the bank's unimpaired capital and surplus. And there should be an exception to this restriction if the loan is insured under the National Housing Act or fully guaranteed or insured by a State.

The next item that we feel is necessary to assist in this area is a basket provision. Experience has shown that real estate provides excellent security for loans. In fact, the record shows real estate loans during the depression fared better than other types of loans or investments. There is no logic in prescribing rigid limitations on ratio of loan to value, maturity, and amortization for real estate loans if at the same time restrictions are placed on total real estate loans.

I believe in 1959 the Comptroller supplied Congress with a table showing State statutory limits, and at that time there were 18 States which had no limitations. We feel that if these limitations are removed that a greater contribution to the financing of imaginative projects to revitalize the decaying inner cities as well as to operate financing for entire new towns could be made. It would assist in this particular area.

Ideally there should be no restrictions when real estate is taken as collateral. However, we deem it advisable and we recommend an interim step. This is that national banks be permitted to invest up to 10 percent of what may be invested in real estate loans in real estate loans free from loan restrictions.

As an aside, I believe the ABA has taken a position before I believe it is the President's Commission on Financial Structure and Regulation that all restrictions be lifted with respect to real estate loans, that there be no ratio of loan to value restrictions at all or with respect to amortization or maturity. We feel at this time that, we should do it in an interim step first and see how it in fact does work. though we feel that it will work without detriment to the stability of banks, and ultimately that all controls will be lifted.

Housing investments. National banks may now invest in the stock of the National Housing Corporation. They may also invest in housing projects in conjunction with the National Housing Partnership. Both organizations were created for the purpose of attracting private capital earmarked for low- and moderate-income housing.

The partnership operates on a national basis so the attention and investment that it can make in any given community is limited. Federal savings and loans through general service corporations are permitted to make equity investments in real estate. New York savings banks have had the power for many years to invest in housing projects and were recently given additional equity powers. New York State banks may own land use improvement projects and industrial projects sponsored by the New York State Urban Development Corporation, which is a State-authorized community development corporation with overriding jurisdiction on condemnation, zoning, and building codes.

National banks through a bank holding company may invest in corporations or projects designated primarily to promote community welfare such as the economic rehabilitation and development of low

income areas.

In our considered judgment, national banks should be able to do directly what they can now do only indirectly through a holding company or through the National Housing Partnership. In these

respects they should be given the same prerogatives as State-chartered banks, savings banks, and Federal savings and loan associations to take equity interests.

National banks with greater powers could assist greatly in solving the housing shortage.

We recommend that national banks be permitted to invest in equity interests in residential housing projects up to 10 percent of the maximum amount that may be invested in real estate loans.

Projections indicate that there will continue to be an acute shortage of housing funds over the next decade. We would like to see national banks encouraged to make housing loans rather than discouraged by outmoded statutes. We believe the recommendations proposed here if enacted would go a long way toward modernizing the real estate investment patterns of national banks, placing them on a par with other financial institutions, and allowing them better to serve their customers and assume an ever-expanding role in solving our housing problems and revitalizing our inner cities.

If any or all of these proposals are deemed to have merit by the committee, the proposals could be considered as an amendment to current legislation, be considered along with other housing legislation, or be considered separately. We have drafted some proposed legislative language to accomplish these results, and I would be glad to include it after I have had an opportunity to review the transcript. I have a copy of it but I failed to bring it with me today. (The complete statement of Mr. O'Keefe follows:)

STATEMENT BY RAYMOND T. O'KEEFE, EXECUTIVE VICE PRESIDENT OF THE CHASE MANHATTAN BANK, N.A.

A PROPOSAL TO UPDATE THE REAL ESTATE INVESTMENT POWERS OF NATIONAL BANKS

Banks have taken a strong leadership position in trying to solve our urban problems. One area to which they have devoted particular attention has been the need for more housing and the related urgency to redevelop and revitalize our cities.

In their attempts to finance these legitimate needs of their customers and communities, however, national banks have been needlessly hindered by outmoded and cumbersome investment statutes. In the real estate area the impediment has been Section 24 of the Federal Reserve Act.

Section 24 was part of the original Federal Reserve Act enacted on December 23, 1913. In looking back at the initial legislation one is shocked to note how highly restrictive it was in the area of mortgage loans. They could only be nade by country banks on improved and unencumbered farm land within a certain radius of the bank. There were also severe limitations as to term and ratio of loan to value. This was the genesis of national bank mortgage loan

>owers.

Section 24 has been amended many times when experience indicated it was safe and advisable to respond to the changing needs of our society and to increase he ability of national banks to meet the growth needs of their communities and promote business recovery.

Today, mounting unemployment, the need for more and better housing and ther sophisticated problems unheard of in 1913 have produced a new urgency o reexamine Section 24. If the increasingly urgent housing needs for the comnunity and the resources of the real estate industry are to be effectively joined o solve these critical problems, Section 24 must be amended.

We believe the following recommendations are consistent with the needs of the ommunity and the stability of national banks.

Loans against unimproved property

National banks may make real estate loans upon improved real estate inluding improved farm land and improved business and residential properties. 'hey are prohibited from making real estate loans upon unimproved real estate.

The Comptroller has taken a liberal position as to what constitutes improved real estate. Some of the rulings issued by the Comptroller in this area have been challenged.

The question is: Are real estate loans secured by unimproved real property suitable investments for national banks? In our view economic circumstances are so changed that these loans no longer carry the risk they once did. Indeed, state legislatures and the Congress, itself, acknowledged this change when they permitted state banks, savings banks and savings and loan associations to make real estate loans against unimproved property. These institutions have been making such loans over an extended period without damage to their stability. If the same permission were now extended to national banks, it would greatly facilitate the acquisition of unimproved land for the large developments which are necessary if this nation is to solve its massive housing problems. If entire new cities are to be built on a conventional basis by drawing upon the fullest resources of the private sector, the removal of this restriction is essential.

In line with the powers of other financial institutions and modern practices we believe national banks should be permitted to make loans against unimproved property and recommend that:

(1) On unimproved property, the loan should not exceed 66%% of appraised value; and

(2) On property improved with offsite improvements such as streets, water supply, sewers and other utilities the loan should not exceed 75% of appraised value. Property improved with a building would remain at 90% of appraised value.

Amortization requirements

The purpose of amortization is to diminish gradually the risk that results from long term loans. For national banks, the amortization requirements for real estate loans are exceedingly complex. They vary with term and ratio of loan to value. Owing to a series of uncorrelated amendments over the years, Section 24 now, quite illogically, requires greater amortization on short term loans than on long term loans.

The Comptroller's Manual for National Banks in the form of a chart, sets forth the official explanation of the law governing amortization requirements for real estate loans by national banks. This chart recently has been updated and appears as Subdivision C of Section 7.2125 of Part 7, Chapter I, Title 12 of the Code of Federal Regulations, which I have reproduced here. (c) Amortization requirements of 12 U.S.C. 371.

A-1-Installment payments sufficient to amortize 40 percent or more of the principal of the loan within a period of not more than 10 years.

A-2-Installment payments sufficient to amortize the entire principal of the loan within a period of not more than 20

years.

A-3-Installment payments sufficient to amortize the entire principal of the loan within the period ending on the date of its maturity.

As you can readily appreciate after examining this chart it takes a sophisticated and experienced mortgage loan officer to understand, to interpret and apply these rules. Any attempt to explain the rules leaves the uninitiated as well as sophisticated mortgage lender and borrower stunned.

Upon analysis of all these rules, we are left with a curious reversal of the original intent of the Act. It no longer applies the safeguard where the risk occurs with long term, high ratio loans.

Let's consider a specific case. It results in a great deal of confusion and misunderstanding when we must inform a customer that his 70%, 5 year loan must be fully amortized by the fifth year whereas his 90% loan may be amortized over 30 years. The only way to reduce the heavy amortization payments required by the five year loan-which is not needed for security purposes-is to extend the term of the loan which was never requested by the customer.

Under these rules a 90% 30-year loan is not reduced to 50% of value until the 18th year, while a 50% loan without amortization cannot be made for more than five years.

On the other hand, a 50% loan for six years carries heavier amortization than a 90% 30-year loan as it must bear amortization that will repay it within 20

years.

These examples illustrate what we find inconsistent and illogical in the present amortization requirements of Section 24. The net result has been the unnecessary stretching out of maturities in order to reduce amortization.

In the case of short term loans, this is a positive hindrance to the acquisition and development of property for housing. Non-amortizing loans in excess of 50% of appraised value are now required in order to finance property being acquired for develpment. But it is precisely at this critical acquisition and planning stage, when cash flow is diminishing and planning costs are increasing, that assistance is needed. Frequently, planning costs must be financed on an unsecured basis because of present restrictions. In our judgment, national banks could make a more practical contribution if they were permitted to tailor amortiIzation schedules such as in the case of ordinary business loans, to meet the economics of the project.

In the consumer area, i.e., where the real estate is improved with a one to four family dwelling, it is advisable to require some amortization at all times. In view of the need for both flexibility and a margin of safety we recommend that:

Mandatory amortization requirements be eliminated for loans less than 75% of appraised value except where the property is improved with a dwelling for one to four families. For loans over 75% or where the property is improved with a dwelling for one to four families we recommend such payments as would fully amortize the loan within any designated period up to a maximum of 30 years.

Construction loans

National banks may make loans of no more than 60 months to finance the construction of residential or farm buildings. They may also make loans to finance the construction of industrial or commercial buildings. These loans are also limited to 60 months, but require a valid and binding "takeout" agreement with a financially responsible lender. Under this provision, the permanent lender, as distinct from the construction lender, advances the full amount of the bank's loans upon completion of the buildings.

Construction loans are not considered real estate loans. They are classified as ordinary commercial loans. There is no requirement that the loan be secured by a mortgage on the real estate upon which the buiding or buildings are being constructed. They are limited in an aggregate amount to 100% paid in and unimpaired capital plus 100% of its unimpaired surplus fund.

This part of Section 24 has worked fairly well but only with the application of considerable imagination and ingenuity.

With industrial or commercial building, when a takeout lender is not availible, the construction lender can supply its own takeout in order to qualify he loan. The borrower may then call on the construction lender to actually und the permanent loan but usually the intent is that another permanent ender will be located before the building is completed.

We can see no reason why national banks should have to resort to this interim xpediency in order to make a construction loan. National banks should be authorized to make sound construction loans even if the loan does not qualify is an ordinary commercial loan as is the case for state commercial banks and ther financial institutions.

The requirement that construction loans for industrial or commercial buildngs may not exceed 60 months and must be backed by a takeout is reasonble, if the loan is considered an ordinary commercial loan, but not if it is to e classified as a real estate loan.

Construction lending could be far more responsive to community growth eeds of the 1970s if national banks were permitted to make real estate loans eleased from the term and takeout restrictions of Section 24. Term should e dictated by the needs of the project. The artificial limit of five years does ot restrict most construction loans. Where it does apply, it impedes massive rban renewal projects that may go on over a period of years in our inner city reas. The absence of a takeout lender should not be allowed to keep national anks from supplying badly needed construction financing.

To avoid national banks having to issue their own takeouts for construction loans and to permit them to make construction loans which do not qualify as ordinary commercial loans, we earnestly recommend that:

National banks be permitted to make construction loans on a real estate basis up to 75% of value without a takeout or restriction as to term.

Guaranteed loans

Under Section 24 certain insured or guaranteed loans are exempt from individual loan restrictions. Basically, these include loans insured under the National Housing Act or other Federal Acts and loans which are fully guaranteed and insured by a state on the pledge of its full faith and credit. These kinds of loans are taken into account in determining the overall amount invested by a bank in real estate loans. Such investments are limited to whichever of two totals is the greater: the amount of capital stock of the bank paid in and unimpaired together with its unimpaired surplus fund or 70% of its time and savings deposits.

Loans insured under Section 203b of the National Housing Act (FHA insured loans 14 family housing) or at least 20% guaranteed under the Servicemens' Readjustment Act of 1944 (VA loans), in addition to being exempt from individual loan restrictions, are not considered real estate loans in determining the bank's aggregate investment in real estate loans.

The exemptions presume that insured loans carry a lesser risk. There is no reason, however, why only certain insured loans are excluded from individual loan limitations and others from the aggregate amount invested in real estate loans, especially since loans guaranteed by a third party are not considered real estate loans. It is our feeling that the statute should be made consistent by excluding all guaranteed or insured loans from the limitations mentioned. This would further increase the maximum amount of bank assets available to invest in housing. This will be of special advantage to the smaller banks that reach their statutory loan limits first.

We, therefore, recommend that:

All real estate loans insured under the National Housing Act or fully guaran teed or insured by a state where the full faith and credit of such state is pledged be exempt from individual loan restrictions and excluded from the aggregate amount that a Bank may invest in real estate loans.

Subordinate liens

National banks are restricted when making real estate loans to first liens. This rule was dictated by caution and the fact that a subordinate lien could be wiped out in a foreclosure.

The removal of this restriction now will not result in any undo risk as long as the subordinate lien and prior liens, taken together, do not exceed the ap plicable ratio of loan to value requirements. In the event of a foreclosure, the subordinate lienor can always protect itself by purchasing the prior liens. If the bank held all prior liens the bank's subordinate position would qualify as part of a legal loan.

By way of illustration, if a national bank were to make a loan against a piece of property improved by an apartment building appraised at $1 million, its loan would be limited to $900,000. If the property were burdened by a first lien of $100,000, the loan would be limited to $800,000. If there were two prior liens on the property totaling $300,000, the loan would be limited to $600,000. If there were a foreclosure the bank could always protect its position by purchasing the prior liens.

Such a provision would assist in land assembly by permitting owners and developers to take advantage of existing financing thereby reducing immediate cash outlay or expensive refinancing. The authority to take subordinate liens would place national banks on a par with other banks that already have this

power.

Since a national bank may be called upon to protect its subordinate position. a limit should be placed on the aggregate amount that a national bank ma invest in subordinate liens. Our recommendation is that:

National banks be permitted to make real estate loans secured by other than first liens provided that the combination of the bank's lien plus prior liens does not exceed the applicable ratio of loan to value. Real estate loans secured by subordinate liens should be limited to 20% of the bank's unimpaired capital and surplus with an exception for loans insured under the National Housing Act of fully guaranteed or insured by a state.