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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 should 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?

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

Senator MCADOO. There is a wide place there to increase the interest rate due to commissions.

Mr. SCHMIDT. Our bill provides, Senator McAdoo—

Senator McADOO. Let me ask you before you proceed, right there. You said the rate through the building and loan associations was 72 percent?

Mr. SCHMIDT. I said those mortgages with which I have personal contact. I do not know what the average would be in our city. Senator McADOO. Does that include the amortization charge? Mr. SCHMIDT. No; that does not.

Senator MCADOO. That does not include the amortization charge; that is exclusive?

Mr. SCHMIDT. Yes.

Senator MCADOO. That is their interest, then, and commissions and other charges?

Mr. SCHMIDT. Yes.

Senator MCADOO. Fines, and so forth?

Mr. SCHMIDT. Yes. I think the average rate borne on the face of the building and loan association mortgages is about 612 percent. I think the building and loan associations have performed a real service. you understand me.

Senator McADOO. I agree with you.

Mr. SCHMIDT. They have paid, however, a very high interest to their depositors. They have had to pay a very high interest in order to secure those deposits in place of the money being put into banks which would perhaps enjoy a little more prestige so far as solidity is concerned. I should say they have paid high dividend rates in the purchase of their stock in their associations, rather than high interest rate to depositors.

Senator McADOO. For the building and loan association mortgages what is the average term, will you say?

Mr. SCHMIDT. I think they are frequently 11 years. Sometimes 16 years.

Senator McADOO. The amortization charges are necessarily quite high in order to amortize the principal within that time?

Mr. SCHMIDT. Yes.

Senator MCADOO. What would they be in 11 years?

Mr. SCHMIDT. Well, I think 6 and 6. Six percent interest based on that and 6 percent amortization.

Senator MCADOO. That is 12 percent?

Mr. SCHMIDT. Yes.

Senator McADOO. And in addition to that the commissions and charges, and so forth, that you described?

Mr. SCHMIDT. Yes.

Senator McADOO. That brings it up to about 132 percent per annum?

Mr. SCHMIDT. That is correct. In taking my actual interest charge on such mortgages I have taken the fact that the payments into the association which are usually made on a weekly basis are not given their credit frequently in the reduction of interest.

Senator MCADOO. Of course, I do not want to infer that that amortization payment is interest. That goes to the reduction of the debt.

Mr. SCHMIDT. Yes.

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Senator MCADO0. But I wanted to bring out the size of the burden of the amortization plus the interest.

Mr. SCHMIDT. Yes. It is an intolerable burden, and has been, upon the home owner.

Senator MCADOO. The mortgages ought to be of a longer term and with a lower amortization charge.

Mr. SCHMIDT. Precisely. Our bill provides that the amortization should be not less than 2 percent per annum and that 50 percent of the mortgage should be written off within a 15-year period. Two percent amortization would do that if the savings in interest on amortized amounts were paid and were credited to future amortization.

Senator BULKLEY. Does this provision that you refer to in your bill apply exclusively to homes? The provisions that you are now talking about?

Mr. SCHMIDT. As to amortization?

Senator BULKLEY. Yes; does it apply to homes only?

Mr. SCHMIDT. No. We provided that all kinds of property must

be amortized.

Senator BULKLEY. Do you provide any distinction between the different classes in interest?

Mr. SCHMIDT. No; but we provided a very great differentiation of amount that can be discounted. On low-cost multiple housing we provided 55 percent. On the class A home amortized mortgage 66% percent. And on other classes of property only one third. We have made our distinction in that respect.

I might say on that, we have further provided in order to see that the Government was not a party to another abuse that exists in our country, that no mortgage was eligible to discount upon which the charges for title search, fees, and commissions exceeded in total 5 percent. The fact that such a mortgage had had a heavier charge put upon it would render it ineligible for discount in this system. We feel that 5 per cent is too high. But we felt we must put some figure which was not unreasonable.

We provided that the Federal bank as set up should have recourse upon members discounting mortgages, and that if the member was an inspected institution, either Federal or State, that the mortgage might be discounted up to the face thereof, less the 5 percent for stock subscription. But that if the mortgage was from a person or a corporation which was not State inspected, that there must be a reserve in the hands of the bank of 20 percent of the face of the discount as a fund for protection against loss in the mortgage, interest on that reserve sum to be allowed back to the borrower at a slightly lesser rate than provided in the mortgage.

We provided that the Federal mortgage bank might issue its bonds with interest guaranteed by the United States until the principal sum is paid, at rates of interest to be determined.

it.

Senator BARKLEY. That is, on all bonds, on all real estate?

Mr. SCHMIDT. Yes.

Senator McADOO. Restate that, will you please? I did not catch

Mr. SCHMIDT. That it may issue its bonds with the interest thereon guaranteed by the Government until the bond is paid.

Senator McADOO. Do you want the Government to guarantee the amortization charge too?

Mr. SCHMIDT. Yes.

Senator McADOO. Well, then that is a Government guarantee of principal and interest?

Mr. SCHMIDT. No.

Senator MCADOO. Why is it not?

Mr. SCHMIDT. Because the Government only guarantees the interest upon the bond.

Senator McADOO. Well, I asked you if you wanted it to include the guarantee to cover the amortization charge as well, and you said yes. Now if you do that, that is a guarantee of the principal.

Mr. SCHMIDT. Well, the way you expressed it, Senator, goes perhaps a little beyond the actual requirement upon the Government. It would not guarantee the amortization charge on any specific mortgage, but it would in effect guarantee that it would pay the interest until that amortization charge was paid or the same met by some other means.

Senator McADOO. Well, you said at first that your contemplated guarantee was of the interest and the amortization. Now you say no, that you do not contemplate that. I just wanted to get the exact fact.

Mr. SCHMIDT. Well, we provided that the Government should never be under the obligation to pay the principal upon that mortgage. So the statement you made is partially correct and partially incorrect. That is why I corrected myself.

Senator McADOO. You do not answer my question. To guarantee the interest is one thing.

Mr. SCHMIDT. That is all we want.

Senator McADOO. Then that applies only to interest on the debt.
Mr. SCHMIDT. That is all we require.
Senator MCADOO. All right.

Mr. SCHMIDT. That is all we require.

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Senator MCADOO. Then you do not expect the Government to guarantee the amortization?

Mr. SCHMIDT. Only in the sense that the Government would continue to be responsible for the payment of interest until that bond was paid.

Senator BULKLEY. Regardless of its being in default?

Mr. SCHMIDT. Yes. We feel, Mr. Chairman, that that is absolutely essential. It is absolutely essential if these bonds are to have a market which will make a Federal agency utilized by the groups that should use it.

Senator MCADOO. Why would it not simplify things a good deal just to let the Government of the United States build a home for everybody and just take back a mortgage on it and take its chances of getting the money back on it?

Senator BARKLEY. Not only a home but an office building.

Mr. SCHMIDT. Well, are you confusing the bonds, Senator, with the mortgage itself?

Senator McADOO. I say, why would it not be simpler to just let the Government issue its own bonds in view of the breadth and depth of all of these proposals, and provide everybody with a home

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