REPORT OF HOME OWNERS' LOAN CORPORATION LETTER FROM THE COMMISSIONER, FEDERAL HOME LOAN BANK ADMINISTRATION TRANSMITTING THE REPORT OF THE HOME OWNERS' LOAN CORPORATION FEBRUARY 1, 1944.-Referred to the Committee on Banking UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1944 LETTER OF SUBMITTAL NATIONAL HOUSING AGENCY, FEDERAL HOME LOAN BANK ADMINISTRATION, The SPEAKER OF THE HOUSE OF REPRESENTATIVES. SIR: I have the honor to submit herewith the report of the Home Owners' Loan Corporation to the Congress pursuant to the following proviso contained in the Independent Offices Appropriation Act, 1944, Public Law 90, Seventy-eighth Congress, approved June 26, 1943: Provided further, That the Home Owners' Loan Corporation shall prepare a plan for its liquidation at the earliest practicable date and shall, by February 1, 1944, submit a report of such plan to the Congress, setting forth the terms of liquidation and such other information as may be necessary to inform the Congress of the disposition of the property of such Corporation while in the process of liquidation. Respectfully, II JOHN H. FAHEY, Federal Home Loan Bank Commissioner. A REPORT TO THE CONGRESS OF THE UNITED STATES BY THE HOME OWNERS' LOAN CORPORATION Pursuant to the Independent Offices Appropriation Act, 1944, Public Law 90, Seventy-eighth Congress JOHN H. FAHEY, Federal Home Loan Bank Commissioner JANUARY 31, 1944. The Independent Offices Appropriation Act, 1944, Public Law 90, Seventy-eighth Congress, includes the following provision: Provided further, That the Home Owners' Loan Corporation shall prepare a plan for its liquidation at the earliest practicable date and shall, by February 1, 1944, submit a report of such plan to the Congress, setting forth the terms of liquidation and such other information as may be necessary to inform the Congress of the disposition of the property of such Corporation while in the process of liquidation. The meaning of this provision is not altogether clear, inasmuch as the original Home Owners' Loan Act of 1933, Public Law 43, Seventythird Congress, provided that the Corporation should cease making loans on June 12, 1936, and, in accordance with its terms, the Corporation has been engaged in liquidation operations since that date. It is assumed that what Congress desires is (1) Full information concerning the results of Home Owners' Loan Corporation liquidation thus far; (2) Whether the plan adopted by Congress in 1933 should now be displaced by a new plan; and (3) Whether the Corporation's loans can now be sold without serious loss or injustice to the Government or to the home owners the Corporation was organized to help, as suggested by some mortgage lenders and brokers. The answers to these questions are First. The $3,484,047,906 total investment of Home Owners' Loan Corporation at the end of the last fiscal year, June 30, 1943, had been reduced to $1,632,451,939, representing a total liquidation of 53.1 percent. As of the fiscal year ending June 30, last, of 196,750 properties acquired, 170,652, or 86.7 percent, had been sold. As of November 30, the total number sold was 181,910, or 92.2 percent. The 1,017,821 loans made by Home Owners' Loan Corporation, on June 30, last, had been reduced 28 percent to 736,694. As of November 30, the number was 699,773, a reduction of 31 percent. The peak of administrative expenses of the Corporation was $37,679,998. This had been reduced to $10,711,749 for the fiscal year 1943, or 72 percent. The number of employees of the Corporation at the height of its operation was 20,811. As of June 30, 1943, this number had been. reduced to 3,810, a reduction of 81.7 percent. The number provided for for the 1945 fiscal year is 2,904. As of June 30, last, the outstanding bonds of the Corporation had been reduced from $3,489,453,550 to $1,729,481,800. As of June 30, 1943, the net earnings of the Corporation before losses were $189,838,205, as compared with $157,728,773 at the end of the preceding fiscal year. The Corporation's loss resulting from the sale of foreclosed properties and minor losses from fire, casualty, etc., as of June 30, 1943, was $255,080,636 which, being offset by the $189,838,205 of interest income on loans and rentals, resulted in a realized net loss as of that date of $65,242,431. Second. Many proposals for a forced liquidation of Home Owners' Loan Corporation have been advanced for several years and examined thoroughly. None has been devised which compares in economy and effectiveness with that which Congress incorporated in the Home Owners' Loan Act, and no scheme has been suggested which would not increase greatly the Government loss. A plan which, instead of causing a loss of a half billion to a billion dollars, will lose but a small fraction of what was expected and may lose nothing whatever can hardly be regarded as an unsuccessful plan which should be discarded for some proposal which makes large losses certain. Third. Generally speaking, private lending institutions legally and under the limitations fixed by their directors, can purchase only those loans which, although representing great risks when granted, have now been made entirely safe. The sale of such loans would leave the Corporation with the slow accounts, the small and widely scattered loans, and those on which borrowers have not yet reduced their debts to the point where they have acquired safe equities. Private lending in stitutions ordinarily cannot buy Home Owners' Loan Corporation foreclosed properties, and those remaining in the possession of the Corporation would have to be sold at substantial losses with little net return from the loans to offset such losses. As a result, the Government would be deprived of the regular income on sound assets and would still be obliged to maintain a Nation-wide organization to manage the slow and doubtful accounts, and the Treasury would have to make up the difference. Such a sale of the Corporation's loans would simply make certain large and unnecessary losses to the Government which must inevitably increase the war debt and the burdens of the Nation's taxpayers with no public advantage whatever. Some of the country's most experienced mortgage lending executives who have studied the matter carefully agree as to this result. It is moreover, difficult, to see how private lending institutions can enter into binding agreements to carry Home Owners' Loan Corporation loans on the same terms as those which Congress granted under the act or extend the same leniency to borrowers as that now possible in the event of the development of unforeseen difficulties. State laws do not permit the latitude in such matters which is authorized by the Home Owners' Loan Act of 1933. Any proper consideration of proposals to sell the loans of the Home Owners' Loan Corporation obviously calls for a review of the circumstances under which the Congress passed the Home Owners' Loan Act, what it was expected to accomplish, the extent to which these hopes have been realized, and the present prospects of the Corporation. It will be recalled that the stock market and banking collapse of 1929 was accompanied by the greatest mortgage panic in the history of this or any other country. From 1930 to 1932, mortgages had been foreclosed on more than a half million urban homes, which provided housing for approximately 2,000,000 people in the United States. Hundreds of thousands of additional foreclosures were being initiated and many thousands of mortgage lending institutions were not only impaired but steadily developing more serious insolvencies while the fair values of many more homes were being undermined. In the spring of 1932 the Congress established the Federal Home Loan Bank System. It provided $124,741,000 of Government capital to open 12 regional home-loans banks. While these banks were intended chiefly to make loans to mortgage lending institutions, Congress took cognizance of the dangerous mortgage situation and authorized the banks, under the supervision of the Federal Home Loan Bank Board, which was appointed in July 1932, to make direct loans to home owners who were in distress. The banks were not opened until October 1932. Meanwhile, the foreclosure tide was rising and by the spring of 1933 had reached the record height of 1,000 a day. Conditions as affecting the lending institutions were so serious that, as of January 1, 1933, the bank system had enlisted but 118 institutions in its membership. The records of the Board show that, notwithstanding the grave difficulties affecting home owners in every part of the country, it not only failed to take adequate steps to meet the crisis, but it also neglected to make any report to Congress on the basis of which prompt remedies could be applied. The regulations adopted by the Board providing for the making of direct loans by the banks were so restrictive as to prove wholly ineffective. They authorized loans up to 30 percent of the current appraised value of the homes in some cases, or 40 percent in others, if the owners proved inability to obtain loans elsewhere, at a time when there was no market value. The futility of these measures is demonstrated by the fact that, while over 42,000 applications for relief were considered, and over $136,000 was spent by the Board, only three loans, amounting to a total of $9,000, were made in the entire country. The Senate of the United States refused to confirm the Board which had been appointed, their interim terms expired in March 1933, and on the recommendation of the President of the United States, Congress promptly passed the Home Owners' Loan Act. This law created a Corporation with a capital stock of $200,000,000 subscribed by the United States Treasury with the right to issue $2,000,000,000 of bonds bearing an interest rate of 4 percent, with provisions for exemption from Federal, State, and local taxes, except surtaxes, estate, inheritance, and gift taxes. In spite of the 4-percent rate, the tax-exempt features of these bonds, and the fact that the Government guaranteed the payment of interest on the bonds, many lending institutions declined to exchange them for defaulted mortgages they had foreclosed or were about to foreclose. It was not until the act was amended to provide for a Government guaranty of principal as well as interest that the bonds were freely accepted by large numbers of institutions. The new Federal Home Loan Bank Board which had been appointed by the President and confirmed by the Senate was named as the Board of Directors of the Home Owners' Loan Corporation and charged with |