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percent per year, and $1,200,000,000 a premium of three-fifths of 1 percent per year.

T'he premium income would be as follows: Class 1, paying one-fifth of 1 percent-

$960, 000 Class 2, paying two-fifths of 1 percent..

2, 880, 000 Class 3, paying three-fifths of 1 percent.

7, 200, 000

Total income.

-- 11,040, 000 Based on losses in failed building and loan associations, this premium income would be more than sufficient to meet all expected losses and would permit of a transfer of a substantial amount to a loss reserve.

The following table gives a summary of building and loan association failures and losses in the 13-year period, 1920–32. The 1932 figures are the latest so far available.

Summary of building and loan association failures and estimated losses,

1920-32

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1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932

8, 633 $2,519, 914. 972 9, 255 2,890, 764, 621 10, 009

3,342, 530, 953 10, 744 3,942, 939, 880 11, 844 4,765, 937, 197 12, 403 5, 509, 176, 154 12, 626 6, 334, 103, 807 12, 804 7, 178, 562, 451 12, 666 8, 016, 034, 327 12, 343 8, 695, 154, 220 11, 777

8,828, 611, 925 11, 442 8, 417, 375, 605 10, 997 7, 750, 491, 084

18 26 12 21 23 159 190 126 122

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The largest percent of losses to total resources was in 1930, when 0.2795 of 1 percent of the assets of building and loan associations were lost. The percentage of loss in both 1931 and 1932 was lower.

Taking the year in which the loss ratio was the largest, this would indicate that, of $2,400,000,000 of assets, the expected loss would be $6,708,000, leaving a margin of $4,332,000 of premium income over expected losses. This margin is more than 60 percent of the loss which might reasonably be anticipated.

ADEQUACY OF INCOME WITH $6,000,000,000 INSURED

Using the same basic data, the expected income if assets of insured associations were $6,000,000,000 would be: Class 1, paying one-fifth of 1 percent..

$2,400,000 Class 2, paying two-fifths of 1 percent.

7, 200,000 Class 3, paying three-fifths of 1 percent-

18,000,000 Total income

-- 27, 600, 000 - Again using the worst year so far experienced as a criterion of what might be expected, the losses in associations of $6,000,000,000 of assets would be $16,770,000.

In this case the margin of income over losses would be $10,830,000 per year.

SUMMARY

These calculations are probably conservative from the point of view of the solvency of the insurance fund. The year with the greatest percentage loss is used as a basis for the calculation. When the losses in that year are compared with those over the rest of the 13-year period, it is reasonable to expect that over a period of years the average annual loss would be substantially less than is here calculated.

Again, the percentage of loss in 1930 included the experience of all associations, good, bad, and indifferent. It is considered that the poor 20 percent

of building and loan associations, where losses are most likely to occur, will not be eligible to join the Federal Home Loan Bank System, so that the experience of the other 30 percent who are or might become members should be substantially better than the entire group. It may reasonably be expected that this factor will add another very significant element of safety.

It therefore seems reasonably certain that the premium schedule in the proposed bill for the creation of a Federal Savings and Loan Insurance Corporation will yield a premium income more than sufficient to pay probable losses and, in fact, large enough to make substantial additions each year to the reserves of the Corporation.

It should be noted that, since the greater proportion of building and loan assets will be in associations paying the highest premium rate, the average premium rate will be more than two-fifths of 1 percent per year. On the basis of the figures gathered as indicated above, it would be 0.46 percent. If an assessment of 0.25 percent has been deemed by Congress to be sufficient to insure liquidity and losses in banks, 0.46 of 1 percent should be ample to insure only solvency of thrift institutions.

In any insurance plan, as has been pointed out by the commission on banking law and practice of the Association of Reserve City Bankers, the payment should“ be determined according to the quality of the risks insured.” Again quoting from the Commission's study, “ the essence of insurance is the payment by the insured of premiums in actuarial relation to the risk involved." As that study pointed out, under a flat premium plan " there is no penalty for bad management." The graduated premium plan in the proposed bill does place a penalty on bad management, as such management can be judged by failure to create an adequate surplus by charging a higher premium rate.

This study would seem to indicate that, so far as the facts can be ascertained, the premium plan and rate is based on actuarial practice since the premium is more than sufficient to meet losses experienced over a considerable number of years and bears a direct relationship to the risk involved in insuring institutions of varying qualities.

Mr. Brown. Before you leave the question of the premiums, do you not think that the premium ought to be high enough to in time wipe out the investment of the Home Owners' Loan Corporation in this Federal Savings Insurance Corporation? I fail to see any good reason why the Government should do anything more than assist you by the present supply of the capital. I think that a provision should be made for a sufficiently high premium for the repayment of the hundred million back to the Government. You referred to the Federal Deposit Insurance Corporation. I agree with the chairman, that the situation is decidely different there from what it is here. Even in that case, the banks themselves, I know some of the members of the committee disagree with meearned the money which furnished the bulk of the original investment. I am referring to the $139,000,000 that the Federal Reserve banks will put up for this purpose. That was the property of the national banks of the United States. One hundred and fifty million was put up by the Treasury. Here we have a close supervision by the Treasury over these banks, and a great many of us feel that there was some responsibility on the part of the Comptroller's Office and the Treasury for the situation we were in. It seems to me in the case of building and loan associations if we advance the hundred million and supply the present capital, in time you ought to return that to the Government, and do it by a sufficiently high premium over a period of years. I think they should be insured; I think the Government should assist you; I do not think we ought to take the entire risk of the investment.

Mr. BODFISH. I would like to comment on that point, because I think we are in complete agreement. In the Bank Deposit Insurance

Corporation, the Government put up 150 million, the Federal Reserve 140 million and the banks about 100 million.

Mr. Brown. Thirty-nine million.

Mr. BODFISH. I think the Government has furnished practically all of that, except the 40 million, because you turned over to private concerns the most profitable perquisite of Government, outside of taxation, namely, the right to issue currency.

The premium rate we propose is sufficient, and this memorandum which I have submitted for the record, will give you an analysis of our losses over the past 15 years, and this premium is sufficient to pay twice over the losses we have incurred in any year on all institutions. We assume in this corporation we are going to select 75 percent of the best, or 80 percent of the best and insure their accounts. The highest losses we have ever had were just a fraction of a percent over a quarter of 1 percent.

Mr. Brown. Does your proposal include one which would repay to the Government this $100,000,000?

Mr. BODFISH. No; our proposal does not. I have not thought about that, particularly, and we had not thought about it. Our thought about the hundred million from the Government was that it was more or less a capital working fund, to be used by the Corporation, and the bill provides that the cost of that capital be paid to the Government. I will say frankly we are willing to have any operation set up so that ultimately the Government is out. I think we evidenced that view in the home-loan banks. We do not want the premiums so high that they will be too much of a burden. Our provision is that the premiums which are adequate to cover twice any losses we have experienced, be accumulated until there is 5 percent in the fund.

Mr. Brown. Roughly speaking, what would that be on the basis of the present obligations?

Mr. BODFISH. For example, if tomorrow morning we insured the present membership of the Federal Home Loan Bank System, that would give an annual return and that is important, decreased by an initial contribution-and then subject to assessment; that would give a premium of 11 million. That is from $2,500,000,000 of the building and loan assets of the country. The highest losses we have ever experienced were 24 million on all associations. That included some second-mortgage operations, due to lax Pennsylvania laws, things that should not have been insured. The losses on building and loan associations have been negligible, as you know.

Mr. WILLIAMS. When you build a reserve to the full 5 percent, what does it amount to?

Mr. BODFISH. That would be roughly, on the present membership of the Federal Home, around $50,000,000.

Mr. WILLIAMS. How do you figure it? I figure it about one hundred and twelve million.

Mr. BODFISH. I was thinking out loud. Our percentages are based on the insured accounts, rather than upon the total assets: I would say it would be about fifty million, just a rough estimate.

Mr. WILLIAMS. If it is on the entire number, it would be over a hundred million.

Mr. BODFISH. Yes. That assumes the classification in which the one-fifth, two-fifths, and three-fifths scale applies.

Mr. WILLIAMS. That would take 10 years under your plan.

Mr. BODFISH. It would take 10 years; if there are any losses, the losses would have to be taken out.

Mr. WILLIAMS. To accumulate the required reserves, it would take 10 years; that would amount to $50,000,000.

Mr. BODFISH. That is right.

Mr. Williams. To accumulate enough to pay back the hundred million to the Government.

Mr. BODFISH. Our high costs in any one year have been less than about twenty-five million. I think if the thing operates 10 years that the thing would, for one thing, as we have worked it out on this basis, be self-sustaining and build up a substantial reserve fund.

Mr. Brown. Let us come to one conclusion, anyway. Mr. Wolcott disagreed on this, but isn't it a fact that at the present time, as this title is drafted, the maximum Government responsibility would be the capital investment!

Mr. BODFISH. Absolutely.

Mr. Brown. Except for what he refers to as moral responsibility, there could not be a greater responsibility than one hundred million?

Mr. BODFISH. That is right. And, incidentally, the premiums under this would bring in for the country approximately $50,000,000 a year; that is, considering what you force them to put in their reserves, and that is just too much of a load for these institutions to take on at this time and the reason they do not accumulate. The latest figures and details on this premium schedule are in this little memorandum which may be useful to the committee.

Mr. WOLCOTT. Let me interrupt there to say I think the statement which I made the other day had to do with title I; it did not have to do with this title. It had to do with the liability of the Government in excess of a billion dollars of loss for the insurance of mort. gages for new construction in title I.

Mr. Bopfish. That is a very different question, as you say.
Mr. WOLCOTT. I did not have in mind title III.
Mr. Brown. We are talking about two different things.

Mr. BODFISH. This amends title III. It says the Insurance Corporation shall fix initially the annual premium for applicants for insurance as follows: All eligible institutions having a surplus of more than 5 percent of the total of the accounts of their insured members, plus other creditor obligations—I have always included other creditor obligations, because if the Insurance Corporation takes over one of those institutions and it owes any debts, in other words, has any notes payable to the bank, they have to pay those before they pay any shareholders. And I also suggest in this amendment that these little newly organized Federals be carried in the one-fifth of 1 percent class for 2 or 3 years until they get on their feet, as all of the mortgage loans are new and they are just starting on them. There are about 300 of them around the country.

Mr. GOLDSBOROUGH. Let me interrupt right there. I am wondering if the amendments which you have in mind are not contained in the Duffey bill, H.R. 9571?

Mr. BODFISH. The origin of the Duffey bill is about as follows: Mr. Duffey is a building and loan man and we discussed these amendments with him and, in order to have them in printed form, so that

we could check them with the building and loan supervisors and people around the country, so as to make sure there was not any unwieldy motion, the Duffey bill was introduced. The Duffey bill is merely Mr. Steagall's bill with the main amendments printed in it.

Mr. GOLDSBOROUGH. What I have in mind is, there are others who want to be heard, who have been here day after day, and I am wondering if you cannot complete your statement

Mr. BODFISH. I will be very glad to conclude here in just a minute or two. I hope the committee will investigate the question of the premiums and our suggestions in that connection, because we have studied the matter very carefully.

The next amendment we suggest is merely a request to the committee that you parallel, on behalf of the home-financing institutions, the action you took many years ago in regard to the Federal Reserve System, and authorize an advisory council of 12, 1 representing each Federal Home Loan bank, which would have contact with the Government agencies handling and developing this program. That suggestion is explained in the amendment.

There are a number of other amendments, Mr. Chairman, that are of an incidental and perfecting nature, growing out of our study of the legislation, and I will submit them in memorandum form for your consideration.

I think that is about the whole story. We would like to see legislation enacted at this time, before Congress adjourns.

We are very cordial to the repairs and modernization program; we are opposed to the insurance of individual mortgages; opposed to the national mortgage associations. We would like to see the H.O.L.C. have a little more money, and we would like to see title III and title IV of this bill, although we suggest the inclusion of the amendments as we have offered them or as they are printed in the Duffey bill.

I think that concludes my statement, unless there are questions.

The CHAIRMAN. Thank you, Mr. Bodfish. We shall now be glad to hear Miss Obenauer.

[Memorandum re: H.R. 9620-submitted by United States Building and Loan League,

Chicago, Ill., Morton Bodfish, Executive Vice President]

Our organization is in favor of the enactment of H.R. 9620. We are opposed to the inclusion of section 5 of title I and offer a complete and immediately effective substitute for this section, and are opposed to the inclusion of title II.

We feel that the repair and modernization program will develop substantial employment in the building trades and that the legislation, if the following amendments are included, will stimplate the flow and cooperation of private capital and rapidly develop normal activity in local thrift and home-financing institutions,

The following amendments are in the nature of constructive additions or alterations to accomplish the purposes with which the bill deals and which the President of the United States suggested in his message.

EXHIBIT I-AMENDMENTS PROPOSED

I

Page 4, lines 23-25, and page 5, line 1:

Proposal.-In the proposed repair and modernization operations, the Gov- , ernment is underwriting losses which may occur as the result of operation of privately managed financial institutions. The language of the bill would permit

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