with one large mortgage on an individual piece of income-producing property because, for one thing, we see in this situation the application of the great investment law of averages which is operative in real estate as it is in every other form of investment to minimize the risk of loss.

There have been many attempts, both local and national, to overcome the handicaps which investment and mortgage securities on real estate have labored under. It might be well at this point to review briefly some of these efforts.

We have, for example, the guaranteed mortgage which is sold to the investor usually by a large company with great experience in dealing with property in a given locality, which large corporation pledges its capital and surplus as a guarantee fund to make sure the payment of the mortgage which it sells. A further step in this direction is the sale of the guaranteed mortgage certificate by similar companies, the security behind which being a group of first mortgages deposited in a trust fund, against which mortgage certificates are issued in amounts to meet the requirements of smaller investors.

We have the large central mortgage bank, frequently encountered in Europe and perhaps typified best by the Credit Foncier of France. Here was an institution which issued its own securities against the deposit of first mortgages which were regarded as of such high character as security and having such a broad appeal, from the smallest investor to the largest, that such securities frequently sold at a lower rate than ruled in the market for industrial and railroad securities.

Up to the present time in this country, the Federal farm loan banks and the joint-stock land banks represent the most important step to nationalize realestate securities, their operations, of course, being limited to one form of real estate only-the farm. While many of the joint-stock land banks, due to depression in the farming industry and other causes, have fallen on evil days, the operations of the Federal farm loan banks and the market value of their securities have held up very well, all things considered. That they have resulted in great savings to the farmers of the borrowing class and have broadened the market for these securities is a well-known fact. Prior to the formation of the Federal farm loan banks, investing in farm loans was carried on in a very limited way due to lack of knowledge of the values, but certain investing groups in the East were able to make a very high rate upon their money by investing through skilled agents in the West who had knowledge of farm values in these localities. All this was changed when the Federal Farm Loan Act went into effect. Thousands of investors who had never dreamt of buying a farm mortgage bought the bonds of the Federal farm loan banks. Small investors who might need their funds felt safe in investing in farm-loan bonds because there was a market available. The home loan bank bill would extend the enormous benefits, heretofore enjoyed as far as real estate is concerned only by the farmer, to the owner of the urban house. The proposed limit on the size of such mortgages will bring these benefits within the reach of probably the greatest number of people in the United States. With the migration from the farm to the city which has gone on during the last 50 years, by far the greater part of the population of the United States now resides in the towns and cities of the country, and in so far as such town dwellers own their own houses and the same are of modern size, the benefits will fall upon them directly but all forms of urban property will benefit. To the individual house owner the benefits should accrue ultimately in lower interest rates on his mortgage. If lending companies and mortgage companies discount these mortgages with the home loan banks it will release their funds for additional real-estate loans and in consequence make more money available for lending to other forms of improved property. A large new field to the investor will be opened up, which would enable him to participate in the mortgage market in proportion to his means in a way that has heretofore been possible only to relatively large investors possessed of special real-estate knowledge.

The buyer of home loan bank bonds should find a ready market for them and so the small investor would be encouraged to put his money in this form of security, where he now dreads the thought of being locked up in a nonliquid investment.

In the relatively large bond issues of the new home loan banks, the law of averages before referred to will have very full scope and effect. The investor, instead of buying a mortgage on one man's house, would with the same money, by purchasing a home loan bond, secure a first mortgage interest in the houses of perhaps a thousand men. We have therefore a twofold advantage in the new

home loan bank:

To the home owner new and greatly increased sources of funds upon which he can borrow upon bond and mortgage at probably a lower rate of interest than at present.

To another great class, the small investor, the opening up of a new field for saving in one of the safest investments ever devised by man.

While the home loan bank bill will require the amendment set forth in the beginning of this article in order to fully develop the benefits to be derived from it, yet it seems that the bill-promising as it does great benefits to the home owner and the small investor-should have practically the unanimous support of the entire country.

Senator COUZENS. Is there anything else?

Mr. CLEMENT. There is nothing else. I think I have covered all the ground I want to cover.

Senator COUZENS. All right, sir. Thank you.

Are there no other witnesses to-day?

We will adjourn.

(Accordingly, at 3 o'clock p. m., the committee adjourned to meet again on Tuesday, January 19, 1932, at 10 o'clock a. m.)

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

TUESDAY, JANUARY 19, 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 in the Capitol, pursuant to adjournment on January 16, 1932, Senator James E. Watson presiding. Present: Senators Watson (chairman of the subcommittee), Couzens, Townsend, Bulkley, and Morrison.

Senator WATSON. The subcommittee will be in order, and we will proceed with our hearing. Mr. Lofgren.

STATEMENT OF H. J. LOFGREN, MORTGAGE SECURITY CORPORATION, NEW YORK CITY

Senator WATSON. What is your name?
Mr. LOFGREN. H. J. Lofgren.

Senator WATSON. Where do you live?

Mr. LOFGREN. South Orange, N. J.

Senator WATSON. Are you connected with some financial institution there?

Mr. LOFGREN. I am connected with several financial institutions; and the one I am appearing for to-day is the Mortgage Security Corporation.

Senator WATSON. What is that?

Mr. LOFGREN. That is a mortgage company which financed mortgages during the upgrade of this mortgage situation.

Senator WATSON. During the what?

Mr. LOFGREN. During the time when everybody was making mortgages rather freely, I should have said.

Senator WATSON. What is the capitalization of that organization? Mr. LOFGREN. $3,000,000.

Senator WATSON. How old a concern is it?

Mr. LOFGREN. It was in 1921, I believe, that we started. I was not with the company at that time. I have only been with it in recent years, since it got into some financial difficulties.

Senator WATSON. When did it get into financial difficulties?

Mr. LOFGREN. I should say they began in 1928.

Senator CouZENS. What caused that situation?

Senator WATSON. Yes; I was just going to ask you that question.

In 1928 nearly everything was on the upgrade.

Mr. LOFGREN. Well, the difficulty with the mortgage and realestate situation started I meant about that time. In fact, I think it

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started a little before that, in 1927, and in 1928 mortgage difficulties began, some year or two ahead of the stock-market crash.

Senator COUZENS. What type of mortgages became bad at that time, would you say?

Mr. LOFGREN. I think the home-owner's mortgage. The small fellow got into trouble at that time. The difficulty with mortgages seemed to be that they tried to pay off too much; the amortization was too heavy. In other words, I think those men in the boom period took on obligations which they could not finance when the situation became worse.

Senator COUZENS. And did it get worse in 1928?

Mr. LOFGREN. Yes; I think it did, or at least at that time it started to get worse.

Senator ČOUZENS. Why?

Mr. LOFGREN. That was in the smaller communities. The larger communities did not feel it then, but in the smaller communities, where this company made its loans, conditions started to get bad in 1928. I mean in the smaller cities, like cities of 30,000, 40,000, or 50,000 population, and from that point on up to 100,000 population. Senator COUZENS. Did you have any specific class of buildings that you took mortgages on?

Mr. LOFGREN. Practically all were home-owned residences, one and two family houses.

Senator COUZENS. Was any limit placed on the amount of the mortgage that you would take?

Mr. LOFGREN. No; there was no special limit, but the average mortgage was approximately $6,000.

Senator COUZENS. Did you take any mortgages on apartment houses?

Mr. LOFGREN. A few; I do not know just how many, but not many. Senator COUZENS. They were not the ones that caused you distress?

Mr. LOFGREN. Not immediately. Apartment houses were in the larger centers, and no trouble was caused there until approximately the time of the stock market crash. The larger properties started to go at that time, but the smaller ones started before that.

Senator COUZENS. Have you any statement that you wish to make?

Mr. LOFGREN. Yes; I have.

Senator WATSON (chairman of the subcommittee). Go ahead and tell what suggestions you have to make.

Mr. LOFGREN. I have reviewed this bill with a view to the relief which might be afforded mortgage security corporations. I think by the present terms of the bill mortgage security corporations are excluded entirely because of the provision in section 4, which states —and I will read it if I may.

Senator WATSON. Proceed.

Mr. LOFGREN. That portion reads as follows:

Such of the following as are duly organized under the laws of any State or of the United States, and are subject to inspection and regulation under the banking laws, or under similar laws, of the State or of the United States, shall be eligible to become a member of a Federal home loan bank.

These mortgage companies are not under any inspection. Of course they were organized under the corporate laws of some States,

but they were not required to submit to inspection in the sense that a bank is examined or inspected. And if that provision is read literally it would exclude every mortgage company which is not organized under the banking laws as I read the bill. That would of course eliminate a great number of mortgage companies that were in the bona fide mortgage business, as they would not benefit from this act.

Senator COUZENS. Would you approve having them come under the provisions of this section of the bill?

Mr. LOFGREN. Yes. I think they should come in under that provision.

Senator COUZENS. If that section were maintained would it not make it mandatory upon these mortgage companies who desire to come within the provisions of this bill, to come under that act?

Mr. LOFGREN. Well, you see they are already incorporated under some other act. They would probably have to reincorporate in order to bet into that situation. It would mean quite a change in their status. They would have to get a new charter, and so forth. Senator WATSON. Have you any objection to being inspected? Mr. LOFGREN. None whatever. It is only a question of not applying it at the moment.

Senator COUZENS. Are there not some other agencies mentioned as beneficiaries under this bill that do not come under it so far as the section to which you refer goes?

Mr. LOFGREN. It mentions building and loan associations. I am not certain whether they are inspected in every State or not.

Senator WATSON. I do not think they are in every State.

Mr. LOFGREN. Then that would exclude a building and loan association that is not examined by some public examining body.

Senator WATSON. I think the gentleman from Baltimore who was here the other day told us about that situation there.

Mr. LOFGREN. I did not hear him because I was not present at the time. I might suggest that that clause is rather drastic, in that it draws the line right close as to who can get in and who can not. I have a brief memorandum in longhand here of one suggestion as to how you might cover my particular company. I do not know how well that would suit the situation as to other mortgage companies, but as to my particular company I have prepared this suggestion for for section 4 (a):

Such of the following as are duly organized under the laws of any State, or of the United States, and are subject to inspection and regulation under the banking or insurance laws, or other similar laws, or whose mortgage collateral is guaranteed as to principal and interest by a company_so organized, inspected, or regulated, shall be eligible to become a member of a Federal home loan bank.

Much of the colateral of my company is guaranteed by the National Surety Co. That would give us the privilege of the mortgage-loan bank as long as we used collateral that was guaranteed by a surety company, insurance company, or title company that was inspected or regulated under other insurance laws, or the banking laws, or similar laws. It would open the door for my company and quite a few others that I know of. Whether or not the door should be opened wider than that is something I am not qualified at the moment to pass upon, but I think at least guaranteed mortgages should be admitted.

Senator COUZENS. Are all of your mortgages guaranteed?