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?
Senator WAGNER. Yes.

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

issued at varying rates, 2 percent, 3 percent, 4 percent, or 41⁄2 percent, whatever the particular conditions prevailing at the time may be. But however interest rates may differ, all debentures are debentures of the same class. They are merely issued in serials. I cover that a little more fully later on.

The CHAIRMAN. All right. You may proceed.

Mr. BARKER. Mortgages owned by the mortgage bank will be for long term and properly amortized. In the past, the custom has been for lending institutions to take mortgages for a 3- or 5-year period, requiring no amortization. As these mortgages were frequently renewed, it often happened that the mortgage indebtedness remained at the same level for 10 years or more, while the property continued to depreciate. Moreover, when defaults began to occur, practically all mortgages were in default on principal, and legislation enacting moratoria was made necessary. Investments secured by these mortgages were likewise in default. People who had planned to receive their principal within a given time were subjected to disappointment and frequently to serious inconvenience. The market for the sale of these investments collapsed due to the defaults, and bonds and certificates were sold at sacrifice prices.

Short-term-mortgage financing, experience shows, may prove equally disastrous to mortgagor and mortgagee. No mortgagee can afford to disregard the interests of the mortgagor and remain in a position where he must trust to the mortgagor somehow or other being able to refund or refinance himself at maturity date. The trouble has been with mortgage financing that neither mortgagor nor mortgagee seemed to realize that the transaction involved a debt which must be paid. In many cases of short-term mortgages the ink was hardly dry on the documents before the mortgagor was confronted with a problem of refinancing, all of which laid him open to renewal fees and expenses and rendered him averse to taking on any amortization burden. All this will be avoided by the mortgage bank, which will lend money on long-term mortgages properly amortized. Our proposal provides that mortgages shall be for periods of not less than 10 nor more than 20 years, and shall be amortized at a rate of not less than 2 percent per annum. These requirements will place in the vaults of the mortgage bank securities which will endure through long periods of time and will thus pass through various changes in economic conditions. At the same time, the constant payment of amortization will tend to enhance the value of the securities as time goes on, and they will furnish a sound basis for the issuance of debentures by the mortgage bank.

Appraisals are to be regulated and scientific: We have long been aware that many of the difficulties experienced in the past with regard to mortgage investments have been due to haphazard methods of appraisal. Agitation for the improvement of methods of appraisal has been going on in this State for a number of years. Appraisers themselves have organized to promote this end. The time has come when institutions which lend money on mortgage and sell their obligations to the public cannot be allowed to accept any appraisal that seems proper to them under the circumstances. Our plans call for rigid supervision of appraisals by the department of banks.

We wish to raise appraisers to a professional standing and to require each and every appraiser in the community to be licensed by the State, after having passed an examination with regard to his fitness and character. Mortgage banks will lend money only upon appraisals by licensed appraisers. Such appraisals will contain specific information required by statute, and will be subject to the disapproval of the superintendent of banks, so that, in the case of each loan made by a mortgage bank, the superintendent of banks will be in a position to pass upon the soundness of the appraisal. We believe that in appraising property more attention must be given to income, the present and convertible use of the property, trend of population and possible change in the character of neighborhood than to mere present principal value of the property.

This will result in scaling down the valuation by appraisers. While the proposed statutes require that no loan shall be made for more than 60 percent of the appraised value of any property, we think that, with this rigid supervision, the appraised value will be so low as to make the 60-percent requirement a very safe margin.

There must be personal responsibility for appraisals, and only individuals should be licensed, although corporations and firms, as in the case of insurance brokers and others, may act through designated, licensed individuals. With responsibility personal, with disciplinary action possible, even including revocation of license, there should be a tendency toward conservatism on the part of the appraiser. We are not foolish enough to believe that mere licensing in and of itself will make a good appraiser out of a poor appraiser.

I might interpolate here and say that we believe the recommendation to license appraisers is merely the first step toward raising the general standards of the profession. In the insurance business a battle was waged for years before we were able to obtain the licensing of brokers. After they were licensed the battle was carried on looking to a written examination of insurance brokers, and after we had accomplished that, then legislation was introduced requiring the serving of an aprenticeship in order for an applicant to receive an insurance broker's license.

I believe the American Institute of Appraisers, and other similar professional bodies, will join heartily in any and all suggestions to raise the tone and standard of appraisers. But all that we are doing at the present time is recommending governmental supervision through licensing.

The CHAIRMAN. All right, Mr. Barker.

Mr. BARKER. In addition to the benefits that will flow directly to the mortgage bank and to its debenture holders, great benefits will flow to the community generally from this supervision of appraisals. A wide equity will be left in each property which will be a fruitful source for junior financing. There is no reason why junior financing should not have a legitimate and proper sphere of activity in the community; and this method of regulating appraisals should limit first-mortgage loans to modest proportions, and thereby will provide a market which will not only enable the community to engage in junior financing, but will leave a satisfactory margin for equity holders to trade in from time to time and thus result in stimulating the real-estate activity throughout the State.

The mortgage bank will have a legate apie strple and reOur plans call for a minimum avial for eat Engage bank of $2000990, and a minimum paid-in spis eral to the capital, plus a reserve fund. to be accolated from the net earnings of the bank. also equal to the capital. Thus a bank oyanized with a $3.900900 capital will ultimately have $20000000 in capital. surplus, and reserves. Of this, the surplus and reserve fund, equal to $6.000.000. is required to be liquid. This will form a substantial support for the outstanding debentures of the bank and will enable the bank to weather periodic storms that may occur. While in foreign countries we have found that there is no insistence upon the maintenance of liquid reserves and surplus funds, we believe that American systems and the psychology of the American investor require that such liquid reserves be established, if the confidence of the investing public is to be secured.

The fact that we suggest at the outset a surplus equal to the paid-in capital does not in the least reflect upon the character of the bank's operations. While the records in other countries show that the constant source of income from interest, amortization payments, and principal payments provides over the long term sufficient liquidity within the bank, we believe it to be wise, until the bank has been in existence long enough to provide for cash turnover and the consequent liquidity, to provide arbitrarily for a substantial surplus.

The extent to which the bank may issue debentures is narrowly limited by statute. We have found that, notably in the case of the Credit Foncier, the bank was authorized to sell its debentures to the extent of 50 times its capital. In other countries, however, narrower limitations obtain. We think that it is a good plan to limit the quantity of debentures that may be sold in relation to the capital and surplus of the bank. In the past no limit has been upon the certificates that may be guaranteed by a mortgage-guaranty company, or upon the bonds that may be sold by a mortgagebond house.

While it is not entirely clear that such limitation is indispensable to the safety of the investments, or that it will add appreciably thereto, nevertheless we think that at the beginning, at least, this limitation ought to be put into the statute, and we have thus proposed that the mortgage bank shall not be permitted to sell debentures in excess of 20 times the capital and surplus of the institution.

Senator COUZENS. I notice that this bill, S. 2914, provides that such a bank shall not be permitted to sell debentures in excess of 12 times the capital and surplus of the institution.

Mr. BARKER. This is 20 times.

Senator COUZENS. Where do they get the 12 times inserted in the bill?

Mr. BARKER. Do you mean in the Fletcher bill?

Senator CouZENS. Yes.

Mr. BARKER. I do not know.

The CHAIRMAN. That is just preliminary and is subject to change. Mr. BARKER. They vary. In my studies I find they vary from 8 times to 50 times, and we have arbitrarily selected 20 times as our judgment.

The CHAIRMAN. That is about right, I take it?