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Senator MORRISON. How can you contend, then, that it is for just a special few, when by its terms it embraces every bank and every building and loan association, or anybody else mentioned in it that wants to join?
Mr. ADAMS. If the desire is to secure private capital to operate this system, why should not the books be thrown open to any investor, instead of limiting it to a few!
Senator MORRISON. Why could not that same question have been applied to the Federal reserve system or the farm loan system?
Mr. ADAMS. The Federal reserve system is in a little different form. That is for the special relief of commercial banks, and they were asked to contribute capital, which they did, in full, although Congress authorized an appropriation.
Senator MORRISON. Congress provided the funds to organize it originally.
Mr. ADAMS. Just the expense funds, I think, but no part of the capital. It did authorize appropriations for capital purposes in the Federal reserve system, but they were never required. The private banks supplied all the capital required.
Such a scheme to build and acquire a great business with the use of Government money without interest and have the special privilege of using a Federal name that leads the people to believe it is an institution backed by the Federal Government, and all with taxexempt privileges, should not be approved but roundly condemned.
Senator MORRISON. Is not that the same case as the farm loan banks?
Mr. Adams. Yes, sir; and what is the result? You have just had to provide $125,000,000 more of Federal funds to revive it, and resuscitate it, and make it possible for them to serve the interests of the farmers and carry them through the period of depression.
Senator Morrison. That is your opinion. My opinion is that the Government found it highly profitable to do so. It was about the soundest system of banks left in the country, and it would help the country to double its capital and let it proceed to render the fine service it had been rendering.
Mr. Adams. I think anybody can own stock in the farm banks. It is not limited to those who borrow, and it is not limited to the little local associations that were formed to help the farmers in the community.
Senator MORRISON. They might buy some of the bonds, but nobody can borrow money from it except the farm associations.
Mr. Adams. That is practically, to all intents and purposes, a straight loan to the individual farmer, guaranteed by the association in that locality. This does not provide for any such system.
Senator MORRISON. Go ahead. I do not see much benefit to the committee if I do not ask you questions that occur to me as you go along. Otherwise, we will have to go over the whole thing again.
Mr. Adams. I am very glad to have you do so, Senator. It does not disturb me to be interrupted.
Senator MORRISON. Go ahead.
Mr. Adams. The conditions imposed upon borrowers are excessive and will prevent any institutions other than some building and loan associations that have borrowed money at banks and are unable to pay; banks that are loaded up with real-estate mortgages of this kind that are not liquid assets under present conditions; and a few insurance companies that are in sore need of ready funds to meet their obligations; and other like institutions in distress are the only ones that can afford to comply with the conditions imposed to secure money for immediate needs, but not one dollar will pass through the hands of either these building and loan associations, banks, or insurance companies to help any home owner to refinance a mortgage that is due and perhaps under foreclosure, even though the security is several times the amount of the mortgage, and not one dollar for a new loan to buy or build a home will find its way to a home owner.
Senator MORRISON. How do you know that?
Mr. ADAMS. Just as you know anything, when you read a set-up like this and think along the course of its procedure.
Senator MORRISON. That is just your opinion.
Mr. Adams. That is my conclusion, my opinion, and it may not be worth anything, Senator. But that is my firm conviction that that is the situation to-day. There is not a dollar's worth of benefit in this bill for the home owner that is in distress or wants to buy a home, and there will not be until this depression period is over. Then there might be. Even so, the conditions imposed on borrowers are so strict that the outsider, even though eligible to borrow, could not afford to do it. The insiders might.
The only ones that will receive any benefit are building and loan associations, banks, insurance companies, and similar institutions that are in distress and the private stockholders that will acquire a great business at the expense of the Government.
Senator MORRISON. The banks and insurance companies will receive benefits, will they not?
Mr. Adams. If they can afford at this time to put up the collateral and comply with the conditions.
Senator MORRISON. Don't you suppose, if they did, that they would carry the benefit along to the borrower?
Mr. Adams. Not now. A building and loan association would borrow just enough to pay its note at the bank and meet its other pressing obligations. The banker would borrow just enough to liquidate a portion of his mortgages and pile money up in his vault to add to his reserves.
Senator MORRISON. Would not that enable him to go on with his business in the usual way and grant extensions and make new loans ? Would not that additional accommodation tend to give him that strength ?
Mr. Adams. No. He will not make new loans. He may grant extensions.
Senator MORRISON. He ought to be the better able to do it if he wanted to, ought he not!
Mr. ADAMS. He will get relief.
Senator MORRISON. If he gets relief, is it not quite probable that that would benefit those dependent on him for help?
Mr. ADAMS. No; because the practical banker is not going to comply with the conditions of this system to borrow from it unless he is in distress. He is not going to borrow money there to loan again. Senator MORRISON. If he is in distress and gets relief, then will he not be the more able to give relief to those in distress as his debtors ?
Mr. Adams. That is true, and to that limited extent there is some worthiness in the bill. Beyond that, I see none, Mr. Chairman. I want my criticisms to be absolutely fair and unprejudiced. I am only pointing out to the committee what I see.
Senator MORRISON. I do not mean to be impolite at all. It simply struck me that you are reading an argument against it rather than testifying to facts. If I do not ask you questions about the different points in it, when we get through reading it we will have to turn around and go all over it again.
Mr. ADAMS. I am delighted, Senator, to have questions at any time.
This bill even provides for a board of 11 directors for each district bank, only two of whom shall be appointed by the Federal board representing the Government, the rest carefully selected by the controlling private stockholders, and the Government without voice in selecting them even though it may own 90 per cent of the capital stock.
Senator MORRISON. Then you think it would be a great business for those who went into it?
Mr. Adams. There is no question about it. Any man who could put $1 in, and get from six to ten times that much benefit from the earnings on Government money, would be foolish not to invest if he was eligible to invest. But that right is limited to a few of a certain class who can afford to invest at this time.
Senator MORRISON. If they were able to do it, the institutions authorized to enter it are very extensive, are they not?
Mr. Adams. Yes. One insurance company in New York could subscribe all the private capital that was allowed, if they wanted to.
Senator MORRISON. Not under this bill.
Mr. Adams. They could, through dummies out in the district, and they could control the entire system. They could borrow all the money that was available and shift their securities from one bank to another under the provisions of this bill. That is not the purpose of the bill, and it is not the thought of the President, in my judgment, although I have no authority to speak for him, but I am heartily in sympathy with his desire to assist the people of this country to secure homes of their own upon the best practical terms. This bill does not do it, in my judgment.
The bill even provides that while the usual certificates of stock may be issued to private stockholders, that only receipts for money paid shall be issued to the United States (p. 8, lines 9-12).
If the dominating desire is to secure money for the relief of home owners, why are the stock-subscription books not thrown open to everyone who desires to invest in the capital stock of the system? And why is stock ownership limited not only in the beginning but for all time to the few specified institutions, and the board vested with power to refuse stock to any one of the few institutions that are eligible to buy it, and if at any time the board becomes displeased with any private stockholder it may compel him to give up his stock and get out (p. 9, subdivision i) ?
Senator MORRISON. Only banks can join the Federal reserve system.
Mr. ADAMS. Yes.
Senator MORRISON. Do you think all the individuals in the United States who want to ought to be allowed to subscribe for that stock?
Mr. Adams. I would not say that. That is quite a different proposition. That is purely a banking system for the convenience and service of commercial banks.
Senator MORRISON. And this is designed to be one for those dealing in home-loan mortgages. What is the difference in principle?
Mr. ADAMS. And for the relief of people who want to buy homes, Every provision should be made to enable them to profit if there is profit to be divided, and, at any rate, secure their loans at a rate of interest stripped of the usual charges of brokers' fees, commissions, attorneys' fees, and all that sort of thing. They should be able to get their homes on terms that they can afford to pay. A man must have a home in which to live, and he must either rent it or buy it, If a system can be devised that is sound and safe, that will enable people to get their homes and pay for them at a cost no greater than rent, you are granting a great benefit to the common people of the country.
Senator MORRISON. That is what the authors of this bill hope it is going to do.
Mr. ADAMS.. I wish I could see that advantage in it, but I do not
If the bill is intended to relieve and help home owners, why are the excessive conditions placed upon loans and why is there no provision that the money loaned shall be used to extend such relief and help to the home owners even though it is loaned by the Federal bank to an institution that has in the past made loans to home owners? And why does it not limit the rate of interest that can be charged to the home owners? And why does it not prohibit the imposition of excessive charges for brokers' commissions, financing fees, attorneys' fees, title determination, and other incidentals in connection with making a loan?
Again, let me repeat, there is not one dollar's worth of help or relief in this bill for the home owner, and I am sure the President has never examined this bill or given thought to its provisions and the way it would work out.
There are many minor provisions in the bill that are very objectionable, unreasonable, and impractical to which I have not referred, but I am sure will appear to the members of this committee upon careful reading of the bill.
All of the terms used in the bill should be defined in section 2. Only part appear there now.
The term "advances" is used throughout the bill to designate loans. The limit placed upon a mortgage of this character offered as collateral is too low if the property is properly appraised and the mortgage does not exceed 50 or 60 per cent of the appraised value.
Twenty years to run from the date a mortgage is received as collateral is altogether too long a term of years. It should not exceed 200 months from the date of the mortgage to its maturity.
No mortgage should be accepted that exceeds 60 per cent of the real value of the property mortgaged. The provision on page 15, line 20, providing for a mortgage to three-fourths of the appraised value is probably written in to accommodate certain building corporations that add from 1 to 15 per cent to the contract price of the building erected as a finance fee, and this provision will probably secure the approval of this bill by such building corporations.
(P.16, lines 1-5.) Certification of appraised value by borrowing member is not sufficient to establish the real value of the property mortgaged. No mortgage should be accepted as collateral until the property has been examined and appraised by a skilled and trained estimator of building costs and property values, an appraiser employed by the Federal Government and assigned for duty in the various districts, changing from one to another as occasion requires.
The present system of appraising the value of property, as the chairman probably well knows, is this: If it is a loan from the bank, and the bank is taking the mortgage, two or three real-estate men will be called in to sign on the dotted line, as to the value of that property. They have no knowledge, perhaps, of the construction costs. They could not estimate the costs of the building, or specify the materials in it. They have an exaggerated idea of the value of the real estate, and the bank loan board takes those estimates and files them, but arrives at its own estimate of the value, and makes a loan accordingly. If they desire to hypothecate that security, here are the certificates of the real-estate men, and that is a mighty unsafe basis on which to make loans at a distance. So, I say that no security should be accepted until the property mortgaged has been appraised by competent appraisers in the employ of the Government, and shifted from district to district, so that there will be no influence brought to bear upon their judgment.
The provisions in the bill for selling obligations by one district bank to another and the joint liability by all of the district banks for the obligations of one should be given careful consideration before being written into a law.
If bonds issued by district banks can not be sold for less than 5 per cent interest (p. 19, subdivision e), there is no hope at any time for help to the borrowing home owner.
The Federal district banks must be able to secure the money it Joans at a cost of not exceeding 312 per cent to be of any service to the borrowing home owner.
Under no conditions should these home mortgage banks be authorized to receive deposits, either from its members or others, or the United States.
Provision should be made for the collection of all installments of principal and interest on mortgages pledged as collateral by the borrower and a surety bond required to insure prompt and accurate accounting. These payments should be indorsed upon the collateral and the obligation of the borrower as they are received. Upon this point the bill is silent.
Section 10 provides that a district bank shall be authorized to do business upon filing an application called an “organization certificate" with the board, and does not require the approval of the board or the issue of a charter or certificate by the board. Section 10 also authorizes the employment of officers, attorneys, agents, and other employees without regard for the civil service and classification acts, and section 17 specifically declares that the board shall employ and