sion, from his attention being called to that fact, that the Government of the United States was back of them. Mr. MACCHESNEY. The interests that I represent are in thorough accord with you on that; we do not want these bonds passed on under any misrepresentation, and we are perfectly willing that there shall be added something to negative that. Mr. REILLY. I raised the question so that you could consider it, and if it is possible without defeating the intent, I think it should be put in. Mr. MACCHESNEY. I make the suggestion, and I think it would accomplish the purpose, that you could go so far as this: "That if any part of this language with reference to instrumentalities shall be used, the entire section shall be quoted " such as auditors sometimes use to protect themselves, by saying that "no part of this shall be used separate from its text." Mr. Williams asked a question with reference to banks and building and loan associations and in some States not being able to subscribe to stock in other institutions. That was discussed quite fully yesterday. Of course, there are States in which they can not do that. I must say that I agree with Mr. Friedlander, that people who borrow money from this institution should go in on a parity and that therefore if the majority of people who borrow must rediscount the collateral and therefore put the Federal home loan bank in the position of a preferred creditor as against the other creditors of those institutions, that everybody should be compelled to do so as a basis of the use of the institution. Mr. WILLIAMS. Have you information as to the extent to which that applies in the various States, and how many States are affected by that law? Mr. MACCHESNEY. I attempted to make a check of that, but did not have time; but, as I understand it, about seven States, Mr. Williams, unless you take the position that a previous authority is required. I mean to say, as I understand it, that this applies to about seven States, where there is a negative dealing with it, that is, they are prohibited from doing it. I should say, in the absence of a prohibition, they probably would be allowed to subscribe. The question has been raised whether or not, in the absence of a permissive right to subscribe, some affirmative legislation would be necessary, but I do not believe that is true. May I now, in passing from those specific inquiries, pass to two or three questions that were raised yesterday by members of this committee? Mr. WILLIAMS. Before you proceed, and while I am thinking of that, you say that there are seven States to your knowledge that are affected by it? Mr. MACCHESNEY. I understand so; yes. Mr. WILLIAMS. Would you care to put them in the record? Mr. MACCHESNEY. I would not want to without checking it, but as I understand it, they are Missouri, Nebraska, Kansas, New Jersey, and there is one other eastern State and one western State. There may be somebody here that has that exact information. We would be glad to get it for you, and furnish it to the Committee. 113235-32- 6 I am just told that Texas is one. That would be the other western State. Mr. FRIEDLANDER. Texas has the right to assign the mortgage. Mr. MACCHESNEY. There was a question of difference raised here yesterday between the right to assign and the right to put them in the channels as a negotiable instrument. Mr. WILLIAMS. It has just been suggested that Connecticut is perhaps one of the States. Mr. MACCHESNEY. It seems to me that it is perfectly apparent that under this law, where it is provided that securities may be put up, that, when the securities are put up, the institution putting them up shall be regarded as the same as a member, and that that privilege shall cease whenever the law is passed permitting subscription or at the end of 42 months. With reference to questions asked by members of the committee yesterday, Mr. Hancock asked, "Why is this system better than the Federal farm land bank system?" I should say that there are two things that might be involved in that question, from my understanding of it. The first is that it does not make direct loans. It rediscounts the loans, which means that it is a safer institution, that its bonds, therefore, are safer, and that it has that sympathetic knowledge and personal contact, nevertheless and notwithstanding that it is so removed, because it works through the local institutions and not direct. It was criticized because it was said it lacks a sympathetic contact. My observation is that the average money lender is not a philanthropist, but jumping over that point of view for the moment, it does maintain the local relationship, because it operates as a bank of rediscount and not a direct lending institution. With reference to safety, it is a better system than the Federal land bank system from the standpoint of the investor. Without taking your time to read the provision, the land bank system securities provide for joint and several liability on those bonds, but they only provide for that after complete liquidation and ascertainment of liability, which is so postponed that it does not maintain the price, whereas this legislation provides for a joint and several liability. That you will find in section 9 (f), on page 19. You will find that the language there is as follows: The Federal home loan banks shall be jointly and severally liable for the payment when due of all bonds and debentures, and of notes and other obligations issued by any Federal home loan bank, and interest thereon, in accordance with their terms. This would apparently make them a much more desirable investment. So it is better for the investor from that point of view. Mr. REILLY. What effect on the desirability of these investments is the fact that the borrowing institution only gets 60 per cent at the most on its bonds? Does that increase the value? Mr. MACCHESNEY. Yes; very much indeed. Mr. REILLY. The farm loan banks get 100 per cent. Mr. MACCHESNEY. Yes. Mr. REILLY. This bank, I understand, would only sell bonds to the extent of 50 or 60 per cent. Mr. MACCHESNEY. With a 90 per cent of margin. So that, as a matter of fact, these securities are very much better from that point of view. They are better secured. They are sure of prompt payment, and they have all the elements that pretend to make a sound investment. Mr. Chairman, you also asked, what spread must there be between the interest on the bonds issued by these proposed banks and the rate charged the borrowing institution. Well, it is provided, of course, in the act itself, for a spread, as you probably know-this is on page 19, subsection (e), commencing with line 14 And (the board) shall provide such margins between interest rates received upon advances made to members and interest paid upon obligations which the Federal home loan bank may issue as will cover expenses of operation and reserves and, under such regulations as may be provided by the board, some part of such reserve may be devoted to retirement of the stock subscribed by the United States. I do not know what the chairman had in mind. Of course, he may have had in mind the situation that has arisen with reference to farm mortgage rediscounts at the Federal reserve banks. I know that the Governor of Iowa was in Chicago recently at a conference with some of us with reference to a question as to whether something could not be done for the Iowa farmers to lower the rate that they were paying. He said that they were paying, under the guise of interest, a commission in one way or another of from 8 to 11 per cent for their money, and he came to discuss with the Federal reserve bank in Chicago the possibility of something being done to lower the cost of those funds to the farmer. He was shown all of the Iowa investments in the Federal reserve bank, and was shown that the money was loaned to the Iowa institutions at something less than 3 per cent, and that the spread occurred in Iowa, due to the fact that the institutions were small or inefficiently operated or were gouging or whatever you want to lay the cost to. It would seem that the question of necessary spread that would be fixed in this case, which in this case would be fixed and not left to discretion, would depend somewhat upon the volume of business. There is a suggestion here by a banker from Cleveland, Mr. Monks, that it could be operated for less, probably; that it would not need so much money. I should say that one-half of 1 per cent should cover it. Mr. REILLY. What spread have the farm loan banks? Mr. MACCHESNEY. I think it is the same as this bill. Mr. REILLY. Many of the friends of the farm loan banks state that the trouble with the banks originated when they were not given sufficient spread to start with; that there should have been a larger margin to provide a fund. Mr. MACCHESNEY. These Federal reserve banks are supposed to be sufficiently large units. They are not like a small bank. Mr. REILLY. I mean the land banks; they claim that the Federal land banks were not permitted a sufficient spread. Mr. MACCHSNEY. But we are talking about a spread for the district loan bank here, and the spread would not have to be so large, because it is a large institution, because it would be a sufficiently large unit to get a low operating cost, which is not true of a smaller institution. Mr. Hancock asked if there was any provision in this bill that would prevent the banks from using funds derived from the sale of foreclosed properties to purchase their securities? I understand that the Federal land banks are doing this in some instances. Of course, that situation does not arise here at all. That question, I think, grew out of a misrepresentation in the pamphlet issued by the Mortgage Bankers Association with reference to the foreclosures, intimating that this was going to put the Government in the foreclosure business, which was an undesirable position for the Government of the United States to occupy with reference to its citizens. In the first place, it is not going to put the Government in the foreclosure business, and, in the second place, the provisions of this bill provide for substitutions and empowers this institution to call upon the discounting institution to substitute, so that if a mortgage was defaulted they would immediately call upon the borrowing institution member to replace it with something else and it would go back to the borrower and that borrower would have to substitute good collateral for it. Mr. HANCOCK. Does not that same situation exist with the Federal land banks? Mr. MACCHESNEY. Not as I understand it. Mr. HANCOCK. They are required from time to time to substitute and to keep their reserves up to the limit. Mr. MACCHESNEY. Yes; but they do the foreclosing. Mr. HANCOCK. That is true. Mr. MACCHESNEY. The difference there is that they do the foreclosing, whereas here this gets outside of the system. That is the point that I am making. This goes back to the building and loan association or to the local bank, where it is just where it is now." What I am saying, so far as the foreclosure situation is concerned, is that this bill, in contradistinction from the land bill, does not change the situation at all, because if the layman defaults it goes back to where it is now. Mr. WILLIAMS. But, after all, if your member institution was not able to put up the solvent security, what shape would it be in? Mr. MACCHESNEY. That is a long question, but it is a fair question. However, it takes some time to answer it. In the first place, this gives a right to examine that institution, its solvency and position, and presumably if this bank is on the job it does not wait until a borrower gets into that situation before taking action. In the second place, they would hold these mortgages by way of collateral, and their first action would be brought against the institution, and under those conditions, under the laws in most States, the foreclosure would take place in the name of and on behalf of the borrower and not the institution. Mr. REILLY. Is it not a fact, that these Federal home loan banks would never have to start a foreclosure proceeding unless the borrower went broke? Mr. MACCHESNEY. That is absolutely true, and even then I doubt if they would start it. Mr. REILLY. To protect themselves they might have to do it. Mr. CAMPBELL. Would not the borrowing institution have additional collateral or interest in the bank making the loan, inasmuch as they owned their securities and had subscribed their money to these banks? Mr. REILLY. They might have borrowed so heavily and gone broke so that this bank might be holding the bag. Mr. CAMPBELL. But all of their mortgages would not be out. They have $2,500 for a membership fee, and 1 per cent of their capitalization. Mr. MACCHESNEY. As the chairman says, it could not happen unless the borrowing institution went broke. The probability is that they would have ample warning of it and the substitution would occur probably before that. But I want to call your attention to the fact that under the process of liquidation ordinarily the collateral is sold to satisfy the note as a banking proposition, and the foreclosure would take place by the purchaser of the collateral under the note and not by the bank which held the rediscount. That is the way we do it now in banking circles. I can not see where it would ever get to a point where this bank would foreclose, because the bank does not take title to the collateral itself. In fact, under the normal form of collateral now, a bank can not buy the collateral, but must offer it for sale and the purchaser of the collateral would foreclose. Mr. REILLY. I think it is very remote, too, when the bank would have to foreclose. Mr. MACCHESNEY. I think it is impossible. As I think of the process under which collateral notes are made, they are made on a note which requires not that the bank shall forfeit, but offer for sale. So much for the questions that were asked yesterday, but there are a few questions that were asked by the Senators which I think it might be illuminating to discuss for a moment, because they have a direct bearing upon the matter. I have first a notation with reference to interest to the United States. We have covered that, because we are prepared to favor the participation of the Government in the profits while the money remains, upon precisely the same basis as other investors. Mr. REILLY. I think that is a very fair proposition. Mr. MACCHESNEY. Second, Senator Couzens raised a question with reference to the $15,000 limit in the bill, and I want to discuss that. You will note the distinguished Senator's suggestion with reference to that matter. Senator Couzens said that originally it was his understanding that this rediscount privilege should be limited to homes not worth more than $30,000, and where the mortgage should be not more than $15,000. Now, that bill is not so drawn, and we do not think it should be. We think the bill is right as it is. In other words, if the extent of the mortgage is $15,000, it ought to be possible for the home owner to get that relief, and for the institution which holds the mortgage where that is the unpaid balance, even though the original mortgage might have been beyond the limit, and that is the way it is now. In other words, the unpaid balance should determine, and not the original amount of the mortgage. There are many such cases right now, and in that event, of course, the loan would be that much stronger. In other words, it would be a much better loan as the bill is now written, and we see no reason why a man who |