been set forth in the bill introduced by Senator Fletcher at the last session of Congress. The bank may issue notes or bonds against mortgages held up to 12 times its capital and surplus. We believe that this type of privately conducted but publicly supervised agency is the best method of getting Government out of the private mortgage field.

We doubt if there is any other way in which this can be achieved. We believe that the Federal mortgage bank should be free to deal in all types of urban mortgages. We believe that some form of sound mortgage bonds is desirable, as a safe investment for the savings of the public. We believe that mortgage bonds should be issued by a central agency so that standards will be uniform and liquidity assured.

We believe that a Federal mortgage-discount bank is necessary to the ultimate success of the State mortgage banks, which Mr. Barker, chairman of the Mortgage Commission of the State of New York, has so clearly defined to you and the committee this morning.

We are convinced that the mortgage associations, which are provided for in title III of the National Housing Act, are too limited. We ask that your committee, in its deliberations, take a broad view of this matter, and we hope that you will find it possible to recommend the passage of this bill by Congress, which will create a comprehensive Federal mortgage bank for urban mortgages.

Thank you, sir.

The CHAIRMAN. You will hand us later the proposals with regard to amendments?

Mr. MACDOUGALL. Yes, sir. We will do that; and, bearing directly on the bill, I would ask you to invite our former president, Mr. Walter Schmidt, to address you on those questions.

The CHAIRMAN. We will do that. When can you have those proposed amendments?

Mr. MACDOUGALL. In the course of a few weeks, or probably 30 days, we can submit something.

The CHAIRMAN. Very well. We would like to have it for the record.

NOTE. At the time this portion of the hearing, part 1 on S. 2914, went to press, the above-referred-to amendments to be submitted by Mr. MacDougall and his association had not been received. They will be incorporated in subsequent hearings, reference to which will be made in the index or table of contents thereto.

The CHAIRMAN. The next witness will be Mr. Walter S. Schmidt.

STATEMENT OF WALTER S. SCHMIDT, CINCINNATI, OHIO, FORMER PRESIDENT, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS

The CHAIRMAN. Please state your name, Mr. Schmidt, your place of residence, and your occupation.

Mr. SCHMIDT. My name is Walter S. Schmidt; my address, Fifth and Main, Cincinnati, Ohio. I am engaged in various businesses, including real estate, engineering, and so forth.

The CHAIRMAN. Mr. Schmidt, you have examined the bill, have you?

Mr. SCHMIDT. I have read the bill very carefully, Senator.
The CHAIRMAN. We would like to have your views about it.
Mr. SCHMIDT. My general views are these:

First, that it is an absolute function, and, further than that, an obligation of government, by directive action, to protect its credit structure.

The real-estate-mortgage credit structure has not been protected in the past. The short-term credit structure has its reserve system in the Federal Reserve banks, whereas the long-term, which is of much greater amount than short-term credit, has not only had no reserve system, but practically no directive action, whether that direction was in the practice. followed in the operation of such an agency, or in such economic direction as would make for the stability of a mortgage system.

It is therefore our measured judgment that government must establish a comprehensive agency covering not only the housing of the Nation, but, as well, the other types of mortgage investment.

We feel that the mortgage structure is one unit whole, and that you cannot have collapse in one portion of that mortgage structure without pushing down the remaining portions of it. We therefore feel that Government has an obligation to cover that entire longterm-credit field by a measure or a group of measures that will provide marketability for the mortgage and a reserve system for the whole structure.

The sociological problems involved in housing and the farm have naturally first engaged the attention of Government in these recent years, but we feel, having studied the situation from every angle for many, many years, that one of the weaknesses of our situation has been that partial coverage of the field and the attempt to take it piecemeal.

It is our judgment that there must be a synchronization and a pulling together of the various agencies that are concerned with the mortgage, and that therefore the reserve system must cover urban mortgages of every type, in addition to the housing mortgage and the farm mortgage.

This bill, as I read it, does not do what Senator Couzens suggested in his statement, namely, permit the investment of a central mortgage bank directly in mortgages. As I read the bill, it definitely provides that the bank can buy mortgages only from originating sources. For that reason it is a supplementary agency to existing lending institutions and not an actor in the first instance.

The bill does provide that the Federal Government shall subscribe to a portion of the capital stock, and, in that respect, many might say that it was an entry of Government into business.

However, I invite your attention to the fact that subscription is limited to 10 percent of the stock of the bank. Inasmuch as Government properly should have some interest in this agency in order that it may secure the right of supervision and some control, it is my judgment that that is a very wise and necessary provision.

The CHAIRMAN. Is there any plan whereby that stock may eventually go out of the Government, or is the Government to keep that stock?

Mr. SCHMIDT. There is absolutely no reason why the Government could not, at any moment, sell that stock, so far as I read the bill.

The CHAIRMAN. What participation does it require on the part of the Government in the management of the bank or institution?

Mr. SCHMIDT. It requires that the President appoint three of nine directors, the remaining six to be elected by the stockholders, and that the bank shall be examined just as are members of the Federal Reserve banking system, at stated periods, to see that the conduct of its affairs is sound and comprehensive. If that conduct is not sound, it is my judgment, according to the reading of the bill, that that would lodge in the Government certain rights affecting the charter of the bank to continue its operation so that, in effect, the Government would have absolute supervisory powers.

The CHAIRMAN. Do you think there is a real need for an institution of this kind?

Mr. SCHMIDT. Gentlemen, we presented the fact of the existence of that need before this depression started. We started this activity back about 1927. We presented a measure that contained ideas very similar to those set forth in your bill, in 1929. Mr. Calder presented a similar idea in 1921. The need has been recognized, I think, by every student of credit and currency, but, in view of the vast wealth of this country and the tremendous funds that we had for investment, and the fact that our prosperity continued in an unexampled way, creating an expansion of credit, the need for a stabilizing agency was not, perhaps, recognized as it should have been, in our long period of active conditions. Money was available. Values were continuously going up, which made for the safety of mortgage investment, and, as a result, the need for a reserve agency that would stabilize practice and make the mortgage more secure through regulation as to the character of loan and type of instrument used, and the adjustment for laws in the various States governing the mortgage, was not recognized. The need for that type of supervisory activity was not recognized as early as it properly should have been.

Senator RADCLIFFE. Mr. Schmidt, you think, then, that the greater need is one for stabilization, and not due to the unwillingness of private capital to invest?

Mr. SCHMIDT. The unwillingness of private capital to invest in real-estate mortgages is due to the fact that the real-estate mortgage periodically becomes frozen. The same statement is true as regards the F. H. A. insured mortgage. It still remains a frozen asset in the hands of its possessor in periods of stress. There is no more reason

to say that you can sell an insured mortgage in periods of stress than there is to say that you can sell any other very sound mortgage. Experience has proven that mortgages become absolutely frozen. The CHAIRMAN. How does this bill relieve that?

Mr. SCHMIDT. In our judgment, Senator, when periods of stress come, the investor tends to the ultimate in security. Psychologically, people recognize that the ultimate in security is the real-estate investment, provided there is diversity and a market for that investment. As a result of that circumstance, the bonds of this mortgage bank automatically, in periods of stress, having a cross-cut of mortgages over the country, as a back log of security, and in addition, a substantial capital, and, further than that, Federal supervision as to sound practice, in our judgment would find such ready sale for its bonds that the bank would be enabled, in periods of stress, to get

all the money it needed from the people of this country at a low interest yield.

As a result of that fact, it would be in a position to buy sound mortgages. We feel that there is no reason for a bank to be operated on any but a very conservative basis, and we feel that if you take care of the base, as this bill provides, that you can have this washout of the unsound mortgage without destroying all real-estate values, which was the result of our previous collapse.

Senator RADCLIFFE. If the market became frozen, do you not think that would embarrass this bank?

Mr. SCHMIDT. The market would never become frozen if a place to go to sell your mortgage.

Senator RADCLIFFE. What could the bank do with it?
Mr. SCHMIDT. Issue bonds against it.

you had

Senator RADCLIFFE. Suppose the mortgages were due and they could not collect. Assets can be frozen in their hands as well as in the hands of an individual.

Mr. SCHMIDT. That is true; but one reason the mortgage cannot be paid is because the realty values depreciate, and, in my judgment, this was the major cause for the depth of the depression to which we sank-the lack of a reserve system for long-term credit. When you crashed your realty values you crashed the tax systems in all your municipalities and States, because they depended upon real-estate

values.

In my own State we had three successive percentage reductions in real-estate valuation, which resulted in continual reduction of the taxes. One reason for that was that there was no financing available. If the mortgage was due, it had to be paid off or the property was foreclosed. As a result of that, a person sold his property at a depreciated price in order to pay off his obligations. As a result of this continuous movement, real-estate values just collapsed. In our judgment, the lack of an agency of this kind contributed more than anything else to the depth to which we went in this depression, and its long-continued severity.

Senator RADCLIFFE. Would not an agency of this sort be very seriously affected, if not frozen, by a drop in real-estate values, if they found themselves in possession of mortgages which they could not dispose of? How could this institution operate under those circumstances?

Mr. SCHMIDT. It does not have to dispose of mortgages. If this institution is created as a billion-dollar corporation, and has a right to issue bonds to the extent of 12 times its capital and surplus, that would mean that it would have an issuing power of at least 12 billion dollars, which is more than adequate, as events have proved, to take care of any collapse in our mortgage structure.

Senator RADCLIFFE. It might not have to dispose of them, but would have to have money to meet its obligations, and it seems to me that if those mortgages were frozen in the possession of this bank it would be just as embarrassing to that institution as it was to other mortgage companies during the depression.

Mr. SCHMIDT. I will answer that statement by this, Senator. I happen to represent the Metropolitan Life Insurance Co. in the placement of money in my district. During the greatest depths of

the depression, it is my understanding that that great company, counting its foreclosed properties as worthless, still received an average of the 3 percent per annum, in its worst year, mortgage portfolio.

on its

Senator RADCLIFFE. That is much better than the average. Senator BULKLEY. Mr. Schmidt, are you presuming that these bonds would always be readily saleable? You refer to the issuing power as if that_were_almost equivalent to cash.

Mr. SCHMIDT. Yes. Experience in other countries has proven that in periods of stress these bonds sell on an interest-yield basis very little in excess of Federal securities, and it is, therefore, my judgment that the worse the times the more saleable these bonds would be. Of course, they would be dependent upon the interest rate, just as any other bond is dependent upon the interest rate, and that interest rate would fluctuate; but it has been proven by experience in other countries that bonds of this nature are almost the ultimate in desirability.

The CHAIRMAN. Do you think you could get the capital required in the bill for setting up an organization like that sufficiently subscribed?

Mr. SCHMIDT. It is my judgment, Senator, that it may be necessary, perhaps, to base subscription to the bank upon a percentage of mortgage portfolios, instead of setting a minimum sum of $1,000. Perhaps the bill would permit, by regulation, the directors or the organization committee to make such provision, so that subscription would be received. It is my opinion that the necessity for this bank is such, and the facilities that it offers are so valuable, that, once created, it would receive from private enterprise ample subscriptions. That is my best judgment. I have been all over this country in the past year. I have talked to bankers, heads of insurance companies and savings banks, in every city of the country. It is true that when it comes to formal action, many banks and insurance heads fear that perhaps an agency of this kind would go completely into the control of Government, and, as a result, that there would be interference with their own activities.

On the other hand, that feeling is offset by many, even in the conservative northern New England States, where I have talked to the heads of many of the savings banks and insurance companies, who recognize the fact that an agency of this kind is really essential in our country if we are to have a sound financial structure for the future. They also look with great favor upon the purchase of the bonds that this bank would issue. I think-and they have expressed the thought that we have come into a period of lesser interest rates to deposited money, and that the bonds of a bank of this kind issued, say, on a 4-percent basis, would be extremely attractive to those agencies that have a surplus of funds.

In order to get mortgage investment, many of these northern banks bought participating certificates of guaranteed mortgages on very badly selected mortgages, through undeveloped sections like North Carolina, central Kentucky, and so forth. They wanted that higher rate that comes from mortgage investment and at the same time they were not able to get it in a sound, stable security. This would offer them that.