In states where the deed of trust is used court action is not even necessary. The trustee has only to advertise the facts and sell. In either case the property is sold and the borrower receives, or is liable for, the difference between the proceeds and the debt.

The mortgagor promises to keep the taxes paid and exhibit the receipts. He promises to keep the property insured, perhaps in a company designated by the lender, under a mortgagee clause. This makes losses payable, as his interest appears, to the lender. It frees him from the acts of the borrower, and requires the insurance company to give the lender ten days' notice if it cancels the policy. If the taxes or insurance premiums are not paid, the lender is empowered to pay them, in which case they are due immediately as interest.

The cost of appraisal and the cost of searching and insuring the title are items which the borrower pays in addition to the interest.

putting his name upon it Pat asked Mike to indorse name on the back of your

107. Elements of personal security. - "Personal security " is often used to denote the guarantee which one can give to another's loan by as joint maker, or an indorser. his note. "Sure I'll write me note guaranteeing you'll pay it, and I know doomed well you won't pay it. We'll have a laugh at the ixpense of the bank." If Hunter's business is separate from Charlton's, and Charlton is himself good security, it adds greatly to Hunter's note to have Charlton's indorsement. The chances are many times less for both to fail within a short time than for one. In cases where it is inconvenient for one or more persons to indorse notes which are to be given as renewals, it is possible for them to sign a guarantee. In such a guarantee the notes are described and a maximum of liability as well as the duration of liability is stated. Banks sometimes ask the directors of

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a corporation to personally indorse its notes. If the managers are not willing to guarantee a loan, the bank can hardly be asked to make it. The double security is present whenever a buyer gives a note, or accepts a bill, which the seller indorses and discounts. Some states require that paper bought by trustees and savings banks shall have three names. That is also a rule of the Bank of France, which requires collateral if only two names appear on a bill.

When a loan is made upon a one-name note without collateral, the security is also personal, but there must be more of it. Where definite property is not pledged the borrower must convince the lender of his (1) property and income, (2) chances of success, and (3) integrity. The borrower shows these by his statement of condition, and his bank and trade references as to his general standing. The security the lender seeks is practical certainty that a prompt payment will be made out of quick assets without any resort to seizure and sale of property. Government loans have as security the taxing power and good faith of the government.

108. Property and income. Even when property is not pledged the security includes all the unpledged property of the borrower. The confidence of the lender is due mainly to the fact that the borrower possesses a factory, a farm, a business that is growing, and profitable, or a certain income in excess of ordinary needs. There has to be a good safe net worth. Unless there is personal knowledge of the assets and liabilities of the borrower, an oral, or written, statement of them must be analyzed. The less the lender knows about the capacity and character of the borrower, the more he depends on property. Whenever income or a growing business is dependent upon the life of a person, confidence is increased by the existence of life insurance payable to the business or estate of the borrower.

109. Chances of success. Every loan is a business venture. Will the borrower succeed in his earnings so that the loan will be easily repaid? This involves both the capacity of the borrower and the proposition in which the credit is to be used. The less the underlying property, or the more specialized its use, the greater is this second feature. A new invention, or some untried scheme, always produces doubt as to the outcome. The ability and success of the managers in other things may augur success. A carload of fresh fruit is perishable. Its loan value is nothing. In the possession of a hustling huckster the fruit might realize good profits. Evidently a loan here rests on the selling ability of the salesman. Ability consists not merely in the successful handling of a project but in the correct judging of the opportunity, and in knowing when safety demands a limit to borrowing. Both the proposition, and the ability of the buyer must inspire confidence, but often the ability of the enterpriser is so great as to produce confidence in the project.

The chances of success of a borrower are affected by the entire industrial situation. Business men are becoming better acquainted with the business cycle. Knowledge as to the part of the cycle in which business is, is an aid in determining what to do. The end of a wave of business prosperity is a poor time for new ventures or further expansion. Studies in fundamental business statistics enable both banker and borrower to guess more intelligently as to whether business is to be good or poor for the next six months.

110. The integrity of the borrower. This is important else the lender can have no confidence in the promise of the borrower, either as to how he will use the funds, or when he will pay back. Nor can any confidence be attached to his statements as to the value of his property, the amount of his income, the amount of his

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life insurance, or the extent of his loans and other obligations. Misrepresentation and deceit are the devilish princes of fraud and disappointment" in the credit markets of the world. An honest borrower who knows his ability will not try to borrow unless he sees clearly whence he can repay. No lender wants to go to the trouble and expense of collecting his debt at the end of a lawsuit; he wants a debtor who is determined to repay. Personal security germinates in the past and blooms in the present. A reputation for square dealing and success in what one undertakes is developed in the conduct of business life. It is to be striven for, and zealously, jealously guarded. J. P. Morgan, Sr., said he knew men without property to whom he would lend a million dollars more quickly than to others with much property.

CHAPTER X

THE BORROWER'S STATEMENT OF CONDITION

111. An analysis of debt-paying power. The purpose of the statement of condition is to enable the lender, who is not personally acquainted with the net worth of the borrower, to subject to analysis his income-earning and debt-paying power. The balance sheet, showing the assets, liabilities, and net worth, of a person, or corporation, is a picture of the debt-paying power at a given moment. The income statement shows the proportion of income to capital during a given period, and reveals, in connection with similar figures for preceding periods, whether a business is growing or failing. The long-time lender is interested in earnings over a series of years, and in how many times the income exceeds bond interest, sinking fund requirements, and other fixed charges. He is also interested in how much the sale value of the property pledged to secure the loan exceeds the principal. The short time lender is interested mainly in the current assets and liabilities. How much does the business now owe? How much cash, accounts and notes in the process of payment, merchandise, raw materials, goods in process, and goods that can be quickly sold at a good value, does the borrower have, which will enable him without sacrifice to pay all his debts as they fall due. He also wants to know how much property, that is not ordinarily to be sold, there is to keep the business going, and which could be taken, if necessary, to enforce the payment of all debts. The statement should be recent, as changes in condition sometimes take place quickly. Some banks require a statement each six months,