It seems to me, therefore, that the scope of the bill should be so enlarged as to include the amount of the first and second mortgages where their aggregate amount does not exceed 80 percent of the present value of the property.

I believe that such a provision will be found to apply to many cases. The correction could be made appropriately, it seems to me, by inserting in subdivision (d) of section 4, at line 23, authority to make advances to pay not only taxes and assessments on the mortgaged property but also junior mortgages and other liens on the property. That would not take it above your 80 percent.

Senator COUZENS. What would Mr. Russell say about that, as long as you kept_within the 80 percent?

Mr. RUSSELL. I do not understand the gentleman's question. Senator COUZENS. He wants you to take second mortgages and any other lien on the property as long as it did not exceed the 80 percent. What would you say as to that?

Mr. RUSSELL. Under this bill if the home owner, however many liens he has against his home, can get the lien holders to take the bonds in lieu of the liens, the transaction could be closed up to 80 percent of the home value.

Mr. LORD. So that your conception of the bill is that the bill would allow a consolidated mortgage of 80 percent?

Mr. RUSSELL. Yes, sir.

Senator TOWNSEND. That would cover your point, would it not? Mr. LORD. That would cover my point, Senator, but it was, not clear to me.

Second mortgagees-this is just in answer to Mr. Russell-might well be induced to settle for a considerably less sum than the face of their mortgages in cases where a first mortgagee would feel amply secured by his first mortgage, and the second mortgagee felt insecure and is not so situated as to be able to take over the property and carry it.

There is one other feature of the bill to which I want to call attention, and that is the provision on page 6, lines 4 to 11, to the effect that if the amount of face value of bonds and accrued interest accepted by the mortgagee is less than the amount of the unpaid obligation of the mortgagor to the mortgagee, the corporation shall credit the difference between such amounts to the mortgagor and shall reduce his obligation under the mortgage to that extent. In other words, the profit made by the efforts of the corporation is to go to the individual who has perhaps defaulted instead of to the corporation that is taking over a doubtful mortgage. It seems to me that any profits made by the corporation should go into the earnings of the corporation so as to meet some of the losses which the corporation is sure to sustain. You need only to consider the situation of the guaranteed mortgage companies to see the necessity of having some sort of fund to offset the certain loss in a proportion of the cases. Solvent mortgagors should not be encouraged to default in order to seek a reduction in principal. The better the security behind the Home Loan Corporation's bonds, the more readily a mortgagee will agree to accept them.

On that last proposition, it is simply this, Mr. Chairman: If my brother and I go out and borrow on two exactly similar houses and I have borrowed $7,000 and my brother has borrowed $5,000, my

mortgage of $7,000 is not as good as his $5,000. So that the man takes these bonds for $5,000 on mine and I do not have to ever pay the other $2,000, but my brother with his $5,000, which is a good mortgage, and a man refuses to take it or the Home Loan Board takes it at par, he gets off that $2,000, which does not seem to me in the first place to be equitable, and there is no reason why the Government should not get some sort of a sinking fund to better the situation.

Senator BULKLEY. Had you concluded?

Mr. LORD. I have concluded, Senator.

Senator BULKLEY. Are there any further questions? pause.] Thank you very much, Mr. Lord.

[After a

We will hear Mr. D. E. McAvoy, who is also here at the suggestion of Senator Wagner.

STATEMENT OF D. E. MCAVOY, SECRETARY OF THE HOME MORTGAGE ADVISORY BOARD, NEW YORK CITY

Senator BULKLEY (chairman of the subcommittee). Will you give your name and business connection to the reporter, please?

Mr. McAvoy. D. E. McAvoy; treasurer of Wm. D. Bloodgood & Co., Inc. Am also secretary of the Home Mortgage Advisory Board, a volunteer organization that is cooperating with the Reconstruction Finance Corporation in the Second Federal Reserve District, headed by Mr. Frank A. Vanderlip and instituted last year by Mr. Chas. A. Miller, former president of the R.F.C.

Senator BULKLEY. Have you a statement to make to the committee?

Mr. McAvoy. I have a brief here to present, Senator, if you wish, in duplicate for the record, that represents the survey of the Home Mortgage Advisory Board, an outline and summary of the recommendations of the Long Island division of that Board of which division I am chairman, as to a bond issue, which was presented in March to the Home Mortgage Advisory Board and sent out generally to the administration and legislators principally interested.

The Long Island board, which our division is administered by, is preparing some amendments for the existing bill, in which we have suggested amendments to take care of what we feel are points from practical observation in our work dealing with home owners in distress.

Senator BULKLEY. This document that you have handed me seems too voluminous to print in the record.

Mr. McAvoy. The bill as amended is on the way. It is being prepared now, in short form. This pamphlet contains information as to the administration of the Home Mortgage Advisory Board in the second Federal Reserve district. We feel it necessary that similar advisory bodies be formed in all Federal districts to work out the readjustment of the home owner in distress, who would receive exceptional aid under this new bill. I can reduce to several pages the matter pertinent to the records.

(Inserted at end of Mr. McAvoy's remarks.)

Senator COUZENS. What have you to suggest? Are there any amendments to this pending bill now?

Mr. McAvoy. Yes; there are several we are suggesting. The principal weakness that we feel in the existing bill, where it would not operate, is in the matter of appraisal. We advocated last week, when the outline was disclosed, prior to the introduction of the bill, that we felt that it would fail to function properly because of the fact that the 80 percent was to apply on "present value." At that time I outlined to Senator Wagner that, from my experience, the reappraisal evil was destroying the home world and the realty world in general, because of the fact that there was no real, true gauge of appraising today, and virtually appraisals were mere matters of opinion, and most generally matters of depressed opinion surrounded by depressive influences, derived from foreclosure sales or distress sales. True, actual conveyances were made, apparent sales that were nothing but foreclosures off record, where the owner had taken a miserable stipend, perhaps a quarter to a half of what the foreclosure expense would be, to give a deed.

Senator COUZENS. What is your substitute?

Mr. McAvoy. My substitute is to establish 1928 values as a base, add the cost of improvements, such as garages, sun parlors, as most home owners have made to their homes, and deduct for the time being the sum of 25 percent, and then apply the 80 percent clause to that.

Senator COUZENS. That is your substitute for the present bill as a method for arriving at the value to apply the 80 percent to?

Mr. McAvoy. Yes. We feel that until a selling market is reestablished, which would speedily be reestablished over long-term financing is in being with lowered interest rates-there has to be, as it were, protective forms established-that in our opinion the responsibility of that should be taken by higher authorities and the responsibility not thrust upon a field appraiser, who enters into a street, we will say, of $12,000 houses with $6,000 mortgages, houses, say, of $12,000 value in 1928-27

Senator COUZENS (interposing). Before you get to that, what would you say to using 1926 as a basis instead of 1928?

Mr. McAvoy. I think that the percentage based on my calculations would perhaps vary then. It is a question of whether it would be 25 percent. It would have to be a matter of recalculation as that 25 percent base of deduction is based upon 1928 values.

Senator COUZENS. All of these efforts so far, that is, discussion of our efforts, have been to establish 1926 bases, and I think that that was because it was more nearly normal than 1928.

Mr. McAvoy. I think that could just as well be done, but I would have to recalculate as to what the percentage would be.

Senator COUZENS. Oh, you want to get back to the same figure by using a different percent, is that it?

Mr. McAvoy. Yes; because the 25 percent is not arrived at by guess, and would alter in proportion to change of base; it is arrived at by a series of calculations based upon many factors, one of which is the possible cost of reproduction when reproduction is possible.

Senator COUZENS. Then if you are going to get the same loaning value there would not be any use of going back to 1926. You are just going to change the percentage so you could get the same amount of money.

Mr. McAvoy. No. That is not the basis of working it out.

Senator BULKLEY. Can you make a little more clear to us just how you arrived at 25 percent as the amount to be deducted? Perhaps that will clear the situation up.

Mr. McAvoy. It is partially arrived at by the cost of reproduction properly weighed in relation to the existing facts.

Senator TOWNSEND. The cost of reproduction now?

Mr. McAvoy. That is but one factor. Now, I want to bring out that where the cost of reproduction as used by a great many appraisers is erroneous in that they fail to calculate in their cost of adding the cost of building and land, the cost of financing, or if they do that they base it upon former financing figures. It is impossible today to determine what that factor of cost would be, since no financing is to be had in any volume that could be competitive. Therefore, you have to weigh out cost of reproduction in a light differently than generally used by the average appraiser. Senator TOWNSEND. What do you figure the difference in the cost of reproduction today as compared with 1928, just the cost of production?

Mr. McAvoy. Regardless of the fact of whether you can reproduce in competitive volume?

Senator TOWNSEND. Yes.

Mr. McAvoy. I would say that it ranges probably 40-anywhere from 35 to 40 percent. Where I consider it unjust to use that is that the moment you get reproduction in any volume, the moment financing permitted it, those costs would immediately rise, and that saving would not be as great.

Senator TOWNSEND. That is the reason you fix it at 25 percent, sir?

Mr. McAvoy. That has a bearing. There are a series of calculations that are based upon building perhaps 8 or 10 million dollars' worth of small homes in 30 years of business. I would have to have my work sheets here to quickly demonstrate just how that is arrived at.

I would like to draw this example: We will take the ordinary house in our section of $12,000 on 1928 values. It has a $6,000 first mortgage. If we took the basis that I suggest

Senator TOWNSEND (interposing). What percent of that was set up for financing? You said that had to be taken into consideration. What percent of that was set up for financing of the $12,000 home? Mr. McAvoy. You mean in the original instance?

Senator TOWNSEND. Yes.

Mr. McAvoy. In 1928 it would probably have run about 5 percent of the first mortgage to cover, and the second mortgage financing would probably have figured from 15 to 20 percent of the second mortgage.

Senator TOWNSEND. That would be an average of, say 12 percent? Mr. McAvoy. No; because the 15 to 20 percent on the second mortgage would only apply to an amount of, say, $3,000 or $4,000 and the 5 percent upon the $6,000.

Senator TOWNSEND. Then probably 10 percent?

Mr. McAvoy. That would be, say, 300 and twice four is 8001,100. That would be about 9 percent.

The example that I would like to draw there is that, taking that $12,000 value, less the 25 percent, would be $9,000. Applying the

rule of 80 percent, you would have a loan of $7,200. The existing first mortgage would be $6,000

Senator TOWNSEND (interposing). You would have a loan of $7,200 that you could reproduce now for

Senator BULKLEY (interposing). About the same amount, isn't it? Senator TOWNSEND. Yes; or less.

Mr. McAvoy. How do you arrive at that?

Senator TOWNSEND. This way: You said the difference in cost now would be about 40 percent.

Mr. McAvoy. I was talking of building construction, not of building, land, and profit and financing costs. I was applying that 35 to 40 percent entirely upon the building construction. Now, if we take roughly there the building was $8,000 and take a third from that, we have the building under six, and the other ascertainable factors would then be $4,000, and we will take, say, $1,000 off of the ground on that. That is $3,000. There is $9,000 and we still have the possible cost of financing in any volume which would permit reproduction to be a solid guide.

You cannot add what financing costs would be, because you cannot get it now at any price. Therefore, it is impossible to use that as a guide except with discretion. And then you have the probable estimate of how much of that apparent saving in building construction costs would be taken away by the rise when there is any volume in the construction industry.

Could I continue the analysis by my illustration?

Senator BULKLEY. Yes.

Mr. McAvoy. That is a $7,200 loan. We have an existing mortgage of $6,000. The individual in 75 percent of the cases, either at the present time or in May or June or July will have facing him a situation where he is in arrears for his interest, for the second half of 1932 taxes, or for the entire year. He has got that to clear up. Perhaps he is out of a job. He has a $6,000 paid-in equity, we will say. He has got to be cared for for a little while until the upturn of business gives employment.

That leaves a sum of $1,200, which we have advocated not to permit to be turned over the individual but to be placed with the servicing unit or with the governmental unit making the loan, as a credit either to pay his arrears or to meet expenses in connection with the reconditioning. That would afford relief.

In my work with the Home Mortgage Advisory Board, which is a volunteer body, in which we mediate between the mortgagee and the owner, sometimes, between second mortgagee, 33 Liberty Street, which is my headquarters, at the Reconstruction Finance rooms, we are not supposed to contact the individual cases. Our divisions do that. As you see, there are a half a dozen divisions with 8 or 9 departments over the Federal Reserve districts, administered by the different boards, such as Buffalo, Rochester, Syracuse, Dutchess County, Jersey, Brooklyn, Long Island, Westchester County.

Despite the fact that those bodies contact the individual owner, 3,900 or 4,000 people have come into our office at 33 Liberty Street. Altogether probably 15,000 cases or owners in distress I am intimately familiar with, either through personal contact or the reports of our divisions. Mr. Vanderlip's several broadcasts concerning this