Mr. ECCLES. That is right. Mr. FORD. The materialman furnishes the materials, is paid, and he gets clear out? Mr. ECCLES. That is right. Mr. FORD. But the fellow that comes along and buys the place has an equity in there for 10 percent. Would there be any way to devise another insurance fund to insure that equity? Mr. ECCLES. Not unless someone paid for it. Mr. ECCLES. That again includes the question of cost. The only way it seems to me that the cost can be reduced would be through some kind of subsidy. Now this whole program is designed for the purpose of getting away from any direct subsidy, where the Government does stand in the background in order to be able to get this type of credit through private lending agencies on the basis proposed. Mr. FORD. There is a risk all the way through. The man that loans the money is taking a risk. The other people are not taking any, but the fellow that buys the property is taking a risk. Now, I wonder if there could not be some method providing for insuring his equity? Mr. ECCLES. That might be given some study. It may be, but I do not think it would be practicable to insure a loan to the lending institution beyond the proposals. Of course as to the down payment made by the borrower, whether it be on a home or anything else, there is always a risk if he is unable to keep up his payments, and how can you provide a mechanism to insure that? I cannot conceive of a way of doing it and I doubt if it is necessary and I know that I do not think it is necessary. Mr. FORD. A few years ago everybody said that if you would insure a mortgage that would be crazy. Mr. ECCLES. The 10-percent down payment applies only to the small individual homes. Mr. FORD. I understand that. Mr. ECCLES. The places for rental will likely be the larger developments and the great volume of building, particularly in the cities or industrial areas will likely be placed for rental and will be of the limited dividend type or be of the walk-up apartment type that is based on an 80-percent loan. Mr. HANCOCK. Governor, do you understand that the 5-percent interest rate would cover all the charges allowed other than the insurance premium? Mr. ECCLES. Well, there are some charges such as title, such as the drawing of papers, et cetera, but they are charges I think that are incidental in case any loan is made whether it be an insured loan or whether it be a loan made by the lending institution without insurance. Mr. HANCOCK. I did not have in mind that character of charge. I am just wondering whether it is your understanding that brokerage and other similar fees would be permissible. Mr. ECCLES. I think by regulation they should be eliminated. Mr. HANCOCK. I am also wondering whether you think by regulation it should not be required that the borrower take out a certain amount of life insurance in order to have his mortgage insured. Are additional costs of this kind going to be permitted, that is what I am trying to find out. Mr. ECCLES. Well, that may involve a question whether he could get life insurance. It would slow the thing down. I think that is something that might be thought of later on when you have a building boom, but I question now whether you should put any more restrictions around this program when the thing we are anxious to do is get construction. Mr. HANCOCK. I know in the past the F. H. A. claimed that it had nothing to do with those charges, but by this new program it will be a little more restrictive so it will give the F. H. A. wider control in matters of that kind so as to insure that people who want to build and own homes can get the money at the rates in the bill, so when they advertise 5 percent the advertisement will be honest. Mr. ECCLES. I think they have powers to regulate in a pretty broad manner the conditions under which a loan is to be insured so as to protect the borrower. Mr. LUCE. Governor, if this program should go into effect would there be any cause remaining for commercial banks to engage in the real-estate business? Mr. ECCLES. Commercial banks do not engage in the real-estate business today with reference to their demand deposits. They are permitted only to make real-estate loans up to 60 percent of their savings or their time deposits, and outside of New England, your section of the country, and New York, the savings are in the savings department of the commercial bank. The banks do not do strictly a commercial banking business. In fact more than one-half of the deposits of the smaller banks are savings deposits. In many cases they go as high as 80 percent of the total deposits and it is not only proper but absolutely essential in the interest of the community that those banks will put their time funds into the investment field. They, during the twenties invested those funds largely in collateral loans and in real-estate mortgage bonds, and in other types of bonds which were supposed to be readily marketable, and the bad bonds, foreign bonds, and others sold to banks had more to do with their collapse than the real-estate mortgages did. This type of mortgage which would syphon the funds in the community back into the community instead of the funds in the community into the money market in the purchase of all types of bonds seems to me to be a much more constructive use of the savings funds of the people in the respective communities, and a 20-year amortized loan that is getting better each year through payments being made together with this mutual insurance feature is, it seems to me, an excellent place to put private funds-in the construction field rather than putting funds into Government bonds and have the Government in turn undertake to do the financing. Mr. LUCE. You will recall that four or five of our State banks, which we call trust companies, went on the rocks because of their financing of apartment houses and similar construction. The statement you have just made makes me wonder how you are going to prevent banks from putting their money into securities that the Government guarantees or insures. My original question was aimed particularly at this matter of State banks taking mortgages on real estate. I wonder if the passage of this law would not warrant us in forbidding them from doing that, compel them to take securities that are insured instead of the mortgages themselves. I may say that personally for a long time I have felt the biggest reform we could make in the banking field would be to separate the commercial and investment banking. Mr. ECCLES. That is a big subject and will require a complete reorganization of our whole banking structure from the grass roots to bring about such a separation. Mr. LUCE. It struck me that this bill is based upon that theory in effect that you are to have insured certificates instead of mortgages in the bank portfolios. Mr. ECCLES. Well, you are going to have insured mortgages, not insured certificates. You would have insured mortgages in the bank portfolio, but the insured mortgages in the bank portfolio, as in the case of national banks and State member banks, which are affiliated with the Federal Reserve Board, are restricted to 60 percent of their time funds in the amount that they can hold in mortgages. Mr. LUCE. But the suffering of the people is just as great whether the smashup comes from time deposits or what. Mr. ECCLES. That is true; but the fact that they own mortgages does not necessarily mean that is responsible for the smashup, and I feel perfectly sure that if banks were prohibited from holding in their portfolio insured mortgages such as proposed, it would in no way lessen the danger of the smashup. In fact I think it would engender it because banks then would be compelled to put their funds in the investment market and they would likely experience what they experienced before. They would be undertaking to buy miscellaneous kinds of bonds, other types of outlets for their funds or they would undertake to buy strictly Government bonds and in that case they would not be directing private funds into private construction. As long as the banks are permitted to and do have the savings funds to the extent that they do, then they must, it seems to me, be expected to find an outlet for those funds in a manner that will best serve the community interests where they are located; and it seems to me that there is no better place to put the savings funds of the people in the community than in the home-construction field through a system of amortized mortgages. Mr. LUCE. With that I quite agree. I was simply trying to develop the point that the banks would no longer have the occasion or temptation to finance mortgages that are not insured. Mr. ECCLES. Well the mortgages that are not insured can be loaned on only up to 60 percent. Mr. LUCE. I appreciate that. Mr. ECCLES. And for 10 years, and there are a good many cases where you will find that the borrowers may want only a 50- or 40- or 60-percent loan, and they may want a straight loan for 5 years. A bank can make a straight loan for 5 years, I think for 50 percent, or it may be the person may not want to borrow in excess of 10 years, and in which case they must pay 40 percent of the payment over the 10-year period. Mr. FISH. Mr. Chairman, may I ask a question? The CHAIRMAN. Certainly. Mr. FISH. Now you very apparently are familiar with all the details of this legislation and the required legislation and I would like to be enlightened. There is a matter connected with this bill that worries me a good deal and that is the mutual-mortgage insurance which was carried in the original bill and a half of 1 percent was put up by the home owner in this bond for the purpose of paying for these losses incurred by lending institutions and then building up the fund so as a mutual proposition it would pay off the mortgages of the home owners. That was the original purpose, as I understood, of the bill and of that fund. Now it appears that some amendment has been made in the Appropriations Committee of the House of Representatives which permits retention for running expenses up to $5,000,000 a year out of this fund which is a mutual fund. I ask you, Is that fair play, is that equitable, and is that playing fair with this committee after we have set up a mutual-mortgage fund for this purpose? I hope you will clear that up, as that is a very serious charge that has been made here. Mr. ECCLES. I would prefer, the F. H. A. people being more familiar with such legislation-if any has been passed-than I am, that they explain it. The thing I am interested in primarily was to develop a mechanism that would provide for the financing of all types of home construction, both for owner occupancy and for rental purposes, by private capital. As to the disposition of the mutual-mortgage fund, the detail of that I am not familiar with and as I say, I would prefer that they [the F. H. A.] answer that. It seems to me, however, that like any insurance company, the first year's premium more often is taken to pay the expenses. I think every life-insurance company figures that more than the first year's premium is required to put the business on the books of the insurance company. reserve. Mr. FISH. Governor, they are required to have a large fund in All we had to start with was a $10,000,000 appropriation or nest egg from the Government and we loaned $600,000,000 and I do not think you would say that was sufficient. Mr. ECCLES. Of course one or two things could happen. If that is not sufficient, the Government could appropriate more to make it sufficient or they could wait until such time as the fund is sufficient. Mr. FISH. Of course the purpose of the fund was written into the law and this fund was established as a mutual fund to be put aside and go back to the home owner to pay the mortgage, but all of a sudden we find the Appropriations Committee has acted, so far as I know, without the knowledge of a single member of this committee. Mr. ABNER H. FERGUSON. Mr. Fish, may I interrupt? Mr. FISH. Yes, sir. Mr. ABNER H. FERGUSON. I propose at the conclusion of the testimony of all the witnesses to discuss this matter fully. Mr. FISH. I wanted to get his ideas. It has raised a very serious question. Has the Governor any suggestions to make in the way of possible reduction of interest rates? Mr. ECCLES. There is one way the 5-percent rate can be brought down. Mr. PATMAN. May I interrupt? Mr. ECCLES. Merely fixing in the law not to exceed a certain rate does not mean that the rate is going to be brought down. It might merely mean the lending institutions would not be interested in making a loan. It is a perfectly easy thing to offer Government bonds on other securities on the market at some fixed rate, but you do not have any assurance they will be purchased. Merely saying this rate ought to be 4% or 32 percent, and fixing it in the law, does not accomplish anything because the thing we want to do is to fix the very maximum rate, the lowest possible rate we can interest private capital in, and our survey would assure us that the 5-percent rate on this type of loan, that does involve a good deal of work and a good deal of expense, is as low as it is possible to get it. Over a period of time, with experienced people, and with the establishment of a proposed national mortgage association having a capital of perhaps $50,000,000, upon which debentures can be issued and sold, that may tend to bring down the rates in this manner. If the mortgage association would offer to buy, stand ready to buy the insured mortgages, say at a 4-percent rate, lenders may be willing to sell those mortgages or make those loans on a basis of 4% or 4% percent, retaining the half or three-fourths for the servicing, which is necessary on a monthly payment loan. Even though the mortgage association buys the mortgage it would be like an insurance company taking the mortgage. They always have agents in the field to service the mortgages. The mortgage associations buying at the rate of 4 percent, it may tend to bring the rate down to 4% or 4%, but the mortgage association would, of course, sell its debentures secured by these mortgages to the public on a 1- to 20-year basis because the mortgages they hold they would be collecting payments over a period of from 1 to 20 years. If these debentures could be sold on a basis of 31⁄21⁄2 percent Mr. FISH. That is what I want to know. Mr. ECCLES. Or 3 percent, depending on what the money market situation is then, of course, it may tend to bring down this rate. Mr. FISH. You do not maintain because these banking institutions if they get money at 34 they have to charge 5 percent? Mr. ECCLES. That is right. Mr. FISH. Is not 1 percent sufficient, if they get it at 3 they could put it out for 4? Mr. ECCLES. Yes; but the highest grade bonds, the ones which are not taxed offer today a yield of 31⁄2 percent. That is the triple A, that is the very highest grade of bonds. Your long-term Government bonds yield very close to 3 percent, that is the very long-term ones. The short-term ones get down as low as 2 percent or around that figure, but the average is about, as I said a moment ago, approximately 3.6. Mr. PATMAN (interposing). You mean 2.6. Mr. ECCLES. I mean 2.6. All other securities, of course, are going to have a comparative relationship to the most favorable security which is the Government bond, because of its more ready marketability, because of the tax-free feature, because it is acceptable as an investment by every type of institution and fund. These debentures of the mortgage association would, of course, not be tax free and if we want to bring down the rate one way to do it would be to make those debentures of the mortgage association tax free. Of course I |