Leaving now the consideration of the securities of public corporations, we come to that larger class of mortgage securities based upon private property, either corporate or individual. Mortgage securities may be divided into two general classes, one of which is based upon the actual value of the property mortgaged and the other upon the earning power of the property. Thus when a man loans money and takes as security a mortgage upon the house and land of the borrower, he estimates the actual value of the house and land. He does not wish to become in effect a partner with the mortgagor by making the repayment of the loan dependent wholly upon the borrower's success in business. He wishes the security to repay the loan in case the borrower fails to pay; hence if he is prudent he loans but one-half or two-thirds of the actual value of the security, so as to leave abundant margin for shrinkage in case of forced sale. But suppose he loans to a corporation - say a railroad company - by purchasing its bonds, he depends for the security of his money not upon the property as such, consisting of road-bed, depot buildings, etc., but upon the business success of the road. If the road does a profitable business the bonds are safe, otherwise not. There is not a railroad in the United States that would sell for its bonded indebtedness in case its business was to cease. The rails and ties would be worthless except as old iron and wood, and the right of way could be sold to neighboring farmers at only a small price. Considered simply as real estate, the entire property of a railroad company would be worth but a small fraction of its bonded indebtedness. The value of the bonds, then, is sustained by the profits or income from the property. From this another reason is apparent why when a railway company becomes financially embarrassed the courts appoint a receiver to take charge of and run the road, pending a settlement with the creditors. To stop the operation of the road would be to vastly depreciate if not ruin and destroy the property. The investor, therefore,

Mortgage Securities who contemplates the purchase of railway securities should consider well the present and future earnings of the corporation. If its earning capacity for any reason becomes seriously impaired, nothing can save the bondholders from loss. And yet railroads are such a necessity to our civilized life, and their traffic so dependent upon our industrial system that their income can be made the basis for borrowing money as safely as can a dwelling-house.

It is apparent from the foregoing that the desirability of railroad bonds as an investment is dependent upon two conditions, viz.: With old, established roads these two factors in the problem can be easily ascertained, but with new roads the question of earnings can only be surmised, and if the management of the company is defective, or the earnings are overestimated the result is likely to be a receivership and reorganization, with all of their disastrous consequences to investors. In the case of street railroads, telephone systems, water and gas works, the franchise is usually a valuable asset which will support a considerable bond issue, especially when it has many years to run. On the other hand, the danger of competition is always a menace to the income of a corporation unless it has an absolute monopoly. Thus gas and electric companies are competitors and the profits from each may be correspondingly reduced.

The value of the security afforded by bonds of ordinary commercial and manufacturing corporations must be estimated wholly upon the merits of each individual case. Each interest must be investigated in all its bearings in order to reach a wise decision, while competition, management and public requirements are important factors which should be carefully considered by the investor before placing his money.

There are many uncertainties that threaten stocks which do not appertain to bonds. The latter are secured upon the property or earnings of the corporation, and are fixed and determined, but the value of stocks rests largely upon the earning power and the management of the corporation and also the future conditions under which the company may conduct its business. The investor in stocks should, therefore, anticipate the future and weigh the probabilities of business success. A business which is successful to-day may be run at a loss next year or compelled to close down entirely. Competition is constantly shifting and must be met in a variety of forms. New inventions and labor saving processes may give a temporary advantage to those who discover or secure them first, and reduce the dividends of companies which were prosperous before. The telephone competes with the telegraph, and the trolley car cuts into the suburban traffic of steam railroads. Lines of business which yield large returns especially invite competition, and as a result the business may become overdone and profits entirely disappear. The stock of companies formed to use or promote new and useful inventions is frequently the most profitable and where a monopoly is thus secured for a time, large fortunes have been made. Late investors in such stock, however, are very likely not to fare so well. Every hour shortens the life of a trade monopoly. Among the safest stocks are those of well managed banks and insurance companies. The states exercise a supervision over these companies, and their shares can generally be relied upon as representing actual cash investments, especially in those states where the laws are strict concerning such corporations and the general administration of law is considered good. In the case of banks, however, the stockholder often incurs the risk of liability to creditors to the extent of the face value of his stock, in the event of the bank becoming insolvent.

Mortgages on real estate are considered a desirable class of securities, especially when the mortgage represents not more than one-half the actual market value of the property, and where the property is located in a prosperous and growing community.

Many insurance companies and savings banks decline to loan upon wooden houses, confining their investments to securities upon either stone or brick improvements for the reason that these are less liable to deteriorate by the ravages of time or to be destroyed by fire. Other investors prefer mortgages upon residence property upon the theory that a man will protect his home from foreclosure when he would not other property. Unless there is a decided advance in the value of land in the vicinity of the property mortgaged, the mortgagor should aim to reduce the amount of the mortgage at maturity by making a part payment at least, since property naturally deteriorates with time, and at the end of three or five years the property may not be as good security for the debt as it was originally.

Real estate mortgage notes are usually made payable to the order of the maker and are then endorsed by him in blank. This makes the security transferable by mere delivery, and hence the holder of a mortgage may sell it, and an investor purchase it, the same as any other chattel. The buyer must of course, exercise good judgment and proper care to see that the security is sufficient and the character of the property satisfactory before investing. By trusting to representations of brokers in regard to these vital points, instead of making a personal investigation, investors have been known to find later on that their money was paid for a comparatively worthless security.

As the country becomes more densely populated, and the unoccupied lands of the West are taken up, the farm lands in the great Mississippi Valley become more valuable and prices tend to advance. Mortgages upon good, productive farms in the central west are therefore growing in popularity and more and more absorbing the capital of investors. Paper resting upon landed security in the newer and rapidly developing sections of the West, where farming is uniformly successful is almost sure to be good. But like city mortgages farm securities must be carefully investigated or disaster may result. There have been mortgage companies located in western cities whose business consisted in making loans on farms and selling the securities to eastern investors. In some instances these companies guaranteed the paper. But as the loan company used the same money over and over again to make the loans, it is apparent that their guaranties would soon exceed the amount of their capital and hence become practically worthless. One objection to farm loans is the uncertainty of payment of interest in case of a crop failure. What an investor wants is not only safety of principal, but regularity as to payment of interest. A locality where there is a diversity of crops is preferable for desirable mortgages, since in case there should be a failure of one crop, the mortgagor may yet be able to pay his interest from other products. Where a single crop is depended upon, or the land is situated so that it is subject to overflow, resulting in an occasional total failure of crop, the mortgagor may be compelled to default in the interest perhaps for a year.

Then again, investors would do well always to consider the disposition and ability of debtors to pay. No matter how good the security, the mortgagor's credit has an important bearing upon the value of his paper as security for money loaned or invested. Where public officials repudiate their just obligations and the laws are framed in the interest of the debtor class, investors may well beware. As previously noticed, several of our states have openly violated their obligations, and hostile laws have been passed against capital by both state and municipal governments. It can hardly be expected that private citizens will prove to be shining examples of integrity when those in authority above them are thus derelict. Investors, therefore, aim to avoid such localities.