Loans secured by mortgages on farm properties.
The fact that in many sections of the country the lands in the agricultural districts are steadily rising in value has attracted many people towards them for investment purposes. With the exception of a few localities, especially in the East, where lands are either "run out" or of a poor quality, or where prices have risen to a point beyond the earning capacity of the land, the history of farm values, in spite of the tremendously increased area under cultivation, has been one of fairly steady advance, always excepting, of course, periods of depression.
It is true that there have been many losses in farm mortgages, but such losses may generally be attributed to a desire for excessive interest rates, improper judgment of the local conditions, dishonest or too greedy agents through whom the business has been accomplished, who have been willing to recommend too large loans for the sake of the increased commission, or to the failure on the part of the one holding the mortgage, and who has been obliged to foreclose the property, to wait for a favourable time to sell.
The question of the agent suggests, however, that few investors are so situated that they can make personal examination of farms located at a distance, upon which they may have an opportunity to make a loan. This necessitates the selection of some one with an unbiased opinion in whom confidence may be placed, and there is, perhaps, no grade of investments which calls for a more careful selection of those with whom the business is done, than in the purchasing of farm mortgages.
The subject of farm mortgages is very deep and one extremely difficult to cover with any general rules. What applies as a conservative selection of a mortgage on farm lands in New England, might not apply at all in Kansas. In general, however, the nature of the soil must be considered, whether the location obtains sufficient moisture from natural causes; if not, what the irrigation rights are, if any. If it is a Western farm and dependent upon irrigation, the investor must ascertain whether or no the farm has the right to a sufficient amount of water at a reasonable price at all times. There are many farms located at the extreme lower end of irrigating canals, which, at times, may suffer from a deficiency of water supply The climate, the class of crops raised, quality and depth of soil, the nearness to a market, churches and schools, transportation facilities, the sufficiency of farm tools necessary to properly carry on agriculture by modern methods, whether or no such farming tools are covered by a " chattel mortgage," the record which the farmer has made for some years back as a producer and saver, the reason for his needing the money - and this last is a very necessary feature to consider, for, if the money is going for betterment of the property or for partial payment thereon, that is one thing, if it is to be used for some outside purpose, it should not be encouraged. In lack of personal knowledge of the character of the proposed mortgagor, inquiry should be carefully made among his neighbours and tradesmen, if possible. The probable ready market value of similar lands in the same locality should be ascertained; not their salable value during boom times, but during dull times as well, and upon the latter figures the probable market value of the farm ascertained, and a mortgage not more than fifty to sixty per cent, of the value made thereon, including, of course, a fair valuation for the buildings and improvements. Although buildings may add materially to the value of the farm, yet that is not where the earning capacity of the property lies. Therefore, in a security of this kind, the buildings should not be taken at more than 25% of the whole property. It is desirable that the borrower should be married and an occupant of the property. Unimproved land is doubtful security, and loans upon it should be made not only with great caution, but at a very low percentage of a conservative market value.
What one Western writer has said is of interest here:
"The farmer uses money in his business precisely as does the merchant, and his mortgage is no more to be considered as an evidence of lack of prosperity than the note of the merchant, given in exchange for goods. The farmer in the Corn Belt has been able to make legitimate profits during the past ten years on account of the steady rise in land value. From his income he makes a partial payment on lands which he wishes to acquire, and gives a mortgage to pay for the balance. This has been his savings bank and it cannot be denied by those familiar with the conditions that it is a good one. We are still an agricultural nation and land is the foundation of our national prosperity. When agriculture prospers, other industries also prosper."