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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 712 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

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 McĀDoo. 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 1312 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.

16 years.

were

Senator McAdoo. 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

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 6623 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.

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 it.

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.

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 out of the Treasury, and then let the Treasury take a mortgage back on the homes and take its chances of recovering something some day? That is about what these things get back to in the final analysis if you are going to put Government guarantees back of the thing.

Mr. SCHMIDT. I do not agree with your statement, Senator, and I do not think it is a correct mirror of the picture as we presented it.

Senator McAdoo. I do not mean to propose that, but I am just stating it as probably a simpler alternative.

Senator BARKLEY. Upon what theory do you advocate that the Government should guarantee the interest upon bonds upon all types of real estate? This bill that we are considering, and the farm mortgage bill, which is a sort of a companion and prototype, are based upon the fundamental belief that it is not socially or economically wise to permit the people to lose their homes. And these bills are both based on the necessity of trying to preserve the homes of this country, both in the country and in the cities, from foreclosure, and not to embark in the general real estate business. Upon what theory do you seek to enlarge this proposition into embarking into the whole real estate business by guaranteeing the bonds out of the Treasury on all sorts of real estate?

Mr. SCHMIDT. Our provision as regards other types of mortgages, Senator, is one third of the fair value of the property.

Senator BARKLEY. I do not care about that.

Senator McAdoo. He talked about the enlargement of the scope of the bill.

Senator BARKLEY. The enlargement of the scope of the bill.

Mr. SCHMIDT. We feel that the whole mortgage problem is one problem.

Senator McAdoo. Business properties as well as homes.

Mr. SCHMIDT. Yes. We feel that the whole mortgage problem is tied up together, and that efforts to relieve the mortgage situation which must be taken must comprehend the whole mortgage structure if they are to be effective. Now that provision can be stricken from our bill with the elimination of one clause of 4 or 5 lines. But personally, as having had a very wide experience in the matter of mortgage business, I feel that unless a comprehensive bill covering the mortgage field on a very conservative basis is enacted, that you will not accomplish for the home owner what you are setting out to do, because I do not think you will put the mortgage in the shape of a liquid instrument into which it must be put if that whole mortgage structure is to survive such periods as we are having now and if you are to come to a lessening in interest rate, which is also necessary.

I might also point out to you that the home owner is essentially and vitally concerned with these banks in our country, most of them frozen because of real-estate mortgages. Those mortgages are good, but there is no place to put them. Even in good times they are not salable instruments. And we feel that they must be liquefied. We feel that the savings of the people would go into the bonds of the mortgage banks if they were given the protection that they should have, and that as a result of that, the people themselves of greater means than those who need the mortgages would finance the mortgage situation of our country.

Senator BARKLEY. What kind of a national corporation do you set up in your bill?

Mr. Schmidt. We set up a national corporation with seven directors appointed by the President, one as a governor.

Senator BARKLEY. Does the Government take any interest in it in the way of financing ?

Mr. Schmidt. No, no interest excepting the translation of such sums as have hitherto been authorized for the home-loan banks and the sum of $150,000 for the balance of this fiscal year, and $300,000 for the next fiscal year.

Senator BARKLEY. Does it provide for any subscription to the stock of this corporation?

Mr. SCHMIDT. None except that already provided in the homeloan bank measure.

Senator BULKLEY. What is that $150,000? I did not quite catch that.

Mr. SCHMIDT. Expense for the balance of this fiscal year, Senator.
Senator McAdoo. Expense of operation, I presume ?
Mr. SCHMIDT. Operation.

Senator McAdoo. You do not contemplate then that these banks shall be self-sustaining?

Mr. SCHMIDT. Not at the start.
Senator MCADOO. No. But the Government shall

pay
the

expense of conducting these operations?

Mr. SCHMIDT. To some small proportion.

Senator McAdoo. Well, I do think myself $150,000 is some money; $300,000 I thought was considerable.

Mr. SCHMIDT. This is a Nation-wide activity, Senator, and that is not a great sum.

Senator McAdoo. Of course you know that in the Federal Reserve System the cost of conducting it is imposed upon the banks. Mr. SCHMIDT. Yes.

Senator McAdoo. Now, in a like measure there ought to be some provision in the bill here whereby the expense would be made a part of the system.

Mr. SCHMIDT. Would be returned. We have followed the homeloan bank bill.

Now I feel strongly, gentlemen, and I wish to stress that point, that the bonds of this corporation will not be saleable unless the Government guarantees the interest until the bond is paid. Personally and from every experience that I have had and investigation that I have made there should not be one atom of loss in that guarantee.

Senator BARKLEY. We have reached the point where we have been told by some very wise gentlemen that it is a question whether the Government can sell its own bonds guaranteeing the principal and interest.

Mr. SCHMIDT. That is true. And for your information, the bonds of the home-loan banks of other countries, with the interest guaranteed by the Government, usually sell on a much better basis than a straight Government bond for the reason that they have behind them real estate security which does hold up even though governments go to pieces.

Senator BULKLEY. What countries are you referring to?

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