Mr. O'BRIEN. It means other than amortized eight years or more. Senator WATSON. Yes.

Mr. O'BRIEN. In the case of such as are straight loans and short time amortized loans, the advance can be no more than 50 per cent of the unpaid principal. I think I have explained the unpaid principal before. The unpaid principal is the amount which Smith, the home builder, is obliged to pay the cooperative bank or the building and loan association. It is not contemplated that the bank will be able to lend 50 per cent of the face of the mortgage. You might have a situation in there where the face of the mortgage was $10,000 and all but $1,000 on that mortgage had been paid. It is not contemplated that they are going to lend 50 per cent of $10,000, but, rather, not more than 50 per cent of $1,000.

Senator MORRISON. Under this, if the bank has taken a mortgage of 50 per cent of the value of the property originally, then this institution could lend him 50 per cent of that mortgage, which would in general practice be about 25 per cent of its value.

Mr. O'BRIEN. Would you mind postponing that, Senator, until we get down to discussing subsection (b)?

Senator MORRISON. Not a bit.

Mr. O'BRIEN. I think that is taken care of in subsection (b).
Senator MORRISON. That is all right.

Mr. O'BRIEN. I might explain that in subparagraph (b) there is an express provision.

Senator WATSON. Which one?

Senator MORRISON. Well, let us go ahead. Disregard my question until you get to it.

Mr. O'BRIEN. All right.

Paragraph 3, lines 12 to 14 on page 15. That says that in no case shall the amount of the advance be more than 40 per cent of the appraised valuation of the real estate. That is, in any case, even in spite of the 60 per cent provision, the bank can not make an advance which exceeds 40 per cent of the appraised valuation of the real estate for which the loan is placed.

Senator COUZENS. Whose appraised valuation?

Mr. O'BRIEN. There is a provision over on the next page with respect to appraisals.

Senator COUZENS. All right.

Mr. O'BRIEN. Subsection (b), page 15, lines 15 and following, puts further restrictions on the type of collateral security which may be received for an advance by the bank. Those restrictions are, first, that if and at the time the advance is to be made the mortgage has more than 20 years to run to maturity, that mortgage can not be accepted. Second, if at the time the advance is made by the bank the unpaid principal of the home mortgage exceeds three-fourths of the appraised valuation of the real estate, if the loan is an amortized loan or exceeds 60 per cent of the appraised valuation if the loan is not amortized, that mortgage can not be accepted as collateral.

In addition to that, if the unpaid principal of any loan is in excess of $15,000, it is not eligible to secure an advance under this act.

Senator COUZENS. My understanding was that this $15,000 was limited to the principal, but I see you have it here as unpaid principal. Mr. O'BRIEN. Unpaid principal; that is right.

Senator COUZENS. So that the mortgage might be a $100,000 and reduced to $15,000.

Mr. O'BRIEN. That is quite true.

Senator COUZENS. That is not my understanding. My understanding of the purport of the law was that no loan was to be made or home supported which exceeded in valuation $30,000, and therefore the $15,000 limit was placed there.

Senator WATSON. Where did you get that conception?
Senator COUZENS. I can not tell you.

Mr. O'BRIEN. In that respect the bill has not been changed by the committee.

Senator COUZENS. I might say in that connection that I participated in the discussion in which that very question was raised, and some of the strongest advocates for this legislation said that this was not proposed for the purpose of aiding homes that cost $40,000, $50,000 or $60,000, but was, rather, proposed to limit the support to persons desiring homes that did not in any sense exceed the original cost of $30,000. In other words, I understand that the President at one time made a public statement to the effect that his limit is proposed to be $20,000, and I took the position that $10,000 was enough for the Government to interest itself in, and that would mean that it would only interest itself in a home that might not cost more than $20,000, but it now seems by the wording of this bill that any kind of a home, no matter what its luxury or style or elegance may be, may be helped under this plan if the original mortgage has been reduced down to $15,000.

Mr. O'BRIEN. Yes.

Senator COUZENS. That is not my conception of the bill.

Mr. O'BRIEN. In that connection, lines 1 to 5 provides for appraisals. Those are appraisals not only for the purpose of subsection (b), but also for the purpose of subsection (a). That is, appraisals under 3 under which the loans can not be for more than 40 per cent of the appraised valuation of the real estate, and also for the purpose of ascertaining whether the unpaid principal of the home mortgage exceeds three-fourths of the appraised valuation under subsection (b). That, I think, Senator, answers your question with respect to whose appraisal. The appraisal has to be established under such evidence as the board may require, but there is a suggestion made in the bill that it may be established by a certification to the bank by the borrowing member. That does not, however, prevent the board from requiring such other evidence as it wants to establish that appraisal.

The bank is also given the privilege to make appraisals or such other investigations as it thinks necessary.

There is a further restriction that no mortgage can be accepted as collateral security for an advance if any officer or director, and so forth, of the bank or of the borrowing institution is personally liable thereon, unless the board specifically authorizes that mortgage to be accepted as collateral.

Senator MORRISON. Would it be permissible for me to go back to this question you were talking about just now.

Mr. O'BRIEN. Certainly.

Senator MORRISON. On page 15, 3 at the bottom there: "The npaid principal of such home mortgage loan exceeds $15,000."

Why not just say the principal, if we wanted to do that? Would that amend it? "The principal of such home mortgage loan exceeds $15,000." Scratch out the "unpaid.'

Mr. O'BRIEN. Yes.

Senator MORRISON. Will you just make a note of that, so if we want to use it in that way we can.

Mr. O'BRIEN. Yes.

Senator MORRISON. So it will make the original amount of the mortgage $15,000 instead of the unpaid principal. I do not know that I favor that, but I rather think I do.

Senator WATSON. Suppose a man has an original mortgage of $50,000 paid down to $15,000, under the terms you are proposing that would shut him out from a loan.

Senator COUZENS. Why not?

Senator WATSON. If he owes only $15,000 on $50,000 it would be safer than to borrow $15,000 on an original proposition.

Senator COUZENS. I understand that this legislation is not proposed along the line of safety, but, rather, to promote home building. Senator WATSON. That involves a question of policy, Senator. Senator COUZENS. Yes. I am not discussing it. I am just raising the question. That can be taken up later on, when we have other witnesses.

Senator MORRISON. I think it involves the question of safety, certainly.

Senator WATSON. Yes.

Senator MORRISON. Cutting down the amount that would go through. But there is another question involved, and that is the question of helping folks who do not need it, but who nevertheless get the money.

Senator WATSON. Yes.

Senator COUZENS. Let's go on. We can discuss that later.

Senator WATSON. We can discuss the broad question of policy when we get the men in here who are familiar with that.

Senator MORRISON. I just wanted this gentleman to prepare an amendment for me so if we did want to do it we could do it without much trouble.

Senator WATSON. Yes,

Mr. O'BRIEN. Subsection (c) of this section 8, page 16, lines 15 and following, provides that in addition to the collateral the member trying to secure advances must put up, he must put notes and obligations, and the advances shall bear the rate of interest that the board determine.

It also provides that the bank shall have as security for the advances made to the member the stock which such member owns. The last line of that subsection deals with the aggregate amount which may be borrowed by any member, and that can not exceed at any time twelve times the amount paid in by the member. That includes, of course, the case in which there is a deposit in lieu of stock subscriptions Senator COUZENS. In other words, I understand that your inter pretation, beginning at line 15 on page 16, of the language "such advances shall be made upon the note or obligation of the membe secured as hereinafter provided" means that in all cases that accom panying the security must be the note of the borrower.

Mr. O'BRIEN. That is quite so.

Mr. O'BRIEN. Page 17 has more to do with what the member must do to get advances. That is, he has got to enter into an unconditional obligation to pay off his advances and pay his interest and any unpaid costs. The form of this obligations and the terms of the obligation are to be fixed by the bank, with the approval of the board.

The bank is also given authority to require additional or substituted collateral whenever the bank deems that additional collateral is necessary for its protection. In such a case the member who is securing advances must put up additional or substituted collateral. The sentence beginning on line 11 of page 17 deals with the power of one bank to sell to another bank any advances which it has made to a member. That is, you have this situation: A bank in the district of New York has made an advance to a cooperative bank in New York State. It is possible for that bank in New York to sell that advance to a bank in Boston. It can sell it in part. It can allow participation in that advance. Of course, there is a provision with respect to the assignment of securities which have been deposited for that advance.

Section 9, which begins on page 17, line 23, specifies the general powers and duties of the banks. This relates chiefly to banks borrowing money under section 9 (a). The bank is given the specific authority, subject to the approval of the board, to borrow money and give security therefore and to pay interest thereon. It is also given authority to issue bonds and debentures, having such maturities as may be fixed by the board, secured by the deposit of the home mortgages.

The board, by subsection (b), page 18, line 5 and following, is given authority to prescribe rules and regulations governing the assignment, deposit, custody, and so forth of the home mortgages securing the bonds and debentures, and is also given the authority to prescribe rules and regulations governing the form and terms of the bonds and debentures, and the conditions under which they may be issued or retired.

Lines 11 to 14 provide for the depositing in trust with the trustee, on behalf of the bondholders, whoever he may be call him registrar, or whatever you may term him-the home mortgages which will secure the bonds or debentures issued by the bank. The bank has got to get some money so it issues bonds and debentures. The trustee is going to get some security for them, and the board provides rules and regulations for the deposit of the home mortgages as security. The next subsection (c), on that page, lines 15 to 23, is quite complicated.

Senator WATSON. All of it is.

Mr. O'BRIEN. The provision in brief is that the amount of home mortgages which the trustee for the bondholders holds as security for bonds and debentures shall as nearly as possible equal 190 per rent of the total outstanding amount of the bond issue. One hundred and ninety per cent is with respect to the aggregate unpaid principal of the home mortgage loans secured by the home mortgages deposited 3 collateral for the bond issue. That is, the trustee for the bondholders has got to have in his hands not less than 190 per cent of the

bond issue in unpaid principal of the home mortgages which he has in his hands as security for the bondholders.

Senator CoUZENS. Then I suppose when these mortgages are paid down or anything paid on them, there is a provision made for the substitution of other collateral.

Mr. O'BRIEN. There is?

Senator CoUZENS. Yes.

Mr. O'BRIEN. It is possible for the trustee to secure cash instead of home mortgages, but the theory is that he will only secure cash in a very narrow class of cases. In the main the trustee is to have home

mortgages deposited as security instead of cash.

Senator COUZENS. Is there any provision in the bill providing who shall be a trustee under the mortgage?

Mr. O'BRIEN. NO. There is nothing said in that respect. There is authority in the board to appoint officers. We have not provided specifically who is going to appoint the trustees for the bondholders. Senator COUZENS. Is there any inhibition against the bank itself being the trustee for the mortgages, to secure the debentures?

Mr. O'BRIEN. I do not think there is any express inhibition, but I rather think that would be unlikely.

Senator COUZENS. It may appear unlikely; it should be unlikely, but as a matter of fact, we find many of these international bankers who are acting as trustees for sinking funds now, on many of these bonds that have been sold in this country. I think it is bad policy. Mr. O'BRIEN. That is a question we did not have time to go into. Senator COUZENS. Just make a note of it, so we may consider it later on.

Senator WATSON. That is a good point too, Senator.

Senator MORRISON. What would be the objection to making some highly respected board of the Government the trustee rather than the bank?

Senator COUZENS. We will discuss that, Senator, when we get into that.

Senator WATSON. Will you make a note of it, Mr. O'Brien.

Mr. O'BRIEN. Certainly. I must say that I am not too familiar with this provision in that respect. We really did not have an opportunity to go into this appointment of trustees very thoroughly. Senator WATSON. You may go on.

Mr. O'BRIEN. Subsection (d) on the same page, lines 24 and 25, and down to line 6 on page 19, relates to the depositing of additional home mortgages to secure the bonds and debentures, and then there is the express provision at line 2:

Except that when in the opinion of the board home mortgages are not available for such purposes, it may permit, for certain limited periods, as it may deen advisable, the deposit of cash in lieu of the deposit of substitute or additiona home loan mortgages.

The idea is that in the main the trustee for the bondholders wil have home mortgages as security, and in that very narrow class o cases referred to the trustee may be permitted to get cash in lieu o home mortgageş, either in substitution or otherwise.

Page 19, subsection (e), line 7 and following, relates to the rates o interest which shall be paid by the banks on their obligations.

Senator COUZENS. May I ask the witness at that point why the fixed the limit of seven years, in line 10.