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that and at least a million in the country, on the $10,000 basis, the present proposed basis.

Senator COPELAND. And Mr. McAvoy is entirely right when he speaks about the effect upon the life and upon the health of the people trying to struggle along and carry their mortgages under present-day conditions, which is resulting in the very thing that he says, malnutrition, undernourishment, and certainly in the production of disease.

But I know that the heart of the committee, and I am sure that you will seek to liberalize the bill so as to make possible our people taking advantage of its privileges. I am much obliged.

Senator BULKLEY. Thank you very much, Senator.

Senator TOWNSEND. I would like to get a definite idea from Mr. McAvoy, if I might, how much he would feel that this corporation would have to be increased from 2 billion dollars to carry out the ideas that he has conveyed. It is confined to 2 billion at the present time.

Mr. McAvoy. Yes. I feel that that is insufficient to meet the situation.

Senator TOWNSEND. What do you suggest it should be?

Mr. McAvoy. I think it should be extended, as explained, to 9 billions of dollars.

Senator TOWNSEND. All right.

Senator BULKLEY. Very well; the subcommittee will meet again at 10 o'clock tomorrow morning.

(Whereupon, at 12 o'clock noon, the committee adjourned, to meet again at 10 a.m. of the next day, Friday, April 21, 1933.)

HOME OWNERS' LOAN ACT

SATURDAY, APRIL 22, 1933

UNITED STATES SENATE, SUBCOMMITTEE OF COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C. The subcommittee met, pursuant to adjournment from Thursday, April 20, 1933 (no meeting having been held on April 21), on Saturday, April 22, 1933, in room 301, Senate Office Building, Senator Robert J. Bulkley presiding.

Present: Senators Bulkley (chairman of the subcommittee), Barkley, McAdoo, Couzens, and Townsend.

Senator BULKLEY (chairman of the subcommittee). The committee will be in order. Mr. Walter S. Schmidt is here this morning, representing the National Association of Real Estate Boards. You may proceed, Mr. Schmidt.

STATEMENT OF WALTER S. SCHMIDT, CINCINNATI, OHIO, REPRE

SENTING THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS

SO

Mr. SCHMIDT. Mr. Chairman and gentlemen of the committee, our association originally presented the idea of the home-loan bank, and Mr. Herbert Q. Nelson and myself wrote the proposals that were originally presented to the legislature for action into law.

Senator TOWNSEND. Are you speaking of the Ohio Legislature now, or the Federal ?

Mr. Schmidt. Federal. Our proposals at that time were emasculated that when the bill was finally enacted into law it did not meet in any way the situation as we originally felt it was necessary that Federal action should provide for.

Some months ago we came to Washington feeling that something must immediately be done to remedy the situation as regards home mortgages or our country would be in anarchy. We marshalled our ideas, had a committee upon which was represented men of ability from every section of the country and men intimately connected with real estate, and prepared anew proposals which when prepared we found almost paralleled our original suggestion for a Federal mortgage bank. At the request of members of the Treasury Department we prepared to put that proposal in the form of a bill, and did so. But in the interim period a bill was prepared by the Home Loan Bank Board, as I understand, and was submitted as legislation.

Senator TOWNSEND. Are you familiar with this bill, S. 1317?
Mr. SCHMIDT. Yes.

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Senator TOWNSEND. Does that carry your ideas?

Mr. SCHMIDT. It does not. We do not think that the bill as proposed meets the exigencies of the situation, especially in view of the proposed inflation. We have no criticism to offer of the bill, but would rather in an affirmative manner present what we feel is absolutely essential if the mortgage situation in our country, with special reference to the home mortgage, is to be met in a manner to save the home owner from dispossession.

Senator BULKLEY. Mr. Schmidt, would it be logical for you to explain at this time just what you meant by the reference to the exigencies of the proposed inflation and what bearing that has upon this bill?

Mr. SCHMIDT. Well that, of course, is an economic question, Senator Bulkley, but I think our country must have inflation—whether it is credit inflation or currency inflation I am not competent to judge. But when currency inflation comes real estate, as a matter of experience, lags far behind the increment in other costs and values in any other field, and as a result of that our condition will be more seriously hampered in real estate due to that interim period of probably a year, maybe 2 years, before which the benefits of inflation would be felt, but during which interim period all the evils would be present. For instance, it would cost more

Senator BULKLEY. All the evils would be present and the benefits not felt?

Mr. SCHMIDT. That is right.

Senator BULKLEY. You mean especially with respect to real estate?

Mr. SCHMIDT. That is always the history of real estate. It gets the benefits last. It is the last to lose the benefits when we have a deflation.

Senator TOWNSEND. Have you definite suggestions as to how you would remedy that?

Mr. SCHMIDT. Yes. We have a very definite suggestion which is in the form of a bill, and I will synopsize that bill if I have your permission, Mr. Chairman.

Senator BULKLEY. Yes; I would like to have you do so. But I want to understand what you meant by inflation. Do you mean that inasmuch as inflation now seems to be likely, that that accentuates the disadvantage of S. 1317 to the relative advantage of your bill? Was that your meaning?

Mr. SCHMIDT. Yes; I mean that. And in addition I mean that you must go further than Senate bill 1317 does.

Senator BULKLEY. In what respect? Or is that a part of your prepared statement?

Mr. SCHMIDT. I think if I make my statement, Senator Bulkley, that the reasons for that will appear.

Senator BULKLEY. All right.

Mr. SCHMIDT. We feel that there must be a permanent discount system for long-time financing, comparable to the Federal Reserve System for short-time financing. We feel that the scope of the Federal home-loan bank as it now exists must be upon that permanent basis extended. We think that the benefits that exist in the home-loan bank legislation due to the fact that many States

have enacted legislation permitting dealing with the home-loan bank on the part of State corporations, should be preserved.

We feel that the name of the Federal bank should be changed and that it should be known as the Federal mortgage bank.

Senator TOWNSEND. Why?

Mr. SCHMIDT. For two reasons. We feel that the mortgage system whether now or at a slightly later period must be a comprehensive discount system.

Senator BARKLEY. Do you mean to include all sorts of real estate then?

Mr. SCHMIDT. Yes; but upon different bases.

Senator BARKLEY. You want it enlarged so as to put the Government in mortgage business on all real estate!

Mr. SCHMIDT. Well, I do not think our bill contemplates the Government being in the mortgage business at all. It contemplates a discount system under which the Federal credit would be used in the same way as it is used for the banks.

Senator BARKLEY. Whatever it is, you want it to include all real estate?

Mr. SCHMIDT. Yes. Upon, however, different bases. We feel that the real estate that deserves real consideration is the home. We feel also, however, that there is certain low-cost housing now existent and a great deal more low-cost housing which should be created which should have the benefits of a Federal discount system so that the mortgages would have liquid qualities.

Our bill provides that membership in the system is open to any firm, corporation, or person engaged in the business of making mortgage loans. We feel that the restrictive membership as set forth in the home-loan bank bill has seriously operated to prevent that instrumentality from being of the wide use that it should be. I am extremely friendly to the building associations, but the fact does remain that they, while only doing some 20 percent of the financing in this country, yet are about the only group which as a practical matter have found it to their advantage to become members of the present home-loan bank system. We, therefore, feel that that membership should be enlarged and put on a basis not too onerous, so that those engaged in the business of making mortgages can become members of the system.

We provided an original cash stock subscription of a thousand dollars as an admission to membership, and thereafter provided that those who use the bank should be the ones who in proportion to their use provided the capital for the bank, and to accomplish that end we set forth that 5 percent of all amounts discounted in the bank should be purchased by the discounting member in the stock of the bank. That 5 percent to be one of the cushions against loss which might be suffered on the mortgages and to be subject to decrease if there were loss.

We provided with the permanent institution that existing home mortgages on single- or two-family houses, such mortgages not exceeding 15 years in life and amortized at not less than 2 percent per annum, might be discounted up to the face of the mortgage but not exceeding two thirds of the fair worth of the property.

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We provided that the second class of mortgages, that is, home mortgages unamortized, the life of the mortgage not to exceed 5 years, and mortgages upon multiple-unit housing for the low-wage group might be discounted up to the face but not exceeding 55 percent of the value.

In order to take care of property reorganizations and other such very essential situations now existing, we provided that all other classes of existing sound mortgages might be discounted up to one third of the fair worth of the property.

We provided that no interest on a mortgage to be discounted shculd exceed 6 percent. And if I may say a word by way of interjection at that point, it is my personal knowledge that in many communities rates of interest on home mortgages will average over 9 percent, and that the home-loan bank as now constituted offers the makers of those mortgages the opportunity to secure 9 percent or more from the home owner and get their money from the homeloan bank at 5 percent, and not pass that benefit along. We feel that that situation is abominable. We feel that it has existed, insofar as an excessive rate charged the home owner is concerned, for many years in our country. And even in towns that have ceased to be frontier towns, where you might expect higher interest rates, the rates of interest upon the home mortgage is far out of proportion, and always has been, to what should have represented the fair return which the productiveness of the home owner could afford to make upon barren capital.

Senator TOWNSEND. Would you care to state what class of lenders were exacting that rate of interest?

Mr. SCHMIDT. Well, in my own city, as I stated to you, I feel that the building associations have per ormed a real function. But I believe that so far as all of the mortgages I have examined of building associations in our city are concerned, the average rate, when you take in the various fees and dues or fines, whatever they may be called, plus the failure to credit interest as amounts are paidthe average rate to the borrower in our conservative city is over 712 percent.

Senator TOWNSEND. Then you are referring to building and loan associations?

Mr. SCHMIDT. I am not alone referring to them.

Senator TOWNSEND. Are there other classes of lenders that receive that rate?

Mr. SCHMIDT. There are. The banks, which have been perhaps as large lenders as the building associations, have usually exacted not such a high interest rate, but a fee for renewal of mortgages which brings the rate up. In other words they make a mortgage for 1 or 2 years, and when you renew it you have to pay a fee of 2 or 3 percent.

Senator TOWNSEND. What is the legal rate of interest in your State?

Mr. SCHMIDT. The legal rate is 6 percent, and beyond which it is usury is 8 percent. Is that not right, Senator Bulkley?

Senator BULKLEY. That is right.

Senator McAdoo. What about commissions that are taken; are they considered usurious if they exceed 8 percent?

Nr. SCHMIDT. I do not think they are. They should be.

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