and sections 5 and 6 of the Home Owner' Loan Act of 1933, without regard to the provisions of any other law governing the expenditure of public funds. SEC. 10. Subsection (a) of section 4 of the Act entitled "An Act to provide for the establishment of a Corporation to aid in the refinancing of farm debts, and for other purposes", approved January 31, 1934, is amended by striking out the eighth sentence thereof reading as follows: "Such bonds shall be fully and adequately secured by such assets of the Corporation and in such manner as shall be prescribed by its board of directors", and by inserting in lieu thereof a new sentence reading as follows: "No such bonds shall be issued in excess of the assets of the Corporation, including the assets to be obtained from the proceeds of such bonds, but a failure to comply with this provision shall not invalidate the bonds or the guaranty of the same."

SEC. 11. If any provision of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provision to other persons or circumstances, shall not be affected thereby.

STATEMENT OF JOHN H. FAHEY, CHAIRMAN FEDERAL HOME LOAN BANK BOARD

The CHAIRMAN. We have with us Mr. John H. Fahey, the chairman of the Federal Home Loan Bank Board, who will discuss H.R. 8403, and I am going to suggest that Mr. Fahey be permitted to proceed as long as he desires without interruption, and after he has concluded his general statement, of course, the members of the committee will all be free to interrogate him, and I will now ask Mr. Fahey to discuss the bill without interruption, as long as he desires. Mr. FAHEY. Mr. Chairman and gentlemen of the committee, I should explain at the outset that this bill is presented to you with the recommendations of our Board, has the approval of the President, so far as its terms are concerned, and that we have also checked with the Treasury Department and the Director of the Budget relative to its financial phases. In addition to that, because of its relation to financing in general, we have also discussed it over recent weeks with the chairman and other members of the Board of the Reconstruction Finance Corporation.

To summarize briefly the outstanding features of this bill, I would say that first of all, as you are aware, it provides for the guaranty of the principal of its bonds. Its further purpose is to encourage employment in the country, to stimulate modernization and construction, and, in turn, to help in the restoration of the capitalgoods industries of the country, because of the influence on those industries of the construction industry.

More than that, we believe that these amendments will have a substantial influence in restoring the confidence of savers, whose thrift is necessary to the further extension of home building in this country; likewise, that it will have a very definite tendency to encourage the lending institutions to adopt a more liberal attitude in making funds available for the modernization and repair of homes and also for new construction wherever it is needed. Of course, you gentlemen will realize that another incidental factor of importance involved is the strengthening of the assets of the corporation itself, because under the terms of this act the corporation would be allowed to advance money for the modernization of the homes on which it takes over mortgages, thus putting them in better shape than they are today and increasing their value as assets behind the mortgages and bonds of the corporation.

There is also provision in this bill for extending the time during which those who are entitled to assistance may take advantage of the terms of the act. We have also made one other suggestion of amendment here, which we are convinced is important and which we hope will appeal to you gentlemen, and that is remove from the present act its mandatory provision that we shall grant a moratorium on any payment of principal on the part of these borrowers during the next 3 years.

The other, a very important and constructive feature of this act, as we see it, is the encouragement it lends to the further and more rapid development of the Federal building and loan associations, and also in putting some assets at the disposal of the home-loan bank system, and, in turn, its member institutions, so that they, too, may be in a position to extend their aid in home building and home rehabilitation without undue delay.

Dealing with the incidental features of the bill, may I explain that, of course, in the first place, the purpose of the act, so far as the guaranty of principal is concerned, is in general to place the bonds of this corporation on exactly the same basis as those of the Farm Credit Administration. In its terms, the bill provides that those who hold donds of our issue may, during the next 6 months after the passage of the act, if it be approved, exchange the bonds which they now hold for the new bonds which the corporation will issue. After long consideration of the subject and discussion of it with the Treasury and other financial authorities, this Board was convinced that that was the most equitable plan which could be adopted, and for these reasons: As you know, we encountered considerable resistance in the acceptance of these bonds on the part of mortgagees, largely because of their maturities as investments, because they were due and not understood, and because in some quarters there was considerable resistance to the idea that such an institution as the Home Loan Corporation should be created at all, but there was considerable misunderstanding on the part of financial institutions and of individual mortgagees as to just what this corporation was expected to do and how sound the securities were. The result was that we had to go to considerable expense and carry on quite an elaborate educational campaign to have the bonds understood at all. I say, it was not appreciated in the country generally just what they represented, because it was not realized, for example, that the Treasury Department had ruled that these bonds of the Home Owners' Loan Corporation should be accepted at par as security for United States Government deposits; that the Comptroller of the Currency had ruled that national banks might accept them at their par value in exchange for home mortgages held by such banks and carry them in their balance sheets at par, unless at some time in the future there was occasion for some other ruling; that the Reconstruction Finance Corporation had rated them as in the highest class of investments against which they advanced loans and had agreed to loan 80 percent in cash against these bonds.

Aside from that, we were successful in persuading the various State legislatures to make them legal investments, not only for savings banks but for trusts, and some of the States cooperated with us to the utmost in making them legal investments for munici

pal and State sinking funds. All of that took time, however, gentlemen, and it took time to persuade these tens of thousands of mortgagees that they ought to accept these bonds, and it has cost a good deal of money to carry on that campaign.

However, it is fair to say that as the facts were brought to their attention, the organizations representing the savings banks, the building and loan associations, and the individual building and loan societies, and the insurance companies, all gradually came into line and began accepting the bonds without reservation. That is evidenced by the fact that before the proposal was advanced to guarantee principal we had obtained consents from some 450,000 mortgagees to the exchange. Of course it is fair to say, in obtaining consent of the mortgagees, it does not necessarily mean that the Corporation has agreed to take over a mortgage from a mortgagee at its full value, because in a large proportion of the cases it is necessary to negotiate a compromise and secure some reduction in order to effect the exchange and keep within the terms of the law. Moreover, in practically all of these cases where such adjustments are negotiated it is fair that they should be adjusted downward. However, it is a fact that in time and as they understood the facts of the case, the great bulk of these mortgagees with whom we negotiated accepted the bonds on the basis of our representations and accepted them at par and in good faith.

From our point of view, it would be manifestly unjust to now discriminate against those who have cooperated with the corporation in this work, in comparison with those who may now be ready to exchange without objection, in view of the guarantee of principal. We feel, therefore, that the suggestion offered here-that those who have already taken the bonds be given an opportunity to exchange them for new bonds within a limited period-is a sound and fair solution of that particular problem. As to the terms of the act, they are not obliged to exchange, of course. Moreover, you will recall that we have the right to take up these bonds at their par value as funds accumulate in our hands to do so. Of course, aside from those who exchange, we would hope to take up the balance of these 4-percent bonds within a reasonable term and thus reduce the interest charges to the corporation. Under the terms of the act at present the Board has the right to fix the rate on our bonds from time to time. Of course, we would expect, in cooperation with the Treasury, to fix this rate consistent with financial conditions at the time the various issues were authorized. I should say, in conclusion, I believe we are all convinced that the guarantee of principal of these bonds will greatly expedite the work of the corporation in granting relief and it will also have a material influence upon our costs of operation. We would be able to save a lot of expense and effort which would be necessary otherwise in making clear to thousands of mortgagees just what the facts are about these bonds.

I suggested that, in the opinion of this Board, the bill which we have presented to you represents an opportunity to stimulate greatly in this country. I think business men generally-and it is certainly true of the labor organizations, and I assume that you gentlemen are of the same opinion-think that there is nothing more important than the stimulation of employment in the construction

industries in this country and that it should be brought about as quickly as possible. Next to agriculture, construction represents the greatest opportunity for employment among all the groups in the United States. The indirect effect of construction activity is widespread, as everyone knows, in pretty near every line of manufacture, so far as machinery is concerned; and, of course, so far as transportation is concerned, we are all familiar with the influence of the activity in the construction field on transportation.

Ordinarily about 4 billions a year are put into housing in this country by the building and loan associations and the lending institutions. About 2 billion of that represents new construction, new housing, and more than half of it housing for the workers, which is a large part of the problem. From an average of over 2 billions a year for new construction for many years past, the figure dropped last year to somewhere around $250,000. The latest figures available from the building trades indicate that employment in the building trades affected by work on small houses is down to about 10 percent of the average or normal. I ought to say that the figures are not altogether conclusive. They are somewhat controversial, but the very best estimates available from all directions indicate a drop to about 10 percent, and the construction in that field in the last few months is lower than it has been at any time, I think, for at least 15 years; I would not want to be quoted directly as to the period, but it is for a very long period.

Directly and indirectly, 1,750,000 men are employed in a normal year in house building. It is unnecessary, I think, to dwell upon the influence of construction in this field on the capital goods market, or the necessity for the immediate stimulation of the capital goods industries in this country. In these two fields lie our great failure, so far as employment is concerned, at the present time; they represent the direct challenge, which must be met, so far as employment is concerned, if we are to go forward in our successful attack on depression.

I have ventured to suggest that it seems to us also, of the greatest importance that the revival of buildings should be encouraged in all parts of the country where there is any reasonable demand for it, because of its secondary influence on thrift and saving, and because it will certainly have an influence in restoring confidence on the part of the people generally in the ownership of their homes, and in the value of real estate generally. Many thousands of people who have land and money, and who, by now, would be utilizing these resources to build new homes, have been reluctant to do so because of the panic condition of the real-estate market. When a man owns a vacant lot in a block where two or three houses are sold under the flag, at ridiculous prices, he is persuaded that it is no time for him to use whatever savings he may have to build a home, because he observes that the home of his neighbor is being sold at a price below what it would cost him to build his new home, far below it. You face two problems here in trying to meet this situation; one is the stabilization of the real-estate market and the restoration of confidence in home values, and the other the stimulation of a demand which is chloroformed by the conditions which we have been going through. Again, as modernization and new construction is resumed.

we are of the opinion that you will find more people resuming the process of taking shares in the building and loan associations and saving their money for the purpose of building. Also, it will have an influence in stopping withdrawals on the part of those who already hold shares and having a feeling there are still elements of danger in the situation, are inclined to withdraw their money and thus present extraordinary demands on these very necessary financial institutions.

It is very important that the mortgage-loan institutions of the country should resume normal operations as soon as possible. We do not believe that that can take place while absolutely nothing is being done to modernize existing homes, to repair adequately those which have been neglected for 1 years, nov, or to build new homes, no matter how much they may be needed. It is the judgment of this board of ours, strengthened by the experiences of the last 6, 7, or 8 months, that there is no problem before this country than that of the proper housing of our people, and that everything that we might do in this field, not only improve social conditions, but it has economic reactions of the most important character.

I should add, in explaining some of the other provisions here, as I suggested a little while ago, we have suggested an extension of time during which home owners who have lost their property through foreclosure, may recover them, and also an extension of time of the period during which applicants for loans may qualify to receive consideration by the corporation.

Another feature of the bill to which I have referred is that relative to the moratorium. Under the law, as it is at present, any home owner whose mortgage we take over may at once demand relief from any payment of principal for the next 3 years. One effect of that provision has been to bring to us a lot of people who were not in distress, who were abundantly able to take care of their present obligations with the present mortgage lenders, but who thought it would be a a nice thing if they did not have to meet any of these obligations for the next 2 or 3 years.

It

Of course, every loan of that character, which gets by us when it ought not to be granted, limits our opportunity to help those who ought to have relief. It is perfectly plain that with the great burden of mortgage indebtedness in this country, amounting to some 21 billions, it is utterly impossible for this corporation to meet the situation with anything like 2 billions. We have already nearly a million applications, representing $2,700,000,000 of demand. should be explained that on the average about 30 percent of those have to be dropped out because the applicants are ineligible, but our conviction about it is, with our ability to help those who are in real need of help, and who ought to be helped, and whom we may legitimately help, ought not to be impaired or curtailed by taking care of people who have no legitimate demand upon the help of this corporation, and it is a fact that a great many of them who have gotten by do not want to pay the very moderate principal payments, because you will remember that these mortgages are amortized over a period of 15 years; they do not want to pay when they are abundantly able to and when the payments do not represent any burden on them at all. We feel very strongly, therefore, that the present provision of the law should be amended.