Farm lenders’ dilemma: force a sale now, or maybe lose more later

Press, 7 February 1986, Page 25

Farm lenders’ dilemma: force a sale now, or maybe lose more later

PA Wellington Farm lenders are weighing the cost of forcing mortgagee sales against that of waiting and possibly selling up clients later when their farms are worth less, says the Rural Bank’s planning and policy director, Nr Arnold Snodgrass. He was commenting in a “Dominion” newspaper report that farm lenders were trying to stave off a flurry of forced sales that would send land prices tumbling and yield them little money. The predicted spate of farm mortgagee sales had not begun, partly because creditors were reluctant to trigger a collapse in the land market for little financial gain, the newspaper said. Bank and stock firm staff reported no significant increase in the number of farm foreclosures in spite of the gloom and doom talked about agriculture.

Financiers’ efforts to keep struggling, but competent, farmers on their land emerged as the main reason, along with the good season farmers had last year and the length of time it took to force a sale.

Many lenders were frightened to sell up hardpressed fanners because premature moves could hasten the fall of land prices - and the chances of debt recovery were slim.

However, other farmers were wondering whether to cut their losses and act now while they might be able to get some money 01$ and before land prices

sank further, the newspaper said. Mr Snodgrass said that considering farmers’ financial difficulties, there had not been many mortgagee sales among the bank’s 44,000 clients over the last year. Farm mortgagee sales had usually been abnormally low compared with business failures. After 20 years with the bank, he could count the number of forced sales on the fingers of one hand. "It’s an area that most lenders haven’t really had to confront in the past.” A Stock and Station Agents’ Association spokesman, Mr Vince Connolly, said many sales were still three or four months away.

“It’s very much a Catch 22 situation at the moment — everyone is too nervous to move,” Mr Connolly said. Creditors forcing sales could well end up in trouble themselves, he said. Most farmers at risk had at least two mortgages and their main creditors would have first claim on debt recovery. “If lenders initiate any action, there will probably be no crumbs left for them on the plate.” The deferment of interest and principal payments was the key to the survival of many famers, Mr Connolly said. The Bank of New Zealand’s chief manager for its New Zealand business division, Mr John Mac Gibbon, said a survey by the bank in December showed that only 6 per cent of its fanning clients needed urgent debt Res-

tructuring. Mr Mac Gibbon put this down to high farm production last year and the bank’s policy of basing lending on cashflow rather than equity.

He had not detected any recent increase in the number of forced farm sales.

The bank was worried about the effect mortgagee sales would have on land prices so it would do everything commercially possible to keep competent fanners in business, he said.

“That is in the back of our mind when we are looking at protecting the farmer. If a farm is sold at a depressed price, what impact is that going to have on adjoining farms? We have got to weigh that up.”

The bank was determined not to upset the land market

“We are hopeful of not influencing it one way or the other by being able to work through our problems rather than selling. We must have our share of forced sales but the skill is going to be in keeping numbers down,” Mr Mac Gibbon said.

The bank already was restructuring farmers’ debts to carry them over short-term difficulties, and interest rates might be adjusted in special cases.

If other creditors were involved, the bank would look at rearranging the debt share.

“There is a need to work hand in hand with other financiers.” It had tried to work in with other lenders to keep a farmer on his drought-

affected farm last November but the attempt had failed because of the attitude of some creditors and the shortage of time. The bank sometimes set up deals between clients wanting to get out and others looking for more land.

Mr Mac Gibbon said he expected farm incomes to decline over the next year but it would be 18 months to two years before the real crisis came. Farmers who had experienced drought or flooding were most under pressure at the moment.

Elder’s Rural Finance credit and lending manager, Mr Henry Playne, said fewer than 5 per cent of the company’s clients were causing concern. His company was keeping a close eye on borrowers through its pastoral arm.

“There are times when we see the need to be more lenient," he said.

It was generally too early for farmers’ problems to have reached the stage of foreclosures but he had no doubt that many had been set in train.

The funding manager for Wrightson Farmers Finance, Mr Barry Brook, expressed concern about the outlook for land prices.

“If you start having too many farms on the market, prices could start to fall dramatically and that’s where you start getting problems,” Mr Brook said.

Wrightsons did not usually hold a first mortgage so it had not inflated forced sales but he knew

some struggling clients had chosen to sell. Many had cost the firm a lot of money, he said.

Mr Brook said the company was encouraging its borrowers to face their situation. It was sticking with farmers it considered had a future.

“We are financing a number of deficiency debts. We have kept our interest rates below or at least not ahead of the market.”

Agriculture had lost more assistance than the manufacturing sector and the Government should redress that imbalance.

“We are a bit concerned about the flow-on effects at the moment into the small rural communities that are pretty vulnerable,” Mr Brook said.

The Rural Bank is drawing up a scheme that would allow private lending institutions to swap the mortages of defaulting borrowers for Rural Bank debentures.

A farm debt survey by the Stock and Station Agents’ Association last, year revealed that more than 80 per cent of the most hard-up farmers were Rural Bank clients.

The proposed Government measures would therefore mean the Rural Bank could end up carrying a predominance of financially shaky farmers.

This could lead to further Rural Bank purchases of farms at mortgagee sales. The bank last year was forced to buy four farms as mortgagee sales failed to produce buyers willing to pay prices that would match the bank’s investment