TO PROVIDE FOR THE ESTABLISHMENT OF A FEDERAL

MORTGAGE BANK

SATURDAY, JANUARY 18, 1936

UNITED STATES SENATE,

SUBCOMMITTEE OF THE

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The subcommittee met, pursuant to call, at 10:30 a. m., in room 301, Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Bulkley, Radcliffe, and Couzens.

Present also: Senator Wagner.

The CHAIRMAN. The subcommittee will come to order. Mr. Committee Reporter, this is a hearing before the subcommittee of the Senate Committee on Banking and Currency on S. 2914. The bill is as follows:

[S. 2914, 74th Cong., 1st sess.]

A BILL To provide for the establishment of a corporation, known as the "Federal Mortgage Bank", creating a permanent discount and purchase system for mortgages on urban real estate, designed by comprehensive yet conservative action, to fill a gap in the national financial structure to the end of stabilizing mortgage practice, easing mortgage credit, and by the establishment of an adequate agency preventing periodic frozen condition in financial institutions

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be known as the "Federal Mortgage Bank Act."

SEC. 2. The President shall appoint as soon as practicable an organization committee of nine persons. The Secretary of the Treasury, the Governor of the Federal Reserve Board, the Chairman of the Board of the Reconstruction Finance Corporation, the Chairman of the Board of the Home Loan Bank, and the Housing Administrator shall be ex-officio members of said Committee. The remaining four members of said Committee shall be persons possessing a practical knowledge of real-estate and mortgage finance. A majority of the organization Committee shall constitute a quorum with authority to act.

The Committee is instructed to organize a Federal corporation, to be known as the "Federal Mortgage Bank", hereinafter called the "bank", to acquaint interested persons with the structure and functioning methods of the bank and to take pledges of subscription to its stock. The Committee shall serve for a period of six months from the date of its appointment; at the end of ninety days it shall report to the President the status of its activities.

The Committee is authorized to maintain an office; to employ legal counsel, expert aid, secretaries, and clerks, and to incur such other expenses as may be necessary in the express performance of its duties, but the total of its expenses shall not exceed $75,000. The Reconstruction Finance Corporation is authorized to advance the amount of expense up to said sum, which said advancement shall be returned to the Reconstruction Finance Corporation by the bank if and when it commences operations.

SEC. 3. When the Committee has secured pledges of subscriptions to the capital stock of not less than $10,000,000 from other than the Federal Government, the Committee shall notify pledgors to pay their subscriptions, and,

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when stock has been paid for to the extent of $10,000,000, the bank shall be declared ready for operation and, upon the filing of a certificate in due form with the Chairman of the Board of the Reconstruction Finance Corporation, the bank shall become a body corporate and shall have power

First, to adopt and use a corporate seal;

Second, to have succession after the approval of this Act until dissolved by Congress or until forfeiture of its franchise for violation of law; Third, to make contracts;

Fourth, to sue and be sued, complain and defend, in any court of law or equity;

Fifth, by its board of directors, to select, employ, and fix the compensation of such officers, employees, attorneys, or agents as shall be necessary for the performance of its duties without regard to the provisions of other laws applicable to the employment or compensation of officers, employees, attorneys, or agents of the United States, and to pay such proportion of the salaries and expenses of officers and employees of Federal or State agencies as the board of directors may determine to be equitable in proportion to their use by the bank in accordance with agreements with such agencies; to designate approved appraisers of real estate and servicers of mortgages at fees determined by it; and further to define the duties of its officers, employees, appraisers, and servicers, to require bonds for them, to fix the penalty thereof, and to dismiss at pleasure its officers and employees, appraisers, and servicers.

Sixth, to prescribe, by its board of directors, bylaws and regulations, not inconsistent with law, determining the manner in which its business shall be conducted and the privileges granted to it by law may be exercised and enjoyed. Seventh, to exercise by its board of directors or duly authorized officers or agents all powers specifically granted in this Act and such incidental powers as shall be necessary to carry on the business of mortgage banking within the limitations prescribed by this Act.

Eighth, to create reserve funds and to declare and pay such dividends as may be earned by it and as, in the judgment of the board of directors, it is proper for the bank to pay.

The bank shall transact no business, except such as is incidental and necessarily preliminary to its organization, until it has been authorized by the chairman of the board of the Reconstruction Finance Corporation to commence business under the provisions of this Act.

SEC. 4. The bank shall be conducted under the supervision and control of a board of directors, consisting of nine members, holding office for three years (except as hereinafter provided for the first board) and selected as follows:

The President of the United States, with the approval of the Senate, shall appoint three members, two of whom shall be selected from among those who are heads or directors of Federal agencies dealing with the mortgage, and the third, a person possessing an especial knowledge of real-estate and mortgage finance who shall devote his entire time to the bank and be chairman of the board.

Six members shall be elected by the stockholders, not more than one of whom may reside at the time of his election in any particular Federal Reserve district as created by the Federal Reserve Board. No Senator or Representative in Congress shall be a member of the board, nor an officer or employee of the bank. Nominations for director may be made by any stockholder, but the nomination must be in writing and received by the bank at least thirty days prior to the date set for the election. The nominee to be eligible must have had practical experience in the business of real-estate and mortgage finance. With the nomination shall be furnished a statement of the nominee's experience in connection with real-estate and mortgage finance. Officers and directors of corporations or partners in firms which are stockholders shall be eligible to serve. Voting shall be by preferential ballot as now provided for the election of directors in classes A and B in Federal Reserve banks, one vote being recorded for each share of stock hold by the stockholder. The chairman of the board of the bank, or, if he be unable to act, the vice chairman, is charged with the duty of seeing that a list and stated qualifications of the nominees for directors and a ballot is mailed each stockholder at least twenty days prior to the date fixed for the election. Voting may be by mail, but such votes to be valid must be formally signed and acknowledged by the stockholder. Directors of the bank shall receive, in addition to compensation otherwise provided, a reasonable allowance for necessary expenses in attending meetings of the board.

The Committee shall handle the detail of the first election of the board. Appointmments by the President for the first board shall be one director for one year, one for two years, and one for three years. Thereafter the annual appointment shall be for three years. Of the six elected directors, the two receiving the largest vote shall be declared elected for three years, the second two for two years, and the third two for one year. Thereafter the annual election shall be two directors for a three-year tem. Vacancies that may occur shall be filled in the manner provided for the original selection of the directors, such new directors to hold office for the unexpired terms of their predecessos.

The board of directors shall elect a vice chairman and such other officers as it may deem necessary or desirable. The vice chairman shall be a director selected by the stockholders.

SEC. 5 The capital stock of the bank shall be divided into one million shares of $1,000 each, nonassessable; five hundred thousand of said shares shall be common stock, and five hundred thousand shares shall be cumulative 4 per centum preferred stock, sharing with the common stock in dividends after the common has paid 6 per centum dividends.

The bank may sell stock only for cash and for no less than par.

No stockholder, except the United States, may hold stock in the bank in excess of 1 per centum of the bank's authorized capital. Any individual, partnership, corporation, the Government of the United States, or any State or subdivision thereof may be a stockholder.

National banks and other banks, members of the Federal Reserve System, as far as the legal effects of this Act may extend, are authorized to buy stock in the Federal Mortage Bank to the extent of 1 per centum of the amount they have invested in mortgages, and may invest in the obligations of the bank, its notes, debentures, and other evidences of indebtedness; the obligations of the bank shall be lawful investments and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority or control of the United States or any officer or officers thereof.

The Secretary of the Treasury, on behalf of the United States, shall subscribe to one hundred thousand shares, the authorized common stock of the bank, paying therefor, on call of the Committee or the directors, in such manner that it shall have paid in cash 10 per centum of the total cash capital made available to the bank. In order to enable the Secretary of the Treasury to make such payments, the Reconstruction Finance Corporation is authorized and directed to allocate and make available to the Secretary of the Treasury the amount of such sums, to be paid out of unappropriated balances. At the instruction of the President or of Congress, the Secretary of the Treasury shall pay the subscription on behalf of the United States in full or in such part as may be directed.

SEC. 6. The bank may lend on mortgages to, or buy mortgages from, persons, partnerships, funds, corporations, associations, and banking or other institutions complying with these two requirements: First, that they have been commonstock holders for at least six months prior to the proposed lending or purchase, and, second, that they are engaged in the business of using their own funds in the making of real-estate mortgages on urban property. The six months' period shall not apply to sellers or borrowers during the first eighteen months of the bank's existence.

SEC. 7. The bank may purchase or lend upon first mortgages, or other similar instruments of obligation defined in the Home Loan Bank Act, as amended, as eligible for lending, on improved urban property in such maximum and minimum amounts as the bank by regulation may determine, as follows:

(a) Any mortgage insured prior to July 1, 1937, under title II of the National Housing Act.

(b) Home mortgages (on single, and two-, three-, or four-family homes) not exceeding twenty years of life, amortized at the rate of not less than 2 per centum per annum, not exceeding 65 per centum of the fair worth of the property.

(c) Home mortgages unamortized not exceeding five years in life, and mortgages amortized at not less than 2 per centum per annum not exceeding fifteen years of life on multiple dwellings not exceeding 60 per centum of the fair worth of the property.

(d) All other classes of sound mortgages on improved property not exceeding 55 per centum of the fair worth of the property.

(e) Mortgages on property, where construction is to be started subsequent to the enactment of this Act and prior to January 1, 1937, at percentages to fair worth on above class (b), 75 per centum; on class (c), 70 per centum; and class (d), 60 per centum. The bank may commit that it will purchase or lend upon such mortgages prior to the commencement of construction, under regulations established by it requiring submission of plans, and other special acts. SEC. 8. The bank shall require that these provisions, as they may apply, shall, be met by the mortgage before it is declared eligible for lending or purchase: (a) Mortgages must not exceed in the amount of unpaid principal thereof the maximum fixed by regulation nor be less than the minimum, and the maker thereof must not be in default for interest or taxes, or in any other of the terms of the mortgage.

(b) Before purchase or lending upon any mortgage, the bank shall require the member to furnish satisfactory evidence of the title to, and the fair worth of, the property given to secure the mortgage through sources approved by the bank.

(c) The mortgage practice of the stockholder must not have been found unsatisfactory.

(d) The bank is able to arrange for the servicing of mortgages transferred to it through approved agencies designated by it at reasonable fees.

SEC. 9. The bank may lend to responsible stockholders upon mortgages declared eligible up to 90 per centum of the unpaid principal due on said mortgages. The borrower shall execute his note, transfer the mortgage notes as collateral thereon, and shall endorse the mortgage and its note, which shall be deemed a waiver of demand, notice, and protest as to such borrowers' own endorsement exclusively. The loan shall be subject to such regulations as to maturity, interest rate, and other conditions as the bank may prescribe.

SEC. 10. The bank may purchase, from stockholders, mortgages declared eligible, paying therefor in cash 98 per centum of the amount due in principal thereon, plus accrued interest. The mortgage shall be purchased without the right of recourse against the seller thereof.

SEC. 11. The bank is authorized to issue notes, bonds, debentures, or other like evidences of indebtedness to obtain funds for the purpose of carrying out the intents of this Act, in the aggregate amount not to exceed twelve times its unimpaired capital and surplus. These notes, bonds, or debentures may be used for the purpose of exchange by the bank for mortgages agreed to be purchased; or may be sold by the bank as required and the proceeds of such sale used for the purchase of mortgages. Such obligations issued shall not exceed 90 per centum of the principal due on the mortgages owned by the bank plus the cash in hand, securities of the United States, notes of borrowers from the bank, and unpaid subscriptions to the captital stock, and shall be in such denominations at such interest rate and under such regulations as the board prescribes and shall mature within a period not to exceed twenty years from the date of issue. The regulations shall require that maturities of obligations of the bank and the principal payments to be made on mortgages shall be synchronized as closely as practical.

SEC. 12. The stock of the bank, and any and all notes, debentures, bonds, or other such obligations issued by the bank shall be exempt both as to principal and interest from all taxation (except surtaxes and estate, inheritance, and gift taxes) now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority. The bank, including its franchise, its capital, its reserves and surplus, its advances, and its income shall be exempt from all taxation now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority; except that any real property of the bank shall be subject to State, Territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed. If and when the United States eliminates tax-free provisions on bonds issued or guaranteed by it, the same provisions as are made to apply to obligations of the United States shall apply to the stock, notes, bonds, debentures, and so forth, issued by the bank. The notes, debentures, and bonds issued by the bank, with unearned coupons attached, shall be accepted at par by the bank in payment of, or as a credit against, obligation of any debtor of the bank, or of any mortgagor whose mortgage it owns.

Neither the stock offering of the bank nor its subsequent offering of notes, debentures, bonds, or other such obligations need be subject to the approval of the Securities and Exchange Commission.

SEC. 13. When designated for that purpose by the Secretary of the Treasury the bank shall be a depositary of public money, except receipts from customs, under such regulations as may be prescribed by said Secretary; and it may also be employed as a financial agent of the Government; and it shall perform all such reasonable duties as a depositary of public money and financial agent of the Government as may be required of it. The bank may act as agent for any other instrumentality of the United States when designated for that purpose by such instrumentality.

SEC. 14. Subject to such rules and regulations as the directors shall prescribe, the bank shall have power to deal with, rent, renovate, modernize, or sell for cash or credit, or otherwise dispose of, with a view to assuring a maximum financial return to the bank, any property acquired by it as a result of foreclosure proceedings or otherwise.

SEC. 15. The bank shall semiannually carry to reserve account a sum not less than 25 per centum of its net earnings until said reserve account shall show a credit balance equal to 25 per centum of the outstanding capital stock of the bank. After said reserve is equal to 25 per centum of the outstanding capital stock, 10 per centum of the net earnings shall be added thereto semiannually. The funds in said reserve account shall be retained in cash or invested in obligations of the United States, except when the said reserve is equal to the outstanding capital stock any excess over that amount may be used to lend upon or purchase mortgages. Whenever said reserve shall have been impaired due to losses on defaulted mortgages, it shall be fully restored before any dividends are paid, excepting that such restoration need not be made as long as the reserve fund is an amount equal to the outstanding capital stock.

SEC. 16. The bank shall be examined in the conduct of its financial affairs in the same manner, at the same periods, and by the same agencies as are the national banks and shall bear the expense of such examinations. The bank shall give the findings thereof serious consideration through its board of directors and if defects in operating practice exist shall correct such defects as far as it may be able.

SEC. 17. The bank shall have its principal place of business in Washington, District of Columbia, but may establish branches in other cities as conditions indicate may be expedient, and may take such steps and make such deposits as are necessary to qualify it to do business in other States.

SEC. 18. The bank shall pay directors $50 as a fee for each day required in traveling to and attending meetings. The compensation of the chairman of the board and of the members of the Executive Committee shall be at the rate of $10,000 per annum each. If found desirable, it may create an executive committee of three of the directors, one of whom shall be the chairman of the board, who shall devote their entire time to the affairs of the bank. At least two of such executive committee shall be persons with a thorough knowledge of real-estate and mortgage finance.

SEC. 19. (a) Whoever makes any statement, knowing it to be false, or whoever willfully overvalues any security, for the purpose of influencing in any way the action of the bank or the board upon any application, advance, discount, purchase or repurchase agreement, or loan, under this Act or any extension thereof by renewal deferment, or action or otherwise, or the acceptance, release, or substitution of security therefor, shall be punished by a fine of not more than $5,000 or by imprisonment for not more than two years, or both.

(b) Whoever (1) falsely makes, forges, or counterfeits any note, debenture, bond, or other obligation or coupon, in imitation of or purporting to be a note, debenture, bond, or other obligation, or coupon, issued by the bank, or (2) passes, utters, or publishes, or attempts to pass, utter, or publish, any false, forged, or counterfeited note, debenture, bond, or other obligation, or coupon, purporting to have been issued by the bank, knowing the same to be false, forged, or counterfeited; or (3) falsely alters any note, debenture, bond, or other obligation, or coupon, issued or purporting to have been issued by the bank; or (4) passes, utters, or publishes, or attempts to pass, utter, or publish, as true, any falsely altered or spurious note, debenture, bond, or other obligation, or coupon, issued or purporting to have been issued by the bank, knowing the same to be falsely altered or spurious, shall be punished by a fine of not more than $10,000 or by imprisonment for not more than five years, or both.

(c) Whoever, being connected in any capacity with the bank, (1) embezzles, abstracts, purloins, or willfully misapplies any money, funds, securities, or other things of value, whether belonging to it or pledged or otherwise intrusted

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