment; 8) the work of district and local agents; 9) their foreclosures. Functions of the Farm Mortgage Company A proper understanding of the functions performed by the farm mort- gage company may be had by classifying them under three distinct heads: 1) to make loans on farm lands; 2) to sell mortgages, or bonds issued on the basis of a collection of mortgages; 3) to care for the investment while the mortgage is maturing. Making Loans: There are four distinct phases to the making of loans. First, connections have to be established with prospective borrowers, which is done chiefly by advertising in newspapers and magazines and by main- taining local agents who are well acquainted with the land and the bor- rowers in their locality. Secondly, the work of properly appraising the value of the farm to be mortgaged is a great task in itself and trained appraisers are required for the job. Thirdly, an investigation of the mortgagor’s title and the preparation of an abstract are necessary. Lastly, the loan is advanced to the borrower and the papers recorded in the files of the company. - Selling Mortgages: The second function as indicated above is that of finding investors for the mortgages. It is probably not generally realized that farm mortgage companies pass practically- all of their mortgages on to other business organizations and to individual investors. Here again is the task of establishing connections, which is likewise done by various advertising methods and by maintaining agents in investment centers. The reputation of the company for conservative appraisals and sound judgment is its chief asset in the matter of finding investors for its mortgages. There 18 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION remains then the process of actually negotiating the sale of the mortgage, or the bonds based on the mortgage. Caring for Investments: The third function of the mortgage company is that of caring for the investment while the mortgage is maturing. This function is, likewise, not generally understood. The service rendered here distinguishes the farm mortgage banker from the commission man and broker, who merely establish connections between buyer and seller or in- vestor and borrower. In the first place, the mortgage banker looks after the security from the day the loan is made to the day it is paid off. He must see that the taxes on the land mortgaged are paid each year. He must see that the property does not depreciate in value by slack methods of farming or by the depreciation of buildings and, if buildings and other im- provements are ‘included in the original appraisal, he must see that the insurance is kept up. Secondly, it is the work of the banker to collect and pass on to the investor the annual or semi-annual interest payments, and to collect and pass to the investor the amount of the loan at maturity. In the third place, because of the practice of most farm mortgage companies to guarantee the payment of interest and the loan itself in case of default of the borrower, these companies often advance funds to the borrower for payment of taxes, insurance, and interest and charge it to the farmer's ac- count‘. This procedure has two great advantages: 1) it makes it possible for the borrower to pull through a hard year without fear of a foreclosure and forced sale of his farm; 2) it adds greatly to the attractiveness of the farm mortgage as an investment. Location of Companies and Investors Of the fifty companies which are indicated as doing business in Texas, andto whom letters were sent, 39 are located in Texas, four in Oklahoma, three in Missouri, two in Illinois, and one each in Colorado and Louisiana. Of the fourteen which actually gave information, all, except one, are located in Texas,—three in San Antonio, three in Fort Worth, and one each'in Austin, El Paso, Wichita Falls, Amarillo, Sherman, Palestine, and Lan- caster. One of the 14 is located in Oklahoma City. It should, therefore, be remembered that most of the information presented here concerning farm mortgage companies comes from companies located in the State, whereas a considerable amount of the loans actually made in Texas are made by out-of-state companies. It has been pointed out above that farm mortgage companies supply only a small part of their loans from their own capital. Seven of the larger companies having a total of loans in force amounting to $49,835,808 have a total capital and surplus of $1,175,734, or 2.36 per cent of their loans. Moreover, according to the reports from eight companies having loans amounting to more than $45,000,000, only 0.54 of one per cent of this amount was actually held by them on January 1, 1924. Hence, practically all the capital is obtained from other sources by the mortgage companies.- ‘Robins, K. N., “The Farm Mortgage Handbook”, pp. 67-71; Putnam, Geo. E., “The Land Credit Problem", Bulletin of the University of Kansas, Vol. XVII, No. 18, p. 28. FARM MORTGAGE FINANCING IN TEXAS i 19" The mortgages are sold to individuals, insurance companies, and business organizations having surplus funds. Unfortunately, not much detailed information was obtained concerning these investors. It was found that one company passes practically all its mortgages on to a. British investment concern while others indicated that certain insurance companies of the North and East take the mortgages. The great bulk of funds for these loans to farmers comes from outside-of the State. A summary of the reports of nine of the larger companies shows that 91.8 per cent of the total amount of their mortgages is sold outside the State. Of the remaining 8.2 per cent, 2.3 per cent is sold in Texas but outside the counties in which the companies are located, and 5.9 per cent in their home counties. Amount of Loans The twelve companies which reported the amount of loans in force had $57,577,408 outstanding January 1, 1924, less than one million of which was secured by second mortgages. ‘This sum probably represents well above ten per cent of the total farm mortgage indebtedness of the State. Five of these companies had loans in force amounting to less than 2% millions of dollars each, three had 2% to 5 millions each, one had between 5 and 7% millions, one between 71/; and 10 millions, and two had over 10 millions of dollars outstanding. Since most of these loans run for five-and ten-year periods, it is obvious that the larger companies make loans amount- ing to well above a million dollars a year. Appraisals To the casual observer the determination of the value of a farm seems simple and, since the loan company only loans 50 to 60 per cent of its value, appraising it should be a small matter. But upon closer examination it is found: 1) that 50 to 60 per cent does not leave such a wide margin of security, since in case of a forced sale under foreclosure much less than the actual value must often be accepted; 2) that land values in a particular lo- cality may decline; 3) that, far from being a simple process, the accurate determination of the value of a piece of land is a very complex problem. ‘There are two main bases used by these companies for appraising the value of a farm: 1) the sale price and; 2) the value based on the produc- tivity of the land. Since in many cases land is not being sold at the time the,loan is made, the appraiser or inspector for the company must arrive at the sale price either by what the land sold for the last time it changed hands or by the price at which the land in the surrounding community is actually selling at the time. The former method is not accurate, since land values have probably changed, and the latter method is somewhat dif- ficult since land prices often vary considerably within the same commu- nity. The more scientific basis for land appraisal is its productivity, but pro- ductivity varies from year to year. The problem is further complicated by the fact that not only does land vary from year to year in the amount of 2Q BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION Irzspectofs Report ' ' 1 1¢1111y1111111111111.... 34;... , ............ .1111 o! --------------- "Juli ------------------ ~m4~1 iwwvwl "'- "H" 11 ..... HJtIM-Jlllk- -------------------------- ~mu1i~dh>~ --------------- ~vIg=gg_§,;_%-_{gg;§_1g1;;n;1_-;;_;h; -------- ~ 111 ..... .1. cup“ ............................. "Cm-my. Saw o! ------ .1011 ------------ --~r-w-ins--»3Z0-~-\¢m 1111111111111urono-wrflm.3011141411.“.ma.soul»ou-.ant...uz.soazun.i.zo,.u.a.mbuvuxmotn“ ...... I . T91 _ . . . . . . . . . . . . . . lhc neurvsb mjlmul slntion. A’ 11 sou.s=~ 1 1 n», Mum“, 1 e 1 N“. “u”. “...?‘..“2§';."Z'..1 111111» i: 1114 1.111.152.3111- 1 A I w 7 ‘111111 11111 111 1111111111111 7 "*1 _ I ‘l;‘¢£:1v_ “tagmg ‘ihj-ofgfi; ._ 1-p1“,,1___3zq___,\,11__11_,z90 ___________ H1111“! .... __lo..._111~1¢.11“ 320 acres don]: black 11.1111“. T111111 11111,. .._,1;n1111111111 11111111...1“ nnx§y a011, no gravel 11-‘1. 1.11.11, 1111111101111 _11§11111y..... 1 mo. m: a 500d ehy sub- ' .1: 1111/11 ......... ..A P11111111... .11 11/111111 W1 . 1011. 7 'un'»rr . .19.. 401111.... . .. . . _ . _ . . _ _ _ _ HAcIu .__...........\1‘ Tam: Hay . _ _ _ . _ .4 fnugh nr I;VUK(H_1“;‘ 1111111101111“. ..1 5111111, .. .. Paalurz _ _ _ _ _ _ _ , ..4 1.0mm Wt.‘ _. Timber _ . . . . . .. A Quiz... . ._____..__...1\L 121111411111 111111-11... $111,111.... . .11 .1111-1111v11. ,,,,, .. .1 1T "' y 1 " "*' '"‘ M 1111111111. . R1111111111;111-111._.1 1 21.11I11-.111111....______.._1{('111/11:11111,1., . 1 ‘ Q1111”, _______ _,1' 1‘ 101001‘ m.- ,,,,, ..4 " i prak”... -l 1 "ll-o": A_11 021011;: 1:011 Q sgblgll E1111 ‘=20 " 11131;; -290‘ _ so Ronda; 11111111111111 1111111111 1111 1111111111 1111111‘ . . 1111111 111 111111- 1111111 11111111~1'...2uh11a.21h Road é D1-inge=—- Island included 1n any draimge 11m1i11?.....]a . . . ‘If so is it subject 10 wo-mflwnl? -------------- 1104 5-. _1_1 12111111111111":1111111111111111111111111 .. . 3° 11111111 1111111111111 .. .. .. . .. .. .. g f, 1.1 1111111 11111111 ,,,,,,,,,,,,,,,, __ . mm, ...... _.Any 11111111111111 11111111 11111111111111? 2 g 1,,.,,,_ 1111111-1111111111-11-111111111-11-11111111111111.1111,"11,1|11m1¢111111g11111r111111111__.. .. “a: E 0verflmn~ $11110 mrougc 111111-1111, damage to 11111111, mvvasional or periodical . . . . _ . . . . . . . . . . . . . . . . _ . . . . . . . . - - E 3 pum- 1.1111111111111111’, _ _____________ __ ,1 , 1Q! , , , _ __F111|1-1,11111111111|y? ________ .. é ~- ll coal, uil or other operations are curried on, deucrihe and 111.1410 area of land so occupied . . 1 IO. punk‘, pfi“,_ 11-111 1111111111|?_____l_9_3_2___>_p,1L1Imhpw _ _ _ _ffiQlQQQj‘QZQJIQQHQQQII-‘BQOQ1108691 Z 3 111111111111111- 111111111 111.1 11111111111111. 111111 111111111111115111111111111111-2. ,,,, . i011. reszomencxniin 31.817.137.- . < m Crop Reporn- During the crop year 1925.. , . the land produced as lollowa: lGivo figurw fur last rrnp harvested) ,,,, ..40.......\--rw£\~m1-1111111111111101101110) . 1200. ..1111.,111111w111111-.1111111~.x ..6OQ.no...111s...75 111-11111. _ *1 111111111. -~ ~ *~ <. . _ . . _ . . . . _ .. '- __, “l9”... “ Dal: ~ , , _ _ _ _ _ _ , _ _ _ _. " " " S. . . . . . r . _ . . ..“$ . . . . . . . .. ,,,, .411 11-111111- 1111-1" £on£0l~ ton: ~~ 1.450.111»... "s 15.1111 - ...... ‘1 11.111 norghnm A1 lunan __ . ....11111._ ~ -- 1.100.110“. "s.1Q.ao..... ~101- ~ (‘11111111 ..... .1041. .1~=11~_~ “ " 110400.011...“ 8m 12541:. “ "-- “ Pasture worm 11111-1111 mm atock run- $ . . . . . . . . . . . . .. ‘" Other (Tops 11101111114111 value 11f a . .. . . .. ._ "1211111 1111111111- 1111111111111 1111111 1.1111111 9 L1 , 150. on .190 .... ..111-11-11.Cul(§:%t‘::\(11.125.... . ..11111111-11-s .36,250.no. LAND --fl~"m-fl»lil.»l=oat.@~ 5O 1-~'I*'-**""'5- 2,500.00 z g;';;;;;~_'sg;;=;1 ——————————— ~~~~~~~~~~~~ ---------- ~I"'="'°"~ - 1 ~ 1 31,150,111: o 110111111131 .. .. Haunts. . . .Q1. . . 1n-1:1cr1-$... F “acres . . . . . . . . . . .. Q‘ . . . . . . . . . . . hpernvrvfi. g . . ...111~r¢~. ... . (d1 . . . . . . . _ . . . . _.P(‘l‘&l‘l'(‘$ . . . . . . . .. .. ,1 . 5 “ml'°°'l“°**"ll"“l’“'*"£“5°"l"i'"1§Z§I;"Z“ 1.1111... 0m! wpurunely) [- Labor hounn, implement shad; 0:11.. .. .. $ __ _4§lg._99>._. 111111;“) p00,“ 1111111 1111111111111-111111111 11111111111111 111 111111111111111111111 11111111111-111111 111111 11~1111111111111111y 1111111-11111111111111 1111-111-1-11-1111111111; 12,000.00. 1111 i1 would 111M311, >1-1111~11,=11111111111111111111111111 111-1111111111111-1 . "41;;mww. . ..i11~1\"'r.\'r@*1r"1- 11. 4- mm" “ ‘The above security 1n 1.11011 located Sn one the belt timing sections in Tomi, 1| composed of good claes of black vnxay a011, vary prodwtlve, and in perfect state of cultivation and fairly well improved an to houses. Applicant is a Inn of good standing. '1'1111111111~11111111 1111111111111111111111-11. a/zemJ . rm TEXAS FAR! IDRTGAGE i INVEbTlENT COMPANY """" " Prm-M-n» 1 ' " 1 "1;.'...11;.;;,;;1;.;" "1515; 511111111111111111111111111111111011- _ Figure 2. Copy of an actual report made June 24, 1924, by an 1nspector o_f the Texas Farm Mortgage and Investment Company of _San Antomo, Texas. The names of the prospective borrower and the mspector were purposely omltted by the company. FARM MORTGAGE FINANCING IN TEXAS 21 commodities it will produce, but the prices of these products vary widely from time to time. Another point which must be considered by the ap- praiser is that the productivity of the land is different with different farmers in charge. Hence, the ability of the borrower as a farmer must be con- sidered. It should, therefore, be clear that the scientific appraisal of a farm requires many facts and a high degree of skill and judgment on the part of the appraiser. With the permission of one of the larger Texas companies a copy of an appraisor’s or inspector’s report made on June 24, 1924, for an actual transaction is presented in Figure 2. Observe the systematic arrange- ment of facts concerning the property: 1) the location, the surface, the state of cultivation, and the soils; 2) the improvements, coal and oil leases, the purchase price and the reputation of the applicant; 3) the crop report includ- ing the amount and value of each crop; 4) the actual appraisal, the above facts being used as a basis. Interest Rates Average Rates: Interest rates affect borrowers, investors, and mort- gage companies; therefore, the rates paid by the farmers, the rates received by the investors, and the margin received by the bankers will be discussed together. According to the reports of the farm mortgage companies they charge the borrowers an average prevailing interest rate of 6.94 per cent on first mortgages and 7.5 per cent on second mortgages. The average pre- vailing rates paid to investors on first and second mortgages combined is 6.2 per cent. The nominal rate to cover the costs of operation is, therefore, probably less than one per cent. Frequently certain commissions and bonuses are required when the loan is made and again in case of renewal of the note, and these charges should of course be added to the interest rate to obtain the full cost of the loan. The figures in Table 9 include only the straight interest rates as reported by the mortgage companies. Range of Rates on First Mortgagesz‘ It was indicated above that the average prevailing interest rate charged on first mortgages is 6.94 per cent, but since an average does not give all facts which may be of value, the range of interest rates will be shown. Each company was asked to give its highest, its lowest, and its prevailing rate on first mortgages. The average highest rate on first mortgages is 8.12 per cent”, and the highest rate charged on any loan is 10 per cent. The average lowest rate is 6.76 per cent, and the lowest rate charged on any loan is 6.5 per cent. Figure 3 shows the average of the highest, lowest, and prevailing rates on first mortgages reported by farm mortgage companies. The prevailing rate, however, is the one which is the most commonly charged and is of much more significance than is an exceptionally high or low rate charged on an occasional loan. Hence, a fuller analysis was made lSecond mortgages held by these companies are relatively insignificant, the total of such loans being only $803,516. The average rate on second mortgages, as indicated above, is 7.5 per cent, and the range of rates is from 7 to 10 per cent. zThis average was calculated by weighting each highest rate reported according to the total amount of all the loans of the company reporting, 22 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION AVEQAGE RATES PER. Cslvr O I Z 5 4- 5 6 7 8 IO Avzznsc Hlcussr Bars 8.1,: AVEQAQ; pQEvAIL/NG RATE 6. Avenues Lowzsr 241-5 60-76 Figure 3. Average highest, lowest, and prevailing interest rates of farm mortgage companies. Each company reported its highest, lowest, and prevailing rate. Averages were obtained by weighting the rate reported by each company according to the total mortgage loans of the company. of prevailing rates. Three of the larger companies reported 6.5 per cent as their most usual rate, two reported 7 per cent, one reported 7.5 per cent, five reported 8 per cent, and one reported 10 per cent. Table 9 shows the amount and the per cent of total loans made by companies reporting each of these prevailing rates on first mortgages. TABLE 9 Per Cent of Total Loa'ns by Farm Mortgage Com- panies Reporting Various Prevailing Rates on First Mortgages Total Amount l Per Cent of , . of Loans by l Loans by Prevalhng Companies Companies Interest Rates Reporting Reporting Each Each Rate Rate Total . . . . . . . . . $56,683,769 100.0 6% . . . . . . . . . . 28,445,169* 50.2 7 . . . . . . . . . . 15,350,000 27.1 7% . . . . . . . . . . 4,000,000 7.0 8 . . . . . . . . . . 8,788,600 15.5 10 . . . . . . . . . . 100,000 O . 2 ‘This does not mean that loans amounting to $28,445,169 were made at 61/; per cent, but it means that companies whose total loans of all kinds amounted to $28,445,169 reported that their prevailing rate is 6% per cent. It willbe observed that companies having only two-tenths of one per cent of the first mortgage loans reported indicated that the prevailing or most usual interest rate charged is 10 per cent, while companies having 50.2 per cent of the loans indicated a prevailing rate of 6.5 per cent. By weighting all the prevailing rates according to the amount of loans by com- panies reporting each rate the weighted average prevailing interest rate of 6.94 per cent was obtained. A close study of Table 9 should give a definite idea of the range of the prevailing interest rates of the farm FARM MORTGAGE FINANCING IN TEXAS 23 mortgage companies operating in Texas. The relative importance of each of the prevailing rates reported is graphically shown in Figure 4. pREvA/L/~¢ /mrsnesr QArss P5421 CENT OF Toraz. Amounr <> 6v»? 7'166*49 9n 1o QATE Figure 4. This chart shows the percentage of the total of all mortgages reported by farm mortgage companies which was reported by companies having prevailing rates of 6.5, 7.0, 7.5, 8.0, and 10.0 per cent. 24 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION Rates to Investors: In Table 10 the prevailing interest rates which are paid to the investors in these farm mortgages are analyzed in a sim- ilar manner. Companies having 73.5 per cent of all loans reported indicate that their mortgages most commonly pay investors 6 per cent interest. The weighted average prevailing, or most usual, rate is 6.2 per cent, and the range of prevailing rates reported by these companies is from 6 to 8 per cent. TABLE 10 Amount and Per Cent of Loans Made by Eight Com- panies Reporting Various Prevailing Rates Paid to Tn- vestors* Total Amount of Per Cent of Total Prevailing 01333311235 grzililpinligs Interest Rates Reporting Each Reporting Each Rate Rate Total . . . . . . . . . . . $43,951,808 I 100.0 6 . . . . . . . . . . . 32,285,808 73.5 61/2 . . . . . . . . . . . 4,050,000 9.2 6% . . . . . . . . . .. 3,500,000 8.0 7 . . . . . . . . . .. 4,100,000 i 9.3 8 . . . . . . . . . . . 16,000 | * * *Each company reported the prevailing rate which it paid to investors in its mortgages. Since the amount of mortgages sold to investors is in direct proportion to the amount of loans made to farmers each rate re- ported here is weighted according to the total amount of loans made by the company. **Very small fraction of one per cent. The relative importance of the various prevailing rates paid investors is graphically shown in Figure 5. It will be observed that a very large por- tion of these mortgages pay investors 6 per cent interest. Purpose of Loans Ten farm mortgage companies having a total of $49,551,808 in loans on Texas farms reported the purposes for which loans were used. Approx- i/mately 42 per cent of this amount was used directly by the farmers to purchase farms. The percentage of loans by farm mortgage companies going immediately for this purpose is considerably higher than that of any other types of institutions‘ making loans on farm land, except the trust companies? On the other hand, the percentages of loans by these com- panies for the payment of old mortgages“ held by borrowers is less than that of the other loaning agencies, except the trust companies. Thus, 78 per cent of the amount of the _loans by the Federal Land Bank, 68 per cent of the ‘See Table 7 above. 2ft should be remembered that only three trust companies reported, which is not an adequate sample. “Indirectly, of course, for the purchase of land, improvements, etc. See discussion of purposes for which old mortgages were originally made following Table 7. FARM MORTGAGE FINANCING IN TEXAS 25 DREVAIL/Nc /IYTER.EsT QATES Psz CENT or Term. Amovnr BA TE Figure 5. The per cent of the total loans of all reporting farm mortgage companies held by companies which reported the various prevailing rates t0 investors. joint stock land bank loans, and 53 per cent of the loans of the insurance companies went to pay ofl’ old mortgages, while only 331/; per cent of the amount of these farm mortgage companies’ loans went for this pur- pose. Over 15 per cent of the loans of these companies went for buildings and improvements, and the next highest percentage for these purposes is that of the insurance companies, which is slightly over five. Table 11 shows the amount and per cent of the total loans going for the various purposes. 26 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION TABLE 1 1 Amount and Per Cent of Total Loans Made by Reporting Farm Mortgage Companies for Various Purposes Purposes Amount Per Tgiglt: of Total . . . . . . . . . . . . . . . . . . . . . .. $49,551,808 100.0 Land Purchase . . . . . . . . . . . . .. $20,842,472 42. 1 To Pay Mortgages . . . . . . . . . . 16,591,599 33.5 To Pay Short-Time Debts . . . . . . 3,272,532 6.6 For Buildings and Improvements 7,554,705 15.3 To Buy Supplies . . . . . . . . . . . .. 215,500 0.4 Other Purposes . . . . . . . . . . . . . . 1,075,000 2 . 1 PER C EN T O IO 2O 6O 4O LAND Puzcunsss 42.! To pAY IVImLTGAGES - £655 BLots- Ann lmmzovsmfinrs I65 To Buy Swear Tum: Dears 6.6 To Buy $0001.15: .4 Cruse Pun posse ZJ Figure 6. Per cent of the total loans of all reporting farm mortgage com- panies made for the various purposes. . Over three millions of dollars, or upwards of 6 per cent of the total, were used for funding and paying off short-time debts, which the bor- rowers had contracted with merchants, commercial banks, and individuals. Slightly less than one-half of one per cent was used to buy supplies, such as feedstuffs and seed, and to pay family expenses. “Other Purposes” in- cludes the purchase of machinery and livestock and the payment of in- terest, insurance, and taxes. The Term and Repayment of Loans Length of Term: All of the 14 reporting companies indicated the per- centage of outstanding loans which was made for periods varying from one to twenty years. From these percentages and the amount of loans of each company a summary of the per cent and the amount for each term was calculated. It was found that $26,857,954, or 46.6 per cent of the total, was loaned for a term of ten years, and $18,686,809, or 32.4 per cent, FARM MORTGAGE FINANCING IN TEXAS 27 for five years, the two terms covering 79 per cent of all loans. _The next most important term is twenty years,.fol1owed closely by the seven-year term. Exactly 16 per cent of the total amount of all loans falls within these two periods. ‘ TABLE 12 Amount and Percentages of Total Loans by Reporting Farm Mortgage Companies Classified According to Length of Term* | Term of Loans Amount Loaned Per Cent of in Years for Each Term Total Loans 1 . . . . . . . . . . . . . . $ 3,200 0.01 2 . . . . . . . . . . . . . . 31,802 0.06 3 . . . . . . . . . . . . . . 1,237,873 2.2 4 . . . . . . . . . . . . . . 1,155,663 2.1 5 . . . . . . . . . . . . . . 18,686,809 32.4 7 . . . . . . . . . . . . . . 4,100,000 7.1 10 . . . . . . . . . . . . . . 26,857,954 46.6 15 . . . . . . . . . . . . . . 357,531 0.6 20 . . . . . . . . . . . . . . 5,146,576 8.9 l Total . . . . . . . . . . . . $57,577,408 100.00 *Weighted arithmetic average length of loan is 8.57 years. 28 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION TE/Z/Vl OF l. OANS so h I 4o a o Z ‘T q q .50 x o k u. o zo x C u U oz u 1o Q / 2 .5 4 5 7 /0 15 2o TEAM or Loan/s IN Ysnas Figure T. Percentage of the total loans reported by farm mortgage companies made for various periods from one to twenty years. Table 12 and Figure 7 show the relatively short term of these loans, and the characteristic clustering of loans at the round number periods of five, ten, and twenty years. Methods of Repayment: Closely connected with the question of length of period for which loans are made is that of the method of paying off the mortgage. Not all the companies reported on this question but approxi- mately 40 per cent of the loans of those reporting is paid in a lump sum at FARM MORTGAGE FINANCING IN TEXAS 29 the date of maturity, slightly less than one-fourth by regular annual pay- ments, and over 18 per cent by partial payments whenever it is conven- ient for the borrower. That the amortization plan of paying off loans is coming into prominence is indicated by the fact that these companies have loans in force under this plan amounting to $5,504,107, or 15.5 per cent of all their loans. ' TABLE 13 Amount and Percentage of Total Loans by Reporting Farm Mortgage Companies by Each Method of Repayment Methods Amount I Per Cent l Lump Sum . . . . . . . . . . . . . . . . .. $13,638,603 V 38.3 Annual Payments . . . . . . . . . . . . . 8,242,489 23.2 Partial Payments at Will . . . . . . . 6,442,208 18.1 Amortization . . . . . . . . . . . . . . .'. . 5,504,107 15. 5 At Will After a Certain Period. . 1,750,000 4.9 I 100.0 Total . . . . . . . . . . . . . . . . . . $35,577,407 METHODS OF [QEPAYMENT Pen, Csnr o l0 2o 60 4O LumP Sum 66.6 Annual. PAvMEHTS 2.3.2 Panama. PAYMENTS 16.! AM¢K-TIZATION I55 AFTEL Cezrmu Ptz/oo 4,9 Figure 8. Percentage of all loans reported by farm mortgage companies ac- cording to the method of repayment required. Agents Most of the farm mortgage companies maintain local agents. The number of these agents ranges from seven to thirty-five, with the excep- tion of one large company, which has one hundred and fifty representatives in the farming communities of the State. These agents are very frequently business and professional men, such as lawyers, abstractors, insurance agents and bankers, who ‘take the farm mortgage agency as a supplement to their regular business. They establish local connections, make prelim- inary appraisals and represent the mortgage company in any transactions with borrowers, receiving compensation usually in the form of a certain - 3Q BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION commission on the loans negotiated. The most usual commission is two per cent, the range being from one to three per cent of the amount of the loan. Commissions are paid in most cases by the company. Three of the larger companies also have district officers who super- vise the work of the local agents in particular sections of the State. One company has one, another has two, and the third has ten district officers. Foreclosures Five of the 14 companies reported foreclosures for the year 1923. The total amount of the mortgages involved is $531,800, or .09 per cent of the total loans of all the companies. About one-fourth of this amount had been settled by December 31, 1923, with no losses to the companies. JOINT STOCK LAND BANKS Five joint stock land banks were operating in Texas January 1, 1924, with loans in force amounting to $33,892,271, or an average of $6,778,454 per bank. Two of the five are located in Dallas, two in San Antonio, and one in Houston. Three were established in 1919, one in 1922, and one in 1923. The Federal Farm Loan System of the United States is composed of twelve Federal land banks and, at the end of 1923, seventy joint stock land banks. All are under the direct supervision of the Federal Farm Loan Board according to the provisions of the Federal Farm Loan Act of 1916. Con- cerning joint stock banks, the law specifies the minimum capital stock, the maximum interest rate to be charged, the length of the term of loan and the method of repayment. Furthermore, it defines the maximum ratio of loans to value of land and buildings, and supervises bond issues. Hence, the five Texas banks, just as the joint stock land banks in other states, charge a uniform rate of 6 per cent on all loans, have capital stock amount- ing to at least $250,000, and loan a maximum of 50 per cent of the value of the land and 20 per cent of the value of buildings and improvements. Loans run for a period of thirty-three years, and are paid on the amortiza- tion plan. Bonds are issued under the supervision of the Federal Farm Loan Board, and are sold to investors at 5 per cent interest‘. While the law creating these banks is specific in certain requirements, there are some facts of interest concerning the actual operations of the five Texas banks. Capital Stock and Loans Although each joint stock land bank is required to have a minimum cap- ital stock of only $250,000, the five Texas banks had a total capital stock of $2,867,000, or an average of $573,400 per bank. Since the total loans of these banks on January 1, 1924, amounted to $33,892,271, the ratio of loans to capital was 11.8 to 1. Some such ratio must be maintained since the law providing for the creation of these banks limits the outstanding bonds of the bank to fifteen times the amount of its capital and surplus. This 1Authority was obtained to issue bonds at 51/; per cent but a very small amount has been issued at this rate. FARM MORTGAGE FINANCING IN TEXAS 31 provision is a protection to the holder of the bonds and a restriction upon the bank in over-expanding its loans. Hence, as a bank’s business expands its capital stock must be increased accordingly. The largest one of the five Texas banks has loans amounting to more than $15,000,000, and has a capital stock of over $1,000,000. Appraisals and the Ratio of- Loans to Value Appraisals are made for these banks by Federal appraisers specially appointed by the Federal Farm Loan Board for each bank. Three banks: reported the number of appraisers operating in Texas. One bank had six, another had three, and the other had one. The law requires that the earning power of the farm shall be the principal factor in determining its value. Rather than use the production for a single year, an attempt is made to determine the average produc- tion, and the average prices of products, over a series of years. The rental; value of the farm is often used as an index to the power of the farm to- produce a profit sufficient to pay off the loan. The sale price of the land. is also considered. Another important item affecting the appraisal is the so-called moral risk, or the character and ability of the borrower. After a value is placed on the farm, a loan, not to exceed 50 per cent. of the value of the land and 20 percent of the permanent insurable im- provements may be recommended by the appraiser. The executive com- mittee of the bank either approves or rejects the loan upon the basis of the appraiser’s full report on the property. This report must also be approved by the ‘Securities Division of the Federal Farm Loan Board before the mortgage can be used as a basis for a bond issue. District Officers and Local Agents The number of local agents maintainedby these banks varies from time to time, and no definite data could be obtained on this point. The most usual commission paid these agents is one per cent of the amount of the loan, while some are paid only one-half of one per cent. Two joint stock banks indicated that district or branch offices are maintained over the State. One has seven branches in the leading towns and cities and the other has two. Interest Rate and the Length and Repayment of Loans Only first mortgages are taken and a uniform interest rate of 6 per cent is charged. Loans run for a period of about thirty-three years, with the privilege of paying off the note in full at any interest payment date after the loan has run five years. Payments on the loan are made on the amortization plan, the borrower paying 6 per cent interest and 1 per cent on the principal annually, or semi-annually, retiring the loan at the end of thirty-three years. The borrower pays the attorney's fee for examination of land title, the cost of inspection of the land, and the recording of papers. 32 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION Purp-ose of Loans Two of the banks having over- 65 per cent of the total loans of all joint stock land banks in the State made estimates of the purposes for which their loans were made. One bank loaned 10 per cent for land purchase, 80 per cent for the payment of old mortgage indebtedness,‘ 5 per cent to pay off short-time obligations, and 5 per cent for buildings and improvements. The other reporting bank estimates that 98 per cent of the total amount of its loans was used for the purpose of paying ofi’ old mortgages, and 2 per cent for buildings and improvements. Bond Issues and Sale These banks issue and sell bonds secured by a collection of farm mort- gages instead of selling the mortgages, as is done by the regular farm mortgage companies. For instance, if a joint stock bank is in need of $500,000 to loan it presents an equal amount of farm mortgages to the farm loan registrar at Houston who, with the approval of the Federal Farm Loan Board at Washington, deposits the mortgages as security for a bond issue. Only first mortgages are acceptable, and the bond issue must amount to at least $50,000. Bonds outstanding at any given time must not be more than fifteen times the amount of capital and surplus of the bank. Bond issues of the reporting banks range in size from $100,000 to $3,750,000, the frequency and size of issues depending upon the require- ments of the bank. According to the reports of these banks all the bonds are sold outside the State. The practice is to turn the whole issue over‘ to the big investment companies, who advertise and sell them to the public for the bank for a stipulated commission. A large part of all these bond issues is sold by bond or investment houses located in the large cities of the North and East, particularly in New York City. The bonds uniformly bear 5 per cent interest’, payable semi-annually by the bank. There has been very little difiiculty in marketing these bonds, since they are based on very sound security and are exempt from taxa- tion. They are secured by first mortgages representing less than one-half the value of farms as determined by Federal appraisers. Foreclosures Three banks reported that no foreclosures occurred during 1923. One bank had two or three minor foreclosures during this year, with no loss to the bank. THE FEDERAL LAND BANK Although the Federal land banks and the joint stock land banks are su- pervised by the Federal Farm Loan Board, there are certain outstanding differences in the organization and operations of these two types of banks. First, the joint stock banks are organized by private initiative and are ‘See discussion of purposes for which old mortgages were originally made following Table 7 2A few issues were made at 51A; per cent, but practically all these bonds to date have been sold at 5 per cent. FARM MORTGAGE FINANCING IN TEXAS 33‘ operated with private capital, while the Federal land banks were organized by the Federal Government, which furnished the original capital-stock. Secondly, the joint stock banks loan directly to farmers, whereas the Fed- eral land banks make loans through national farm loan associations or through banks acting as agents. Thirdly, loans may be obtained from joint stock banks by farm owners who are not farmers, while Federal land banks may loan only to actual farmers who are actively engaged in ope- rating the farm mortgaged. ‘The state of Texas comprises District Number 10 of the Federal Farm Loan System of the United States. There are twelve districts in the country, each of which is served by a Federal Land Bank, Houston being, selected as the location for the Texas bank. Loans Amount and Growth of Loans: The Houston bank began doing bus- iness in 1917, and at the end of 1923 it had made loans to 32,928 Texas farmers amounting to $96,605,891. The $90,093,950 remaining in force December 31, 1923, represents almost three times the total amount of loans of the five joint stock land banks in the State. Over 8,000 loans amounting to $22,239,100 were closed during 1923. The growth of the business of the Houston bank is indicated in Figure 9, A comparison of the growth of the combined loans of the twelve banks of the United States with that of the Houston bank can be made from Table 14. TABLE 14 Amount Loaned in the United States and Texas by Federal Land Banks From Organiza- tion to the End of Each Year, Including 1923 Year gig/Egg Texas 1917* I $ 29,824,655 $ 1,145,345 1918* I 147,452,861 13,588,461 1919* I 282,007,781 31,408,401 1920** II 369,242,464 40,816,066 1921* I 441,859,940 48,514,291 1922** I 684,407,289 74,366,791 1923** I 876,490,304 I 96,605,891 *To November 30th. **To December 31st. It will belobserved that at the end of 1923 the Houston bank had loaned I approximately 11 per cent of the total loaned by the twelve Federal land banks of the country. These figures represent the total amount which had been loaned at the end of each year. A part of this amount had of course been paid off, since annual or semi-annual payments upon the prin- 34 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION lGr-owth of Loans I00- //z M////un§ Do//a/'5 19/7 19/5 1W7 I920 I721 I722 I925 Figure 9. Total amount of loans made by the Federal Land Bank of Houston from the date of organization up to the end of each year from 1917 to 1923, inclusive. cipal begin the first year after the loan is made. Some loans have been paid in full. Thus, the twelve banks had a total of $799,596,835 of loans in force December 31, 1923, the borrowers having paid approximately $77,000,000. In Texas, loans amounting to $90,093,950 remained in force at this date, over $6,000,000 having been paid. For every loan that is made the borrower must purchase an amount of stock in his local association equal to 5 per cent of the loan. In turn, the local association buys that amount of stock in the bank. Since the law sets the limit of the bond obligations of the bank at twenty timesthe amount of its capital and surplus, and since 5 per cent of every loan must ‘be used to purchase capital stock, the loaning power of thebank is limited only by its ability to market bonds. FARM MORTGAGE FINANCING IN TEXAS v p35 At the end of 1923 bonds had been issued to the amount of $91,769,000. The capital stock of the bank amounted to $4,629,230, and was all owned by the borrowers. The reserve and surplus was $560,000, and the ratio of bond obligations to capital and surplus was 17.4 to 1, while the legal max- imum ratio is 20 to 1. — National Farm Loan Associations: Loans are made indirectly to the farmer through national farm loan associations which are organized by groups of farmers all over the State. These associations are regular busi- ness organizations with officers and directors, a secretary-treasurer attend- ing to the details of the business. The farm loan association receives ap- plications for loans from farmers in the surrounding community and, after investigation and a preliminary appraisal of the value of the farm to be mortgaged, passes the application on to the Federal Land Bank for ap- proval. All interest payments and communications are made through the secretary-treasurer of the association. The borrowing farmer automat- ically becomes a member of the association and remains a member until his note is paid. There were 348 of these asociations in Texas on March 20, 1923. The distribution of these farmer organizations over the state is shown in Figure 10. LOCATION OF NATIONAL FARM LOAN ASSOCIATION-S ..... ..v Q A V ~ ( : ¢ I - . - ~ u ¢ - . b. .1 ..... ~ nuns ...... . p ::::::: u. ~'~-- u. .- ...... ‘ ' ,,,,, no ------ v! ----- .- 11111 i.» pa". Q A ¢ n o n - u av u.“ Figure 10. Geographical distribution of the 348 national farm loan associa- _ tions in operation March 20, 1923. 36 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION One county had eight associations and forty counties in the state had none. More than one-half of the counties have one association each. TABLE 15 Number of Farm Loan Associations in Texas Counties Associations per i Number of County Counties 0 i 40 1 i 134 2 i 47 3 l 18 4 9 5 i 2 6 2 . i . Appraisals: When an application for a loan is made to the secretary- treasurer of the local farm loan association the loan committee of the as- sociation makes a preliminary appraisal of the farm to be mortgaged, and sends in the application, with its recommendations, to the Federal Land Bank. Before the loan is made a special appraiser of the bank is directed to make an investigation. There are many factors which enter into the appraiser’s determination of the value of the farm as security for the loan. In the first place cer- tain facts are learned about the farmer himself. The appraiser inquires concerning the prospective borrower’s character and reputation for reli- ability in meeting obligations. He also investigates the farmer’s ability, which is indicated by his reputation in the community as a good or a poor farmer and by his methods of management. In the second place, the appraiser finds the total amount of the real and personal property owned by the ap-plicant, and makes a special investi- gation of the property to be mortgaged. He determines, as nearly as pos- sible, the productivity of the farm for the past few years, and inspects the buildings and improvements. Inquiries are made to determine the prevail- ing sale value of other farms in the surrounding community. Upon the basis of all these facts a final estimate of the value of the farm is made and sent in to the executive committee of the Federal Land Bank for approval. Ratio of Loans to Value: Loans are limited by law to an amount equal to 50 per cent of the value of the land and 20 per cent of the value of per- manent improvements. Figures for the year ending November 30, 1923, show the relation between the total appraised value, the sale price, and the total amount loaned. During this year 781 farms mortgaged to the Fed- eral Land Bank changed hands, and the actual sale price was recorded at the FARM MORTGAGE FINANCING IN TEXAS 37 Bank. Checking these sale prices with the appraised valuations, one finds that the total of the latter is three per cent below actual sale prices, and that the loans made amount to 40 per cent of the value of both land and improvements and 39 per cent of the sale price. Table 16 gives the data for the Texas Bank and for the twelve Federal Land Banks combined. TABLE 16 Number of Private Sales of Farms Mortgaged to Federal Land Banks, Appraised Value, Amount Loaned, and Relation of Loans to Sale and Ap- praised Value of Farms, for the Year Ending Novemberl30, 1923 Sale, Appraisal, and Loan l} Texas Lslggggg Number of Sales . . . . . . . . . . . . . . . . . . . . ..l 781 ' 5,943 Total Appraised Value . . . . . . . . . . . . . . . . . $5,408,486 $43,883,415 Total Loaned . . . . . . . . . . . . . . . . . . . . . . . .. $2,156,855 $17,492,109 Total Sale Price . . . . . . . . . . . . . . . . . . . . . .. $5,589,978 $43,659,950 Ratio of Loans to Appraised Value . . . . . . . . 40 40 Ratio Loans to Sale Price . . . . . . . . . . . . .. 39 40 Ratio Appraised Value to Sale Price . . . . . 97 101 LOANS AND VALUES Deanna: 1w /"\ muons o 1 2. 3 4 5 Sa/e Price . .516 App/mused Value. 5.4- Amounf Loaned 2.2 Figure 11. The total sale price, appraised value, and the amount loaned on farms mortgaged to the twelve Federal land banks. Farms were sold by owners during the year ending November 30, 1923. - Interest Rates: The legal maximum interest rate which the Federal land bank may charge is 6 per cent. The present rate is 5% per cent, and is payable either annually 0r semi-annually. Other Costs: A maximum of 2 per cent of the amount of the loan may be charged to cover the costs of making the loan. Certain expenses are in- volved in the appraisal of the farm and the preparation of the abstract by the farm loan association, for which it may charge as much as one per cent of the loan. "One per cent is allowed for costs of appraisal and the legal determination of title by the bank. 38 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION Term and Repayment of Loans: A loan at 5% per cent interest, pay- able semi-annually, runs for a period of 341/2 years, unless the borrower prefers to pay it oif ‘more promptly, in which case it may be paid in full at any interest payment date after the loan has run for five years. The Houston bank’s financial statement of December 31, 1923, indicates that during the seven years of operation loans amounting to $4,112,493, or ap- proximately 4.3 per cent of its total loans, had been paid in full. Loans are paid on the amortization plan. The word amortization is de- rived from “amort” meaning death, and has come to mean “to extinguish”- here, it seems, “to extinguish debt”. As used by the Federal Farm Loan System, it is a method by which a sinking fund is built up by the bor- rower by paying an amount equal to one per cent of the loan at each interest payment date. These periodical additions to the sinking fund reduce the principal of the loan and, therefore, the interest which must be paid. Foreclosures: The results of conservative appraisals, low interest rates, and small annual payments are shown in the negligible number of foreclosures which have been necessary. Of the 32,928 loans which had been made up to December 31, 1923, only 14 foreclosures had been made. The following statement on this point was made by R. D. Johnson, Treas- urer of the Houston Bank: “The total amount of our loans up to Decem- ber 31, 1923, at any time involved in foreclosures was $68,267.00 with a total number of foreclosures of 14. The. total amount involved in foreclosures during the year 1923, ending December 31, 1923, was $47,557.00, there hav- » ing been a total of 9 foreclosures during 1923 and 5 foreclosures during the latter half of 1922”. Purpose of Loans: Loans made by this bank are limited strictly to ag- ricultural purposes. These purposes are classified under ten heads as fol- lows: 1) to purchase land which is mortgaged to obtain the loan; 2) to pur- chase other land; 3) for buildings and other improvements; 4) for imple- ments and equipment; 5) for fertilizer; 6) for irrigation; 7) to purchase livestock; 8) to pay 01f old mortgage obligations; 9) to fund short-time in- debtedness; 10) to purchase stock in the local farm loan association. The Federal Farm Loan Act of 1916 creating the Federal land banks provides that loans may be made “to liquidate” any “indebtedness” of the owner of the land mortgaged, existing at the time of the organization of the first national farm loan association established in or for the county in which the land mortgaged is situated, or “indebtedness subsequently in- curred for purposes mentioned in this section.” The purposes mentioned in the law for which loans may be made are indicated above. Approximately 68 per cent of the amount of all loans of the Houston bank to October 31, 1923, went to pay off old mortgages and 9 per cent was used to liquidate other debts. Hence, over three-fourths of the amount of . all loans of the bank was used by farmers to shift from various other creditors to the Federal Land Bank. FARM MORTGAGE FINANCING IN TEXAS’ 39 TABLE 17 Amount and Per Cent of the Total Farm Loans in Texas Made by the Federal Land Bank for Each Purpose, From Organization to Octo- ber 31, 1923 Purpose QTS§$ l Perwiifil’ °f 1 Purchase of Land Mortgaged . . . . . .. $ 9,179,805 11 Purchase of Other Land . . . . . . . . . . . 872,838 1 Buildings and Other Improvements. 2,673,686 3 Implements and Equipment . . . . . . .. 1,008,410 1 Fertilizer . . . . . . . . . . . . . . . . . . . . . . . . 49,700 * Irrigation . . . . . . . . . . . . . . . . . . . . . . . . 19,485 * Bank Stock . . . . . . . . . . . . . . . . . . . . .. 4,476,211 5 *’ Purchase Livestock . . . . . . . . . . . . . .. 2,125,007 2 Pay Mortgages . . . . . . . . . . . . . . . . ..| 60,993,238 1 6s Pay Other Debts . . . . . . . . . . . . . . . .. 8,105,849 9 Total . . . . . . . . . . . . . . . . . . . . . . . $89,504,229 100 *Less than one per cent. Loans made for the direct purchase of land, for buildings, equipment, livestock, and fertilizer are proportionately low, and the percentages going for these immediate purposes in the future may be expected to incrase. At present the per cent of loans used to liquidate old mortgage indebtedness is exceptionally high, due, in part, to the recent agricultural depression and, in part, to the particular attractions of Federal land bank loans. In the first place,- interest rates are low. Interest rates are low because: a) bonds (principal and interest) of Federal land banks are exempt by law from tax- ation; b) bond sales are made on a large scale by a country-wide organiza- tion; c) appraisals are made on a uniformly safe basis; d) costs of opera- tion are comparatively low. Secondly, loans are made for a long period of years, and a convenient method of repayment requiring small annual or semi-annual payments is provided. Sources of Loanable Funds It was stated above that the bank had loans in force December 31, 1923, amounting to $90,093,950. The total capital and surplus of the bank at this date was, however, only $5,279,230. Hence the bank’s own capital and sur- plus is a small item in its total loans. Capital and Surplus: The total capital stock, $4,629,230, was owned by the borrowers. For every loan that is made the borrower must accept 5 per cent of the amount of the loan in the form of stock in the bank. Since the borrower actually receives only 95 per cent of the amount for which his note is made, it cannot be said that the capital stock of the bank is a BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION DUE/DOSES OF LOANS 40 PURCHASE or PAY Moarcncss 68 °/a LAN b /"\oz1'c AGED II "lo Figure 12. Distribution of loans of the Federal Land Bank of Houston according to the purposes for which they were used. source of its loanable funds. The legal reserve (or-surplus) held by the bank was $650,000, which is negligible when compared with the total loans of the bank. Hence, the money advanced to borrowers is obtained from the pub- lic through the sale of bonds. ' Bond Issues: The bank had issued bonds to the amount of $91,769,000, slightly more than one and one-half million dollars more than its total out- standing loans. As the need for more money arises bonds are issued under the supervision of the Federal Farm Loan Board, and sold by its fiscal agent. The amount of each issue depends upon the anticipated require- ments of borrowers for a period of months. Three or four issues are made each year and they range in amount from $3,000,000 to $7,500,000. For illustration, suppose the officials of the bank estimate that within FARM MORTGAGE FINANCING IN TEXAS 41 the next six months loans can be made amounting to $5,000,000. An ap- plication is made to the Federal Farm Loan Board at Washington for a bond issue of that amount. Upon the approval of the Board, individual farm mortgages in the hands of the bank, totalling $5,000,000, are placed in the vaults of the farm loan registrar as security for the bonds. Bonds are then printed by the United States Treasury Department and turned over to the fiscal agent of the Federal Farm Loan Board for sale to the public. The agent usually places the bonds with large bond and invest- ment companies, which charge a certain commission for selling them out to their clients. A Federal Farm Loan bond is not secured by any particular mortgage, as was formerly the practice among farm mortgage companies, but rather the total issue is secured by a collection of mortgages. The investor has no dealings directly or indirectly with the borrower. The bank has the perennial function of collecting principal and interest payments from bor- rowers and paying the principal and interest to investors. ‘These bonds are considered very desirable from the investor's stand- point. Besides mortgages equal to the amount of the bonds issued, the capital and surplus of the twelve Federal land banks, the reserves of the local associations in this district, and an amount equal to the capital stock held by each stockholder of the bank, serve as additional security. More- over, they have the particular attraction of being exempt from taxation. These bonds bear an interest rate which varies with the conditions of the investment market. The usual margin for covering all expenses of the bank is one per cent. That is, if it is necessary to issue 5 per cent bonds, the rate for loans to farmers is set at 6 per cent. Recently, the rate on bonds has been 41/; per cent and loans are being made to farmers at 5% per cent. It probably should be added that once a bond is issued at a given rate, it bears that rate throughout the period for which it was is- sued, or until the bond is “called.” Likewise, a loan to a farmer, say at 51/2 per cent, bears the same rate of interest throughout the term of the loan. INSURANCE COMPANIES An enormous amount of money is collected regularly by insurance companies in the form of premiums. Since not all of these funds are re- quired to pay ofl’ currently maturing policies, an attempt is made to find investments which yield a maximum rate combined with safety and a term adapted to the requirements of the company in meeting its obligations. Insurance companies have for many years found farm mortgages well adapted to their needs. This is particularly true of the life insurance companies, since they require investments of relatively longer terms than do the fire, casualty, and other types of insurance companies. ‘Texas comes in for a very substantial share of the farm mortgage investments of the life insurance companies of the country. On December lThese bonds may be called, or paid off, at any time after ten years from the date of issue upon due notice to the investor. 42 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION 31, 1921, they had more than $84,770,566‘ invested here.” In the same year it was estimated“ that 21 per cent of the amount of all farm mortgages in the State was held by life insurance companies. The heavy investment .of life insurance companies may be due in part to the fact that the Robertson Insurance Law requires that all life insurance companies which sell policies in the State must invest seventy-five per cent of their legal reserve back of these policies in Texas securities, which of course include farm mort- gages. It is the opinion of Mr. B. Werkenthin, Deputy State Commissioner of Insurance, that a very large portion of the farm mortgage investments of life insurance companies, particularly those located in the Northern and Eastern States, is due to the requirements of the Robertson Law. ‘The present investigation includes not only life insurance companies, but several other types as Well. More than one-half of the 274 insur- ance companies which were addressed on the subject of farm mortgage in- vestments in Texas reported, and 31 of these had such investments amount- ing to $53,112,569‘. This is practically one-half of the total held by all insurance companies and, therefore, the facts given by these companies are accepted as being representative of the farm mortgage business of all in- surance companies investing in the State. Types of Insurance Companies: These 31 companies are classified in Table 18 according to the classification of the State Department of Insur- ance and Banking. TABLE 18 Classification of Thirty-one Insur- ance Companies Operating in Texas Type of Number of Insurance Companies Life . . . . . . . . . . . . . . 18 Casualty . . . . . . . . . . 6 Fire . . . . . . . . . . . . 3 Assurance . . . . . . . . . 2 Auto . . . . . . . . . . . . . . 1 Miscellaneous Stock . 1 Investments of Insurance Companies Proportion in Farm Mortgages: The percentage of all investments made by insurance companies in farm mortgages varies with the type of insurance handled and with the individual company. While farm mort- h lCompanies which do not have admitted assets of $500,000 or more are not included ere. ‘See “Real Estate Mortgages as Investments for Insurance Companies,” prepared by Institute for Research in Land Economics and Public Utilities, from data assembled by Alfred M. Best Company, New York City. » 3U. S. D. A. Department Bulletin No. 1047, December, 1921. ‘Only first mortgages are accepted according to the reports of these companies. FARM MORTGAGE FINANCING IN TEXAS 43 gages are usually considered very good investments by insurance com- panies, they have certain disadvantages. For instance, many fire and cas- ualty insurance companies do not consider that farm mortgages are suf- ficiently liquid. Their obligations are such that they require investments of shorter maturity, or such securities as stocks and bonds which may be readily sold to meet their current needs. These shortcomings hold, to a less degree, with life insurance companies. Over 47 per cent of the amount of all loans made by 13 reporting life insurance companies was made on farm mortgages, while only 18 per cent of the total amount loaned by nine companies of other types was made on farm mortgages. TABLE 19 Total Loans and Farm Mortgage Loans by Twenty-Two* Insurance Companies Total Farm Per Cent in Companies Numb.“ T°tal LQanS Mortgage Farm Reporting of All Kinds Loans Mortgages Life Insurance. . . .. 13 $423,285,000 $200,365,206 47. 3 Other . . . . . . . . . . . . 9 95,527,700 17,211,308 18. 0 *Nine companies did not answer this question. Loans in Texas: Six of the 31 companies reporting are located in Texas, and 25 are distributed over the country from Hartford, Connecticut, to Los Angeles, California. The larger investors are, in most cases, located in the cities of the North and East. The six Texas companies had $13,199,699 in Texas farm mortgages, and the other companies had $39,912,869. Table 20 indicates the percentage of loans of the Texas and other com- panies which are made in this State, as indicated by the twenty-two com- panies reporting on this question. ‘ Tt/XBLE 2o Total Farm Mortgage Loans and Amount and Per Cent Made in Texas, by Texas and Outside Companies l v Amount of Per Cent of _ Number Total Farm Farm Farm Companies Reporting Mortgage Mortgages Mortgages Loans in Texas In Texas _ l l Texas Companies . . . . . .. 6 $ 18,103,581 ‘ $13,199,699 72.9 Outside Companies . . . . . 16 155,043,833 l 30,123,360 19.2 Size of Business in Texas Mortgages: The 31 companies vary greatly in the amount of Texas farm mortgages held. Eight companies have loans varying from one to seventeen millions of dollars, and the amount held by these companies is $46,152,041, or 86.9 per cent of the total. With one ex- ception these are all life insurance companies. The other 23 smaller in- vestors have amounts ranging from a few thousand to one million. Eleven q have less than $100,000, and twelve have $100,000 to $1,000,000. 44 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION TABLE 21 Distribution of Twenty-Three Insur- ance Companies According to Amount of Investments in Texas Farm Mortgages. Amount of Number of Loans Companies $ 0- $ 1 9 9,9 9 9 1 1 n O 400,000- 599,999 600,000- 799,999 4 800,000- 999,999 . l.” I 20o,ooo- 399,999 l 4 I I l I x 1 l Methods of Making Loans Many farm mortgage loans are made indirectly through the regular farm mortgage companies, particularly those located in the State. In this manner the insurance company avoids the necessity of dealing directly with borrowers, who are widely distributed over the State. Large amounts can be invested at once with little or no difficulty. It was found that ap- proximately 30 per cent of the total farm mortgage investments of the com- panies was made indirectly through farm mortgage companies or individuals. However, the method of acquiring farm mortgages directly from the borrowers is the more usual practice. A few companies maintain regular district and local agents for this purpose. Table 22 gives the amount and per cent of the total loans made by 29 companies by each method. TABLE 22 Amount and Per Cent of Loans Made Directly to Farmers and Through Mortgage Companies and In- dividuals Method Amlogiariltts of Per Ceilgafig Total ' I Direct . . . . . . . $36,764,663 ll 70.3 Indirect ... .. 15,506,905 29.7 Ratio of Loans to Value It was pointed out above that safety is one of the prime requisites of an ideal investment for insurance companies. The safety of farm mort- gages is based primarily upon conservative appraisals and an adequate mar- gin between the amount of the loans and the value of the property mort- gaged. Twenty companies indicated the ratio of their loans to the value of land and buildings. On the average, 44.5 per cent of the value of the land is loaned. Only nine of the twenty companies consider the value of buildings and an average of 38.3 per cent of their value is loaned. FARM MORTGAGE FINANCING IN TEXAS 45 TABLE 23 Ratio of Loans to Appraised Value of Land and Buildings Loans on Land Loans on Buildings A P A P Number of Amount Cgsgaieoangg Number_ of Amount Cgsgaiiangg Companies ‘ Reported on Land Companies Reported on Buildings 1 r l 20 l $26,464,914 44.5 9 $2,803,149 38.3 H" L_W,-__-_ Foreclosures The relatively few foreclosures of insurance companies should give some indication of their conservative policy in making loans. Of the twenty- seven companies which reported on this question only four had foreclosures during 1923. The total involved was $87,469, less than one-third of one per cent of the loans of the companies reporting. No loss had been in- curred at the end of the year. Interest Rates Average Rates: The usual interest rates of insurance companies are 6 and 7 per cent. The weighted average prevailing rate for the 31 com- panies is 6.47 per cent.‘ The Texas companies get an average of 7 per cent, While companies located outside the State charge an average of 6.2 per cent. Range of Rates: In order to get an idea not only of the average but also of the range of interest rates, each company was asked to designate its highest, lowest, and prevailing rates. The lowest rate reported on any loan is 51/; and the highest is 9 per cent. The averageof the lowest rates reported is 6.07 per cent and the average of the highest rates is 7.42. These averages along with the average prevailing rate are shown in Figure 13. AVERAGE RATES PER» CENT 9 I Z 5 4- 5 6 1 AvnzAoi l-hcussr Bare . 74¢ Avenue: Pzsvaunc Bar: 64 Avrzltc: Lowssr Bare ‘a0 Figure 13. Aveiiage highest, lowest, and prevailing interest rates on farm mortgage loans as reported by insurance companies. Since the most usual rate charged by a company has the greatest sig- nificance, the average prevailing rate of 6.47 per cent can well be analyzed further by finding the variation of prevailing rates about this average. For instance, one company reported its prevailing rate at 5.75 per cent, while ‘Insurance companies accept only first mortgages. One company had a second mort- gage of $2,500. 46 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION two other companies reported 8 per cent as being the rate most commonly charged. Table 24 shows the total loans of companies reporting the va- rious prevailing rates. It will be readily observed that companies having a large percentage of the total loans of all companies indicate that their prevailing rates are 6 and 7 per cent. TABLE 24 Amount and Per Cent of Loans at Various Pre- vailing Interest rates ? P c t f ‘Total L037,“ by Totgll Lzgnso by Prevailing ; Companies "Companies Interest Rates ;Report1ng Each Reporting i‘ Rate l Each Rate l 1 l Total . . . . . . . . . . $52,362,568 100.00 I 534 . . . . . . . . . . . ..l 50,000* 0.09 6 . . . . . . . . . . . .. 27,376,404 52 .28 6% . . . . . . . . . . . 1,534,500 2.93 6% . . . . . . . . . . . .. 435,963 0.83 7 . . . , . . . . . . . 21,959,681 41.94 71/5; . . . . . . . . . . . 636,308 I 1.22 8 . . . . . . . . . . . 369,712 II 0.71 *This does not mean that $50,000 was loaned at 5% per cent, but that companies having total loans of all kinds amounting to $50,000 reported their prevailing rate as being 5% per cent. Purpose of Loans Sixteen companies indicated the distribution of their loans according ,- to the purposes for which the borrowers used the money. Here again, as in the case of the Federal and joint stock land banks, a large part of the total loans went to pay ofl’ old mortgage indebtedness. Since most of the loans of insurance companies are made for five- or ten-year periods, prac- tically all of the loans in force at the end of 1923 had been made since 1913. This ten-year period has been one of prosperity, with the exception of two or three years. The high percentage of loans for the purpose of can- celing or renewing old notes can, therefore, hardly be due to exceptionally hard times or lack of prosperity. A more reasonable “conclusion is that the term of the original loan was entirely too short. Less than one-fourth of the amount of the loans goes directly to buy land. This is very low when it is considered that by far the larger por- tion of farm mortgage financing is for the ultimate purpose of securing funds to purchase land. It is obvious, of course, that the old mortgages, which are being paid off by the renewal of notes, were originally made largely for the purpose of buying land and buildings. If the amounts FARM MORTGAGE FINANCING IN TEXAS 47 loaned to pay off old mortgages and directly to purchase land are com- bined, about 75 per cent of the total is included. Approximately five per cent of the total is used for buildings and other permanent improvements. Technically, farm mortgage financing should be involved wholly with land and permanent improvements, but the facts here indicate that only about four-fifths of the total amount of these loans goes for these purposes. The other 20 per cent is used to buy cur- rent supplies, to fund current short-time indebtedness, and for the pay- ment of taxes, insurance, and so forth. Figure 14 shows the distribution of the Texas farm mortgage loans of sixteen insurance companies according to the purposes for which the money was borrowed. DL/QDO§ES OF LOANS PER CENT Os/olszozssossivoacso PAY Moarcnaes 53.6 LAND Puacnnszs 22.9 Pnv Juan-TIME Dcers Z4 OTHEIZ punPosss 56 Buv Gum-Uta $5 Foe. BUILDING! S! _Figure 14. Distribution of farm mortgage loans by insurance companies ac- cording to the purposes for which loans were made. Summaries of the amounts and percentages are presented in Table 25. TABLE 25 Amount and Per Cent of Total Loans for Each Purpose - i Per Cent Purpose Amount of Total Loans Land‘ Purchase . . . . .. $ 6,359,931 22.9 Pay Old Mortgages... 14,816,658 53.3 Pay Short-Time Debts 2,046,385 7.4 For Buildings _ . . . . . . . 1,414,578 5 . 1 Buy Supplies . . . . . . . . 1,539,604 5 . 5 Other Purposes . . . . . .| 1,625,904 5.8 I _- Total . . . . . . . . . $27,789,610 100. 0 48 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION Length of Term 0f Loans Reference was made above to the fact that loans by insurance companies commonly run for periods of five or ten years. Figure 15 brings out this fact in a striking manner. TEQ/“l OF LOANS 50 4O 55 25' Z0 l5 IO PER. Csnr OF TOTAL 0 1 z 6 4 5 7 1o 16 2o 20* Lenora or Loaw n1 Ysans Figure 15. Per cent of the total farm mortgage loans of reporting insurance companies for the various terms of years. Loans made for five-year terms include approximately one-half of the total loans of 26 companies, and forty per cent of the amount outstanding is in ten-year notes. The next most usual term is twenty years, while a con- siderable amount is loaned for three years, and some notes are made for only one year. FARM MORTGAGE FINANCING IN TEXAS 49 TABLE 26 Amount and Per Cent of Loans Made for the Va- rious Terms Length of Loans Amount Per Cent in Years Loaned of Total 1 . . . . . . . . . . . . . . $ 701,475 1.46 2 . . . . . . . . . . . . . . 631,275 1.31 3 . . . . . . . . . . . . . 1,058,277 2.20 4 . . . . . . . . . . . . .. _ 331,275 0.69 5 . . . . . . . . . . . . . . 23,679,255 49.15 7 . . . . . . . . . . . . . . 145,609 0.30 10 . . . . . . . . . . . . .. 19,687,664 40.84 15 . . . . . . . . . . . . . . 1,682 0.01 20 . . . . . . . . . . . . . . 1,937,901 4.02 Over 20 . . . . . . . . . 3,363 0.02 I Total . . . . $48,177,776 I 100.00 A noticeable feature of Table 26 is that practically no loans are made for fifteen years. The reason for this is not known. It seems obvious, however, that it is not due to the fact that the fifteen-year period is not adapted to the needs of the borrower. It is probable that custom is the chief factor here. Certain periods have come to be round-number periods for mortgage loans. Only four per cent of the total of the loans of these companies has terms other than three, five, ten, and twenty years. Methods of Repayment As in the case with the farm mortgage companies, there are five rather distinct plans upon which the insurance companies have their loans paid ofi‘. The most usual is that of requiring a lump-sum payment of the amount of the loan at the end of the term. This plan is simple and the necessity for loaning the money occurs only at the end of the five- or ten-year period. Over 45 per cent of the total amount of loans of the twenty-one companies reporting on this question was loaned under this plan. Another method which is more convenient for the borrower is that of requiring regular an- nual payments until the note is liquidated. Slightly over 26 per cent of the amount loaned by these companies is included in this plan. The next most important method is that of permitting partial payment of the note at any time convenient to the borrower. This plan covers approximately 20 per cent of the total loans. A slight variation of this method is to let the note run without payments, or with regular specified payments, to the end of a certain period, say, three or five years, and then to permit pay- ments in any amount at the will of the borrower. I 5() BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION The amortization plan of repayment of mortgage loans is coming more and more in favor with financing institutions in this country. It is a vari- ation of the annual payment method described above. A fixed sum which covers both interest and principal payment is paid annually, while under the old annual payment plan the amount paid each year decreases as the note matures. The amortization plan is used entirely by the Federal Farm Loan System and to some slight extent by farm mortgage companies. Loans made under this plan by the twenty-one insurance companies amount to about 6 per cent of the total. TABLE 2v Per Cent and Amount of Loans by Various Methods of Re- payment as Indicated by the Twenty-One Insurance Companies Reporting Method of Repayment Amount igrTgfigf l Lump Sum . . . . . . . . . . . . . . . . .. $13,702,669 45.7 Annual Payments . . . . . . . . . . . . . 7,864,104 26.2 Partial at Will . . . . . . . . . . . . . . .. ' 5,784,139 19.3 By Amortization . . . . . . . . . . . . . 1,931,174 6.4 At Will After a Specified Period 730,085 2.4 Total . . . . . . . . . . . . . . . . . . . $30,102,176 100.0 PER C E N T O 1o Z0 30 40 L. um p SUM 45.7 Annual. Pnvmsurs 26.2 PARTIAL AT W/Li. 19.5 5y AmoATIZATloN 64- AFTEIL Snzclmso Pele/on z,4 » Figure 16. Distribution of farm mortgage loans of insurance companies ac- cording to the method of repayments required. TRUST COMPANIES Nature of Business ‘The trust company has as a major part of its business the invest- ment of funds placed in its care, and usually the more substantial types of investment are selected. First mortgages on real estate are almost uni- FARM MORTGAGE FINANCING IN TEXAS 51 versally included, along with government bonds, in any list of “safe and sound” investments for funds held in trust. Limitations of Data The information obtained on the loans of such companies on Texas farm lands is entirely too fragmentary to permit definite conclusions to be drawn, since only three companies reported. However, a very brief sum- mary of the facts as indicated by these three companies—located, one each in Kansas City, Dallas, and Austin-will be given. Amount of Loans The total Texas farm mortgage loans by these companies in force December 31, 1923, amounted to $17,387,951. This is not an insignificant amount, and the conclusions as to methods of making loans, interest rates, and so forth, are limited in accuracy chiefly by the small number of com- panies rather than by the total of the loans represented here. Methods of Making Loans Loans to farmers are usually made through district or local agents of the company. One company has four district loan agents in the State, while another maintains seventy-five local loan agents throughout the sec- tions of the State where loans are made. Ratio of Loans to Value, and Interest Rates Each company reports that loans are made up to 50 per cent of the value of the land and none on buildings and improvements. The prevail- ing rate of interest for each company is 7 per cent, while the widest range of rates by any one company is from 6 to 9 per cent. Most of the loans run for periods of either five or ten years, and are either paid in lump sum, or by partial payments after a specified number of years. Purpose of Loans One company estimates that 50 per cent of the total of its farm mort- gages is used to purchase land, 40 per cent to liquidate short-time debts. The other company which answered this question indicates that 75 per cent goes for the purchase of land, 10 per cent each to pay short-time debts, for buildings, and to buy farm supplies. The percentage of the loans of these companies used directly for land purchase is much higher than that of the other types of financing institutions. There is no obvious reason for this diiference. If the facts from all trust companies were at hand it might be found that these two companies are exceptional on this point. ST-ATE AND NATIONAL BANKS State and national banks are designed primarily to accept deposits and make short-time loans. Loans are made chiefly from the deposits of their customers, and the term for which the loans are made must be adapted 52 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION to the term of the deposits. In the great majority of cases depositors are privileged to withdraw their funds at any time. Such “demand” deposits are practically universal with the country banks, in contrast t0 “time” deposits, which are frequently accepted by the larger city banks. Since the bank is liable at any time to pay its depositors, it is the policy to make loans only for short periods of thirty days to six months. Hence, by the nature of their business they "are not adapted to making farm mortgage loans. Mortgage Loans Notwithstanding, many such loans are made by these commercial banks. No very large amounts are loaned by any individual bank, but the combined mortgage loans of upwards of 30,000 banks in the United States amount to a huge sum. It was estimated by the Federal Department of Agriculture in 1921 that the commercial banks of the United States had farm mortgage loans amounting to approximately one and one-half bil— lions of dollars, or about 17 per cent of all such loans in the country.‘ The estimated amount loaned on Texas farms by these banks was over $15,000,000, or 4 per cent of the total farm mortgage indebtedness in the state. A very considerable item in this total is that of land mortgages held by these banks as security for short-time debts previously contracted. Many banks indicated that it is only under such circumstances that they accept farm mortgages. State and Federal banking laws have been designed to limit rather a strictly the long-term loans of commercial banks. The solvency of the bank and the safety of the depositors require that a very large proportion of its funds be invested in more liquid security. Up to 1913 national banks were not legally permitted to make farm mortgage loans. But with the passage of the Federal Reserve Act creating a new source of funds for its member banks in case of need, an amendment was passed allowing national banks to make a limited amount of such loans for periods not to exceed five years. National banks were thus enabled to compete with state banks for loans of this type. Mortgages Reported The facts collected in this survey indicate that only about one-third of the national banks and about one-fourth of the state banks in Texas have farm mortgage loans. Of the 573 national banks in the State, 182 sentlin reports. Sixty of those reporting had farm mortgage loans in force De- cember 31, 1923, amounting to a total of $1,100,708. Of the 985 state banks in the State, 243 sent in reports. Sixty-five had farm mortgages amount- ing to $1,010,648. The average held by national banks was $18,346, as compared with an average of $15,458 by state banks. From these figures it is estimated that a total of approximately $7,500,000 in farm mortgages is held by all the state and national banks in the State. 1U. S. D. A. Department Bulletin, Number 1047, published December, 1921. 53 FARM MORTGAGE FINANCING IN TEXAS vfiawqw M313 @353; 5mm 3 3N £3 . . . . . . .. 315m ~35 fiwafiaw 33; wiaiq» _ ma” _ 3 wmH Em . . . . . . 318m 12222 _ _ $30 firm nwnfisZ E owwfianmwmwvsf< wmflfiwmmomq wwuaonwfl mcomammzfi madam . hm 3mm _, m: 3mm mwwwwuaoz wfiuozfimc< E 3.125 comusfiufli £5554 N “E5034 mo “b.9054 mwuwwuanwg mxcwm mo nonfigz wwawzbumfl wwwfiriw 583m mfiiwfl =€w>>wc< nwnEPZ ‘ _ mxnmm "E00 firm was awnfisz xcwm .6.» mcnofl om9$>< win Juavw p3 13cm. uwawfimumfl dwpuonofi "E5084 fiwmamunog mfiiwm nwnfinz .mcm.~w>>w:< nwnfiPZ dfia-m m5 E wxcsm wfimuw. was GZSBQZ 13cm. _. . w w Hdmgflv 54 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION State banks are as a rule smaller than national banks and accord- ingly have less loaned on farm mortgages. But since there are almost twice as many of the former, the estimated total of their loans is greater. The fact that more capital is required to organize national banks may ac- count for the larger average amount of farm mortgage loans of these banks. Farm Mortgage Loans by Districts The great size and the varied types of agriculture of Texas make it advisable when practicable to divide the state into districts.‘ Loans on land are obtained more easily and at a lower rate of interest in the more highly developed sections of the State than in the less developed sections. Local customs affect the farm mortgage business differently in different parts of the State. For the purpose of the study of the farm mortgage business of local banks the State is divided into five districts as indicated in Figure 17. DIVISIONS 0F TEXAS ACCORDING TO ECONOMIC CONDITIONS = » . _ - n - . | _ n. ----- .. - . . A - < . | - u m~ u - . . -~ ~ . I _ (~ »»»» n! ~ ~ I . ~ I . . . .- ln-cn ms.“- ...... ~ - - . I V u ,;..- : A V » t r A I II» ,_.... Figure 17. Districts of Texas as determined by (1) the type of soils, (2) the value per acre of land, and (3) the type of agriculture. District No. 1 is com- posed of 36 counties with an average value, according to the 1920 Census, of $85.33 per acre. District N0. 2 has 40 counties. The Census valuation of the land is $34.00 per acre. District No. 3 has 71 counties with an average value per acre of $27.35. District No. 4 has 27 counties and the average value per acre of the land is $21.85. District No. 5 is the largest division and contains 81 counties in the ranching section of the State. The average value of the land here is $10.75 per acre. ‘This was hardly possible in the case of the financing institutions other than the local banks. The loans of the bank are usually made in the immediate community in which it is located. FARM MORTGAGE FINANCING IN TEXAS 55 These divisions are based chiefly upon land values and types of agri- culture. The‘ “Black Land Belt” is included in District Number One, the great cotton producing area of the State. The average value per acre of the land in this district is $85.33, according to the 1920 Census. District Number Two includes most of the Coastal Plain and the lighter soils of the southeastern portion of the State. The average land value here is $34.00 per acre. District Number Three is comprised of 71 counties in the more recently developed farming sections of Northwest Texas. The average value per acre in this section is $27.35. “East Texas”, with its lumbering, its cotton and truck farming, is included in District Number Four. The average value of land here is $21.85. The largest district, and probably the most homogeneous from the standpoint of land values and the occupation TABLE 29 Number of State and National Banks Reporting Loans, Total and Average Amount of Mortgages, by Districts* E i National Banks State Banks w?» e q p e053 a .54 *5 s5 3 Fé’ 22 = 1.1-5 t’ 2%“ 22% 5 n? b0 ,_ b0 mg at be ,__, be om +> E “Z “i? ‘a E °€ “i? ‘a E :1 8 ° ‘S ° | > if s 8 ° *5 ° > 23 Q Z012 5-42 = <0. ' 2x2 PE ma. 1 23 $335,554 $14,589 15 $256,315 $17,088 2 I 9 126,506 14,056 18 193,641 10,758 3 14 292,247 20,875 15 226,250 15,083 4 5 174,800 34,960** 8 68,006 8,501 5 9 171,601 19,067 9 266,616 29,424 *In the case of Districts 4 and 5, at least, conclusions could be drawn with greater certainty if a greater number of banks were represented. **One of these banks had $150,000 in mortgages, which unduly raises the average. of its residents, is comprised of 81 western counties from Cameron in the South to Dallam in the North Panhandle. This more arid section is utilized chiefly for the raising of cattle, sheep, and goats. The average value of land per acre is $10.75. Q The reports from banks were classified according to their location in these districts. It is interesting to compare one section with another with regard to the extent of farm mortgage business of the banks, and interest rates charged. i More than half of the banks reporting are located in Districts One and Three, i. e., in North Central and Northwest Texas. Also more than half of the total loans’ reported are by banks in these districts. Banks having the largest average amount of mortgages are located in the ranching sec- tion of West Texas. Banks in East Texas have the smallest average with the exception indicated in the footnote of Table 29. 56 BULLETIN NO. 330, TEXAS AGRI'CULTURAL EXPERIMENT STATION Loans Placed Besides the mortgage loans actually made by these banks they are in- strumental in placing many loans for farm mortgage and insurance com- panies. Of the 243 state banks which sent in reports, 40, or 16 per cent of the total, had placed loans amounting to $1,384,000 during 1923. Of the 182 national banks reporting, 17, or "about '9 per cent of the banks, had placed loans amounting to $917,750 during that year. The total of the loans placed by these state and national banks for other loaning agencies is slightly greater than the loans actually made with their own funds. Ratio of Loans to Value These banks in a majority of the cases make loans amounting to 50 per cent of the total value of the farm mortgaged. Since the farm mort- gage business of commercial banks is incidental, there seems to be no great amount of uniformity of policy in the ratio of loans to value. Not many banks make a distinction between the value of buildings and land in making loans. Usually a value is placed upon the farm as a whole or else the land value alone is considered. Thus, 50 of the 75 banks reporting on this point placed a flat value on the farm as a whole, 13 considered the value of the land alone, and 12 made separate valuations for land and buildings. In all these cases loansrange from around 40 per cent to 75 per cent of the value of the property mortgaged, the most usual being 50 per cent. Interest Rate-s fior the State As a Whole As would be expected, the interest rates charged by commercial banks on farm mortgages are higher than those of the insurance companies and the regular farm mortgage companies. In the first place, as was pointed out above, these banks are not adapted to long-term loans, and the interest rate must be particularly attractive to induce them to invest their funds in such AVEIQAGE RATE-S PER CENT 8.4 8.6 Avszz AGE PzsvA/L/ua BATE e Ave/ancs HIGHEST BATE 9i 80 Avcancs Lowssr BATE a‘ , r/esr moerc AGES % sscono MORTGAGES Figure 18. The average highest, lowest, and prevailing interest rates charged by state and national banks (together) on notes secured by first and second farm mortgages. r I FARM MORTGAGE FINANCING IN TEXAS 57 “frozen” security. In the second place, the customary rates for short-term notes are 8 to 10 per cent and similar rates are expected on farm mort- gage loans. r ‘The average prevailing rate on first farm mortgages is 8.4 per cent, the average highest per cent is 9.2, and the average lowest is 8.0. These aver- age rates for second mortgages are: prevailing, 8.5 per cent; highest, 9.2 per cent; and lowest, 8.3 per cent. ‘The highest rate charged on any first mortgage is 10 per cent and the lowest is 5.5 per cent. The highest rate on any second mortgage is 10 per cent, while the lowest is 6 per cent. Figure 18 is a comparison of the average highest, lowest, and prevailing rates on first and second mortgages. Prevailing rates on first mortgages reported by state and national banks range from 6 to 10 per cent. Banks having 24 per cent of all first mort- gages reported their prevailing rate as 10 per cent, while banks having more than two-thirds of all first mortgages reported indicated 8 per cent ‘ as their prevailing rate. Table 3O shows the per cent of all reported first mortgage loans held by banks reporting the various prevailing rates. TABLE 30 A Per Cent of the Amount of First Farm Mortgages Held by State and National Banks Iéeportmg the Various Prevailing Interest ates Per Cent of To-tal Prevailing Loans by Banks Interest Rates Reporting Each Rate T012211 100 . 0 1 O 24 . 0 9 1/3 1 . 6 8 68 . 8 7 3 . 5 ~ 6 2 . 1 Table 31 shows a similar analysis of the prevailing rates on second mortgages. It will be observed that the prevailing rates here are just slightly higher than those on first mortgages. Thus, banks having 28.3 per cent of the second mortgages reported 10 per cent as their usual rate, and so on through the table. Interest Rates by Districts Whereas the average prevailing interest rate on first mortgages for the State as a whole is 8.4 per cent, it ranges from 8.2 in the Balck Land Belt to 8.9 in West Texas. A graphic representation (Figure 19) of the aver- age prevailing rates in the five districts will help to show the variation in rates in the different sections of the State, and between first and second mortgages. 58 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION TABLE 31 Per Cent of the Amount of Second Farm Mortgages Held by State and National Banks Reporting the Various Prevailing Interest Rates . . Per Cent of Total Prevalhng Loans by Banks Interest Rates Reporting Each Rate Total 100 . 0 1 0 28 . 3 8 70 . 3 7 O . 9 6 0 . 5 D/ZEVA/ L //‘/G [BATES PERCENT’ 0Iz34-56769/9 3.2.0 n. / D/sr rcr asz D'~"@'" Z 3.73 1, '3' sTe/CT 5 Z121 ass Dusre/cr 4 moo I 8.95 D/sre/cr 5 a” _ nrzsrmonroncss % SECOND PWOIZTGAGES Figure 19. Average prevailing rates charged by state and national banks ftogetgier) on farm mortgages, according to the district in which banks are ocate . For second mortgages the rate is lowest in the north central section and highest in the eastern section. Table 32 gives the averages upon which the chart is based. FARM MORTGAGE FINANCING IN TEXAS 5Q TABLE 32 Weighted Average Prevailing Interest Rates on First and Second Mortgages Outstanding January 1, 1924, for Reporting State and National Banks by Districts. i Rates Districts _ | l First Mortgages Z Second Mortgages 1 II 8.20 l] 8.32 2 ' 8.50 7 9.10 3 8.39 z 8.76 4 8.33 10.00 5 a 8.95 I 8.77*. *This figure is lower than would be expected, due probably to the fact that only a few of the banks reporting from this district had second mortgages. If each average in Table 32 is broken up into its component parts, a better idea of how the rates vary in the different sections of the State can be obtained. Thus, about 80 per cent of the total in first mortgage loans in the Black Land Belt bears 8 per cent interest and over four per cent of the amount bears only 6 _per cent. On the other hand, in the northwest section of the State only about 58 per cent of the total in first mortgage loans bears 8 per cent, while there are no loans made at less than 7 per cent. In the western and southwestern section only 37 per cent of the total in first mortgages bears 8 per cent, and over 59 per cent bears 10 per cent. 60 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION dawn .8.“ w aw 35E mcmwn wing QNHE 3mm hnofiufiwa w mo wmwuuwn, fir: 3325 Enwnoan mm wwwucouawa wit: _ _ 92: m; i wan 93 _ 92: i fin i i N9» i 53 _ m 0.3: _ ca? i 92: ii i i ~13 i i 92 i v 92: i N56 9E i 92: i v5 _ “v.5 i =5” i w _ 0.2: $55 5w i o6“: i 7m i :3 i i Nam i m 92: m5 ma» “Y: i Q41: __ w; i i; i wa i ad i ~ i _ i w i i. , w 2 m. p w f“ i S l 1.3a i Each. mwwdmfioz wiouwm mmwwmtog ambrfl QQTSmMQ 3.3m mfizwifim comm u.» mzwofl fiauoH we "Z50 pom . mod-am uwwawfi; mfizflggm wwaucmmmwfl MN iaoffimmfl >3 fixcwm fiNCOWHNZ fiflfi wfifiw Mnfiaonofi hi mCdOQ QMNNQMOS Ehfl@ MO aCQOEAW wO HGUU 3m mm HQMAJH. FARM MORTGAGE FINANCING IN TEXAS ' 61 Certain banks reported each of these five rates as being their prevail- ing rate on first mortgages. Say four banks in District Number Three re- ported 10 per cent as being their usual or prevailing rate on first mort- gages and their total first mortgage loans amounted to $100,000. Then calculations are made to see what per cent this is of the total first farm mortgages reported by all banks in that district. Hence, in the above case it was found that banks reporting 39 per cent of the total loans of the dis- trict reported 10 per cent as their prevailing rate of interest. The interest rate seems to vary inversely with the certainty of in- come from the land and directly with the distance from the larger centers of population. Fundamentally, these two factors are almost synonymous. In those sections where the greatest certainty of an income exists there 'is the greatest concentration of population, both urban and rural. Fur- thermore, it is in these more prosperous sections that the best facilities for credit exist. There is more competition for loans,’ and custom has less in- fluence upon interest rates. ’ Term of Loans "The lack of adaptability of commercial banks to the farm mortgage business hinges chiefly, as was pointed out above, upon the length of term of mortgage loans. Normally, it is to be expected, therefore, that mort- gage loans made by state and national banks would be concentrated on the shorter terms. Moreover, it has been indicated above that a good share of the mortgages held by these banks is taken as additional security for short-term debts previously contracted. These notes are of course made for the shortest term practicable, which means in most cases one year or less. Banks having approximately 75 per cent of the total mortgage loans indicated the length of term for which their mortgages are made. Over 58 per cent of the amount of farm mortgage loans of national banks has a term of one year or less, while more than 62 per cent of the amount held by state banks falls in this period. With national banks the next most usual TABLE 34 Amount and Per Cent of Total Loans by Reporting National and State Banks for the Different Terms National Banks State Banks Term In ; Years Per Cent Per Cent Ammmt l of Total . Ammmt of Total I l !| 1 . . . . . . . . . . . $434,730 58.2 | $477,082 62.7 2 . . . . . . . . . . . 77,452 I 10.4 \ 34,771 4.6 3 . . . . . . . . . . . 37,493 » 5.4 ' 57,380 7.5 4 . . . . . . . . . . . . 132,779 17.9 | 5,060 0.7 5 . . . . . . . . . . 39,397 | 5.31 169,885 22.3 10 . . . . . . . . . . 17,031 | 2.3 | 15,790 2.1 15 and Over .. 4,374 ‘I 0.5 1,000 0.1 I l 1| Total . . . . . . . . .‘| $743,256 I] 100.0 III] $760,968 100.0 62 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION term is four years, approximately 18 per cent of the total being indicated as four-year mortgages. With the state banks the five-year term is the next most common, the loans for this term making up over 22 per cent of their total loans. Neither state nor national banks have loans of much significance running more than five years. Table 34 shows the distribution of the mortgage loans of these banks according to the length of term for which loans are made. TER/"l OFLOANS w- :22 5E E 63*!) 3 JO- O pq ‘ g <:l- <1 I”) 4 7 rs 4°" *2 O F u. Q $0.. l~ Z h] U d Z0- l-AJ O. Io- , t Z - ° 1 2 s 4. 6 IO 15* TERM or LOANS IN YEAzs Figure 20. Distribution of loans of state and national banks (separately) accord- ing to the number of years for which loans were made. Method of Repayment of Loans The lump-sum method of repaying the entire principal of the loan at the end of the specified term is most usual with commercial banks. Loans made under this plan include about 62 per cent of their total loans. The method of requiring regular annual payments is, however, quite common, FARM MORTGAGE FINANCING IN TEXAS ‘" " ‘ 63 as the reports indicate that the amount of loans under this plan includes 26 per cent of the total loans. The amortization plan of repaying loans has not made much progress with the commercial banks. TABLE 35 Amount and Per Cent of Total Loans of Reporting State and National Banks by Various Methods of Repayment - Method of Repayment Amount Per T3311‘; of l Lump Sum . . . . . . . . . .. $ 881,493 61.9 Annual Payments . . . . . 376,338 26.4 Partial Payments at Will 149,384 10.5 Amortization . . . . . . . . . . 16,028 1 . 1 Other . . . . . . . . . . . . .. 1,000 0.1 Total . . . . . . . . . . . . $1,424,243 100.0 SUMMARY A summary of the results or conclusions of this study of the farm mortgage business in Texas may aid the farmer, the investor, and the financing institution in retaining the essential facts. In the first place, this study emphasizes the fact that farm mortgage financing is a large and im- portant element in the business operations of Texas farmers. Secondly, the whole process of making a loan is analyzed. Connections between borrow- ers and the financing institution are established through advertising, or the local agent, or the local loan association. The value of the property to be mortgaged is determined by an actual inspection of the farm, the inspector ascertaining its productivity, its location, the condition of improvements, and the farming methods used by the prospective borrower. If, on the basis of the appraiser’s report to the headquarters of his company or bank, the security is acceptable, there remains only the details of determining a clear title and advancing the money to the farmer. Thirdly, this study reveals the ultimate sources of the funds loaned on farm mortgages. Insurance and trust companies loan funds which are supplied them by their policy holders and Wards. Commercial banks loan funds of depositors, or their own capital and surplus. The regular farm mortgage institutions—farm mortgage companies and Federal and joint stock land banks——obtain their loanable funds from the investing public. The farm mortgage company usually sells its mortgages, while the Federal and joint stock land banks sell bonds secured by a collection of mortgages. In either case the mortgages, or bonds, are sold through large investment houses located in the large cities or, more directly, to individual investors through special sales agents of the company or bank. It is a very notice- able fact that a very large percentage of these bonds or mortgages are sold out side the State. . Fourthly, in addition to the functions of making loans and obtaining 64 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION METHODS OF PEP/l YNENT ANNUAL PAY/WENT 26.4% Figure 21. Distribution of loans of state and national banks (together) accord- ing to the methods of repayment required. funds through the sale of securities, the farm mortgage financing institu- tion has the further important function of looking after the security during the period of the loan. In the case of the farm mortgage company, in par- ticular, this often involves advancing insurance and taxes to the borrower, and the advancement of principal and interest to the investor in case of de- fault of the borrower. Joint stock land banks, likewise, have the function of looking after the security. In the case of the Federal Land Bank the care of security, as well as the responsibility of guaranteeing the payment of the loan, is the function of the local farm loan association. Insurance and trust companies look after their own security in case their loans are made directly to farmers rather than through some regular farm mortgage bank. FARM MORTGAGE FINANCING IN TEXAS 65 Commercial banks usually make loans in their immediate community and of course look after the security of their loans. Fifthly, the interest rates paid by farmers are analyzed, and an at- ' tempt has been made to account for the diflerence in rates by the different institutions. The Federal Land Bank is ‘at present charging 5.5 per cent. This is the lowest rate charged by any of these institutions. This low rate is possible since 1) its securities are exempt from taxation, 2) it does business on a very large scale, and 3) Federal land banks are well known and, therefore, there is “a wide market for their securities. Joint stock land banks charge 6 per cent. They are organized by private individuals for the purpose of gains for the stockholders, whereas, in the case of the Federal land banks, the profits of the business are received by the borrowers, largely in the form of lower interest rates on loans. Their securities are likewise exempt from taxation. Insurance companies get an average of 6.47 per cent on loans made directly to farmers. A large portion of the farm mort- gages reported by these companies is held by companies located in other states; yet these “foreign” companies charge 6.2 per cent on the average, while Texas companies get an average of 7 per cent. Farm mortgage com- panies charge an average of 6.94 per cent on first mortgages and 7.5 on second mortgages. The securities of these companies are not exempt from taxation, and they have the function of selling mortgages, which is not true in the case of the insurance companies. The average rate for trust companies is 7 per cent, while that of commercial banks is 8.45 per cent. The farm mortgage companies and Federal and joint stock land banks get a margin of approximately one per cent between the rate charged the farmer and that paid to the investor. Sixthly, it was found that farm mortgage loans run from one year in the case of the commercial banks to more than thirty years in the case of Federal and joint stock land banks. The loans of farm mortgage and in- surance companies fall within these periods. More than 49 per cent of the loans of insurance campanies are made for a five-year period, and approx- imately 41 per cent are made for ten years, while 32 per cent of the loans of farm mortgage companies are made for five years, and 46 per cent for ten years. The large number of renewals, indicated in the high percentage of current loans made to pay off old mortgages, seems to indicate defi- nitely that the one- five- and ten-year periods are entirely too short. Seventhly, it was found that a relatively low percentage of the total farm mortgage loans is used for the immediate purpose of buying land and improvments. Of the total amount of the loans of the farm mortgage companies, 57 per cent was used for these immediate purposes; of the joint stock land banks, 12 per cent; of the Federal Land Bank, 15 per cent; of the insurance companies, 28 per cent; and of the trust companies 55 per cent. On the other hand, a relatively high percentage of loans is used to pay ofl’ old mortgages, which of course were in most cases originally made to buy land and improvements. Over 33 per cent of the total amount of the loans of farm mortgage companies is used to pay off old mortgages; 78 per cent of the loans of joint stock land banks; 68 per cent of the loans of the Fed- 65 BULLETIN NO. 330, TEXAS AGRICULTURAL EXPERIMENT STATION eral land banks; over 53 per cent of the loans of insurance companies; and 33 per cent of the loans of trust companies. These high percentages of loans going to pay off 01d mortgages are interpreted as meaning 1) that the original loans were made for a period too short for the borrower, or 2) that borrowers are refunding their old loans at a lower interest rate. The latter evidently explains the very high percentage of the loans of Federal and joint stock banks which are used to pay ofi’ old mortgages. Another outstanding fact revealed in the analysis of the purposes for which bor- rowers use these funds is the large amount going to pay ofi’ short-time in- debtedness, such as debts contracted with local banks and merchants. The portion of the total loans of all these mortgage institutions going for this purpose ranges from 6 to 9 per cent. Eighthly, it was found that approximately 62 per cent of the mort- gage loans of commercial banks are arranged to be paid off in one payment at the maturity of the loan; 46 per cent of the loans of insurance com- panies are to be repaid in this manner; 92 per cent in the case of trust com- panies; and 38 per cent of the loans of farm mortgage companies. The next most popular method of repayment required by these four types of insti- tutions is the annual payment plan, while the privilege of paying a part of the note at any time is granted in~many cases. All loans of the Federal and joint stock land banks are paid on the amortization plan. Ninthly, a large percentage of the banks and companies which reported on the effects of the Texas Homestead Exemption Law upon farm mort- gage financing hold the opinion that the law is antiquated and should either be abolished or modified. The opinion is about equally divided as to whether this law increases interest rates. It is the consensus of opinion that this law prevents many loans which could otherwise be obtained to the advantage of the borrower. FARM MORTGAGE FINANCING IN TEXAS 67 LITERATURE CITED Annual Report of the Comptroller of the Currency for 1923. Annual Reports of the Federal Farm Loan Board. Bulletin, North Carolina Department of Agriculture, May, 1923. Bulletin, Number 247, Wisconsin Agricultural Experiment Station, Janu- ary, 1915. Census, 1920. Department Bulletin, Number 1047, United States Department of Agri- culture, December, 1921. Real Estate Mortgages as Investments for Insurance Companies, Prepared by Institute for Research in Land Economics and Public Utilities, Mad- ison, Wisconsin, from data assembled by Alfred M. Best Company, New York City. Robins, K. N., The Farm Mortgage Handbook. Thompson, C. W., Hearing before the Subcommittee of the Joint Committee on Rural Credits, 64th Congress, First Session. University of Kansas Bulletin, Vol. XVII, Number 18, December, 1916.