Full text of Marriner S. Eccles Papers : Letter to Ernest J. Draper, Box 28, Folder 1, Item 11

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

January 14, 19S7

]fc»* Ernest^. Draper,
Assistant Secretary,
Department of Coronerce
Washington, D* C #
Daar Mr* Draperi
Acting en Administrator McDonald's statement that there ia
plenty of money available in the small line insurance companies with
which to finance large-scale apartment construction, I contacted several such companies, the names of which he gave ma, aa being among thoae
able and willing to finanoe projects like Henderson Gardens* (You will
recall that he admitted in a former conference that the large line
insurance companies, and savings9 banks would not cooperate*}
I called on the officers of the National Life of Vermont,
the Atlantic Life, and the Virginian, and they refused outright to
consider an application for a loan on Henderson Gardens* The Pilot
and Jefferson-Standard permitted me to make an application, but re*
jeeted same upon due consideration* Briefly, the conditions actuating
this refusal are those advanced by all the other companies which I contacted* They are aa follows;
1* The email line insurance companies are not financially
able to finance large-scale projects, except on a participation basis*
(They agree with ma that large projects can only be financed by the
large line companies or on a bond iaaue basis*)
2* They are adverse to the idea of participating on large
loans for two principal reasons: (a) In caae of default the companies,
or company, having the largest interest in the loan are forced to assume
the burden of reorganization and liquidation by the smaller interests*
(b) The smaller interests feel that because of the amallneas of their
share in the loan that they have no voice in its control, and for that
reaaon they do not like to join in on a participation basis*
In conclusion, I do not know the source of Mr* McDonald9a
information, but I have talked with the outstanding man in this group
and they all assure me that he ia mista&en in his assumption that they
are able to bear the burden of financing the large scale housing program
of the F*H*A* Therefore, if this work is to be placed on a going
basis other sources of financing must be found* Two possible avenues




-2-

are (a) Mortgage banks set up under the terms of the Federal Housing Aot*
and (b) Bond issues underwritten by commercial and industrial bankers*
The former is a long drawn out possibility involving the necessity of
additional legislation which means months of delay with the question of
its working satisfactorily after enactment*
Therefore, bond issues seem to be the logical method immediately
available* Hundreds of millions of dollars are available at onoe on
this basis, and the only objections which I have heard raised against
this method are negative banker arguments, rather than production arguments* Imaginary fears about a market for the bonds, and the details
connected therewith seems to be the problems which worry Mr* McDonald
in this respect*
Thanking you for your consideration of the above which is vital
to our economic and industrial progress, I remain,




Very truly yours,

Robert Aldrioh Rodger,
Brown, Wheelook* Harris, Stevens, Ino*

I*

INSURANCE COMPANIES SEASONS FOR NOT LENDING TO FH4 INSURED HtOJECTS,
(1)

Interest rat* t o o 1cm t o be a t t r a c t i v e . A loir rate interferes
with earnings and established procedure*

(2)

Bents below t h e i r f a i r market value — too competitive*

(I)

Government Standard of appraisals unsatisfactory*

REASONS FOR NOT ACCEPTING raOFFEREDLQAHS OF COMIERCIAL AND
INDUSTRIAL BANKERS ifeo ARE PREPARED TO tfNPEKHRlTB LOANS ON A BOND
ISSUE BASIS FCR FUBLIC SUBSCRIFTIQN»

(1) No scarcity of mortgage money* Plenty available in third line
mortgage companies*
(2) Securities Exchange obstacle — a too close scrutiny of projects
permitting no concealment of pertinent data*
(S) Possible challenge by a bond-holder on constitutionality of the
Administrations approval of specific projects*
(4) Inability to sustain a market for the bonds due to small volume
of insurance*
(5) Inadvisability of raising any new issues, or opposition, until
after law is amended in coming session from "low cost" to
H
large scale* basis*
(#) Interference with Treasury financing operations*
[* General Conclusions:
(1) None of the reasons accounting for each succeeding failure are
valid* A strong, competent, experienced Administrator should
either circumvent or ride rough-shod cnrnr all of them*
(2) The favorite alibi
for failure of performance is the "need of
new legislation*4 This excuse for failure was the main reason
advanced for the creation of the RFC, ISA and PBA housing authorities* It is the prinoipal reason being urged for the creation
of the United States Housing Authority (Wagner Bill).
(S) The revival of the building Industry is essential to a continuance of the favorable advance in general business conditions*
which for the greater part is based among many factors on the
frail and inflationary support of (a) Government deficit financing,
(b) foreign gold, and (c) the emergence of hoarded and surplus
money* The revival of the building industry would place a solid
foundation tinder the market and ward off wild inflation now a
possibility*




(4) The "key log" in the housing jam is its inadequate and arohaio
financing • For example,
(a) The industry ia.. forcibly finanoed at a pegged rate of
interest, whereas other industries can borrow long
term capital in a free money market at a price dictated
by the law of supply and demand*
(b) Its financing on any basis whatever, is largely dependent upon the will to lend of the larger insurance
ooinpanies, whioh more or less determine the policy of
the small lending institutions*
(5) It is clear that the only way to revive the building industry,
on a wider and more stable basis* is to release it from the
stranglehold of what has become a virtual mortgage monopoly*
or dictatorship, on the part of a few large lending institutions*
This can be accomplished by encouraging new, competitive money
to come into the construction industry* This can be had in
unlimited amounts from oaameroial and industrial bankers, on a
bond issue basis, at current money rates*
(6) Beyond question, the lid is still down on financing for new
construction* The bankers' abdication of their functions in
this respect presents a golden opportunity for the Administration
to free the industry from their clutches and thus place all
industry and employment on a wider and more stable basis* This
also is the only way possible to provide financing for low cost
housing on a "large scale" production basis*