net question, Mr. Chairman. We have considered this many times. It is an issue that we keep in front of us all of the time.

We feel that the agency, in spite of its reduced number of farmers is serving a very worthwhile purpose.

I am sure that this committee well realizes that this is a most difficult field of lending, to take and select from the many applications that come into these offices the good families that are determined to go ahead and make a success in farming and to loan them the high amounts that are involved in this authorization and to make those loans successful, and to help these people become well established when they cannot get credit from other sources. That is, certainly, a service that is not available in any other place in the country.

The CHAIRMAN. Let me interrupt you.

You do not have to sell us on the idea as to the value of the program. I did not mean to question the program; I am for it, and you know that. I have been for it all of the time.

What I want you to do is to put something in the record to justify your continuation.

Mr. SCOTT. Thank you, sir. We do feel that this is bound to be a costly program. It cannot be successful-you cannot loan money under the authorities we have, these high-rate loans, and get the money back and help people become established and graduate to other sources of credit, and turn around and do that for other people without spending a good deal of money. If you do not have close supervision of these loans, if you do not have a good analysis of these businesses, a good intelligent setting up of tests for the loans, the thing would be

a mess.

I think that the record of collections speak very well for the kind of people we have administering this program.

The CHAIRMAN. We want you to put in the record that information. (The information to be furnished follows:)

Recent record of repayments on loans—Continued

REAL ESTATE TYPE LOANS ON AN AMORTIZED BASIS

Mr. SHORT. Mr. Scott, is not an important factor in the relationship of the number of applications that you people have as compared to the number of loans that you actually make, the fact that the earning capacity of these farms that are under consideration and the actual true, current sale value of these farms are two different things?

As I well know you have a responsibility in approving a loan for an individual, so far as the cost of the farm involved, of the individual being able to make a decent living and to repay the obligation. For whatever reasons there may be, we all know that many times the current cash sale value of the farm is a figure that is a far cry from what any fair-minded person can work out on a family type operation basis as the true long-time earning capacity of that farm.

Many times, as you people well know, it is no kindness to make a loan to somebody that you know when you make the loan will never be able to pay it off. I am sure that is one of the reasons that many of these loan applications that you continuously receive never result in a completed loan.

Mr. SCOTT. That is right, Mr. Short. In most instances, it is by common agreement between the applicant and our county supervisor that they just should not go into this possible purchase of a farm. They reason that out and explain it.

That is the main reason why there are so few farm purchase loans.
Mr. SCOTT. A question on another subject.

I do not quite have in mind the picture of your loan limitation under the provisions of this bill. Supposing you have a farm that an individual is satisfied with and you can arrive at a price that reaches up to the $50,000 limit. That farm still needs a new home. Possibly and conceivably there is need for water and soil facilities. Can you add those on top of the original farm loan of $50,000? To put it this way, specifically, could you lend $50,000 for the farm and another $10,000 for the home and another $10,000 for other things?

Mr. SMITH. Mr. Short, the loan that the Farmers Home Administration would make under this bill in connection with real estate lending could not exceed $50,000, including all of the purposes that you have mentioned.

In addition, it may not exceed 90 percent of the agency's appraised value of the unit on which the loan is made, and the loan to be advanced would include funds for improvement to be made to the farm and farm buildings.

Naturally, they will have to be within the $50,000 limitation. Mr. SHORT. All of it has to be within the $50,000 limitation? Mr. SMITH. Yes. The authority to make soil and water loans will be abolished. That will be incorporated in title I loans.

The authority to make farm housing loans will be incorporated in title I, of the bill which is before the committee.

Mr. SHORT. That was the point that I wanted to clarify, so far as I was concerned.

Mr. McINTIRE. They would be included in it-I mean, every improvement would be included in the appraisal?

Mr. SMITH. That is right. The appraiser would take those into account in arriving at his determination of the value of the farm. The CHAIRMAN. For how many years do you carry a delinquent? Mr. SMITH. We have no set policy, Mr. Chairman.

The CHAIRMAN. At one time you fixed 5 years as the limit; did you not?

Mr. SMITH. In connection with operating loans, the original statute that you have reference to provided that we could not advance more loans to a borrower who had been indebted for such loans for a period of 5 years. That was extended by the Congress first to 7 years and again in 1956 to a 10-year period, and this particular bill carries the 10-year limitation on operating loans, but this limitation does not apply to real estate loans.

The CHAIRMAN. Do you have any records of those who have been delinquent for 10 years?

Mr. SMITH. I could not say, Mr. Chairman. Our policy on carrying delinquent borrowers is simply this; that if a borrower, even though he is delinquent on his loan, if our local supervisor, in working with the family, has reached a decision that the farmer can eventually pay his debts and be successful in his operation, we carry the loan in that delinquent status and let him pay out of each year's income as much as possible on the loan.

The CHAIRMAN. You carry him for 10 years. Under the law you have to drop him; do you not?

Mr. SMITH. We cannot advance him any more funds after 10 years.

Mr. HOEVEN. Mr. Smith, on the other side of the picture. Just when do you graduate a borrower to private lenders?

Mr. SMITH. When he has reached a financial position that will enable him to be eligible for loans from private sources.

Mr. HOEVEN. Specifically, when do you put him back on the private credit side?

Mr. SMITH. I think that would have to be considered now in the light of what kind of loan the farmer owed us. Under the present law, unfortunately, there is a provision in the statute that we cannot require a borrower of the agency to seek private financing unless he can obtain the private financing at a rate of interest not in excess of 5 percent. Under the bill that is before the committee, we would be privileged to write into our mortgage contract with the borrower that when his financial position has improved whereby he can obtain credit from private sources at prevailing rates of interest charged by other private and cooperative credit institutions, we could require him to obtain loans from private and cooperative sources and pay off our loan.

In connection with our real estate lending, the Federal Land Bank and the national insurance companies normally loan up to 65 percent-from 60 to 65 percent of their appraised value of the unit. So it would mean that when a farmer obtains 35 percent equity in his farm, he would under normal conditions be able to obtain other financing.

And we would require him to do that.

In connection with operating loans, it would be a matter of judgment and it would be a matter of the attitude of the local creditors. When he had paid the mortgages down on his livestock and machinery to the point where he could meet the credit standards of production credit institutions, associations and banks, banks doing agricultural lending or other sources, when he could meet their standards, we would require him to refinance our loan.

Mr. HOEVEN. You would make the determination?

Mr. SMITH. That is right.

Mr. Scorr. May I say in further answer to that, it is the general program throughout the agency, in all of the county offices, to encourage our county people to keep a good close relation with the local banks and the production credit associations, and to get them interested in some of these good families earlier than they are ready to graduate so that they will be following them.

It is a continuous process of helping these people become well-established with other sources of credit.

The CHAIRMAN. You say that under the proposed bill you could graduate these people out when they are able to obtain credit at prevailing rates?

Mr. SMITH. Yes.

The CHAIRMAN. The limitation in the law now is that it is 5 percent? Mr. SMITH. Yes.

Mr. BREEDING. How long do you carry a client if you find that he cannot pay, or do you ever foreclose on them?

Mr. SCOTT. Yes, there is a definite policy of discontinuing credit whenever it is hopeless. The collection policy is very sympathetic, it should be stated. They try to work these matters out with the borrowers, unless there is some bad faith, and then they move immediately, but if it is a case of just being in a situation that becomes hopeless for some reason or another, they usually always try to arrive at an agreement with them to sell their property and do what is necessary to wind it up.

Mr. BREEDING. Has the agency lost any money-are we in the red as an agency?

Mr. SCOTT. Yes, this is based on losses.

Mr. BREEDING. Could we have in the record that information. I think that it would be helpful?

Mr. BARNARD. Yes, I can furnish that. I can give you offhand the volume of our loans outstanding, if you want that, Mr. Breeding. Mr. BREEDING. Yes.

Mr. BARNARD. As of December 31, 1959, we had $801 million of loans outstanding that would be involved in titles I and II of this bill, that is, direct loans.

We had $47 million that would be involved in title III, the emergency type loans.

And there were insured loans outstanding of $202 million in the hands of private lenders where we have a contingency liability.

Mr. BREEDING. Is there any way of telling over the period of years how much money the agency has lost?

Mr. SMITH. We can supply that for the record.

(The information to be furnished follows:)

Estimated principal losses on loans of the Farmers Home Administration

Mr. JONES of Missouri. I was interested in this matter of appraising. At the time that you were making such a large volume of loans, say, in 1949, along in that period, did you have a larger number of appraisers then, than you have now?

Mr. SMITH. No, sir. The agency at that time had a little different policy in connection with staffing for carrying out its appraisal work. The appraisal work then was done by appraisers attached to State staffs and they traveled out from the headquarters in the States and performed the appraisal work all over the territory covered by the State office.