with headquarters in Washington, undertaking to spread loans all over the country. They are fearful of the result of that policy. Mr. HARRIMAN. You rather set up a contradiction. You say, on the one hand, that they won't borrow, and then you worry if they should borrow. Mr. MEEKS. That is based on if they do borrow. Mr. HARRIMAN. There are a great many people in this country who still have incomes, on the basis of which they can afford to borrow. Mr. MEEKS. One more question on another phase of the matter, on which there has not been very much said. You hope to enlist the cooperation of banking institutions? Mr. HARRIMAN. Yes, sir. Mr. MEEKS. Including commercial banks. As you are aware, the policy of the Department here as to banks, the examination of banks and the methods of doing it and the restrictions placed on those banks as to their lendings, would enter into the picture, would it not? Mr. HARRIMAN. I think there are specific provisions in the bill which increase the amount which national banks and Federal Reserve banks could loan on this type of security. Mr. MEEKS. Another element which enters into it is the insurance law. Just now I think many of the commercial banks would like to lend, but they are afraid to lend because they are afraid of criticism from a loss. I happen to be in a position to know something about that. Mr. HARRIMAN. I think so, too. Mr. MEEKS. They are afraid that the bank examiners and the Department will condemn loans which the banking authorities think are perfectly good and sound. Mr. HARRIMAN. It is a perfectly sound criticism. Mr. MEEKS. Nevertheless, they are afraid to make those loans. That is one thing which is driving down securities. Mr. HARRIMAN. Do you not think that that fear in connection with that matter is gradually lessening? It was perfectly natural, after the cataclysm we went through, that everybody would want to get liquid loans. I think now the banks are willing to take a greater risk, and I hope the examiners are willing to recognize the wisdom of that course. Mr. MEEKS. I am sure they would take the risk if the conditions are such that they can get rid of the fear of what will occur later. I think that is a very important consideration. Mr. HARRIMAN. I think it is. Mr. MEEKS. It is a matter of policy. In order to get cooperation, it is essential to make this proposed legislation effective. Do you agree with that? Mr. HARRIMAN. I should hope that all the departments of the Government would cooperate if this bill passed. Mr. MEEKS. And would loosen up a little? Mr. HARRIMAN. And would loosen up a little. Mr. MEEKS. Do you agree with me on that proposition? Mr. HARRIMAN. I think that the Government should loosen up a little on their examination, and I think the banks should loosen up on that fear. Mr. MEEKS. I am quite sure that they will abandon that fear. The CHAIRMAN. Gentlemen, it is suggested that we have worked enough for one day. Mr. FISH. Mr. Chairman, may I ask a question before we adjourn? The CHAIRMAN. Certainly. Mr. FISH. Have you made arrangements to hear the United States Building & Loan Association representatives, their official representatives? The CHAIRMAN. Yes, sir. Mr. FISH. Do you know which ones you are going to hear? Mr. FISH. Have you set any particular day? The CHAIRMAN. We have tried to make it for tomorrow. Mr. FISH. The United States organization has certain official representatives and, of course, each State has others. I think it is only fair to hear those representatives. The CHAIRMAN. We except to hear them. Mr. FISH. On tomorrow or the next day? The CHAIRMAN. Tomorrow, if we can get to them. Mr. FISH. Or Wednesday? The CHAIRMAN. Yes, sir. (Whereupon the hearing was adjourned until 10:30 a.m., Tuesday, May 29, 1934. ) NATIONAL HOUSING ACT TUESDAY, MAY 29, 1934 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, The committee met at 10:30 a.m., Hon. Henry B. Steagall (chairman) presiding. The CHAIRMAN. The committee will please come to order. We have with us this morning Mr. Watson, of the Reconstruction Finance Corporation. STATEMENT OF FRANK WATSON, ATTORNEY WITH THE Mr. WATSON. Frank Watson; attorney with the Reconstruction Finance Corporation. The CHAIRMAN. Mr. Watson, let me ask you what provisions of this bill are you most familiar with, and those to which you desire to direct your statement primarily? Mr. WATSON. Mr. Chairman, I started on this housing matter, associated with Mr. Walker, away back in January. As for the parts with which I am most familiar, I think I have followed the entire bill right through. My position is one of a technical draftsman, not one of an experienced mortgage man. The CHAIRMAN. The committee will desire to have you cover the technical provisions of the bill. Mr. WATSON. Yes, sir. The CHAIRMAN. Those which have been discussed from time to time, and to get more directly to the point, I am going to suggest that the Chair will recognize the different members beginning on my right. Mr. CROSS. Why not let him take each section as he comes to it? Mr. WATSON. I think, sir, if I may say so, I have listened with great interest to the hearings. As you raised the questions that were raised, I feel that they were entirely legitimate. I feel very - much as I did as a boy when I ran away from the school to go jack-rabbit hunting and was called in before the principal. The questions which were raised were due to my lack of skill in the draftsmanship of this bill. I feel that I need to explain what I was striving for in the drafting of this bill, and if I may do that, I think we can clear the matter up with greater speed. I think before going into the question of the national mortgage associations it is essential that we understand the insurance provisions, because, if the insurance provisions are unsound, obviously the national mortgage associations are unsound, and their relationships are so connected that it is necessary to see the picture on both. As we worked on this bill, we drew those insurance provisions out in great detail. Then, at the last moment it was thought advisable and that it would expedite your action and your study of the bill to draft it in a much shorter form. It was then that I attempted to cram in section 5, what you have before you as title 2. I think that was the cause of far more confusion than it was of help; that it is practically impossible to understand the insurance set-up from the provisions of section 5. I think the charge may be absolutely and utterly laid that the Government could go into the national surety set-up under the provisions of section 5. It is intended that the Government does not go into that. The insurance scheme has been carefully worked out, and I think a hasty consideration of those details will show the strength and the purpose for which it is being put into effect. That is why I distributed this mimeographed title 2 to you. I do not intend to go into it in any great detail, but I thought we might hastily skim over it, hoping that the ability of the eye to follow the line would do more to clear up the matter than my vocal explanations would. The essence of the insurance scheme is that we start with the soundest type of instrument. That is true for two reasons; the solidity of insurance depends upon a sound type; second, you are also striving to accomplish a social purpose, the purpose in view being to encourage the home owner to borrow. It is different from other types of regulation, because here we seek to encourage people rather than to force them. It is important to consider what we conceive is the sound type of mortgage instrument. I say that advisedly; I know nothing about it myself, but I sat at the elbow of the best men in the business when this was being discussed. If you will now turn to section 204 of the mimeographed copy, you will find there described the type of instrument which we feel is the financially sound and socially desirable instrument. It is first necessary to be held by a mortgagee who is approved by the Corporation as responsible and able to service the mortgage. This is very important from the standpoint of servicing. Paragraph (b) that it will be a valid and binding lien is unimportant. Paragraph (c) involves the principal obligation not in excess of a maximum to be set by the Corporation. We do not insure palatial residences. Such principal obligation is to be limited to such a percentage of the appraised value of the property as shall be determined by the Corporation, such percentage not to exceed 80 percent of the new construction, or 65 percent in the case of existing homes. You will notice those are limits; it is not neces-sary to go to that limit. The difference is based upon the difficulty of accurate appraisal upon existing homes, as distinguished from the greater possibility of accurate appraisal on new construction. Eighty percent is put on two bases; first, you have to determine how high it is necessary to go in order to squeeze out the second mortgage. Mortgage men say the sound way is to lend 30 percent, but I think from what I have learned as a result of discussing this matter these men are missing a point. If they drive that appraised value down to a point where there has to be a second-mortgage in strument, by the burden which the second mortgage puts on the home owner they decrease their own security; it makes the home owner less able to pay them. Of course, they are in a preferred position, but you come to the question of when you take security, do you expect him to default or do you expect him to pay the mortgage indebtedness? The other question involved is how much of a shoe string do you want a man to have before he is entitled to home ownership? On that, of course, we are dealing again with a social problem. I think everyone grants that the stability of a system such as ours is dependent, to a large extent, upon the desirability of home ownership, and that it is advisable for the Government to encourage home ownership. We then try to set a figure at a point that people will not go in without any capital of their own, entirely on a shoe string. We try to find out at what point that shoe string should be set. Mr. Harriman said 80 percent; the building associations say 75. Paragraph (d) says that the mortgage shall have a maturity satisfactory to the Corporation and not to exceed 20 years, except that the Corporation may, in its discretion, approve as eligible mortgages having maturities of more than 20 years but not to exceed 30 years. Again note that the maximum is 20 years and 30 years. There is nothing to prevent a 12- or 14-year mortgage. The question of time is one we have to set; how long will the home last as a desirable place in which to live, because it is an agreed fact that a man is not going to continue to make monthly payments on a home he is on the verge of moving out of. It is necessary that you do not continue to have the mortgage longer than the desired period. On the other side, it is necessary that you extend over a long period, so as to make the payments as small as possible. You cannot make it cost too much per month, so that he will be able to carry the charges. Then there is the provision for complete amortization. In paragraph (f) we have provided that the mortgage shall involve a principal obligation which includes, in addition to the amount actually advanced, only such initial service charges as are satisfactory. If you do not get a protection of that kind you lose everything you seek to gain, because some mortgage companies will put out a mortgage at 5 percent, but they will have so many service charges that you destroy the entire efforts you are making to get a low cost of financing. In (g) we have the provision that it shall bear interest at not to exceed 5 percent, except where the mortgage market demands it we may go to 6 percent. In connection with that question of interest, I was rather surprised yesterday to hear the statement made before the committee and by the committee that it is not desirable to drive interest rates down in certain localities; that the well-settled sections have low inerest rates and the newer sections have higher rates, and the implication arose that it was based upon the question of risk, and that it was undesirable to readjust that. I have thought, myself, that it was very desirable to get interest rates down as far as economically possible. On the question of high rates and high risk, it seems to me that the high rates go with the scarcity of funds. It seems to me that 1 percent grants very little insurance against a loss and it is the scarcity of funds and not the risk that creates the high rates. It is said that it is in the new areas where the interest rates |