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CHAPTER ONE

PURPOSE OF THE FEDERAL FARM LOAN SYSTEM

HE best safe investment is a first mort

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gage on a good farm owned, occupied and operated by a good farmer.

So true is this in the United States that farm mortgages constitute one of the largest classes of investment. The total of farm mortgages now held by American investors probably exceeds 6,000 millions of dollars, compared to nearly 12,000 millions of railroad bonds.

Equity in Farm Mortgages. The average farm mortgage is now probably about one-quarter of the fair value of the mortgaged property. Thus the borrowing farmer's equity in his land and buildings averages seventyfive per cent.

Stockholders' equity in our railroads is a vastly less proportion. The banks of the United States possess an equity of only 15 to 25 per cent in their own resources, because they owe 75 to 85 per cent of their resources to their depositors. Banks and railroads do business mostly upon other people's money,

farmers own nearly three-quarters of the capital they employ.

Because farm mortgages are not only safe but yield relatively high rates of interest, they have become a favorite investment with the largest and most conservative of American insurance companies. Those ultra careful corporations now own over $700,000,000 in farm mortgages, mostly upon property in the Western and Southern states.

The superiority of farm mortgages over other securities of the most conservative character, is proven also by long experience in Europe. Even during normal times, bonds secured by first mortgages on farms in Germany usually sell at about the same price as imperial government bonds bearing the same interest.

Under abnormal conditions, when war suggests the dangers that confront a dynasty, people sell imperial bonds and buy farm bonds, knowing that though governments may be imperiled or dynasties fall, the land remains, the people must be fed, therefore landed security is the ultimate safe in

vestment.

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Entitled to Better Facilities. In spite of the recognized advantages of farm mortgages for investment, the American farmer is forced to pay dearly for the money he borrows upon his note secured by an underlying first mortgage upon his farm.

Often the farmer pays an excessive commission, brokerage or bonus to the agent through whom the loan is obtained. These charges are exacted again, in full or in part, at each renewal of the loan, which may come every three or five years.

The result is that the farmer supports a vast, elaborate and expensive system of middle men or intermediaries between the actual borrower and the ultimate investor.

Besides the various costs of the old method, however disguised, the farm borrower too often is compelled to pay a rate of interest which is abnormally high relative to the giltedge nature of his security and the stability of farm credits.

Few conveniences are afforded the farm borrower, under this old system, for reducing the principal of his debt. No inducements are extended whereby he may pay a little upon his debt at periodic intervals. The con

sequence is that the farm borrower may renew his obligation for the full amount, perhaps repeatedly, with all the expenses attendant upon each renewal.

All these unfavorable conditions, including dear rates and high charges, have a tendency to keep the farm borrower in debt instead of encouraging him to get out of debt.

Moreover, in some sections it often has been difficult for even successful farmers to obtain first mortgage loans at any price. Even in the Middle and Eastern states where loans are made by individuals and savings banks directly to farmers, possibly without commissions and as low as five per cent interest, it often has been difficult for the farmer to get funds.

Efforts Toward Reform. These and other abuses which might be detailed became so painfully apparent, the economic waste involved in the old method was so evident, that over 25 years ago the author inveighed against it and suggested the necessary reforms. The amazing success of the wage earners' co-operative building and loan association-a type of institution originated and perfected in the United States and now being imitated

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