We can identify no reason in connection with the introduction of the standby feature for changing the existing provisions of title XI with reference to refinancing mortgages. Accordingly, we suggest that the references to refinancing mortgages be deleted from S. 1434 and that its provisions be confined to the standby mortgage. Specifically, this would require the following amendment to new section 1107 as it appears in S. 1434 (matter to be deleted in black brackets):

"SEC. 1107. The Secretary of Commerce is authorized, upon such terms as he may prescribe, to make a commitment to the prospective owner of a vessel, prior to the time when the keel of such vessel is laid under a contract which such prospective owner has made with the shipbuilder for the construction of the vessel, to insure the interest on and the unpaid balance of the principal of a mortgage or mortgages which such prospective owner, as mortgagor, may at any time place on the vessel in order to finance the construction of other vessels, Cor both to refinance a mortgage insured by the Secretary of Commerce on the vessel and to finance the construction of other vessels, subject to the folowing conditions”

(2) S. 1434, unlike S. 1457, would not authorize the use of a standby mortgage on one vessel to finance the reconstruction or reconditioning of another vessel or vessels. In this respect the availability of the insured standby mortgage would be more restricted than is the availability of other insured mortgages under the present provisions of title XI. We know of no reason for introducing such a restriction. We believe, on the contrary, that insured standby mortgages should be available to facilitate the private financing of reconstruction and reconditioning, which in many cases will involve substantial amounts, particularly in the case of passenger vessels and in instances where containerization or roll-on, roll-off features are to be added to cargo ships. Accordingly, we propose that new section 1107 as it appears in S. 1434 be amended as follows (new matter italicized, matter to be deleted in black brackets):

"SEC. 1107. The Secretary of Commerce is authorized, upon such terms as he may prescribe, to make a commitment to the prospective owner of a vessel, prior to the time when the keel of such vessel is laid under a contract which such prospective owner has made with the shipbuilder for the construction of the vessel, to insure the interest on and the unpaid balance of the principal of a mortgage or mortages which such prospective owner, as mortgagor, may at any time place on the vessel in order to finance the construction, reconstruction, or reconditioning of other vessels or both to refinance a mortgage insured by the Secretary of Commerce on the vessel and to finance the construction, reconstruction, or reconditioning of other vessels, subject to the following conditions—

"(6) the loan agreement for the making of the loan secured by the mortgage, or the mortage, provides that the loan, except such portion thereof as it has been agreed will be used to refinance an existing mortgage on the vessel which has been insured by the Secretary of Commerce, will be disbursed by the mortgagee to a [shipbuilder] shipyard in payment, on behalf of the mortgagor, of part of the contract price for the construction reconstruction, or reconditioning of [a] other vessels contracted for by the mortgagor [which has not yet been delivered];"

(3) The introductory sentence of new section 1107 as it appears in S. 1434 requires that a commitment to insure a standby mortgage be obtained prior to the laying of the keel of the vessel to be mortgaged. We can identify no reason for this requirement, since the bill does not contemplate that any significant determinations as to the amount of the mortgage or the economic soundness of the mortgaged properties will be made until later execution of the mortgage and the insurance contract. The only consequence of requiring advance commitments in this fashion will be to force the operator to apply for and the Administration to act upon such a commitment prior to every keel laying even though in some cases a later standby mortgage may never be employed. Further, this unnecessary requirement would eliminate from eligibility for a standby mortgage all vessels whose keels were laid prior to enactment of the bill. We would eliminate the requirement by amending the introductory sentence of new section 1107 in S. 1434 to read as follows:

"SEC. 1107. The Secretary of Commerce is authorized, upon such terms as he may prescribe, to make a commitment to the owner1 or the prospective owner

1 Under the standard shipbuilding contract, title to the uncompleted vessel during construction is vested in the prospective operator rather than in the shipyard.

of a vessel [prior to the time when the keel of such vessel is laid under a contract which such prospective owner has made with the shipbuilder for the construction of the vessel,] to insure the interest and the unpaid balance of the principal of a mortgage or mortgages which such owner or prospective owner, as mortgagor, may at any time place on the vessel ****

(4) Under new section 1107 (1) as it appears in S. 1434, a commitment to insure a standby mortgage on a vessel is expressly made nonassignable. This introduces an inflexibility which may operate to frustrate the recourse to private financing which title XI is designed to encourage and which is in no way necessary to protect the Government. The necessary flexibility could be obtained, and full protection for the Government would be retained, if section 1107(1) were amended to read:

"(1) the commitment shall not be assignable, either separately or in conjunction with a transfer of the vessel, to successor companies or others, without the prior written approval of the Secretary of Commerce;"

(5) New section 1107 (2) as it appears in S. 1434 would forbid insurance of a standby mortgage if the vessel to be mortgaged is subject to a prior uninsured mortgage, but it is not clear from the language of the bill whether the vessel must be free of a prior uninsured mortgage at the time of insuring of the standby mortgage or at the time of the commitment to insure. The former interpretation seems adequate to protect the Government and to meet the present requirement of section 1101 (a) that mortgages insured under title XI shall qualify as preferred mortgages when recorded and endorsed as required by the Ship Mortgage Act of 1920. Accordingly, we propose that section 1107(2) be amended to read:

"(2) the vessel is not, at the time of insuring the mortgage pursuant to the commitment, subject to a mortgage which has not been insured by the Secretary of Commerce;"

(6) New section 1107 (3) as it appears in S. 1434 would incorporate the economic soundness test of section 1104 (è) of title XI. Since the latter section refers to the economic soundness of "the property or project with respect to which the mortgage or loan executed," it is not clear in the standby mortgage situation whether that test refers to the ship to be mortgaged or to the ship whose construction, reconstruction, or reconditioning is being financed by the mortgage. If the language which now appears in brackets in section 1107 (3) of S. 1434 were to be retained and enacted, it would be clear that the reference is to the economic soundness of the ship to be mortgaged. If that language is not to be enacted, we recommend that section 1107 (3) be amended to read:

"(3) within a reasonable period prior to, or at the time of, insuring the mortgage pursuant to the commitment, the Secretary of Commerce [makes the finding required by section 1104 (c) of this Act] finds that the mortgaged vessel or the project with respect to which the mortgaged vessel is to be operated will be, in his opinion, economically sound;"

(7) New section 1107(4), as it appears in S. 1434 has several defects: (a) It would limit the principal amount of mortgages covered by section 1107 to an amount "which when added to the unpaid balance of the principal obligations of prior mortgages on the vessel" will not exceed 75 percent (or 871⁄2 of actual cost which, under title XI is the maximum principal amount of any mortgage eligible for insurance. If section 1107 is to continue to cover refinancing or refunding mortgages, section 1107 (4) may impose an unintended obstacle. Read literally, it would require that the principal amount of the mortgage to be refinanced or refunded be deducted from 75 percent or 872 percent of actual cost in order to fix the principal amount of the refinancing or refunding mortgage. Whenever the unpaid balance of the existing mortgage exceeded 371⁄2 percent (or 43.75 percent) of actual cost, refinancing, or refunding by another insured mortgage would be impossible.

(b) In determining the insurable actual cost of the vessel to be mortgaged, its original actual cost is to be depreciated at the rate of 5 percent per annum from date of delivery by the shipbuilder regardless of the facts that (i) there may have been capital improvements at some time subsequent to original delivery of the vessels by the shipbuilder, which improvements should not be depreciated from original delivery date, (ii) under 607 (b) of the Merchant Marine Act, 1936, the useful economic life of a subsidized vessel may, by reason of reconstruction or reconditioning, be extended beyond 20 years, and (iii) the useful economic life of many unsubsidized vessels is in any event longer than 20 years.

If section 1107 (4) were revised as indicated below, the language first italicized would cover (a) above and the language last italicized would cover (b). If all

reference to refinancing mortgages were deleted as we have suggested in (1) above, the language first italicized would, of course, be unnecessary.

"(4) the mortgage involves a principal obligation which will not exceed, or, in the case of a mortgage given to finance the construction of other vessels will not, when added to the unpaid balance of the principal obligations of prior mortgages on the vessel, [result in a sum which will not] exceed (a) if the vessel was not built with the aid of construction-differential subsidy and complies with the requirements of Section 509 of this Act, [exceed] 872 per centum of the actual cost of such vessel, depreciated Cat the rate of 5 per centum per annum from the date such vessel is delivered by the shipbuilder] to the date such mortgage is executed on the basis of the economic life of said vessel as determined by the Secretary of Commerce, together with the actual depreciated cost of capital improvements thereon, and (b) if the mortgaged vessel was built with the aid of construction differential subsidy or does not comply with the requirements of section 509 of this Act, [exceed] 75 per centum of such amount;"

(8) New section 1107 (5) as it appears in S. 1434 would limit the maturity date on a standby mortgage to a date 20 years after original delivery of the vessel by the shipbuilder. If S. 1434 is to apply to refinancing mortgages, this provision may conflict with section 1106(3), which limits the maturity of refinancing or refunding mortgages to the maturity date of the original mortgage. Insofar as standby mortgages are concerned, subsidized vessels may have, and many unsubsidized vessels do have, as indicated in (7) above, a useful economic life in excess of 20 years. If section 1107 (f) were revised to read as indicated below, the language first italicized would deal with refinancing mortgages and the language second italicized would deal with standby mortgages. If the reference to refinancing mortgages were deleted from S. 1434 as we have suggested in (1) above, the language first italicized would be unnecessary.

"(5) the mortgage has maturity dates which do not, in the case of a mortgage to refinance a mortgage insured by the Secretary of Commerce, exceed the maturity dates of the original mortgage, or [exceed the remaining years of a useful life of the mortgaged vessel of 20 years computed from the date the vessel was delivered by the shipbuilder], in the case of a mortgage to finance the construction, reconstruction, or reconditioning of other vessels, extend beyond the economic life of the mortgaged vessel as determined by the Secretary of Commerce;"

(9) New section 1107 (6) as it appears in S. 1434 is defective in several respects:

(a) It requires that all proceeds of a standby mortgage be disbursed directly by the mortgagee to the shipbuilder despite the facts that: (i) It is desirable that the owner retain some flexibility in the timing of his mortgage: in order to get the best interest rate, it may be most provident to enter into the mortgage before any payments are due the shipyard or, indeed, before execution of the construction contract. (ii) In any event, payments are made to the yard progressively on the basis of work accomplished and the final payments to the yard will not be due until sometime after completion of the ship being financed by a standby mortgage. (iii) Section 1101 (f) of title XI now recognizes as a legitimate part of the actual cost of construction, reconstruction, or reconditioning the costs of "designing, inspecting, outfitting, and equipping" and many of these costs are not payable to the shipyard. That is true of the costs of both designing and owner's outfit, which are purchased elsewhere, and of the owner's own inspection costs for which he will be entitled to reimbursement, with the approval of the Administration, from the proceeds of the standby mortgage. (iv) The owner may in many instances pay part of actual cost in advance of execution of the standby mortgage and would then be entitled, with the approval of the Administration, to reimbursement from the proceeds of the mortgage. All such reimbursement of the owner is now recognized as proper by section 1104 (a) (8) of title XI.

(b) It also provides that the payment to the shipyard shall be "in payment *** of part of the contract price." This language is not apt for the situations where several existing ships are mortgaged to finance the entire contract price of one new ship, or where one large existing ship is mortgaged to finance the entire contract price of a smaller new ship.

We doubt the need of any such statutory restriction on the use of insured mortgage proceeds. None is now contained in title XI and the matter is governed by the Administration's regulations and by the financing documents covering each separate mortgage transaction.

If any restriction is to be imposed, however, the Government would be better protected by a requirement that the proceeds of the standby mortgage be either (1) paid to the shipyard, or (2) in the case of a subsidized operator, deposited in his capital reserve fund, withdrawals from which are subject to Administration approval, or (3) in the case of a subsidized or a nonsubsidized operator, deposited in a fund from which withdrawals can be made only with the approval of the Secretary of Commerce.

Accordingly, we recommend that section 1107(6) be deleted or, if not deleted, be amended to read:

"(6) the loan agreement for the making of the loan secured by the mortgage, or the mortgage, provides that the loan, except such portion thereof as it has been agreed will be used to refinance an existing mortgage on the vessel which has been insured by the Secretary of Commerce, will either be (a) disbursed by the mortgagee to a [shipbuilder] shipyard [in] as payment, on behalf of the mortgagor, [of part] on account of the contract price for the construction of a vessel contracted for by the mortgagor which has not yet been delivered, or (b) to the extent not so disbursed, shall be (i) deposited in a fund from which disbursements may be made only with the written approval of the Secretary of Commerce, or (ii) in the case of a mortgagor receiving operating differential subsidy under the provisions of this Act, deposited in the mortgagor's capital reserve fund;" (10) New section 1107 (8) as it appears in S. 1434 requires that the vessel on which a refinancing or standby mortgage is placed be "in as good condition as it would have been if it had been mortgaged immediately after delivery by the shipbuilder (and remained subject to such mortgage until the date of execution of this mortgage) and such mortgage had been insured by the Secretary of Commerce, and all requirements of the Secretary of Commerce with respect to a vessel on which he has insured the mortgage had been complied with." This language could be construed to impose the impossible requirement that the vessel be as good as new when the refinancing or standby mortgage is executed. We understand that its purpose, however, is to require the vessel to be in as good condition at the time of execution of the refinancing or standby mortgage as it would have been if the owner had from time of original delivery by the shipbuilder complied with the requirements imposed under title XI for maintenance and repair of vessels which were at delivery covered by insured mortgages. In the case of a refinancing mortgage, this requirement seems unnecessary and productive only of confusion. In the case of a standby mortgage, some requirement may be necessary, but this one is still confusing: The requirements for vessel maintenance and repair imposed by the Secretary under title XI are not embodied in the statute or the regulations, but are written into the financing documents for each insured mortgage transaction. Since there would have been no original insured mortgage in the usual case of a standby mortgage, this requires the Secretary to measure the condition of the vessel at the time of the standby transaction by the hypothetical requirements of a nonexisting prior insured mortgage. We believe that the Government would be better protected, and confusion would be avoided, if section 1107 (8) were amended to read:

"(8) the mortgaged vessel is in as good condition, ordinary wear and tear excepted, as it [would have been in if it had been mortgaged] was immediately after delivery by the shipbuilder [(and remained subject to such mortgage until the date of execution of this mortgage) and such mortgage had been insured by the Secretary of Commerce, and all requirements of the Secretary of Commerce with respect to a vessel on which he has insured the mortgage had been complied with]."

(11) S. 1457 deals with one problem, apart from the standby mortgage situation, not dealt with by S. 1434. Section 1104 (a) (2) of title XI now provides that the principal amount of a mortgage to be insured shall not exceed 75 percent of the actual cost of the vessel. It contains a proviso, however, authorizing insurance of a mortgage whose principal amount does not exceed 87% percent of actual cost in the case of a vessel of the size and speed eligible for an 872-percent Government mortgage under section 509 of the Merchant Marine Act, 1936. As previously indicated, title XI authorizes insurance of mortgages not only to finance new construction, but also to finance reconstruction or reconditioning. And it is clear from section 1101 (f) that an 872-percent insured mortgage was intended to be available for reconstruction or reconditioning whenever it would be avilable for new construction. Since section 509 authorizes an 872-percent mortgage only for purposes of new construction, however, it is doubtful whether the language in the proviso of section 1104

(a)(2) is adequate to effectuate the intent of section 1101 (f). S. 1457 would correct this deficiency. We suggest a similar correction be embodied in an additional section 5 of S. 1434 reading as follows:

"(5) by revising the first clause of the proviso of section 1104(a) (2) to read: That in the case of a vessel, the size and speed of which are approved by the Secretary of Commerce, and which is, or in the case of a vessel to be reconstructed or reconditioned would have been, eligible for mortgage aid for construction under section 309 of this Act and in respect of which the minimum downpayment by the mortgagor required by that section would be 121 per centum of the cost of such vessel, the obligation may be in an amount which does not exceed 87 per centum of such actual cost;"" We also note one typographical error and three probably desirable changes in S. 1457:

(1) The typographical error occurs in clause (1) in the proviso to section 1101 (f) (2) of title XI as amended by section 1 or S. 1457. Clause (1) of the proviso should be amended to read:

"(1) as insurance on a loan, or on a mortgage to finance the construetion, reconstruction, or reconditioning of the vessel mortgaged, the amount paid by or for the account of the [mortgaged the amount paid by or for the account of the] mortgagor or borrower for the construction, reconstruction, or reconditioning (including designing, inspecting, outfiting, and equipping) of the vessel :"

(2) If, as indicated in paragraph (6) of our comments on S. 1434, the economic soundness test of section 1104(e) of title XI is to apply, in the case of a standby mortgage, to the vessel mortgaged rather than to the vessel whose construction, reconstruction, or reconditioning is to be financed by the standby mortgage, section 1104(c) as amended by section 5 of 8. 1457 should be amended

to read:

(e) No commitment to insure a mortgage or loan shall be made by the Secretary of Commerce unless he finds, at or prior to the time sach commitment is made, that the mortgaged russel or the rosedd ahose constructive, reconstruction or reconditioning [project] is being financed by the [mortgage or the loan, or the project with respect to which such roved is to be operated, will be, in his opinion, economically sound, and no mortgage or loan, unless made pursuant to a prior commitment, shall be insured less the Secretary of Commerce finds, at or prior to the time the insurance becomes efective, that the mortgaged vessel or the vessel, whos87 constinetion, reconstruction or reconditioning [project] is being financed by the [ortgage or the】 kan, or the project with respect to ackich such vessel is to be sacraitd, will be in his qizia, economically sound."

(3) Section 3 of S. 1457 in its amendment of section 1204 a 3 of title M would require the Secretary to determine at the time the standiy mintage is executed 100 percent of the actual cost of the Tessel or resses the con struction is to be financed. In fact, no such determine an be made at that tine and the requirement would produce shilkatre dārzites In this respect we believe that S. 1434, which hits the amount of the stabdy mortgage to 75 percent (or 879 percent) of the deprecited armal ost of the ressel or vessels mortgaged, without regard to the actual out of the ressel or ressels to be constructed, represents a preferibue igrað. JovožzgĮ, we wocid amend section 1104(a)(3) as li ajgents 2 & 1st a read before the prvriso as follows,

~(3) shell invoère an alpidiu in a principal anom rhd in com bination with other mirgiges 1 take the crustrace revetraING or reconditioning does nc exceed [the lesser 15 per cent of the actual cost of the Tesses or Tesseis Drogi [e 10 pervetract of the actual cost of the ressei ir Tesses the SINDE MEXIGE reconditioning is furared mder this tie] se stai cst to be deter mined by the Secretary of Commerce at de pele ta the elastin of the morizace and suta decermana & de anciisire for the purposes of deternating the principal amount of the zertpage:”

4) As måned a pricipà ý of vZ OLLES e 8 164 we do not believe £27 restrain qua the proveeds of a study meat is DECOSSLIF. If a restriccia is a be imposed bonerer, or if the authority to deposit, such proceeds in agual reserve finds is thecht te rue andana ve mad