CHAPTER XLIV ELEMENTS OF SAFETY IN CITY MORTGAGES By FRANK J. PARSONS1 The first requirements for safety in mortgage loaning is to select as loaning fields those states whose laws permit of the free flow of funds without burdensome taxation; the assurance of a satisfactory return upon capital employed and the strong possibility of being able to collect the principal of the loan when necessary without legal technicalities or serious delays. Excessive taxation upon capital employed, low maximum legal rates, stringent homestead and exemption laws, burdensome foreclosure requirements and long redemption periods, while all designed to protect the borrower, frequently result in a withholding of outside capital and leave borrowers at the mercy of local lenders, whose funds are often inadequate and for which exorbitant rates, commissions and other charges are made. Furthermore, local lenders not infrequently are not averse to acquiring property under foreclosure, whereas this is almost never the case with outside lenders. Legal Interest Rates in Various States.-In states where outside capital is permitted to enter for loaning purposes without being heavily taxed, money flows in freely and local capital is released for the development of general industries and other enterprises and a larger and more stable prosperity is assured. Furthermore, as a rule, such taxation largely fails of its object. Money is a commodity which seeks the highest return consistent with safety, so that taxation beyond reason1 Frank J. Parsons, New York, Vice-President United States Mortgage and Trust Company. The present chapter is a copy of Mr. Parson's booklet Elements of Safety in City Mortgages, which has been recommended by the Actuarial Society of America to its students in mortgage and real estate classes. able bounds in one state causes it to seek other and more hospitable fields. Moreover, the borrower is ever the servant of the lender and even when the latter nominally pays the tax, the actual result is an indirect tax upon the borrower, in the form of expenses or an increased interest rate. In most states there is a statutory provision fixing the legal rate of interest obtainable, but also providing that a higher rate may be provided for by means of a written agreement; in other words, where no rate of interest is specified, the legal rate would be the maximum, while in other cases it would be legally possible to secure the maximum rate provided for by the statute. With respect to this feature, the situation in the various states is indicated as follows: |