issued at varying rates, 2 percent, 3 percent, 4 percent, or 412 percent, whatever the particular conditions prevailing at the time may be. But however interest rates may differ, all debentures are debentures of the same class. They are merely issued in serials. I cover that a little more fully later on.

The CHAIRMAN. All right. You may proceed.

Mr. BARKER. Mortgages owned by the mortgage bank will be for long term and properly amortized. In the past, the custom has been for lending institutions to take mortgages for a 3- or 5-year period, requiring no amortization. As these mortgages were frequently renewed, it often happened that the mortgage indebtedness remained at the same level for 10 years or more, while the property continued to depreciate. Moreover, when defaults began to occur, practically all mortgages were in default on principal, and legislation enacting moratoria was made necessary. Investments secured by these mortgages were likewise in default. People who had planned to receive their principal within a given time were subjected to disappointment and frequently to serious inconvenience. The market for the sale of these investments collapsed due to the defaults, and bonds and certificates were sold at sacrifice prices.

Short-term-mortgage financing, experience shows, may prove equally disastrous to mortgagor and mortgagee. No mortgagee can afford to disregard the interests of the mortgagor and remain in a position where he must trust to the mortgagor somehow or other being able to refund or refinance himself at maturity date. The trouble has been with mortgage financing that neither mortgagor nor mortgagee seemed to realize that the transaction involved a debt which must be paid. In many cases of short-term mortgages the ink was hardly dry on the documents before the mortgagor was confronted with a problem of refinancing, all of which laid him open to renewal fees and expenses and rendered him averse to taking on any amortization burden. All this will be avoided by the mortgage bank, which will lend money on long-term mortgages properly amortized. Our proposal provides that mortgages shall be for periods of not less than 10 nor more than 20 years, and shall be amortized at a rate of not less than 2 percent per annum. requirements will place in the vaults of the mortgage bank securities which will endure through long periods of time and will thus pass through various changes in economic conditions. At the same time, the constant payment of amortization will tend to enhance the value of the securities as time goes on, and they will furnish a sound basis for the issuance of debentures by the mortgage bank.

These

Appraisals are to be regulated and scientific: We have long been aware that many of the difficulties experienced in the past with regard to mortgage investments have been due to haphazard methods of appraisal. Agitation for the improvement of methods of appraisal has been going on in this State for a number of years. Appraisers themselves have organized to promote this end. The time has come when institutions which lend money on mortgage and sell their obligations to the public cannot be allowed to accept any appraisal that seems proper to them under the circumstances. Our plans call for rigid supervision of appraisals by the department of banks.

We wish to raise appraisers to a professional standing and to require each and every appraiser in the community to be licensed by the State, after having passed an examination with regard to his fitness and character. Mortgage banks will lend money only upon appraisals by licensed appraisers. Such appraisals will contain specific information required by statute, and will be subject to the disapproval of the superintendent of banks, so that, in the case of each loan made by a mortgage bank, the superintendent of banks will be in a position to pass upon the soundness of the appraisal. We believe that in appraising property more attention must be given to income, the present and convertible use of the property, trend of population and possible change in the character of neighborhood than to mere present principal value of the property.

This will result in scaling down the valuation by appraisers. While the proposed statutes require that no loan shall be made for more than 60 percent of the appraised value of any property, we think that, with this rigid supervision, the appraised value will be so low as to make the 60-percent requirement a very safe margin.

There must be personal responsibility for appraisals, and only individuals should be licensed, although corporations and firms, as in the case of insurance brokers and others, may act through designated, licensed individuals. With responsibility personal, with disciplinary action possible, even including revocation of license, there should be a tendency toward conservatism on the part of the appraiser. We are not foolish enough to believe that mere licensing in and of itself will make a good appraiser out of a poor appraiser.

I might interpolate here and say that we believe the recommendation to license appraisers is merely the first step toward raising the general standards of the profession. In the insurance business

a battle was waged for years before we were able to obtain the licensing of brokers. After they were licensed the battle was carried on looking to a written examination of insurance brokers, and after we had accomplished that, then legislation was introduced requiring the serving of an aprenticeship in order for an applicant to receive an insurance broker's license.

I believe the American Institute of Appraisers, and other similar professional bodies, will join heartily in any and all suggestions to raise the tone and standard of appraisers. But all that we are doing at the present time is recommending governmental supervision through licensing.

The CHAIRMAN. All right, Mr. Barker.

Mr. BARKER. In addition to the benefits that will flow directly to the mortgage bank and to its debenture holders, great benefits will flow to the community generally from this supervision of appraisals. A wide equity will be left in each property which will be a fruitful source for junior financing. There is no reason why junior financing should not have a legitimate and proper sphere of activity in the community; and this method of regulating appraisals should limit first-mortgage loans to modest proportions, and thereby will provide a market which will not only enable the community to engage in junior financing, but will leave a satisfactory margin for equity holders to trade in from time to time and thus result in stimulating the real-estate activity throughout the State.

The mortgage bank will have adequate capital, surplus, and reserves. Our plans call for a minimum capital for each mortgage bank of $3,000,000, and a minimum paid-in surplus equal to the capital, plus a reserve fund, to be accumulated from the net earnings of the bank, also equal to the capital. Thus a bank organized with a $3,000,000 capital will ultimately have $9,000,000 in capital, surplus, and reserves. Of this, the surplus and reserve fund, equal to $6,000,000, is required to be liquid. This will form a substantial support for the outstanding debentures of the bank and will enable the bank to weather periodic storms that may occur. While in foreign countries we have found that there is no insistence upon the maintenance of liquid reserves and surplus funds, we believe that American systems and the psychology of the American investor require that such liquid reserves be established, if the confidence of the investing public is to be secured.

The fact that we suggest at the outset a surplus equal to the paid-in capital does not in the least reflect upon the character of the bank's operations. While the records in other countries show that the constant source of income from interest, amortization payments, and principal payments provides over the long term sufficient liquidity within the bank, we believe it to be wise, until the bank has been in existence long enough to provide for cash turnover and the consequent liquidity, to provide arbitrarily for a substantial surplus.

The extent to which the bank may issue debentures is narrowly limited by statute. We have found that, notably in the case of the Credit Foncier, the bank was authorized to sell its debentures to the extent of 50 times its capital. In other countries, however, narrower limitations obtain. We think that it is a good plan to limit the quantity of debentures that may be sold in relation to the capital and surplus of the bank. In the past no limit has been upon the certificates that may be guaranteed by a mortgage-guaranty company, or upon the bonds that may be sold by a mortgagebond house.

While it is not entirely clear that such limitation is indispensable to the safety of the investments, or that it will add appreciably thereto, nevertheless we think that at the beginning, at least, this limitation ought to be put into the statute, and we have thus proposed that the mortgage bank shall not be permitted to sell debentures in excess of 20 times the capital and surplus of the institution.

Senator COUZENS. I notice that this bill, S. 2914, provides that such a bank shall not be permitted to sell debentures in excess of 12 times the capital and surplus of the institution.

Mr. BARKER. This is 20 times.

Senator COUZENS. Where do they get the 12 times inserted in the bill?

Mr. BARKER. Do you mean in the Fletcher bill?

Senator CouZENS. Yes.

Mr. BARKER. I do not know.

The CHAIRMAN. That is just preliminary and is subject to change. Mr. BARKER. They vary. In my studies I find they vary from 8 times to 50 times, and we have arbitrarily selected 20 times as our judgment.

The CHAIRMAN. That is about right, I take it?

Mr. BARKER. And we have proposed that the mortgage bank shall not be permitted to sell debentures in excess of 20 times the capital and surplus of the institution. It may be that in later years it will be possible to extend this ratio, but at the present it seems a wise policy to include this limitation also.

The term of the bonds to be issued by the bank we think may be safely left to the judgment of its directors. In the case of Credit Foncier the bonds are usually for a term of 75 years, occasionally 50 years, and the shortest term of any of the bonds issued by that institution was 35 years. Should a mortgage bank issue its bonds for, say, 50 years, whereas its mortgages are for terms of 10 years, 15 years, and 20 years, it will produce the desired "spread", "average" and "turnover". Credit Foncier, established in 1852, in France, has weathered two major wars in one of which France was defeated and the other of which (the World War) it is claimed by many was more disastrous. In addition, Credit Foncier has survived an 80 percent deflation in the franc. No greater testimonial to the theory of long-term mortgage financing can be found.

The management and supervision of the bank: One of the most important items in the regulation of mortgage investments is the necessity of securing prudent management and adequate government supervision. We have included provisions in our proposed plan which are to that end, and provide both of these. In the first place, we have limited the board of directors to not more than nine people. I might say at this point that we have received some criticism for that suggestion, it being argued that with a limited board of nine it might result in having a number of executive officials of a bank on the board, and consequently might end up in having so-called internal control. In fixing the number at nine it was purely arbitrary with us, and it is not a very material point in our recommendations.

A small group of that type will essentially feel a greater responsibility to the institution that it serves than the larger, unwieldy groups which manage other financial institutions. They will have a feeling of direct contact with the affairs of the bank which each director who assumes the office will at once realize and appreciate. Moreover, no one can be a director of a mortgage bank who does not first gain the approval of the Superintendent of Banks, and the Superintendent will therefore be in a position to make careful selection among financial people of the community, to that end that only those who have experience, ability and integrity will be permitted to serve these institutions. In addition, the bank is required to report—and I want to say that I consider this a very important item, gentlemen of the subcommittee-quarter-annually to the Superintendent of Banks with regard to all its transactions, giving particularly a statement of all defaults suffered by the bank during the period of the report, and all that has been done in connection with these defaults. The Superintendent is thus kept constantly in touch with the affairs of the bank; he is aware of what is going on within its walls; and he is enabled to take such steps as may seem wise to him from time to time to prevent, in advance of the event, the happening of any untoward contingency.

One of the greatest difficulties encountered today in the supervision of financial institutions by public authorities, such as the

Superintendent of Insurance or the Superintendent of Banks, has to do with man power adequately to check, supervise and examine these institutions.

It was very forcefully and fully brought out in the Moreland investigation, conducted a year or more ago at the direction of the Governor of the State of New York, that the best the superintendent of insurance could do was to get around every 2 or 3 years to make a real examination of insurance companies and mortgage guaranty companies. Our thought is that the subject of defaults being currently suffered by mortgage banks as respects payment of taxes and interest, is exceedingly important.

No truer barometer of the trend of events in a mortgage bank can be found than in the current record of defaults as respects the payment of principal, interest, taxes, et cetera. If, therefore, a quarterly, cumulative and running account of the occurrence and the treatment of defaults is required of the bank the supervising authorities will prevent many of the evils which have been laid at the doors of the mortgage guarantee companies in the past.

Payment of dividends: We think that those who invest in mortgage banks and who have the enterprise to carry on its affairs and to provide the service which it will inevitably have to give to the community, should be rewarded by fair and reasonable dividends; but we think that the business of the mortgage bank will be a profitable one, and that its stock will be widely sought by the financial fraternity in the State. At the same time, we have put provisions in our proposed legislation to prohibit the payment of dividends whenever the surplus funds of the bank or its reserves are in any way impaired, and we have imposed severe penalties upon the violation of this statute. We do not wish to see again a time when directors will declare dividends to their stockholders while their institution is suffering serious losses and the affairs of the investors are in a precarious condition.

As to the activities of the mortgage bank

Senator COUZENS (interposing). Before you go into that, let me ask you this question: Is there any inhibition against discounting mortgages on vacant property?

Mr. BARKER. No.

Senator CouZENS. Shouldn't there be?

Mr. BARKER. We have given earnest thought to that. We think it is a question of degree and not of kind. We have conducted exhaustive investigations in our commission, with the result that many ideas have been exploded. I have had people suggest to me that a mortgage bank should absolutely prohibit consideration of vacant land, theaters, garages, hotels, or so-called specialties.

Senator COUZENS. Didn't you state a while ago in your testimony that there were found in the portfolios of many of these mortgage companies mortgages on vacant property?

Mr. BARKER. I did. But the difficulty with that was that the distraught investor found himself saddled with vacant land, without the benefit of income-producing property. In other words, experience has shown that where you get a wide cross-section of real estate, with intelligent and proper appraisals, there is nothing inherently dangerous. For instance, in putting into the general pot,