As has already been noted a mortgage is a direct lien on the property covered. If the loan is not paid the property may be sold and the proceeds applied to pay it. From the point of view of safety the mortgage should be a first lien, that is, it should be prior to all other claims against the property. It is true that there are mortgages which are not first liens; they may be second mortgages or third mortgages for example. Usually no mortgage but a first mortgage can be considered a safe investment. As an illustration assume a parcel of improved city realty appraised at $25,000. The owner secures a first mortgage of $15,000. The property can depreciate in value about 40% before there is danger of loss to the holder of the mortgage. Suppose the owner places on the property a second mortgage of $5,000. If the property depreciates only 20% the equity has disappeared, and the holder of the second mortgage is in danger of loss. This risk is increased if the owner neglects to pay taxes and assessments and interest on the two mortgages. In the event of foreclosure the sum of the liens may exceed the value of the property, and unless recovery can be had on the bond, the second mortgagee may lose part of his investment.

In the placing of funds in a first mortgage, the investor should satisfy himself that the mortgage is a valid lien, that is that it is made and executed by the owner or owners of the fee simple, that they have a legal right to mortgage the property, that dower and all other rights have been released or subordinated, and that it is superior to all other liens on the property. It is usually necessary to see that there are no encroachments or other defects affecting the marketability of the title, and no restrictions which have been violated or which adversely affect its value. These things can only be determined by an examination of title by a competent attorney or by a title company, or by a certificate of registration under the Tor-rens Law. An accurate survey should always be obtained in connection with the examination of title.

Prior even to the examination of the title, reliable information should be obtained as to the value of the property. The lender himself may have personal knowledge of the value of the property offered as security for the loan. In the absence of such knowledge he should obtain a reliable appraisal.

The question naturally arises, what percentage of the appraised valuation of a piece of property can, with safety, be loaned on a mortgage? In answering this it must be stated that no rule can be made which applies to every case. Under the law in New York, savings banks are permitted to loan 60% on improved property and 40% on unimproved and unproductive property, and many other lenders follow the same rule. In practice, however, many lenders find that safety requires that in many cases the loan should be for a much smaller percentage of value than those quoted. Consideration should be given to the question of stability of value and the marketability of the security. If there should be a default on the mortgage; the property should be of such a character as to find a ready market. Property not easily saleable is not usually the best security for a loan.

Dwellings, apartment houses, stores and office buildings are classed as properties of standard values and, based on a fair appraisal, loans on them should be secure. Factories and garages are not always saleable or rentable and it is not usually wise to make too full a loan on them; the percentage of value loaned should be less. Theatres and churches are special buildings; some investors will not loan upon them at all and others loan only a small percentage of their value. In the case of special buildings, and in fact with all property, the safety of the loan is increased if the land value is a large proportion of the total value. Some lenders favor loans where the land value alone equals or exceeds the amount of the loan.

Mortgage loans are sometimes made on unimproved and unproductive land. There is danger in this, as such land produces no income and is frequently difficult to sell. Of course a choice plot in a large city may be an exception to this rule but it certainly applies to land in suburban sections. Farm land of good quality is not usually unproductive land, but the loan should be based on its value as farm land and not as potential building lots.

The cost of a building is not always a measure of its value. A large sum may be spent by an owner in erecting a mansion to suit his own tastes and inclinations, but commercially the building would not be worth its cost. A valuation of such property for loan purposes should be on the basis of what it would reasonably sell for. A New York lending institution recently rejected an application for a loan of $75,000 on a mansion costing $750,000 on the ground that, while it might be a beautiful monument its commercial value was small.

Conditions caused by the world war have resulted in building costs being increased greatly. Both materials and labor have been high in price and often difficult to obtain. Lenders used to making loans on pre-war costs have felt that these prices would ultimately return to normal and they have not thought it wise to make loans based on prices temporarily prevailing.

First mortgage loans on new buildings have been between 40% and 50% of cost (land and building) rather than the customary 60%.