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Form No. 131

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FEDERAL RESERVE

U r h c e Correspondence
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Governor Eccles

From

J. M. Badger. _ ^

B0ARD

Dat e

July 10, 1955

Subject:J>M£f^i^aiendm^^
12-year instead of 10-year amortization
^ _ r e a l - e s t a t e JLoaiis

(CC to Mr. Wyatt aoi Mr. Thurston)
In view of the manner in which the mortgage market has been
opening up during the three or four months since the ABA committee and
the Federal Advisory Council published their recommendations on the
Banking Bill, it occurs to me that you might get a good deal of support for a proposal to change the amortization clause in the Senate
measure from "ten years11 to * twelve years,11 and leave this clause
otherwise unaltered.
Twelve years is the period in which a loan reaches 50 per
cent of its face amount if equal monthly payments of principal and
interest are made at a rate that would fully repay the loan in 20 years #
The language of the ABA report plainly shows that the committee evaded the question of amortization. If they favor it at all,
they would certainly, as practical men, ask for the same privilege
as to a 20-year maturity on amortized loans that Congress has given
to the Federal Savings and Loan Associations, or, as an alternative,
the privilege of having the same number of years (12) that these associations ere given to reduce a real-estate loan to 50 per cent of its
original face amount.
Another thing: Has anyone ever asked how the Federal Advisory
Council happened to hit on a 12-year maturity as its recommendation to
the Glass committee? Bankers do not ordinarily think of any investment
in terms of a 12-year maturity* Hhat prompted them in this case?
It seems to me that some member of the Council must have suggested half amortization as a substitute for your proposal of full
amortizationfcyequal payments over 20 years. Thus he would have found
that his substitute proposal involved a 12-year maturity. Then some
other member, with a zeal for making Washington safe for conservatism,
must have come forward with the proposal to recommend stiffer amortization requirements—namely, "payments of not less than 5 per centum per
annum on principal in addition to current interest.*
There would seem to be no other logical explanation of why
a group of practical bankers would think in terms of reducing an obligation to 40 per cent in 12 years rather than 50 per cent in 10 years.