26 BULLETIN 968, U. S. DEPAETMEN"T OF AGRICULTURE. 



ciple. Instead of seeking to avoid all risk, such a system would care- 

 fully estimate the risks incurred and spread this risk over a large 

 number of loans widely distributed in different sections of the 

 country, charging enough extra on the interest rate to earn the actu- 

 arial value of the risk assignable to the particular loan. Such 

 charges could be graded for different degrees of risk. The larger 

 the credit desired the higher the per cent of charge to be added to 

 the basic interest rate. The charge might also be varied according 

 to the section of the country, being made higher, for instance, in 

 regions where frequent drouths occur. 



It is obvious that such a basis for credit could not be safely adopted 

 by any agency with only a small volume of loans nor by one whose 

 loans were confined to a single section of the country. For the last- 

 mentioned reason it could not well become a basis for a local system 

 of credit, but might be feasible for an agency doing a large business 

 on a nation-wide scale. 



If such a system were developed to supplement the Federal farm- 

 loan system it would be necessary to offer its privileges only to those 

 cases in which the first mortgage is held under the Federal farm- 

 loan system, for the element of risk on the second mortgage would be 

 greatly reduced if both first and second mortgages were controlled by 

 the same agency. Holders of second mortgages have always been 

 faced by the danger of arbitrary foreclosure of the first mortgage, 

 with the resulting destruction of the second-mortgage equity. Many 

 first-mortgage loans are made with the expectation of renewal. If, 

 however, the holder refuses to renew, he may foreclose and force 

 a sale of the property. This may occur even though the farm busi- 

 ness is to all intents and purposes solvent. If the same person or 

 agency holds both mortgages he can exercise discretion in protecting 

 the second-mortgage equity. 



It is also possible that second mortgages can be made a more effec- 

 tive method of promoting home ownership by providing convenient 

 terms of repayment. While it would probably be the part of wis- 

 dom, as suggested above, that the borrower be required to pay off 

 the second mortgage in a shorter period than the maximum allowed 

 for first mortgages under the Federal Farm Loan Act, yet it should be 

 possible to spread the payments over a considerable period. Such 

 payments could be made periodic and on the amortization plan, with 

 privilege of repaying larger amounts on due notice. Mortgages are 

 sometimes given in connection with the purchase of farms on which 

 considerable development work must be done before they can be 

 put on a paying basis. While the work of development is progress- 

 ing, a mortgage holder could render the farm owner great assistance 

 by deferring all payments, as far as possible, until a paying basis 



