erations of Federal savings and loan associations, the Federal homeloan banks, and the Federal Savings and Loan Insurance Corporation. Without passing any judgment on the merits of the proposals contained in these sections, we are of the opinion that the subjects dealt with in these sections should not be incorporated in a bill which is concerned with so many matters that are not related to the operations of these institutions. To the extent that these matters ought to receive consideration, they should be made the subject of a separate bill in order that they may be studied by Federal and other officials concerned with these institutions. We understand also that in fact there are bills now pending before this committee which would deal with those matters, and that hearings will shortly be conducted in reference to them. We ask permission at that time to be heard by you in connection with those bills.

Sections 309 to and including section 317 of this title are amendments to the National Housing Act. We have no objection to these sections, with the following exceptions.

The first exception is section 309 (b). This section of the bill would require that before the FHA could insure a mortgage, that mortgage would have to contain a mandatory provision requiring the lender to grant a moratorium to the borrower if the borrower could not pay his interest and his installment of the principal because of unemploy ment or economic conditions or misfortunes beyond his control. As I understand that section, the maximum extension at any one time would be 1 year, and the aggregate of such extensions or moratoria would be 3 years.

The effect of this provision, in my judgment-and we are a large lender-my bank is a large lender on FHA mortgages-may well be to make FHA mortgages unattractive to many investors. We have nearly $50,000,000 invested in FHA insured loans. And I may say that we think that the FHA is an agency of the Government which has made an immense contribution to improving mortgage lending practices and standards among private lenders.

Senator MURDOCK. Do you not think that was the primary purpose of the FHA, to do just what you have just now indicated?

Mr. SCHWULST. I think one of the primary purposes of the FHA was to do just that, improve standards, improve practices, help to eliminate expensive second-mortgage financing and establish a more liquid market for mortgage loans. And I think it has accomplished all of those purposes.

Senator MURDOCK. You consider that from the banking standpoint the primary purpose of the FHA?

Mr. SCHWULST. Well, now, Senator, I do not know that I get the exact purport of your question.

Senator MURDOCK. Well, what I contemplated as a legislator when I voted for the FHA was that its primary purpose was to make it possible for American home owners to occupy decent American homes. Surely that was the primary purpose.

Mr. SCHWULST. I think that was one of the primary purposes, and, I think the FHA has been very successful in accomplishing that purpose, notwithstanding the fact that there have been some houses secured by FHA loans which have fallen far short of the standards which FHA is supposed to promote.

Senator MURDOCK. If we ever begin to look at the Federal housing program as a convenience, let us say, for the lenders, then in my opinion we will lose sight of the primary purpose of the legislation. Mr. SCHWULST. Well, I do not want to give you the impression that I think the FHA was created primarily to serve the lenders. I do not believe that is so.

Senator MURDOCK. I am sure it was not.

Mr. SCHWULST. I think a very large part of the benefit that has flown out of the creation of the FHA has been just along the lines you have indicated as having been the intent of Congress in establishing it.

Senator MURDOCK. And if that does not remain the foundation of it, and of Federal housing, then we are building on sand, are we not? Mr. SCHWULST. I agree with you.

Senator BANKHEAD. Could you state succinctly your understanding of the difference between this bill and the Federal housing bill? Mr. SCHWULST. The difference between this whole measure and the Federal housing bill?

Senator BANKHEAD. Yes, the bill pending before this committee. Mr. SCHWULST. Well, this bill contains a number of provisions which radically modify the Federal housing bill, or the National Housing Act, and of course it has provisions which are in no way related to the National Housing Act at all. For example, one title having to do with the assembly of land for sale to public bodies and to private developers for housing purposes. There is one title concerned

Senator BANKHEAD. What do you mean by the assembly of land? Mr. SCHWULST. If you will permit me, Senator, I am going to come to that in my remarks. Would you like to have me proceed? Senator BANKHEAD. I want that statement completed. Mr. SCHWULST. Well, I will discuss that.

Senator BANKHEAD. I am asking it in good faith for my own information, because I have not participated in the preparation of this bill. I would like to know.

Mr. SCHWULST. Well, to come back to your question, this bill modifies very extensively the FHA. I am going to discuss some of those modifications in my statement. Some of the modifications we do not approve of. Then there is one of the most extensive titles of the bill, with which FHA has nothing to do at all. That has to do with the provision of public housing through subsidy by the Federal Govern

ment.

Now there are some provisions of the bill which operate to liberalize in some measure FHA activities, that we do approve of. I am going to discuss one or two of those in the course of my remarks. And then there are other liberalizations of the FHA legal limitations, which we do not approve of, and those we will discuss as we come to them.

Senator BANKHEAD. Well, I suppose we might as well let you proceed. I have not gotten any facts yet that will help me. But go ahead with your statement. You just stated some things you approve of, and some you do not approve of, without mentioning them. Mr. SCHWULST. Those things will be covered.

Senator BANKHEAD. I thought you could state it succinctly.

Mr. SCHWULST. They will be covered partly by me and a witness who is to succeed me. To come back to section 309 (b) of the bill, we are opposed to the incorporation of that provision because we think that the effect of it is going to make FHA insured loans unattractive.

In the first place, there will be created the difficulty of determining whether a default in the mortgage has been due to economic conditions, or to unemployment, or to some misfortune over which the mortgagor had no control, and that may well throw a cloud around the collectibility of the debt itself.

But the point that I should like to make in this connection is that this section of the bill is in my judgment not necessary. I think that lenders, and certainly my bank, have in practice extended every reasonable indulgence to mortgagors.

We have done it. We have in cases of default where the mortgagor had been acting in good faith with us, on FHA loans and other conventional loans, done it repeatedly. We have lowered the interest rate in some cases to zero in order to assist the mortgagor in working out of a temporary difficulty. In the case of over a hundred FHA insured loans, we have reduced the interest rate to as low as 234 percent, and waived amortization, with the approval of the FHA, of course, in order to assist the borrower to rectify some temporary situation that was embarrassing him.

Now that is the attitude of these lenders on FHA mortgages. We do not want to take over the property of these people. What do we gain by taking over the property of these people? We lose an investment. In many jurisdictions it costs a good deal of money to foreclose the mortgages on these properties, and what do we get? We get a debenture at a very low rate of interest, and a debenture which is likely to be called within a short time. It is obviously in our interest to carry these loans along where the mortgagors are acting in good faith with us, and where there is some hope that he may eventually work out his situation, and that is the practice.

Senator MURDOCK. Are you not now making a very extended argument for the provisions of the bill?

Mr. SCHWULST. I am just telling you, Senator, that it is not nec

essary.

Senator MURDOCK. But you do exactly what this bill provides for, you nurse him along and try to keep the family in the house? Mr. SCHWULST. We certainly do.

Senator MURDOCK. And you say that it is not profitable for you to take the house over by way of foreclosure. Now if that is your attitude, and that is your intention, then what harm can be done by the provision in the bill, which in my opinion is beneficial in this respect, that it tells the mortgagor or the home owner that if any of these vicissitudes mentioned in here do occur, he is given the assurance that he will not be thrown out of his home. So the banks' intention is to do just exactly what you say you are doing-and I can see no reason for your doing otherwise.

Mr. SCHWULST. That is right.

Senator MURDOCK. So I can see little harm in leaving that provision in the bill, under the very statement you make.

Mr. SCHWULST. Well, the harm I see in it, Senator, is this: In the first place, who is going to determine

Senator MURDOCK. The Administrator here.

Mr. SCHWULST. Whether or not the economic conditions have been unfortunate for the man, and that he is not at fault. I mean you have such a large

Senator MURDOCK. Let us settle the question that you asked me. Now as I read the provision, that is entirely up to the Administrator to decide to his satisfaction, so that the Administrator has under that provision the discretion of deciding whether the conditions and the circumstances meet the provision of the bill. Is not that true?

Mr. SCHWULST. Well, it would seem to me the lenders, inasmuch as they are responsible for having loaned their depositors' money, ought to be in the position of determining whether or not the borrower is acting in good faith with them.

Now I think the effects of this bill will simply be to curtail the use of the FHA's facilities, because it is entirely voluntary with the lenders as to whether they shall use the FHA's facilities. So it seems to me that if you leave this provision in the bill and make it applicable only to FHA loans, and do not make it applicable to all loans, you will simply discriminate against the use of the FHA's facilities.

Senator BANKHEAD. Do you think it is the intent to discriminate against the FHA?

Mr. SCHWULST. I did not say that, Senator. I said if it were not enlarged to include all lenders, you would be discriminating against the FHA.

Senator BANKHEAD. Do you think it should be enlarged?

Mr. SCHWULST. I do not believe it is necessary. I think it ought to be discretionary with the lender who is responsible for the money you have left on deposit with him, to determine whether or not the person who has borrowed your money is acting in good faith with respect to the repayment of that money when it is due. I think that is the responsibility of the man to, whom you entrust the money when you deposit it with him.

Senator MURDOCK. But let us take the next step, and let us assume that the occupant of the home, or the borrower, is acting in good faith, and that he finds his circumstances exactly as described in the bill. Now, eliminating the question of his bona fides, or good faith, would you still have the same criticism and objection to the provision? Mr. SCHWULST. Yes, I would. I do not think it is necessary. I do not think it is necessary. I think that it is an undue and unnecessary infringement on the discretion of the management, who, after all, have the responsibility for taking the proper care of the money you have left with them for investment. And I simply do not think it is a necessary provision to be put in the law.

Now if I may, I should like to proceed with my statement.

Section 312 of the bill requires as a condition for mortgage insurance a warranty by the principal contractor who built the house securing the mortgage against structural and other defects, and so forth.

We would enter a vigorous objection to this section. Builders and contractors would run a considerable risk under the provisions of this section, and they will be very reluctant to understake that risk if they can obtain financing from lenders who would not require it. Therefore, the result of this section will be to discourage the use of FHA insurance, thus depriving home owners and lending institutions

of the benefits that have flowed from the inspection and rating services, as well as from the improved methods of construction, which have been instituted by FHA, and which have done so much to raise the standards of home construction and home financing in this country. It would be particularly unfortunate to have this section apply to loans insured by the FHA and not make it apply to uninsured loans made by savings and loan associations, banks and all other mortgage lenders.

Section 315: We approve this section. This section amends section 207 (c) of the National Housing Act. That is the section which authorizes the FHA to insure mortgages on rental housing.

Now we approve the proposed amendment to that section 207 (c) of the National Housing Act, incorporated in this bill, providing there can be certain changes made in it, which we think are necessary to the accomplishment of the purposes which the bill has in view, with respect to rental housing.

Now the first change that we would suggest has to do with section 207 (b) (1) which defines certain types of lending agencies which can avail themselves of the privileges of this section 207. This refers to section 315 of the bill.

Senator MURDOCK. Beginning on page 29.

Mr. SCHWULST. I do not happen to have the bill in front of me. Now what we would suggest is that subsection 1 under section 207 be amended that is not quoted in this bill. It is in the National Housing Act itself. That subsection states that lenders under this rental housing section of the act may be Federal or State instrumentalities, municipal corporate instrumentalities of one or more States, limited dividend corporations formed under and restricted by Federal or State housing laws as to rents, charges, capital structure, rate of return, or methods of operation."

We believe that there should be included with those types of lenders that I have mentioned, redevelopment corporations and housing corporations organized for the purpose of clearing slums or blighted areas or for the purpose of rental housing and restricted by Federal or State laws or regulations of State banking or insurance departments as to rents, charges, capital structure, rate of return, or methods of operation.

This is merely an addition in order to enable certain types of housing companies which under the laws of certain States, for example, New York State, may be set up by savings banks and insurance companies for the purpose of building, owning, and operating rental housing.

Now those housing companies under our laws would be subject to regulation in that case by State authority, if it is an insurance company that has one of these housing corporations, the State superintendent of insurance would regulate it, inspect it, examine it, and so on. If it were owned by a savings bank, which we can do in New York, then the State superintendent of banks would inspect it, get reports on it and regulate it. And the banking board even fixes the rates of rental, or fixes the maximum rent.

Now we think it would be helpful in making this act useful in urban centers if that particular phraseology could be amplified a bit by the inclusion of the types of corporations which I have mentioned.