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CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

MONDAY, FEBRUARY 15, 1932

UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,

Washington, D. C. The subcommittee met at 10 o'clock a. m., in the hearing room of the committee on Interstate Commerce, the Capitol, pursuant to call of the chairman, on Monday, February 15, 1932, Senator James E. Watson presiding.

Present: Senators Watson, Townsend, Couzens, and Bulkley.
Also present : Senator McKellar.

Senator WATSON. The committee will be in order. There are a number of witnesses here, as you all observe. The committee plays no favorites, but takes the witnesses just as the secretary has made out the list. He has made out a list, and we will follow the list and there will be no use for any of you to come to me to ask that you be put on first, unless you are sick, in which case you have no business to be here; or some member of your family is sick and you have to go home. I hope there will not be a breaking out of sickness.

The first witness is Mr. Walter S. Schmidt. You may come forward, Mr. Schmidt, and sit right down.

STATEMENT OF WALTER S. SCHMIDT, REPRESENTING THE NA

TIONAL ASSOCIATION OF REAL ESTATE BOARDS, CINCINNATI, OHIO

Senator Watson. Will you give your name to the committee !
Mr. SCHMIDT. Walter S. Schmidt.
Senator Watson. And you are from Cincinnati, Ohio?
Mr. SCHMIDT. Yes, sir.
Senator WATSON. What do you represent?

Mr. SCHMIDT. I represent the National Association of Real Estate Boards.

Senator WATSON. What is that?

Mr. SCHMIDT. That is an association of realtors, men engaged in the real estate business, a National association, comprising both men who are active in the brokerage business and in the management field, and also owners of real estate, a total membership of about 42,000.

Senator Watson. There is a national organization, is there?
Mr. SCHMIDT. Yes, sir.
Senator Watson. What is the object of that organization?

Mr. SCHMIDT. The object is to improve methods and real-estate practice.

Senator WATSON. You are located in Cincinnati ?
Mr. SCHMIDT. Yes, sir.

Senator Watson. Do you represent, in any wise, a building and loan association?

Mr. SCHMIDT. Not at this time. I was president of one.
Senator WATSON. When?
Mr. SCHMIDT. During the European war.
Senator WATSON. But not since that time?
Mr. SCHMIDT. Not since that time.

Senator WATSON. Now you may proceed with any statement you care to make, Mr. Schmidt.

Mr. Schmidt. I would like to make just a brief affirmative statement, gentlemen of the committee, as regards this bill.

We feel that it is a matter of permanent necessity to create such an agency as that proposed. We feel that there is a distinct gap in our financial structure which makes that creation necessary.

Senator WATSON. When did that become noticeable?

Mr. SCHMIDT. It has been noticeable at various times in the past, and the present emergency merely has pointed the weakness; some two years ago the conditions began to make the necessity even more noticeable.

Senator COUZENS. When, prior to that date, did you first notice it!

Mr. SCHMIDT. It has always been a noticeable fact that mortgage money on homes was more expensive than any other type of conservative financing. Business loans have been securable at from 5 to 512 per cent when money was easy, but home mortgages have been at 6 per cent or more.

Senator TOWNSEND. You think this legislation should be permanent and not temporary?

Mr. SCHMIDT. Most decidedly so.

Senator BULKLEY. When you say there has been a difference in cost of loans, has that not been dependent on the percentage of value that is loaned on the mortgage !

Mr. SCHMIDT. In part; but mortgage money on home loans has always been at least 6 per cent in almost any section of the country, and it runs up to 8 or.9 per cent in various sections.

Senator BULKLEY. Even on a 50 per cent loan?
Mr. SCHMIDT. Even on a 50 per cent loan.

Senator WATSON. Why is that? Has it not always been regarded as one of the safest assets, to loan on real estate?

Mr. SCHMIDT. It is the safest asset, and experience proves that; but, of course, the amount is small, and the market conditions govern the situation.

Senator WATSON. Mr. Schmidt. what is the situation now that emphasizes the necessity for this legislation?

Nr. SCHMIDT. The situation now is that because of the nonliquidity of mortgages; the fact that they are not good collateral for loans; and the fact that they are not salable since private money has entirely disappeared—because of these facts a frozen condition exists in banks and building associations, which results in their inability to pay depositors; the need of cash then causes foreclosures, for the reason that banks require their money and when mortgages are due they want their principal in order to meet their obligations. That means foreclosures. It also means that those who have mortgages coming due can not get the help to which they properly should be entitled. If the mortgage has been reduced, they should be able to bring it back, as they have the best security that exists; they should be able to get some slightly larger amount in order to tide them over this period. But that is impossible. Mortgage money has practically disappeared. And, contrary to what anybody may say, I have investigated over this country, and mortgage money simply does not exist except in a few centers.

I might tell you of just one little instance I had. I was called in by the Elkhart Housing Co. to advise them as to their condition. I found that they had sold a great many homes to purchasers on a contract basis. Those homes were mortgaged to the extent of 25 or 30 per cent of their value. My advice to them was that they replace those mortgages with mortgages of 50 per cent of the value, a very conservative loan, to give them money to tide them over, the loans being made directly by the buyers who were in possession and who would have the title. Every big agency in this country that has been approached has rejected those loans, on the ground that no loans are being made in communities of that size.

Senator TOWNSEND. Are the big agencies you refer to, the insurance companies and other big companies, foreclosing their mortgages rapidly!

Mr. SCHMIDT. The insurance companies are not foreclosing their mortgages rapidly.

Senator TOWNSEND. They are not?

Mr. SCHMIDT. They are not requiring, payment when it is due, and are frequently waiving the amortization, because few have money to take care of the amortization payments.

Senator TOWNSEND. Do the insurance companies have a large percentage of the mortgages!

Mr. SCHMIDT. Comparatively small. The savings banks, and savings societies, and building and loan associations carry the bulk of home loans.

Senator COUZENS. Have you stated the reason for the difference between the 5 or 512 per cent and the 6 per cent that you just spoke of?

Mr. SCHMIDT. In my judgment, the improper flow of money into that field is one of the reasons, and the other is the small amount of the mortgage; more trouble to attend to it.

Senator COUZENS. As a matter of fact, that accounts for the differ, ence in rate? That is, the examination of the abstract, and the preparation of the papers for a small loan is really the difference between the rate on a $5,000 mortgage, or a $50,000 mortgage, or a $500,000 mortgage.

Mr. SCHMIDT. Not entirely. It is a lack of money.

Senator COUZENS. Well, there is no more money in the field for apartment houses and hotels than for small homes.

Mr. SCHMIDT. No; not at this time, but there has been in the past.

Senator COUZENS. I do not agree with you on that, but I am not the witness.

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i Mr. SCHMIDr. There has been money for apartment houses, and so on, at the rate of $1,000,000,000 a year.

Senator COUZENS. But never available at 412 per cent.
Mr. SCHMIDT. No.
Senator COUZENS. That is what I am trying to bring out.
Mr. Schmidr. I grant that perfectly.
Senator WATSON. Have you studied this bill, Mr. Schmidt?
Mr. SCHMIDT. Yes; I have.
Senator Watson. Have you any objection to any of its provisions ?

Mr. SCHMIDT. No objection. I think, undoubtedly, in the course of development improvements may be made in it.

Senator Watson. You think it presents a feasible plan that is workable?

Mr. SCHMIDT. I do.
Senator BULKLEY. Can you suggest any improvements now?

Mr. SCHMIDT. It would seem to me that would be the part of those who object to certain provisions. The bill seems to me to be workable. Some adjustments of some kind may have to be made. .. Senator WATSON. Do you look upon it as a temporary proposition, or as a permanent institution?

Mr. SCHMIDT. As a permanent institution.

Senator WATSON. Do you think that when we get out of the doldrums and get on a prosperous basis, that there will be enough business to keep 12 banks going and make them a paying proposition?

Mr. SCHMIDT. I do. I think that when such an agency is created, permitting the discounting or sale of mortgages, it will be used. În fact, I have asked any number of bankers about that. I happen to be a director of one of our large national banks in Cincinnati, and I know the feeling that exists in regard to it.

I might also say that the passage of this bill, in my judgment, would immediately create a psychological effect of confidence.

Senator CouZENS. You understand, of course, that this bill does not in any sense help second mortgage money people.

Mr. ScHMIDT. It does not.

Senator COUZENS. How much do you think a man should have before he starts a home?

Mr. SCHMIDT. That would vary in communities. I should think that he should have, probably, from 15 to 25 per cent.

Senator COUZENS. How does he get the money that is the difference between the 15 or 25 per cent and the 50 per cent that he is required to have before he gives his mortgage? That is, that will be about that which he has to have, or, probably, 45 per cent. How does he get that ?

Mr. SCHMIDT. That is carried sometimes by the builder; sometimes by a second-mortgage company. That situation is always unsatisfactory.

Senator COUZENS. Is not that one of the worst features of the home-mortgage situation?

Mr. SCHMIDT. It decidedly is.
Senator Couzens. Will this legislation help that?
Mr. SCHMIDT. It will help it by setting up a better base.
Senator COUZENS. What is that?

Mr. SCHMIDT. It will help it by setting up a better base. The mortgage practice in this country is not always sound. We repre

to

sent the Metropolitan Life Insurance Co. in placing mortgages and frequently are approached by second-mortgage groups willing to lend 15 or 20 per cent on top of our first mortgages, because the conservatism of the Metropolitan is known. The same can not be said of the usual first-mortgage lender. We feel that this bill will tend to better appraisals, because the companies will want to be able to obtain the advantages of the act and, therefore, their practice will be improved. This will make for a sounder first-mortgage base, upon which to erect a second-mortgage structure.

Senator Watson. Have you studied the figures on page 15 of this bill?

Any such advance shall be subject to the following limitations as amount

(1) 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.

Do you think that makes your plan a workable plan?

Mr. SCHMIDT. Yes, sir. I don't see the logic, precisely, of the provisions as there set forth. I think the advancement should be based upon the 'appraisal of the property, rather than the amount due on the mortgage; and, also, it rather looks to me as though certain disadvantage might be done to institutions that do not take an 8-year or more amortized mortgage in the amount they can borrow from the banks as they are set up.

Senator Couzens. Do you believe that the mortgagor should live in the home?

Mr. SCHMIDT. Yes, sir.

Senator Corzens. You do not believe that the money should be advanced for building homes speculatively?

Mr. Schmidt. Decidedly not. I do not see any speculative stimulation in this bill.

Senator COUZENS. In other words, if a builder wanted to build 15 houses, he would not be able to get the whole 50 per cent?

Mr. SCHMIDT. No; it wouldn't do him any good anyhow.

Senator Couzens. I do not quite get you. I understand there is no prohibition in this bill against a builder getting 50 per cent on a home which he builds speculatively, and which has not yet been sold, so that if the bill stands as is, the builder can build 15 homes and borrow 50 per cent and have a rediscount, under this bill, without having sold them at all.

Mr. SCHMIDT. Yes, sir.
Senator COUZENS. Is that desirable!

Mr. SCHMIDT. I think it is almost necessary, because almost all homes of the class which this bill is intended to serve, are built by builders. They are sold finally, and if the builder can not get any financial assistance it stops building entirely.

Senator Couzens. Yes; but your testimony seemed to be contradictory, when you said that before the mortgage was rediscounted the home should be lived in by the owner.

Mr. SCHMIDT. I did not precisely say that, Senator; if I did, I did not intend to say it. Before the mortgage becomes what might be called a permanent mortgage, or before the rediscount becomes what you might call a permanent loan, I think the owner should live in

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