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To the home owner new and greatly increased sources of funds upon which he can borrow upon bond and mortgage at probably a lower rate of interest than at present.

To another great class, the small investor, the opening up of a new field for saving in one of the safest investments ever devised by man.

While the home loan bank bill will require the amendment set forth in the beginning of this article in order to fully develop the benefits to be derived from it, yet it seems that the bill-promising as it does great benefits to the home owner and the small investor-should have practically the unanimous support of the entire country.

Senator COUZENS. Is there anything else?

Mr. CLEMENT. There is nothing else. I think I have covered all the ground I want to cover.

Senator COUZENS. All right, sir. Thank you.
Are there no other witnesses to-day?
We will adjourn.

(Accordingly, at 3 o'clock p. m., the committee adjourned to meet again on Tuesday, January 19, 1932, at 10 o'clock a. m.)

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

TUESDAY, JANUARY 19, 1932

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

Washington, D. C. The subcommittee met at 10 o'clock a. m. in the hearing room of the Committee on Interstate Commerce in the Capitol, pursuant to adjournment on January 16, 1932, Senator James E. Watson presiding.

Present: Senators Watson (chairman of the subcommittee), Couzens, Townsend, Bulkley, and Morrison.

Senator Watson. The subcommittee will be in order, and we will proceed with our hearing. Mr. Lofgren.

STATEMENT OF H. J. LOFGREN, MORTGAGE SECURITY CORPORA

TION, NEW YORK CITY

Senator WATSON. What is your name?
Mr. LOFGREN. H. J. Lofgren.
Senator Watson. Where do you live?
Mr. LOFGREN. South Orange, N. J.

Senator Watson. Are you connected with some financial institution there?

Mr. LOFGREN. I am connected with several financial institutions; and the one I am appearing for to-day is the Mortgage Security Corporation.

Senator WATSON. What is that?

Mr. LOFGREN. That is a mortgage company which financed mortgages during the upgrade of this mortgage situation.

Senator Watson. During the what?

Mr. LOFGREN. During the time when everybody was making mortgages rather freely, I should have said.

Senator Watson. What is the capitalization of that organization?
Mr. LOFGREN. $3,000,000.
Senator WATSON. How old a concern is it?

Mr. LOFGREN. It was in 1921, I believe, that we started. I was not with the company at that time. I have only been with it in recent years, since it got into some financial difficulties.

Senator Watson. When did it get into financial difficulties?
Mr. LOFGREN. I should say they began in 1928.
Senator COUZENS. What caused that situation?

Senator Watson. Yes; I was just going to ask you that question. In 1928 nearly everything was on the upgrade.

Mr. LOFGREN. Well, the difficulty with the mortgage and realestate situation started I meant about that time. In fact, I think it 98195-32-18

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started a little before that, in 1927, and in 1928 mortgage difficulties began, some year or two ahead of the stock-market crash.

Senator COUZENS. What type of mortgages became bad at that time, would you say?

Mr. LOFGREN. I think the home-owner's mortgage. The small fellow got into trouble at that time. The difficulty with mortgages seemed to be that they tried to pay off too much; the amortization was too heavy. In other words, I think those men in the boom period took on obligations which they could not finance when the situation became worse.

Senator COUZENS. And did it get worse in 1928?

Mr. LOFGREN. Yes; I think it did, or at least at that time it started to get worse.

Senator COUZENS. Why?

Mr. LOFGREN. That was in the smaller communities. The larger communities did not feel it then, but in the smaller communities, where this company made its loans, conditions started to get bad in 1928. I mean in the smaller cities, like cities of 30,000, 40,000, or 50,000 population, and from that point on up to 100,000 population.

Senator COUZENS. Did you have any specific class of buildings that you took mortgages on?

Mr. LOFGREN. Practically all were home-owned residences, one and two family houses.

Senator COUZENS. Was any limit placed on the amount of the mortgage that you would take?

Mr. LOFGREN. No; there was no special limit, but the average mortgage was approximately $6,000.

Senator COUZENS. Did you take any mortgages on apartment houses?

Mr. LOFGREN. A few; I do not know just how many, but not many.

Senator COUZENS. They were not the ones that caused you dis. tress?

Mr. LOFGREN. Not immediately. Apartment houses were in the larger centers, and no trouble was caused there until approximately the time of the stock market crash. The larger properties started to go at that time, but the smaller ones started before that.

Senator COUZENS. Have you any statement that you wish to make?

Mr. LOFGREN. Yes; I have.

Senator WATSON (chairman of the subcommittee). Go ahead and tell what suggestions you have to make.

Mr. LOFGREN. I have reviewed this bill with a view to the relief which might be afforded mortgage security corporations. I think by the present terms of the bill mortgage security corporations are excluded entirely because of the provision in section 4, which states - and I will read it if I may. Senator WATSON. Proceed. Mr. LOFGREN. That portion reads as follows:

Such of the following as are duly organized under the laws of any State or of the United States, and are subject to inspection and regulation under the banking laws, or under similar laws, of the State or of the United States, shall be eligible to become a member of a Federal home loan bank.

These mortgage companies are not under any inspection. Of course they were organized under the corporate laws of some States, but they were not required to submit to inspection in the sense that a bank is examined or inspected. And if that provision is read literally it would exclude every mortgage company which is not organized under the banking laws as I read the bill. That would of course eliminate a great number of mortgage companies that were in the bona fide mortgage business, as they would not benefit from this act.

Senator COUZENS. Would you approve having them come under the provisions of this section of the bill?

Mr. LOFGREN. Yes. I think they should come in under that provision.

Senator COUZENS. If that section were maintained would it not make it mandatory upon these mortgage companies who desire to come within the provisions of this bill, to come under that act?

Mr. LOFGREN. Well, you see they are already incorporated under some other act. They would probably have to reincorporate in order to bet into that situation. It would mean quite a change in their status. They would have to get a new charter, and so forth.

Senator Watson. Have you any objection to being inspected?

Mr. LOFGREN. None whatever. It is only a question of not apply. ing it at the moment.

Senator COUZENS. Are there not some other agencies mentioned as beneficiaries under this bill that do not come under it so far as the section to which you refer goes?

Mr. LOFGREN. It mentions building and loan associations. I am not certain whether they are inspected in every State or not.

Senator Watson. I do not think they are in every State.

Mr. LOFGREN. Then that would exclude a building and loan association that is not examined by some public examining body.

Senator WATSON. I think the gentleman from Baltimore who was here the other day told us about that situation there.

Mr. LOFGREN. I did not hear him because I was not present at the time. I might suggest that that clause is rather drastic, in that it draws the line right close as to who can get in and who can not. I have a brief memorandum in longhand here of one suggestion as to how you might cover my particular company. I do not know how well that would suit the situation as to other mortgage companies, but as to my particular company I have prepared this suggestion for for section 4 (a):

Such of the following as are duly organized under the laws of any State, or of the United States, and are subject to inspection and regulation under the banking or insurance laws, or other similar laws, or whose mortgage collateral is guaranteed as to principal and interest by a company so organized, inspected, or regulated, shall be eligible to become a member of a Federal home loan bank.

Much of the colateral of my company is guaranteed by the National Surety Co. That would give us the privilege of the mortgage-loan bank as long as we used collateral that was guaranteed by a surety company, insurance company, or title company that was inspected or regulated under other insurance laws, or the banking laws, or similar laws. It would open the door for my company and quite a few others that I know of. Whether or not the door should be opened wider than that is something I am not qualified at the moment to pass upon, but I think at least guaranteed mortgages should be admitted.

Senator COUZENS. Are all of your mortgages guaranteed?

Mr. LOFGREN. Not all of them.

Senator COUZENS. What premium do you pay when you do get a guarantee?

Mr. LOFGREN. One-half of 1 per cent.
Senator COUZENS. Of the face of the mortgage?
Mr. LOFGREN. Yes, sir.

Senator Watson. Do I understand that your company had some financial trouble back in 1928?

Mr. LOFGREN. They got into a frozen condition due to the difficulty of getting money when things started to tighten up and the commitments that they had on their books and maturing mortgages had to be extended because borrowers could not pay off. They were the small fellows, with small mortgages, on small residences. The maturity date arrived and they could not pay, and it was necessary, therefore, that they have an extension of the mortgage. In the meantime the bonds of my company came due and had to be paid. We had no moratorium on our bond payments but the borrower had to have a moratorium. We had no other alternative then than to give him a moratorium or an extension or else take his property away from him.

Senator WATSON. And that happened in 1928?

Mr. LOFGREN. Well, it did not get bad until the latter part of 1929. I referred to 1928 as the turning point.

Senator WATSON. Did you have a large number of these small mortgages?

Mr. LOFGREN. At that time I could not say. I was not with the company then. There are about 10,000 on our books now.

Senator WATSON. What percentage of those defaulted in 1928?

Mr. LOFGREN. Oh, not many in 1928; but 1928 was the turning point.

Senator Watson. How many defaulted in 1929? Were there many of them?

Mr. LOFGREN. Yes, quite a few. I have not the statistics as to how many but quite a few defaulted. On that point of default I might explain: We of course endeavor to make extensions for everybody we can, where our financial condition will permit of it, where the man shows a bona fide interest in taking care of his property. But where we could not do that it was necessary to foreclose. So that we have either extended payment or foreclosed on a very large percentage of our mortgages due to the fact that there was nothing else to do. The maturity date arrived and the man could not make good on his mortgage.

Senator TOWNSEND. Were all those mortgages guaranteed by a bonding company?

Mr. LOFGREN. Not all but some of them.

Senator COUZENS. Where do you draw the line between those that are guaranteed and those that are not guaranteed?

Mr. LOFGREN. The surety company would only guarantee those which they approved of. As to some mortgages their underwriters disagreed with our underwriters as to the acceptability of the mortgage for guarantee.

Senator Watson. Did you overreach yourself in the making of loans? Is that the reason why you got into trouble?

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