Mr. RUSSELL. None at all.

Senator CoUZENS. And should not?

Mr. RUSSELL. That is my opinion, that it should not. It provides $200,000,000 of cash, but to be used to pay taxes only.

If the home owner owes nothing else except $500 in taxes and has to lose his home on that account, this corporation could lend him $500, you see, and save his home.

Or if he owes a $4,000 mortgage on a $5,500 house and incidentally has two or three hundred in taxes, this corporation could swap the bond for the mortgage and pay the taxes in cash and any other incidental charges of that character, and give the home owner the new mortgage for $4,300 and amortize that for 15 years at 5 percent, thereby getting the home owner out of default, bringing everything up to date and giving him a monthly payment on that $4,300 obligation of about $41 or $42 a month, and then if he were out of work it could give him a moratorium of up to three years to save his home. Senator BULKLEY. In case a man built a new home he could borrow under this system as soon as the home was completed, could he not?

Mr. RUSSELL. He could not under this act, Senator. This act does not provide cash for loans except to pay taxes.

Senator BULKLEY. But through the local home loan association? Mr. RUSSELL. He could go to his local association, these Federal savings and loan associations, or existing building and loan associations could lend him money for a new home.

Senator BULKLEY. And get it financed through this system?

Mr. RUSSELL. And they could obtain funds through their Federal home-loan bank.

Senator COUZENS. But the interest would not be guaranteed the same as on the old mortgages?

Mr. RUSSELL. That is true. It is a question of what he could borrow and probably at private loan.

Senator BULKLEY. So this system set up here is strictly relief? Mr. RUSSELL. That is all.

Senator BULKLEY. And nothing of this sort for new construction? Mr. RUSSELL. It does not provide anything whatsoever for new construction.

Senator BULKLEY. Yes; I wanted to get that clearly stated.

Mr. RUSSELL. Yes. Now, I would like to state to the committee that in our study of this question since this Federal board was appointed last August the effort has been to set up a sound and a conservative reserve system for these institutions; that that system is functioning, and that it is putting out several million dollars a week now, and that money is partly being used by those institutions to pay withdrawals where their memberships are in dire distress, but it is largely being used to make loans on homes, and those loans are for new houses occasionally, but it is chiefly to take up present existing mortgages where the mortgagor is in direct distress.

Senator COUZENS. What did you use to arrive at your 80 percent of the present-day values? How did you arrive at 80 percent instead of 70 or 60 or something else?

Mr. RUSSELL. Senator, they had the Federal farm loan bill that is pending, and they said 50 percent of normal value, and I did.

not know what normal value meant, and I could not find anybody that did, and my judgment was that it was impractical to appraise on normal value, and my judgment was that 80 percent is probably about the same as 50 percent of what somebody might term "normal value." And, furthermore, that 80 percent would take up the sound mortgages. That is, if a man had a $10,000 place and he borrowed $6,000 on it, which was a reasonable mortgage in 1929, and that place is now worth, we will say, $6,000 and he has that mortgage paid down to $4,000, he could refinance it through this plan. He could refinance it up to 80 percent. If he hasn't it paid down at all, then the mortgagee would take 80 percent of the $6,000 in bonds. Then the home owner could be put on an easy basis by this exchange.

So it was arrived at in consideration of the idea that was in the farm mortgage bill that came up first, and in consideration of the fact that in our judgment that is as high as you can soundly go, especially with a moratorium provided for in the bill. You see, the moratorium provided for in the bill, if a man got one of these mortgages and then secured his 3-year moratorium, immediately at the end of the 3 years you would have 80 percent plus 15 percent of interest, or 95 percent, and if he had to pay his taxes first he would have 105 percent of the value of the home at the end of 3 years, and that certainly is as far as anybody can go.

Senator TOWNSEND. And the home may have depreciated in that 3 years.

Mr. RUSSELL. And doubtless would have depreciated all of that much.

Senator COUZENS. Eighty percent I think would be perhaps too far, if anything.

Senator TOWNSEND. I think so, too.

Mr. RUSSELL. And it was figured in the light of the existing depressed market, and we believe that the market would not go down any further, but we recognize that if it does go down any further and if a moratorium has to be extended to anybody there would likely be a loss on that loan.

Senator COUZENS. I suppose this new plan would cover for insurance premiums and additional taxes?

Mr. RUSSELL. It provides for those incidental assessments and insurance premiums and incidentals of that kind. The reason that is necessary and entirely necessary is that nearly every home owner has a few of those little items, and you would not do him any good, according to my experience in mortgage financing, unless you can take him out of all of his trouble, set him up so that he has a $40 or $50 payment or a $10 payment, whichever his home is, a little one or a big one, and fix him up so that he can reasonably be expected to keep up with his payments from that time on and not be bothered with anything behind.

Senator BULKLEY. Don't you think it reasonable to believe that if that percentage remained any less than 80 percent there would be a great many desirable cases that would not be cared for?

Mr. RUSSELL. I think that is entirely true, Senator, that if you make it less than 80 percent, while if this was a private enterprise I could not recommend 80 percent, I am recommending 80 percent in

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this case because I think that the Government at least in the case of small home owners can go pretty far. I think that you are entirely correct.

Senator BULKLEY. In other words, you support 80 percent as a fair and sound compromise between making loans that are absolutely good and our desire to relieve cases that really ought to be relieved?

Mr. RUSSELL. That is exactly the compromise that I am making in my own mind, and I think that that compromise in this case is justifiable, because if the owner has a 20 percent equity on the present market in his home, if he has any sense at all he will try to hold on to it, and especially when the payment under this plan will be as small as he could rent a house just like it for, even on the present market.

Senator CouZENS. What would the situation be after a home owner in the kind of distress that you referred to got all his troubles behind him and then got out, sold his home or something of that sort? Would the mortgage apply to the purchaser and the purchaser have all the relief?

Mr. RUSSELL. He could, of course, only sell it subject to the mortgage, but the purchaser could take advantage of that low interest rate that that mortgage carried and of the long terms of that mortgage and could take advantage of course of the mortgage if he became a bona fide home owner.

Senator COUZENS. But he could not sell it for speculation? Could he rent it and get out?

Mr. RUSSELL. If he got out and rented a place he could not, of course, obtain a moratorium, because he could not show the personal necessity for a moratorium.

Senator COUZENS. But there is not anything to prevent him or any man from getting all these troubles behind him like you have just been talking about and then getting out and renting the place to somebody else?

Mr. RUSSELL. There is no provision in the bill to prevent that, Senator, and I do not know whether it could successfully be done or not. I suppose that there could be a provision put in one of those loans that if the owner ceased to occupy the premises the loan could be called, but that is not in the bill.

Mr. STEVENSON. That would be a matter of regulation. That could be covered by regulation under the bill.

Senator COUZENS. Which the Board is authorized to make?

Mr. STEVENSON. If the Federal Home Loan Bank Board should choose to make that kind of a regulation it could put that in. A great many of these local private institutions would put that kind of a clause in their loans. In Ohio, for instance, there are a great many of them that put a clause in that if the borrower moves out of that house and ceases to occupy it as his home they have a right to call that mortgage.

Senator COUZENS. I think they ought to put everything around it to prevent the speculation in this Government enterprise.

Mr. STEVENSON. That could be in the bill and it could be enforced by regulations by the Board.

Senator COUZENS. I doubt that it could be enforced by regulations.

Senator TOWNSEND. I notice on page 5 of the bill that they are "to make advances in cash to pay taxes or assessments on the mortgaged property, or to provide for necessary maintenance or repairs." Mr. RUSSELL. Yes, sir.

Senator TOWNSEND. How far could that be carried?

Mr. RUSSELL. Well, Senator, I think I can answer that best by an illustration. If here is a $5,000 home, but the home owner has been unable to maintain his property and he needs a roof that will cost him $200; he has, we will say, $3,700 in the place, and therefore 80 percent would give him up to $4,000 on the place. This Corporation could exchange some of these bonds for a $3,800 mortgage, and then it could advance the $200 to put his new roof on and give him a $4,000 loan, so that he would have a tenantable house when the transaction is over, and it would be financed on a 5 percent basis and over 15 years.

Senator TOWNSEND. And you figure on this set-up that you have in the provisions of this bill that the Government would not lose any money?

Mr. RUSSELL. Senator, I think the rate ought to be 6 percent in this bill, and if it were 6 percent, in my judgment the Government would not lose any money, but at 5 percent my best judgment is that it cannot be operated at all on 1 percent spread. Nobody else has ever been successful in operating a first-mortgage business of this character on a 1 percent spread.

Senator TOWNSEND. If you thought it ought to be 6 percent, why did you make it 5?

Mr. RUSSELL. Well, I made it 6 and it was changed.

Senator COUZENS. So far as I am concerned, I am perfectly willing that the Government should lose some money

Mr. RUSSELL (interposing). That was the theory of that change. Senator COUZENS. On those homes, if you would carry it out strictly what seems to be the intent of the bill, and that is in the name, the protection of the small home owner.

Mr. RUSSELL. I would like to make myself clear on that question, Mr. Chairman. I do not object at all to the 5-percent rate. In the original draft of the bill I made an effort to draw something that was economically and financially sound, and I therefore suggested a 6-percent rate, and, knowing that a 6-percent rate is as low as the prevailing rate in the country anyway, and knowing that this mortgage would be a better mortgage than is obtainable anywhere else at 6 percent even, but the rate was changed to 5 percent in an effort to render some real relief to these home owners who are in distress, and I know they are in distress, and I have no objection under the sun to giving them some relief.

Senator TOWNSEND. Neither do I.

Mr. RUSSELL. I just want to make myself clear.

Senator COUZENS. I notice in this language on page 5 that these properties or bonds and so on are tax exempt except surtaxes. Is that not new? As I recall, the other legislation said except estate, inheritance, and gift taxes. It seem sto me that surtaxes were not in the previous acts.

Mr. RUSSELL. Senator, that was taken from the other acts. The Federal Home Loan Bank Act has that identical clause in it.

Senator COUZENS. Surtaxes, too?

Mr. RUSSELL. Yes, sir. The Federal Home Loan Bank Act has that identical clause, and it was taken from that.

Senator COUZENS. Is that true of the farm-mortgage loans, too, exempt from surtaxes?

Mr. RUSSELL. I am sorry, but I am sure I do not know about the land-bank bonds. I do not know whether it is or not.

Senator COUZENS. Do you, Mr. Stevenson?

Mr. STEVENSON. My recollection is that is the exact language that is in all of them. We had a considerable controversy about the surtaxes there in this particular bill, and we held it to the language used in the others; my recollection is all of them.

Senator COUZENS. Of course, if these are subject to surtaxesand I am only trusting to my memory; I did not think that these other bonds were subject to surtaxes, but maybe I am in error about that—but if they are subject to surtaxes you will have perhaps a difficulty in selling them. Of course, I would like to see them not exempt at all, but I don't want to handicap the home owner.

Mr. RUSSELL. I have here section 13 of the Home Loan Act, which says:

Any and all notes, debentures, bonds, or other such obligations issued by any bank shall be exempt both as to principal and interest from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States.

And so forth.

Senator CoUZENS. That is the Home Loan Bank Act?

Mr. RUSSELL. That is the Home Loan Bank Act.

Senator BULKLEY. Senator, you did not mean to suggest that we should follow the general practice in these other acts, did you?

Senator COUZENS. No, no; I did not recall that these other bonds are subject to surtax.

Senator BULKLEY. I think that should be checked to see that we are in line with the other legislation. I do not see any reason to depart from the usual practice.

Senator COUZENS. No; I do not. But there are, of course, a number of Government securities out that are wholly tax exempt, and I did not remember that these other acts, the Land Bank Act and the Home Loan Bank Act, had surtaxes in them, were subject to surtax.

Mr. STEVENSON. The Reconstruction Act has exactly the same language, but I am inclined to think, after thinking it over, that the Land Bank Act was passed, you know, in 1914, before we were indulging in surtaxes and so forth, and I am inclined to think that they are exempt from everything.

Senator BULKLEY. Yes; I believe Judge Stevenson is right about that.

Senator COUZENS. I think I am right about it.

Mr. STEVENSON. Since surtaxes were established this is the language that is given in every one. We had quite a controversy over that language in the Reconstruction Finance Act, as Senator Townsend will remember, right here in conference.

Senator BULKLEY. I think the Land Bank Act is out of line with the more recent practice.