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FormNQ. 131

Office Correspondence
Chairman Eccles
>m

FEDERAL RESERVE
BOARD

Subject:

Date March 16, 1936
S

}gage proposal

JJ* ¥• Paiger_
• re

Much as I should like to see a compromise effected that
would forestall further controversy over the proposal to put the
Government into the business of making 20 per cent second-mortgage
loans, I do not see any means of effecting one. I hope that you
will stand on your decision of last week to make a strong protest
against the proposal when it comes up for discussion with the
President today.
Here is the situation in its practical aspects. First, the
Administration obtains the adoption of a workable insurance law to
induce first-tfortgage lenders to make 80 per cent loans• Then all
the States, except Georgia, pass enabling acts to authorize firstmortgage lenders to make 80 per cent loans*
After getting off to a false start the FHa finally gets down
to work under a law that was workable from the outset if the first
Administrator had known how to go about it. Now in more recent months,
the business has begun to get into its stride and there is every
practical indication that, if the movement toward the long-term
insured mortgage is not suddenly arrested, there need be no doubt
that the future course of mortgage lending in the United States is
definitely fixed.
Certainly, from a long-term banking point of view such a
result is far more to be desired than any temporary advantage from
whatever addition might be made to the current volume of construction
by an offer of second-mortgage money on the part of the Government •
Furthermore, a law authorizing the Government to
per cent second-mortgages is for all practical intents and
to induce first-mortgage lenders to make 70 per cent loans
standing the fact that the law to induce 80 per cent loans
beginning to show very tangible results, not only directly
the FHA, but in a general movement toward the revamping of
lending practices.

take 20
purposes
notwithis now
through
mortgage-

Mr. Fahey continues to insist that he does not want the
20 per cent second-mortgages restricted to cases where the result




16—852

would be a 90 per cent loan. He wants authority to make a secondmortgage loan regardless of the percentage of appraised value represented by the first mortgage* This proposal seems to me to be utterly
untenable. There is no conceivable need for it in the increasingly
competitive state of the mortgage market, and its..only result could
be that, from the point of view of the HOLC, the second-mortgage
scheme would be a huge success because only a borrower with superlatively high ideals and perfect conscience would fail to take advantage of
it.