why the home owners should not be able to borrow money to purchase a home at the same rates at least that the great utility and railroad corporations borrow money to finance their operations, because I know that this home-mortgage collateral and security is better from the point of view of investment risk. While that is a fine ideal and objective, there is one fact that we must not overlook, that the $20,000,000,000 that we have financing the homes of America today, and we have a more liberal homemortgage credit system and facilities than any other country in the world, has come entirely from the savings of the ordinary people of this country. Until you get people to a place where they are willing to save their money at less than 42 percent, 5 or 52 percent in the building and loan associations, you cannot expect mortgage interest rates to go below 6 percent, 62 percent, and 7 percent, because it takes from a point to a point and a half to operate these institutions, and they are operated for the benefit of all their people and are the most economically operated financial institutions in the whole country. It is very fine to feel that a distressed home owner should have 5 percent interest or 4 percent interest, but frankly, gentlemen, his problem has not been created by the rate of interest. On a $3,500 loan the difference of one point of interest is only $35 a year at the most. Do not create a Government comparison in terms of interest rates to home owners which will be so low that the existing institutions cannot go ahead and pay rates to investors, and by investors I mean the ordinary citizens who save their money, which will urge those citizens to invest their money in building and loan associations. We might as well face one fact. While I am not sure is going to be true in this depression, in every other depression we have come out with high mortgage interest rates. Why? Because mortgages are nonliquid investments, and in a depression period people are not willing to put a substantial sum of money into thrift and homefinancing institutions when they expect it will be frozen somewhere. We are as interested in low interest rates as anyone, but I will say frankly that the interest rate of the Home Owners' Loan Corporation so far has dried up a substantial amount of the savings that otherwise we might have received. There is no question but what the Government can raise capital at 1 or 2 points lower cost than we can by going out and getting the ordinary citizens—and that includes all of us right around this table-to put their money into a long-term. nonliquid investment. I just want to deal frankly with that situation. I have no inclination to defend exorbitant interest rates, I have no patience with 9- or 10-percent lending-there is no excuse for it whatsoever-but let us not sin in the other direction. I am sorry I took up so much of your time, Mr. Chairman, but that was the message I wanted to get over. Mr. CHAIRMAN. Mr. Fahey made an announcement on January 3 that an insurance plan for building and loan associations was being studied by their board on the order of the President of the United States. That stirred up a lot of our investors. I would like very much to have that news release of Mr. Fahey's put into this record. Mr. BUSBY. All right, sir. 49036-34-8 (The matter referred to is as follows:) FEDERAL HOME LOAN BANK BOARD, [For release a.m. newspapers of Wednesday, Jan. 3, 1934] It was announced today that by direction of the President the Federal Home Loan Bank Board has been studying and hopes to present soon an insurance plan for building and loan associations, savings banks, and other homefinancing institutions along lines similar to those provided for commercial banks by the Federal Bank Deposit Insurance Corporation. Numerous suggestions have been submitted by bank commissioners, savings banks, and building and loan associations. The American Savings Building and Loan Institute has also proposed a plan patterned after that of the Federal Bank Deposit Insurance Corporation which is receiving the attention of the Home Loan Bank Board. "The overwhelming success represented by the establishment of the Federal Deposit Insurance Corporation for the greater protection of deposits in commercial banks", said Chairman John H. Fahey of the Federal Home Loan Bank Board, has aroused wide-spread interest in the possibility of developing an insurance plan adapted to the peculiar needs of building and loan associations, cooperative banks, and mutual savings banks. 66 66 By direction or the President, our Board is giving the matter careful consideration and hopes to suggest changes in the home-loan bank system which will expand and strengthen the system and provide for insurance. The problem is, of course, somewhat different from that presented by commercial banks, in which cash deposits are subject to immediate withdrawal, since the homefinancing associations are primarily investment institutions. Those associations receive in large measure the long-term savings of millions of our people and keep these funds invested in long-term home mortgages and other first-class investments, such as the most select bonds. They represent investments of approximately 12 billions of dollars. About 8 billion of this sum is in building and loan associations and 4 billion in mutual savings banks. For those home-financing institutions the Government has established the Federal Home Loan Bank System in which it is the largest stockholder. The system represents a great reservoir of capital which enables those institutions in different parts of the country to render a very much greater service to their customers and to protect their interests to an extent which was impossible before its organization. "In addition, as a result of the initiative of the Government, Federal savings and loan associations are being organized to extend this system of thrift and home financing into every county in the United States. This is being done because, when properly organized, supervised, and operated, this plan has proved to be the safest for savings and the best for long-term home financing. For the better protection of the public the Federal Home Loan Bank System examines and supervises all Federal savings and loan associations and may examine all institutions which are members of the bank system. It is the policy of the Federal Home Loan Bank Board to take every step practical to insure continued confidence in those institutions and the flow of savings into them. The Board is giving full consideration to every proposal presented to it which contemplates strengthening the system and assisting its members in rendering a great public service. "The Board hopes to announce certain recommendations in the near future." STATEMENT OF HON. WILLIAM F. BRUNNER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK Mr. BRUNNER. I was not present at any of the other hearings, and some of the things I have to suggest may have been brought up before. I represent a district which has a million people living in it, of whom 75 percent live in their own homes. It takes in an area of about 18 square miles, so I am quite familiar with it. In my county (I represent practically the entire county) we have about 10,000 applications. I do not know just how many loans have been made. These suggestions that I have to make, of course, come by way of constituents coming to me with complaints, so I just give them to the committee for their benefit. I am heartily in favor of the guaranty of the bonds, and I think that will facilitate matters to a great extent. But so long as we are going to guarantee these bonds, I think the interest rate should be reduced to 312 percent, and I think that the mortgages should bear, instead of 5 percent, as it is now in some cases, 41/2 percent, whether that mortgage is made by cash or by bonds. In our State, for instance, you might have noticed recently the savings banks have reduced their interest rate to 22 perecnt. I do not think there should be a limit placed on the value of the homes. If a home is worth $30,000, the owner should be permitted to get a loan from the Corporation as well as somebody whose home is worth only $10,000. There is one more suggestion, which applies directly to this bill— that is, a loan should be made for repairs. I think it should be made about 5 percent of the amount of the loan, but in no instance should that be over $500. One other obstacle we have met where I live is that, for instance, a man and wife live in the home, and they have formed a corporation in order to own that home, for no particular reason, but the corporation nevertheless owns it, and the stockholders in that corporation are just the man and wife, the people who really live in the home. I think it should be permissible that they should apply for these loans. I think that covers entirely everything that I have to say. Mr. LUCE. When you can go in the market today and buy American Telephone stock that will yield you 72 percent, how far down on interest do you think we can afford to go in draining the savings banks and the building and loan associations of their investors? Mr. BRUNNER. The prevailing rate in our State, of course, is 6 percent. In fact, the law limits it to 6 percent in New York State. They do not have to guarantee that Government bond, I do not think. Mr. LUCE. You can get first gilt-edged bonds and gilt-edged stocks that will pay you anywhere from 5 to 72 percent. What will be the effect on the depositors in the savings bank and the shareholders in the building and loan associations if we drop the rate as you suggest? Mr. BRUNNER. I do not just get the question. You mean the people would not put their money in savings banks any more? Mr. LUCE. Sure. Mr. BRUNNER. They are getting only 22 percent in my State now. They are still putting it in if they have any to put in. Mr. LUCE. Your State is in a different position. My State is paying 4 or 412 percent. Mr. BRUNNER. Of course, I can speak only with respect to my own State; that is, New York. Mr. LUCE. That is a factor that we have to take into account, the effect of what we do here on the savings of the people of the country. Mr. BRUNNER. Do you not think the added guaranty you are giving the bondholder when you guarantee the principal should be considered? Mr. LUCE. Oh, yes; that has to be taken into account, but taking all the factors into account, I wanted to point out that change of interest rate such as you suggest would have a very serious effect upon the investments of the life-insurance companies of the country, who are the great holders of mortgages. Mr. BRUNNER. I cut it down only a half of 1 percent, you notice. My thought is, the security back of the bond would be so great with the guaranty of the principal that the people would be not only glad but anxious to take it even at the reduced rate. Mr. BUSBY. The committee will stand adjourned until 2:30 o'clock this afternoon, when we will gather back here to hear the other witnesses. (Whereupon, at 12:05 p.m., the committee adjourned until 2:30 p.m., March 16, 1934.) TO GUARANTEE BONDS OF HOME OWNERS' LOAN CORPORATION-H.R. 8403 MONDAY, MARCH 19, 1934 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee met at 10:30 a.m., Hon. Henry B. Steagall (chairman), presiding. The CHAIRMAN. The committee will come to order. Gentlemen, we have with us this morning several Congressmen who desire to be heard on this bill. We will first hear from Mr. Sweeney, of Ohio. STATEMENT OF HON. MARTIN L. SWEENEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO Mr. SWEENEY. Gentlemen, I am seeking to amend this bill, H.R. 8403, by way of a rider, and I am going to give you this amendment particularly to the section ending on page 5 and to be known as "subsections Q, R, S, and T", immediately preceding line 24 of section 2. Subsection Q will read as follows: The Corporation is further authorized for a period of two years from the effective date of this act to make loans in cash or to exchange bonds for repairs, modernizations, or alterations of homes on which the Corporation does not have a home mortgage, but no such loan shall exceed sixty per centum of the value of the structure and the land before the improvement is made, or the sum of $3,500. Each such loan shall be a first lien on the property covered thereby, and shall be secured by a duly recorded mortgage bearing interest at the rate of five and one half per centum per annum and shall be amortized by means of monthly, quarterly, semiannual, or annual payments sufficient to retire the interest and principal within a period not to exceed 10 years. No such loan shall be made for the purpose of changing a home into any other type of structure. Subsection R would read as follows: The Corporation is further authorized, for a period of two years from the effective date of this act, to make loans for the construction of homes, but no such loan shall exceed 75 per centum of the value of the structure and the land, or the sum of $20,000. Each such loan shall be a first lien on the property covered thereby and shall be secured by a duly recorded mortgage bearing interest at the rate of 52 per centum per annum and shall be amortized by means of monthly, quarterly, semiannual, or annual payments sufficient to retire the interest and principal within a period not to exceed eighteen years. Subsection S will read as follows: The Corporation is further authorized to purchase or agree to purchase from any building and loan association, savings and loan association, cooperative |