Act and in title IV of the National Housing Act under which was established the Federal Savings and Loan Insurance Corporation. The conclusions and agreement of the Coordinating Committee with respect to such legislation has been submitted to you in accordance with the agreed upon plan by the Home Loan Bank Board through proper channels. The Administrator of the Housing and Home Finance Agency as the spokesman for the Government on this particular type of legislation and the Chairman of the Home Loan Bank Board have expressed the views of the Government and their own opinions on this omnibus proposal to amend the Federal Home Loan Bank Act and the National Housing Act. We were most pleased and gratified to learn that the Bureau of the Budget on behalf of the President had concurred in these proposals. This, we believe, is the first time in many years when there has been submitted to the Congress a proposal which has the support of the entire savings and loan business and of the Government.

Unless the committee has specific questions in regard to this proposal which is offered as a proposed amendment to H. R. 2799, now pending before this committee, I shall not make any detailed statement in regard to it. However, I would like to call your attention to the fact that included in this proposal is a provision for the orderly retirement of the capital stock of the Federal Savings and Loan Insurance Corporation now owned by the Home Owners' Loan Corporation. This provision is consistent with what we understand to be the policy of the Congress in regard to the retirement of the Government's investment in corporations. It is also consistent with the wish expressed by the President when in 1946 he vetoed a bill to reduce the premium charge of the Federal Savings and Loan Insurance Corporation.

The proposal which you have for consideration as a suggested amendment to H. R. 2799 should in our opinion be passed. It will strengthen the Federal Home Loan Bank System and the savings and loan associations of the country. It will enable these institutions to do an even better job in the future in the financing of homes of veterans as well as other families.

Only one of the several bills and proposals which I have mentioned does not have the united support of the savings and loan business and the Government. That bill is S. 2417, to adjust the premium charge of the Federal Savings and Loan Insurance Corporation. I might state that that bill was introduced separately because of the fact that the Federal Home Loan Bank Board didn't feel that it could give it support.

We recognize that the opposition of the Government to S. 2417 is consistent with what appeared to be the policy laid down by the President when in 1946 he vetoed H. R. 4428 which had been passed unanimously by the Congress. In the circumstances we could hardly expect the Home Loan Bank Board to agree with the Coordinating Committee on this particular point. However, we should like to point out that a principal reason for the President's veto of a similar bill in 1946 has been eliminated in the proposed amendment to H. R. 2799 which has been submitted and supported by the Government; that is, with respect to retirement of stock. I refer to the provision for the retirement of the Government investment in the stock of the

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Federal Savings and Loan Insurance Corporation. The other reason stated in the President's veto message was

the legislative history of the original bill creating the Federal Savings and Loan Insurance Corporation indicates that the Congress originally contemplated that the reserve of the Federal Savings and Loan Insurance Corporation should some day reach 5 percent of the insured risk, but after 10 years of operation this reserve had reached less than 1 percent of the insured risk.

In order to correct what seems to be a misunderstanding I should like to point out the following facts. Section 404 (a) of the National Housing Act provides that—

such premium (one-eighth of 1 per centum) shall be paid * * * annually until a reserve fund has been established by the Corporation equal to 5 per centum of all insured accounts and creditor obligations of all insured institutions.

During a period of normal growth, such as insured institutions have experienced in recent years, the reserve fund of the Federal Savings and Loan Insurance Corporation cannot possibly be expected to grow to 5 percent of the Corporation's liability within the foreseeable future. In the past 14 years since the Corporation was established, the ratio of the Corporation's reserve to its liability has grown from nothing to 1.16 percent as of the close of the last fiscal year. Incidentally, on that same date the ratio of the reserve of the Federal Deposit Insurance Corporation, which insures the deposits of banks, to that Corporation's liability was almost exactly the same; i. e., 1.15 percent as against 1.16 percent.

If a reduction in the premium charge of the Federal Savings and Loan Insurance Corporation were postponed until the Corporation's reserves are 5 percent of its liability, a great injustice would be done. to the insured savings and loan associations of the country as compared to the treatment given the insured banks of the country which pay a premium charge of only one-twelfth of 1 percent.

Senator CAIN. And that is what you are asking for-to equalize the percentage?

Mr. ELLINGSON. That is right.

Moreover, when, as, and if the reserve of the Insurance Corporation equals 5 percent of the insured risk, no legislation will be necessary to obtain relief for the insured institutions inasmuch as further premium charges will then be waived in their entirety so long as reserve is maintained at 5 percent. However, if we may use past experience as a guide, we can hardly expect relief through this means for another half-century.

Senator CAIN. Let me stop you there.

Mr. Divers, that is an interesting comment. To what degree, if any do you agree with Mr. Ellingson's feeling that it will be a halfcentury before there will be an opportunity to reduce the premium charge?

Mr. DIVERS. I think that his point is that it would be a halfcentury before the provision of the act would waive the payment of any premium.

Senator CAIN. Premiums in their entirety; that is correct.

Mr. DIVERS. And not that it would be a half century before the Home Loan Bank Board might see fit to recommend a reduction in the insurance premium.

Mr. ELLINGSON. Let's hope not.

Senator CAIN. Well, we are moving in the direction of a calculation.

Do you have any to make? It is reasonable to assume that you would prefer, as an institution, to maintain prevailing premium charges for 10 or 15 or 25 years?

Mr. DIVERS. No, sir; we cannot see that far ahead.

Senator CAIN. From your point of view, they ought to be maintained as they are until circumstances yet unknown justify a reconsideration of the matter at a later date?

Mr. DIVERS. That is correct, sir.

Senator CAIN. To whatever satisfaction you can derive from that statement, Mr. Ellingson, you are welcome.

Please proceed.

Mr. ELLINGSON. I think we have some more facts here that might knock down that position.

Senator CAIN. Go right ahead, sir. We would like to get these things coordinated, so that other people, who read this record, will know what the industry and the Government actually have in mind.

Mr. ELLINGSON. In 1946 the then Commissioner of the Federal Home Loan Bank Administration submitted testimony before the committees of Congress favoring the reduction in the premium charge of the Federal Savings and Loan Insurance Corporation from oneeighth of 1 percent to one-twelfth of 1 percent of the total amount of the accounts of each association's insured members. The Congress unanimously passed H. R. 4428 to effect such reduction. We respectfully submit that the reasons for a premium reduction are even stronger today than they were in 1946. The Corporation has had an additional 2 years of favorable operating experience. Its total losses in the 13%2 years of its operation through December 31, 1947, were only 11 percent of its premium income. In fact, the Corporation's earned income in 1947 was greater than its entire losses since the Corporation was established.

Studies made by the Home Loan Bank Board through its corps of Federal examiners show that the loans made by insured associations in the past 2 years have averaged only 59 percent of the purchase price of the homes securing such loans. That is excluding FHA and veterans' loans. We believe that this is evidence of a sound lending policy on the part of these institutions which augurs well for their future stability and a continued favorable loss experience of the Federal Savings and Loan Insurance Corporation.

In addition to sound current lending policies, insured associations have set up a very important first line of defense against losses to the Insurance Corporation in the form of their own reserves. Total reserves and undivided profits of insured savings and loan associations are now 6.4 percent of their total assets. This compares most favorably with the ratio of capital and reserves of banks insured by the Federal Deposit Insurance Corporation to their total resources, since their latest reported ratio was also 6.4 percent, exactly the same figure. Despite the fact that the funds of savings and loan associations must be invested almost exclusively in Government bonds and first mortgages on homes, they have for many years been required to pay a higher premium charge than is paid by commercial banks. We submit that this inequality should be corrected.

Only a very, very small percentage of the savings and loan associations insured by the Federal Savings and Loan Insurance Corporation actually need this insurance coverage for the protection of their

investors. They carry insurance for psychological reasons and to protect and stabilize the system as a whole, but they should not be penalized for having insurance of accounts. In addition, there are several hundred thoroughly sound savings and loan associations throughout the country which do not have Federal insurance of accounts. Their participation and support would further strengthen the system and actually reduce the effective risk ratio of the Insurance Corporation. The proposed reduction would encourage these institutions to joint the insured system and begin making contributions to the insurance fund.

Senator CAIN. Are these associations to which you refer under State control?

Mr. ELLINGSON. Yes, entirely.

Senator CAIN. In certain States, one therefore gathers, they do not have to be insured.

Mr. ELLINGSON. There is no State law impelling them to take Federal insurance.

Senator CAIN. No. But how about State insurance?

Mr. ELLINGSON. Most States don't have the insurance.

It may be argued that the risk of the Insurance Corporation has increased in recent years because the ratio of the reserves of insured institutions to their mortgage holdings has declined. In this connection, I should like to call attention to the fact that during the war years our institutions could not profitably employ their funds in mortgage loans because of the stoppage of home building. Consequently, while the dollar amount of their reserves has increased substantially, the ratio of reserves to total mortgage holdings has declined. However, this ratio does show a good net increase from the prewar year 1941 when it was 7.3 percent to the present time when it is better than 8 percent.

It may also be argued that the effective rate collected by the Federal Deposit Insurance Corporation is greater than the effective rate collected by the Federal Savings and Loan Insurance Corporation because of the lower ratio of total deposits which is insured by the Federal Deposit Insurance Corporation. However, this does not help the individual small association in Middletown, America, which has to pay a 50 percent larger premium than the relatively small bank across the street.

We would also agree that these are uncertain times, but frankly, gentlemen, it looks as if we will be living in uncertain times for many years to come. Uncertainty seems to have become a normality. We can only compare the operation and experience of any particular segment of the business or financial world with the whole economy. If our national economy were to run into catastrophic upsets, then we would have to admit that all financial institutions and all types of business would suffer. However, we submit that the savings and loan associations of this country by reason of their plan of operation are in as good if not better condition to meet future hazards than any other system or type of financial institution.

Therefore, in view of the increased operating costs of our institutions and the very favorable loss experience of the Federal Savings and Loan Insurance Corporation, we urge that the Congress again pass legislation to adjust the premium charge of the Federal Savings and Loan Insurance Corporation. We hope you will approve S. 2417 along with the approval of the proposed amendments to H. R. 2799.

Senator CAIN. Mr. Ellingson, let me ask you one question, please. I have forgotten the page on which you mentioned that a Home Loan Commissioner, I think, in a given year, recommended a reduction of the premium rate.

Mr. ELLINGSON. That is right. That was at the time that Mr. Fahey was Commissioner.

Senator CAIN. It seems a little strange to me that he would have made that recommendation without properly establishing its merits with the administration which vetoed it. Do you know anything about why that was not done?

Mr. ELLINGSON. I really could not answer that. However, he did recommend it, and it was passed, and then the President later vetoed it.

Senator CAIN. It was in part, obviously, on the strength of his recommendation that the Congress took favorable action, only to have the administration veto it.

Mr. ELLINGSON. I presume that Congress was influenced to a certain extent at least.

Senator CAIN. But you do not remember any of the circumstances? Mr. ELLINGSON. I do not know the background, as to why the President and the Commissioner were not in accord.

Senator CAIN. That was a very instructive statement, Mr. EllingThank you.

son.

For the reason that Congress is going to start shortly, with a very heavy calendar, necessitating the presence of this Senator and others, too, we will stand in recess until 2:30 this afternoon, in the hope that we can accommodate those who are on the list before us.

(Whereupon the committee recessed until 2:30 p. m.)

AFTERNOON SESSION

The committee reconvened at 2:30 p. m., upon the expiration of the recess.

The CHAIRMAN. The committee, what there is of it, will come to order.

The first witness this afternoon will be Mr. Ralph M. Smith. STATEMENT OF RALPH M. SMITH, PRESIDENT, UNITED STATES SAVINGS AND LOAN LEAGUE, LEXINGTON, MASS.

Mr. SMITH. Mr. Chairman, my name is Ralph M. Smith, from Lexington, Mass., and I am president of the United States Savings and Loan League. I promise you this will be very, very short.

The league is composed of 3,608 local savings institutions specializing in home loans. It was organized in 1893 and includes approximately 70 affiliated organizations, such as State and local leagues. Our members' resources are in excess of $8,500,000, and, taken State by State, our member institutions make from one-third to one-half of all the home loans originated by financial institutions.

We wish to express our hearty approval of the action of the committee in reporting yesterday S. 2415 and S. 2416. S. 2415 is a matter of great interest to State supervisory authorities and our member institutions, and we are very happy to see a final disposition of this conversion question in sight.