And, on the other side, a letter from the American Radiator & Standard Sanitary Corporation, dated January 6, 1936: AMERICAN RADIATOR & STANDARD SANITARY CORPORATION, Hon, DUNCAN U. FLETCHER, United States Senate, Washington, D. C. MY DEAR SENATOR FLETCHER: Answering your letter of the 20th ultimo, I beg to return herewith the questionnaire which you enclosed therewith. Federal mortgage banks such as you have described I am sure would prove of great value in rectifying the existing mortgage situation. Short-term mortgages, with consequent high rates for renewals, bonuses, and commissions, have frequently brought the total rate for financing, after the current renewals, to 10 percent and upward, so that on the small house more than 30 percent of the total cost is sometimes paid for finance fees alone. This practice should be corrected. I am delighted to observe that a man of your distinguished reputation and understanding of these financial matters has undertaken to study these problems. The removal of building, in the manner you have outlined in your questionnaire, from the speculative to the investment field, with long-term mortgages to be paid off in installments, will result in a demand for improved methods of construction and thereby assure the soundness of investment and financing, since under proper auspices no loans would be made unless specifications submitted with all applications therefor were carefully examined by competent and honest officials specially trained for such work. Such practice will inevitably create an incentive for improved methods in all the industries concerned with building, and construction will begin to play the part that informed people are increasingly coming to believe it should play in our economic and social destiny. The Credit Foncier of France has conducted business on the basis you have outlined for more than 75 years, and has proven to be a sound and helpful instrumentality. Its debentures are among the most attractive of any in that country and, until the recent flurry in France, were in great demand at rates as low as 22 percent. I do not know what their rates are presently, but a number of years ago our company, which operates a factory in France, put up an office building in Paris and borrowed the money from the Credit Foncier at the rate of 4 percent per annum, with annual amortization covering a period of 75 years, at the end of which time the entire principal was to be paid off. When the franc went down to almost nothing a number of years ago we invoked the privilege under the mortgage to anticipate the full payment thereof. I presume their rates are much higher than 4 percent now since the rate of the Bank de France has only recently been reduced from 6 to 5 percent. The building industry when operating normally employs, directly or indirectly from forest and mine through transportation, manufacturing and workers in the building trades, an aggregate of over 4,000,000 men and is one of the largest, possibly the largest, in the country all things considered. Before a home is completed and occupied it touches almost every department of our national industrial and commercial life. When that industry sinks into a deep decline it carries with it a depression in all business. That has been the record of the 45 years during which I have been connected with this industry. A curious thing is revealed by statistics, which show that 8 months minimum and 11 months maximum after a continuing decline in building activity is started a stock-market panic occurs, followed by the usual business depression with all the ills and embarrassments of unemployment attendant thereupon. It is, then, important and vital that the building industry should be surrounded with a financial system under some sort of Federal supervision which will prevent inordinate booms incident to cheap money loaned by persons who are not qualified to examine the character and dependability of construction for in due course it contributes its full quota to the creation of a general collapse in, I might say, the controlling if not the most influential industry in the country, since the larger part of its activities are dependent upon the heretofore short-term mortgages. Practically every real-estate mortgage matured during the recent depression and placed a weight upon the banking situation which was responsible for quite the largest measure of frozen, if not worthless, loans that were found in the portfolios of many banks. Faithfully yours, J. M. WOOLEY. Also a letter from Mr. Hugh L. Clary, vice president, Bank of America, San Francisco, Calif. Hon. DUNCAN U. FLETCHER, BANK OF AMERICA, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SIR: I am returning the attached questionnaire which I have filled in. I believe that a mortgage bank of the type you propose would be helpful. However, I have answered your second question, as to whether or not the existence of such an agency would prevent the periodic freezing of the mortgage credit in times of stress, in the negative. As I read the act, the mortgage bank's money for purchasing and lending on mortgages will come primarily from the sale of debentures, and, inasmuch as these debentures are not guaranteed, I do not believe that they will sell freely in times of stress. This was clearly illustrated by the attitude toward Home Owners' Loan Corporation bonds prior to the time they were guaranteed. Nor is there any provision in the bill, as I read it, whereby a mortgage bank could rediscount its own assets with some agency which had the power to issue currency. For these two reasons it would appear to me that at a time when everybody was needing to turn their mortgages into cash there would be no practical way by which the mortgage bank could raise the cash which was needed; nor do I believe that the public would consider these debentures as equivalent to cash at such a time in the absence of a guaranty. I am not suggesting that these changes be incorporated in the bill, and I believe a mortgage bank would be a helpful thing in spite of these defects. Very truly yours, HUGH L. CLARY, Vice President. The CHAIRMAN. The first witness this morning will be Mr. Wendell P. Barker, chairman of the Mortgage Commission of the State of New York. Mr. Barker? Mr. BARKER. Yes: Mr. Chairman. The CHAIRMAN. If you will come forward to the committee table and take a seat opposite the committee reporter. Mr. BARKER. Thank you, Mr. Chairman. The CHAIRMAN. You will have to hurry because the Senate meets at 12 o'clock noon today, and we will have to get along as fast as we can. Mr. BARKER. All right. The CHAIRMAN. Mr. Barker, please state your name, residence, and occupation. STATEMENT OF WENDELL P. BARKER, CHAIRMAN OF THE MORTGAGE COMMISSION OF THE STATE OF NEW YORK, NEW YORK CITY; RESIDENCE ADDRESS: YONKERS, N. Y. The CHAIRMAN. Mr. Barker, have you examined this bill? If you have, we will be glad to have your views about it, stated in your own way. Mr. BARKER. Senator Fletcher, I have not given to the particular bill before you a critical examination. My thought in coming before you today was to state my views and the result of the study by the commission, of which I am chairman, with respect to the general subject of mortgage banking and the necessity for that type of institution. Within the last week our commission has caused to be filed with the Governor of the State of New York and with the Legislature of the State of New York a report containing our recommendations as to the proposed legislation. The principal recommendation which we are making is for the establishment of privately owned and publicly regulated State mortgage banks. This report is rendered pursuant to the provisions of the mortgage commisison law of the State of New York, which, in addition to vesting in the commission jurisdiction over some $600,000,000 or some $700,000,000 of certificated mortgages, and the problems of salvaging and rehabilitating those mortgages, also is the problem of recommending legislation which will prevent a recurrence, if possible, of the evils which we believe led to the debacle as respects mortgage guaranty companies. I have with me a copy of that report which I will be very happy to submit to the subcommittee for what it is worth. The CHAIRMAN. Will the subcommittee desire to have that spread on the record? Senator COUZENS. I do not think that it all needs to be printed in the record. Mr. BARKER. I have also prepared a statement of the views of my colleagues and myself with respect to the subject of mortgage banking which I think will fairly well summarize what is in the rather bulky report which I will be glad to leave with you. The CHAIRMAN. I think we will receive and file the report, and we thank you for it, and will put in the record your statement regarding it. I think that ought to go into the record. Senator CouZENS. Yes. The CHAIRMAN. And the report will be filed with the subcommittee. Mr. BARKER. May I proceed, Mr. Chairman? Mr. BARKER. The mortgage bank idea is The CHAIRMAN (interposing). May I ask first, Mr. Barker, how was this commission created? Mr. BARKER. This commission was created in the early spring of 1935, and the commissioners were qualified on the 23d day of February 1935, and we immediately undertook our tasks. Senator COUZENS. Was the commission created by an act of the legislature? Mr. BARKER. It was created by chapter 19 of the laws of 1935 of the State of New York. The CHAIRMAN. How many persons compose the commission? Mr. BARKER. There are three commissioners, my associates being Mr. Louis S. Posner and Mr. Lawrence B. Cummings. One of the earliest moves that we made in the commission was the creation of what we called the bureau of legal research, which consisted of 8 or 10 lawyers, to whom was delegated the task of making an intensive and exhaustive study and search into the whole subject of mortgage banking, particularly as it has prevailed and been practiced in about 22 countries of the world. The report which I am leaving with you contains some rather interesting exhibits with respect to mortgage banking in these 22 countries and forms the foundation of the recommendations which we have made. Senator WAGNER. Might I interrupt you right there? Mr. BARKER. Yes, sir. 44106-36-3 Senator WAGNER. In view of your exhaustive research, the result of which is shown in this report, it might be useful to the members of this subcommittee, and the only way to preserve it, as it seems to me, is to have it in the record. Senator COUZENS. Do you mean this whole volume? The CHAIRMAN. The analysis here may cover that. Senator COUZENS. Yes; the analysis will cover it, and as the Senator from New York knows, hardly anybody reads hearings after they are taken down. Senator WAGNER. Well, it is quite an important matter. Mr. BARKER. There is other matter in this report which, perhaps, would not be germane to the particular subject we are here discussing, so that when you cull it out and confine it to the subject of mortgage banking it will really not be very bulky. Senator WAGNER. Are you going to review that? Mr. BARKER. Yes, sir. I am going to review it in this statement. Senator WAGNER. All right. The CHAIRMAN. Very well, Mr. Barker, you may proceed. Mr. BARKER. The mortgage-bank idea is, of course, not new in the history of mortgage financing, but the form in which it is recommended to the Legislature of the State of New York is much more than a mere copy of foreign prototypes. It is essentially an adaptation of these foreign institutions to our native American traditions and needs. No two countries are strictly alike in customs, in habit, or in temperament of the people, and no legislation which fails to take these differences into account can long be effective. The mortgage commission has therefore very carefully canvassed the situations abroad and has compared them minutely with local conditions, in order to be able to recommend the most favorable approach to the entire problem. We think that the mortgage investments to be held by the public in the future must be given three fundamental characteristics: (a) Liquidity, so that the holder of a mortgage investment may at all times feel that he can convert his investment into cash without serious loss, as needs may require; (b) certainty of income, so that the investor may be left in a position to feel secure that so long as he holds on to his bond or debenture, he will receive a minimum periodic amount thereon; (c) confidence in the security of the principal, so that every holder of a security issued by a mortgage bank may feel that it is an obligation of the bank which is adequately supervised by government authority and adequately regulated by sound and prudent financial management. To achieve these ends, we have suggested that the legislature authorize the creation of mortgage banks, under the direct supervision of the superintendent of banks, and subject to limitations which will advance each of the requirements of mortgage investments which we have listed above. The simplest way of expounding the problem will be to go through the requirements of the mortgage bank as we have planned it seriatim, and to explain the reasons that have led us to include each of these requirements and why we think these limitations will inure to the public interest. The public investments issued by the mortgage bank are to be general obligations of the bank and not shares or participations in individual mortgages or groups thereof. This is a fundamental requirement of future mortgage financing. Our experience has shown that the practice of selling shares or participations in individual mortgages or groups, or of selling bonds secured by an individual mortgage or group, is unfair, calculated to deceive the public, and fraught with great danger. In times of calamity, individual mortgages suffer default. Many of them, however, weather the storm. The purchasers of mortgage investments generally rely upon the recommendations of the issuing house. They are not in a position to discriminate between good and bad mortgages. The result is that the investing public is treated to the remarkable realization that not all of the investments are in the same class; some are good, some are bad. The disorganization which results from this situation has led the guaranty company into liquidation or rehabilitation, and has caused the winding up of nearly all of the mortgage houses in the State. This will be entirely avoided under the plan proposed, where mortgage banks will issue debentures which are their own direct obligations and are not individually secured by any of the mortgages held by the bank, but are secured on the other hand by the total resources of the mortgage bank, of every kind and description. Experience has shown that the average investor in so-called guaranteed mortgage certificates and, even indeed, in guaranteed whole mortgages, had little or no knowledge of the character or worth of the underlying real-estate security behind the guarantee. In fact, the investor relied upon the guarantee, and in so doing he relied upon the integrity and standing of the company. But when the crash came the investor found in some cases that he had invested in vacant lands or in a country club, whereas his neighbor, equally ignorant at the time of investment, found himself interested in a high-class income-producing property. There is no reason why there cannot be applied to real-estate financing, so far as the public is concerned, the same principles of "spread" and "average" which are fundamental in the insurance business. One assured in the life-insurance business may die on the day following the writing of his policy and another assured may live 50 years, and yet the life-insurance company, by reason of the distribution of the profits and losses over and among all policyholders, is able to meet its contractual obligations. While definite figures are not available, there is little room for doubt that with a lower interest rate payable to investors and a pooling of the mortgages, notwithstanding the loose practices which prevailed with respect to appraisals, many of the mortgage companies would have been able to survive the recent economic collapse. The next point The CHAIRMAN (interposing). What interest rate do you propose here? Mr. BARKER. In the recommendations which we make we do not propose, nor could we propose by statute, any definite interest rate. Interest is like a commodity-it must be fluid, it must be fixed according to the economic conditions of the time. Bonds may be |