This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
It is interesting for purposes of comparison to examine the requirements of margin which are met with in Europe, in different countries, and on different classes of loans. If we disregard the advances of the Russian government to its peasants, which have amounted to 75% of the value of the land in Russia, and 90% in Poland, we find that the only companies or associations ever allowed by law to loan more than 66 2-3% of the value government to its peasants, which have amounted to 75% is the usual limit on land and 60% on buildings, the Hamburg Association, founded in 1782, which could loan up to 75%, and the Deutsche Grandschuldbanke in its loans on city property. In Germany, generally, the limit is 66 2-3% of the value, though the Prussian Central Boden Credit, one of the largest of their mortgage companies, is limited to 50% of the value of buildings and 66 2-3% of the value of land, while on vineyards and forests the limit is 33 1-3%. The Deutsche Grandschuldbanke, of Berlin, is limited on farm loans to 60%, and the Bavarian Mortgage Company, of Munich, to 50%. Other German companies are restricted to 50% of the value of the property, or to 60% of the land value and 50% of the value of the buildings. There is quite generally a tendency in Germany and Scandinavia to distinguish between the land value and the value of the buildings. This is, no doubt, largely due to the fact that their loans are commonly for a long period of years, the terms of 50 and 75 years being by no means unusual there, and the depreciation of buildings from age during the life of the loan being very considerable.
Turning to other countries, the Credit Fonder, of
France, is limited to 50%, except on forests and vineyards, where the limit is 33 1-3%. In Italy the limit for mortgage companies, originally placed at 50%, was raised in 1881 to 662-3%, though the loans of associations are still kept under 50%. In Russia the St. Petersburg Credit Association is limited to 50%, and the same is true of the associations in Belgium, though the mortgage companies there loan up to 662-3%. The largest mortgage company in Austria is limited to 50%. In Denmark the companies are limited to 60% on land and 50% on buildings, while the associations are limited to 50% on land and 40% on buildings. In Norway the limit is 60% on all farm loans and loans in Christiania and Bergen, while it is 40% to 50% in other towns. In Sweden the limit is generally 50%, though the Stockholm Mortgage Company has been raised to 60%. In Argentine and Mexico the limit is also 50%. The limitation in Germany is sometimes expressed in terms of rentals, the German Mortgage Bank of Berlin, for instance, being limited to ten times the official assessed income in cities, and twenty-five times the assessed income on estates, and the South German Mortgage Company to twenty times the net income.
To summarize the result of an examination of the margins required in different countries, it may be stated that the limitation on loans varies from 25% to 75% of the value of the security, and that with few exceptions the limitation varies between 33 1-3% and 662-3% of the value.
To those who are familiar with the small margins required on short-time banking loans based on collateral consisting of high grade stocks or bonds, the margins required on mortgage loans are likely to seem unnecessarily high, and this point of view on the part of bankers and investors has led to serious losses. On the other hand, through laying down fixed and severe rules as to the amount of margin required, without examining the reasons for it, opportunities have often been sacrificed for meeting what is really a reasonable and conservative demand. While many of the same factors are present in farm loans, it is of loans on city property that I wish especially to speak. The margin on city loans to insure safety must be sufficient to cover the following six elements of risk: