CHAPTER III

Mortgages Limited to Percentage of Value of Property - Abstract — Appraisal — Fire Insurance Policies" Purchase Money Mortgages "-Notice to Mortgagor - Guaranteed Mortgages - Transfer of Tax Lien.

In some States (New York, for instance) a mortgage is a lien upon a piece of property given to secure a debt. In other States (Massachusetts, for instance) a mortgage is a conditional transfer of property as security for a debt, and if the debt be paid no title to the property passes. In some jurisdictions the evidence of the debt is a bond signed by the owner of the property. In other States the form which the

evidence of the debt takes is that of a note with coupons attached, and the mortgagee simply deposits these coupons in the bank as he would the coupons of a railroad bond. In some cases you will find that the owner has executed a deed of trust in favor of the mortgagee.

As I pointed out in the case of a real estate deed, the mere presence of the mortgage is not an absolute evidence of the possession of anything of value. Until a short time ago in New York a mortgagor could pay his indebtedness and the mortgage be satisfied upon the record without the mortgage papers being surrendered. You can, therefore, see the danger of au examiner assuming that because the company has in

its possession a mortgage, it must, therefore, have an asset of value. In New York at the present time a mortgage cannot be satisfied unless the original mortgage is deposited with the proper county officer at that time. This, however, may raise in you a false sense of security, since it is possible under that law for the mortgagor to make a partial payment and the mortgagee is not required to surrender the original mortgage. This is an important point to be borne in mind when the company that you are examining is not the original mortgagee, but has taken the mortgage from another party by assignment.

You will recall that I divided the work on the real estate holdings of a company into two parts: the first to be undertaken by the attorney or conveyancer, and the second to be undertaken by the examiner. In the same way the work on mortgages may be advantageously divided. The attorney should determine the presence of all the necessary papers, such as the mortgage, the bond and the application for the loan setting forth the details of the property which is to be mortgaged. These details should show the true rental value, the value of the land, the value of the buildings, if any, how long the building has been constructed, and all of the other data which are necessary in order that the board of directors or the finance committee may pass intelligently upon the loan. He should also find in each case some evidence that the property has been appraised by disinterested, competent people. The margin of safety which must exist between the value of the property and the loan which is made thereon varies in different States. In some, the loan may not exceed 50 per cent. of the value of the prop

erty, while in others the loan may be 66% per cent. of the value, the law in the latter case requiring that the property shall be worth at least 50 per cent. more than the amount loaned thereon.

In the case of a mortgage loan, there should be an abstract of title which will indicate that the title was in the mortgagor at the time that the loan was made, whether any prior mortgage has been given and recorded and whether there are any liens of any kind recorded against the property. The abstract should be brought down to show that the mortgage under consideration has been recorded by the proper county officer. There should also be some evidence of a search having been made in the proper office for evidence of unpaid taxes, unpaid water rents or any other liens of any kind, and these should of course be cleared up before the loan is made.

The statutes do not permit insurance companies to invest in second mortgages, and in order to determine whether the mortgage in which the company has invested its funds is a first lien on the property, you will of course realize the importance of ascertaining that there are no unpaid taxes or liens recorded against it. In some states there is a recording tax which must be paid at the time that the mortgage is recorded and it is important to observe that this has been properly attended to, for under the New York procedure, for instance, it is impossible to foreclose a mortgage without setting forth at some time that the recording tax has been properly paid.

Now as to the examiner's work. He should carefully observe that all the details of the mortgage correspond with the details set out in the schedule of

mortgages which the company is compelled to file with Insurance Departments. Upon him also devolves the duty of determining the security behind the mortgage, and for this purpose it becomes necessary to employ an appraiser familiar with the local conditions surrounding the parcel upon which the mortgage has been placed; you will recall that in the case of real estate holdings I advised the employment of at least two competent appraisers; in the case of mortgages I think that one should be sufficient. There is a greater necessity for determining the value of the property with great exactitude in the case of real estate holdings, for the company may properly claim that any excess of the appraised value of the property over the book value should be allowed as an asset. In the case of mortgages, however, the asset value remains stationary, irrespective of any increase in the value of the property, and we are concerned only with determining whether the required margin of safety exists.

The statutes of nearly all the states prohibit the loaning of the funds of an insurance company upon unimproved property, and the examiner will, therefore, be compelled to consider the value of the buildings as well as that of the land; it becomes necessary for him, therefore, to scrutinize the fire insurance policies which the mortgagee holds for his protection in the event of the destruction of the buildings and the consequent reduction in his security. Observe that they are in solvent, admitted companies and that the policies contain what is known as the "mortgagee clause, which not only provides that the loss or damage, if any, under the policy shall be payable to the mortgagee instead of to the owner of the property,

but that the interest of the mortgagee shall not be invalidated by numerous acts of the mortgagor or owner over which he (the mortgagee) has no control and which ordinarily would void the policy.

A mortgage calls for a definite rate of interest, payable upon certain dates; it is advisable to note whether any discrimination has been shown by the company in making loans upon property owned by its officers or their friends at rates of interest not equal to the rate received from other borrowers.

You should also note whether the interest is paid promptly, as this is one of the best negative indications of the value of the property; I mean by this, that if the mortgagor does not pay his interest prompty, we naturally look with some suspicion upon the parcel and should scrutinize it more carefully in order that we may determine whether in the event of foreclosure, the investment and the expenses will be fully protected by the value of the property. On the other hand an examination of the history of the mortgage may indicate that there is no necessity for having it appraised, for if we find that the mortgagor has reduced his loan by substantial payments it is a very good indication that the remainder is amply protected. If, however, the mortgagee in consideration of this partial payment has released any of the security which stood behind the original loan, it becomes necessary to carefully observe whether the part that remains is ample to secure the balance of the loan.

In selling a piece of property which it owns, a company is frequently required to accept part of the purchase money in the shape of a mortgage on the property; these are called "purchase money mortgages,"