Mr. FAHEY. No, indeed. You are quite right about that. Mr. FAHEY. You are quite right, because it is common experience that if lending institutions generally have any doubt about a loan with reference to which FHA has made a commitment for insurance, they make an independent check. Federal associations are requested to independently check all loans. Senator MURDOCK. The trend I have noticed, and I hope we can stop it, is because there is insurance of these loans the safeguards that otherwise should attend the loans do not attend them; it becomes just a matter of keeping them insured, and anything that has preceded is 0. K. I want to get completely away from that idea in any future legislation. Mr. FAHEY. Of course I would agree, and I am sure the Commissioner of the Federal Housing Administration would also agree, that loans ought not to be made just because they are insured. In any doubtful case the lending institution as a trustee of savings should check the physical value of the property, the credit record of the borrower, and any other factors which should be taken into consideration. Senator MURDOCK. Inasmuch as I interrupted your statement, and it may be that I will have to leave in a few minutes, I would like to ask you this question: What is the primary purpose of Federal housing legislation of all types? Mr. FAHEY. Well, that is a rather broad question to answer without going into considerable detail. Senator MURDOCK. It seems to me that question could be answered in comparatively few words. That is, if I have the right idea I think it could be answered in a few words, for what I have in mind seems to me at least to be the primary purpose of such legislation. Mr. FAHEY. In my judgment, the fundamental purpose which should be behind every piece of legislation dealing with housing, it is to protect absolutely the safety of the loans made. Senator MURDOCK. In my opinion that is absolutely not the primary purpose, but it is the trend that we find today under such legislation. My idea of the primary purpose of housing legislation is this: That we supply the American citizen who is interested in a good home, with a good home. That is the primary purpose, is it not? Mr. FAHEY. That is right. Senator MURDOCK. And other things are incidental. Insuring the loan is incidental, and the work of the contractor, in my opinion, is incidental. The primary purpose is the construction of good American homes for good American citizens. But I find the trend under this legislation to be what? You have your bankers over on this side, your contractors over on that side, and the Federal Government on a third side, and it seems to me that too much emphasis is being placed on safeguarding the banker, and the profits of the contractor, and the Federal Government, and that the little fellow standing off here, on whom the whole structure depends, is left out of the picture. He is not safeguarded, in my opinion, to the extent that we should and must safeguard him. Mr. FAHEY. Well, I would say to that Senator MURDOCK. Now, my experience in Federal housing is this: That after 2 or 3 years, if you go into one of these houses constructed as a Federal housing project, you find a discouraged and disappointed American home owner. Why? Because the construction of the home has not been sufficiently safeguarded. Now, if we do not change that trend, if we do not bring ourselves around to the view that the primary purpose of this type of legislation is that the American home owner is to have a good and substantial home, the whole thing is going to crumble of its own weight. I think in this legislation, at least as I interpret it, the biggest factor in the whole thing is this: That after a home is constructed and is occupied by an American family, that American family must, when they move into it, have the assurance that the house is built to certain specifications, and that a few years hence that family is not going to find itself disappointed and discouraged by reason of the fact that those safeguards have not been fully carried out. Mr. Chairman, I wanted to make that statement because I may have to leave before the witness completes his testimony. I hope that every Federal agency, and every banker, and every contractor in this country that comes into this program is going to understand it is not just so much for him, that the interest of the banker or the contractor is merely in the profits he may get out of it, but that we are attempting to legislate for the little fellow over here who will occupy the home. Senator ELLENDER. If Senator Murdock will permit me, I would like to call his attention to section 312 of the bill, which provides for a warranty of 1 year against defects in construction. Senator MURDOCK. That is hardly long enough. This is the complaint I find out in my State, that people who have taken their entire savings and placed them in one of these homes, after a couple of years living in the home, begin to find defects. And when he goes out and calls it to the attention of the contractor or the banker, who has made the profit, they are not interested; and if mention is made that such defective construction is absolutely undermining the housing program what do they say? They say, "We are through with the thing.' Yes; they say, "We have our contract money. We have made our . profit." And the little fellow over here occupying the house is holding the bag. They say, in effect at least, "If there are defects, it is none of our business." They say, "The whole thing is insured under the Federal Housing Act, so what?" And I want to say to the authors of this bill, if the bill we are considering does not have for its primary purpose the absolute safeguarding of the American home owner, then it is deficient and defective. Mr. FAHEY. Senator Murdock, amplifying what I have said, and doing it briefly, I certainly would agree with you as to those fundamental principles. Moreover, I would emphasize the fact that we should not take any step so far as encouragement of housing is concerned, that will lead people into buying or taking over houses the cannot possibly pay for. It is not only important that Senator MURDOCK. Not only that, but if they can build houses that are defective, instead of building up the morale of the peopl instilling pride in home ownership, then the law is not sound. Mr. FAHEY. Of course that is true, but Senator MURDOCK. The thing that will make a Federal housin project sound is to have satisfied home owners, contented home owners, home owners that by reason of the type of homes they occupy are proud of the fact that they belong to them. Those are the very basic principles, in my opinion, of any housing project. Mr. FAHEY. Of course, Senator Murdock, there is no question about that. But what I referred to was if they are led into overbuying, taking on obligations they cannot possibly meet, then you are in for trouble. That is the kind of thing that happened in this country from 1922 to 1928, and brought on the greatest mortgage panic the world ever saw. There are, however, difficulties in bringing about the type of guaranties that are referred to in this bill. That is a pretty large subject, and I would rather not be asked to go into that at the present time. But you have to remember that of the total number of houses built in this country, those which are insured by FHA are only a portion, and always will be only a portion. Senator MURDOCK. I understand. Mr. FAHEY. Moreover, of course for long years satisfactory houses were built by responsible contractors for the people of the United States on the advice of competent architects, and they were pretty well protected in the character of the construction. One of the difficulties we have experienced since 1920 is that we built more jerrybuilt houses in this country than ever before in our history. From time to time we talk about old houses, and I would say that there are hundreds of thousands of old houses in this country that are a lot better than those built within the last 20 to 25 years. Senator MURDOCK. But as a private citizen contracts for a home he goes to a bank and gets his financing. If there is any fooling there, of course all three parties are responsible. But when the Federal Government steps into the picture and induces its citizens to come into these housing projects, then I think the Federal Government has the responsibility of seeing to it that the construction is of such a type that the home builder gets a run for his money. I am sure you will agree with me on that. Mr. FAHEY. Yes. The CHAIRMAN. You may proceed with your statement. Mr. FAHEY. Section 303 of the present bill deals with the base for the issuance of consolidated Federal home-loan bank debentures. These debentures, which are the joint and several obligations of all the Federal home-loan banks, afford a means by which the bank system obtains necessary funds for the conduct of its operations. Under existing law, such debentures may not be issued in excess of five times the total paid-in capital of all the Federal home-loan banks nor in excess of the notes or obligations of member institutions held by all the banks and secured under section 10 (a) of the Federal Home Loan Bank Act. However, no provision is made for including in the debenture base secured advances made under other provisions of the Federal Home Loan Bank Act or for including therein Government obligations which are owned by the Federal home-loan banks, such as Government bonds. The present section would include in the debenture base any secured advances made by the banks and any direct or fully guaranteed obligations of the Government which are owned by the banks. Section 304 would require that the Federal home-loan banks be examined at least annually, ir place of the existing requirement that they be examined at least twice annually. Under this amendment there would still be power, as at present, to examine them at any time, but there would be no requirement that they be examined oftener than once a year. This change, while preserving all essential authority, would make possible the accomplishment of savings both in money and in personnel, at a time when such savings are of more than ordinary importance. The material in sections 301 through 306 incorporated in S. 1592 does not include another important legislative proposal affecting the operations of the Federal home-loan system. I refer to the provision of S. 179, introduced by the chairman of your committee on January 10 last. This measure would authorize the Secretary of the Treasury, in his discretion, to purchase obligations of the Federal home-loan banks up to the limit of three times the outstanding capital stock, reserves, and surplus of the banks. S. 179, which is still with your committee, would also confer similar discretionary authority on the Secretary of the Treasury to purchase obligations of the Federal Savings and Loan Insurance Corporation. The substance of the latter authorization is included in section 305 of the present S. 1592. The provision of S. 179 authorizing the Treasury to purchase obligations of the Federal home-loan banks, however, has been omitted in the present bill. The consolidated debentures of the Federal home-loan banks have a well-established market position and whenever offered to the public they have been oversubscribed. At the same time, it is vital that in the event of an unexpected emergency under which these debentures might not be salable on reasonable terms, or under which it might be impossible to refinance a maturing debenture issue on a reasonable basis, the Government should be in a position not only to protect the investment which it holds in the capital stock of the banks through the Reconstruction Finance Corporation but to prevent the development of incidents which might cause apprehension in our financial markets. As you know, the Government supports the commercial banking system of the country through the power of the Federal Reserve System to issue currency which is an obligation of the United States. The farm-credit system is supported through the Federal Farm Mortgage Corporation, which has authority to issue Government-guaranteed bonds, and the Secretary of the Treasury has authority to purchase the bonds of that Corporation. The Secretary of the Treasury has authority to purchase the obligations of the Federal Deposit Insurance Corporation, and the debentures of the Federal Housing Administration are guaranteed as to principal and interest by the United States. It seems to us illogical to provide that the Treasury may purchase obligations of the Federal Savings and Loan Insurance Corporation and not set up a corresponding safeguard so far as the bank system is concerned. I do not believe that the Treasury will ever be called upon to take over any obligations of either the Insurance Corporation or the banks. I think it is clear, that if an emergency developed with which the Federal home-loan bank system was unable to cope it would not only affect the Insurance Corporation but would disturb seriously the entire financial mechanism of the country. It is of great importance, therefore, that out of the whole series of financial institutions which are backed by the power of the Government this one should not be left without corresponding protection. It is the part of prudence as a matter of sound national fiscal policy to close this gap. For these reasons I suggest that there be added, after section 304, the following new section: Section 11 of the Federal Home Loan Bank Act, as amended, is amended by adding at the end thereof the following new subsection: "(i) The Secretary of the Treasury is authorized to purchase any obligations issued pursuant to this Act as heretofore, now, or hereafter in force, and for such purpose the Secretary of the Treasury is authorized to use as a public-debt transaction the proceeds of the sale of any securities hereafter issued under the Second Liberty Bond Act, as now or hereafter in force, and the purposes for which securities may be issued under the Second Liberty Bond Act, as now or hereafter in force, are extended to include such purchases. The Secretary of the Treasury may, at any time, sell, upon such terms and conditions and at such price or prices as he shall determine, any of the obligations acquired by him under this subsection. All redemptions, purchases, and sales by the Secretary of the Treasury of such obligations shall be treated as public-debt transactions of the United States. The Secretary of the Treasury shall not at any time purchase any obligations under this subsection if such purchase would increase the aggregate principal amount of his then outstanding holdings of such obligations under this subsection to an amount greater than three times the aggregate amount of the then outstanding capital stock, reserves, and surplus of the Federal home loan banks." Senator MURDOCK. I wonder if you could elaborate a little on how that would work out? Mr. FAHEY. It is this way: These debentures- The Secretary of the Treasury is authorized to use as a public-debt transaction the proceeds of the sale of any securities hereafter issued under the Second Liberty Bond Act what do you mean? Mr. FAHEY. That, as I understand it, is a legal definition of his powers. Will you, Colonel Lee, explain that? Mr. LEE. The Secretary of the Treasury may issue bonds, notes, or other obligations of the United States for the purpose of providing funds under those circumstances. He would not be required to do it, but in his discretion he may do it. Senator MURDOCK. It does not contemplate, I take it, the issuance of currency? Mr. LEE. No. Senator MURDOCK. Similar to the case of banks in the Federal Reserve System. Mr. LEE. Not at all. Senator MURDOCK. Is there any reason why it should not be done? Mr. FAHEY. Do you mean is there any reason why the Treasury should not permit the issuance of currency? Senator MURDOCK. Yes. Mr. FAHEY. I think it would be wholly unnecessary. It would be a temporary matter because these obligations are absolutely sound. Senator MURDOCK. I understand their soundness, but if they are as sound as you say they are, then they are as sound as the other system of issuing to secure currency. Mr. FAHEY. Yes, sir. Senator MURDOCK. That is the reason I asked the question. Mr. FAHEY. As has been indicated above, section 305 of the present bill would authorize the Secretary of the Treasury, in his discretion, to purchase any obligations of the Federal Savings and Loan Insurance |