Doctor GRIES. In the same way that the bank is in competition with the building and loan on extensive long-time paper. While I am a native of Ohio and citizen of Ohio, I do not think that this legislation should be drawn solely with reference to Ohio, because it has a peculiar problem and we can not settle nationally Ohio's problems.

Senator COUZENS. Yes; that is true, but what about the other States? Is that the only State that is in that unusual position? Doctor GRIES. That is the most striking case. I do not recall them offhand.

Senator COUZENS. What is the situation in Michigan?

Doctor GRIES. I am not so well acquainted with Michigan. Secretary LAMONT. I think, Senator, judging from the people who have been in to see us about this thing, the building associations, bankers, and so forth, that the Ohio situation is the worst of all; there seems to be a rather bitter feeling there between the banks and building and loan associations. Each one thinks the other is infringing on its territory; I told some of the bank presidents who came down that theirs was a purely local difficulty which had to be fought out in their State legislature and should not be settled by this bill, which is a national bill, and had to be framed in a broad, general way, and while it might not be entirely satisfactory to certain States, the States could more easily accommodate themselves to this bill than this bill could attempt to accommodate itself to conditions in all the 48 States.

Senator WATSON. While we are talking about that, how do you propose to overcome the obstacle that presents itself in Missouri?

Secretary LAMONT. Missouri will simply have to change its law. They have a law to the effect that the building and loan associations can not put up as collateral mortgages which they hold.

Senator WATSON. For rediscount?

Secretary LAMONT. For rediscount.

Senator WATSON. They can not do it. I was wondering how they could overcome that in this bill.

Secretary LAMONT. They would have to change their law and make it uniform with the other 47 States.

Senator WATSON. How many States are similarly situated?
Secretary LAMONT. I do not know.

Senator WATSON. Doctor Gries, do you know?

Doctor GRIES. I do not think there are more than two or three at the most.

Senator WATSON. Somebody told me that my State is in that condition, but I confess I do not know.

Secretary LAMONT. I do not think so.

Senator COUZENS. Would you think it would be proper to amend this bill so as to permit loans up to 75 per cent?

Doctor GRIES. Well, I think if we had loans to 75 per cent home ownership would increase, and much of the second-mortgage financing would be eliminated. Taking a sample study, checking over with people who bought their homes there were more than 50 per cent that had less than 40 per cent to pay down. More than 25 per cent had less than 25 per cent to pay down. But home ownership would be very much reduced if they had to pay down as much as 50 per cent. And the second mortgages--another thing that happened during the boom period, trying to accommodate their customers instead of

giving them 50 per cent, 60 per cent, or 70 per cent loans they made a 40 per cent loan. This drove the borrower into the second mortgage field. I think, if it were placed on a reasonable basis and if they could get up to 75 per cent, it would wipe out at least 50 per cent of all that second-mortgage difficulty, but I would not recommend anything unsound. It must be on a sound basis of appraisals.

Senator COUZENS. Do you think it would be sound to raise it to 75 per cent, in view of the explanation just made?

Doctor GRIES. I think it would be on sound appraisals, but not the type of appraisals that we had during the boom period.

Senator COUZENS. Is there anything in this bill which standardizes or insures sound appraisals?

Doctor GRIES. I think it is left to the board. Do you remember that passage, Mr. O'Brien?

Senator WATSON. Yes. It would be left wholly to the administrative board.

Doctor GRIES. Yes, sir; that is correct. It seems to me that they would have an excellent opportunity to stabilize matters there and make more secure our home investments.

Senator COUZENS. Of course, that would make it a very great handicap on any person who had been perhaps unfortunate enough to pay too much for his lot, would it not?

Senator WATSON. That was relative: What is too much now might not have been too much then, and we hope will not be too much in the future.

Senator COUZENS. That is the very point I am trying to drive home, that values have been shot to pieces, and what was a sound appraisal three years ago is not a sound appraisal now. So how are you going to stabilize appraisals so that they are sound all the time?

Senator WATSON. Well, that is like everything else, because of the depression.

Senator COUZENS. I know, but one of the most emphatic things that has been said during all the testimony on this bill is the fact that, just as Mr. Gries says, this would help to stabilize appraisals on a sound basis. Now, of course, the interpretation would be as to what is a sound basis.

Senator WATSON. That is true, but I am assuming that the tendency in this bill would be to make that appraisal more uniform throughout the whole Nation, if it was subject to this Federal supervision.

Doctor GRIES. It seems to me that a well-constituted board would have a very valuable effect on all appraisals all over the country; and if we did have the wild appraisals, they could be compared with similar ones on property that this bank deals with. I think we need the stabilizing influence of something of that description.

Senator COUZENS. The great difficulty in that is the changing type of environment in these sections.

Doctor GRIES. Yes, sir.

Senator COUZENS. And the shifting of industry. For instance, some of the sound locations in Florida, like Key West, which was not one of the boom places, for example, which has been materially affected by the almost entire elimination of the cigar business, which nobody could have anticipated, and people have gone to cigarettes and chewing tobacco and dropped cigars, and nearly the whole colony is dead; not because of any boom, not because of anything that any

body could have foreseen, but it is a fact that it is apparent and nobody could have anticipated it and nobody now could say what was a sound appraisal for property in Key West.

Secretary LAMONT. There are bound to be exceptions in cases of that sort, I suppose, Senator.

Senator WATSON. You may proceed, Doctor.

Senator BULKLEY. Doctor Gries, I do not feel that we have had an answer to the problem that I proposed. We are talking about life insurance companies being unwilling to make loans on houses more than 15 years old, and I started to ask you about how we could found an enlarged classification, and your reply as I understand it was that there were some houses 20 years old in Mansfield and Bucyrus and elsewhere that are all right. But that is not the point. I take it on the whole that we agree that houses over 15 years old as a class would not be as good risk as the kind that the life insurance companies take.

Doctor GRIES. That is probably true.

Senator BULKLEY. How can we do that sort of business and at the same time make the securities sound and do it all at a low rate of interest?

Doctor GRIES. I would not say that the life insurance companies should change their policy.

Senator BULKLEY. No; that is not what I am talking about; I am talking about how we are going into the business that the life insurance companies are doing and consciously accept the lower class of risks and get away with it?

Secretary LAMONT. I do not know; I can not speak from any statistical background, but I think the general history of real estate home mortgages has been on the whole very satisfactory. The building and loan associations have out some $9,000,000,000 worth of loans, and their losses have been so insignificant that, taking it as a whole, they have been successful and prosperous.

Now the question that you raise, I think, is largely a question of judgment on the part of the people who make the appraisal. A home that is 15 years old has naturally depreciated, but at the same time perhaps the neighborhood has improved. Perhaps it is now surrounded by a lot of good homes and the real estate may have increased in value.

But if, on the other hand, it has gone down, that is to be taken into account in making the appraisal, and it is a question of judgment on the part of the loaner as to what is a reasonable loan, taking into account the normal risk, the character of the individual that makes the loan, the character of the property, and many other things involved; it gets back to a question of judgment. The great danger comes in the boom times, when there is a lot of speculative building, when people are sold properties at too high values and have too small an equity; and then when the depreciation comes, the values drop and their equity is wiped out.

Senator COUZENS. Then they move and get a new house at reduced prices.

Secretary LAMONT. Then they move out, yes. This is all question of management the same as making any other kind of a loan.

Senator BULKLEY. Yes; but let me put it this way: Do we or do we not propose to make the loans on a more liberal basis than the insurance companies and building and loan associations?

Secretary LAMONT. I would not say on a more liberal basis. I will say that the insurance companies and they have a perfect right to do so take the cream of the business. They take selected districts in selected cities and only a certain percentage in each district. They are dealing with other peoples' money, insurance money, their record of losses justifies their method. I think they are perfectly all right in doing it. But they do not by any means cover the mortgage field. They take the best of it. But that does not mean that the $5,000 house is not just as good a risk as the $15,000 house on the same basis of appraisal, or a corresponding basis of appraisal. The buyer of the $5,000 house probably is just as honest, and just as steady in his work, and just as reliable, and just as thrifty as the man occupying a $15,000 house.

Senator BULKLEY. Granting that the security is the same, the man is the same, the man that makes the loan on $5,000 houses does three times as much work in making them as the man that makes the loan on $15,000 houses.

Secretary LAMONT. Quite right.

Senator BULKLEY. How are you going to absorb that?

Secretary LAMONT. In the fraction of a per cent higher, perhaps, for the loan, enough to cover it.

Senator BULKLEY. And it will have to cost the borrower more money than the life insurance companies?

Secretary LAMONT. Yes, it will have to cost him a little more money. As I say, the insurance people get the cream.

Senator COUZENS. So we are going to take the skimmed milk? Secretary LAMONT. Well, it may be pretty good milk. You know, Senator, I am told that the strength is in the skimmed milk and the cream is just fat.

Senator COUZENS. I think I would be inclined to agree with you, if we had only a security of income for these fellows who purchase

these homes.

Secretary LAMONT. That has been the same since the beginning of time. There will always be risks.

Senator COUZENS. I do not like to hear you say "always be." Secretary LAMONT. Well, I think we are improving in all these things, but it takes a long time.

Senator WATSON. Now, Doctor, proceed. Were you through, Senator Bulkley?

Senator BULKLEY. Yes, I think that is fairly stated. We are proposing to enlarge the field somewhat and necessarily will have to charge a higher rate of interest than the insurance company. That is the answer, is it not?

Secretary LAMONT. That is about the answer; yes.

Senator COUZENS. Does Senator Bulkley think that the security back of the bonds of this organization will be as good, in view of that statement?

Senator BULKLEY. I would be afraid that it would not be as good, but I do not understand that the Secretary agrees with that view. Í think he feels that the bonds would be perfectly good.

Secretary LAMONT. That is the judgment of financial men who know about such things, and it has been true in Europe where houses are not always $15,000 houses. They build, if anything, less expensive houses than we do. I am told that those bonds are in such demand

that the banks do not have to make any effort to sell them; they just put a small notice in the newspapers to the effect that they have so many of these bonds for sale; the people come in and buy them over the counter. It costs nothing whatever to sell the bonds.

Senator COUZENS. Have you any evidence, Mr. Secretary, as to how much of a demand there is from the home owner, or whether it is confined mostly to the financial interests who finance the home?

Secretary LAMONT. Well, I think it gets back to the home owner, whether he buys a house built by the contractor or whether he buys a lot and puts up an individual house. I think it all gets back to the

owner.

Senator COUZENS. Yes, but I was referring to the demand for the bill, whether we had any information from some source-I am not saying that we have not-that the real home owner is demanding this bill.

Secretary LAMONT. It would be very difficult to get to the home owner. We are working through the institutions that deal with the home owner.

Senator COUZENS. Have you considered at all that, if we embark on this step of aiding the single or double homes, we will not eventuate a demand for looking after the man or families who live in apartment houses?

Secretary LAMONT. Well, that may come.

Senator COUZENS. I ask that in all seriousness, because there is a terrific number of our people living in apartment houses.

Secretary LAMONT. And growing.

Senator COUZENS. And growing more, and finding it very convenient. Those types of homes have probably suffered as much, if not more the investors in them-than any other type during this depression.

Secretary LAMONT. Yes; that would be a little more difficult. You know, Senator, I have never felt that this bill in its present stage was necessarily a final bill. I think it would be like the Federal reserve and the Federal farm loan and other institutions. It will have to be modified from time to time as our experience grows.

Senator COUZENS. You mean modified or expanded?
Secretary LAMONT. Expanded and modified, both.

Senator COUZENS. Of course, we are expanding the Federal reserve but not modifying it.

Secretary LAMONT. It has been modified, I understand, 20 or 30 times since it was originally passed. I know that some of the ablest bankers in Chicago were violently opposed to the Federal reserve bank bill and did everything they could to block it.

Senator COUZENS. Doctor Gries, is there anything in this information you have that indicates the volume of rediscount that these banks might expect to have?

Doctor GRIES. Of course, it is difficult to measure anything that is to take place in the future. We have statements from hundreds of institutions that are stating that they would make use of it, and we have some evidence in the past from the transfer of funds and from the shortage in '23 and '24 that would indicate that a considerable number would make use of it. But to measure it quantitatively, considering the business cycle and what it may call forth, is very difficult.