NATIONAL HOUSING ACT MONDAY, MAY 21, 1934 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, The committee met at 10 a.m., pursuant to adjournment on Saturday, May 19, 1934, in room 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Barkley, Bulkley, Bankhead, Adams, Goldsborough, Townsend, Couzens, Steiwer, and Kean. Senator BARKLEY (presiding). The committee will come to order, please. Senator Fletcher had to go to attend a meeting of the Joint Committee on Printing, and asked me to preside until he returns. We will hear Mr. Fahey this morning, and if he will come forward to the committee table and give his name, address, and occupation. STATEMENT OF JOHN H. FAHEY, CHAIRMAN OF THE FEDERAL HOME LOAN BANK BOARD, WASHINGTON, D.C. Senator BARKLEY. Mr. Fahey, may go ahead and make your statement in any way you prefer with reference to this bill (S.3603), which we are now considering. Mr. FAHEY. Thank you. Now, Mr. Chairman and gentlemen of the committee: It seems to me it is quite unnecessary for me to review or repeat a good deal of information which has already been presented to you as to the need for this legislation as we see it; also as to the necessity of dealing with the problem that it presents as quickly as possible. Senator COUZENS. Before you start in on that may I ask you a question? Mr. FAHEY. Certainly. Senator COUZENS. In what way does this relate to an appropriation made in a bill which we passed and in which we made provision as to mortgages of the Home Owners' Loan Corporation. You will remember that there was an appropriation there for some of these things. Mr. FAHEY. Yes, sir. When the amendment was passed guaranteeing the principal as well as interest. $200,000,000 of the available funds of the Corporation were then set aside to be used for modernizing homes which we refinanced and took over. That is, we were permitted to employ up to $200,000,000 of the $2,000,000,000 of bonds at our disposal for that purpose. Perhaps it would be just as well to explain right now that the Board recommended that amendment of the act, because of demands being made upon us by home owners whose mortgages we were taking over, of something for modernizing and repair, and which were beyond our ability to supply. Senator COUZENS. Why was it beyond your ability to supply? Just because you did not have any authorization for that work, or what was it? Mr. FAHEY. Yes. Because under the original act we could only, in taking over a home, and where it was necessary, advance cash and that cash had to come out of our cash capital. We advanced cash only Senator COUZENS. (interposing). In addition to the mortgage, do you mean? Mr. FAHEY. Yes. We advanced only for absolutely necessary maintenance and repairs. In other words, the repair of a roof or any other repair that would serve to put the home in good and proper condition. Senator COUZENS. Was that included in the mortgage, or was it a separate item? Mr. FAHEY. That was included in the mortgage and paid for out of our cash capital. Senator ToWNSEND. What became of those $200,000,000 appropriated for that purpose? Mr. FAHEY. What I started out to explain was this: The demands for repair and for modernization from these home owners was far in excess of just maintenance and ordinary repairs. In other words, we kept things down to absolutely necessary maintenance and repairs, you see. Senator BARKLEY. So as to keep the property in shape, to the end that the mortgage would be good, was that it? Mr. FAHEY. That is right. It was just like the case of any other mortgage lender. We just had to do that. For instance, there was no sense in taking over a first mortgage on a home that was not in condition and then presently be obliged, in servicing that mortgage, to expend substantial sums in putting it in repair. It was a far better policy to do that just as all other mortgagees do, at the time the loan was made. Senator BARKLEY. But it did not contemplate more than that. Mr. FAHEY. No, sir. Senator COUZENS. It did not, for instance, contemplate putting in American Radiator Co. radiators, or Johns-Manville heating apparatus, did it? Mr. FAHEY. Oh, no. What we could do was restricted to absolutely essential maintenance and repair, and no more. Senator COUZENS. Are you using any of that money now? Mr. FAHEY. Oh, we have been using it right up to now, of course. Senator BARKLEY. And if this bill should pass would you continue to operate under that same provision? Mr. FAHEY. The law was amended so that we might use up to 200 million dollars in going beyond just repairs and maintenance, and in improving and modernizing those homes wherever the condition of the borrower justified it, and the demand existed. That provi sion was recommended by the Board because of the large number of applications we were receiving from these home owners for money beyond just maintenance and repair. Senator ADAMS. Has your 200 million dollars been used up? Senator ADAMS. Yes. Mr. FAHEY. Oh, no. But at the rate we were going it would have disappeared already and long before our 2 billion dollars were gone, because, as you will remember, we absorbed taxes as well as delinquent interest. As a matter of fact, in the matter of taxes alone the corporation has already paid out almost 50 million dollars to municipalities in this country on the 650 million dollars of loans we have made. Senator BARKLEY. As a matter of fact, that 200 million dollars. was not an additional appropriation above the 2 billion dollars, but the amendment simply allowed you to use that much out of the original maximum sum you had for the purposes contemplated under the Act. Mr. FAHEY. That is right. Senator KEAN. At the present time you are keeping in repair the properties and are paying taxes, but you do not give the borrowers anything else, do you? Mr. FAHEY. We take over the mortgage if the appraisal justifies us in doing it. And then if there are accrued taxes-because those are a lien against the home-we absorb those in order to protect our own lien of the first mortgage, of course, and provided the home owner isn't able to pay the taxes himself. If he is able to pay we do not absorb any taxes. That also applies to any delinquent interest or any default in the payments to the mortgage corporation. In other words, we take only what we are satisfied he cannot meet at the time and what he must have time on. Then we rewrite his mortgage. Under the new mortgage, which is for 15 years, we discharge this indebtedness. The result of that is that his monthly obligation under his old mortgage, whatever it was, is very substantially reduced, and it is comparatively easy for him, or should be under anything like reasonable conditions, to carry the 50 payments over a period of 15 years to the corporation. In most instances the monthly payments are cut down from one half to two thirds. Senator KEAN. Are your mortgagors, for the most part, meeting their payments, or if not, in what proportion are they meeting them? Mr. FAHEY. That is hard to say, because of course the bulk of them have just been gotten out in recent months. Some of them undoubtedly will be behind in their payments for a while. On the other hand, it has been quite surprising some of the experiences we have had. For example, because loan papers are slow in passing through the recording stage, and all that sort of thing, and sometimes in getting them in there is liable to be delay between the closing of the loan and the arrival of the loan papers here in Washington, and our recording the papers here and sending out bills. As a matter of fact, before we had gone through that process and sent out the bills we had received here in Washington nearly 11⁄2 million dollars in payments from people who had not received their bills at all, which is rather interesting, and I think a most encouraging commentary on the character of the people. Senator ADAMS. I gather, then, that all of your collections will be made out of the Washington office. Mr. FAHEY. Oh, no. Senator ADAMS. You spoke of sending out bills from Washington. Mr. FAHEY. They have been in the first instance set out from here. Then when they fail to pay we send the matter along to our State and district offices, but will follow up these collections personally. In other words, we will have to do that just as any other mortgagelending institution has to do. We have to go through exactly the same process that every insurance company and every other mortgage lender in the country goes through. That part of it we are just beginning on. Senator ADAMS. I merely wanted that made clear. Mr. FAHEY. No; it would be an utter impossibility to make all these collections direct from Washington. It just could not be done. Senator COUZENS. The reason I asked the question a while ago was that it seemed to me the $200,000,000 provision in the bill that we passed was somewhat in conflict with the present bill. Is that true? Mr. FAHEY. No, sir. Senator BULKLEY. About that $200,000,000 provision, your Board recommended it, as I understand. Mr. FAHEY. It did. Senator BULKLEY. Was it with the idea of meeting the demand and to make your security on the loans better, or was it with the idea of providing employment by means of renovation? Mr. FAHEY. All three. First, as I have already explained, we received a great many applications from people whose equity in their homes was very substantial in relation to our appraisal and our loan; from people who wanted to add an L, or to rebuild a porch, or to do something else to the house, but they could not get the money to do it from any private lenders, and they could not get it from us at that time because we were restricted to necessary maintenance and repair. Now, gentlemen of the committee, of course, we would not be justified in making loans of that sort for such purpose unless the loan was in shape for us to do it. But we found that we were refusing, because we had to, to meet a great many demands of that sort; and we felt that if we were free to meet such requests it would be of advantage to the Corporation, because it would strengthen the asset value of our property behind the mortgage. And, secondly, it would encourage employment, and would have, therefore, a generally beneficial effect. Not only that, but, of course, over the 15year life of our mortgage, if the home were put in really first-class shape, it would relieve us of the possibility of difficulties in the future. And so it was thought that wherever it was justified, out of those hundreds of thousands of applications the Corporation had, out of the money available it was worth while doing this work from every standpoint. Senator BULKLEY. That is, if the borrower wanted it. You did not have in mind putting on a campaign to sell it to him, did you? Mr. FAHEY. Oh, no; hardly that. Senator BARKLEY. Of course, the expenditure of those $200,000,000 authorized out of the original $2,000,000,000 was limited to those who had the need and who were available for refinancing. Mr. FAHEY. Yes. Senator BARKLEY. It does not authorize you to go out and make Government loans at all? Mr. FAHEY. No. Under the limitations of the law we cannot deal with the general public but are limited to the homes we refinance. Senator BARKLEY. I wanted to understand that. Mr. FAHEY. I ought to add an explanation of that situation, and it illustrates what happens: We were impelled to make this recommendation, as I have explained, as a result of the information coming to our offices from week to week in the applications presented for consideration. The amendment was signed about 3 weeks ago, you will remember, and our offices all over the country are now getting into shape to deal with those applications for modernization. And yet as a result of the very limited publicity it has received, our offices all over the country are just being overwhelmed with people who are coming in asking for loans for this purpose, under the impression that we were able to deal with all applications and that we were not restricted to just those for whom we refinanced mortgages. And that development of last week in that respect was quite serious. These thousands of applications were flooding into our offices, and we just could not attend to them; and it was none of our business to attend to them, and many of the applicants were finding fault with us and are filing complaints now. They do not understand the situation. We are trying to put out some publicity to clarify the situation, and we hope what we are doing will clarify it. But that experience, and it is going on right now, is pretty conclusive evidence that there are a lot of people in this country who would be glad to make use of the money if it were made available to them. Now, how far you are justified in letting them have the money is something that we cannot say. We can only speak so far as our own experience goes. Of these people who are coming in and filing applications we can express no opinion, because we cannot take care of them, and we simply have to turn them away. But it must be a fact that a substantial number of them at least are eligible for loans of this sort, and certainly they are disposed to negotiate them if they have the opportunity to do so. Senator TOWNSEND. Do you know from your short experience. what percentage of them have been eligible; that is, that you could make loans to? Mr. FAHEY. Do you mean of those who have come in to us? Mr. FAHEY. No. We could not tell you about that. They are coming in to us, and to them we have to say: You understand that we cannot deal with anybody except as to homes we take over. You are not in distress and you are not filing an application for a loan. We cannot do anything for you. On the other hand, you will realize that the very fact of these people not being applicants for loans to us is of itself rather substantial evidence that they are worth while. They are not people who have filed applications with us for loans at |