In loaning money on demand, when it is strictly understood between bank and borrower that the money so advanced is positively minute money—money returnable at any minute when the bank calls for it—banks usually charge low rates of interest. When interest rates are high bankers prefer to deal in long-time paper. This general rule is reversed when the situation is reversed. Bankers aim also to scatter and locate their maturities so that as the seasons roll around they will not have very large amounts maturing at one time and very small amounts at another. They plan also to be "in funds" at those seasons when there is always a large and profitable demand for money. For instance, in the centres of the cotton-manufacturing interest the banks count on a large demand for money between October and January, when the bulk of the purchases to supply the mills are made. Again, among those who operate and deal in wool there is an active demand for money in the wool-clip in the spring months. The wheat and corn crops are autumn consumers of money. Midwinter and midsummer in the north are usually periods of comparative stagnation in the money market. All these things affect rates, and the successful banker is he who from observation and large experience shows the most skill in timing his money supply.
V. COLLATERALS AND SECURITIES
TWO DISTINCT CLASSES OF SECURITIES
There are two distinct classes of mortgage securities—one class based upon the actual value and the other upon the earning value of the property. When a man lends money upon a dwelling-house he bases his estimate of security upon (1) the cost of the property, (2) its location, (3) the average value of adjoining properties, and (4) the general character of the locality; that is to say, the value of the property is the basis of the security. On the other hand, the lender of money upon railway mortgages, for instance (that is, the buyer of securities known as railway mortgages), considers the general earnings of the road rather than the cost of building and equipping the road as the correct basis upon which to estimate the value of the security. These two classes of securities differ in other particulars. The value of the mortgage upon ordinary real estate is constant and the security itself is not so likely to change ownership, while the value of the railway mortgage may vary with the success or failure of the road, and the security itself is in the market constantly as a speculative property. The whole property of a railroad company, considered simply as real estate and equipment, is usually worth but a small fraction of the amount for which it is mortgaged. The creditors, as a rule, depend for the security of their money upon the business of the company.
We have already learned that collaterals are mortgages, stocks, bonds, etc., placed temporarily in the hands of lenders as additional security for money borrowed. The student will note, further, that the borrowing value of such securities depends very largely upon the character of the property represented.
MORTGAGES AS SECURITIES
A mortgage is a conveyance of property for the purpose of securing debt, with the condition that if the debt is paid the conveyance is to become void. A mortgage in form is really a deed of the land, with a special clause stating that the grant is not absolute but only for the security of the debt. It is usual for the debtor at the time of executing the mortgage to execute also a bond or promissory note in favour of the creditor for the amount of the debt. This is called a mortgage note. Mortgages are frequently given in cases where there is a debt existing to secure or indemnify the mortgagee against some liability which he may possibly incur on behalf or for the benefit of the mortgagor. For instance, when a man has indorsed another's note for the latter's accommodation or gone on his bond as surety the latter may execute to the former a mortgage of indemnity. The power of a corporation to mortgage its property is usually regulated by its character or by the general law under which it is organised. All mortgages must be recorded in the office of the register of deeds for the county in which the property is located. The object of recording is to give notice of the existence of the mortgage to any one who might wish to purchase the land or to take a mortgage upon it. There may be several mortgages upon the same property. The first mortgagee is entitled to be paid in full first, then the second, and so on. The mortgagee may use his mortgage as security for loans or he may assign it as he pleases. When the requirements of a mortgage are not met the holder has under certain conditions the right to foreclose—that is, to advertise the property for sale and, within a time fixed by law, to sell it to satisfy the mortgage. It is usual for the mortgagor to insure the property for the benefit of the mortgagee.
Although the terms of corporation mortgages are similar to those on real estate such as is represented by dwelling-houses, the commercial conditions make it inconvenient or impossible to foreclose and sell such properties. To stop all business of a railway or to shut down the work of a manufacturing concern would not only result in injury to the public but would reduce largely the earning value of the property. To overcome this difficulty where an active concern is financially embarrassed, the court appoints a receiver, who is responsible for the proper conduct of the business until a satisfactory reorganisation or sale is accomplished.
Mortgages upon improved property, if properly graduated in amount, should be safe and profitable investments. The buyer, however, must exercise great care and good judgment. Should there be collusion between the loaning agent and the land-owner, the money advanced may be largely in excess of the actual property value. Villages with less than a dozen houses are often the sites of investment companies doing business under pretentious names and offering mortgage investments at interest rates which by the local conditions are impossible. One of the devices of these enterprising companies is to offer their own guarantees as to both principal and interest of all mortgages negotiated by them. The investor should be sure of two things: (1) The safety of the principal, and (2) regularity in the payment of the interest. There is great danger of default from causes not anticipated by the mortgagor and over which he has no control.