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in the markets of this country to-day, so why not strike out of section 8 all that pertaining to percentages and insert “if not amortized shall exceed 50 per cent of the appraised value of the property at the time the mortgage is made.”

VALUE OF MORTGAGE

It is just as easy to find 50 per cent as it is to find 40 per cent or 75 per cent. Section 8 should be stricken out.

Another reason why this section, so far as percentage is concerned, should be deleted, is because it is not to be made workable to any reasonable extent.

Again section 8, subsection 1, provides that in the case of an amortized 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. This clause means nothing, for if the security behind the 8-year-old mortgage is the same as it was at the time the mortgage was made, then the mortgage would be worth its face value, but if the security supporting the mortgage is a great deal less, then the mortgage would not be worth its face value.

When the mortgage is amortized there must be some basis provided for the gradual payment of the mortgage. In the business world to-day, it is almost the usual custom to require a payment of 12 per cent per annum, generally payable in monthly installments. This 12 per cent per annum would have paid the interest on the mortgage; besides the other 5 per cent would be applied on the mortgage, and in eight years the mortgage debt would reduce $1,920, leaving a remainder of $2,080 to pay the mortgage in full.

Under this subsection the borrower up to 60 per cent of the unpaid principal of the home-mortgage loan, or $1,280, on an $8,000 home, which to-day the home may be worth $6,000, $7,000, or $10,000.

Home lots that had become business sites have increased in value by 200, 300, and 400 per cent. We know of hundreds of such cases, and we have known of business lots being turned into town lots on account of the chain stores. This section having reference to the 60 per cent and 50 per cent clause, means trouble.

The Federal home loan bank must be self-supporting. It must earn enough money to pay the debts owing the Treasury. It can not be successful when its earning power is dwindled down to meet the provisions of the bill as it now stands.

For instance, it limits the loaning power of the member bank to 12 times the amount of capital stock which it has paid in. That is, paid in and subscribed for. This is freezing bank securities with a vengeance, especially when the bill provides that the member bank must guarantee the loan.

Some of the bigger member banks might be able to function for a few days under this provision. A repetition of borrowing under that section of the bill would soon deplete the soundest securities of the strongest mortgage institution.

Loaning companies, strong banks, and trust companies, can not afford to dis:ipate their solvent securities by borrowing 25 per cent or 30 per cent of the value of their mortgage securities (except in emergency cases), thus creating a shortage of cash for the amortization and extension of old mortgages, as well as shortage of cash for new home construction. Besides an extra burden will be put on second-mortgage money.

Even in prosperous times mortgage renewals are frowned upon.

Thousands of mortgages have been foreclosed because the monthly, quarterly, or yearly payments have been beyond the ability of the buyer, who, if given time, could save his home.

The large life insurance companies let their local agents have money at 542 per cent, and the agent bank finds it profitable to operate on this basis of 6 per cent. By the same token the local member of the Federal bank could do business on the same provision.

It would not cost the Federal bank as much as it does the local member, because three-fourths of the cost of preparing for the loan is done by the local bank. So it is reasonable to suppose that a profit of one-half per cent would cover the operating expenses of the parent bank. This one-half of 1 per cent would carry on during the term of the mortgage.

The Federal land bank act does not provide for any compensation for the Government's capital, no matter how long it remains in the service of the banks and if the Federal home loan bank would be treated with the same liber

ality there would be an immense profit earned that should be paid into the sinking fund every year for the purpose of paying the debt which the Federal home loan bank owes the Treasury. The parent bank should receive its pro rata share of all dividends.

There should be no tax assessed against the credit of the Federal home loan bank. A tax upon money or money credits would increase the rate of interest in many States, as in Michigan there is no tax assessed against mortgage credits, but there is a recording fee of one-half of 1 per cent charged at the time of recording the mortgage on land contracts. Such fee is paid once and once only during the life of the mortgage or contract.

The futility of taxing mortgages credits is recognized by most of the States. It should be clear to any well-informed man that money invested in mortgages has its earning circumscribed within the narrow limits of the legal rate of interest obtaining in each State while the earning power of money invested in other property is unlimited. Any tax on mortgage credits would be shifted to the shoulders of the borrowers, which can least bear the extra burden.

The insurance companies allow local agents one-half of 1 per cent for nego tiating loans. It would not cost the Federal banks as much as it does the local member because three-fourths of the cost of preparing for the loan is done by the local bank. So it is reasonable to suppose that a profit of onehalf per cent would cover the operating expenses of the parent bank.

Financial concerns have a billion dollars in mortgages earning 6 per cent interest and to expect them to lose one-sixth of their earnings would cause severe and certain disappointment. If these severe and unwarranted restrictions are retained in the bill the much needed supply of money for workingmen's houses will be shut off.

I should respectfully recommend that the unwarranted restrictions now in the bill should be stricken out, that a plain statement be made to the effect that a member bank could have the mortgages received by the parent bank on the basis of 50 per cent of the appraised value of the real estate.

Senator WATSON. The committee will rise until 10 o'clock to-morrow morning.

(Whereupon, at 5 o'clock p. m., the committee adjourned until the following day, Wednesday, February 17, 1932, at 10 o'clock a. m.)

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SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY

UNITED STATES SENATE

SEVENTY-SECOND CONGRESS

FIRST SESSION

ON

S. 2959

A BILL TO CREATE FEDERAL HOME LOAN BANKS
TO PROVIDE FOR THE SUPERVISION THEREOF

AND FOR OTHER PURPOSES

PART 3

FEBRUARY 17, 18, AND 23, 1932

APPENDIX

Printed for the use of the Committee on Banking and Currency

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