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The CHAIRMAN. The suggestion you made about surplus and reserves—a system of that kind would tend toward stabilizing the whole situation, would it not?

Mr. BARKER. Yes, Mr. Chairman. I feel that in the illustration that I gave, if you had $3,000,000 capital, $3,000,000 surplus, and $3,000,000 reserve, and that capital is invested in mortgages, it would start you on your way. If you keep $6,000,000 in high-grade non-real-estate securities, then as against your $120,000,000, assuming you reach that limit, you would have $6,000,000 of liquidity, and that added to the normal liquidity from the income would be sound and safe financing, and I have had the advice of many bankers on that.

Senator RADCLIFFE. If it were once put up it would have to stay there?

Mr. BARKER. Yes; it would have to stay there. And the superintendent of banks is given the right at any time, of course, to step in and stop them from making any further loans, or stop them from paying dividends. That reserve iš sort of a hybrid; it is a liability, as you say, Senator, but it cannot be used for dividends. It is just an arbitrary thing that is put in there for liquidity.

Senator RADCLIFFE. And once put there it would have to stay, even though failure to take it out would mean impairment of capital and the company would be called upon for new capital?

Mr. BARKER. That is right.
Senator RADCLIFFE. It would stay there how long?
Mr. BARKER. Indefinitely.

The CHAIRMAN. Do you think it is wise to use the term “bank”? It is not a bank; it does not receive any deposits.

Mr. BARKER. It is somewhat of a misnomer, Mr. Chairman, calling it a bank.

The CHAIRMAN. Would it not be better to call it a corporation or institution?

Senator WAGNER. I suppose you are afraid to call it a mortgage company?

Mr. BARKER. I was going to say, Senator, that there are certain names that are sort of not in good standing now.

There are one or two other observations that I would like to make, and then I think I will be through with this. The debentures issued by the mortgage bank while issued in series from time to time will all be of the same general nature as respects the security behind each series. That is to say, they will all be of one general class. Interest rates on the various series will vary according to the condition of the money market and it will be permissive for the bank, if its board so decides, to write into the debentures the privilege of permitting debenture holders to share in profits. The mortgage bank will be able to register and sell its debentures on the leading exchanges of the country. This should provide a ready market for the bonds, enabling the debenture holders to feel certain that they may at any time convert their holdings into cash. Debentures of this character have for many years been recognized and favored in Argentina where such debentures are traded in on the leading exchanges to a greater extent than perhaps any other security.

The bank will be permitted to redeem and to refund and will thus be able to take advantage of fluctuations in interest rates and a cheap money market. By the use of amortization payments to buy in its own debentures on the public market, the bank will be able to prevent severe oscillations in price on exchanges. As a matter of fact, our

. investigations reveal that fluctuations in price on foreign exchanges of the securities of foreign mortgage banks have been very slight, even in the years of depression.

Mortgage banks, when organized, should be given a free and open field so that their business may prosper and the mortgage business of the state may be directed through these channels and others precluded from entering that field. In other words, we feel that we have got to be very careful not to interfere with legitimate corporate financing. You cannot stop a railroad from issuing its bonds, even though back of the bonds there may be a mortgage on a great deal of real estate. Nor can you prevent a corporation, which owns an office building, from issuing its corporate bonds to the public, even though back of those bonds there may be substantially nothing but real estate.

The distinction that we draw in defining a mortgage bank is that it is an institution which is organized primarily for the purpose of lending money on mortgages and selling its debentures to the public. Our investigations are still continuing, Senator, and I will be very glad, if there is anything that I can give you out of our economic and research bureau or statistical department, if you will indicate any character of information that you think would be helpful, to furnish such information as you desire. I will not promise to give it to you, but I will go the limit to get it for you.

The CHAIRMAN. We are much obliged.

Senator WAGNER. What is the attitude of the present lending institutions to the proposed mortgage bank?

Mr. BARKER. So far it has been very, very favorable—so much so that I am frightened. I wonder where the opposition is. One of the leading executives of the savings banks association during the last week has strongly endorsed it. We have discussed it with the various leaders of real-estate boards, such as the New York Real Estate Board. They seem to be very favorably disposed toward it; and I understand that the life insurance executives are giving it favorable consideration.

Senator WAGNER. Would it be in competition with such institutions? Mr. BARKER. To a certain extent. Of course, the savings banks

, and insurance companies will continue to make direct loans, too. I think they will loan large and small sums of money directly on mortgages on specific pieces of property: My thought is that we have got to find some way, if you are going to have real real-estate financing, to get Mr. John Public into it safely.

Senator WAGNER. Do you think you are going to sell them your certificates

Mr. BARKER. We will sell them debentures. In the investigation we made we took some testimony. One man advanced the theory that you should not allow these bonds to be issued in denominations of less than $2,500 or $3,000. When I asked why he said, “Well, Mrs. Riley, with her $500, should not be permitted to go into the real-estate business. She should keep her money in a savings bank.”

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Of course that sounds very well, but the difficulty as I see it, is that either the thing is sound or it is not sound; and why we should not permit Mrs. Riley to put her $500 in a properly regulated realestate investment, but allow her to go down to Wall Street and lose her money in anything she likes, I have not yet been able to answer. I see no more logic or reason in saying that you shall not invest $100 in a real-estate bond than to say that you shall not invest $100 in stock or bonds or any security that is on the exchange.

Senator RADCLIFFE. Do you think the insurance companies would be willing to buy these debentures rather than make corresponding loans?

Mr. BARKER. My thought is that they will do both, Senator, and to a large extent will buy the bonds of a mortgage bank. We are also proposing an amendment to the laws which expressly permit savings banks and life-insurance companies to buy these bonds.

Senator RADCLIFFE. Would not insurance companies be inclined to insist, as in the past, on the direct loan and direct contact?

Mr. BARKER. They, I think, will continue to make many of these large direct loans, but they have great difficulty today in finding a real outlet for all the money that they have to invest, and my judg. ment is that if they can get a cross-section of real estate through the bonds they will do so.

The CHAIRMAN. Do you know what interest savings banks pay?
Mr. BARKER. Anywhere from 3 to 312 and 4 percent.
The CHAIRMAN. Do they pay that much?
Mr. BARKER. Yes, sir.

The CHAIRMAN. That is about as much as these debentures would bear, is it not?

Mr. BARKER. Yes. I do not want to see these debentures particularly high. I should say 4 or 412 percent would be about the limit. If you are going to have them sound and attractive for the investor I do not think you can offer very high interest rates.

One of the curses of the past has been high interest rates required of mortgagors. Since all the mortgages are in the pot, so to speak, there will be nothing to prevent them in times of stress from reducing the interest rate by one-half of 1 percent or 1 percent, if need be, to the mortgagor. That is what the life insurance companies did.

Senator RADCLIFFE. What difference do you think there ought to be as between what a mortgage pays and what these debentures pay?

Mr. BARKER. I confess it is just my opinion not yet followed through that there should be a differential of, say, 11/2 percent between the amount that the mortgage pays and the interest which the bond pays; and my reason for that is that I am told that the expenses of the bank should absorb roughly 1 percent, leaving roughly one-half of 1 percent.

The CHAIRMAN. The Federal Land Bank has a margin of one-half of 1 percent to cover the expense of administration.

Mr. BARKER. Yes, sir. Senator RADCLIFFE. If that could be done, why should not one-half of 1 percent be put up as reserve without waiting for the question of the profits to be determined?

Mr. BARKER. I am open-minded on that. It has been suggested. Senator WAGNER. That is pretty high, is it not?

Mr. BARKER. I should say it is plenty high. I think one and a half would be the absolute maximum of differential. We are having some investigations made, but it will not run more than one and a half.

The CHAIRMAN. Mr. Walter Rose, president of the National Association of Real Estate Boards, Orlando, Fla.

Mr. Rose. Mr. Chairman, in view of the limited time, I am going to ask that Mr. MacDougall, chairman of our finance committee, and Mr. Walter Schmidt, immediate past president, present our arguments.

STATEMENT OF EDWARD A. MacDOUGALL, CHAIRMAN, FINANCE

COMMITTEE, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, NEW YORK CITY

The CHAIRMAN. Mr. MacDougall, please state your name, place of residence, and occupation.

Mr. MacDougaLL. Edward A. MacDougall; New York City; real estate.

The CHAIRMAN. Mr. MacDougall, you are familiar with this bill. are you not?

Mr. MacDougall. Yes, Senator. I have some knowledge of the bill.

The CHAIRMAN. We will be glad to have you discuss it.

Mr. MacDoUGALL. With your permission, Senator, I should like to submit first for the record a resolution passed by the National Association of Real Estate Boards at its convention at Atlantic City, at which there were a thousand delegates represented. I will not undertake to read that resolution, or the one from the State of Florida, but they are characteristic of the resolutions that have been passed by real-estate boards throughout the United States, and I should like to leave with your office these records for your examination and reference.

[NOTE.—Resolution passed on October 25, at National Association of Real Estate Boards' twenty-eighth annual convention at Atlantic City, to Federal Mortgage Bank.] NATIONAL ASSOCIATION OF REAL ESTATE BOARDS,

November 23, 1935. Mr. E. A. MACDOUGALL,

Jackson Heights, New York City. DEAR MR. MACDOUGALL: Enclosed herewith is a copy of the resolution passed at our Atlantic City convention with reference to the Federal mortgage bank, as requested in your wire.

Following is an excerpt from the minutes of the directors' meeting which has to do with amendments to the Fletcher bill:

"It was moved by Mr. Harry A. Taylor, seconded and unanimously carried, that the committee on real estate finance be authorized to make such amendments as may be necessary in negotiations upon the passage of the Fletcher bill.” I presume that this is what you have reference to in your wire. Sincerely yours,

HERB NELSON, Secretary.

RESOLUTION PASSED OCTOBER 25 AT NATIONAL ASSOCIATION OF REAL ESTATE BOARDS'

TWENTY-EIGHTH ANNUAL CONVENTION AT ATLANTIC CITY

Whereas the Federal Government has established various great instrumentalities concerned with mortgage finance; and

Whereas these agencies cover but a portion of the field and do not assure marketability of the mortgage; and

Whereas mortgage lending should be kept in private hands with such safeguards thrown about it as will make investors and institutions secure; and

Whereas the security resulting from the establishment of a Reserve system for long-term mortgage credit providing marketability would induce the lowering of interest rates: Now, therefore, be it

Resolved, That we urge the Federal Government immediately to provide a major agency upon some plan as that outlined in the Fletcher bill (s. 2914), and establish this agency as the focal point for synchronizing the work of various Federal corporations and administrations dealing with the mortgage to the end of inducing standardization of practice and providing marketability for the mortgage.

The CHAIRMAN. Very well. We will put those resolutions in the record.

Mr. MacDOUGALL. Our committee has sent to our membership, bankers, and mortgage investors throughout the United States, several hundred letters inquiring as to whether or not if this Federal Mortgage Bank were incorporated as provided for in S. 2914, they would invest in the stock of a Federal Mortgage Bank.

The second question was, “Will you cooperate in urging the passage of this bill?”

I have some 50 letters representing very responsible institutions on that subject. I should like to leave those also in the record for your consideration.

The CHAIRMAN. Very well.

Mr. MacDOUGALL. As you can see from our directors' resolution, we are quite prepared to recognize that bill which you introduced at the last session may have to be amended in some respects to satisfactorily meet the requirements or suggestions that we have developed in the course of the interval which has elapsed since the bill was introduced. Those recommendations we will submit to your committee at a later time.

The emergency feature of the Federal Mortgage Bank has been emphasized far too much, in our opinion, as against another far more important function of the bank. I refer to the transfer of funds from where they may be available to where they may be needed for mortgage purposes. That is one of the greatest functions, if not the greatest function, that this bank will exercise. It will have a tendency to equalize interest rates on mortgages throughout the country, as the Federal Reserve banks have done in connection with short-term financing. We cannot emphasize too greatly this function of the bank. The benefits which it would confer to the South and the West, where interest rates are proverbially higher than they are in the eastern section of the country, need no emphasis. The value to the investors in the east, in putting their money in first-mortgage securities in the West and South, is equally important.

We believe that a Federal mortgage bank should cooperate closely with the Federal Housing Administration, since that is a permanent agency set up by the Government, which has done already a great deal of good in encouraging loans and in creating new standards for neighborhoods and housing developments, upon which any sound mortgage structure must be based. The form which such a central mortgage-discount bank should take, in our opinion, has

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