encouraged. Vacancy surveys indicate that the vacancies in single family homes are small and that the present doubling up accounts for much of it. In order to accurately give the committee a picture of the homefinancing activities of building and loan associations year by year, the following table is presented for the record: Home-financing activities of building and loan associations in the United States This table, covering the homes finances from 1920 to 1930, shows a grand total of 4,563,000 homes. Senator WATSON. Have you studied the reconstruction bill that was passed? Mr. BEST. I have not studied it in detail, although I feel, Mr. Chairman, that by the time they take care of the railroads and other institutions whose needs are very imperative for their success—or at least the standing of their bonds-there will be little left of $2,000,000,000 to take care of these small-home owners. Senator WATSON. That is your one answer to the statement that the provisions of that bill might be ample to take care of this situation? Mr. BEST. Yes. Senator WATSON. Lack of funds? Mr. BEST. We in the home loan field have no idea that we would have sufficient relief from the Reconstruction Finance Corporation. Then, in addition, that is an emergency measure, as we understand it.. Senator WATSON. Yes. Mr. BEST. We are not asking for emergency relief alone, but we think what we need is a permanent institution. We can not go to these commercial banks, after their recent experience, and borrow money from them. More than that, we do not have the desire to create that very undesirable relationship of debtor and creditor with commercial banks, where they may ruin us in the event the bank fails, or they call our loans. Senator WATSON. You feel, then, that if we get back to normal. times in the future it would far more difficult for you to get money from the banks on loans of this kind than in the past? Mr. BEST. Yes, sir; absolutely; and that has been indicated to me by the bankers. Senator WATSON. Take the homes, on which your mortgages were made for their construction. They were all given to building and loan associations originally, or were loans made directly by banks for that purpose. Mr. BEST. Oh, no. All our loans are based upon applications of the owners to the building and loan associations. Senator WATSON. All building loans? Mr. BEST. All building loans. We do not take an assignment of any person's mortgage. Senator WATSON. What about the defaults in the monthly payments on those building loan debts all over the country? Mr. BEST. Conditions vary in different parts of the country. There are some places where we have defaults in payments. Our system is elastic, so that we may be able to take care of them, and carry them without immediate foreclosure. There are many parts of the country where the collections are coming in normally. Senator WATSON. What I am trying to get at is this. What is the dire necessity at the present time for legislation among people of that kind? Are there a great number of people in that situation! Are there many foreclosures? Mr. BEST. Yes; there are a great many foreclosures. Senator WATSON. By building and loan associations? Mr. BEST. There are foreclosures by building and loan associations only where it is impossible to carry the borrower any longer. There are thousands of foreclosures of short term and straight mortgages. Building and loan associations do not make this type of loan. Of course, in building and loan associations when the amount of the loan gets too close to the value of the property the association must protect itself in order not to lose the money of its investors on the loan. The real need of building and loan associations is funds to take care of withdrawing shareholders and funds to refinance loans and to make such loans for modernization or building as are needed. It seems to me there is a dire necessity at the present time for this sort of legislation in order that the people may regain their confidence in the thrift and savings institutions such as ours. To my mind these 12 banks will function continually and economically. Take the land bank of the State of New York for instance, which is rather similar to the 12 banks that are proposed here. The assets of savings and loan associations in the State of New York are approximately $400,000,000 or one-twentieth of the assets throughout the whole country. That land bank in normal times has transacted from $10,000,000 to $14,000,000 worth of business each year. It has been a steadying and stabilizing influence, and to-day the building and loan associations in the State of New York are functioning more normally than in any other State of like size and population and building and loan assets in the country. Senator WATSON. There has been some contrariety of thought and opinion here as to the definition of an amortized loan. What is your definition of an amortized loan, as you use it? Mr. BEST. The borrower pays, either weekly or monthly, a certain proportion of the principal, and his interest. Senator WATSON. Running over a certain number of years? Mr. BEST. Running over a period varying from possibly 10 years and 7 months, to 16 years, depending upon the payments made on the stock. Senator WATSON. With a fixed time for payment, and fixed payments during that time? Mr. BEST. Yes. Senator WATSON. That is what you call an amortized loan? Mr. BEST. Yes. The longer we have the loan, the better our security becomes. Keep in mind this Senator WATSON. That is, if the payments are kept up? Mr. BEST. Yes. Keep in mind this, that these commercial institutions that come to you and talk about having plenty of mortgage money, lend 50 per cent. Your average wage earner can not finance on 50 per cent unless he goes into the second-mortgage office and pays high commissions. Let me remind you of this, that there are, I would say, according to a conservative estimate, 90 per cent of the population of this country having incomes of less than $3,500, and we go on the theory that a man may spend twice his salary for a home. A man making $3,500 a year might well spend $7,000 for a home. Having 20 or 25 per cent for a down payment, one week's pay each month will pay his principal, his interest, and take care of his taxes. Senator WATSON. What does the rate of interest amount to, on the average, on these loans? Mr. BEST. The rate of interest varies, of course, with the rate in various States. In Pennsylvania, 6 per cent is the limit. Senator WATSON. Do they run above 6 per cent anywhere? Mr. BEST. In the Western States I imagine they are 7 or 8 per cent. That is their legal rate. I am not familiar with just exactly what they charge. Senator WATSON. Have you studied these provisions on page 15 to which very strenuous objection has been made? If secured by a home mortgage given in respect of an amortized home-mortgage loan which was for an original term of eight years or more, the advance may be for an amount not in excess of 60 per cent of the unpaid principal of the home mortgage loan. Mr. BEST. Yes. Senator WATSON. Can an institution of this kind, lending as you do under those terms, operate on a paying basis? Mr. BEST. Yes. Senator WATSON. Can it be put on a sound financial basis? Mr. BEST. If you take, in connection with that, subsection (b) down here. Senator WATSON. How does that make it secure to lend if the advance is not in excess of 60 per cent, and you have to sell your bonds at 5 per cent? How, then, can you run the institution successfully, from a financial viewpoint? Mr. BEST. Which institution? Senator WATSON. Yes; this institution we are setting up here. Mr. BEST. You mean as to safety? Senator WATSON. Yes. Mr. BEST. I do not think there is any question about it, because we have to deposit certain securities, practically two for one, and you are limiting it to 60 per cent of the unpaid balance, and limiting it as to the amount that might be loaned on that particular property, by subsection (b). I think that feature was discussed by Mr. Friedlander a few days ago, representing the building and loan viewpoint. There seems to be some confusion about the percentages that appear in section 8, particularly on page 15. As I read and interpret the section no mortgages are excluded. The section merely says that where there are monthly repayment mortgages of long duration, say eight years or more, 60 per cent of the unpaid principai of such a mortgage may be loaned to a member by one of the 12 banks. Other mortgages on homes with an unpaid balance of less than $15,000 are eligible for collateral to secure advances from any one of the 12 banks but on these mortgages the amount which may be advanced by any one of the 12 banks is limited to 50 per cent of the unpaid principal. This is on the theory that the home owner or home buyer is best served by a long-term monthly repayment mortgage and also that such mortgages are slightly better collateral for the bonds than are straight mortgages. No home-loan mortgages, as I interpret it, are excluded but merely small preference is given to the monthly repayment long-term mortgages. Item No. 3 of the same section on page 15 contains an important limitation. It says that money shall not be advanced on a mortgage in excess of 40 per cent of the appraised valuation of the real estate securing the home-mortgage loan. This is a wise provision in order that the bonds of the home loan bank system be absolutely safe and thus find a popular and ready market. In lines 19 through 24, there is a further limitation which I consider highly desirable from the point of view of the safety of the system and the safety of the bonds. gage As I understand the sense of line 19, it means that no home mort. shall be accepted as collateral if at the time the advance is made the unpaid principal sum, note that I say unpaid principal sum, as apparently the words "principal sum" only appear in the bill. but it was intended to mean the unpaid principal sum as has been mentioned previously, should be less than three-fourths of the appraised value of the real estate in the case of an amortized loan and less than 60 per cent in the case of any other loan. It seems to me that this might be worded so that there could be no danger of the bill discouraging liberal financing particularly on the long-time amortized plan and instead of three-fourths the appraised value that might be raised to even four-fifths or possibly 85 per cent. In other words, the limitation should merely see that at the time the advance is made the unpaid principal of the mortgage is a sum less than the then value of the real estate. Then if half or 60 per cent of such an unpaid principal is advanced by one of the 12 banks we have a secure loan from the point of view of the bondholder. It seems to me, one of the principal purposes of this whole system is to encourage liberal and low cost loans to home owners or home buyers, and for that reason I think the three-fourths could be changed to even 85 per cent. With your permission, I would like to file, or at least refer to the President's conference on home building and home ownership report, and file this statement of the land bank of the State of New York. (Exhibit C.) Senator WATSON. Yes. (The statements referred to are as follows:) 98195-32-PT 2——7 EXHIBIT A Single-family house vacancies in 37 cities, including comparison with situations of a year ago or nearest date to a year ago, if data are available THE PRESIDENT'S CONFERENCE ON HOME BUILDING AND HOME OWNERSHIP— TENTATIVE REPORT OF THE COMMITTEE ON FINANCE, SUBMITTED FOR DISCUSSION OF THE CONFERENCE ON DECEMBER 4, 1931 Frederick H. Ecker, chairman; president Metropolitan Life Insurance Co., New York, N. Y. Morgan Adams, president Mortgage Guarantee Co., Los Angeles, Calif. William E. Best, president United States Building and Loan League, Pittsburgh, Pa. Alexander M. Bing, president City Housing Corporation, New York, N. Y. Leonard E. Fackner, comptroller Metropolitan Life Insurance Co., New York, N. Y. William A. Johnston, owner and engineer of Industrial Developments, Akron, Ohio. Harry A. Kahler, chairman of the board, New York Title & Mortgage Co., New York, N. Y. William H. Kingsley, vice president Penn Mutual Life Insurance Co., Philadelphia, Pa. |