us with a lasting real benefit in the form of better homes and consequent better living conditions. To promote and perfect a program of this sort becomes both a governmental duty and a governmental opportunity.

Such a program calls for two things: First, a campaign to sell the idea to the people as a whole, and, second, proper governmental aid to make participation in the program not only financially possible by the home owners of the country but also financially desirable. The first object is an administrative problem that can presently be handled without the need of new legislation. The second calls for congressional action.

In approaching this second problem of financing a home modernization and repair program on desirable terms, it appears eminently preferable to arrange, if possible, to facilitate the flow of money from its present sources to the point of need without an excessive use of Government financing and the funnelling of funds through the Federal Government and back out into the market. This approach is not only commendable from the standpoint of the National Budget but is important from the standpoint of preserving and stimulating the private money market and private lending institutions so that they can more quickly assume the burden of normal financial operations.

Assuming, then, that it is desirable to finance a home modernization and repair campaign by facilitating direct advances of credit to home owners making repairs from private institutions now having surplus funds, the problem becomes one of the Government aid necessary to do this cheaply and economically. While it is doubtless advantageous, both collectively and individually, for the private citizen to make home improvements at the present time, he cannot be asked to mortgage his future too heavily to accomplish this. He cannot and should not be asked to pay too much and too long in the future for benefits to his home, even though they are desirable and worth while to himself and his family. The socially sound debt for him is one which he can pay out of future income, but on which the payments will not be so heavy as to jeopardize his future. The costs of this type of financing have in the past been excessive. To get these costs down and to control such financing the scheme embodied in section 3 of the bill in general language has been worked out in detail as follows:

A Federal corporation, with headquarters in Washington, D.C., will be created with a capital of $200,000,000 provided by the Federal Government. It will function as follows:

(1) Determine standards for qualifying private financing agencies (commercial and savings banks, finance or acceptance corporations, and building and loan associations) with whom contracts of insurance will be made, insuring them against losses on promissory notes, up to 20 percent of the total face value of all such notes held by them, and provided:

(a) Notes have been executed in settlement of the cost of economically justified repairs, alterations, or renovations to private dwellings.

(b) The title owner has qualified under such credit standards as to income and moral reputation as may be required by the Home Credit Insurance Corporation, as furnished from time to time to contracted lending agencies and has not incurred an obligation beyond his reasonable ability to pay.

(c) Notes conform to such terms as required by contracted lending agencies, but which qualify within the following minimums and maximums:

Minimum principal amount of loan, $100, plus interest for period of loan. Maximum principal amount of loan, $2,000, plus interest for period of loan. Minimum monthly payment, $10.

Maximum term of note, 5 years.

Maximum interest, added to the principal cost of the job must not exceed 5 percent true interest per annum on decreasing balances.

(d) In the discretion of the Home Credit Insurance Corporation, notes may be made payable in quarterly payments, or in the case of title owners engaged in agriculture, payments may be made to conform to crop income dates, with a minmum of one payment annually.

(e) The total cost of the renovating job may include a service fee authorized by the Home Credit Insurance Corporation, in addition to the 5 percent interest provided for above.

The authorized service fees are calculated on the following basis:
Credit investigation and entry on books, $2 per note.

Collection costs, 50 cents per payment.

Supervision and legal costs, one half of 1 percent per annum on amount of

job.

The financing charges provided in the plan are about half the lowest costs of similar types of financing available through private sources today, yet, through the cooperation of all parties to the transaction, these charges will be adequate to cover necessary costs.

II. MORTGAGE INSURANCE

Home modernization and repair can serve as an immediate stimulant to the building industry but cannot permanently provide employment for all of those normally engaged in the building trades and associated activities. Eventually new construction must come back into the picture. Even assuming we were overbuilt during the boom, we have had 5 years during which there has been practically a cessation of new building. In isolated areas now there is a sound economic demand for new construction. By the time the home modernization and repair campaign exhausts itself, that demand should be sufficiently substantial to provide continuing employment to those engaged in the building industry. When that time comes a sound mortgage market must exist.

In addition, the effects of the past, now facing us in the form of hardships both to the lender and the borrower in the mortgage field, must be taken care of. The present mortgage problem is a serious one. Mortgage debts comprise one of the largest single classifications in our national-debt structure. The following table gives some idea of its importance (figures are approximate only and in round numbers):

The $2,000,000,000 of the Home Owners' Loan Corporation was intended and can serve only to care for extreme emergency cases. Obviously the private mortgage market must be encouraged to again cover the mortgage field unless the Government is prepared to take the radical step of assuming the entire mortgage-debt burden. The present private market is frozen and inoperative. The causes of this must be analyzed and remedied.

Three primary causes may be named as contributing to our present mortgage problem:

(1) The debt has been created upon a structure of excessive values and is unsound in relation to either existing or normal values.

(2) The debt has been upon unsound terms from the standpoint of the borrower.

(3) The debt has been upon unsound terms from the standpoint of the lender.

The first problem may be taken care of by the inauguration of a national system of real-estate appraisal and by arranging for the collection and dissemination through a governmental agency of statistical information to guide the mortgage market analogous to the information now furnished through the Federal Reserve System with reference to our general financial market. The possibilities along this line are tremendous and the service is one which should, appropriately, be rendered by the Federal Government.

The second cause of our present mortgage market involves the individual mortgage instruments in that market. From the standpoint of the home owner and wage earner a debt incurred to obtain things for current use and consumption is unsound if it cannot be paid periodically out of current income but must be met at some future date in a lump sum. The self-liquidating character so desirable in a commercial loan can only be approximated in an individual debt by the device of small current periodic payments in the form of amortization. This principle is now rapidly being recognized in the field of mortgage finance but its general acceptance is hampered by the present system of mortgage lending. The so-called "sound" financial institutions generally lend but 40 or 50 percent of the appraised value of the property upon a short

term instrument payable in full at maturity. This not only necessitates a burdensome expense to the borrower in the form of renewal charges but also forces him into the second-mortgage market if he is to enjoy home ownership on any thing else than a prohibitive down payment to begin with. Secondmortgage instruments, representing as they do the subordinate security and the border-line risk, necessarily involve extremely high rates and charges to the home owner. In addition, they are usually short-term instruments calling for extremely high amortization payments or requiring substantial curtailments of principal if they are to be refinanced. Rates of interest in the secondmortgage market have ranged to as high as 14 to 20 percent, the legal rate being circumvented through the medium of fictitious service charges which are added to the principal.

A sound instrument from the standpoint of the borrower is one which enables him to consolidate his entire obligation in one mortgage and which does not confront him with the perils of refinancing, but which allows him to pay off his principal in monthly payments within his earning capacity over a reasonable period. From his standpoint, therefore, a 10- to 25-year amortized mortgage at reasonable interest rates is the only sound method by which he can acquire the socially desirable status of a home owner.

Such an amortized instrument is also economically desirable in the long run from the standpoint of the lender. While the short-term first mortgage at 40 to 50 percent of the appraised value of the property appears on first thought to be the perfect mortgage instrument to conservative lending institutions, if it must depend for its liquidity upon the possibility of being refinanced at maturity, it must inevitably involve grief to the lender in time of loss of confidence and disruption of the money market such as have characterized the past 5 years. Insofar as it necessitates second-mortgage financing by reason of its low ratio to the appraised value of the property, it likewise is unsound in the long run, since the additional burden of such second-mortgage financing upon the mortgagor seriously impairs his ability to meet his first-mortgage obligation.

The remaining four divisions of the housing legislation are designed to encourage mortgage lending upon a sound amortized instrument. The first of these divisions permits the insuring of such mortgages upon a mutual principle, such insurance being necessary if conservative financial institutions are to be induced to make mortgages of this type at a reasonable rate to the borrower. Because varying conditions in different sections of the country would make the setting forth of the details of the insurance plan in the statute both lengthy and dangerously restrictive, the insurance plan is therein outlined only in general language. The details of the plan are somewhat as follows:

To be eligible for insurance under this plan, a mortgage must conform to the following recognized standards of sound mortgage practice:

(1) The mortgage must be a first lien on an owner-occupied dwelling. (Certain exceptions in the case of slum clearance and low-cost housing projects will be referred to later.)

(2) The mortgage must be held by an acceptable mortgagee capable of servicing it properly.

(3) The mortgage must provide for regular amortization until the loan is completely retired. In general, this amortization period will probably be not more than 20 years. A longer period may be desirable, however, on properties of exceptionally stable value.

(4) The mortgage must be of such a nature that the insuring of it by the Corporation is beneficial to the mortgage market as a whole; and it must conform to such standards in respect of the character and income of the mortgagor as may be established by the board of the Corporation.

(5) The mortgage must be for an amount not in excess of 80 percent of the appraised value of the property in the case of new construction, or 60 percent of the current appraised value in the case of existing dwellings. It must also conform to such other appraisal standards as may be established by the board of the Corporation. Because of the security afforded by the insurance, and by the other standards to which the mortgage must conform, the entire firstand second-mortgage financing can be safely combined in a single instrument. This will eliminate both the need of second-mortgage financing and the disturbing effects of such financing on banking and investment conditions in general.

(6) The net interest return to the lender must not be in excess of 5 percent, except that the Corporation may, where the local mortgage market requires it,

authorized a rate up to a maximum of 6 percent in order to attract mortgage funds.

Except with regard to the requirements just enumerated, the customary relations between mortgagor and mortgagee are fully retained under the operation of the insurance plan. If the mortgage becomes delinquent, the mortgagee may still foreclose, or refrain from foreclosing, as at present, without interference on the part of the Corporation. Should the mortgagee elect to realize on his insurance, however, he must foreclose and turn the property over to the Corporation.

Upon the election of the mortgagee to realize on his insurance, the Corporation will deliver to the mortgagee a debenture or debentures guaranteed as to principal and interest by the United States Government, the amount of such debenture or debentures to equal the unpaid principal on the face of the mortgage as of the date on which title is transferred to the board, plus taxes and other advances specifically authorized by the board of the Corporation. Those debentures will bear the rate of interest (not in excess of 3 percent) agreed upon at the time the mortgage was insured; and the debentures will mature 3 years after the mortgage would have been paid off if it had remained in good standing.

The premium for mortgage insurance under the plan will vary from one half percent to 1 percent per annum of the original face value of the mortgage, according to the risk. This premium will be paid by the mortgagor to the mortgagee in addition to the interest and amortization payments provided in the mortgage. The mortgagee will in turn remit this insurance premium to the Corporation.

The insurance principle involved is similar to mutual life insurance. This premium is considerably in excess of the amount of risk ordinarily involved in mortgages of this type, and hence should eventually be returned in whole or in part to the mortgagor. The premiums thus returned will be paid to the mortgagee to pay off the mortgage for the benefit of the mortgagor. For example, if there were no loss at all, insured mortgages carrying amortization charges calculated to retire the principal in 20 years, would build up, at the end of about 17 years, an insurance reserve sufficient to retire at that time the remaining unpaid principal of the mortgages. In that event the insurance would be terminated and the reserve would be used to take up the mortgages for the benefit of the mortgagors.

The insurance premium, therefore, covers both insurance risk and additional, but unspecified, amortization. On a 20-year amortization contract yielding 5 percent to the lender, the borrower would be required to pay an annual total charge-for interest, amortization, and insurance-equal to 9 percent of the original face value of the loan. This charge is much lower than the present equivalent combined cost of first and second mortgage money, and also lower than the equivalent cost even during favorable periods in the past.

By paying this total annual charge, the borrrower might retire his total mortgage in something over 17 years, and would in any event be guaranteed complete retirement in 20 years. The length of the payment between 17 years and 20 years would depend on the extent of the general losses sustained by the insurance reserve.

The insured mortgages will be segregated at the time of insurance into separate funds containing substantially similar risks. A lending institution, therefore, could benefit by insuring its mortgages even if it desired to confine itself to stricter requirements than those prescribed in the mortgage-insurance law. For example, an institution could confine itself to 60-percent mortgages instead of making loans to the limit of the 80 percent permitted as a maximum for new construction, and know at the time of insurance that its mortgages were segregated with others of the same type. Such mortgages would naturally involve fewer realizations on the governmental guaranty, and therefore would not be required to share in the risk of mortgages made on a higher basis of appraisal. All premiums paid on mortgages of common characteristics as to risk would be kept separate in a single fund, and all costs and realizations incidental to realization on the insurance would be debited and credited to this fund.

From careful calculations made on an actuarial basis, the plan of mortgage insurance here outlined would involve no loss to the Treasury on its guaranty of principal and interest on the debentures issued to replace the defaulted mortgages. As was previously stated, the premium payments on a maximum 20-year amortization mortgage, if no losses are incurred, would be sufficient to

retire the principal of the mortgage commitments in about 17 years, the exact period depending on expenses of operation (which should be relatively low) and on percentage of the reinsurance deduction made by the corporation.

In order to determine the extent to which this period of approximately 17 years might be extended by losses, the following loss assumptions were made the basis of actuarial computations of risk:

(1) That all mortgages in a single fund were insured at the maximum riskthat is, at 80 percent of appraised value.

(2) That 25 percent of the total face value of mortgages in a single fund defaulted.

(3) That the ultimate realization of the fund on these properties in default was only 50 percent of the original appraised value of the properties.

(4) That all the defaults occurred during the earlier years and reached a peak in the fifth year when, owing to the lower extent of amortization, the insured risk was large.

(5) That 2 years were required for the fund to dispose of the defaulted properties.

On this set of assumptions, all of which are far more drastic than past experience would justify as an average calculation of the risk on home mortgages, the fund was still solvent, and would have been terminated some time in the nineteenth year, without drawing on the general reinsurance fund.

The general provisions of the proposed act insuring mortgages on a mutual basis are written also to cover the problem of financing public or semipublic projects for the stimulation of low-cost housing and slum clearance. It is contemplated that the Corporation will establish separate insurance funds in which mortgages on property of this type can be insured under special conditions as to interest, amortization, and insurance to be determined by the Board. This should permit slum-clearance and low-cost-housing projects to obtain financing on a self-insurance basis at much lower rates than has been possible in the past.

III. MORTGAGE ASSOCIATIONS

As a second step in introducing sound basic practices in the mortgage market, it is necessary to introduce the further element of liquidity. The shortterm unamortized instrument of the past with all of the evils which it involved, was doubtless based upon a desire to get liquidity in funds invested in mortgages, the theory being that the funds were thereby tied up for a shorter time and if needed at maturity the borrower could be forced to look for refinancing elsewhere. The unsoundness of this theory as a universal practice has been amply demonstrated by the experience of recent years. True liquidity must be secured by other methods. The Federal home loan bank system offers such liquidity to certain types of borrowers and its efficiency in this regard can be and is being increased in the proposed legislation. Further liquidity can be obtained, however, by permitting the chartering of federally supervised mortgage associations. These associations do not involve any startling innovation in the mortgage market. They have sprung into existence, State chartered and uncontrolled, in the past. True, experience with them has been far from satisfactory, but that has been due to the lack of supervision of them rather than to any inherent unsoundness in theory of their existence. Such institutions should not serve on the one hand as a medium for facilitating speculative building, nor on the other hand as a device for abusing the investing public. Mortgages on owner-occupied homes are of necessity small in individual amount, and preferably should be originated and serviced during their first years by local institutions thoroughly familiar with local conditions and in a position to keep close watch on the condition of the property and the responsibility of the borrower. After these mortgages have been amortized to a conservative figure, however, they will constitute safe and acceptable investments for mortgage associations operating over a larger field, which will be able to obtain cheaply the funds used to purchase such insured mortgages from local institutions at a favorable price and thus release fresh funds for local investment.

If operated in this manner, such mortgage associations will furnish a market for insured mortgages and give to the investment in them the liquidity only secured in theory by the device of a short-term mortgage.

Furthermore, the primary reason for high interest rates (often as high as 8 or 9 percent), renewal fees, etc., on home mortgages in many sections of the