its obligations. It has no recourse to the Treasury or support by the Federal Government in the event of emergency need, notwithstanding the ownership of 67.5 percent of its stock by the Government and the important relationship of the Federal home-loan banks to sound and safe home ownership throughout the country. With the necessity of readily financing and refinancing in the future the national debt resulting from the war, it is clear that we cannot, under any circumstances, risk even the remote possibility of any untoward development which might even temporarily raise questions as to the power of our national financial system to deal immediately with any monetary problem which may arise.

It is wholly illogical that the Federal Home Loan Bank System alone should be without that protection against unexpected developments already provided for the other important financing agencies to which I have referred.

Protection of the Federal Savings and Loan Insurance Corporation is also included in section 3. Under the statute the Insurance Corporation has the right to issue debentures in settlement of accounts in insured savings institutions in the event of receivership and liquidation. It may also sell debentures in the open market in an emergency in order to secure funds which may be needed for the time being in connection with the liquidation of insured institutions. The Insurance Corporation has never had any occasion to offer debentures for sale but if the need arose and market conditions were such that debentures could not be disposed of it is most important that the Treasury should have authority to protect the situation, as it has in the case of the Federal Deposit Insurance Corporation.

Senator BUCK. Are these debentures of the Federal home-loan banks?

Mr. FAHEY. No. These are debentures of the Federal Savings and Loan Insurance Corporation.

Senator BUCK. They are not tax-free debentures?

Mr. FAHEY. No, sir.

Senator BUCK. What interest rate do they carry?

Mr. FAHEY. We have never offered any for sale. We never had occasion to do so.

Senator BUCK. All right.

Mr. FAHEY. Failure of the Insurance Corporation at any time to meet promptly its obligations would seriously undermine, if not destroy, confidence in Government insurance of bank deposits and savings and cause grave financial repercussions.

Section 4 requires that the Federal home-loan banks be examined annually instead of twice a year. Under this amendment the Federal Home Loan Bank Administration would still have power, as at present, to examine the banks at any time, but would not be required to do so more than once a year. This change, while preserving all essential authority, would make possible substantial savings both in money and personnel, at a time when such savings are of more than ordinary importance.

S. 757 contains two provisions. The purpose of the first is to clarify the definition of "other improved real estate" as used in section 5 (c) of the Home Owners' Loan Act of 1933. The new language would read, "any improved real estate." Under existing law, a Federal association may lend any of its funds on first liens upon homes or combinations of homes and business property within 50 miles of its

home office. Not more than $20,000 may be loaned on the security of a first lien on any one such property, and not over 15 percent of its assets on "other improved real estate" without regard to the 50-mile and $20,000 limitations. The present amendment would make it clear that loans under this 15-percent provision may be made on homes or combinations of home and business properties, as well as on other improved real estate.

Senator RADCLIFFE. Is there very much demand for loans beyond 50 miles? As to these associations and banks, which are local to a very large extent, is it contemplated that they would extend their activities well beyond the 50-mile limit, or only to meet special emergencies?

Mr. FAHEY. Only to meet special emergencies. Conditions differ in different sections of the country. In areas of highly congested population, where there are more institutions, and also where there is a greater accumulation of savings, the condition is quite different from sparsely settled areas of the country, as in some of our large cities in the West and the Southwest. Under most State legislation, local interests are permitted to loan anywhere within State borders. These Federals are restricted to 50 miles, except for the 15 percent provision. Senator RADCLIFFE. Is that 50-mile limit a purely arbitrary figure? In other words, is there any reason why it should be 50 miles rather than some other distance?

Mr. FAHEY. No. And there have been questions raised as to whether or not in order to be flexible, depending upon the part of the country, it should apply farther, but under the Home Owners' Loan Act of 1933, as amended, where an institution which is converted from a State charter was lending beyond the 50-mile limit, it is permitted to continue to lend in the territory in which it made loans while operating under State charter, but in the main their lending on home property is confined to the 50-m le limit; although there are great variations among State-chartered institutions, institutions of all kinds.

But the point here is that they can lend up to 15 percent outside. of 50 miles on improved real estate, but they cannot lend on homes. That is the important change involved here. There ought not to have been that limitation. They should not have been restricted to business.

Senator RADCLIFFE. Is there any reason why it should have been restricted to business and homes combined?

Mr. FAHEY. No. I do not think it was ever so intended. In fact I am quite sure it was not so intended, but that language was in the act and it was interpreted that way. Perhaps Colonel Lee could tell you more about that.

Colonel LEE. I think it was actually intended to include homes. or combinations of home and business property. It stated 15 percent on other improved real estate property. But in the interpretation of the act it was held that it meant business property. This is merely a technical amendment in an endeavor to do what the Congress originally intended to do, and also to overcome what appears to be an inconsistent position.

Senator RADCLIFFE. The language is more or less an inadvertence rather than any deliberate intention to exclude homes.

Colonel LEE. There is no question about that. Some people even contend now that it includes a combination home and business.

Senator RADCLIFFE. You mean a combination home and business house?

Colonel LEE. Yes, sir.

Senator RADCLIFFE. Would you think it would also cover homes where there was no combination with business?

Colonel LEE. My recollection is that the former general counsel, Mr. Russell, took the position that it now includes a home or a combination of business and home. . I took the position that it cannot be so interpreted, although it was so intended. It very clearly states the contrary. It states "other improved real estate" and it would be business property.

Senator Buck. That is one provision that you have here.

Mr. FAHEY. Yes.

The inconsistency of permitting these associations to make loans on homes within the 50-mile limit, and denying them the right to make loans on homes under the 15-percent provision, is obvious.

The remaining provision of S. 757 would expressly authorize Federal savings and loan associations to invest their funds in any mortgage or obligation which is insured under the National Housing Act or for which a commitment to insure has been issued under that act, or as to which the association has insurance under any title or provision of the National Housing Act.

Under the present law, Federal savings and loan associations have a limited power to make loans under titles I, II, and VI of the Nationa[ Housing Act. However, since they are required to make these loans only on first liens, they cannot make use of those provisions of title I which permit the making of title I loans without the expense and delay of taking a mortgage or other lien and searching the title. Title I loans of this type have been found to be highly advantageous in connection with the provision of war housing, as they make possible the conversion of existing dwellings into accommodations for a larger number of family units with the minimum of delay and with the least possible use of critical material. They are certain to be very useful also in the post-war period for the modernization, improvement, and repair of properties and the providing of employment in that period. If it is agreeable, I will go to the other, S. 1034, unless there are some questions that members of the committee would like to ask.

Senator DANAHER. I have questions on S. 756, when we get to it, but you might as well complete your statement first, please. Mr. FAHEY. Very well.

S. 1034

In 1934, in the midst of the depression and following the organization of the Federal Deposit Insurance Corporation which insured deposits in commercial banks up to $5,000, Congress established the Federal Savings and Loan Insurance Corporation to insure accounts. in savings and loan institutions up to the same limit. As you know, when it was created in 1933, the Home Owners' Loan Corporation was contemplated not only as an agency to save the homes of a host of our people who were threatened with foreclosure, but also to render assistance to the mortgage-lending institutions of the country and to aid in restoring the confidence of savers.

In order to make money available for these purposes and revive mortgage lending, Congress provided that the Home Owners' Loan Corporation could use up to $300,000,000 of its authorized bond issue

for investments in the shares of savings and loan associations or for deposits in savings banks. Under this provision of the Home Owners' Loan Act, nearly $225,000,000 was invested in the shares of savings and loan associations and these associations were given 10 years to retire these shares and pay back the Corporation. All but $63,000,000 had been repaid at the first of this year.

It was in connection with the general task of reestablishing the home mortgage market and to stimulate the return of hoarded money to the savings institutions that Congress established the Federal Savings and Loan Insurance Corporation and provided that its capital of $100,000,000 should be supplied by the Home Owners' Loan Corporation. This capital was furnished in accordance with the provisions of the statute by transferring to the Insurance Corporation $100,000,000 in 3 percent bonds of Home Owners' Loan Corporation, guaranteed as to principal and interest by the Government. It was also provided that the Insurance Corporation should pay to the Home Owners' Loan Corporation cumulative dividends out of net earnings at the same rate as the interest rate on the bonds transferred in payment for the Insurance Corporation's capital stock, which, as stated, was 3 percent. ' While all Federal savings and loan associations were by law obliged to obtain insurance of their accounts from the Federal Savings and Loan Insurance Corporation, such insurance was of course optional with State-chartered associations.

The results of this insurance measure have proven far more successful than anticipated. When the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation came into existence there was a vast amount of idle money in hoarding as a result of long-continued withdrawals from our financial institutions. The Federal insurance plans had the effect of returning a large part of this money to our banks and savings institutions promptly and also stimulating a great increase in savings. The insurance of deposits and of savings by the Federal Government has so completely allayed public apprehension as to the safety of money in insured institutions that when one is now closed the incident is almost unnoticed and causes no anxiety to depositors or savers.

In the 10 years of its existence the Federal Savings and Loan Insurance Corporation has risen to a present membership of 2,452 institutions with total assets of $4,327,868,000. Of this number 1,466 are Federally chartered institutions and 986 are State chartered. From the beginning the insured institutions, as compared with those without insurance protection, have steadily shown great gains in savings while the general trend of uninsured institutions has been downward.

When the Federal Savings and Loan Insurance Corporation was created there was no experience to depend upon in fixing the premium

It was expected that, notwithstanding the care which might be exercised in extending the privilege of insurance to members, there would be serious losses because of reactions from the depression which would only become apparent in the course of time. Accordingly, the original rate was fixed at one-fourth of 1 percent of shares outstanding and creditor obligations.

It presently became apparent that this rate was higher than necessary. In May 1935 Congress reduced the rate to one-eighth of 1 percent, but retained the right of the trustees of the insurance corporation to assess an additional one-eighth of 1 percent at any time.

In the 9 years which have elapsed since this rate was fixed, the Corporation has not experienced the difficulties and losses which were expected.

Aided unquestionably by insurance, the revival of home construction and management which heeded the lessons of the depression, these institutions have gained steadily in strength and public acceptance. Those which held an undue proportion of real estate in 1937 and 1938, as a result of foreclosures, have disposed of it with satisfactory results. They have built up substantial reserves which are increasing steadily. They are today large holders of Government bonds and are in a stronger position today than at any time in decades.

To December 31, last, during this 10 years of operation, the Insurance Corporation has been obliged to render financial assistance in the form of contributions to but 26 institutions in order to make good impairments.

Senator BUCK. Isn't the rate now one-twelfth, or is it still oneeighth?

Mr. FAHEY. It is still one-eighth. That is what this amendment 'proposes to correct.

The total losses on this account to December 31 last were $4,955,898. To the 1st of April last but seven insured institutions have been placed in receivership. Of these, three were State chartered and four were Federal. Of the seven institutions in receivership, liquidation has been completed in two, with total losses to the insurance corporation of but $25,147.45. The other five institutions are still being liquidated under the receiverships. Our estimate of total losses in these cases is $715,838.84.

Senator DANAHER. What is the aggregate of losses in your whole experience, independent of these seven?

Mr. FAHEY. It would be $4,955,898.
Senator DANAHER. Thank you.

Mr. FAHEY. As of the end of the last calendar year, December 31, 1943, the Insurance Corporation had total assets of $146,821,258.22. Its capital stock was the $100,000,000 supplied by the Home Owners' Loan Corporation. Its reserves required by law and unallocated income amounted to $19,074,132. Special reserves represented by accumulated dividends on the stock held by H. O. L. C. amounted to $25,500,000.

Because of the belief in the early years of the Insurance Corporation that it might encounter serious losses, it was the opinion of the Federal Home Loan Bank Board that the dividends payable to the Home Owners' Loan Corporation should be allowed to accumulate until such time as the Insurance Corporation had built up a substantial reserve out of its own earnings. The Treasury Department approved of this policy, and the H. O. L. C. dividends have until now been allowed to remain in the treasury of the Insurance Corporation. As of the 1st of this month-May-the total amount of this accumulation was $26,500,000. The income of the Insurance Corporation has shown steady increases from year to year. It has risen from $182,000 in 1935 to an estimate for the present fiscal year of $4,500,000.

The Corporation has been operated on a most economical basis for the calendar year 1943, with an income of $7,486,977, approximately $7,500,000. Its total operating expense was but $298,982.