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 distress?

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 applying 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?

Mr. LOFGREN. I should not say so. I think the difficulty was entirely due to the tightening of money to a point where we could not turn around.

Senator TOWNSEND. One of the provisions of the guarantee of the bonding company is that you must proceed on the mortgage first? Mr. LOFGREN. The guaranty of the surety company has 18 months grace period. The mortgage company is in default after 30 days. You see the surety company guarantees the bond to the mortgage company and not the mortgage itself. If the bond comes due the mortgage company has 30 days to make good. If it fails to make good at that time the mortgage company is in default to the trustee under the bond issue. However, the surety company has 18 months. Either the mortgage company had to go out of business at the end of 30 days or survive, as the case might be. We have been able to struggle along so far.

Senator TOWNSEND. Has the surety company been called into the picture?

Mr. LOFGREN. Yes, sir. It has come to the point where it was essential for them to protect their own interests.

Senator COUZENS. In issuing bonds did you pool a certain number as guaranteed and segregate them from those not guaranteed? Mr. LOFGREN. Yes, sir.

Senator COUZENS. Then, you had two types of bonds, as to one of which a surety company guaranteed the principal and interest and another group where there was no surety company guaranty? Mr. LOFGREN. That is correct.

Senator WATSON. It looks to me as though your mortgage company was not guaranteed at all, but that the bondholders were guaranteed.

Mr. LOFGREN. Yes; the bondholders were guaranteed that they would get their money. The mortgagors must be able to meet that situation or we must foreclose.

Senator WATSON. What is the condition of your company now, if I might ask that question without embarrassment?

Mr. LOFGREN. Well, its capital is impaired, I should say, to a very considerable extent, maybe two-thirds.

Senator WATSON. How many mortgages had your institution on homes?

Mr. LOFGREN. Ten thousand.

Senator WATSON. Now?

Mr. LOFGREN. Approximately that number, yes; in round figures. Senator WATSON. How many of those do you say are in default now?

Mr. LOFGREN. Well, I should say

Senator WATSON (continuing). Small home owners I am talking

about.

Mr. LOFGREN. I could not answer that question, because really I do not know. You see, a man defaults when he neglects to pay on his principal and interest at a certain point. If we extend the matter for that man, we take that out from default. Technically there is a default at that time, but we give him an extension of time. A very large percentage have come to that point. The number in default now where foreclosure is pending I think maybe I could give you from my figures here if I look them up.

Senator TOWNSEND. What percentage of the 10,000 mortgages are bonded?

Mr. LOFGREN. About two-thirds, I should say, approximately. Senator WATSON. What percentage of the value of the property, or what is the appraisal?

Mr. LOFGREN. Sixty per cent of the appraisal is the top. It averages around 53 to 55 per cent.

Senator COUZENS. Do you find the figures you were going to give us?

Mr. LOFGREN. I find I have not got them. But I could make an estimate that about one-third are in default.

Senator CoUZENS. What would that be in dollars and cents?
Mr. LOFGREN. In the amount of the mortgage?

Senator CoUZENS. Yes.

Mr. LOFGREN. I should say about $15,000,000 perhaps.

Senator COUZENS. And therefore you would have about how many more millions of dollars of mortgages that are good?

Mr. LOFGREN. Some $35,000,000 that were good.

Senator COUZENS. What is the length of those mortgages?

Mr. LOFGREN. They were made on various terms. The maturities of the mortgages were usually over a 10-year period. As to the unamortized mortgages, where it was a term mortgage, was a 5-year period with extension arrangements at the end of the period if possible. Senator COUZENS. Which do you consider the better mortgage, the amortized mortgage or the definite period mortgage?

Mr. LOFGREN. The amortized mortgage is unquestionably better from the standpoint of the mortgage company and the surety company. But the term mortgage has proved better in some other ways, because, as I said before, the borrowers were very optimistic as to what they could do, and committed themselves for amortization when their earnings were high, which proved in excess of what they could do at at subsequent date, with the result that that caused more defaults than with the other form of mortgage. The man could pay his interest all right, but when he also took a large slice by way of amortization every year, while that was fine when he was making money, when he was not making money he had to default.

Senator COUZENS. I do not get your point yet why a term 5-year mortgage is better than an amortized 10-year mortgage.

Mr. LOFGREN. It was better because the borrower paid less on the term mortgage. He only had to pay his interest every six months. Senator COUZENS. And when the five years was up, what happened? Mr. LOFGREN. He expected to have a renewal, and under normal conditions, had this financial crash not occurred, a renewal could have been readily arranged because money would have been free. But when money tightened up it was impossible in a great many instances to give him such an extension.

Senator COUZENS. What were your obligations as to the value of the property after the 5-year period? Was it usually up or down after the 5-year mortgage had expired?

Mr. LOFGREN. During the period from 1921 on to 1928 values were pretty well intact. There was no objection to continuing the mortgage. After that time there has been a very decided slump in values figured from the standpoint, not of intrinsic value relative. to price, but as to the price at which you could sell it.