The New York herald., 1922-05-21
INVESTORS TURN TO
! MORTGAGE MARKET
Find Profit From Realty
Loans More Equable Than
From Gilt Edged Bonds.
BY FRANK BAILEY.

=
{ president Prudence Bonds Corporation
Since January / there has been an
unprecedented demand for mortgage in
vestment Of tho type Of guaranteed first
mortgage bonds and certificates and
guaranteed mortgages, and the ratio Of
increase in the demand during this
period has been so remarkable that
have attempted to discover the specific
cause of It
One is apt on first sight to attribute
1t to the active real estate market and
the tremendous building operations now
on. for during the months of January
and February the total of building per-
mits issued in twenty of the leading
cities of the United States has broken
all records. their aggregate value being
s17S.894,S95. as against $61.058.590 for
the same months Of 1914. But this itself
creates demand on the part of bor-
rowers ana not q cause Tor investors to
purchase this class Of securities. In
analyzing the situation here are a few
facts that should be borne in mind:
During the first three months of this
year more than $4,000. 5000 in money
has been In circulation. or an average
OF s51.25 per capita, as against s35.05
per capita during the same period of
1914. all OF which has been eligible for
other investments as well as for mort
cages.
Industrial dividend payments. which
reached the peak in August OF 1916 at
sS9.020.412 for that one month alone
fell to an average OF $5s.940.333 for the
entire first quarter of 1918 and to
$46.755,033 for the first quarter Of this
year. Although they have not quite
reached the level Of 1914, the indications
ara that fhav will fali ha1ou This
would show that industrials are not re-
garded as class A conservative invest
ments.
Promises, Not Actualitfes.
Even the railroad securities are as
yet promises and not actualities, and
the Liberties, which are certainly of the
highest class of security, are now around
par and are averaging about per cent.
an yield.
These are glaring facts and should
serve to supply a sufficient motive for
the turn to the real estate mortgage
bond or certificate. But let US go a
little further.
Despite the great amount Of money in
circulation In 1920-21 and the aggre
gate resources of the national banks
nearly double those of 1914-the busi-
ness failures recorded throughout the
country have been appalling. During
the months of December, January and
February last these failures, in liabiIi-
ties exceeded the total of any one year
between 1915 and 1920. while the fail
ures of 1921. in liabilities. exceeded the
combined failures of 1916. 1917. 1918
and 1919.
These facts amplify the motive for
the turn from speculative securities. But
they do not necessarily explain why the
investor did not stop with the so-called
'gilt edged" securities now upon the
market, other than the real estate first
mortgage bond or certificate, which
conservatively yields from to per
cent. and is worth 100 cents on the
dollar.
The answer is found in the actual
record since 1906 OF twenty of the lead
ing bonds on the markete. The average
value of these twenty bonds during this
long period never reached higher than
1914. This was in 1913. They dropped
to 1877 in 1920. They are now about
64.5. The average yield for the entire
period has been exactly sos per cent.
In 1909 1t was as low as 4.13 per cent.
1t now averages about 5.22 per cent.
The fundamental reason, therefore,
for the turn to guaranteed mortgage
securities. as shown by these records, Is
that, in addition to the factor Of safety.
they pay more to the investor than do
the same conservative class Of railroad
and industrial bonds and stocks.
For IL the investor, ten years ago
when these bonds were averaging about
4.25 per cent. had taken ten year first
mortgage per cent. bonds or certifi-
Gates instead. he would have stood more
than / per cent. per annum to the good
on his investment. This fact he now
knows from actual experience, and I
Lit
once now being shown for the mortgage
security.
But even In the realm OF mortgage
Investments there IL danger, for there
arc mortgages and mortgages, and any
thing by tho name does not necessarily
mean security for tho investment
Rules for Investors to Follow.
The legal interest rate of per cent.
has been established because this has
been proven to be the limit of safety.
Anything above per cent. whether a
mortgage or other security. must neces-
sarily be of q speculative character.
There Is ample money available to-day
for all first mortgages Of 8 per cent. But
even q 8 per cent. investment in some
mortgages Is unsafe. Take, for in
stance. the mortgage on a building con-
strncted at the peak OF costs in labor
and building materials. with an income
shown at the peak of after war yield.
Many q mortgage has been inflated to
correspond with this fictitious valuation.
and there are apt to be some sad expe-
riences recorded when comes the in
evitable slump In rental values due to a
natural readjustment, IL not greatly ag-
gravated by heavy overproduction
In buildings. i am looking for the wip-
Ing out of many equities due to this
cause and many foreclosures endanger-
ing the principal of the mortgage itself.
Investors in mortgage securities
should. therefore. make certain of these
points:
/. That the property mortgaged shows
margin OF safety of at least so per
cent. more than the mortgage, with
peak construction costs and peak rentals
properly discounted.
2. That the property is not prospective
or projected. but actually existant ana
yielding an income amply sufficient to
discount peak costs and to pay ali
charges with amortization.
3. That above all and in addition 20
these safeguards, the mortgage be Sc
cured by a guaranty, which OF itself
should be an ample protection, whatever
happens to the property itself
If the investor observe these points
he will avoid the many pitfalls. even in
the mortgage field to-day, which have
been created by the unnatural condi-