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Orhce Correspondence







Date My 14^ 1955
l e g i s l a t i v e questions

J- »

In view of your chance meeting with Mr. McDonald Saturday, I think it would be well for you to know the suggestions that
I have made with regard to four legislative proposals involved in
the general changes under discussion at the Federal Housing Administration* I made these suggestions last Tuesday at a conference with
McDonald, Catharine, Ferguson, and Riefler* The subjects involved
are as follows:

!• Authorizing the Federal Housing Administrator to
include, in the face amount of a debenture issued against
a foreclosed mortgage, interest up to three per cent from
the date on which foreclosure proceedings were instituted
fay the mortgagee, rather than from the date of conveying
title to the Federal Housing Administrator, as now provided in the Housing Act*
I suggested that taken up immediately
with Senator Bulkley, chairman of the Senate Subcommittee in ch&rge of HOLC and FHA amendments, with
a view to having it included in the conference
report now pending* I pointed out that this would
be somewhat irregular, but that in the absence
of any objection among the conferees it might
nevertheless be done* I pointed out also that
this amendment appropriately belonged in the
pending HOLC-FHA bill rather than in the banking bill, though I expressed the view that it
might later be put forward by Senator Bulkley
as an amendment to the banking bill if he should
find that, owing to parliamentary raales, it could
not be added to the HOLC-FHA bill in conference*
2* Classifying bonds issued against FHA insured mortgages on low-cost-housing projects as investment securities
within the terms of Section 5136 of the Revised Statutes,
rather than as real estate loans within the terms of Section 24 of the Federal Reserve Act*
I suggested that this be taken up immediately
with Mr. Await, with a view to having it put forward as an amendment to Title III of the banking


- 2 bill* The Comptroller of the Currency has roiled
that, under the existing law, bonds issued against
FHA insured mortgages on low-cost-housing projects
are real estate loans. Hence banks could participate in this kind of financing only by acquiring
an entire issue. Furthermore, the bank would be
unable to dispose of any part of the issue to its
5* Exempting bonds issued against FHA insured mortgages
on low-cost-housing projects from the provisions of Section
77 B of the Bankruptcy Act.
I suggested that there might be a good deal
of difficulty about obtaining Administrative consent to reopen the Bankruptcy Act to amendment at
this session of Congress, but that the matter
might nevertheless be discussed informally with
Tom Corcoran or some others familiar with either
the Securities Act or the Bankruptcy Act. The
point involved is a serious one where the issuing
of bonds on low-cost-housing projects is concerned.
A prospectus describing such an issue would have
to state that the Government guarantee might in
practical effect become inoperative in the event
of a receivership, since the essence of a corporate
reorganization under Section 77 B is the elimination, for most purposes, of the requirement of foreclosure and judicial sale. The Housing Act, on the
other hand, makes the mortgagees right to recover
from the FHA dependent on foreclosure. Moreover,
the sale of the bonds in the first instance would
be made feasible in the main by the reliance of
investors on the possibility of ultimate recovery,
in an emergency, from the FHA.
4. Authorizing national baxiks to purchase the stock of
national mortgage associations in the same manner in which
they are authorized to purchase the stock of the Federal reserve banks, the National Agricultural Credit Corporations,
Edge Corporations, etc.
I suggested that consideration of this proposed
amendment be deferred until after the Senate and


- 5 -

House conferees reported on the HOLC-FHA amendments now pending. One of these amendments, as
you know, provides for increasing the ratio of
mortgage association debentures to capital from
10 - 1 to 15 - 1. The House Committee reported
this amendment favorably; the Senate Committee
rejected it* Senator Bulkley has proposed a
compromise of 12 - 1, but what the conference
committee will report is still uncertain* Since
it appears that the mortgage associations will
require a 15 - 1 ratio in order to operate at
a profit, it is doubtful that any effort will
be made to organize any associations if the
pending amendment fails* For this reason I took
the position that there would be no point to
considering an amendment authorizing national
banks to purchase the stock of mortgage associations until it was knonn whether an effort to
organize them would actually be made*