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owners as to financial soundness, which shows that out of 530 families, 74 percent are now insolvent or nearly so, sadly contrasted with their position of 1928 which then showed a net worth of $1,890,000 excluding their home property.
REQUISITES TO WIDE USAGE OF CONVERSION
These unquestionable statistical findings clearly indicate that any plan adopted to meet the home-mortgage problem must include all homes regardless of value, with a limit, however, as to the total loan to an individual; a workable method of appraising that will remove the fate of the home owner from the perils of a depressed valuation made by a field appraiser surrounded by depressive influences; the guaranty of the principal of the bonds, or some measures effected so that they will be eligible for rediscount through the Federal Reserve System, in order to make the conversion sufficiently attractive to insure the mortgagee utilizing the privilege for mortgages other than those of doubtful quality.
The better mortgages, as a president of a New York savings bank pointed out in a recent press release, under the administration's proposed set-up would not be proffered for such conversion. Instead such mortgages when in default would be subjected to foreclosure at the first rise of a selling market in preference to a long-term tie-up of capital at lowered interest rates. This point of principal guaranty is of vital importance to the security investor in home mortgages, whether sayings bank depositor, mortgage or certificate holder, life insurance investor, building and loan shareholder, or even commercial bank depositor, for many home mortgages make up their collateral assets.
A FAULTY SYSTEM
A noted economist has pointed out that a fundamental wrong in our mortgage system has been the making of long-term obligations from demand deposits. By this method these financial deposits are made liquid from a now frozen situation and a reform of a faulty method for effected.
The above institutions, if the bill is amended as to principal guarantee with rediscount facilities through the Federal Reserve System can so immediately liquefy their position that in our opinion not only can their doors be thrown wider open but they can then much more successfully grapple with their commercial mortgage problems.
The outstanding defects in the bill as introduced are
(1) Lack of principal guarantee with consequent uncertain market or collateral value in times of stress. Will not attract mortgagee who under this bill possesses control. The mortgagee will convert the poorest quality of mortgages and foreclose where ample equity exists. This is a direct penalty upon the thrifty individual who has reduced his mortgage to below average, and is manifestly unfair, as well as unwise. We anticipate a great increase in such foreclosures immediately upon the passage of this bill if not amended.
(2) Lack of parity to home owners in establishing eligibility in a fashion that is not logical and inequalities that will occur can neither be justified nor defended. However it would seem logical to rely upon the fact that as the flood of protests center in Washington already reaching the Home Mortgage Advisory Board in the second Federal Reserve district, fortified by repetition throughout the country for this limitation operates against homes in every city, this phase of the bill will be amended to encompass the needs of many of this vast number of home owners representing about one home owner out of every four in the country. It is not difficult to envision the social unrest that would arise from a sense of inequality, when a home owner in losing his home, witnesses his next door neighbor saved by their common Government because his home happened to conform to a process of selectivity that does not seem to be based on any fundamental.
The last minute deviation in the bill from rumored outline in advance of its introduction, in which homes above $10,000 in value are excluded from its superior mortgage benefits must prove nothing less than a tragedy to many in a class comprising probably half of the home owners in the metropolitan area of New York, some quarter million, with an approximate million or more home owners throughout the country. ,
(3) The absence of an appraisal method defined so as to insure reasonable values. The liberal percentage of the loan, 80 percent, is nullified as to its
intent unless the method of valuation is defined and a reasonable standard set-up. The Long Island division has advocated that the valuations of 1928 plus improvements, discounted by 25 percent, should be the basis of appraisal for the time being. If the standard of “present value" is not adjusted to include some element of faith, some sounder measures than customarily employed throughout this depression period, the home owner will face another crushing blow and again suffer from the reappraisal evil that has used fear as the base measure in the absence of a “market,” which has played a large part in creating the present mortgage dilemma. (4) The 15-year plan of amortization will entail too high a monthly cash outlay upon the home owner. It will be considerably higher than the 6 percent he is now paying. In most cases the mortgage has been a standing One without amortization and introducing this feature, the term of the mortgage should be long enough so that interest and principal together will approximate not much over 6 percent. We have advocated 30-year plan, entailing 6%. percent total outlay on the first-mortgage payments. Such a mortgage would always continue safe, for in the term of 15 years it would be reduced to approximately a half and in many cases probably more by voluntary reductions on the part of the mortgagor. It can furthermore be rendered safe by a proper control on new building to prevent overbuilding and wanton destruction of older structures whose values should be preserved by reconditioning and modernizing. Homes are a long-term commodity, properly of some 50 years duration, and they should not be permitted to be outmoded by lack of civic control. Such regulation is of just as great need as are zoning laws which have so generally been adopted country-wide, now regarded as a necessity in sustaining community values. (3) Five percent interest set up in the bill is too high. It does not afford enough relief to the majority of home owners whose incomes are now halved even where employed. (6) The bill is too limited in scope, it would seem, judging by the composite reports of the divisions of the Home Mortgage Advisory Board, of which Frank A. Vanderlip is chairman, which indicate that the majority of the home owners in the second Federal Reserve district are either in default on interest and taxes or fast approaching that state. This composite picture, startling as it is, is borne out by the FriedrichHerendeen survey of the 530 home owners in Sunnyside, residing in homes ranging from $9,000 to $20,000, with $2,000,000 in paid-in equities, which show that factually 74 percent of a shortly before prosperous group of home owners are now insolvent, with their homes hanging in the balance. A $2,000,000 bond issue will fall far short of meeting a situation comprising $9,000,000,000 in urban home mortgages on owner-occupied homes. (7) Failure to utilize existing loaning institutions which should be retained to service the loans converted by them, which institutions should be entailed with a defined responsibility in connection with the loans converted. (8) Failure to set up advisory machinery to aid in the readjustment of owner, to secure settlements, readjustments, or subordinations from second mortgages. To protect the owner in the retention of his home against pressure from Outside debtors, (9) Absence of suspension of foreclosures pending the period of conversion. (10) Absence of provision that the bonds are to be callable by the Government unit. It is quite likely that these bonds, if guaranteed with their taxexempt features, would shortly be at a premium, and could be refinanced at a later date at a much lower interest rate which could accrue to the mortgagor. (11) Absence of privilege to mortgagor to pay off in whole or part in bonds at par. This would be a sustaining feature to the market of these bonds, in depressed periods on a falling market a cushion would be supplied. (12) Failure to make provision for those who had been foreclosed to have the opportunity of recovering their homes if the appraisals warrant the necessary coverages provided under the bill. (13) Absence of provision to define a home, not necessarily as occupied by owner, but as one intended for owner's eventual use. We have advised many home owners to rent their home and take cheaper quarters or double up with a relative in order to save their home. Such should be protected. (14) Absence of absolute definition that 80-percent loan can include both first and junior mortgages with some method of distributing bonds to the several interests if the aggregate comes within the loan percentage.
If these amendments, or their substitutes, are not effectuated, we think it far safer for national advancement that no urban bill be passed.
With no governmental relief furnished, the mortgagees may be forced to abstain from any foreclosures by a moratorium or in self defense. With partial aid for the poorer types he will certainly recourse to foreclosure in the better types, and that strikes directly at the most thrifty.
We seriously feel that class discrimination that the proposed bill includes, even though unwittingly, will result in such social chaos that no governmental relief at all would be far preferable to that which would relieve the mortgagee at the expense of some type of home owners.
SCOPE TOO LIMITED
In my testimony it has been pointed out that only $2,000,000,000 is provided to care for $9,000,000,000 in urban-owned occupied home mortgages and the fear is well founded that this may precipitate a wholesale calling of mortgages, particularly those in default.
Since statistical facts show those in or apprehending default constitute the majority, it will be seen that several times this amount of bonds would be required to care for the situation in the urban-home mortgage field. This will bring chaos in the realty home world if not anticipated and should be provided for.
Parity of position in any relief move should be of prime importance. If the bond conversion is limited to $2,000,000,000 it is impossible to envision how parity can be given to home owners. The Government loan, if amended to meet practical needs, will be superior to customary financing in many ways; it will be fuller, that is, if the method of appraisal of value is predetermined and the bonds made attractive to the mortgagee. Its duration will be 5 times longer than the average home mortgage and the interest lower. This will make the houses so financed more salable and the only gate of salvation to many home owners, it must be borne in mind, lies in a future sale, probable only after refinancing. The credit expansion provided if amended to operate will save approximately a lucky 25 percent. What about the remainder? It would seem if the bill be limited to $2,000,000,000 that some “open-end " plan should be set up to further the idea to encompass all home owners alike step by step.
ENTIRE FINANCIAL STRUCTURE DEMAND'S SOLUTION OF THE MORTGAGE PROBLEM
With the enormous sum in home mortgages at stake, the center of our financial structure can be preserved only with a practical solution of the mortgage problem as it affects the home owner, the investor, and their intermediary—the loaning institution. There are the vast sums invested by the insurance companies, the savings banks with two thirds of their deposits represented in the mortgage portfolio–the building and loan associations with all their assets in mortgages, and the national banks with their collateral dependences. Even the Government has vast sums at stake in the home-mortgage field in the loans of the Reconstruction Finance Corporation secured by home mortgages held by various financial institutions borrowing from them.
The total invested in home mortgages is well in excess of $20,000,000,000. This stupendous figure would indicate that the safety of the financial structure depends upon the safety of the mortgage structure. Any impairment of home mortgages as securities concerns the security of these financial institutions and the impending legislation is of vital concern therefore to the insurance companies, banks, and building and loan associations involved, as well as the investors, depositors, and policyholders.
Instead of a partial plan, a plan should be evolved that would put all interests in homes on a parity. The home owner has the most at stake and it is he who really supports the entire structure. Help him and the whole industry of financing, building, and selling homes can carry on, and mortgages on commercial properties are correspondingly benefited, for if institutions are liquefied to the extent of home mortgages held they can then grapple with their commercial-mortgage problem in different fashion.
WIDESPREAD REEMPLOYMENT IN REPAIRS
A new viewpoint is needed toward reconditioning and modernizing present structures to conform to the “long-term commodity” they truly represent, with a proper life of 50 years, instead of being outmoded in 10 years as they have by exploitation of nonbuilder operators. Reconditioning we deem as most important to keep collateral sound and to create employment.
In Washington there is agreement among nearly all members of the Senate and the House, as there is among business leaders, that there must be an increase of consumer purchasing power if trade and commerce is to revive. Not merely a standstill agreement on capital payments and easier interest but actual credit must be supplied the vast home-owning public to bring their houses into better condition. This would not only create work and trade but would tend to safeguard the investment, insure interest payments which in turn insures purchasing power. -
It could be provided by a plan embracing both rural and urban mortgages, a plan that would require no more new money than has already been requested by the administration, but would let the existing institutions, banks, insurance and mortgage companies, and building and loan associations factor these exchanges of mortgages for bonds under governmental supervision. It would retain these experienced private agencies in a government supervised credit Structure.
The valuations of 1928 plus improvements discounted by 25 percent should be the basis of appraisal for the time being. The Government by proper guarantee could grant borrowing power on these bonds until the public had absorbed them. Where appraisals warranted, loans would be increased to prevent the default of interest and taxes during this crisis, the new funds to be disbursed by the original institutions which could continue to service the mortgages at a total charge to the home owner, advocated by the Long Island division, not to exceed 6% percent, including interest, amortization, and service. The modernization of homes by reconditioning would be financed where advisable to protect the collateral.
CONTROL ON NEW CONSTRUCTION
Loans on new construction should be controlled by surveys to prevent overbuilding, and to insure as well sound building, and this new financing should, in our opinion, set up some such control for the safety of the home owner and mortgage security to investor.
The plan suggested by the Long Island division of the Home Mortgage Advisory Board in March included the extension of similar advisory boards with divisions and subdivisions and community organizations, of which the Sunnyside Gardens Community Association is a splendid example, as volunteer boards throughout the territory of the 12 Federal Reserve districts to provide local contacts, and to aid governmental units in the readjustment required by the home owner.
While this work would be of a volunteer nature, such as has been conducted during the past year by the Home Mortgage Advisory Board in the Second Federal Reserve district, headed by Frank A. Wanderlip, nevertheless the Government should defray the clerical expenses, stamps, stationery, etc., incurred in the numerous personal contacts with distressed home owners.
Many small home owners are in need of readjustment, and advice is needed which can only be given by community-minded people who know their community. This must be done by personal contact. The Home Mortgage Advisory Board and its divisions have proven in the past year the need of this, and they have contacted thousands upon thousands of our country's finest citizens who are badly in need of advice and who are exhausted financially to the point that they cannot even afford the expense of traveling any distance. This applies equally to homes of all values whether $5,000 or $50,000. Sympathetic, understanding, personal contacts of a local nature must be afforded them in the best interests and safety of the social and family life of our country. -
- D. E. McAvoy, Chairman Long Island Division Home Mortgage Advisory Board.
Senator BULKLEY. Is Mr. Dunn here?
Mr. DUNN. Yes, sir.
Senator BULKLEY. Are you going to be here tomorrow, Mr. Dunn?
Mr. DUNN. Yes, sir.
Senator BULKLEY. Come back tomorrow, if you will, please. We want to conclude now for this morning.
Mr. DUNN. Yes.
Senator BULKLEY. Do you want to make a statement, Senator Copeland?
Senator CoPELAND. Yes.
STATEMENT OF HON. ROYAL. S. COPELAND, A UNITED STATES SENATOR FROM THE STATE OF NEW YORK
Senator CoPELAND. Gentlemen, I have been very much impressed by what Mr. McAvoy has said. I know he tells the exact facts as they relate certainly to New York. For 40 years I have been interested in this home-ownership idea, through the building and loan originally. I am satisfied there is not anything in the world that ties a family to our country and the highest principles that we stand for more than home ownership. Nothing equals it in doing that very thing. This bill is much needed in the rural sections of our State, that is, in the small villages of our State; but it does not go far enough as regards urban homes. The limit is too small. Mr. McAvoy has brought that out. It costs more in a city or in an immediate suburb of a city to build a home than it does in the country. Senator BULKLEY. What limit do you advocate? Senator CoPELAND. $20,000. The additional cost of land, the cost of pavements, of curbs, of sidewalks, the building standards to which they have to conform, the underwriting conditions, the fact that the building is erected by union labor with higher prices than in the country, makes the same sort of home in the city cost materially more than it does in the country, and I strongly urge the committee to extend the limit to $20,000. Senator Townsend. Mr. McAvoy, I think, advocated no limit. Wasn't your thought that there should be no limit? Mr. McAvoy. A limit of $25,000 to an individual as a loan, but no limit as to the house eligible for that $25,000 limit; 80 percent on the first $20,000 of its value, with a decreasing percentage on each $5,000, and so on each succeeding $5,000, until the $25,000 is reached, when it automatically stops. That would then take in a half a million dollar proposition, take in a 40,000, take in a 50,000. It would correspondingly give more equity. Senator CoPELAND.. I think Mr. McAvoy and I are not far apart. I have not discussed the matter with him, and I am simply representing in what I am saying to the committee the appeal made to me by hundreds of persons in New York who are anxious to have this change made, and so I do hope that in reporting the bill you will liberalize it just to the greatest possible extent. Mr. McAvoy. I might say, Senator, that our calculations show 250,000 homes in the metropolitan area that would be excluded by