Mr. MCKEOUGH. That is, what proportion is applicable to new financing and old financing?

Mr. McDONALD. We desire to eliminate that. After July 1, 1939, the F. H. A. will drop out of existing construction, except houses which it has previously insured and of which it may be in possession or have to accept after foreclosure, for then we would not again be in the position of selling property with F. H. A. insurance or any house built since 1934-in fact, mighty few were built in 1934, 1935, or 1936-so from a factual point of view this provision limits F. H. A. activities after July 1, 1939, to entirely new construction.

8. The next clause comes about because of the pressure we have had put upon us, both outside and inside of Washington, the reopening of title I, which is the modernization and repair feature which the Congressman referred to, but with a maximum $10,000 loan and only for the purposes of modernization, alteration, or repair and not to include in any way, shape, or form removable fixtures.

It is felt by a great many that this amendment will have a pronounced effect in stimulating reemployment, as title I was very popular during the years it was in effect and undoubtedly did a great deal of good. By limiting it now to repairs to structures and buildings it is felt that a great many mechanics would be worthily employed and that the material and building industries would be aided.

Mr. WILLIAMS. What is the total limitation?

Mr. McDONALD. $10,000 for any one loan.

Mr. WILLIAMS. What is the total limitation of funds for that purpose?

Mr. McDONALD. None whatsoever, but the amount of insurance would be restricted to 10 percent. The first year was 20 percent. Mr. WILLIAMS. The limitation was $2,000 under the original act? Mr. McDONALD. Yes; and that was increased to $50,000 for industrial and business properties, but as a matter of fact our average loan was around $270. We had very few loans over $2,000. We issued a regulation which required a man to submit before previous acceptance any loan over $5,000 and we scrutinized the credit in such cases very carefully.

Mr. WILLIAMS. You did have a limitation on the entire amount? Mr. McDONALD. Yes; there was a limitation of $200,000,000 and in 1936 Congress cut that to $100,000,000 and the total sum that could be loaned on insured modernization and repair notes-one moment. I believe I have the figures right here, while you are on the subject.

Here is the analysis, a total of 1,449,373 insured notes or loans, of that 1,449,373 loans the national banks made 770,235; State banks and trust companies made 352,842; finance companies, 215,313; industrial banks 91,178; building and loan associations, 8,172; savings banks, 10,290; credit unions, 793; and all others 550, making a total of $560,751,206.

Now we have paid to date on that $100,000,000 which would reduce the sum to an item of $12,674,642 paid out in claims of that amount. The procedure is, the bank or any institution submitting the claim to us, we pay it and they pass us the defaulted notes and what residue there is to it and we make a further attempt at collection. We have paid out this claim of $12,674,642 which they claimed they could not make any more collections on and we took them and have collected

$1,093,000 in cash, repossessed property and again sold it for $60,000, making $1,153,567.86.

We have accumulated and collected other items amounting to $2,226,000 which we have turned over to the Government and which they have used again. We have also reinstated of those bad notes $2,796,000 by asking the man to resume payment on it, and so forth, and so on, stretching it out longer, so our settlements of all kinds have been $6,176,000 against the $12,000,000 column which we resettled, repossessed, reinstated, or collected.

Mr. WILLIAMS. As you stand now you have lost $6,000,000? Mr. McDONALD. Well, I would hardly phrase it that way. We still have the balance. We are trying to squeeze something out of it, but it is mighty dry.

Mr. GIFFORD. Has any consideration been given to the abuse in certain localities, for instance, banks and selling organizations would take loans for more

Mr. McDONALD (interposing). That is true. We have a very different kind of experience with different kinds of institutions. For instance, with bankers doing business locally their experience was excellent. The loss record was low. We found they were as careful in making these loans in most instances as if there was no insurance at all. We found some of the finance companies were not so particular and their loss record was higher. We found the most flagrant cases were some of the manufacturing companies that organized subsidiary finance companies of their own and attempted to use the F. H. A. as the vehicle to push their own sales. In those cases the losses were bad, and in one or two instances where we found an excessive loss record, we have notified them that indications pointed very strongly to the fact that usual business prudence was not being followed in making their loans and we would like them to come to us and explain it more carefully.

Mr. CRAWFORD. In order to clear this up I understood you to say 1,449,000 loans have been made.

Mr. McDONALD. Yes.

Mr. CRAWFORD. Aggregating about $560,000,000?

Mr. McDONALD. Precisely.

Mr. CRAWFORD. Of which 12 million plus have been turned back to you by the banks?

Mr. McDONALD. By the lending institutions?

Mr. CRAWFORD. And that you have handed back to the banks, you have paid $12,674,000 back to the banks. Now, out of those claims there were 2,796,000 that were reinstated?

Mr. McDONALD. Reinstated.

Mr. CRAWFORD. And you are making collections as best you can from time to time?

Mr. McDONALD. That is right.

Mr. CRAWFORD. There was one item $2,226,000 that I did not understand much about.

Mr. McDONALD. That has been turned over to the Treasury of the United States, the Procurement Division, which in turn has disposed of this property to other Government agencies. For instance, there are a great many barracks around the country, Army posts, and so on, which have received equipment, originally insured by F. H. A., repossessed and sent to the Procurement Division and by them probably sent to some Army post. I recall a very large modern kitchen,

which came up from some place around Richmond, a rather sizable item, which is now at the Old Soldiers Home.

Mr. CRAWFORD. Would the Accounting Department reflect a loss on that transaction?

Mr. McDONALD. The Accounting Department gives us full credit. Mr. CRAWFORD. May I ask this. Are your figures broken down in such a way that you can tie back the $12,674,000 to the national banks, State banks, industrial banks and so on, so you can show the amount of default with reference to each?

Mr. McDONALD. Yes; I can. I will do it right here. National banks had a gross-loss record before giving effect to salvage of 1.96; State banks and trust companies 1.47; finance companies 3.61; industrial banks 3.79; building and loan associations 0.40; savings banks 1.18; credit unions 0.45; and all others 1.56, making a gross loss record of 2.17, which, by reason of the salvage and otherwise disposed of property, reduces the net loss to 1.16.

Mr. CRAWFORD. Did I understand correctly the building and loan institutions have a much lower net ratio of loss than other financial agencies?

Mr. McDONALD. I noticed that myself. It is the lowest. The credit unions are next.

Mr. CRAWFORD. Would you attribute that to the long years of experience in making loans and the careful scrutiny of applications for loans by the building and loan associations?

Mr. McDONALD. Yes; I think that is so. Our General Counsel just reminds me they can only make loans secured by mortgages. Mr. CRAWFORD. If through this agency we are to make loans up to 90 percent of the appraised value of the property, will that not have a tendency to change the channel of borrowing away from building and loan associations to the Federal mortgages where you get 90 percent of the appraised value in the form of a loan?

Mr. McDONALD. I think if a 90-percent loan is to be current for certain classes of people and for certain properties, that a building and loan association for those particular mortgages would probably want to take insurance which they can do at one-quarter of 1 percent. Mr. CRAWFORD. In other words it either draws the individual to the Government agency or forces the building and loan to accept the loan?

Mr. McDONALD. That is why the insurance is made at that low figure. It is a protection to the building and loan.

Mr. CRAWFORD. Would the State laws allow the building and loan to do that?

Mr. ABNER H. FERGUSON (General Counsel, Federal Housing Administration). In practically all States they have passed enabling legislation.

Mr. McDONALD. As a matter of fact, Mr. Congressman, even with our 80-percent loans, we find a great many building and loan associations do not care to exceed a figure which their directors prohibit. What percentage comes from the building and loan?

Mr. FISHER (Director of Economics and Statistics, Federal Housing Administration). About 20 percent.

Mr. McDONALD. About 15 percent of all of the F. H. A. are originated in the building and loan.

Mr. GIFFORD. I want to follow that up, because I think it is a most important question. Is it going to dry up the business of the building and loan associations and cooperative banks?

Mr. McDONALD. I should think it would help them.

Mr. GIFFORD. Unless they would conform.

Mr. McDONALD. The borrower can get it just as well from the cooperative banks or a building and loan.

Mr. GIFFORD. If he gets it through you?

Mr. McDONALD. No; he goes to them.

Mr. GIFFORD. At present they loan about 60 percent of the appraised value?

Mr. McDONALD. No; more than that, Mr. Congressman.

Mr. GIFFORD. In my section it is lower than that.

Mr. McDONALD. They may have as much as $3 Government money in the Federal savings and loan to $1 of private capital and they can loan up to 80 percent if they choose without any insurance.

Mr. GIFFORD They can if they choose, but Mr McDonald, pardon me, if I say so, I have 17 weekly newspapers on my desk every week. I would like to show you an exhibit of those any week We have an abundance of these associations that will loan money on real estate but they have been unfortunate and they dislike to loan over 60 or 70 percent of the appraised value of the property so, when an individual wants a mortgage and can get 90 percent he would have to come to you.

Mr. McDONALD. If they want insurance they would have to come to us.

Mr. GIFFORD. They do not have to

Mr. McDONALD (interposing). They do not have to make a 90percent loan.

Mr. GIFFORD. This is a most important question, the most important in the whole thing, what effect is it going to have on these existing agencies now doing business?

Mr. McDONALD. I still believe, and I repeat, that any benefits derived from the 90-percent loan by the home owner whereby he may only pay down 10 percent would apply just as much to all other agencies as it does now. As a matter of fact those same agencies allow a second mortgage in many instances. Their first mortgage may be 70 percent, and they will permit a second mortgage of 20 percent, making the down payment only 10 percent.

Mr. GOLDSBOROUGH. You spoke of benefits to be derived for the home owner. How would the individual that originally puts up the 10 percent acquire a benefit?

Mr. McDONALD. He could acquire a home and move into it with a lesser down payment than he would have to put up otherwise. Mr. GOLDSBOROUGH. How does that benefit him?

Mr. McDONALD. I think that is a sound loan.

Mr. GOLDSBOROUGH. Assuming that is true, why do the loans have to be guaranteed by the Government if they are sound?

Mr. McDONALD. You might say that same principle applies to all insurance. If you have a good house, why should you insure it against fire? We know a certain number of houses burn annually.

Mr. GOLDSBOROUGH. If a 90-percent loan was sound, why will not the banks loan 90 percent on the mortgage without having the mortgage guaranteed by the Government?

Mr. McDONALD. The same thing was true when we brought out the 80-percent loan. The making of an 80-percent loan was a new venture in America.

Mr. GOLDSBOROUGH. Do you mean if you were a lending agency you would loan 90 percent without some guarantee or insurance from some outside agency?

Mr. McDONALD. As a matter of fact I would not, but curiously enough I have made a deep study of what they have been doing in England. There, with the tremendous building campaign that has been going on for 10 years, they are loaning 90 percent. Originally on 10 percent down payments, they asked for some form of guarantee until the loan was paid down. Now, they are taking the loan without any guarantee and they have gone to a 5-percent down payment. You get back to the principle which I believe is sound. Everybody knows a 10-percent down payment isn't as conservative as a 20-percent down payment; nor is a 20-percent down payment as conservative as a 30percent down payment; nor is a 30-percent down payment as conservative as a 40-percent down payment, but when you get into the small houses where a man gets a home through a monthly payment of interest and amortization of the loan, at no more than he will pay for rent, he will remain in that home and continue to make payments as long as he is employed. I think the question of down payment is not so important as the question of a man's employment. We can see ahead a year or two when a man makes an application to the F. H. A. We can inquire if he has been steadily employed and if the concern where he is employed thinks well of him, and we can see the man along for several years, but after that the general conditions of the country bear more weight.

Mr. GOLDSBOROUGH. Of course that is true. The question is whether the conditions of the country can improve with that burden of debt loaded on the home owner. That is the question involved, whether you can build up permanent prosperity on that, with such a load of debt.

Now, if a home owner, not the individual; suppose a home owner cannot stand a 90-percent loan, all you are doing is to lose for him his 10 percent and you are guaranteeing the banks that they will receive their emolument without any risk and the builder will receive his and the shark will buy the home in and society will hold the bag. That is the trouble.

Mr. McDONALD. I agree in a great many of the principles I have heard you express in regard to thrift and so on. One of the startling things to me, with every facility the United States has been able to invent, such as rehabilitation of building and loan associations, putting money in Federal loan associations, the home owners loan insurance in the Federal Housing Administration and so on, with life-insurance companies and others loaning money at the lowest rate the country has ever known, nevertheless there has only been bought in this country during the last 2 years something like 500,000 homes against 9,000,000 automobiles, and the automobiles carry about the same monthly payments as a house, but in 5 years the automobile is. on the junk pile while the vines are just beginning to grow on the home.