Mr. O'BRIEN. My interpretation may be wrong, but I think the theory on which the bill is drafted is this: That no loan can be made in excess of 60 per cent of the unpaid principal. Senator WATSON. That is right. Mr. O'BRIEN. Of the loan to the borrower. No loan can be made in excess of 40 per cent of the value of the real estate. Mr. O'BRIEN. Forty per cent of the value of the real estate. Mr. OAKMAN. That is not in the old bill then, is it? Mr. O'BRIEN. No. Three is not in the old bill. Mr. OAKMAN. I see. Senator COUZENS. Would you, Mr. Oakman, like to take the new bill and come back to-morrow on it? Senator WATSON. Yes, he better do that. Mr. OAKMAN. Yes. I didn't see that. But I see enough there now to still think that there is not much change in that. But what I want to do is that I want to say that I am opposed to the bill for many reasons, and I think I can show how you can improve the bill so we will call Congress blessed if you pass it. Senator WATSON. You mean the home owners? Mr. OAKMAN. Yes, the home owners. I am much obliged, Senator. Senator WATSON. Thank you. (Mr. Oakman left the table.) Senator WATSON. Any more persons to be heard to-day? If not, we will meet again at 10.30 o'clock to-morrow morning. (Thereupon, at 11.35 a. m., Wednesday, January 20, 1932, the subcommittee adjourned until 10.30 o'clock a. m. the following morning.) CREATION OF A SYSTEM OF FEDERAL HOME LOAN BONDS THURSDAY, JANUARY 21, 1932 UNITED STATES SENATE, The subcommittee met at 10.30 o'clock a. m. in the hearing room of the Committee on Interstate Commerce in the Capitol, pursuant to adjournment on January 20, 1932, Senator James E. Watson presiding. Present: Senators Watson (chairman of the subcommittee) and Couzens. Also present: Representative Robert H. Clancy, of the first congressional district of Michigan. Senator WATSON. I will go on with the hearing. Is Mr. Adams here? Mr. ADAMS. Yes. STATEMENT OF E. J. ADAMS, CHAIRMAN, SPECIAL BOARD OF INVESTIGATION, FEDERAL TRADE COMMISSION, WASHINGTON, D. C. Senator WATSON. Will you state you name and address? Senator WATSON. And you are connected with what governmental body? Mr. ADAMS. The Federal Trade Commission. Senator WATSON. Have you studied this bill, Mr. Adams? Senator WATSON. How did you happen to make a study of it? Mr. ADAMS. I have been interested in this matter since 1884. First as a loan broker in Michigan. Later as a builder of homes, and also as a legislator, and the practice of law. Those are the four branches that have made this a very interesting subject to me, and has been for many, many years. Senator WATSON. Where did you practice law? Mr. ADAMS. Michigan, and in Washington State. Senator WATSON. When was your attention first called to this bill? Mr. ADAMS. You are speaking now of S. 35? Senator WATSON. Well, it is the forerunner of the present measure we are considering. Mr. ADAMS. As soon as I noticed it had been introduced, and I received a copy upon request from the document room. Senator WATSON. And you have seen the other bill, the new one? Mr. ADAMS. No; I have not seen the new one. Senator WATSON. Well, there is all the difference in the world between S. 35 and the one we are considering. Mr. ADAMS. Well, there ought to be. Senator WATSON. There is. How can you speak of the present bill if you have not read it? Mr. ADAMS. I did not know that there was a present bill other than S. 35. I have not been attending the meetings here. Senator WATSON. You had better study the bill and then come back the next time we have a meeting, because the bill under consideration is entirely different from S. 35. Mr. ADAMS. What is the number of that bill? Senator WATSON. S. 2959. We will have a meeting of this committee next Tuesday, and you can come back at that time. In the meantime compare it with this bill and come back and give your impression of it. Mr. ADAMS. If it would be of any use to the committee I will be glad to submit for comparison a draft I have prepared. Senator WATSON. These bills are altogether different, and what you have to say with reference to S. 35 may not strike this at all. Mr. ADAMS. Well, I was thinking perhaps the chairman or somebody on the committee might be willing to read the draft that I have prepared and compare it with the bill that you have. Senator WATSON. You do that yourself and then come back next Tuesday. This committee will have no more hearings until next Tuesday at 10 o'clock. Mr. Oakman, did you want to conclude your testimony? Mr. OAKMAN. Yes. STATEMENT OF ROBERT OAKMAN, DETROIT, MICH.-Continued Senator WATSON. Mr. Oakman, you were testifying yesterday, and you want to conclude your statement now? Mr. OAKMAN. Yes, sir; if you please. When I came yesterday I had not seen the new bill. I have put in all the hours I could on it. Senator WATSON. The bills are quite different. Mr. OAKMAN. Yes. And I have the same opinion about that new bill that I have of the other, which I will explain. I became interested in the idea from what had been spread as to what the President of the United States had accomplished in the way of helping unemployment, and what he proposed to do to aid work on homes and to relieve what might be called the frozen or slow credits, and so on, early in the summer. We all felt very much pleased with it, and at meetings of the insurance men and money Îenders we used to discuss what we understood would be in the bill, and what a great good it would be. And when we came to look at the bill we found it did not meet the expectations apparently even to a degree, if I may use that expression. Now, I have made some notes here. I do not want to enlarge on every detail, but sufficiently so that if you thought it any good you could read between the lines and complete the idea. I will not take up any more time than necessary. Senator WATSON. All right, you may proceed, Mr. Oakman. Mr. OAKMAN. I am opposed to the Federal home loan discount bank as it stands to-day. It does not meet the requirements advo cated by the President in the matter of freeing so-called frozen credits in the shape of mortgages on working men's homes, to any considerable extent. The bill will not give relief to the workingman who is trying to pay for his home. It can not accomplish this object and it should be clear that the vital part of a home mortgage bill would be destroyed in the making and it should also be evident that it would be folly for the Government to maintain a bank for the purpose of solely making new loans. I could talk a good deal on that point, but I suppose you have heard enough of that so you know what that means. Senator WATSON. Yes. Mr. OAKMAN. The bill provides for mortgage home loans as high of $15,000. This would mean at least a $30,000 home; a splendid palace for the workingman, indeed. This sum should be cut down to not more than $6,000 or $7,000. The 50 and 60 per cent clauses in the bill are its prime defect. For example, supposing a sound, stable bank having three or four millions of good sound amortized mortgages in the morgue and wishes to replenish its cash account to the extent of $1,000,000, guaranteeing said loan. Does anyone believe that such a bank would tie up for 10 to 20 years the sum of $2,000,000 in order to borrow 60 per cent or 50 per cent of the real value of the property mortgaged? Senator WATSON. Well, now, as a practical question, would they or would they not? Mr. OAKMAN. Well, I know they will not do it in Detroit. And I know all the banks connected with Detroit would not. A repetition of such loan would soon deplete the soundest securities of their bank. On that point there is no use to enlarge, because as a mathematical problem it could be figured out. While I am opposed to this bill, I am in favor of a genuine permanent mortgage bank; a bank based upon solid, financial, economic grounds; a bank that will pay its own expenses and make a profit without increasing the rate of interest charged by the great_life insurance companies such as the Metropolitan, the New York Life, and these others that have done wonderful work in building homes throughout the United States, and give plenty of time to pay on them, whose rate of interest in the State of Michigan, and in most of the States-some places I understand it is a little higher-is 6 per cent on loans. Such a bank would not compete unjustly with the large substantial loaning companies or the life insurance companies. I have had conferences with those connected with those large concerns and have thought about that a good deal. The investment field of the life insurance companies is circumscribed. They are doing their full share in making the United States a Nation of homes instead of renters. Such a bank would not injure legitimate mortgage loan companies or building and loan companies. My plan in brief is: The mortgage bank, backed by the credit of the United States. 98195 3212 National and State banks, trust companies, building and loan associations, mortgage loaning companies, and other eligible companies, wishing to enjoy the benefits of the Government mortgage banks, must become members by paying an initiation fee of from $5,000 up. This is just an idea there to keep off the 3-ball fellows and the fly-by-night men and the short-term business. Such money paid in would participate in the earnings of the Government bank. I will call that the Government bank. Any loaning company or agent should be made responsible for the collection of such amortized mortgage and in case the borrower fails to pay any tax assessed against said mortgage or keep up his payments under the contract to date, said loan company must immediately make such delinquent payments to the mortgage bank. Should the local bank wish to redeem-well, that is a matter of detail. No mortgage not amortized should be accepted by the parent bank. Such a system would bring in large sums of money each month. However, I would provide that members wishing to have straight unamortized loans accepted by the banks may do so under certain sections of the law which would be separate and distinct. The advantage in the loaning of money this way is this: For instance, 30, 40, or 50 mortgages are sent down, as the case may be, amounting to $250,000. They may send back one or two. Anyhow, we are very careful in sending them down. And one company gets one-half of 1 per cent, and we find it a lucrative business when it is in a large volume. When it is a small one it is not, but when it is a large one it is lucrative. And the company does not guarantee those loans to the life insurance companies, but in fact it is the same thing, because if you do not keep them up they may not be so anxious to accept the loans as they come in. So they are kept up, and we find no losses, I am very happy to say. Recently, in the last four or five months, the insurance companies went further, and this is what they have done. For instance, suppose a mortgage should become what might be called "sour." Instead of taking that mortgage and sending it back and foreclosing and waiting a year and a half for redemption, they say to the original company, the home company-it may be a mortgage for, say, four or five thousand dollars and there may be four or five hundred dollars paid on it-"Keep this thing up and we will not foreclose. We do not want to go to that expense. If you want to take the mortgage over, take it over and pay us, and then you can deal with the original fellow you dealt with." Which is a big improvement, and has only obtained in the last three or four months. There are hundreds of mortgage loaning institutions, banks, trust companies, and so forth, that are hard pressed for cash now because they made too many loans in the past. I might say they have loaned too much. This situation can be remedied by a law which will be similar to the one I will roughly suggest to you. At bottom a Government mortgage bank must be based on sound business principles, and such a bank must earn a reasonable profit in order to make it a permanent institution. I do not think it ought to be touched at all unless it is permanent. If they want a local short-time emergency bank that is a different thing. It must also |