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Mr. HOPE. I understand that, but I was just wondering if you

felt that you could sell the bonds at an interest rate which would enable you to continue to make loans at the present rate of interest without loss to the Government?

Governor MYERS. It depends upon the conditions in the bond market that cannot be foreseen at this time. I cannot pass judgment on that.

Mr. HOPE. Now, if I understand the new bill correctly--and I have not had an opportunity to study it carefully-a larger proportion of the $2,000,000,000 which is set aside for loans will be diverted into Land Bank Commissioner loans than was originally contemplated. If I understand it correctly, you are to use $800,000,000 of the $2,000,000,000 for Land Bank Commissioner loans, leaving $1,200,000,000 which would be available for land-bank loans, as I understand it?

Governor MYERS. $1,400,000,000 will be available for land-bank loans, since the $200,000,000 appropriated last May is a part of the $800,000,000.

Mr. HOPE. That would be $1,400,000,000

Governor MYERS. The $800,000,000 is the outside figure, and merely represents our judgment of the proportion at the present time. The Commissioner's loans constitute about one third of the present total of all loans made; but more recently they have been running about 40 percent of the total. On that basis, 40 percent of the $2,000,000,000 would be $800,000,000. These figures which we are considering here were based on the best possible estimate we could make. We thought they should be made high enough to permit the making of as many Commissioner's loans as are needed. These loans are important in cases of somewhat greater distress. They permit the refinancing of the more heavily involved farmer, and are helpful in obtaining the scaling down of excessive debts. Thus, these loans make it possible for the good farmer to rearrange his debts so he can handle them. In almost all of the really distressed cases, the Commissioner's loan has been necessary for refinancing the debt of the farmer.

Mr. HOPE. I am entirely in accord with that plan for refinancing.

Governor MYERS. It is just permissive. I do not know that $800,000,000 of Commissioner's loans will be needed, but we would like to be able to use that much if necessary to meet the situation.

Mr. HOPE. Yes. I just wanted to be sure that I understood it. Mr. GLOVER. Mr. Chairman, I would like to ask a question.

The CHAIRMAN. Just a moment. I believe Mr. Hope has not finished.

Mr. HOPE. I would like to ask one or two more questions along that line.

The CHAIRMAN. All right.

Mr. HOPE. I find that the main criticism of the Farm Credit Administration at this time by farmers is the requirement that the proceeds of the Commissioner's loan must be used to liquidate all indebtedness.

Governor MYERS. Yes.
Mr. HOPE. Not only the indebtedness on the land but all indebted-

There has been a great deal of criticism among the farmers of the Farm Credit Administration on this point, and I understand it to be the position of the administration that the law requires this to be done. Now, I do not read the law that way, and I am just wondering what you might be able to say in that connection. I have frequent inquiries about this matter from farmers and borrowers and I would like to know what prompts that interpretation of the law because I would like to be able to advise them correctly about it.

ness.

Governor MYERS. Mr. Chairman, may I ask Mr. Goss to answer that?

The CHAIRMAN. Yes.

STATEMENT OF HON. ALBERT S. GOSS, LAND BANK COMMIS

SIONER, FARM CREDIT ADMINISTRATION Mr. Goss. Mr. Chairman, you will realize that the law was very broad in its provisions. A great deal was left to the administration. When we came to work out the program for its administration, we were confronted with two or three problems which apparently compelled us to reach determinations which were not clearly outlined within the law. Wherever the law mentioned refinancing of debt it spoke of the reduction and the refinancing of debts. We went to the debates in the committees and we went to the debates on the floor of Congress and finally reached the conclusion that it was the purpose of Congress that we do the thing in this way: That we put the farmer in a position where he would have a fighting chance to work his way out; that if we just merely transferred a certain portion of the farmer's obligations over to the Government, and allowed a sufficient portion of it to remain as a hang over, it would swamp the farmer so that he could not work his way out. So we came to the conclusion that it was the intention of Congress first, that the farmer be put in position to work his way out; and, second, to give the creditor as much as could be paid and still leave the farmer so he was not swamped. You will recall that the loans were to be made in such amounts that the total of the first and second mortgages would not exceed 75 percent of the value of the farm property; and, the law also said normal value. If you desire to have me emphasize how we arrived at the normal value I will be glad to do so. But, anyway, we adopted a program for determining the normal value, which was considerable in excess of the distress values which prevailed at the time the law was passed. And, the 75 percent of normal values, in most instances, represented practically the total value of the debt today.

Governor MYERS. Of the property today?

Mr. Goss. Yes, total value of the property today, I mean. Now we were confronted with this problem: Were we to lend more than the value of the property, we would be faced immediately with the proposition that many people would proceed to sell out to the Federal Government through the Commissioner. And so we felt, when we analyzed the whole situation, that Congress had reached a very wise determination in setting the maximum loan figure at 75 percent. In doing that a program was offered to the farmer so that he could work his way out.

Now, if you will take your pencils and follow me for a moment I will just outline for you about what we were up against. The principal factor in determining the value of land is its production, because only from the production will that debt ever be paid in normal cases. And so, in order to get at the value we first determine the average production of the land. Having determined its production, we apply the values that prevailed during the 5-year period, 1909 to 1914. This gives us the gross production expressed in dollars. Next, we determine the cost of production and get the net return. We then capitalize these net returns, so it will be seen that production is the principal factor in establishing the value of the land.

Now, if I can carry this illustration through, let us suppose that we have found that the normal value of a farm is $8,000 and that we are permitted to make a land-bank loan of 50 percent; that would be $4,000; and a commissioner's loan of the additional 25 percent, which would be another $2,000.

In order to get that $8,000 valuation we have capitalized net income, we will say, on a basis of 6 percent. That would mean that we had found about $500 income. All right. Suppose now we take the combined loan, the $4,000 land-bank loan, on which he has to pay 5-percent interest normally, plus 1-percent principal, which is a total of 6 percent. The borrower would have to pay $300 annually upon the land-bank loan.

On the commissioner's loan he would have to pay 5-percent interest, or $100, and he would have to pay one tenth each year on principal, or $200, so that he would have to pay in all $600 annually. However his net income is only $500.

You can see what we have tried to do; we have to take each particular case and see what the normal income would provide.

The result in the case I have just mentioned would be that we would have to cut that loan down a little bit so that he could, in normal times, have enough income to meet the demands which are certain to follow. Were we to allow debts to remain on top of such a 75-percent loan, that would be heading the borrower straight for bankruptcy, because there would not be enough income from the farm to carry the 75-percent loan and the other debts. It is just a matter of figuring out what the farmer can carry, and we have found that we were doing no kindness to the farmer, and that we were doing no kindness to the creditor, to allow him to go ahead under a new program, which just as sure as could be would result eventually in bankruptcy and doing the job over. In other words, we felt that we wanted to carry out the whole program of refunding these debts, which had become so great that they were driving the farmers into bankruptcy, and to refund them on a basis that would enable the farmers to avoid bankruptcy and work themselves out. And with that program ahead of us we felt that it was essential that these debts be reduced within the 75percent loan, because if they were not so reduced the farmer just could not work out.

Mr. GLOVER. Mr. Chairman
The CHAIRMAN. Mr. Glover.

Mr. GLOVER. The question I started to ask was with reference, not so much to the manner in which the credit was worked out, but the criticism I have had is in the difficulty of getting the loans at all, in Arkansas. And I think that was brought about principally by the difficulty in getting any plan worked out where you could get an appraisement of the land, with the result that we had difficulty in getting loans at all. Some of the commissioners, as I understand, took the position that the Federal land banks would first have to

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pass on the commissioner's loans and turn them down before it would make them available to be handled through the commissioners. Then, they would have to go back and file a new application for practically the same thing. Is there anything which justifies action of that kind ?

Mr. Goss. I believe that condition has been corrected, Mr. Glover. When the Farm Credit Administration was first set up it was thought that greater speed and greater saving could be obtained by appointing these special agents of the Land Bank Commissioner for each land bank district to make these applications and to make the commissioner's loans separately. But we ran into innumerable complications, largely centering around the appraisals, and largely centering around the desire of everybody to get a commissioner's loan. We soon found that plan did not work out so that we had to change and make the land bank the agent of the Land Bank Commissioner, with this thought in mind, that they would lend just as much as could be loaned through the land banks and then add a supplemental or commissioner's loan to that. For the first few months we did have a great deal of confusion in many areas, including Arkansas, I think.

Mr. GLOVER. Now, the set-up in this bill provides that the bond may be accepted in full payment for mortgages. Now why not have an independent set-up from the Federal land bank so that you will not run into this same difficulty; why not have an independent set-up from the Federal land bank?

Mr. Goss. Shall I answer that question?
Governor MYERS. Go ahead.
Mr. Goss. I do not quite understand your question, Mr. Glover.

Mr. GLOVER. The point I had in mind was this: I find that the set-up in this bill provides for the exchange of bonds, both principal and interest being guaranteed by the Government, which makes them just as good as cash, for mortgages. Now why not have an independent set-up which would make the handling of these loans independent from the Federal land banks altogether, so that they will pot have to come together at all in making the loans, and by that means cut out a lot of the red tape that they have to go through now and you could do for the farmer what is intended under the law should be done.

Mr. Goss. If we are to make these loans on a sound basis it takes a certain amount of appraisal work and a certain amount of what you might call red tape to see that the title is correct, and that takes time, of course, it is true. We believe, however, that the land banks are now equipped to handle that as well as it can safely be handled by any group if we were to have a separate organization. In other words, we would have to have two transactions to handle the same thing. And, we think the land banks should eventually go back into the money market to secure the funds to lend when the money market becomes more stable. We want to have the loans flowing through the land bank cooperative system rather than calling upon the Federal Government for funds to make the supplemental loans. We think it can be worked out through one organization. If that is done there will be no need for an additional organization to refund the loans. If it can be worked out under the 75-percent limitation it can be done with the same machinery which is operating for the land bank and obviate the necessity of two separate organizations. The landsbank could do just the same thing as two organizations and there would be no duplication of effort or confusion.

Mr. GLOVER. If the system has been changed, of course, that is different, but at the first we had the plan of the person desiring a loan having to make application to the Federal land bank and after it was turned down he had to make another application.

Mr. Goss. He only makes the one now.

Mr. GLOVER. In other words, the theory was that they had to make the application to the Federal land bank before they were eligible to file an application for a loan to the Commissioner.

Mr. Goss. That has been changed.

Mr. GLOVER. And in turn they had to make application to the Commissioner for the same thing.

Mr. Goss. That has been corrected.
Mr. GLOVER. It has been changed?

Mr. Goss. That has been corrected. A single application is put in now. They do not make application to the Federal land bank and then to the Commissioner; they apply for the amount that they want.

Mr. GLOVER. But they cannot come to the Commissioner until they have dealt first with the Federal land bank?

Mr. Goss. They do not apply to the Commissioner for a loan at all. The applicant will apply for $1,000 or $2,000 and then when the farm is appraised, the land bank determines how much will be allocated to the land bank and how much to the Commissioner's loan. The practice of applying for two different loans has been changed. There is only one application now.

Mr. GLOVER. I know that it has been done; I am sure that two applications were made in some instances.

Mr. Goss. Yes; but that practice has been abandoned and the one application goes to take care of both loans. Mr. GLOVER. That is all. Mr. PIERCE. Mr. ChairmanThe CHAIRMAN. Mr. Pierce. Mr. PIERCE. My question relates to your procedure in determining what price you use in appraising the farm. Prices have varied very greatly during the years, since 1914, and if you were to take the produce prices, for instance, at this time, he would not have a very good chance; if you are going to figure the prices on farm produce some of them would not get any value at all.

Mr. Goss. The instructions to the appraisal division are, with certain exceptions which are made necessary by obvious changes in economic conditions, that it will determine the production of the land and apply the prices which prevailed during the 5-year period, 1909 to 1914, which roughly was approximately 40 percent above the present.

Mr. PIERCE. The present prices?
Mr. Goss. The present prices.

Mr. PIERCE. If they use the present prices some of them would get no loans at all?

Mr. Goss. That is correct; in many areas they would not.
Mr. PIERCE. Yes.
Mr. Goss. And in many areas they would not receive any loan.

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