(The witness submitted a tabulation of effective interest rates, which is as follows:) Effective interest rates on mortgage loans made during 1936 by Federal savings and loan associations Prepared in the Office of the Governor Federal Home Loan Bank System. Office of the Chief Supervisor, Dec. 8, 1937. Mr. BODFISH. In regard to the article, I do not like to criticize anything that is published by a Government bureau, even if we pay for it, but this article was not a carefully prepared article, nor is it quite fair to the institutions which the Federal Home Loan Bank Board supervises. Mr. FORD. Pursuing the same line of inquiry, did I understand you to say that that 60 percent of the home loans were made by thrift institutions? Mr. BODFISH. That is right-new loans by our institutions in 1936 and 1937 so far. Mr. FORD. Now, following the same percentage on $17,500,000,000 of loans outstanding, 23 percent of which building and loan societies made, 17 percent Home Owners Loan Corporation-which I think ought to be excluded-the balance is divided between the individual mortgage companies, savings banks, life-insurance companies, national and State banks, so your estimate would be 23 percent of the whole. Now is that a fair comparison, or if not, what is wrong with it? Mr. BODFISH. I believe that the figures you refer to deal with present holdings rather than new loans made. When you include life companies you are including their mortgage portfolios, which in clude a great number of large-unit properties. When you include savings banks, you include their mortgage portfolios, as that $17,000,000,000 total does. You are including some large-unit properties, as I am sure the gentlemen from the savings bank state will bear me out. There is no question in my mind, and I can submit figures of authenticity which will prove that when you go to the small or individual home mortgage field we have a much larger portion of the assets in those kind of loans than the percentage which you mention. Mr. FORD. The home-mortgage people we are particularly interested in, in this bill, particularly where we go up to $6,000-what volume of that type of loan would you say your institutions carry? Mr. BODFISH. I would estimate that in the small-home field, $6,000 and under, that we carry easily two-thirds of it. Mr. FORD. Two-thirds of it? Mr. BODFISH. Without a doubt. Now, of course I have always tried to be very candid with the committee, and we have about a billion of loans on our books which are no longer under the classification of "mortgage loans." They were 66%-percent loans when we made them, but they turned out to be repossessed properties. Our total assets or holdings run about $6,000,000,000 at the present time. Incidentally, Congressman, this Federal Reserve Bank Bulletin dealing with rates charged by member banks-it might be fair to put an excerpt from that into your record or include the whole article just to clarify the matter, on this bank interest-rate question and broaden the criticism of interest rates in our saving and loan associations by Governor Euler to a criticism of all interest rates. Gentlemen, if I may get back to the bill Mr. MCKEOUGH (interposing). Before you leave that, Mr. Bodfish, there is just one thing I would like to ask you to put into the record at this time. Your experience from 1920 to 1929 was I presume somewhat typical of the experience of all others engaged in the real estate field. You made loans that proved to be too high, I presume. Mr. BODFISH. Yes; we made quite a number of them. Mr. MCKEOUGH. Do you remember have you any figures to show what percentage of the loans made in that period your institutions were forced to repossess? Mr. BODFISH. No; I do not have figures on it at the present time. We have approximately 20 percent of our assets in repossessed properties. Mr. MCKEOUGH. And your assets are what? Mr. BODFISH. Our assets are approximately $6,000,000,000. Mr. BODFISH. Our records for 1936 show just over one billion in real estate and those were 66% percent and 70-percent loans, all amortized, Mr. Congressman, without a single exception. We never make anything but a long-term amortized loan. Mr. MCKEOUGH. So with a view of being fair to everybody, even your wide experience proves to be of very little value in that period? I know you want to be fair and we are trying to get the facts out of which we are attempting to make a program. Mr. BODFISH. That is right. Mr. MCKEOUGH. A program that will satisfy your institutions and all other types of institutions Mr. BODFISH. That is right. Mr. MCKEOUGH. And especially with a view of mutually aiding the whole situation. Mr. BODFISH. That is right. Mr. MCKEOUGH. To make it possible and practical for the fellow that borrows as well as you who represent the lenders Mr. BODFISH. That is right. Mr. MCKEOUGH (continuing). the other factors that ought to And the cost of the building and all enter into it, out of your experience and that of the others, to make a practical situation. Mr. BODFISH. That is right. I think, Mr. Congressman, the great lesson of our experience is that there is such a thing as a "real-estate cycle," and when it comes it plays no favorites. Mr. MCKEOUGH. Not even to those of wide experiences. Mr. BODFISH. And that in spite of our having exclusively amortized loans which we thought as best we could judge were originally twothirds and 75-percent loans, that when the deflation came we repossessed considerable property, which incidentally is one of the reasons that personally I can not develop the faith I should in the Government-guaranteed mortgage arrangement. At the next depression the United States Treasury and the Federal Government will have the property rather than the lending institutions, and there is an important question of broad general policy. I think we all ought to move into that thing only after careful study, and make sure that we are doing the right thing. Mr. MCKEOUGH. In other words, when the plague of the depression hits the community or the Nation, it is not a respector of any particular group? Mr. BODFISH. That is right. I was very amused yesterday at the banking witness, who indicated he made 50-percent loans before the depression. You asked him what his experience was, and he said it was "Very bad." We feel that the Federal Housing Administration has done a great service through selling the idea of amortized debt to other lenders and the public; that is, if you are going to acquire debt it does not make any difference whether it is a city or a railroad corporation or a public utility or a home owner, there ought to be an orderly program for the repayment of that debt out of current earnings, and within the capacity of the corporation and the individual to carry it. That has been the basis of what success we have had in our mutual thrift institutions of the building and loan type in home financing. Mr. MCKEOUGH. Will you say right there for the purpose of the record and with a view to making the whole situation for 130,000,000 people better, the shortest way to attack the present housing problem would be in your judgment in the building field, even though it might cost the Government a little to begin with, or even to end with? Mr. BODFISH. No. Mr. MCKEOUGH. Well, let me put it to you this way. Maybe that is an unfair question. Mr. BODFISH. I am willing to answer the question, but I want to answer it my own way. Mr. MCKEOUGH. I know you are, but I do not think it is quite fair. Let us assume now that by reason of the recession the Government cost, which is yours and mine and everybody else's in the coun try, is going to be stepped up say 40 percent on relief costs for the next year or so, and as against that, with a subsidy that will come to this from the Federal Government, we might spend say 10 percent of that 40, to start a building program, and then say 20 percent net cost to the Federal Government, which side would you take? Mr. BODFISH. There is no question, we ought to have the building program, but Mr. Congressman, let us be very sure we have got a program and a legislative vehicle that will work to produce the results. Mr. MCKEOUGH. I have done everything I could for the past 2 weeks to try to get one. Mr. BODFISH. Because, Mr. Congressman, 3 years ago and I am a battle-scarred veteran of that discussion that we had before this committee the people who prepared the F. H. A. legislation were sure that this government-Guaranteed-mortgage scheme would do the job and stated in the published testimony before this committee that it would put 5 million men to work, and this, that, and the other thing. I am not trying to tear it down, but I am trying to push into the realities, and, if we can, try to help work out a program that will get the results. The CHAIRMAN. Mr. Bodfish, will you now direct your remarks to the different phases of the legislation specifically, if you can. Mr. BODFISH. Thank you, Mr. Chairman. Mr. MCKEOUGH. I will refrain from interrupting. The CHAIRMAN. I do not mean to shut you off at all. Mr. BODFISH. Mr. Chairman, on page 5, section 9, I merely want to call to the committee's attention the fact that the shift in premium rates very decidedly places the mortgage insurance on a subsidy basis. A half of 1 percent premium is provided for the larger home construction, and for existing mortgages, on an 80 percent basis, but the premium is cut to a quarter of 1 percent for a 90 percent loan, which we all know is much more risky. The only reason I comment on the premium question is simply this, that you place by premium reductions and the F. H. A. interest change announced by the President the force of Government and the colossal publicity which will flow from the F. H. A. and throughout the land upon this enactment, you place mortgage money on a 54 or a 5%1⁄2 percent interest and 80-90 percent loan basis so far as the expectations of the public are concerned. Now while that may be only let us say one or a half a percent decrease to the borrower, it may become most important to an institution such as our mutual thrift institutions which are trying to gather up savings in the community in the face of competition with our Government, which is paying 2.9 on United States savings bonds, which is guaranteeing bank deposits, savings deposits-not commercial deposits-savings deposits which pay 2 to 2.5, and guaranteeing complete liquidity, and I do not mention all the other competitive phases we have. It is possible if through legislation and publicity you force the rate, let us say, to the borrower from 6 to 5%, while that may be only threequarters of 1 percent to the borrower, on a $3,000 loan, less than $2 a month in his payment, it may take out of the cooperative thrift institution one-third or 40 percent of the net income on which it conducts its business. Frankly, gentlemen, we have to pay the small saver or investor 3.5 to 4 percent in order to invite the flow of capital into these thrift institutions, where we invest every dollar of it in mortgages. It takes about 2-a clear-cut 2 percent-to run these institutions properly and build up their reserves for losses. We are not offering any amendment. We merely call it to your attention because we conscientiously believe that you must be very careful to keep the community institutions, whose whole existence is predicated on mortgage lending, who cannot shift from one investment field to another as can a life company or as can a savings bank, or as can a commercial bank; we must keep them functioning. I know you gentlemen want to assure them, not an exorbitant return, because we have no right or desire for such, but a return on which they can continue to operate and do real community service in thrift and home building. Mr. WOLCOTT. Mr. Bodfish, might not the amount of the mutual insurance fund of the F. H. A. as compared to their contingent liability have some bearing upon whether the banks might continue to accept F. H. A. insured mortgages? Mr. BODFISH. Mr. Chairman, I do not believe banks have been inclined, so far as I have been able to observe, to rely on the mutual mortgage fund. They are relying on the Government bond guaranty. I think they realize as we do that F. H. A. expenditures are in excess of the premium income. Mr. WOLCOTT. How much do you know? Mr. BODFISH. I do not know. I cannot tell from their expenditures. They have drawn about $55,000,000 from the R. F. C. They have about $15,000,000 in the mutual mortgage fund. The balance is expenses as I understand it, but that includes title I. Mr. WOLCOTT. In case of a depression involving liquidation of a large amount of F. H. A.-insured mortgages, what security or what insurance have the banks other than the mutual mortgage fund to rely on? Mr. BODFISH. The Government-guaranteed bonds of the United States Treasury are squarely behind the insurance. Take that away and, in my humble judgment, the F. H. A. cannot function or proceed relying on the strength of the mutual mortgage fund as was originally represented to the Congress. I think the reality should be realized that the only reason that the commercial banking institutions are depending upon F. H. A. guaranty entirely is the fact that if they make a good loan they get a 5- or 5.5-percent rate on the mortgage and they get Government bonds if they make a bad loan, which is amazing. To state my prejudice and connection on the matter, I believe they ought to be financing American industry and business rather than experimenting in the mortgage field-a practice regarded as questionable by the great majority of bankers. Mr. WOLCOTT. It naturally follows that if the mutual mortgage fund is inadequate it raises in the same proportionate amount the contingent liability against the United States Treasury? Mr. BODFISH. That is just automatic. Now, on one of the suggestions I want to call to your attention a little later, it becomes very important in this connection. It has been the policy of this Government to also sponsor and urge and encourage the buying, building, and owning of individual homes. I do not think there is a man here that does not feel that insofar as we can create a nation of small property owners we have done a fine thing, but as you get into the multi-family and large-unit phases of this bill you have a complete Government guarantee practically behind financing of multi-family apartment properties. There is not potential loss there to caution the |