remaining 28 percent of assets of operating associations are held by institutions which are sound and could easily qualify for insurance of accounts. A large portion of these are undoubtedly kept out of the insured system because of the present premium rate. The reduction in the premium rate as here proposed should attract large numbers of sound but uninsured associations into the insured system, thus serving to further strengthen the system.

EXCERPTS FRom the SpeechH OF WILLIAM K. Divers, Chairman, Home Loan BANK BOARD, BEFORE THE STOCKHOLDERS' MEETING, FEDERAL HOME LOAN BANK OF BOSTON, APRIL 3, 1948

Where does the savings and loan and cooperative bank industry stand in the event the business barometers go up or go down? As a new member of the Home Loan Bank Board I have naturally made a general review of the savings and lending operations of these institutions.

On the whole I have found good, sound financial conditions and sound lending practices. I realize that many of the factors I shall discuss are well known to you already—but I believe it is important for all of us to reiterate them for the benefit of the 8,000,000 people whose savings are held by associations and cooperative banks, and for the many more millions of prospective savers in those institutions.

If the prices of real estate should climb again, it will be essential that you men and women who represent management continue to exercise the same sound judgment which you have used in the past 2 years on a rising market.

I have here some figures on the ratio of loans made by associations to the selling prices of the properties concerned. These were compiled from examination reports. Our check was made on a cumulative basis over 28 months ending last February 29 and representing 4,489 examinations of insured institutions in all parts of the United States. It showed that loans made during that period averaged only 59 percent of purchase prices, and that the percent of loan to market price was the lowest in the areas of highest prices.

I realize that there are exceptions but, generally speaking, these figures indicate sound management and sound judgment.

If the signs which point toward deflation are the true indicators and there is to be a decline from the record business level of 1947, what are our defenses against deflation? How are we fortified against a decline in prices and possibly greater withdrawals? You know the defenses, but let me itemize them again.

The first line of defense, of course, is in the savings institution itself. I mean good management. In my judgment, everthing else is secondary in determing the destiny of this business.

The management of associations has demonstrated its capacity in meeting the new problems and new conditions presented by the depression, recovery and the war boom, as well as the challenge of postwar prosperity. Many factors are responsible for this progress, not the least of which is the associations' continual quest for improvements through their national, State, and local trade organizations.

To local management goes the major share of the credit for the far-reaching improvement in mortgage lending which has taken place since the 1920's. I will catalog some of the modernized lending practices-well known to almost everyone here that have been widely adopted during recent years..

DIRECT REDUCTION LOANS-ANALYSIS OF RISK

Associations long have provided for regular amortization of loan balances. They have pioneered in plans leading to the direct reduction and full payment of the debt of home owners.

Now, practically all mortgages held by cooperative banks and associations in the United States are paid down regularly under direct-reduction plans-thus reducing the mortgage risk in a systematic manner. Although the total nonfarm mortgage debt for the Nation is now well above any previous high, it is reassuring to know that most of the loans outstanding are on a direct-reduction basis.

While the matter is not subject to measurement, it is said that in earlier years lenders in some localities were inclined to loan without sufficient checking of the credit rating and income prospects of the borrower. Mortgages were sometimes placed on the basis of property appraisals only. The present use of modern ap

praisal techniques, and insistence on credit analysis, are factors which will assist in the bypassing of many difficulties.

It has been demonstrated that loans sometimes can get into trouble, not because they are 100 percent unsound, but because they are "weak at the edges." They become undermined by a series of delinquencies in taxes or assessments on the part of borrowers. Today, the majority of associations are requiring that tax payments from borrowers be made as a part of regular loan reduction. This practice is reported as proving successful in removing one possible source of trouble.

To offset possible losses from all of the contingencies of the business, associations now hold reserves and undivided profits equal to about 71⁄2 percent of their total resources. No comparable figures are on hand for the predepression era but it is a matter of record that, up to the time of the 1930's, in certain areas reserves were considered unjustified in institutions of the mutual type. As a consequence of this philosophy, some institutions were badly damaged by the depression. Fortunately, this old-time premise has been virtually abandoned. Minimum requirements are now almost universal and reserves should be extremely helpful in facing the future.

LIQUIDITY-ASSET STRUCTURE

Perhaps even more common in savings and loan operations during the earlier periods, according to the records, was the assumption that associations required only enough liquid funds on hand to meet normal day-to-day needs. Many institutions held virtually no cash-depending upon new capital and mortgage repayments to supply their working funds. We now know there is need for a cushion of liquid assets in order to meet unusual demands for withdrawals. Since the test of a financial institution comes in periods of depression, farsighted planning includes provision for liquidity well in excess of bare operating requirements.

Even though the existence of secondary credit sources may seem to indicate a much lessened need for liquidity, the thinking in the industry now favors large holdings of cash and Government bonds. At the close of 1947, nearly one-fifth of total assets of associations were in this liquid state, as compared with only 7 percent before the war.

A glance at almost any balance sheet will show that the composition of the assets held by savings associations is considerably different than that of 18 years ago. It is estimated that about 21⁄2 billion dollars of mortgages insured or guaranteed by the FHA or the Veterans' Administration are now held by associations and cooperative banks.

While this safeguard does not completely assure associations against loss, it is clearly another factor in strengthening the liquidity of institutions, because there is a market for such mortgages if not in default and Government insurance or a guaranty if defaulted. In total, these insured and guaranteed loans, together with liquid assets, now exceed 40 percent of the combined resources of all associations.

Senator CAIN. Our first witness this morning is Mr. Raymond M. Foley, Administrator of the Housing and Home Finance Agency. STATEMENT OF RAYMOND M. FOLEY, ADMINISTRATOR, HOUSING AND HOME FINANCE AGENCY

Mr. FOLEY. Good morning, Senator.

I have a brief statement that I would like to read, on the broad phases of H. R. 2799, and then, with your permission, Chairman Divers of the Home Loan Bank Board will follow me with the details.

Senator CAIN. I wish you would proceed just as you see fit, sir.

Mr. FOLEY. I appreciate the opportunity of appearing before you today and testifying on the proposed amendments to H. R. 2799 which is now before your committee and which is of major importance to the operations of the Home Loan Bank Board. Mr. Divers, Chairman of

the Home Loan Bank Board, is here and will be glad to discuss details of the proposed amendments with you. I should like, if it is agreeable with the committee, to comment very briefly on the general background and importance of the proposed amendments.

As many of the members of this committee realize, legislation dealing with the subject matters covered in the proposed amendments to H. R. 2799 which were transmitted to the chairman of your committee and strongly recommended by me in my letter of April 26, 1948, have been presented to the Congress on several occasions over the last 10 years.

(The letter and amendments referred to follow:)

Hon. CHARLES W. TOBEY,

United States Senate, Washington, D. C.

APRIL 26, 1948.

DEAR SENATOR TOBEY: There are enclosed three copies of proposed amendments to H. R. 2799, a bill to amend the Federal Home Loan Bank Act, title IV of the National Housing Act, and for other purposes, which is now pending before the Senate Banking and Currency Committee. There are also enclosed three copies of a section-by-section summary of the proposed amendment to H. R. 2799. At the outset I should like to call to the attention of your committee two important developments in connection with the proposed amendments to H. R. 2799.

First. In the past, as you will recall, there has not been agreement between representatives of the savings and loan industry with respect to many of the legislative proposals brought before the Congress for consideration. We have worked closely with representatives of the industry and I am pleased to be able to advise your committee that there is agreement as to the proposed amendments to H. R. 2799 now being submitted.

The Federal Savings and Loan Advisory Council created by section 8a of the Federal Home Loan Bank Act established a Legislative Coordinating_Committee consisting of representatives of the United States Savings and Loan League, the National Savings and Loan League, the presidents of the Federal home-loan banks, and the Advisory Council. The proposed amendments to H. R. 2799 have the endorsement of this Legislative Coordinating Committee.

Second. In the past there has been serious objection on the part of some of the interested executive agencies to legislative proposals dealing with this subject matter which have been brought before the Congress for consideration. As indicated more fully in the last paragraph hereof, I am glad to be able to advise that the enactment of the proposed amendments to H. R. 2799 would be in accord with the program of the President.

In its present form H. R. 2799 contains provisions as to three major items: 1. It provides for accelerating the retirement of the Government-subscribed capital stock in the Federal home-loan banks by doubling the requirement as to the amount of members' stockholdings and requiring each bank to retire an amount of Government-owned capital stock equal to the annual net increase in members' stock. It further provides for a resubscription by the Secretary of the Treasury to the capital stock, in an amount not in excess of the amount retired under the amendment, if the proper functioning of the banks at any time requires additional capital.

2. It provides for a retirement, in units of $1,000, of the capital stock of the Federal Savings and Loan Insurance Corporation from funds available from net assets in excess of $150,000,000. In lieu of any provisions for resubscription to the capital stock thus retired, it further provides for Corporation borrowings from the Secretary of the Treasury in an amount equal to the amount of the capital stock retired under the amendment made by H. R. 2799, in addition to the amounts of obligations of the Corporation which he is otherwise authorized to purchase.

3. It provides for a reduction in the premium charged for insurance by the Federal Savings and Loan Insurance Corporation from one-eighth to one-twelfth of 1 percent of the accounts of the insured members of an institution plus its creditor obligations.

The proposed amendment is in the nature of a substitute bill, but contains provisions as to the first two matters enumerated above which are covered by H. R. 2799 in its present form.

With respect to the Government-subscribed capital stock of the Federal homeloan banks, the proposed amendment contains provisions for accelerating its retirement, along the lines now provided in H. R. 2799, but does not provide for resubscription by the Secretary of the Treasury. At the same time the proposed amendment recognizes that there must be statutory assurance that Government support can be made available to the Federal home-loan banks when funds are required and, because of emergency or other special conditions, such funds cannot readily be obtained from private sources. The proposed amendment to H. R. 2799 would therefore permit the Secretary of the Treasury to purchase obligations issued under section 11 of the Federal Home Loan Bank Act. Such purchases by the Secretary of the Treasury could not exceed $1,000,000,000 in amount outstanding at any one time and the Secretary would be given discretion to establish the terms and conditions of purchase, taking into consideration the current average rate on outstanding marketable obligations of the United States. We are firmly convinced that statutory provision for Treasury support for the Federal Home Loan Bank System in time of emergency is essential. While obligations of the banks have had a well-established market position since the first debentures were issued over 10 years ago, unforeseen conditions can occur under which these obligations could not be sold to the public on reasonable terms or under which it might not be possible to refinance a maturing issue on a reasonable basis. This situation has, in effect, been recognized by the Treasury Department when it utilized the banks as depositories of public funds when recent changes in governmental fiscal policy made it inadvisable for the banks to obtain needed funds by the sale of consolidated bonds in the private market. It is not suggested or intended that the proposed authority for the Secretary of the Treasury to purchase obligations of the banks be used as a regular means of supplying funds. In order to negate any such suggestion the authority to purchase is left entirely within the discretion of the Secretary of the Treasury.

The Government has long supported the commercial banking system through the power of the Federal Reserve System to issue currency which is an obligation of the United States. The farm credit system is protected through the Federal Farm Mortgage Corporation which has authority to issue Government-guaranteed bonds which may be purchased by the Secretary of the Treasury. The Federal Deposit Insurance Corporation now has authority to borrow directly from the Treasury. In our judgment it is essential that there also be available, in time of emergency need, comparable statutory provision for the support of the Federal Home Loan Bank System whose member institutions now number more than 3,700 with assets in excess of $11,000,000,000.

You will also note that the proposed amendment authorizing the acceleration in the retirement of Government-owned stock and the purchase by the Treasury of bank system obligations contains a specific provision that the Federal home-loan banks shall continue to be subject to the Government Corporation Control Act regardless of whether Government-owned stock is outstanding or completely retired. It is believed that this provision is necessary and desirable in view of the proposal for Treasury support of the bank system, and in view of the permanent and continuing interest of the Federal Government in the sound operation of the Federal home-loan banks.

With respect to the Federal Savings and Loan Insurance Corporation, the major provisions of the proposed amendment cover (1) the transfer of the capital stock from the Home Owners' Loan Corporation to the Secretary of the Treasury; (2) an increase in the stock owned by the Treasury equivalent in amount to the actual interest cost to the Home Owners' Loan Corporation of carrying such stock; (3) the systematic retirement of the capital stock of the Insurance Corporation at a rate not to exceed 50 percent of annual net income; (4) the payment to the Secretary of the Treasury of a return on its capital-stock holdings at a rate to be determined by the Secretary of the Treasury, and (5) authorization for the Corporation to borrow from the Treasury in amounts which do not exceed in the aggregate $750,000,000 outstanding at any one time.

Up to the present time the Federal Savings and Loan Insurance Corporation has not found it necessary to borrow funds for insurance purposes. It is quite possible, however, that occasions may arise in the future when such borrowing will be necessary, and title IV of the National Housing Act therefore specifically empowers the Corporation to borrow money. That authority does not now extend, however, to borrowing from the Treasury. The proposed amendment, in line with the current general policy that wholly owned Government corporations should be restricted in their borrowing activities to the United States Treasury, would require that in the future all necessary borrowing be from that source. Such a

provision has the dual advantage of coordinating the financial operations of the Insurance Corporation with the over-all fiscal and credit policies of the Government and would assure, as in the case of the Federal home-loan banks, that in the event of unforeseen contingencies the Corporation would have an assured source of borrowed funds.

The proposed amendment does not provide for a reduction in the premium charged for insurance by the Federal Savings and Loan Insurance Corporation. H. R. 2799 in its present form would reduce the premium from one-eighth to onetwelfth of 1 percent of the accounts of the insured members of an institution plus its creditor obligations. The Home Loan Bank Board is of the opinion, in which I strongly concur, that this provision reducing the premium charge should not now be enacted.

There are a number of compelling reasons which have led the Home Loan Bank Board to make this recommendation. Among these reasons are the following: 1. The entire experience of the Insurance Corporation has occurred in a period of business recovery followed by prosperity. Current inflationary tendencies in the real estate field are strong, and cast some doubt on the exact nature of mortgage loan risks. The Board believes that a reduction in the premium rate should not be made while these inflationary tendencies exist.

2. During 1946 and 1947 insured institutions made loans estimated at $5,600,000,000. This figure is roughly equivalent to 86 percent of net first mortgages held at the end of 1947. These figures indicate that the current portfolio of insured institutions, as is true of all types of lending institutions, lacks seasoning, thus increasing the uncertainty of the present mortgage risk underwritten by the Insurance Corporation.

3. A reduction in the premium rate would necessarily reduce the Corporation's income, and thereby retard the rate at which reserves can be accumulated. It is our opinion that such a development would be contrary to the public interest, which demands that every reasonable action be taken to enable the Corporation to meet emergency situations. Certainly the accumulation of adequate reserves is such an action.

The Bureau of the Budget has advised me that our original draft of the proposed amendments to H. R. 2799 were referred to the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the General Accounting Office, and that, on the basis of their views and conferences with representatives of my office, certain changes were recommended. Such recommended changes have been incorporated in the enclosed draft of the proposed amendments to H. R. 2799, and the Director of the Bureau of the Budget has authorized me to state that the enactment thereof would be in accord with the program of the President.

Sincerely yours,

RAYMOND M. FOLEY, Administrator.

PROPOSED AMendment of H. R. 2799, Eightieth CongRESS

Amend H. R. 2799, a bill to amend the Federal Home Loan Bank Act, title IV of the National Housing Act, and for other purposes, as follows: viz, by striking out all language after the enacting clause and inserting in lieu thereof the following: "That section 6 of the Federal Home Loan Bank Act, as amended, is amended by the addition of the following new subsection:

"(1) Within one year after the enactment of this amendment, each member of each Federal home-loan bank shall acquire and hold and thereafter maintain its stock holding in an amount equal to at least 2 per centum of the aggregate of the unpaid principal of such member's home mortgage loans, home-purchase contracts, and similar obligations, but not less than $500. Such stock in excess of the amount hereby required may be purchased from time to time by members and may be retired from time to time as heretofore. One year after the enactment of this amendment, each Federal home-loan bank shall retire and pay off at par an amount of its stock held by the Secretary of the Treasury equivalent to the amount of its stock held by its members in excess of the amount required to be held by them by the first two sentences of subsection (c) of this section immediately prior to the enactment of this amendment and annually thereafter each Federal home-loan bank shall retire an amount of such Government stock equivalent to 50 per centum of the net increase of its stock held by members since the last previous retirement: Provided, That none of such Government capital shall at any time be retired so as to reduce the aggregate capital stock, reserves, surplus, and undivided profits of the Federal home-loan banks to less than $200,000,000: Provided further, That notwithstanding any provision of this sub