Senator COUZENS. So that in effect then you would like the amortized mortgage better, because it decreases the principal.

Mr. LOFGREN. Because that brings it down.

Senator COUZENS. So that you were safer with the amortized mortgage than with the definite period mortgage.

Mr. LOFGREN. Yes, except for the point I made, that there were more defaults in the case of the amortized class of mortgages during the period when this depression started to come on.

Senator COUZENS. As a matter of practical operation wouldn't you rather have a default in an amortized mortgage than in a period mortgage?

Mr. LOFGREN. I think we could, as a matter of fact.

Senator COUZENS. Because your principal is being reduced all the time.

Mr. LOFGREN. That is true.

Senator WATSON. You are for this bill, are you?

Mr. LOFGREN. Yes, sir; very much for it, with some modifications, provided I could get my company in under it.

Senator WATSON. What do you think it will do for you?

Mr. LOFGREN. I still think there are some objectionable points, but granting that the objectionable points can be overcome, it will enable us to get money for our maturing bonds, bonds that we have sold to the public, to investors, and thus extend mortgages for borrowers, the underlying mortgage of the home owner. That is what we are trying to do all the time, is to keep the home owner in possession of his home, and extend his mortgage to a definite period if we can, at the same time meeting our obligations to the public. And if we could take mortgages out of our company, pledge them with this proposed Federal home loan bank, and obtain the necessary money to pay our maturing obligations, it would be very useful to us.

Senator COUZENS. Have you as yet defaulted in any of your bond issues sold to the public?

Mr. LOFGREN. No, sir.

Senator COUZENS. What other objection have you to this bill, besides the one you mentioned to section 4 (a)?

Mr. LOFGREN. Granting that my company would qualify under the amendment I suggested and read a few moments ago, it would be necessary to have a fourth heading in the bill. It now says:

(1) Building and loan associations, cooperative banks, and homestead associations;

(2) Any of the following whose time deposits and financial condition, in the judgment of the board, warrants their making such home mortgage loans, as, in the judgment of the board, are long-term loans; savings banks, trust companies, and other banks; and

(3) Insurance companies.

Now we would suggest a section as follows:

(4) Mortgage loan companies.

It would be necessary to insert something of that kind at that point. Of course that would merely follow as a matter of form if the other amendment I suggested were adopted.

The next point I have noted is under section 8 of the bill.
Senator WATSON. What page is that found on?

Mr. LOFGREN. On page 14. This bill provides that you may be a member of only one Federal home loan bank yourself. And let us

say there are 12 such banks. I assume, or at least there is nothing in the language that I saw which permits a Federal home loan bank, we will say in New York, to make a loan on property in California. Our company did business on a nation-wide scale, or in 33 States of the Union; and to belong to only one of these banks, and if that bank is restricted to the area where it is located, it would not be very useful to our company, because we have loans in California and we also have them in New Jersey.

Senator COUZENS. How do you get loans in California? Through an agent?

Mr. LOFGREN. Yes; we had an agent on the ground.

Senator COUZENS. In that case what did the borrower have to pay for his money when you had to maintain an agency out there?

Mr. LOFGREN. Well, we had offices in all States where we were located, and the borrowers' payments of that money did not vary except as to the local interest rate. For instance, the interest rate in California generally is 8 per cent. In some other States it is 6 per cent, and in some other States it is 7 per cent, and so on. Mortgages were made at the prevailing rate of interest in the State, with whatever additional load was necessary to take care of the expense. I was not with the institution when they were making those loans, so I have no personal knowledge of that situation.

Senator COUZENS. So when you came to make a loan in California, for example, you charged 8 per cent interest and then what you call a loading expense?

Mr. LOFGREN. Yes, sir.

Senator COUZENS. Have you any idea what that loading expense was?

Mr. LOFGREN. No. I was not with the company at that time. Senator COUZENS. So it was pretty expensive for a man in California to pay 8 per cent and on top of that a loading expense. Mr. LOFGREN. I assume so.

Senator TOWNSEND. What is the present loading expense?

Mr. LOFGREN. We are not making any mortgages at this time. We are trying to liquidate the trouble we have on our hands.

Senator TOWNSEND. What has it been since you have been with the company?

Mr. LOFGREN. It has made none since I went with the company. Senator COUZENS. What was your experience before going with this company?

Mr. LOFGREN. I was in the surety business largely. I got interested in this business due to the surety guarantees.

Senator COUZENS. During that period you did not investigate what the loading expense was?

Mr. LOFGREN. No, sir.

Senator COUZENS. Of course that would be a large factor put on the mortgagor to pay.

Mr. LOFGREN. I appreciate that.

Senator WATSON. Mr. O'Brien, in drafting this bill, what was the object on that point?

Mr. O'BRIEN. I think the theory was something like this: That it was not the desire, say, for members in South Carolina to borrow of a New York bank, because it would mean too great a concentration at the New York bank. If the New York bank happened to do better

than a South Carolina bank, all members would go there. There is the opportunity in the bill for a member whose principal place of business is in one district to belong to a bank in the adjoining district, but outside of that there is no provision. It is impossible under the terms of the bill for a company doing business in New York to belong to a South Carolina bank.

Mr. LOFGREN. And it is also impossible for the New York bank to do business in the Carolinas; although it does not say so, I assume that is the situation.

Mr. O'BRIEN. Of course they are reciprocal. It is possible for one bank to buy advances of another bank.

Mr. LOFGREN. Could the New York bank take as collateral a mortgage on property in the Carolinas?

Mr. O'BRIEN. It depends on where it came from. Do you mean in a case where the collateral was given by a member of the New York bank or otherwise?

Mr. LOFGREN. Yes; collateral given by a New York bank.

Mr. O'BRIEN. There is nothing in the bill which restricts that. I think it is true that so far as the bill is concerned it says nothing about that. And inasmuch as it says nothing about that there is nothing to prohibit it. But there is an inhibition against a member whose principal place of business is in South Carolina from doing business with a New York bank. I do not see any inhibition on a member whose principal place of business is in New York discounting in a New York bank a mortgage in the Carolinas.

Mr. LOFGREN. If that is the interpretation, then it would be suitable for our purposes.

Mr. O'BRIEN. The bill is silent on that.

Mr. LOFGREN. In regard to section 8 I have made a notation that it might be considered advisable to insert after the words "home mortgages" in line 23, the following: "On homes located in any State of the United States."

That would make the bill state definitely on that point, which it does not at the present time.

Senator MORRISON. Do you know of any of these loan mortgage companies that make loans and mention in the paper the local rate of interest in the State, but so amortize payments as to double it? Mr. LOFGREN. I do not know.

Senator MORRISON. You do not know of that practice?

Mr. LOFGREN. No.

Senator MORRISON. What State are you from? I was not in the room when you took the stand.

Mr. LOFGREN. I am in New Jersey.

Senator WATSON. Go on with your other objections to the bill, or suggestions.

Mr. LOFGREN. On page 15 there is a provision that the bank may loan up to 60 per cent of the unpaid principal or unpaid balance of the amortized mortgage, and 50 per cent of the unpaid principal of the unamortized mortgage. We would like to get that increased. We think in the discretion of the board it might go as high as 85 per cent. But if a prohibition is put on the exercise of discretion, of course the board could do nothing but go along under the law. Many mortgages, that are amortized particularly, are paid down to a point where they would be safe at 100 per cent as a matter of fact, because of course a

mortgage is based on the value of the property, and the size of the mortgage does not indicate its value as collateral. It is the real estate itself that indicates the value of the mortgage as collateral. We would like to see those sections liberalized. We would like to see paragraphs 1 and 2 of that section liberalized to read 80 per cent and 70 per cent, instead of 60 per cent and 50 per cent, respectively.

Senator COUZENS. What have you to say as to subsection 3, with respect to when the unpaid principal of such home mortgage loan exceeds $15,000?

Mr. LOFGREN. Let me look at that.

Senator COUZENS. The reason I ask that question is this: I understand the purport of the bill is not to loan money on a house that cost more than $30,000. It is my judgment that if the authors of the bill carry out their purpose the word "unpaid" should come out. How would that affect your case?

Mr. LOFGREN. In our case it would be unobjectionable. As I stated at the beginning, our mortgages are much smaller than that, and $15,000 would be ample. Our average mortgage is only $6,000 or $7,000. Therefore $15,000 would be plenty from our standpoint.

Mr. O'BRIEN. Would you suggest changing 60 per cent to 80 per cent in line 6, and the 50 per cent to 70 per cent in line 10, but involving no other change in the bill there?

Mr. LOFGREN. We would like to see the 40 per cent go up to 50 per cent. It is not absolutely essential for our purposes, but we would like it to be a little more liberal than that; 50 per cent of the appraised value would be quite satisfactory. We could even operate under 40 per cent so far as that goes.

Senator WATSON. Have you anything else to suggest?
Mr. LOFGREN. On page 16, line 21, it provides that-

At no time shall the aggregate outstanding advances made by any Federal home loan bank to any member exceed twelve times the amounts paid in by such member for capital stock subscribed for by it.

That is a rather drastic provision from the mortgage company's standpoint, because it is its own capital which is largely frozen, and when the mortgages that are being met were made we restricted it, to I think 15 times the amount of our paid-in capital. Necessarily that capital is still intact except, as I say, frozen. But if we were required to put up 12 times with this bank it would mean a very substantial contribution of capital in addition to the capital we have in our own institution. I appreciate the necessity for a contribution of capital, but I should think it ought to be more liberalized than that, maybe 25 times instead of 12 times, with a view to giving greater latitude to the company that is struggling with its frozen condition, as our company is.

Senator COUZENS. Do you know why the term "12 times" was fixed?

Mr. LOFGREN. Well, that is the 'usual provision, I believe. I do not know why it was fixed in this bill, but that is the usual provision of a mortgage company that puts in capital. They issue bonds to the extent of 10, 12, or 15 times the capital, and it is the very customary thing. I assume the person who wrote it had that in mind. It is really a sort of rediscount corporation already going, and to require 12 times is a difficult provision. I should like to see that about doubled, and then I think it would be much more workable.

Senator BULKLEY. Haven't they decided that 12 times provided for Federal land banks is too much?

Mr. LOFGREN. Yes, sir; 20 times is pretty high.
Senator BULKLEY. But you are advocating 25 times.

Mr. LOFGREN. Yes; but in the case of a company that is a member already and has its own capital, which has been restricted to fifteen times. We are already restricted, and we are not making any new mortgages, and our restrictions in our own company comply with that. To put that restriction here would mean almost a transfer of our capital to this company.

Senator COUZENS. If that were carried out it would necessitate having the condition applied to the company that was rediscounting. Mr. LOFGREN. A much more liberal condition applying to the company rediscounting? Do you mean to the bank?

Senator COUZENS. As the case might be.

Mr. LOFGREN. Yes.

Senator WATSON. Go ahead with your suggestions.

Mr. LOFGREN. In section 9, page 18, paragraph (c), in line 19, the bill provides that

Any issue of bonds or debentures shall, as nearly as possible, be at all times not less than an amount equal to 190 per cent of the total outstanding amount of such issue.

Meaning 190 per cent of the mortgage and other collateral. If we liberalize in the case of the other sections we have talked about, that provision would have to be reduced somewhat. I would figure it should come down to 135 per cent, due to the necessity of changing that provision to fit the other situation. Does this apply to appraisals?

Mr. O'BRIEN. Depending on the way it is calculated.

Mr. LOFGREN. I thought that applied to the amount loaned on the mortgage. I have made a little calculation of my own to see what would be required provided we wanted $1,000,000 from this bank. In order to borrow $1,000,000 we must put up 1 per cent of the amount of the mortgages, and that would be $10,000, as I recall the provision of this act. In addition to that we would have to have one-twelfth of a million dollars as capital subscribed for the bank. That is $83,333.33. And figuring the provision regarding the 50 per cent and 60 per cent, depending upon the class of mortage you have, we would have to put in mortgage collateral, figuring that at 55 per cent as the average of the two, amounting to $1,818,000, which would make a total of $1,911,000 that we would have to freeze of our assets in order to acquire $1,000,000 from this bank. In other words, it would freeze $911,000 for the $1,000,000 we received, which would be rather hard for us to function under this bill.

Senator WATSON. And to change it to meet your idea it would be what?

Mr. LOFGREN. If you changed it to meet my idea the amount would be $1,373,000. In other words, it would freeze $373,000 over and above the $1,000,000 we would receive out of the proposition. That is, it would be 37 per cent of the pledge over and above the amount of the loan. I may be too liberal. On the other hand, I think the bill itself is too drastic and that there may be some happy medium between these two figures that we could agree upon which would be satisfactory.