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STATEMENT FOR SENATE RECORD BY D. E. McAvoyY, CHAIRMAN OF THE LONG ISLAND DIVISION AND SECRETARY OF THE HOME MORTGAGE ADVISORY BOARD, AND ACCOMPANYING AMENDMENTS MARKED ON HOME MORTGAGE BILL, S. 1317, SUBMITTED APRIL 21, 1933, TO THE BANKING AND CURRENCY SUBCOMMITTEE, SENATOR BULKLEY, CHAIRMAN, AND REFERRED TO IN TESTIMONY OF D. E. MCAVOY AT HEARING BEFORE THAT COMMITTEE ON APRIL 20, 1933
The urban mortgage bill as introduced by Senator Robinson of Arkansas carries a sincerity of purpose on the part of our President and those who drafted the measure to salvage a large class of our home owners, that marks a new era in the history of home ownership in America.
While it represents a splendid advance in the recognition accorded the home owner that his equity possesses a borrowing power to tide him over this crisis, the scope of the bill is not wide enough to accomplish the purpose intended. This is the opinion of financial, realty men, and economists who have dealt for some time with the home-mortgage problem.
A. J. Swenson, president of the Long Island Real Estate Board, has pointed out that the whole structure of home ownership is at stake in the proposed urban mortgage legislation.
"The Long Island Real Estate Board from the beginning of the crisis has felt that the home owner was the man who most warranted consideration. He represented the basis not only of realty values, but community and national strength. It is economic folly to permit a single family to disintegrate by the loss of their home.
'Financially exhausted by the effort to retain their home the family or parts of it are certain to become public charges at a cost many times in excess of any loss possible to incur from aid that practical legislation could give. These amendments have the support of the Consolidated Home Owners Mortgage Committee, and groups allied in the home field are rallying to urge that they be put into effect."
OUTLINE OF AMENDMENTS TO THE HOME-MORTGAGE BILL S. 1317 INTRODUCED APRIL 13, 1933, BY SENATOR ROBINSON OF ARKANSAS, AS SUGGESTED BY THE LONG ISLAND REAL ESTATE BOARD
(Copy of bill S. 1317 marked in red ink or with riders, hereto attached)
The principles contained in these suggestions are along the lines suggested March 1933 by the Long Island division to the Home Mortgage Advisory Board-the proposals embodied in the McAvoy all-homes plan approved by the Long Island division are:
(1) Government financing in the form of 34 percent bonds for 30 or 33 years to exchange for all qualifying home mortgages, sufficiently increased to provide for a period of several years for taxes, interest, and reconditioning of homes where appraisal of value warrants.
(2) These bonds to be eligible for rediscount through the Federal Reserve System. With a borrowing power to bondholders and a constant ' market this conversion privilege will make the existing frozen situation of mortgage and loaning institutions immediately liquid, which will insure its usage by mortgagees for their "good" as well as "poor" home mortgages and this liquidity will vitally affect the fate of the commercial mortgages held by these institutions.
(3) These bonds to be offered to the public during a period of a protective moratorium to the institutions, and cash prorated periodically from sales to the participants in this conversion.
(4) Appraisal warranting mortgage loans to be increased where needed for arrears to prevent the default of interest and taxes for approximately 2 years, and to provide for needed repairs, or for settlement of second mortgages. This recommendation is made regardless of the existence of the provision of a 3-year waiver of payments as contained in the bill. Where the equity warrants, and the surplus over existing mortgage is sufficient, it may obviate the necessity of the waiver of payment. We suggest it because it puts the owner on a better parity with those whose mortgages and arrears entailed a full loan, and would operate favorably in the sale of the house, for this is the only way out for many home owners who might be tided over until a selling market is re-created, which will be greatly expediated by the mortgage stability insured once this long-time low-cost financing is in force.
(5) Appraisals to be based on valuations of 1928, plus subsequent improvements, discounted by 25 percent for the time being. If appraisals as the basis for any governmental financing are to be left in the hands of departmental field employees, without a prescribed method, they will be forced to use the standard of the innumerable forced sales that have taken place at virtually the mortgage figures. It is a question then whether the figure of "80 percent" computed upon such a depression appraisal will cover even the existing first mortgage, much less taxes and needed repairs.
(6) All homes, regardless of value or temporary absence of owner to be eligible. Percentage of loan on the value of homes up to $20,000 not to exceed 80 percent; above $20,000 the percentage to be 40 percent. No loan, however, is to exceed $25,000 to a home owner.
(7) Original loaning institutions to continue to service these mortgages under a fixed service charge not to exceed one half of 1 percent. New funds to insure protection from default for two years or to pay off second mortgage and to cover needed repairs are to be disbursed by the institution as trustee for the owner. If this sum in excess is not so utilized at the end of two years, the mortgage is to be reduced by the unused balance. Conversion of mortgages will carry certain responsibilities to the original lending institution.
(8) Provision for home owners foreclosed since depression period to recover property where appraisals warrant necessary coverages.
(9) Total annual charges to the home owner to be 34 percent for interest, 2 percent for amortization, three fourths percent for servicing, a total annual payment of 61⁄2 percent, payable monthly.
(10) The extension of home mortgage advisory boards with divisions. and subdivisions as volunteer bodies throughout the territory of the 12 Federal Reserve districts to provide local contacts and to aid governmental units in readjustments required by the home owner, particularly where second mortgages exist. Reasonable expenses should be allowed these boards.
(11) Governmental control to be maintained over new building in order to protect existing investments against overbuilding.
(12) The plan to be administered by a governmental unit with subordinate units in the 12 Federal Reserve districts.
Fifteen thousand cases of home owners in distress that have come before the home mortgage advisory board and its various divisions attest that mortgage aid of a generous nature must be speedily furnished if home ownership is to be salvaged.
Acute distress is reported from the divisional headquarters of the Home Mortgage Advisory Board from Buffalo, Syracuse, Rochester, Niagara Falls, Dutchess, and Westchester Counties, Brooklyn, and the entire area of Long Island with its 500,000 homes, and the northern portion of New Jersey which is included in the second Federal Reserve district.
As Secretary of the Home Owners' Advisory Board I received so many hundreds of letters from all parts of the country, after the radio broadcasts by Mr. Frank A. Vanderlip, chairman of the board, particularly that on Christmas Day, that I communicated with our President, Cabinet, and other high Federal officials and the Governors of every State, forwarding them data of our organization and its work and of these letters, which clearly indicated the need of a national organization of this sort. A home owner in distress will counsel with a friendly outside interest where he is fearful to even approach hs mortgagee, regardless of how kindly that mortgagee may now feel toward him. Pressure regarding interest payments, principal reduction, prompt tax payments with the foreclosure casualties of the past 3 years, have left a deep fear in the heart of the home owner, not easily eradicated.
Home mortgages distress, widely felt in the spring of 1932, has spread with such velocity that three quarters of the home-owning public of over 2,000,000 in this district are either in default or with default impending in the payment of interest and taxes, as foretold last fall in the printed report of the Long Island Division widely distributed throughout the country. Startling as this statement then was, but now more generally accepted, it is borne out by the Friedrich-Herendeen economic survey of Sunnyside Gardens, made in March 1933, a group formerly of above-average home
owners as to financial soundness, which shows that out of 530 families, 74 percent are now insolvent or nearly so, sadly contrasted with their position of 1928 which then showed a net worth of $1,890,000 excluding their home property.
REQUISITES TO WIDE USAGE OF CONVERSION
These unquestionable statistical findings clearly indicate that any plan adopted to meet the home-mortgage problem must include all homes regardless of value, with a limit, however, as to the total loan to an individual; a workable method of appraising that will remove the fate of the home owner from the perils of a depressed valuation made by a field appraiser surrounded by depressive influences; the guaranty of the principal of the bonds, or some measures effected so that they will be eligible for rediscount through the Federal Reserve System, in order to make the conversion sufficiently attractive to insure the mortgagee utilizing the privilege for mortgages other than those of doubtful quality.
The better mortgages, as a president of a New York savings bank pointed out in a recent press release, under the administration's proposed set-up would not be proffered for such conversion. Instead such mortgages when in default would be subjected to foreclosure at the first rise of a selling market in preference to a long-term tie-up of capital at lowered interest rates. This point of principal guaranty is of vital importance to the security investor in home mortgages, whether savings bank depositor, mortgage or certificate holder, life-insurance investor, building and loan shareholder, or even commercial bank depositor, for many home mortgages make up their collateral assets.
A FAULTY SYSTEM
A noted economist has pointed out that a fundamental wrong in our mortgage system has been the making of long-term obligations from demand deposits. By this method these financial deposits are made liquid from a now frozen situation and a reform of a faulty method forever effected.
The above institutions, if the bill is amended as to principal guarantee with rediscount facilities through the Federal Reserve System can so immediately liquefy their position that in our opinion not only can their doors be thrown wider open but they can then much more successfully grapple with their commercial mortgage problems.
The outstanding defects in the bill as introduced are
(1) Lack of principal guarantee with consequent uncertain market or collateral value in times of stress. Will not attract mortgagee who under this bill possesses control. The mortgagee will convert the poorest quality of mortgages and foreclose where ample equity exists. This is a direct penalty upon the thrifty individual who has reduced his mortgage to below average, and is manifestly unfair, as well as unwise. We anticipate a great increase in such foreclosures immediately upon the passage of this bill if not amended.
(2) Lack of parity to home owners in establishing eligibility in a fashion that is not logical and inequalities that will occur can neither be justified nor defended. However it would seem logical to rely upon the fact that as the flood of protests center in Washington already reaching the Home Mortgage Advisory Board in the second Federal Reserve district, fortified by repetition throughout the country for this limitation operates against homes in every city, this phase of the bill will be amended to encompass the needs of many of this vast number of home owners representing about one home owner out of every four in the country. It is not difficult to envision the social unrest that would arise from a sense of inequality, when a home owner in losing his home, witnesses his next door neighbor saved by their common Government because his home happened to conform to a process of selectivity that does not seem to be based on any fundamental.
The last minute deviation in the bill from rumored outline in advance of its introduction, in which homes above $10,000 in value are excluded from its superior mortgage benefits must prove nothing less than a tragedy to many in a class comprising probably half of the home owners in the metropolitan area of New York, some quarter million, with an approximate million or more home owners throughout the country.
(3) The absence of an appraisal method defined so as to insure reasonable values. The liberal percentage of the loan, 80 percent, is nullified as to its
intent unless the method of valuation is defined and a reasonable standard set-up. The Long Island division has advocated that the valuations of 1928 plus improvements, discounted by 25 percent, should be the basis of appraisal for the time being. If the standard of " present value" is not adjusted to include some element of faith, some sounder measures than customarily employed throughout this depression period, the home owner will face another crushing blow and again suffer from the reappraisal evil that has used fear as the base measure in the absence of a "market" which has played a large part in creating the present mortgage dilemma.
(4) The 15-year plan of amortization will entail too high a monthly cash outlay upon the home owner. It will be considerably higher than the 6 percent he is now paying. In most cases the mortgage has been a standing one without amortization and introducing this feature, the term of the mortgage should be long enough so that interest and principal together will approximate not much over 6 percent. We have advocated 30-year plan, entailing 61⁄2 percent total outlay on the first-mortgage payments. Such a mortgage would always continue safe, for in the term of 15 years it would be reduced to approximately a half and in many cases probably more by voluntary reductions on the part of the mortgagor.
It can furthermore be rendered safe by a proper control on new building to prevent overbuilding and wanton destruction of older structures whose values should be preserved by reconditioning and modernizing. Homes are a long-term commodity, properly of some 50 years duration, and they should not be permitted to be outmoded by lack of civic control. Such regulation is of just as great need as are zoning laws which have so generally been adopted country-wide, now regarded as a necessity in sustaining community values.
(3) Five percent interest set up in the bill is too high. It does not afford enough relief to the majority of home owners whose incomes are now halved even where employed.
(6) The bill is too limited in scope, it would seem, judging by the composite reports of the divisions of the Home Mortgage Advisory Board, of which Frank A. Vanderlip is chairman, which indicate that the majority of the home owners in the second Federal Reserve district are either in default on interest and taxes or fast approaching that state.
This composite picture, startling as it is, is borne out by the FriedrichHerendeen survey of the 530 home owners in Sunnyside, residing in homes ranging from $9,000 to $20,000, with $2,000,000 in paid-in equities, which show that factually 74 percent of a shortly before prosperous group of home owners are now insolvent, with their homes hanging in the balance.
A $2,000,000 bond issue will fall far short of meeting a situation comprising $9,000,000,000 in urban home mortgages on owner-occupied homes.
(7) Failure to utilize existing loaning institutions which should be retained to service the loans converted by them, which institutions should be entailed with a defined responsibility in connection with the loans converted.
(8) Failure to set up advisory machinery to aid in the readjustment of owner, to secure settlements, readjustments, or subordinations from second mortgages. To protect the owner in the retention of his home against pressure from outside debtors.
(9) Absence of suspension of foreclosures pending the period of conversion. (10) Absence of provision that the bonds are to be callable by the Government unit. It is quite likely that these bonds, if guaranteed with their taxexempt features, would shortly be at a premium, and could be refinanced at a later date at a much lower interest rate which could accrue to the mortgagor. (11) Absence of privilege to mortgagor to pay off in whole or part in bonds at par. This would be a sustaining feature to the market of these bonds, in depressed periods on a falling market a cushion would be supplied.
(12) Failure to make provision for those who had been foreclosed to have the opportunity of recovering their homes if the appraisals warrant the necessary coverages provided under the bill.
(13) Absence of provision to define a home, not necessarily as occupied by owner, but as one intended for owner's eventual use. We have advised many home owners to rent their home and take cheaper quarters or double up with a relative in order to save their home. Such should be protected.
(14) Absence of absolute definition that 80-percent loan can include both first and junior mortgages with some method of distributing bonds to the several interests if the aggregate comes within the loan percentage.
If these amendments, or their substitutes, are not effectuated, we think it far safer for national advancement that no urban bill be passed.
With no governmental relief furnished, the mortgagees may be forced to abstain from any foreclosures by a moratorium or in self defense. With partial aid for the poorer types he will certainly recourse to foreclosure in the better types, and that strikes directly at the most thrifty.
We seriously feel that class discrimination that the proposed bill includes, even though unwittingly, will result in such social chaos that no governmental relief at all would be far preferable to that which would relieve the mortgagee at the expense of some type of home owners.
SCOPE TOO LIMITED
In my testimony it has been pointed out that only $2,000,000,000 is provided to care for $9,000,000,000 in urban-owned occupied home mortgages and the fear is well founded that this may precipitate a wholesale calling of mortgages, particularly those in default.
Since statistical facts show those in or apprehending default constitute the majority, it will be seen that several times this amount of bonds would be required to care for the situation in the urban-home mortgage field. This will bring chaos in the realty home world if not anticipated and should be provided for.
Parity of position in any relief move should be of prime importance. If the bond conversion is limited to $2,000,000,000 it is impossible to envision how parity can be given to home owners. The Government loan, if amended to meet practical needs, will be superior to customary financing in many ways; it will be fuller, that is, if the method of appraisal of value is predetermined and the bonds made attractive to the mortgagee. Its duration will be 5 times longer than the average home mortgage and the interest lower. This will make the houses so financed more salable and the only gate of salvation to many home owners, it must be borne in mind, lies in a future sale, probable only after refinancing. The credit expansion provided if amended to operate will save approximately a lucky 25 percent. What about the remainder? It would seem if the bill be limited to $2,000,000,000 that some 'open-end" plan should be set up to further the idea to encompass all home owners alike step by step.
ENTIRE FINANCIAL STRUCTURE DEMANDS SOLUTION OF THE MORTGAGE PROBLEM
With the enormous sum in home mortgages at stake, the center of our financial structure can be preserved only with a practical solution of the mortgage problem as it affects the home owner, the investor, and their intermediary-the loaning institution. There are the vast sums invested by the insurance companies, the savings banks with two thirds of their deposits represented in the mortgage portfolio-the building and loan associations with all their assets in mortgages, and the national banks with their collateral dependences. Even the Government has vast sums at stake in the home-mortgage field in the loans of the Reconstruction Finance Corporation secured by home mortgages held by various financial institutions borrowing from them.
The total invested in home mortgages is well in excess of $20,000,000,000. This stupendous figure would indicate that the safety of the financial structure depends upon the safety of the mortgage structure. Any impairment of home mortgages as securities concerns the security of these financial institutions and the impending legislation is of vital concern therefore to the insurance companies, banks, and building and loan associations involved, as well as the investors, depositors, and policyholders.
Instead of a partial plan, a plan should be evolved that would put all interests in homes on a parity. The home owner has the most at stake and it is he who really supports the entire structure. Help him and the whole industry of financing, building, and selling homes can carry on, and mortgages on commercial properties are correspondingly benefited, for if institutions are liquefied to the extent of home mortgages held they can then grapple with their commercial-mortgage problem in different fashion.