The CHAIRMAN. What participation does it require on the part of the Government in the management of the bank or institution?

Mr. SCHMIDT. It requires that the President appoint three of nine directors, the remaining six to be elected by the stockholders, and that the bank shall be examined just as are members of the Federal Reserve banking system, at stated periods, to see that the conduct of its affairs is sound and comprehensive. If that conduct is not sound, it is my judgment, according to the reading of the bill, that that would lodge in the Government certain rights affecting the charter of the bank to continue its operation so that, in effect, the Government would have absolute supervisory powers.

The CHAIRMAN. Do you think there is a real need for an institution of this kind?

Mr. SCHMIDT. Gentlemen, we presented the fact of the existence of that need before this depression started. We started this activity back about 1927. We presented a measure that contained ideas very similar to those set forth in your bill, in 1929. Mr. Calder presented a similar idea in 1921. The need has been recognized, I think, by every student of credit and currency, but, in view of the vast wealth of this country and the tremendous funds that we had for investment, and the fact that our prosperity continued in an unexampled way, creating an expansion of credit, the need for a stabilizing agency was not, perhaps, recognized as it should have been, in our long period of active conditions. Money was available. Values were continuously going up, which made for the safety of mortgage investment, and, as a result, the need for a reserve agency that would stabilize practice and make the mortgage more secure through regulation as to the character of loan and type of instrument used, and the adjustment for laws in the various States governing the mortgage, was not recognized. The need for that type of supervisory activity was not recognized as early as it properly should have been.

Senator RADCLIFFE. Mr. Schmidt, you think, then, that the greater need is one for stabilization, and not due to the unwillingness of private capital to invest?

Mr. SCHMIDT. The unwillingness of private capital to invest in real-estate mortgages is due to the fact that the real-estate mortgage periodically becomes frozen. The same statement is true as regards the F. H. A. insured mortgage. It still remains a frozen asset in the hands of its possessor in periods of stress. There is no more reason to say that you can sell an insured mortgage in periods of stress than there is to say that you can sell any other very sound mortgage. Experience has proven that mortgages become absolutely frozen. The CHAIRMAN. How does this bill relieve that?

Mr. SCHMIDT. In our judgment, Senator, when periods of stress come, the investor tends to the ultimate in security. Psychologically, people recognize that the ultimate in security is the real-estate investment, provided there is diversity and a market for that investment. As a result of that circumstance, the bonds of this mortgage bank automatically, in periods of stress, having a cross-cut of mortgages over the country, as a back log of security, and in addition, a substantial capital, and, further than that, Federal supervision as to sound practice, in our judgment would find such ready sale for its bonds that the bank would be enabled, in periods of stress, to get

all the money it needed from the people of this country at a low interest yield.

As a result of that fact, it would be in a position to buy sound mortgages. We feel that there is no reason for a bank to be operated on any but a very conservative basis, and we feel that if you take care of the base, as this bill provides, that you can have this washout of the unsound mortgage without destroying all real-estate values, which was the result of our previous collapse.

Senator RADCLIFFE. If the market became frozen, do you not think that would embarrass this bank?

Mr. SCHMIDT. The market would never become frozen if you had a place to go to sell your mortgage.

Senator RADCLIFFE. What could the bank do with it?

Mr. SCHMIDT. Issue bonds against it.

Senator RADCLIFFE. Suppose the mortgages were due and they could not collect. Assets can be frozen in their hands as well as in the hands of an individual.

Mr. SCHMIDT. That is true; but one reason the mortgage cannot be paid is because the realty values depreciate, and, in my judgment, this was the major cause for the depth of the depression to which we sank-the lack of a reserve system for long-term credit. When you crashed your realty values you crashed the tax systems in all your municipalities and States, because they depended upon real-estate values.

In my own State we had three successive percentage reductions in real-estate valuation, which resulted in continual reduction of the taxes. One reason for that was that there was no financing available. If the mortgage was due, it had to be paid off or the property was foreclosed. As a result of that, a person sold his property at a depreciated price in order to pay off his obligations. As a result of this continuous movement, real-estate values just collapsed. In our judgment, the lack of an agency of this kind contributed more than anything else to the depth to which we went in this depression, and its long-continued severity.

Senator RADCLIFFE. Would not an agency of this sort be very seriously affected, if not frozen, by a drop in real-estate values, if they found themselves in possession of mortgages which they could not dispose of? How could this institution operate under those circumstances?

Mr. SCHMIDT. It does not have to dispose of mortgages. If this institution is created as a billion-dollar corporation, and has a right to issue bonds to the extent of 12 times its capital and surplus, that would mean that it would have an issuing power of at least 12 billion dollars, which is more than adequate, as events have proved, to take care of any collapse in our mortgage structure.

Senator RADCLIFFE. It might not have to dispose of them, but would have to have money to meet its obligations, and it seems to me that if those mortgages were frozen in the possession of this bank it would be just as embarrassing to that institution as it was to other mortgage companies during the depression.

Mr. SCHMIDT. I will answer that statement by this, Senator. I happen to represent the Metropolitan Life Insurance Co. in the placement of money in my district. During the greatest depths of

the depression, it is my understanding that that great company, counting its foreclosed properties as worthless, still received an average of the 3 percent per annum, in its worst year, mortgage portfolio.

on its

Senator RADCLIFFE. That is much better than the average. Senator BULKLEY. Mr. Schmidt, are you presuming that these bonds would always be readily saleable? You refer to the issuing power as if that were almost equivalent to cash.

Mr. SCHMIDT. Yes. Experience in other countries has proven that in periods of stress these bonds sell on an interest-yield basis very little in excess of Federal securities, and it is, therefore, my judgment that the worse the times the more saleable these bonds would be. Of course, they would be dependent upon the interest rate, just as any other bond is dependent upon the interest rate, and that interest rate would fluctuate; but it has been proven by experience in other countries that bonds of this nature are almost the ultimate in desirability.

The CHAIRMAN. Do you think you could get the capital required in the bill for setting up an organization like that sufficiently subscribed?

Mr. SCHMIDT. It is my judgment, Senator, that it may be necessary, perhaps, to base subscription to the bank upon a percentage of mortgage portfolios, instead of setting a minimum sum of $1,000. Perhaps the bill would permit, by regulation, the directors or the organization committee to make such provision, so that subscription would be received. It is my opinion that the necessity for this bank is such, and the facilities that it offers are so valuable, that, once created, it would receive from private enterprise ample subscriptions. That is my best judgment. I have been all over this country in the past year. I have talked to bankers, heads of insurance companies and savings banks, in every city of the country. It is true that when it comes to formal action, many banks and insurance heads fear that perhaps an agency of this kind would go completely into the control of Government, and, as a result, that there would be interference with their own activities.

On the other hand, that feeling is offset by many, even in the conservative northern New England States, where I have talked to the heads of many of the savings banks and insurance companies, who recognize the fact that an agency of this kind is really essential in our country if we are to have a sound financial structure for the future. They also look with great favor upon the purchase of the bonds that this bank would issue. I think-and they have expressed the thought-that we have come into a period of lesser interest rates to deposited money, and that the bonds of a bank of this kind issued, say, on a 4-percent basis, would be extremely attractive to those agencies that have a surplus of funds.

In order to get mortgage investment, many of these northern banks bought participating certificates of guaranteed mortgages on very badly selected mortgages, through undeveloped sections like North Carolina, central Kentucky, and so forth. They wanted that higher rate that comes from mortgage investment and at the same time they were not able to get it in a sound, stable security. This would offer them that.

In my judgment securities of this bank would be very much sought after.

The CHAIRMAN. What do you think about 12 times the capital and surplus? The New York plan contemplates 20 times.

Mr. SCHMIDT. I think 12 times is extremely conservative. However, I think that this bank should be operated as a conservative agency, to take care of the base mortgage structure.

Senator RADCLIFFE. You mean capital and surplus combined? Mr. SCHMIDT. Yes; the bill provides that 25 percent of the earnings shall be set aside in a surplus account before dividends are paid, until it reaches a certain amount. 25 percent of earnings would be equivalent to a little over one-half of 1 percent. In my judgment, Senator-and I went over this with the Federal Housing Administration authorities at great length before that bill was passed-it will cost approximately one-half of 1 percent to operate this bank. Another one-half of 1 percent going into surplus would mean that you should have a differential of 1 percent, and earn a fair dividend at the same time.

Senator RADCLIFFE. Do you think it would be feasible to set up some form of reserve, irrespective of earnings?

Mr. SCHMIDT. Yes; perfectly feasible.

Senator RADCLIFFE. Based on percentage of business written, or some other basis?

Mr. SCHMIDT. Yes; however, I think this is perhaps more practical. If you take a percentage of earnings, the bank is bound to earn money.

Senator RADCLIFFE. Of course, you always think of a reserve as something to protect your business, and as not being contingent upon the amount of profits.

Mr. SCHMIDT. Yes. But, inasmuch as this bank, if it were in operation at all, and having expenses of operation, would be bound to have mortgages yielding it 5 or 6 percent, depending upon the character of the mortgage in its possession, it would be bound to earn money. If it had capital to invest and could not get mortgages, it could at least invest it in Government bonds, and earn very much more than its expenses.

An agency of this kind cannot help but earn money. It is impossible to conceive that it would not earn money.

I want to answer a question you raised on the insurance companies and their investment: Unquestionably they will want to take mortgages direct, but also an agency of this kind would be useful to many of them. The five or six largest ones do not need it. They are looking for investments at all times. But there are hundreds of smaller insurance companies in this country, and they become nonliquid and in a dangerous position if they have not a marketing agency for mortgages. There is no place, gentlemen, in periods of stress, where you can sell a mortgage to anybody. It becomes frozen. I wish to read you this letter, which I received from the president of one of the large banks in this country, with a capital of $12,000,000 and surplus of $5,000,000:

It was a pleasure to meet you the other day in St. Louis and I think all of those present enjoyed the luncheon very much.

After we left you Mr. Hord Hardin, of the Mississippi Valley Trust Co., asked me to let him have the copy of the bill you had furnished us and he

has been giving it some study and consideration, after which time I expect he will send the bill over to me.

Feel that it is highly desirable to have some organization such as you describe, which would afford some marketability and liquidity to mortgage loans. It is regrettable that in our periods of depression, regardless of the security afforded by a real-estate loan it becomes absolutely frozen for lack of any market whatever, and I think something such as you have been planning will go a long way toward making real estate loan investments more attractive. This letter is from the president of one of the large institutions in this country, engaged largely in making real-estate loans. That is just one of many that I have had.

I do not wish to take too much of your time, Senator. If there are any questions you wish to ask me, I shall be glad to try to answer them.

The CHAIRMAN. Are there any other questions? If not, we are very much obliged to you, Mr. Schmidt.

Is there anyone else, Mr. MacDougall, that you would like us to hear?

Mr. NELSON. Senator, there are several people here from different parts of the country who simply wanted to express their interest and their approval of this bill. If it is agreeable, may their names be entered in the record? I have given you a list of the names. I would like to say just a few words myself about this matter.

STATEMENT OF HERBERT NELSON, SECRETARY, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, CHICAGO, ILL.

The CHAIRMAN. We will be very glad to hear what you have to say on this subject, Mr. Nelson.

Mr. NELSON. I am secretary of the National Association of Real Estate Boards, which has 430 local units, like the Washington Real Estate Board, throughout the country. I am not a financial expert, Senator, but during the past 12 years I have heard a great deal about this matter. I have had thousands of letters and complaints from people who were interested in mortgage bonds, who bought them and who suffered in their purchases.

We have built, during the past 15 years, thousands of great structures, including hotels, apartments, and office buildings. To meet that building activity there grew up private mortgage banks, such as Straus & Co., the American Bond & Mortgage Co., and two or three hundred institutions of that kind. They functioned largely without regulation. The State regulation that was given them was perfunctory, and, in general, we did not know how to do that job of banking business properly and conservatively. As you know, the result was disaster. There were some 10 billion dollars of mortgage bonds issued by those various companies. Nobody knows what they are worth today. There have been investigations of various kinds, but I have heard it said, and the common gossip is, that probably they are worth about $3,000,000,000.

We are going to have mortgage bonds issued in this country again, because we need these great structures, and it seems to us, after watching this development during the last 12 to 15 years, that if mortgage bonds are issued, they should be issued under a type of regulation and control by the Federal Government, which we be