In each of the two main classes the quality of the individual mortgage as an investment depends upon the conservatism of the valuation placed upon the property and upon the percentage which the mortgage bears to that valuation. The safe rule is that a mortgage should not be drawn for more than thirty to fifty or sixty per cent. of the actual value of the property. And actual value does not necessarily mean purchase price. The value of farm land, for instance, can often be determined only by its productivity, and to determine that accurately one must be informed about such things as soil and climatic conditions, proximity to markets, etc., to say nothing of efficiency of management. Or, the value of improved city property can be determined only by its rent-producing capacity which depends upon a multitude of factors requiring the most expert analysis.

It requires no technical knowledge of either agriculture or finance to perceive that the farm is the basis of wealth, its most essential and stable component part. Even if the census figures did not prove this statement with emphasis and detail, the most cursory reading of newspapers since the war began would establish it. The farm is the soundest of all property. It is the basic element in support of life; demand for its products always increases. Even in war-time foodstuffs, forage crops and meats are more needed than ever. Farms are the foundation of the whole material structure of national life.

This is the fact which underlies the excellent investment record of the farm mortgage. Except for a few years in the late seventies and early eighties, when the western country was very new and thinly settled, and again in the early nineties when western land was "boomed" in a dangerous way, there has been an unbroken record of prompt payment of principal and interest on farm mortgages.

It is no longer true, as it was many years ago, that the investor finds a farm mortgage annoying and troublesome, even granting its safety. There are to-day scores of strong and efficient mortgage houses to which one may turn with absolute confidence in making such investments, and, of course, it hardly need be said that all details, legal and other, are looked after by the dealer. He collects and forwards interest, takes care of taxes and insurance and looks after his clients' welfare to the full. The rate of interest which he offers when he sells a mortgage is strictly net; there are no reductions or commissions to the customer, no incidental expenses.

There are numbers of dealers who have been in business many years who can boast of no loss whatever having been sustained by their clients, and others through whom the loss has been negligibly small. It is quite the common thing to find firms with records of twenty years and more and no losses. It is doubtful if this is true in any other investment field. It is accounted for largely by the fact that the relatively small units in which they deal (the average size of the farm mortgage is under five thousand dollars) enable the established houses to make a practise of relieving their clients of such mortgages as may happen to default, giving entirely new investments and assuming themselves the danger of ultimate loss on the defaulted securities. There are obvious difficulties in the way of following such a practise uniformly even in the case of city mortgages which seldom represent liens less than fifty or a hundred thousand dollars. And it is entirely out of the question in the case of large issues of securities running into the millions and often extremely complex in form made by railroad, industrial and public service corporations.

Outside the big investing institutions like the savings-banks and insurance companies, city mortgages are rarely held in their entirety, as farm mortgages are held, by individual investors. Both classes of mortgages are found on deposit as security under bond issues in denominations frequently as low as one hundred dollars, but city mortgages are more commonly handled in that way. In that form they are known as "divided liens." Many banking houses issue such bonds in serial form, which means that there is lent in the beginning, say, fifty per cent. of the value of the property, and each year the owner is compelled to pay off a small part of the lien, so that at the end of the term of the mortgage (averaging about ten years) there will be outstanding an amount equal to only about thirty per cent. of the value of the property when it was new, or forty per cent. of the value at the final maturity of the lien. In this way, depreciation, the inevitable wear and tear, is taken care of.

Where the lien is thus paid off in part, year by year, out of the actual earnings of the property, the margin of security of course, becomes larger and larger. It would be exceedingly unlikely that the mortgager would default in any of his earlier payments, because of their comparatively small amount. It would likewise be unlikely that he would default on his final payment; for it would be easy to refund the loan at the final maturity because of the great reduction that had been effected in it.

Moreover, even if he did default, the comparatively small size of the loan could be very easily taken care of in foreclosure.

Serial maturities make it easier, in other words, for the borrower to pay his indebtedness, and any device that helps the borrower in paying off the loan, of course, increases the soundness of the loan. Moreover, it saves interest charges to the borrower. It has a further advantage in giving investors a wide range of choice of maturities. Investors purchase successive maturities of various issues so as to have a portion of their principal coming due each year. In this way also the investor is practically always able to secure funds if he needs them, whereas if he owned stocks or bonds he might have to sell them at a sacrifice, even though their intrinsic value were far greater than their market value.