for any other class of financial institution in the country. Our experience to date indicates that insurance of accounts not only increases public confidence and savings, but also has brought into active use a considerable amount of money previously hoarded.

By thus increasing the supply of mortgage funds available to institutions which are actively making loans, insurance of accounts has had a beneficial effect in encouraging home building and home ownership. This influence is especially noteworthy in small communities where there is a particular need for housing and where, quite often, adequate credit facilities are not as plentiful as in larger cities. The present high premium rate has been a deterrent to many home-financing institutions particularly the smaller group which necessarily operates on a somewhat narrow margin. Because it is necessary to make provision for dividends, operating expenses, and adequate reserves, the cost of insurance becomes a matter of real importance to these institutions. A reduction in the premium rate, therefore, should encourage a more widespread utilization of the insurance principle by savings and loan associations.

The remaining provisions of the bill may be discussed more briefly. In short, they would accomplish the following: Expressly exempt the office building owned in the District of Columbia by the Home Owners' Loan Corporation from taxation by the District.

I ought to digress say that the District authorities here have set up a claim that the building ought to be taxed, because it is owned by an instrumentality of the Government. They have suggested they will have to proceed as they see the situation unless it is corrected.

I now continue with my prepared statement: Equalize the tax exemption rights of Federal- and State-chartered associations; permit the conversion of Federal associations into State institutions; clarify the definition of "insured accounts"; exempt the Federal Savings and Loan Insurance Corporation from the payment of a dividend to the Home Owners' Loan Corporation until a minimum statutory reserve of 5 percent has been accumulated; provide a more flexible and economic settlement provision for the Federal Savings and Loan Insurance Corporation; and make certain technical changes in the provisions for terminating insurance of accounts.

The other members of the Board and I will be glad to discuss any of the amendments in which the committee is interested.

Senator TOWNSEND. Mr. Fahey, who prepared this bill?

Mr. FAHEY. In this form I think the final drafting was done in our office, in our legal department.

Senator WAGNER (presiding). Any questions by members of the subcommittee?

Senator BROWN. Mr. Fahey, what was the real purpose of the limitation of these four-family buildings? In other words, why did you limit it to buildings of that kind?

Mr. FAHEY. As I recall it that goes back to 1932 when the Federal Home Loan Bank Act was passed, I mean the original legislation. At that time I think there was no general appreciation of the fact that a greater demand was likely to develop in and about our larger cities for the smaller apartment house.

Another thing is this: There are a good many cases in our cities where well-built but out-moded structures, providing only for four families, and in many cases for three families, if they are to be

used today at all economically must be modernized and practically rebuilt. There is a large demand for small six-family apartments in some of our cities. We strike that in the case of the Home Owners' Loan Corporation where we have had to take over some three- and four-family structures.

Senator BROWN. And that was for four-family home owners finally as I recall it.

Mr. FAHEY. That is right.

Senator BROWN. If I might interrupt you right there further; I thought possibly there might be a different reason for it and that was what prompted me in propounding the question to you. I supposed the idea was to encourage home ownership, and that you were not encouraging home ownership very much in the case of 8- and 16-family structures. I thought that was the fundamental reason for it, to encourage home ownership.

Mr. FAHEY. Well, of course the great bulk of the homes in smaller communities are of the single and double types. There are a great many three-deckers in some of our cities, and even some four-deckers; but in the larger cities the small apartment with six and eight units is a very definite development of recent years.

Senator RADCLIFFE. Mr. Fahey, does not the use of the term "home owners" bear out what Senator Brown has just said? I have had some more or less close contacts with the proposition.

Mr. FAHEY. That is the Home Owners' Loan Corporation, and the other is the Federal Home Loan Bank system.

Senator RADCLIFFE. But the term "home owners" is still there. I think the idea, as suggested by Senator Brown, that was quite dominant in the minds of the people was that they wanted to stress the idea of homes. I do recall that a great many of the losses suffered in the real estate business has been in cases of the larger apartment houses.

Mr. FAHEY. Oh, yes.

Senator RADCLIFFE. And there is another reason, to get away from that, I take it.

Mr. FAHEY. This bill provides a very definite limit, because one could not go into a very large proposition on simply $50,000.

Senator BROWN. But that is not the only limit, the $50,000. There isn't any limit as to the number of apartments in a dwelling. Mr. FAHEY. No; but it must be residential property.

Senator BROWN. I would like to inquire as to whether the section by which you propose to extend your supervisory authority will add very many employees to the organization.

Mr. FAHEY. None.

Senator BROWN. Suppose you have to have additional inspectors? Mr. FAHEY. Oh, no.

Senator BROWN. It seems to me you do propose to go much more deeply into the matter of investigations than heretofore, unless this is merely a restatement of the present law.

Mr. FAHEY. NO. I would not say that, except as the insurance corporation and the bank system might create a need, there will be any occasion for the Board to add to its examining staff. Senator BROWN. What section was that?

Mr. FAHEY. There are no extensions of the Board's authority that refer to supervision, except that the Board shall have the power to

issue subpenas and to compel the attendance of witnesses, and the introduction of documents.

Senator BROWN. Then this is a restatement of the present law, only in a slightly different form.

Mr. FAHEY. And providing the procedure, which it would be necessary to do by way of regulation if that were not done.

Senator BROWN. All right.

Senator WAGNER (presiding). Any other questions?

Senator DANAHER. Mr. Fahey, where do you get the money for your operations?

Mr. FAHEY. You are speaking now of the Federal Home Loan Bank system?

Senator DANAHER. Yes.

Mr. FAHEY. In the first place the Government supplied $125,000,000 as capital. That has been supplemented by capital subscribed by the member institutions, which represents another $40,000,000, so that there is a total capital today of about $165,000,000. The System gets additional money to be lent to member institutions by the issue of consolidated debentures which are sold in the open market. Senator DANAHER. For instance, to banks?

Mr. FAHEY. To all kinds of institutions, to private investors, and all kinds of institutions.

Senator DANAHER. So it has the effect of selling these bonds to banks and of taking from banks money that represents excess capital to them and devoting it to the purposes of this bill?

Mr. FAHEY. That might be so where banks invest in the obligations; yes. These obligations are purchased by insurance companies, banks, individual investors, trusts, and all that sort of thing.

Senator DANAHER. So the effect of it is: If today there is not capital for the six-family unit this particular bill would result in draining the banks and devoting that very capital to the six-family units.

Mr. FAHEY. Of course, there is no change in that respect because the money which they invest goes into the Federal home-loan bank system now.

Senator DANAHER. But it is not going to be used for more than the four-family units.

Mr. FAHEY. No.

Senator DANAHER. And it goes up to $50,000.

Mr. FAHEY. It can be so interpreted; although the fact of the matter is that in most of the cities where such investments would be made the institutions have more cash on hand than they need. Under present conditions they have difficulty in placing their available money in desirable mortgages because there are not so many of the two-, three-, and four-family houses available for investment.

Senator DANAHER. If they would not be desirable mortgages for banks, why would they be desirable mortgages under this bill? Mr. FAHEY. I do not quite get your question.

Senator DANAHER. You have just stated that there is money in excess, that banks have more than they need, apparently because they have not desirable mortgage-investment possibilities within the limits of the bill, four-family houses.

Mr. FAHEY. Take a city like New York, and such a thing as the single-family house, or duplicate house on the island of Manhattan,

and in the most of the metropolitan New York, hardly exists. None of them is being built.

Senator DANAHER. But this bill is not limited to New York.

Mr. FAHEY. Oh, no. But, of course, you strike much the same thing in many sections of our larger cities, like Pittsburgh, Detroit, Chicago, and so on.

Senator DANAHER. Do you contemplate the 25-year amortization period?

Mr. FAHEY. Under the bill as amended here F. H. A. loans which are insured and which are amortized on the 25-year basis, could be made collateral. They are not now.

Senator DANAHER. What is the position of the F. H. A. with reference to this bill, if you know?

Mr. FAHEY. Oh, I cannot conceive of any objection from the F. H. A.

Senator TOWNSEND. What is the position of banks on it?

Mr. FAHEY. I do not know of any present objection on the part of banks.

Senator TOWNSEND. How about the Federal Reserve Board? Mr. FAHEY. I do not know of any objection they have now. Senator BROWN. Do you see any further objection, I mean in the case of banks in State or the national banking system to the extension you propose here?

Mr. FAHEY. Not the slightest.

Senator BROWN. You do not think it would interfere at all with any existing banking business?

Mr. FAHEY. No.

Senator RADCLIFFE. Mr. Fahey, your statement has been very full and clear but it would be a matter of some little convenience to me, and I think maybe to some other members of the subcommittee, if you would summarize, very briefly-or, I will not say very briefly, as fully as you care to-the changes which you seek to bring about. I mean if you were to go ahead and describe them very briefly. I think in following the matter it has been difficult at times to understand what was new and what was old. If you will specify the points of change I think it would be helpful.

Mr. FAHEY. Well, first of all, the very first sections of the bill, as I have said, sections 1 and 2, would simply make eligible as collateral for advances in the bank system, mortgages which the institutions under the law have the right to make and which they have in their portfolios now, in many instances; but they are not eligible, or have not been eligible, under the limitations of the law as collateral for advances.

In a word it represents much the same situation as that which existed in the case of the Federal Reserve System before the amendments of 1935 were enacted into law. You will recall that in the Federal Reserve Act there were very definite limits on what bank members could offer to the system as collateral in order to secure advances. That proved a very great handicap to banks.

It is very interesting to recall the number of banks that were closed during 1932 and 1933 but which in the years since have worked out close to 100 percent liquidation, or at least have made an extraordinary showing. The evidence is conclusive that they had in their portfolios an abundance of available collateral which, if it had been

used, if they had been able to use it, would have proven of great advantage.

The heart of this Federal home loan bank system is that it shall serve as a reserve system, affording the same protection to these mortgage loan institutions, which represent the savings of the great mass of the people of this country-because, remember, there are about 6,500,000 savers and borrowers in these 4,000 institutions of the Federal home loan bank system.

And, also, it is worth while to remember that this institution has seen a most extraordinary growth. There were only about 115 members in it at the beginning of 1933, and the membership amounted practically to nothing until some time after the bank system was established. But its value has been recognized by these institutions, and behind them the people who entrust their money to them, to such an extent that it has grown to be the largest institution of its kind in any country. Another thing that we need to bear in mind it seems to us as having relation to this whole problem, is the fact that the urban home mortgage debt of this country is the biggest single item of private debt that there is, $18,300,000,000. And without a reserve system and a reserve system that is able to serve when trouble comes, you are absolutely certain to have trouble in your commercial-banking structure and in your farm-credit structure. These three credit systems are interrelated. They have to be after all on the same basis so far as the welfare of the country as a whole is concerned.

Now, our feeling-and this is only incidental because it does not apply to the great bulk of these institutions-is that they have mortgages of this type which should be used as collateral. But the point is this: That if trouble should come, if the need should arise, and they have available collateral, certainly they ought not to be stopped from making it available when relief is needed. Now, that is what we are driving at here.

The second important thing here, the right of the Secretary of the Treasury to buy debentures of the Home Loan Bank System, is related to this as the same problem. A reserve system that cannot meet a sudden emergency is no reserve system at all. It belies its name. That is one of its primary purposes, aside from the other, that of affording a pool of credit by means of which surplus money at one point can be moved to another section where it is not available but is needed. That is another function which this system performs.

Senator DANAHER. Senator Radcliffe, will you pardon an interruption at that point?

Senator RADCLIFFE. Why, certainly.

Senator DANAHER. Well, you had asked Mr. Fahey to explain the bill in a little more detail, and I hesitated to interrupt.

Senator RADCLIFFE. Go ahead.

Senator DANAHER. Mr. Fahey, where are such other sections of the country now, if you know?

Mr. FAHEY. For example, if the Boston bank has a surplus of cash, money which its members are not borrowing, and the Los Angeles bank has an increasing demand, the Los Angeles bank may borrow from the Boston bank and use that money in the Los Angeles area. Senator DANAHER. But you used the word "if". Is it a fact that at present there is no pool of capital available at one point which is actually needed somewhere else?