Bonds that are backed by a mortgage on real property are, in this country, the most popular type of bonds and will probably always remain so. In the United Kingdom it is customary to issue debenture bonds (having no specific security behind them) in many cases where we issue mortgage bonds. The difference is in name rather than in fact, for the English debenture bonds are considered by the investor with at least partial reference to the amount and the nature of the corporation's holdings of real property.

After all, the great bulk of the wealth of this country is in the form of real estate. The greater the increase of other forms of wealth, the greater must be, necessarily, the increase in land values. Hence, a mortgage on land, assuming that it is conservatively placed, is bound to remain the most common and perhaps the safest form of security. This is not to say, by any means, that every mortgage bond is safe, but only to state the general principle that land and other real property constitute the most acceptable form of security for bond issues.

Not only is a promise to pay secured by real estate the most popular type of secured obligation, but, for most individually owned businesses, partnerships, and small corporations, it is in fact the only practical form of long-term obligation. Other forms of security are utilized in the main only by large concerns which are widely and favorably known and therefore enjoy an exceptional measure of credit apart from their property holdings.

The great mass of obligations on real property are secured by first mortgages. There is a considerable amount, also, of second mortgage securities and relatively few third and fourth mortgage securities. Third and fourth mortgages are seldom found except among the obligations of large railroad corporations. The Northern Pacific put out a third mortgage issue of $12,000,000 in 1887; the Erie Railroad has outstanding third, fourth, and fifth mortgage bonds. Modern practice favors disguising these junior issues by some euphemistic and suggestive title. For instance, in the financing of the Erie Railroad when a sixth mortgage issue was found to be necessary, it was not called a "sixth mortgage" but "Erie Railroad First Consolidated Mortgage 7's, 1920." This title does not mean, as the unsophisticated might imagine, that the issue is protected by a first mortgage, but only by a "first consolidated mortgage" whatever that may be. A little later we have the "First Consolidated 4's, 1996," which receive the title of "first" apparently because, though not the first consolidated issue of the road, they are the first consolidated issue to bear interest at the rate of 4%. Finally, the Erie put out what is practically an eighth mortgage, which was christened "General Mortgage Convertible 4's, 1953."*

The Erie is a shining, but by no means isolated, example. It would not be difficult to bring to light many another fourth, fifth, sixth, or even later mortgage which is masquerading as a "first refunding" or "prior lien" or under some other high-sounding name.

A second mortgage issue, when it is recognized as such, will customarily have to pay a rate of interest 1/2 to 1% higher than a first mortgage issue, and will customarily, also, be redeemable within a shorter period. The issues which are protected by subsequent mortgages may be expected ordinarily to pay still higher interest rates in rough proportion to the priority of their claims. However, this is not stated as an invariable rule, for in many cases the junior mortgage issues are of larger size and enjoy a wider market or have the other advantages which more than compensate for the inferiority of their liens.

* See W. H. Lyon's "Capitalization," pp. 118-121.