But when you get to the mortgage guaranty business or the mortgage business there is not any way of calculating premiums or setting up reserve, and you have got either a feast or a famine. Experience has shown us in the mortgage guaranty business that it was profitable beyond dreams. In good times there were no losses. When you get an economic collapse, they are all losses. In case of fire insurance, if this building burns, the one across the street does not necessarily burn. In life insurance if I die, you do not necessarily die. But at a time of an economic collapse such as we have gone through in connection with real-estate values, if this plot of land goes down in value, that plot and that plot go down, and they all go down.

That is the reason why, in my judgment, you cannot tie the mortgage guaranty business up to the so-called "insurance theory of reserves". The only way you can solve it, in my opinion, is by the so-called "long-term mortgage financing", basing it, as I said a few moments ago, on spread and average.

Senator RADCLIFFE. If you do not follow the example of insurance companies, of setting up reserves as soon as the risk is assumed—and that is a liability of the company, and the capital and surplus cannot be determined until that reserve is set up-if you do not do that, do you not run into this rather anomalous situation? Suppose there are two mortgage companies. One is making a profit and the other one is not, and yet they are doing the same kind of business in a general sense. The company that is making a profit sets up 25 percent as reserve. The company that is not making any profit does not set up any.

Mr. BARKER. That is right.

Senator RADCLIFFE. Is not that rather inconsistent?

Mr. BARKER. The reserve is purely arbitrary, to provide liquidity or to prevent excessive dividends being paid in the absence of a reserve. My own feeling is, frankly, Senator, and our investigations as to foreign companies show, that once you get this thing turning over and with your interest payments coming in and your amortization payments and your principal payments, you have within the bank itself quite sufficient liquidity. Times get a little tight and you stop making loans.

I was amazed when I found in studying the set-up of the Crédit Foncier and in studying the set-up of the mortgage bank in Argentina and in Chile, that they considered there was no necessity for reserve. Perhaps if I had more courage I might not recommend a reserve. What I have done is to recommend the setting up, as I say, of a pure arbitrary surplus equal to capital and then having in mind the tendency of the American investor putting a little brake upon the payment until they have set up this purely arbitrary reserve, which serves only the purpose of adding to those so-called liquid funds which must be kept in non-real-estate securities. Senator RADCLIFFE. Suppose reserve were set up equal to the capital, and that reserve is diminished

Mr. BARKER. Then the reserve must be made up before dends can be declared.

Senator RADCLIFFE. The company can still operate?
Mr. BARKER. Oh, yes.

any divi

Senator RADCLIFFE. As long as there is any capital?

Mr. BARKER. As long as it has any capital; yes-unless the superintendent of insurance wants to stop them.

Senator RADCLIFFE. The existence of a reserve and the existence of a surplus would not be essential?

Mr. BARKER. Just for liquidity, pure arbitrary liquidity. Frankly, that is as I see it and that has been the history of the other institutions.

Senator WAGNER. What does the French institution do with reference to the bonds? Does it provide a sinking fund for their

amortization?

Mr. BARKER. No. The bonds are, as we suggest here, redeemable, callable at will, so that they are always able to take care of a low money market. For instance, if they have got a series of bonds out at 412 percent and they are in a 3-percent money market, they have the right to redeem or recall those bonds and reissue and refund, just as the United States Government or any government does in its refunding operations, taking advantage of the market rate in interest. Senator WAGNER. The Government has a sinking fund to eventually amortize its bonds, has it not?

Mr. BARKER. Yes.

Senator WAGNER. The French system does not provide for that? Mr. BARKER. No.

Senator RADCLIFFE. The provision in regard to amortization suggested is 2 percent?

Mr. BARKER. Not less than 2 percent.

Senator RADCLIFFE. That is only the rate of normal depreciation? Mr. BARKER. Yes.

Senator RADCLIFFE. So you are really not amortizing it?

Mr. BARKER. But at the same time if you have a conservative appraisal to start with and you do not want to make it prohibitive, if you are making a 20-year loan, as it has been suggested, so amortized as to pay the loan off at the end of the term, you get a prohibitive situation. In other words, you cannot very well have a 5 percent amortization and at the same time pay interest. It would probably result in crippling real-estate financing.

Senator RADCLIFFE. How much does a building and loan association pay off on the principal, on an average? Is it at least that, or probably more?

Mr. BARKER. I should think so.

Senator RADCLIFFE. Why should this percentage be so much less than ordinarily paid in a building and loan association?

Mr. BARKER. We feel we do not want to draw it too fine for mortgage financing. Just assuming for the sake of the argument that 2 percent represents normal depreciation, if you have got your cushion to start with of 40 percent due to a conservative appraisal, and your amortization is coming in all the time equal to the depreciation, we feel that the matter is safe.

Senator RADCLIFFE. Has not the experience of building and loan associations shown that the rate of amortization is not such an excessive burden and, further, that that rate is probably essential for the protection of the property?

Mr. BARKER. The building and loan association does business with home owners and people of that type. I question very much

whether on a large office building or a large apartment house in any urban center they can stand the strain of 4 or 5 percent amortization. I do not believe it would be possible.

Senator COUZENS. May I ask whether you contemplate that this mortgage bank shall be in such form as the Federal Reserve bank? Mr. BAKER. Somewhat in that form; yes.

Senator COUZENS. Do you believe that this bank should interfere with private enterprise or compete with private enterprise? Mr. BARKER. It is a private institution, Senator.

Senator COUZENS. But it is Government-regulated and Government-financed, as I understand?

Mr. BARKER. Not the bank that we are proposing.
Senator CouZENS. But the one in the bill?

Mr. BARKER. Yes.

Senator COUZENS. This bill is being discussed, not something else. Mr. BARKER. Senator, I find on that subject that I have rather definite views. Ever since I have been chairman of the mortgage commission I have taken a very definite stand against any State agency or governmental agency competing with or contending with private enterprise. I would rather have strong governmental regulations than competition.

Senator CouZENS. I am interested in the bill and not what the State of New York may do. On page 9, section 6, it is provided that the bank may lend on mortgages to, or buy mortgages from, persons, partnerships, funds, corporations, associations, and banking or other institutions. If they may go into the field of making mortgages or buying mortgages from individuals or persons, partnerships, and corporations, is not that highly competitive?

Mr. BARKER. I should say it is; yes.

Senator COUZENS. I thought there was a campaign on to take the Government out of business.

Mr. BARKER. That is my view. I have thought very strongly, in the particular job that I am in, that I would rather see the Federal institution aid local institutions and be available for rediscount, rather than to have the Federal institution making direct private loans. I want to say, however, in expressing that opinion, that it is my own view and not necessarily committing my associates on the commission.

Senator RADCLIFFE. Do you think there would be enough facilities among State companies to rediscount each other's obligations? Mr. BARKER. Perhaps not at the beginning, but I think it would

soon come.

Senator RADCLIFFE. Without calling upon the Government?

Mr. BARKER. Yes. It might be necessary at the beginning, but as a long-term policy I would be opposed to it. I think there is a real need now for Government assistance.

May I just conclude this, and then I shall be through?

The CHAIRMAN. The question is whether there is a need for this kind of an organization, whether there is not a private field for private business and just have the Government supplement it. Mr. BARKER. I think it can supplement it and be a powerful factor, sir.

Senator WAGNER. In reference to getting the Government out of business, I am as sympathetic to that point of view as anybody, but

it seems to be a slow process, perhaps. There was called to my attention the other day a proposal to construct a very large number of apartments, and an application was made by the corporation that intended to construct the buildings for a loan. I think it was a loan of $2,000,000. The loan was to be insured so that there probably was no risk to the insurance company at all. At first it appeared to be an attractive proposition. Then it was discovered by those making the investigations that in surrounding territory the company held some mortgages and they were afraid if they made this loan, these new apartments being more attractive, with more modern improvements, it might affect the value of their mortgages, and, therefore, they declined to make the loan. There is a case of progress being impeded for a rather selfish reason, it seems to me.

Mr. BARKER. That is true.

Senator WAGNER. What can we do about a situation like that? Mr. BARKER. I feel as a result of the collapse of the mortgage guaranty companies that we have practically frozen the public out of the real-estate investment field and that it is going now, and has been for the last 2 or 3 years, practically solely into the hands of the large financial institutions, like the insurance companies. That is wrong. In other words, we have either got to have mortgage companies or Federal banks, somebody that can step in here. I have had several cases in my own experience where they have declined. Insurance companies have declined to make loans because of the adverse effect upon something else.

Senator WAGNER. It prevents further construction.

Mr. BARKER. That is true.

Senator WAGNER. What are we going to do about that?

Mr. BARKER. We have got to either get the money through a mortgage bank of this character or through a Federal guaranty bank or F. H. A., or something of that sort. We have simply got to do it.

Senator WAGNER. F. H. A. is ready to insure this mortgage. Is there any other place to go but to a Government agency?

Mr. BARKER. Much as I deprecate it, one of the great problems I think we have in your State and mine, Senator, particularly in the metropolitan area, is the unwise new construction which is really not necessary. I think that is one of the greatest curses todaynew construction.

Senator BULKLEY. What is your test as to whether new construction is wise or unwise?

Mr. BARKER. As to the number of vacancies and the availability of residential quarters and the advisability of modernization. I think one of the most attractive possibilities in New York today is rehabilitation and modernization of existing buildings.

Senator BULKLEY. Have you worked out any formula to figure out how you can apply the figures on vacancies to the problem of new construction?

Mr. BARKER. I have a chart on that. I do not have it with me. We are making an examination along those lines. I think our Commission, dependent upon certain decisions coming down from the Court of Appeals which we hope will be favorable, will probably have a great deal to do along the lines of modernization and rehabilitation.

The CHAIRMAN. That is pretty well covered by the F. H. A., is it not?

Mr. BARKER. Yes, sir.

Senator WAGNER. The experience up in my own neighborhood is that in modernizing some of these houses that did not happen to go to pieces altogether, houses of the very old type, while under former conditions they could not rent them at all, the moment they modernized them they were able to rent them. The poor fellow who owns a house has not the means to modernize it and does not seem, in spite of the efforts that are made, to be able to get the banks to advance money for modernization.

Mr. BARKER. It is very difficult to do.

Senator WAGNER. There is another stalemate, apparently. Yet I think it would help the section I speak of.

Mr. BARKER. Very much so. Of course, Senator, our great problem up there now is this, that we have plenty of real estate, plenty of mortgages, and plenty of money. The difficulty is in getting them to join hands and get this money flowing into the real-estate mortgage market. I think one of the great problems confronting our Commission, and other agencies like it, is the refunding and refinancing of these old top-heavy mortgages. I am working on some plans now which I think will go a great distance to accomplish that. For instance, to give you an illustration, I may have a $100,000 mortgage on a piece of property that is appraised at $100,000, and foreclosed. Obviously, the mortgage is top-heavy. If I can go to a life-insurance company and say, "On a present-day appraisal will you let us have a 60-percent loan on a 10- or 15-year mortgage?" and they say, "Yes." I take that $60,000 and distribute it among the certificate holders, leaving them with a junior noninterest-bearing certificate or participation for the remaining $40,000.

That will go a long way, in my opinion, towards liquefying the situation, getting new money to come in to the real estate field. There are literally hundreds of millions of dollars crying to get in, but everybody is afraid.

Last night I had a meeting up in New York with some very prominent real estate and banking interests, discussing this mortgage bank, and they seemed to feel that some method like this may be the spark that will start this refunding and refinancing.

Senator WAGNER. It is reported that many of these lending institutions that made unwise loans say that the loan they made is not the value of the building now, but in order to hold on and try, if possible, by gradual recovery to bring it back to where they thought it was originally, they are not lending money, because they do not want any construction to go on at all which may in some way affect their houses.

Mr. BARKER. I feel that is true.

Senator WAGNER. But that is a serious situation.

Mr. BARKER. It is serious.

Senator WAGNER. If it is going to have an effect upon our efforts at slum clearance I do not think you disagree that something should be done in order to proceed with slum clearance?

Mr. BARKER. Oh, no.

it.

We must do that. There is no doubt about