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vol. i Inffil No -' FEDERAL HOME LOAN BANK REVIEW OCTOBER 1934 ISSUED BY FEDERAL HOME LOAN BANK BOARD WASHINGTON D.C. FEDERAL HOME LOAN BANK BOARD JOHN H. FAHEY, T. D. WEBB, Vice Chairman Chairman WILLIAM F. STEVENSON F. W. CATLETT H. E. HOAGLAND OFFICERS OF FEDERAL HOME LOAN BANKS Federal Home Loan Bank of— Chairman President Vice president Boston B. J. Rothwell... W. H. Neaves.. Newark G. L. Bliss Pittsburgh George MacDonald. E. T. Trigg R. H. Richards. Winston-Salem Ivan Allen T.W.Ellett... Cincinnati H. S. Kissell H. F. CeUarius, W. E. Julius, executive vice president. Indianapolis... F. S. Cannon Chicago H. G. Zander H. T. Donaldson, F. B. McKibbin, executive vicepresident. A. R. Gardner , Oscar R. Kreutz, A. G. Erdmann. Des Moines— C. B. Bobbins... Little Rock... I. Friedlander Topeka Portland Los Angeles... W. S. Metcalf.... F. S. McWilliams. C.H.Wade Other officers H. N. Faulkner. Frederick Winant, Jr., secretary-treasurer. F. G. Stickel, Jr., Robt. W. E. Murray, secretaryG. Clarkson. treasurer. G. R. Parker H. H. Garber, secretarytreasurer. G. E. Walston F. F. Kidd, secretarytreasurer. H. J. Brodbeck, second W. B. Furgerson, treasvice president. urer; Dwight Webb, Jr., secretary-comptroller. John A. Rhue, vice pres- B. F. Burtless, secretaryident-treasurer. comptroller. E. H. Burgess, treasurer; J. P. Domeier, secretary. R. J. Richardson, presi- W. H. Lohman, vice J. M. Martin, assistant president-treasurer. dent-secretary. secretary. B. H. Wooten , H. D. Wallace, vice pres- J. C. Conway, secretary. ident-treasurer. W. L. Bowersox C. A. Sterling. R. H. Burton, treasurer; W. E. Stevens, secretary. W. H. Hadlock. C. H. Stewart. Irving Bogardus, treasurer; W. H. Campbell, secretary. M. M. Hurford, vice F. C. Noon, secretary. president-treasurer. FEDERAL HOME LOAN BANK REVIEW TABLE OF CONTENTS Page The Government's program for the organization of the Nation's home-financing system The need for new homes: Summary of real property inventory statistics for 64 cities 1 14 Editorial—Introducing t h e R E V I E W 18 Home-mortgage interest rates by States Interest rates of the Federal Home Loan B a n k s . . . 19 21 Page Combined statement of condition of the Federal Home Loan Banks Federal savings and loan associations Federal Savings and Loan Insurance Corporation. One year of the Home Owners' Loan Corporation: Summary of operations of the Home Owners' Loan Corporation by months State Court affirms constitutionality of Federal Savings and Loan Associations 22 21 21 26 27 SUBSCRIPTION PRICE OF REVIEW The FEDERAL HOME LOAN BANK REVIEW is the Board's medium of communication with member institutions of the Federal Home Loan Bank System and is the only official organ or periodical publication of the Board. The REVIEW will be sent to all member institutions without charge, To others the annual subscription price, which covers the cost of paper and printing, is $1. Single copies will be sold at 10 cents. Outside of the United States, Canada, Mexico, and the nsular possessions, subscription price is $1.40; single copies, 15 cents. THE GOVERNMENT'S PROGRAM FOR THE ORGANIZATION OF THE NATION'S HOME-FINANCING SYSTEM By J O H N H. F A H E Y , Chairman, In t h e g r a d u a l strengthening of its economic structure, t h e United States h a s left housing a n d h o m e financing to t h e last. It took 150 y e a r s a n d a n a t i o n a l crisis to b r i n g the F e d e r a l G o v e r n m e n t to assume any r e sponsibility for housing. D u r i n g those years the G o v e r n m e n t t h r e w u p safeguards a r o u n d public use of practically every other necessity of life, helped to organize the m a chinery for its production, a n d encouraged its p r o d u c e r s . It created t h e D e p a r t m e n t of Agriculture to p u t the production of food on a scientific basis a n d it set u p t h e F e d eral l a n d b a n k s to provide credit for agriculture. T o foster i n d u s t r y a n d commerce Federal Home Loan Bank Board it p r o v i d e d F e d e r a l d e p a r t m e n t s a n d t r a d e commissions, tariffs a n d subsidies, a n d it established t h e F e d e r a l Reserve System to h a r n e s s t h e credit resources of t h e nation in their service. W h i l e it organized a n d subsidized, the G o v e r n m e n t also i m p o s e d controls in o r d e r to protect t h e public interest in t h e p r o d ucts of agriculture, commerce, a n d i n d u s try. T h u s w e h a v e t h e P u r e F o o d a n d Drugs Act, t h e antitrust laws, t h e Interstate C o m m e r c e Commission, a n d a host of other r e s t r a i n i n g a n d regulating acts a n d agencies. As for housing, however, the Government neither set u p a n y safeguards Page One FEDERAL HOME LOAN in the public interest not helped organize the machinery for its construction and financing. We have paid a price for this neglect. This is not the place to discuss the obvious social and economic costs of our slums and blighted areas; the immense waste in dollars and cents chargeable to the inefficiency of home construction; the costly burden of periodic booms in the construction industry; the load of taxes carried by home owners to support utilities servicing vacant lots. Our concern here is primarily with the home-financing structure. The organization of our credit resources for home purchase has remained so primitive compared with the rest of our financing structure that the home owner has paid from 2 to 5 times as much as a business ma$ for a loan, and every strong wind of economic maladjustment has driven lending' institutions and Home-owner borrower^ alike into distress. NEGLECT FORCES DRASTIC REMEDY Eventually this neglect of housing and home financing threatened social disaster. With foreclosures on homes averaging more than 200,000 each year during the depression, millions of our* soundest citizens were being turned into embittered malcontents; life savings represented by equities in homes were being lost; values of home properties sank to disastrous levels; the real-estate market collapsed, and mortgage money'disappeared; financing institutions with vaults full of frozen real-estate paper were forced to close. A drastic remedy was unavoidable. The task was too great for any private agency. To protect the public the Government was forced to enter directly into the business of refinancing homes. In June 1933 Congress set up the Home Owners' Loan Corporation, the largest home-financing organization in the world, to take over the mortgages of home owners who could not otherwise escape foreclosure. Page Two BANK REVIEW It is well to recall these facta for they are the spur behind the Government's present pfogram for the organization of the homefinancing system. Up to September 1934 the Home Owners' Loan Corporation has taken over nearly 500,000 mortgages, which means that it has saved nearly 500,000 families from the economic and spiritual defeat of foreclosure. It has enabled financial institutions to pay out tens of millions of dollars to distressed depositors. The money thus released has gone to pay the grocer, and the butcher, and the clothier, and the doctor. It has enabled home owners to pay millions of dollars of back taxes into needy city treasuries. It has ended the chaos of deflation in the real-estate market. In short, it has broken loose an obstruction in the windpipe of the economic body that had threatened to strangle it. It put the Government directly into the refinancing of homes, yet there can be scarcely a banker or businessman in the couiitry who is not the gainer thereby. THE GOVERNMENT'S DUTY TO HOUSING The Home Owners' Loan Corporation is strictly a relief and therefore a temporary agency. It has helped to prevent a complete collapse, but its success must not permit us to forget the necessity which created it nor again to ignore society's responsibility for housing and home financing. In the light of past experience the Federal Government's function is quite clear. It is to set forth sound standards for housing and to educate the public to those standards. It is to bring order into the complex mechanism that produces housing, to organize where the need for organization transcends the capacity of individuals or of smaller units of government, but to control only where control is necessary. These tasks cannot be accomplished over night. In so vast and complex a field as housing, improvement must come step by step. FEDERAL HOME LOAN BANK REVIEW Fortunately there can be no question about Many home owners themselves have approached home ownership in the spirit of where to begin. Nowhere is the need for Federal organ- speculation rather than as the attainment of ization more insistent than in the system a major goal of family effort. Instead of for financing homes. On the one hand the bending their effortsi to own a home clear, present faults in this system give rise to such owners have made the smallest down the most pressing and the most clearly rec- payment possible, obtained the largest ognized of the ills effecting housing. Oi} mortgage they could get, and carried it the other, they imperil the entire credit without reduction of principal in the hope structure of the Nation. The estimated (usually unwarranted) of selling the h6me mortgage indebtedness on urban homes at a profit. Many building and real-estate reached in 1931 the immense sum of $21,- interests have materially contributed to 000,000,000. This is nearly twice the pres- this dangerous practice of home buying by ent total railroad debt, and nearly half the encouraging shoe-string down payments present combined total of Federal, State, and giving second mortgages at appalling county, and municipal debt. To leave rates. Finally, the mushroom growth of our such a mass of credit unorganized and uncontrolled as we have done in the past is as cities has for still another reason militated perilous to our economic structure as an against stability of land values. I refer to the instability of use which leads to such unlashed cargo in the hold of a ship. rapid decay of American home neighborhoods. The good residential district of toL DEFECTS OF NATION'S HOME-FINANCING day is the garage and rooming-house and SYSTEM small-store neighborhood of tomorrow, INSTABILITY OF VALUES FORCES ULTRACONwith the consequent theft of value from the SERVATIVE LENDING POLICIES residential property. The home-financing system 9!" this counThese powerful physical and psychologtry is a typically American product. It re- ical factors working for instability of land flects both the physical environment in values have forced sound home-financing which it has grown and our national char- institutions to insist on wide margins of acter. Thus in the exploitation of new safety in their loans. The decision, in fact, land, whether it be on the frontier of a has not been left entirely to the lending city or on the frontier of the Nation, there institutions. Government, concerned for is inevitably a large element of speculation. the safety of savings, has frequently Population may flock to the new develop- stepped in to limit the percentage of propment or it may not. erty value up to which certain financial Again, our national passion for betting institutions can invest in mortgages. Thus on land values leads us periodically to banks, trust companies, and life insurance oversubdivide and overbuild. Once or companies in most States cannot accept twice in every business generation the Na- mortgages representing mbre than 50 pertion rides a land and building boom to the cent of the appraised value of the property. precipice of inflated values and inevitably Unfortunately, however, this emphasis takes the drop. Within these larger cycles, upon an adequate margin of property value local communities have lesser booms, above the loan has not proved adequate to either periodical or random. The dis- protect the investment nor the solvency of covery of Florida as a winter resort oc- the lending institutions. The portfolios of casioned a typical random boom. thousands of banks which haVe closed in Page Three FEDERAL HOME LOAN the past 4 years have contained quantities of " conservative " first-mortgage paper. A survey recently made by the Division of Research and Statistics of the Federal Home Loan Bank Board indicates that building and loan associations, savings banks, and insurance companies held, at the end of 1933, urban home real estate representing some $900,000,000 of foreclosed first mortgages. BANK REVIEW CAUSE OF SECOND-MORTGAGE SYSTEM Finally, the practice of restricting the amount which many financial institutions may lend on first mortgages has been the principal cause of second mortgages, and second mortgages have been the outstanding sore spot in our home-financing system. The mortality rate among second-mortgage financing institutions during the depression reached practically 100 percent. Investors in second mortgages have been wiped out EMPHASIS ON SAFETY LEADS TO EVILS as buyers on margin were wiped out in the Moreover, the tendency to seek such wide stock-market crash of 1929. Thousands of margins has led to a number of undesirforeclosures can be traced to the exorbitant able results. It has caused many homerates charged for second-mortgage finanfinancing institutions to ignore the personal cing. With true interest rates on secrisk factor almost entirely. So long as the ond mortgages frequently running as high institution holding the first mortgage felt that it could always get its investment out as 20 percent a year due to discounts, plus of the property by forced sale in the event commissions and service charges aggreof default, it concerned itself hardly at all gating 10 percent yearly, the actual cost of with the borrower's capacity and intention obtaining and carrying a second-mortgage to meet his payments, the size of his equity, loan often ran up to 30 percent of the or the amount of other liens on the prop- amount of the loan. These rates are usurerty. When the market becomes glutted ious in many States and in consequence with distressed properties, the expectation many second-mortgage financing agencies that a conservative first mortgage can al- have operated outside the law. They have ways be liquidated for the amount of the not been a part of the reputable organized financial system of the community and loan is shown to be false. The same reasoning has led many finan- have been subject to virtually no control cial institutions to pay no attention to the by law or public opinion. quality of construction nor to the comHOME-FINANCING SYSTEM A MAKESHIFT nunity's real need for new housing. Those STRUCTURE institutions that in times of plenty provided first-mortgage funds for the jerry-builder In addition to being a reflection of the are now burdened with foreclosed and physical environment and of our national unsaleable properties. psychology, our home-financing system has Associated with this indifference to qual- been a makeshift structure, the improvisaity of construction, to desirability of location of the movement to meet an immedition, and to real need for housing is the ate need. This characteristic has led to inefficiency of our appraisal system. Before the depression it was common practice evils no less dangerous than the evil of secin many communities for appraisers to ond-mortgage financing. It has put into judge the value of a house from the run- the business of making loans on homes, ning board of an automobile. Obviously, many financial institutions which should sound appraisals are the very cornerstone have confined themselves to other types of of successful home financing. investments. Page Four FEDERAL HOME LOAN SHORT-TERM FUNDS FOR LONG-TERM LOANS Loans on homes are by their nature longterm loans and under conditions that have obtained hitherto, they have not been liquid. Many institutions such as commercial banks, however, have invested demand deposits and time deposits indiscriminately in home loans. Faced with the dilemma of permitting short-term funds to be invested in nonliquid long-term obligations, the Federal and State Governments tried to effect a compromise by legislation. National banks, for example, have been prohibited from holding mortgages made for periods longer than 5 years. (This prohibition is now removed for mortgages inSome State banks may not hold mortgages sured under the National Housing Act.) made for a period in excess of 1 year. This compromise has satisfied neither the needs of the investing institutions nor the needs of the home owner. That it has not secured the liquidity essential to commercial banks is evidenced by the more than $500,000,000 worth of frozen urban home mortgages held in closed and restricted State and national banks as of October 1933. To the home owner the short-term first mortgage has caused almost as much distress as the second mortgage. When a short-term mortgage comes due in hard times, the lending institution usually refuses to renew or else demands a substantial reduction of principal. As this demand is made at the very time when the home owner is least able to make that reduction, foreclosure is frequently the only alternative. This situation works a hardship also on the entire real estate market, for foreclosures and inability to borrow on real estate depress the prices of all property. UNEVEN FLOW OF CREDIT FOR HOME FINANCING The variety of types of agencies that have financed homes has also contributed BANK REVIEW to the delay in setting up any reserve system for home financing on a national scale. It has led to the credit isolation of each community and of each lending institution within that community. With the exception of the large insurance companies which lend on a Nation-wide scale, each home-financing institution has been almost wholly dependent upon its own local resources. When hard times have come it has had no reserve of credit on which to draw, no central pool from which to borrow against its sound mortgage collateral, and consequently credit for home financing has dried up regularly at the first sign of danger. Even in periods of prosperity, this isolation of home-financing institutions has resulted in an uneven flow of mortgage credit. While large financial centers, particularly in the Northeast, enjoyed a surplus of credit for home financing, smaller communities everywhere and the West and South as a whole tended to suffer from an undersupply. The effect of the surplus in those communities where it existed was frequently to start a boom in building, while the effect of the scarcity in other communities was to increase the cost of financing to the home owner and to keep many wouldbe owners in the tenant class. HOME FINANCING A SIDE ISSUE The fact that many institutions have engaged in the financing of homes as a side issue has contributed to the unevenness of flow of mortgage credit for another reason. Because such institutions have many other outlets for their funds they cannot be depended upon to supply the more or less steady stream of credit needed for home financing. An epidemic of stock speculation such as occurred in 1926-29 diverts the funds of such institutions from residential building. Page Five FEDERAL HOME LOAN LACK OF STANDARDS FOR HOME-FINANCING INSTITUTIONS In addition to these v a r i o u s evils, the multiplicity of types of lending agencies h a s led to a complete lack of uniformity in l e n d i n g policies a n d of accepted s t a n d a r d s for home-financing institutions. W h e r e ever s t a n d a r d s a r e lacking, w h e t h e r it be in sport, in business, or in any o t h e r competitive activity, t h e r e one m a y look for all k i n d s of u n d e s i r a b l e results a n d practices, One u n d e s i r a b l e result of the lack of standa r d s a m o n g home-financing institutions h a s been to k e e p the cost of financing h o m e s unjustifiably high. E l s e w h e r e in this R E V I E W there a p p e a r s a table of interest rates charged by different types of institutions t h r o u g h o u t the United States for loans on first mortgages. This table shows t h a t rates of 7, 8, 9, a n d even 10 percent a r e c o m m o n in m a n y Slates. High as these rates are, however, they do not always reveal the full b u r d e n imposed u p o n the h o m e o w n e r for the privilege of b o r r o w i n g m o n e y on his h o m e . On straight m o r t g a g e s there is generally a b r o k e r a g e charge, ranging, in different p a r t s of the country, from 1 to 5 percent of the f^ce value of the mortgage. Many institutions i m p o s e this fee every time the m o r t g a g e is r e n e w e d . In addition, the m o r t g a g e t r a n s a c t i o n is b o u n d u p with so m u c h r e d tape, is r e n d e r e d confusing by so m a n y w o r d y documents, a n d involves so m a n y extra services that the o p p o r t u n i t y of charging fees out of all p r o p o r t i o n to the v a l u e of the service is too great for h u m a n n a t u r e to resist. T h e charges comm o n to m a n y m o r t g a g e transactions in New York City w e r e r e p o r t e d by the committee on finance of the President's Conference on H o m e Building a n d H o m e Ownership in 1931 to include the following: Interest rate. Title examination State tax Page Six 6 percent. $50 and up. One-half of 1 percent. BANK Conveyancing Recording Attorney's fees Brokerage REVIEW $7.50 to $35. $5 to $10. $100 to $500. 1 to 3% percent. W i t h these m u l t i p l e charges it w a s possible for a h o m e o w n e r b o r r o w i n g $10,000 on a 1-year m o r t g a g e to p a y as m u c h as 12 percent for his loan, a n d on a 3-year m o r t gage 8 percent annually. T h e smaller the amoutit Of the m o r t g a g e the higher its cost u n d e r such conditions. T h e charges listed occur in w h a t a r e k n o w n as legitimate home-financing t r a n s actions. T h o u s a n d s of h o m e owners unwittingly p a y additional tribute to s h a r p ers. Because of the lack of uniformity in home-financing institutions, it h a s b e e n possible for m a n y agencies to engage in this business whose integrity or desire to deal fairly is not above r e p r o a c h . T h e n u m b e r of such institutions is large enough to constitute a serious problem. SUMMARY OF DEFECTS W e h a v e n o w b r o u g h t to light the m a j o r defects that have developed as a result of the h a p h a z a r d a n d uncontrolled g r o w t h of o u r home-financing system. It is w o r t h a m o m e n t to s u m m a r i z e t h e m in the o r d e r in which they have been m e n t i o n e d . 1. Exclusive emphasis by lending institutions on a wide margin of safety and indifference to the personal-risk factor, to the quality of construction, to the stability of the neighborhood, and to the actual need for housing, 2. Shoe-string buying on the part of home owners. 3. Faulty appraisals. 4. The frequent use of short-term funds for long-term financing. 5. The frozen nature of hoine^inortgage paper due to the complete lack of organization among our home-financing institutions and the consequent lack of a national credit reserve for home financing. G. The unevenness of flow of credit for home financing at different times and in different sections of the country. 7. The lack of uniformity in practices and in standards for home-financing institutions. FEDERAL HOME LOAN 8. The high cost of home financing due principally to the extralegal second mortgage structure, and the frequently high-servicing charges and the high interest rates for first mortgages. In spite of these defects, millions of homes have been successfully finance^ in this country. Many institutions have made an immense contribution toward sound home ownership and better housing.. The aim of organization is to reenforce these institutions, to scrap nothing good in the existing structure but rather to expect from each unit the duties it can best perform. The particular elements with which we have to deal in a program for organization narrow down to four. 1. The lending institutions. 2. The millions of shareholders, policyholders, and depositors whose savings constitute the funds of these lending institutions. 3. The Government—municipal, State, and National—whose regulations determine to a greater or less degree the activities of the homefinancing institutions. 4. The home-owner borrowers, on whose needs and participation the entire structure rests. We may as well recognize at once that no organization of our home-financing structure will succeed unless it takes all these elements into consideration. If the last 4 years have revealed anything, it is the fact that the well-being of one is the well-being of all and if the home owner sinks, the home-financing institution and its depositors, the building industry, and the economic structure go down with him. II. PROGRAM OF ORGANIZATION We come now to the Government's program for the permanent organization of our home-financing system. To,carry out this program the Government has established or authorized the establishment under Federal charter of five agencies or types of agencies. These are (1) the Federal Home Loan Banks; (2) Federal savings and loan associations; (3) the Federal Savings and Loan Insurance Corporation; (4) BANK REVIEW the Mutual Mortgage Insurance Fund; and (5) national mortgage associations. These five agencies are planned specifically to eliminate the principal defects in our home-financing system, and to supplement and strengthen existing home-financing institutions. They were designed with full realization both of the ideal to be striven for and of the practical necessities of the situation. The first 3 come under the jurisdiction of the Federal Home Loan Bank Board; the last 2 under the National Housing Administrator* How they are ii> tended to work can best be shown in connection with the objectives sought. LONG-TERM AMORTIZED LOAN FUNDAMENTAL The mainspring of the Government's program is the conviction that the longterm amortized loan is essential to sound home financing and secure home.ownership in this country. Homes are capital goods intended to provide service for many years. They should be paid for gradually during their use. That is the principle upon which industry operates in financing its capital equipment, and it is sound. It is best for the home owner because every payment made increases his equity in his home, thus reducing the danger of loss if values drop or his income is affected by unemployment or sickness. It eliminates the need and cost of renewing the mortgage periodically and the dangers attendant on the mortgagee's refusal to re^new. It encourages thrift and builds up the most desirable kind of an estate. The long-term amortized loan is best also for the lender, because every payment reduces the risk of loss through default. The home owner's growing equity is a guarantee of his intention to carry out his contract. INSTITUTIONS QUALIFIED TO MAKE LONG-TERM LOANS The handling of the long-term amortized loan in the small amounts necessary Page Seven FEDERAL HOME LOAN for most home financing is a specialized business. The making of loans on homes should be a major interest of the institution, to insure expert knowledge of realestate conditions and mortgage activity. The business is local and the personal-risk factor is large, so knowledge of the borrower on the part of the institution is highly desirable. The business has profound social significance and affects the entire community, so that as much of the community as possible should participate, benefits should be mutual, and undue profit through exploitation impossible. Because they disposed of long-term funds and usually were not restricted by law as to period of loan, the institutions hitherto best qualified to make long-term loans on homes have been building and loan associations, the mutual savings banks, and the insurance companies working through local representatives. The business of building and loan associations has been almost entirely in amortized loans; the insurance companies and savings banks are in a most favorable position to adopt that type of loan and in several instances have already done so. In 1931 these three groups together did more than half the urban home financing in dollar volume and the building and loan associations alone held a majority in number of all first mortgages on urban homes. In view of these facts, it is inevitable that the Government's program should seek to strengthen these institutions and to see that all sections of the Nation are adequately serviced by this most desirable type of thrift home-financing institution. Federal savings and loan associations provide the means for attaining this latter objective. FEDERAL SAVINGS AND LOAN ASSOCIATIONS These associations are modeled on the features that have best stood the test of time in the operation of building and loan associations and mutual savings banks. Page Eight BANK REVIEW They are believed to constitute the ideal type of home-financing institution specializing in the long-term amortized loan on homes. Being under Federal charter, they are free from the impractical restrictions and unwise privileges that have injured building and loan associations in some States. They are mutual institutions under private management and Federal supervision. In short, they offer practical models of operation for the Nation's thrift home-financing institutions. They are recognized as so socially desirable that the Government has made available $100,000,000 for subscription to their shares. The Treasury may invest in full-paid income shares of these associations up to 75 percent of the total paid-in share subscriptions. By September 1934 over 490 associations had been chartered throughout the country. These include many building and loan associations converted from State charters as well as newly created institutions. NATION-WIDE ORGANIZATION OF HOMEFINANCING INSTITUTIONS The next step is to give the mutual thrift type of home-financing institution the strength of Nation-wide organization. With all their desirable qualities and potentialities, these institutions have been handicapped by a major weakness— mutual isolation. Each one has stood alone, dependent usually for its resources on its own community. The framework of a national organization is provided by the Federal Home Loan Banks. This is in essence a Federal Reserve System for building and loan associations, savings banks, and insurance companies. It provides a permanent reservoir of credit on which these specialized home-financing institutions can draw in any emergency. Already some 2,700 institutions are members of the Federal Home Loan Bank System. Every Federal savings and loan FEDERAL HOME LOAN association automatically becomes a member. The System's possibilities will not be realized, however, until every eligible thrift home-financing institution in the country has joined. Recent amendments to the Federal Home Loan Bank Act make membership more inviting by liberalizing the banks' collateral requirements at the ratio of approximately 1 to iy2 instead of the former 1 to 2. Member institutions whose creditor liabilities (not including advances from the Home Loan Bank) do not exceed 5 percent of their net assets may borrow for 1 year without collateral. Also, all the Federal Home Loan Banks have recently reduced their interest rates, a move which permits member home-financing institutions to benefit by the System's facilities to a greater extent. OTHER INSTITUTIONS ENCOURAGED TO MAKE AMORTIZED LOANS Though the Government's program seeks by all means to encourage home financing by mutual thrift institutions, it does not seek to give such institutions a monopoly of the business. As a purely practical matter, it would be impossible to transfer the several billion dollars worth of mortgages held by commercial banks and trust companies to thrift institutions in the near future. Faced with the necessity of encouraging the long-term amortized loan without at the same time excluding institutions subject to heavy demand liabilities, the Government is using the device of mutual insurance to give such safety to long-term amortized mortgages that they will be readily negotiable and therefore suitable investments for such institutions. This is the major purpose of the Mutual Mortgage Insurance Fund, which is empowered to insure only longterm amortized mortgages. It is believed that Federal operation of the Fund and the mutual character of the insurance will prevent the evils and failures that have at86968°—34 2 BANK REVIEW tended mortgage insurance by commercial companies in this country. To provide a national market for such insured mortgages Congress has authorized the establishment of private national mortgage associations under Federal charter and supervision. These associations can invest their funds, with the exception of their capital stock, only in mortgages insured by the Mutual Mortgage Insurance Fund. Given the safety of insurance and the liquidity of a national market, Congress has quite logically permitted national banks to invest in such long-term amortized insured mortgages. CREDIT FOR FINANCING HOMES We now have a picture of the framework of a more practical and stronger homefinancing system. It offers support to all types of home-financing agencies; it encourages them all to adopt the long-term amortized loan. The next problem is to insure an adequate and even flow of funds with which to operate. For purposes of clarity we may divide credit for home financing into two categories—the basic and the marginal. Both are essential, and the Government's program provides means for attracting both. The basic funds must be ticketed specifically for investment in home mortgages. The flow must be reliable and free from rapid fluctuations in volume. The obvious source is the savings of shareholders and depositors in the mutual thrift type of savings and insurance institutions. The people's savings belong in the basic wealth of the country—its land and homes. To increase the flow of capital from this source is a major purpose of the Federal savings and loan association? and of the Federal Savings and Loan Insurance Corporation. These two agencies are intended to promote thrift and to provide a haven for the savings of all classes of our population— the worker who invests 50 cents a month Page Nine FEDERAL HOME LOAN and the capitalist who invests $1,000 or $10,000 at a time. The need for some such haven is particularly acute because of the loss of savings and the destruction of confidence that have attended the financial shipwrecks of the depression. The public has confidence in federally controlled and supervised institutions. This is proved by the experience of Federal savings and loan associations already chartered. Some months ago a $6,000,000 Kentucky building and loan association operating under State charter converted into a Federal association. Immediately thereafter its receipts from the investments of thrifty people in its shares increased nearly $100,000 a month over the previous rate. The Federal Savings and Loan Insurance Corporation should end the withdrawal of funds from thrift and homefinancing institutions that has been taking place recently and invite new investments in building and loan shares. This Corporation must insure the accounts of Federal savings and loan associations and may insure those of sound building and loan associations up to $5,000 for any one investor. The funds invested in shares of the Nation's thrift home-financing institutions are to be very definitely earmarked as long-term money. The investor will have to understand that he is not making a demand deposit, that he is putting his money where it will be safe, where it will return him reasonable dividends, where he can borrow on it in an emergency, but where he does not have the right to draw it out on demand. The dangerous practice of soliciting demand deposits is not consistent with the principles and purposes of a thrift and home-financing institution. The Federal Savings and Loan Insurance Corporation is authorized in its discretion to prevent the issue by any insured instituPage Ten BANK REVIEW tions of new securities which guarantee a definite return or a definite maturity. MARGINAL CREDIT FOR HOME FINANCING The basic funds for home financing usually are local in origin and invested in local homes. This fact reveals the necessity for what we have called " m a r g i n a l " funds for home financing, that is, funds which are not tied to any one community but can be easily transferred from an area of oversupply to an area of undersupply. To create such a flow of liquid funds for Nation-wide home financing and to provide the channels for their distribution to any community in need of them are purposes of the Federal Home Loan Banks and of the national mortgage associations. The Federal Home Loan Banks may lend to their member institutions up to $1,000 against every $1,500 of approved longterm home-mortgage collateral. The national mortgage associations, when they are set up, will be free to purchase outright in any part of the country mortgages insured under the Mutual Mortgage Insurance Fund. In other words, these two groups of federally controlled agencies create a national credit reserve for home financing and a national market for home mortgages. In doing so they do more than end the isolation of home-financing institutions and the isolation of communities so far as home-mortgage credit is concerned. They insure a large degree of liquidity to all investments in home mortgages. This is a new and vital service to the Nation's home-financing system. First-mortgage investments in this country have always suffered from a lack of liquidity or marketability. This has been a principal cause of the hardships incurred by the homefinancing institutions and their shareholders in the present depression and for the inevitable withdrawal of mortgage credit at the first sign of hard times. The FEDERAL HOME LOAN Federal Home Loan Banks insure permanent liquidity to their member institutions and through them to the entire mortgage market. The third essential service performed by these federally controlled agencies for the supply and distribution of marginal funds for home financing is to supply a desirable type of investment for funds which demand the highest degree of safety combined with liquidity. At any time that calls upon them require funds in excess of their capital, the Federal Home Loan Banks may issue bonds or debentures against their home-mortgage collateral for sale to the public. These issues will unquestionably be quoted on the leading exchanges and will constitute the first standard negotiable security based on urban home real estate to appear in the United States. In many European countries similar central mortgage bank issues have frequently sold on a lower yield basis than direct governmental obligations of the nations concerned. The national mortgage associations will be privileged to sell similar bonds and debentures to the public against their insured mortgages. BENEFITS TO THE HOME OWNER So far we have considered the Government's program for organizing the homefinancing system as it strengthens lending institutions and protects the investor. Only as it accomplishes these ends can it achieve its ultimate purpose, which is to encourage home ownership and protect home owners. The amortized mortgage gives security to home owners and by eliminating brokerage and renewal fees reduces the cost of home financing. Then, there is the development of standards. The newly created Federal Savings and Loan Insurance Corporation will powerfully supplement the Federal Home Loan Bank System in raising standards. It has the power to reject an appli- BANK REVIEW cation for insurance if in its judgment the character of an institution's management or its home-financing policies are inconsistent with sound and economical home financing. The Mutual Mortgage Insurance Fund will tend to raise the level of lending practices of institutions outside the Federal Home Loan Bank System and provide a uniform type of mortgage. In short, the tendency of the entire program is to bring better standards into home financing. Standardization is the surest means of eliminating the shady lending agency. It is also the key to reduction of the many fixed charges—for appraisals, for title search, for conveyancing, for recording— peculiar to the mortgage business. The operations of the Home Owners' Loan Corporation have shown that these charges can be reduced and rendered uniform. The Corporation has also familiarized the Nation's home owners with a 5-percent interest rate, and the Government's program for the permanent organization of the home-financing system seeks to make possible low rates on all home loans. The rate of interest is largely determined by the supply of funds, and by the safety and liquidity of the investment. To increase the flow of funds and to insure both safety and liquidity are, as we have seen, major purposes of the Federal program. Because they have lacked liquidity, interest rates on first mortgages have been far higher than on the long-term bonds of railroads, of industry, or of the Government. This is no longer justifiable. There is no longer any excuse for an interest rate on a long-term amortized first mortgage in excess of 7 percent in the South and West, and 6 percent in the North and East. What is more, this should be the real interest rate and not conceal a higher rate made possible by such devices as failing to deduct the monthly payments from the principal as they are made. Page Eleven FEDERAL HOME LOAN ELIMINATING THE SECOND MORTGAGE A major question yet to be considered is, How does the Federal program solve the second-mortgage problem? The answer is that the program seeks to eliminate the need for most second mortgages by inducing the lending institutions to grant first mortgages up to 75 and 80 percent of the appraised value of the property, on long-term amortized loans. In some States building and loan associations are already permitted by law to make loans up to 75 percent. All Federal savings and loan associations are authorized to lend up to 75 percent. The Mutual Mortgage Insurance Fund may insure and national mortgage associations and national banks may deal in insured mortgages representing up to 80 percent of the appraised value of the property. However, the making of such loans with a reasonable degree of safety will necessitate the development in every community of a lending technic which is now pretty generally lacking. In the first place, lending institutions that take a 75- or 80percent first mortgage will have to insist that the home owner supply the remaining 25 or 20 percent on the down payment. No liens junior to a 75- or 80-percent first mortgage can be permitted. BANK REVIEW the amortized mortgage means that the risk to the lending institution decreases every month. CONTROLLING BOOMS TO STABILIZE VALUES The second condition to be met if the 75- and 80-percent first mortgage is to be made feasible is that stability of residential property values be increased. This means primarily some control of the periodic booms to which real estate in this country has been subject. Booms are the result of excessive confidence based upon ignorance—ignorance of the real need for homes and of the relation of supply to that need. Booms are typified, of course, by excessive subdivision of land, and by overbuilding with its waste of invested funds and its threat to all home values. There seems little excuse for the ignorance which encourages real-estate inflation. The population trends and probable needs for housing are ascertainable at any time. To guide their lending policies, the homefinancing institutions of Utica, N.Y., for instance, have for years made annual compilations of statistics on local building occupancies, mortgages recorded, real-estate transfers, vacant lots, new lots placed on the market, and foreclosures. Thanks to the guidance of lending policies and the control of building this knowledge made This is not an unreasonable condition. possible, the vacancy ratio in Utica even at Shoe-string buying has proved one of the the height of the depression never exprincipal causes of foreclosure in the pres- ceeded 5.7 percent, and the city is said to ent depression. It benefits no one, neither be practically the only one in New York in the borrower, the lender, nor the commun- which mortgage money has been available ity. If a man cannot save 20 or 25 percent throughout the depression. of the price of his home before he buys it, CENTRAL INSPECTION AGENCIES TO CONTROL there is serious question as to whether he CONSTRUCTION will be able to save that much after he Whether home-financing institutions can buys it. On the other hand, if he does save make 75- and 80-percent first-mortgage the 20 percent and at once establishes such an adequate equity in his property, his in- loans will depend in part also on quality terest in retaining it is the best guaranty of construction. Between the years 1920 of his fulfilling the mortgage contract. and 1930 the jerry-builder made great Also, the installment payment principle of headway among us and contributed effecPage Twelve FEDERAL HOME LOAN tively to the subsequent distress of home owners and mortgage holders. It is not only because his own product becomes a common liability that the jerry-builder is dangerous; it is because, like the employer of child labor, he provides unfair competition to the responsible builder and forces the latter to lower the quality of his product. It is, therefore, a matter of major importance that a technic has been developed to enable home-financing institutions to control the quality of construction of new homes on which they lend money. This technic involves the organization in each community of a construction inspection agency. The agency follows the progress of a home from the submission of plans through all phases of construction to delivery of the finished product to the home owner. Its work is impartial and expert. Against it the jerry-builder has no chance. Many building and loan associations supervise building on their own construction loans. In some cities several associations have cooperated to establish a central supervising bureau. This is a step in the right direction. It would seem mere good business for home-financing institutions in every community to take the lead in organizing central inspection agencies. Responsible building interests will welcome such agencies for their own protection. In this connection it should be pointed out that periodic surveys to reveal the real need for housing, coupled with efficient inspection of construction by central inspection agencies, would go far to put our appraisal system on a scientific basis. Sound appraisals are essential to the success of 75- and 80-percent mortgages. SUMMARY OF PROGRAM We have now seen the major details of the Government's program for the organization of the Nation's home-financing system. The program is certainly simple in BANK REVIEW concept and not impossible of execution. It involves five major steps: 1. Concentration of most home financing in the mutual thrift type of institution and the development of such institutions under Federal charter in all communities w h e r e they are lacking or w h i c h are inadequately served by existing institutions. 2. The organization of these specialized homefinancing agencies on a national scale and the pooling of their resources. 3. The insurance of savings deposited in these institutions. 4. The development of mutual mortgage insurance under Federal supervision. 5. The establishment under Federal charter of private institutions doing a Nation-wide business in insured mortgages. 6. The creation of a national market for home mortgages and the authorization of standard bonds and debentures based on home mortgages. 7. The setting up of uniform standards of operation for all home-financing institutions. SUMMARY OF RESULTS ANTICIPATED This simple organization will, it is hoped, in the course of time produce the following results: 1. Extend the use of long-term amortized loans to the great majority of home-financing transactions. 2. Develop an even and adequate flow of longterm money to meet the needs of home owners, and give liquidity to mortgage investments. 3. Permit the making of first mortgages up to 75 and 80 percent of the value of a property and largely eliminate the costly second mortgage. 4. Put an end to shoe-string home buying and extend the practice of a 20 to 25 percent down payment. 5. Increase the number of home owners by making home ownership possible to many families hitherto forced to live in rented properties. 6. Eliminate the irresponsible and dishonest home-financing agency. 7. Reduce and standardize the cost of servicing home mortgages—fees for appraisal, title search, conveyancing, recording—and largely eliminate brokers' fees, commissions, and bonuses. 8. Lower interest rates on first mortgages in many sections of the country. 9. Increase the stability of property values and add to the control of booms. Page Thirteen FEDERAL HOME LOAN 10. Help eliminate the jerry-builder and improve the quality of construction of small homes. 11. Improve the quality of appraisals. PROGRAM DOES NOT PUT GOVERNMENT IN BUSINESS There is nothing paternalistic in this program for organizing the Nation's homefinancing system. The Government is merely fulfilling a double duty to aid private industry to organize and to protect a vital public interest. The program does not put the Government into the business of financing homes. It protects the savings of the investor and provides security to the home-financing institutions. It puts a premium on thrift. It encourages wise home ownership. It seeks to prevent home ownership that is not financially sound. A basic premise of the whole program is that home owners stand on their own feet, that they deserve protection but do not wish subsidization. I do not mean to say that direct governmental aid to improve the housing of the less fortunate members of the lower income groups should not be given. In fact, it is part of the Govern- BANK REVIEW ment's program to give such aid, but that is a wholly separate field of activity from the one here discussed. Slum clearance, lowcost housing, and subsistence homesteads may become a vital part of the national housing program, but they are distinct from the program to organize the homefinancing system. So, incidentally, is the necessary organization of the system for financing commercial properties and apartment houses. It would be a great mistake to confuse in any way commercial-property mortgages or the bonds financing them with urban home mortgages and homemortgage bonds. The credit system of the country is a single machine of which all the parts are interrelated and interdependent. A wooden piston in a steel motor will not function. Our unorganized home-financing system has been a wooden piston in our credit machine. The Government is seeking to replace it with a steel piston. None will benefit more by this substitution than the private financial institutions of the country. THE NEED FOR NEW HOMES For the accompanying summary of Real Property Inventory Statistics and the material on which this article is based, the REVIEW is indebted to Daniel E. Casey, Chief of the Real Property Inventory, Department of Commerce. Specific information on the need for new homes and consequently for new-home financing is one of the invaluable results of the first extensive inventory of real property ever taken in this country. This inventory, financed by the Civil Works Administration and carried out last spring by the Real Property Inventory Unit of the Bureau of Foreign and Domestic Commerce, gives data on nearly 2,000,000 structures containing the homes of over 9,000,000 people in 64 cities. At least 1 of the 64 cities is located in each State of the Union. The cities were selected to represent different economic types, sizes, ages, and rates of Page Fourteen growth. It is felt therefore that the results may justifiably be accepted as a rough cross section of the national housing situation. The accompanying summary of the inventory shows a vacancy percentage in dwelling units of 7.8. When this percentage is compared with the 7 percent of unit dwellings in which two or more families are doubled up, with the 15.6 percent that are overcrowded, and with the 2.2 percent of structures which are unfit for use, we have a startling picture of the national housing shortage which is developing and will appear the instant that reemployment FEDERAL HOME LOAN permits o u r people to enjoy again an adequate s t a n d a r d of living. T h e d a t a on the n e e d for r e p a i r of A m e r i c a n h o m e s is scarcely less startling a n d significant to home-financing institutions. Only 37.6 p e r c e n t a r e listed as in good r e p a i r ; 44.4 p e r c e n t of the structures need m i n o r r e p a i r s ; 15.4 percent structural repairs. T h e inventory gives an insight also into the type of h o m e most p o p u l a r with Americans a n d the r a n g e of r e n t a l s both as to type of structure a n d n u m b e r of rooms. It establishes the n u m b e r of owner-occupied dwellings to be 39.4 percent, of which 14.8 p e r c e n t a r e owned free a n d 18.9 percent a r e mortgaged. Great as is the value of the information developed by the inventory to real-estate interests, to m a n u f a c t u r e r s of building m a terials a n d equipment, to city p l a n n e r s , to sociologists, to h e a l t h officers, a n d other m u n i c i p a l officials, it is doubtful w h e t h e r a n y g r o u p is m o r e vitally concerned in the detailed information assembled for each of the 64 cities t h a n the home-financing institutions. This detailed information constitutes an analysis of the m a r k e t of h o m e financing institutions in each city. It is safe to say that h a d these institutions been possessed of such analyses in 1925 the overfinancing a n d overbuilding t h a t led to the depression would n e v e r h a v e t a k e n place. T h e h o p e c a n n o t be too strongly expressed that home-financing institutions in the cities concerned will take a d v a n t a g e of the m a t e r i a l m a d e available a n d t h a t the financing institutions in every o t h e r city of the country will take the l e a d in initiating such surveys a n d m a r k e t studies in their cities. T h e 64 cities in which the real p r o p e r t y inventory w a s taken a n d for which data are now available are listed herewith, BANK REVIEW g r o u p e d b y geographical divisions to correspond w i t h the s u m m a r y . New England Burlington, Vt. Nashua, N.H. Portland, Maine. Providence, R.I. Waterbury, Conn. Worcester, Mass. Middle Atlantic Ringhamton, N.Y. Erie, Pa. Syracuse, N.Y. Trenton, N.J. Williamsport, Pa. East North Central Cleveland, Ohio. Decatur, 111. Indianapolis, Ind. Kenosha, Wis. Lansing, Mich. Peoria, 111. Racine, Wis. Zanesville, Ohio. East South Central Birmingham, Ala. Knoxville, Tenn. Jackson, Miss. Paducah, Ky. South Atlantic Asheville, N.C. Atlanta, Ga. Charleston, S.C. Columbia, S.C. Frederick, Md. Greensboro, N.C. Hagerstown, Md. Jacksonville, Fla. Richmond, Va. Wheeling, W.Va. Wilmington, Del. West North Central Des Moines, Iowa. Fargo, N.Dak. Lincoln, Nebr. Minneapolis, Minn. Sioux Falls, S.Dak. Springfield, Mo. St. Joseph, Mo. St. Paul, Minn. Topeka, Kans. Wichita, Kans. West South Central Austin, Tex. Baton Rouge, La. Dallas, Tex. Little Rock, Ark. Oklahoma City, Okla. Shreveport, La. Wichita Falls, Tex. Mountain Albuquerque, N.Mex. Boise, Idaho. Butte, Mont. Casper, Wyo. Phoenix, Ariz. Pueblo, Colo. Reno, Nev. Salt Lake City, Utah. Santa Fe, N.Mex. Pacific Sacramento, Calif. San Diego, Calif. Portland, Oreg. Seattle, Wash. T h e following tables w e r e compiled in the Statistical Division, Alanson D. Morehouse, Chief Statistician, Real P r o p e r t y Inventory Unit, B u r e a u of F o r e i g n a n d Domestic Commerce, U.S. D e p a r t m e n t of C o m m e r c e ; p r e l i m i n a r y figures subject to c h a n g e ; Sept. 7, 1934: Page Fifteen FEDERAL HOME LOAN BANK REVIEW Summary of real property inventory statistics for 64 cities, 1934—distributed by geographic divisions Population figures and data on structures and dwelling units Total number of cities enumerated Population of cities enumerated (1930 census) Persons covered by real property inventory—residential only * Total, 64 cities Percent New England Middle Atlantic 64 9, 793, 371 1, 225, 693 5 740, 785 9, 074, 786 1,112, 767 675, 246 1, 931, 055 100.0 173, 688 125, 475 , 536, 706 250, 670 26, 420 21, 669 7,051 22, 055 66, 370 79.6 13.0 1.4 1.1 .4 1.1 3.4 95, 560 41, 304 21, 753 2,949 424 4,063 7,635 83,143 29, 984 1,418 1,196 1,775 1,247 6,712 726,180 857, 648 297, 791 43, 068 37.6 44. 4 15.4 2.2 76, 407 79,153 16, 513 1,300 56, 444 55, 397 12, 373 1,039 , 584, 032 306, 532 4,545 7,576 115, 918 11, 034 1,453 82.0 15.9 .2 .4 6.0 .6 .1 165, 493 5,251 254 350 2,057 170 113 99, 094 20, 266 487 995 4,021 367 66 , 165, 402 762, 049 , 704, 974 , 343, 047 60.4 39.5 80, 92, 143, 121, DATA ON STRUCTURES Total number By type: Single family 2-family 3-family 4-family Row house Apartment Other By condition:2 In good repair Need minor repair Need structural repair Unfit for use Principal material or type of construction: Wood Brick Stone Concrete Stucco finish Other Not reported Garages and automobiles: With garages Without garages Car capacity reported Number of automobiles reported 501 795 131 609 68, 56, 117, 93, 727 478 293 611 DATA ON DWELLING UNITS Total number By occupancy and tenure: Number of occupied units.. Number of vacant units. . . Number of owner-occupied. Owned free Mortgaged Not reported Extra families 3 Inadequate housing condition:4 Crowded Overcrowded Greatly overcrowded Type of heating apparatus: Warm air Steam or vapor Hot water Heating stove Other None Principal fuel used: Coal Wood Gas Oil Other 2, 633,135 100.0 304, 126 185, 714 , 428, 908 92.2 7.8 204, 227 , 036, 316 39.4 390, 476 14.8 498, 753 18.9 147, 087 5.6 183, 192 7.0 280, 628 23, 498 109, 957 23, 779 46, 050 40, 128 14, 124 173, 12, 83, 21, 37, 24, 10, 118 596 151 387 651 113 156 376, 850 29, 348 6,144 14.3 1.1 .2 43, 678 1,913 112 818, 088 316, 733 194, 845 117, 121 174, 900 7,519 31.1 12.0 7.4 42.4 6.6 .3 33, 289 104, 808 11, 785 151, 482 1,554 435 105, 21, 15, 42, 773, 310, 305, 174, 53, 67.4 11.8 11.6 6.6 2.0 202, 064 8,760 711 72, 241 18, 237 174,141 420 328 258 994 192 19,185 397 54 863 523 258 032 698 234 1,777 2,044 3,400 3,927 1 Does not include persons having residence in hotels, rooming houses, clubs, and summer cottages. 2 Totals do not include "Not reported." 3 Sharing dwelling unit with usual occupants. Page Sixteen FEDERAL HOME LOAN BANK REVIEW Summary of real property inventory statistics for 64 cities, 1934—distributed by geographic divisions Population figures and data on structures and dwelling units Total number of cities enumerated Population of cities enumerated (1930 c e n s u s ) . . . . Persons covered by real property inventory—residential only 1 West South Central Mountain 10 7 4 11 600, 329 1, 357, 264 1, 452, 891 829,152 9 416, 635 560, 462 1, 275, 001 1, 365, 947 763, 926 379, 452 East South Central South Atlantic West North Central DATA ON S T R U C T U R E S Total number By t y p e : Single family 2-family 3-family 4-family Row house Apartment Other By condition: 2 In good repair Need minor repair Need structural repair Unfit for use Principal material or type of construction: Wood Brick Stone Concrete Stucco finish Other Not reported Garages and automobiles: With garages Without garages Car capacity reported Number of automobiles reported 129, 220 253, 227 305, 530 181, 256 89, 266 110, 787 15, 353 74 754 236 489 527 197, 041 36, 839 1,303 096 823 024 10, 101 259,187 160, 646 29, 840 13, 625 660 392 3,737 2,216 271 104 3,627 1,253 8,208 3,020 79, 026 5,666 145 884 585 1,065 1,895 30, 304 62, 862 30, 898 5, 064 81, 492 113, 058 49, 837 8,418 122,191 131, 593 47, 696 5,364 67, 770 79, 313 24, 412 3,955 33,192 37, 264 16, 018 2,642 117, 584 961 448 299 399 446 83 190, 562 50, 523 1,073 1,306 8,540 907 307 225, 945 152, 940 18, 793 23, 741 429 802 1,158 251 56, 008 3,019 662 2,599 214 225 38, 423 34, 593 386 1,165 10, 556 4,034 152 52, 205 76, 830 67, 070 52, 224 112, 849 140, 587 160,193 142, 583 207, 96, 285, 230, 477 113, 425 561 67, 340 361 166, 744 351 126, 120 57, 596 31, 766 73,143 64, 788 154, 447 343, 417 400, 610 215, 827 114, 847 141, 728 12, 719 45, 964 22, 079 20, 342 3,543 15, 122 318, 24, 112, 46, 46, 19, 32, 373, 27, 177, 75, 78, 23, 26, 020 202, 656 590 13, 171 120 76, 163 255 31, 587 305 36, 493 560 8,083 510 20, 090 104, 920 9,927 49, 282 22, 871 20, 499 5,912 6,218 42, 050 5,177 1,407 21, 350 2,212 544 DATA ON D W E L L I N G U N I T S Total number By occupancy and tenure: Number of occupied units Number of vacant units Number of owner-occupied Owned free Mortgaged. Not reported. Extra families 3 Inadequate housing condition: 4 Crowded Overcrowded.. . Greatly overcrowded Type of heating apparatus: Warm air . . . Steam or vapor. Hot w a t e r . . . Heating stove.. Other None Principal fuel used: Coal.. Wood. . Gas.. Oil.... Other 698 719 850 746 737 367 307 35, 957 5,173 957 67, 496 7,625 1,670 15, 754 9,112 2,207 48, 524 78, 587 144 51, 455 27, 331 29, 758 166, 294 66, 641 1,347 153, 283 3,684 39, 841 3,592 83, 920 1,238 120, 271 200, 499 2,305 5,500 687 899 27, 167 10, 961 5,243 68, 437 2,283 498 136, 170 8,369 6,808 167 2,598 268, 386 50, 566 10, 772 5,543 5,833 323, 237 6,537 16, 721 41, 525 28,104 164, 850 29, 575 443 1,574 726 83, 927 10,149 15, 646 2,592 1,696 53, 384 3,303 759 4 Crowded indicates from 1 to 2 persons per room; overcrowded indicates from 2 to 3 persons per room; greatly overcrowded indicates 3 or more persons; figures only presented for cases of inadequate housing conditions. Page Seventeen FEDERAL HOME LOAN Many other cities, quick to sense the value of such data as that collected by the Federal Government, have either conducted or are conducting similar surveys as local projects, using the same schedule and forms as those used by the real property inventory. Among these cities are: Connecticut: Bridgeport and Stamford. Illinois: Chicago. Indiana: Fort Wayne and Gary. Iowa: Sioux City. BANK REVIEW Kentucky: Louisville. Massachusetts: Boston, Cambridge, Chelsea, and Springfield. Michigan: Detroit and Flint. New Jersey: Atlantic City, Camden, Elizabeth, Jersey City, Newark, Paterson, and Trenton. New York: Albany, Buffalo, and New York City. North Carolina: Charlotte. Pennsylvania: Philadelphia, Pittsburgh. Texas: Amarillo and Houston. District of Columbia: Washington. INTRODUCING THE "REVIEW" In establishing this REVIEW as its official monthly publication the Federal Home Loan Bank Board has four major objectives in mind. 1. To provide a permanent official record of the current activities of the four agencies under the Board.—The operations of the Federal Home Loan Bank Board are Nation-wide. They affect directly the solvency and liquidity of the $21,000,000,000 of urban home mortgage indebtedness and consequently the entire financial and credit structure of the United States. Information concerning the variety and extent of these current operations should be made available in permanent form to all those affected or interested. 2. To provide the Board with a regular means of contact with member institutions of the bank system and to give a sense of unity to the Nation's principal homefinancing institutions.—The Federal Home Loan Bank System is a unit and the activities of each regional bank and its members are of concern to all other banks and members. Also, isolation is a major obstacle to the spread of new ideas and practices in the operation of home-financing institutions. A monthly bulletin offers perhaps the most effective means of ending this isolation. The need for uniform and high standards of operation among homefinancing institutions is a paramount one, Page Eightfmn and in creating this organ the Board believes it is taking a major step toward the realization of these standards. 3. To provide a channel for the dissemination of sound principles and sound technic for home-financing and related activities.—As the leading article in this REVIEW by Chairman Fahey points out, the extension of long-term amortized loans representing as much as 75 percent of the appraised value of the property will necessitate the development of a lending technic which is now generally lacking. The REVIEW will, from time to time, publish detailed studies on such subjects as the directreduction plan, the study of their markets by lending institutions, the creation of central inspection agencies, appraisal methods, personal-risk factors, and legal phases of home financing. 4. To present through the medium of statistical tables, indexes, and charts a factual picture of current activities in home financing and home construction in the United States.—Home-financing institutions, shareholders, the building interests, and home owners, all have suffered from ignorance of national and local trends in home construction and real-estate activity. This ignorance made possible the overfinancing and the overbuilding which helped bring on the depression. In the reenforcing of FEDERAL HOME LOAN our system for financing housing and housing construction, facts as to the market are essential. Obviously, information on the situation in each locality is of first importance, but knowledge of national trends— in construction costs, for example—is likewise significant. The monthly publication of fundamental data, both sectional and national, will be valuable as a guide to home-financing institutions and serve as an incentive to them for the collection of more detailed local statistics BANK REVIEW Since it is impossible to divorce residential construction or residential real estate from other types of construction and real estate, the REVIEW should cover these larger fields insofar as space and material will permit. It will take time to develop sources of data and the REVIEW will of necessity proceed slowly. The cooperation of lending institutions and of all Federal and private agencies active in the field of home construction and home finance will be essential to success. HOME MORTGAGE INTEREST RATES BY STATES The accompanying table, showing the results of a survey of interest rates on first mortgages charged by building and loan associations and banks, was made in the fall of 1931. We know there has been since that time a downward tendency in interest rates. The extent of that downward tendency should be revealed when the financial survey of urban housing of the Bureau of Foreign and Domestic Commerce completes the task which now occupies it. Making use of data gathered by the Bureau's real property inventory, the survey is engaged in the most exhaustive study of home-mortgage interest rates that has yet been undertaken. Through the courtesy of the survey, this REVIEW will publish some of its results in a later issue. The striking range in rates revealed by the accompanying table—from 6 percent in the Northeast to 10 percent in the South and West—reflects differences in degree of risk which no longer exist. Doubtless there was a time when scarcity of capital and exceptional risks prevailed in States such as Arizona, Idaho, Oklahoma, Oregon, and New Mexico. The factors which justified high* interest rates have, however, to a large extent disappeared; yet the rates themselves reflect a traditional tendency of interest rates to become customary and to remain at a high level after the circumstances which caused this level have disappeared. We may, therefore, count upon a steady leveling down of rates, a movement which is being strongly accelerated by the Federal Home Loan Banks. It should be noted that interest rates do not always reveal the total cost of the mortgage loan to the borrower. There are some service charges connected with all mortgages; these charges vary as between localities and as between lending institutions. Also, many institutions charge fees and commissions for making and renewing mortgages. On short-term straight mortgages these commissions may considerably increase the real cost of the loan. Page Nmeteen FEDERAL HOME LOAN BANK REVIEW HOME LOAN INTEREST RATES [ D i v i s i o n of R e s e a r c h a n d S t a t i s t i c s , F e d e r a l H o m e L o a n B a n k B o a r d , W a s h i n g t o n , D.C.] Banks2 ConUnited States L e g a l 1 tract * Alabama Arkansas California Connecticut. . . . Delaware District of Columbia Florida Georgia Idaho Illinois Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts. . Minnesota Mississippi Montana Nebraska New Hampshire. New M e x i c o . . . . North Carolina. North D a k o t a . . Ohio Oklahoma Oregon Pennsylvania. . . Rhode I s l a n d . . . South Carolina. . South D a k o t a . . . Texas Utah Vermont West Virginia... Wyoming Alaska Hawaii Puerto R i c o . . . . Philippines Page Twenty B. & L.2 Straight mortgage Amortized mortgage Percent 7.3 10.0 9.0 8.2 8.8 5.9 6.0 Percent 7.2 8.0 Percent 6.9 7.1 6.5 5.9 6.0 7.2 6.0 5.8 6.0 8 10 8 10 7 8 8 10 6 8 4 ( 6) 6 6.0 8.4 7.4 8.6 6.3 7.1 6.8 8.7 6.3 7.4 6.2 6.0 7.5 7.5 7.0 5.0 (4 7 ) 6.2 7.2 7.0 9.0 7.5 7.8 7.3 10.0 6.1 6.5 6.6 6.6 6.0 7.8 6.1 5.9 5.9 6.7 6.1 7.5 6.5 8.6 6.2 6.6 6.7 7.4 6.2 7.8 6.0 5.8 5.9 6.5 6.0 8.0 6.0 10.0 8.0 5.4 6.0 5.2 6.0 5.8 6.0 5.9 6.0 6.6 8.1 7.2 6.0 6.0 7.5 6.4 7.0 7.5 8.1 6.0 6.0 7.2 6.0 6.2 6.6 8.0 6.7 6.0 6.0 7.0 Percent 8 6 6 7 8 6 6 Percent 8 10 10 6 8 7 7 5 6 6 6 6 5 6 6 6 5 6 6 6 8 7 7 6 6 6 6 6 6 6 6 6 6 6 7 7 6 6 8 6 6 6 6 6 7 8 8 6 6 (3) (4 5) 12 6 7 8 8 8 10 10 12 4 (8 ) ( )6 12 ( 9 )6 6 9 8 10 10 6 (10) 8 10 6 10 12 6 6 12 6 10 10 12 12 12 (ll) 6.0 10.0 6.0 6.0 7.7 6.8 9.1 9.3 6.0 6.0 7.9 9.7 6.0 8.7 8.7 6.3 6.4 7.9 6.9 6.7 8.1 7.0 8.5 6.0 6.0 7.4 8.5 6.1 1 Source: R a n d McNally Bankers Directory, January 1932, p. 2132. 2 Source: The finance committee of the President's conference on home building and home ownership, 1931 (questionnaires). 3 Parties may agree in writing to a higher rate of interest than 7 percent but not exceeding 12 percent for 1 year, and not exceeding t h a t rate for a longer or shorter time. 4 Any rate. 5 Any rate agreed upon is legal, on loans over $300, b u t Colorado courts decline to endorse grossly unreasonable rates. 6 A corporation may agree t o pay any rate of interest and may not plead usury. 7 Legal rate is 6 percent. On loans of less than $1,000, interest shall not exceed 18 percent. N o t more t h a n 7 percent can be charged on bonds issued by corporations. 8 A corporation cannot plead usury. Under small loan act ($300 minimum) interest rate is l*/2 percent per month 9 Any rate agreed upon in writing is legal on collateral demand loans of $5,000 and over. 10 On amounts exceeding $50, 30 percent including service and expenses. On amounts not exceeding $50, 5 percent per month for the first 6 months, 2*/2 percent thereafter. Licensees under the small loans act may charge 3V2 percent per month. 11 12 percent when there is security; 14 percent when there is no security. FEDERAL HOME LOAN BANK REVIEW FEDERAL HOME LOAN BANK INTEREST RATES ON ADVANCES TO MEMBER INSTITUTIONS The rates charged on advances to mem- Home Loan Bank Act which liberalize the bers of the Federal Home Loan Banks are collateral requirements and permit larger set at the lowest levels consistent with the advances against a given amount of apcost of such credit to the banks. Present proved collateral. These steps, in conjuncrates range between 4 and 4J/2 percent on tion with the lower rates now in force, are secured advances, as indicated by the table calculated to promote greater lending acbelow, covering the rate schedules of each tivity by the banks. Such a development is of the 12 regional Banks. The maximum directly in line with the Federal Home rate on unsecured loans is 5 percent. Loan Bank Board's policy of cooperation Current rates reflect a recent reduction, with private home-financing institutions to for most of the Banks, from a 5-percent permit them to take advantage of the presminimum on secured advances. The low- ent opportunity to improve their own earnering of such rates coincides with general ing position and assist in the general proefforts by private home-financing institu- gram of economic recovery by the sound tions and the Federal Government to re- expansion of their mortgage lending operastore activity and stability to mortgage tions. finance and to the construction industries by making long-term credit available to Interest rates—Federal Home Loan Banks home owners on reasonable terms. [Rates on advances by member Banks] The present line of credit available to members through the Federal Home Loan in Banks exceeds $230,000,000. This is exclu- Federal home loan Rate effect Type of loan sive of the $50,000,000 which the Home bank on Aug. 31 Owners' Loan Corporation has been authorized by Congress to invest in the bonds Percent or debentures of the Banks. Less than 1. Boston 4 All loans. $100,000,000 of the $230,000,000 of Bank 2. Newark Reconditioning loans. I 4H All other loans. credit immediately available is currently 3. Pittsburgh. . . . 4/ 2 All loans. absorbed in advances outstanding. It is r 4 Short-term and long-term billing. therefore expected that present low rates 4. Winston-Salem. . I 4^ Long-term contract. on such advances will continue in the near WA All loans until Dec. 31, 1934. future. Secured loans. In the long run, it is inevitable that the { 4i Unsecured loans. 1-and 10-year amortized rates must be largely determined by the I loans. yield that bonds or debentures of the Banks 1 4/2 1-year straight loans. I 5 Unsecured1 loans. will command in the investment market. 8. Des Moines 4 ^ All loans. The natural growth of the System's volume 9. Little Rock 4 All loans until Sept. 30, 1934. of advances will doubtless call for the 10. Topeka 4 All loans. issuance of such obligations to provide the 11. Portland Do. 4H 12. Los Angeles.... Do. major source of the System's funds. m Attention is called, elsewhere in this RE1 Des Moines has made a special rate to one member of VIEW, to recent amendments to the Federal 4 percent on an advance of more than $250,000. Page Twenty-one FEDERAL HOME LOAN BANK REVIEW FEDERAL HOME Combined statement of Combined Assets: Cash on hand—in banks and U.S. Treasury Loans outstanding: Members Affiliated banks Other Total loans Investments—United States Government Other assets Total assets Liabilities and capital: Liabilities: Current Total liabilities Capital: Capital stock: Fully paid—Issued and outstanding: Members United States Government Boston $4, 377, 381. 92 $1, 020, 799.15 Newark $334, 885. 40 Pittsburgh $162, 285. 59 Winston-Salem $580, 509. 78 84, 875, 136. 96 2, 540, 972. 60 13, 879, 494. 72 10, 568, 766. 20 6, 077, 579.10 600, 000. 00 600, 000. 00 7, 256. 02 85, 482, 392. 98 3, 140, 972. 60 13, 897, 494. 72 10, 568, 766. 20 6,077,579.10 587,521.07 27, 524. 20 68, 459. 88 37, 896. 46: 73, 317. 82 15, 489, 200. 16 2, 701, 468. 76 108, 570. 86 18, 541. 64 59, 656. 25 8,878.3 7 236, 400. 00 1,010,468.75 6, 553. 36 6,32 7.66 106, 441, 066. 99 6, 909, 306. 35 14, 369, 374. 62 11, 047, 097. 27 7,713,007.45 2, 588, 285. 25 10, 259. 90 802, 624. 66 5, 659. 00 2, 588, 285. 25 10, 259. 90 802, 624. 66 5, 659. 00 17, 815, 100. 00 1, 313, 100. 00 2,142, 000. 00 1, 401, 700. 00 1, 590, 400. 00 81, 445, 700. 00 5, 000, 000. 00 11, 500, 000. 00 8, 500, 000. 00 5, 700, 000. 00 99, 260, 800. 00 6, 313,100. 00 13, 642, 000. 00 9, 901, 700. 00 7, 290, 400. 00 Subscriptions to capital stock: Members and applicants Less: Balance d u e . . . . 5, 020, 600. 00 2, 517, 392. 38 664, 600. 00 1, 256, 400. 00 693, 950.13 225, 000. 00 338, 200. 00 200, 500. 00 306, 300. 00 128, 950. 00 2, 503, 207. 62 439, 600. 00 562,449.87 137, 700. 00 177, 350. 00 United States Gov43, 295, 300. 00 7, 467, 500. 00 7, 463, 200. 00 2, 646, 300. 00 3,508,200.00 ernment Less: Balance d u e . . . . 43, 295, 300. 00 7, 467, 500. 00 7, 463, 200. 00 2, 646, 300. 00 3, 508, 200. 00 Surplus: Reserves: As required under section no. 16 of act United States Government—2 percent dividend Other Surplus—Unallocated Total surplus Total capital 563, 392. 81 25, 460. 44 56, 603. 25 57, Oil. 80 40, 954. 58 848, 404. 53 112, 290. 46 39, 068. 50 70, 915. 07 146, 389. 04 676, 976. 78 18, 855. 45 58, 993.10 77, 145. 74 52,254.83 2, 088, 774. 12 156, 606. 35 154, 664. 85 205, 072., 61 239, 598. 45 103, 852, 781. 74 6, 909, 306. 35 14, 359, 114. 72 10, 244, 472. 61 7, 707, 348. 45 Total liabilities and capital.. 106, 441, 066. 99 6, 909, 306. 35 14, 369, 374. 62 11,047,097.27 7,713,007.45 NOTE.—Italic figures=deficit. Page Twenty-two FEDERAL HOME LOAN BANK REVIEW LOAN BANK SYSTEM condition as at Aug. 31, 1934 Indianapolis Cincinnati Chicago Des Moines Little Rock \ Topeka Portland Los Angeles $664, 321. 57 $625, 806. 91 $389, 920. 01 $85, 212. 01 $404, 062. 83 $29fc, 262. 87 $21, 073. 87 $214, 241. 93 16,689,739.45 5, 870, 990. 33 4, 208, 402. 04 11, 812, 810. 64 3, 957, 816. 52 4,100, 993. 502,157,170. 24 2, 992, 401. 62 7, 256. 02 16, 689, 739. 455, 870, 990. 33 4, 208, 402. 04 11, 812, 810. 64 3, 957, 816. 52 4,100, 993. 502,157,170. 24 2, 999, 657. 64 48, 633. 20 93, 291. 40 78,196. 97 38,107. 94 39, 374. 41 35, 681. 24 18, 299. 04 28, 738. 51 838, 496. 73 1, 576, 408. 59 169, 879. 811, 349, 370. 04 3, 268, 715.131, 262, 664. 50 1, 685, 374. 721, 330, 296. 88 17, 960. 82 3, 703. 93 7, 855. 38 6, 631. 27 7, 248. 33 9, 885. 85 5,198.12 9, 786.13 18,283,809.97 8,125, 542. 9612, 458, 662. 81 5, 687, 723. 30 7, 679, 854. 74 5, 696, 850. 44 3, 887,115. 99 4, 582, 721. 09 1 682, 245. 70 75, 878. 87 320, 373. 22 243, 478. 49 416, 003.16 3, 336. 50 28, 409. 23 16.52 1 682, 245. 70 75, 878. 87 320, 373. 22 243, 478. 49 416, 003.16 3, 336. 50 28, 409. 23 16.52 4, 087, 300. 001, 757,100. 00 1, 671, 500. 00 732, 300. 001,140,100. 00 738, 400. 00 434,100. 00 807,100. 00 12, 775, 700. 006, 000, 000. 00 4, 500, 000. 00 5, 900, 000. 00 4, 700, 000. 00 10, 000, 000. 00 3, 310, 000. 003, 560, 000. 00 16,863,000.00 7, 757, 100. 00 5, 232, 300. 00 7, 040,100. 005, 438, 400. 00 3, 744,100. 00 4, 367,100. 00 11, 671, 500. 00 666, 900. 00 326, 518. 75 259,100. 00 95, 775. 00 340, 500. 00 316, 400. 00 259, 600. 00 298, 900. 00 212, 040. 00 187, 612. 50 163, 020. 00 138, 816. 00 62, 200. 00 28, 075. 00 251, 500. 00 117,135. 00 340, 381. 251 163, 325. 00 128, 460. 00 128, 787. 50 96, 580. 00 160, 084. 00 34,125. 00 134, 365. 00 2, 872, 400. 00 2, 633, 600. 00 2, 650, 000. 006, 407, 900. 00 577, 400. 00 4,173, 900. 002, 894, 900. 00 2, 872, 400. 00 577, 400. 00 4,173, 900. 002, 894, 900. 00 2, 633, 600. 00 2, 650, 000. 006, 407, 900. 00 J 133, 801. 76 52, 930. 50 82, 583. 30 26, 263, 24 49, 521. 43 13, 942. 88 11, 806. 81 12, 512. 82 43, 402. 38 20, 383. 56 131, 972. 59 37, 726. 01 20, 043. 86 91, 523. 29 64, 827. 87 69, 861. 90 220, 978. 88 55, 925. 03 i23, 773. 70 i9, i68. 06 57, 606. 29| 10, 436. 23 3, 847. 08 i, 135.15 398,183. 02 129, 239. 09 338, 329. 59 83,157. 31 127,171.58 95, 029. 94 80, 481. 76 81, 239. 57 3, 858, 706. 764, 582, 704. 57 |5, 693, 513. 94 |l7, 601, 564. 27 12,138, 289. 595, 444, 244. 817, 263, 851. 58 | 8, 049, 664. 09 3, 887,115. 99 4, 582, 721. 09 5, 696, 850. 44 12, 458, 662. 81 [18,283,809.97! 8,125, 542. 96 5, 687, 723. 307, 679, 854. 74 i Page Twenty-three FEDERAL HOME LOAN BANK REVIEW FEDERAL SAVINGS AND LOAN ASSOCIATIONS In the Home Owners' Loan Act of June 13, 1933, authority was given the Federal Home Loan Bank Board to provide for the organization, incorporation, examination, and regulation of Federal savings and loan associations. The Board w^s also authorized to convert existing building and loan associations into Federal associations. These associations are local, mutual, thrift and home-financing institutions modeled on the best features of mutual savings banks and building and loan associations. They are privately officered and managed under Federal charter and subject to annual Federal examination. The shares are carefully defined and uniform for all associations and their lending policies are strictly regulated and likewise uniform. In order to hasten the establishment of Federal associations in communities where other credit for home financing is either totally lacking, frozen, or inadequate and to encourage conversions, the Treasury is empowered to subscribe up to 75 percent of the paid-in stock of any association. The sum of $100,000,000 has been appropriated for governmental subscriptions. The first Federal savings and loan association was chartered in August 1933 and only 67 associations had been chartered by January 1 of this year. The 498 Federal associations chartered up to September 1 are located in 38 States and the Territory of Hawaii. There is at least 1 in each of the 6 largest American cities. The rapid extension of this model form of private, mutual, thrift home-financ- ing institution in the past few months indicates the wide-spread resumption of confidence in home-mortgage investments and reveals the public faith in Federal supervision and control. This growth of Federal associations is one of the most encouraging signs of an early resumption in home construction. The following table gives the status of Federal savings and loan associations as of September 1, 1934. Federal Savings and Loan Associations Sept. 1, 19U as of 1. Charters issued: a. To new associations b. To associations converted f r o m S t a t e institutions 406 92 Total charters issued. 498 2. Charters p e n d i n g : a. For new associations b. For associations converting from State institutions 220 173 Total charters pending 3. Resources: a. Of associations c h a r t e r e d . b. Of associations for w h i c h charters are p e n d i n g . _ Total resources 4. Subscriptions by the Secretary of the T r e a s u r y : a. Requested b. Approved and paid for__ 393 $75,321,616 212,944,400 288, 266, 016 6,151, 500 2, 852, 800 THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION The Federal Savings and Loan Insurance Corporation is the Government's agency to protect savings invested in thrift and home-financing institutions from a recurrence of such losses as they have sufPage Twenty-four fered in the last 4 years. The Corporation was authorized by the National Housing Act of June 27, 1934. It has a capital stock of $100,000,000 subscribed for by the Home Owners' Loan Corporation. All Federal FEDERAL HOME LOAN savings and loan associations are required to insure their accounts with the Corporation. Building and loan, savings and loan, and homestead associations and cooperative banks are eligible to apply for such insurance. The Corporation may insure the share or deposit accounts of any one investor up to $5,000. This program undertakes to do for small investors in thrift and home-financing institutions what the Federal Deposit Insurance Corporation is doing for the small depositors in our banks. However, as homefinancing institutions differ from banks in the type of service they render so their plan of insurance protection must differ. People who deposit their money in banks want to be assured of its immediate availability. Generally they do not expect income on such deposits. Consequently, the Federal Deposit Insurance Corporation insures the liquidity of bank deposits. People who invest in thrift and home-financing institutions want to be assured of its safety; they expect also a share of the earnings from the use of their funds; finally, they want to be assured of recovering their commitments under conditions determined by the nature of the home-financing business. In view of these expectations, the Federal Savings and Loan Insurance Corporation insures the solvency of investments. Insurance by the Federal Savings and Loan Insurance Corporation is on a strictly mutual basis. The Corporation is authorized to charge a premium of one-fourth of 1 percent of the total amount of all accounts of insured members plus any creditor obligations of the insured institutions. It is authorized also to assess additional premiums, not to exceed one-fourth of 1 percent in any year, to recover losses and operating expenses. The Corporation hopes to keep the operating expenses down to a minimum. It is confident that under the plan of operation which it will establish losses should also be small and there- BANK REVIEW fore not burdensome to the insured institutions. With these ideas in mind, it plans to operate for the first year on the minimum premium of one-fourth of 1 percent, and to let additional assessments, if any, be determined entirely on the basis of experience. The Corporation has just adopted a set of rules and regulations for its management and operation. The thought behind the drafting of these rules and regulations has been essentially this: A broad program of insurance of savings and loan accounts should be made effective immediately to such institutions as desire to avail themselves of it. It should be actuarily sound in order to minimize future losses. At the same time it should be sufficiently liberal to admit to its advantages all the solvent thrift home-financing institutions of the country that apply for it. It is generally recognized that the investing public have had their confidence in the security of their investments in many thrift and home-financing institutions shaken severely during the past few years. It is obvious that insurance of such investments will prove a powerful factor in restoring confidence in such institutions, just as insurance of deposits in commercial and savings banks has done. Quick recovery of lost prestige may be expected of those institutions which are able promptly to accept the benefits of this insurance program. The trustees of the Federal Savings and Loan Insurance Corporation are confident that all eligible institutions will recognize the advantages of insurance to them and to their investors and will avail themselves of it. Copies of the Corporation's rules and regulations may be had by addressing the Federal Savings and Loan Insurance Corporation, Washington, D.C. Inquiries about the insurance plan and the procedure necessary to secure its benefits are solicited from any interested parties. Page Twenty-five FEDERAL HOME LOAN BANK REVIEW ONE YEAR OF THE HOME OWNERS' LOAN CORPORATION Within approximately a year from the institutions to assist them in opening their date of the establishment of its last State doors and to aid their depositors. Taxes office, the Home Owners' Loan Corpora- and assessments paid to counties and mution reports as of August 31 the completion nicipalities totaled $103,300,000. Repair of refinancing loans on 492,684 homes and maintenance disbursements to small throughout the country, aggregating $1,476,- contractors for repairs and reconditioning 913,010. Of the balance of 1,159,000 appli- totaled $20,274,000. Attorney and apcations, some 689,000 have passed through praisers 5 fees, insurance, and other adthe appraisal phase and are mostly in the vances amounted to $26,930,000. This dishands of attorneys for title examination tribution of cash has served the useful purand closing. Of the remaining 470,000 applications a large percentage have been re- pose of adding to the purchasing power of jected because they do not fall within the the country during the emergency. The accompanying table shows the progprovisions of the act and a small percentress of the Corporation's activities by age are in the earlier processes of exammonths from the beginning of its operation ination. In addition to the 1,651,811 appliuntil August 31, 1934. , cations received up to August 31, the Corporation has interviewed at least 300,000 Home Owners1 Loan Corporation— persons who were, not permitted to file apSummary of operations plications because of obvious ineligibility. The social consequences of this intervenNumber Loans closed by tion to prevent the eviction from their of applimonths homes of more than 2,000,000 people durcations Months received ing a period of great tension and unrest by months!Number Amount can hardly be overestimated. To save this portion of the population from despair and to prevent complete chaos in the real-estate From date1933 of opening 403,114 to Sept. 30 593 $1, 688, 787 and home-mortgage fields has been wrorth 129, 504 3,424 10,164, 678 October an incalculable sum to the taxpayers of the November 99, 232 10, 946 31, 445, 827 90, 946 22, 286 62, 621, 051 December United States. In addition to the primary social and 1934 123,189 30, 339 £6,143, 838 economic benefits in preserving the existing January 136,132 32, 940 93, 499, 995 February structure of home ownership, there has oc- March 168, 273 52, 260 150, 213, 639 145, 772 56,172| 171,490,768 curred a large number of secondary bene- April 119, 791 64,1721 208, 293, 766 May fits to depositors of closed banks, to mu- June 97, 679| 71, 768 223, 440,191 66,157 78, 046 235,467, 606 nicipalities where taxes were in arrears, to July 72, 022 69, 738 202, 442, 864 August small contractors and repair men, to insurCumulative total ance agents and companies, to professional through Aug. appraisers and attorneys, and, of course, to 31, 1934 1, 651, 811492, 6841, 476, 913, 010 mortgagees who received liquid for nonNOTE.—The total amount of all applications received as liquid paper. Up to September 7, 1934, a Aug. 31, 1934, was $5,349,379,811. Loans closed avertotal of over $200,000,000 had gone to closed of aged $2,998 each. Page Twenty-six FEDERAL HOME LOAN BANK REVIEW VALIDITY OF FEDERAL SAVINGS AND LOAN ASSOCIATIONS By HORACE RUSSELL, General Counsel to the Federal Home Loan Bank In one of the most far-reaching decisions yet made affecting an important measure of Federal recovery legislation which has been in dispute, a Wisconsin State circuit court early in September affirmed the constitutionality of that section (5 (i)) of the Hotoe Owners' Loan Act of 1933 which provides for the creation of Federal savings and loan associations. Thus, for the first time, the validity of such associations is made clear. The decision fully confirms the authority of Congress both to incorporate savings and loan associations under a Federal charter, and also to authorize the voluntary conversion of a State building and loan association into a Federal savings and ldan association, even without the consent of the State. Its immediate effect was to permit the voluntary conversion into Federal savings and loan associations of two Wisconsin building and loan associations which the Wisconsin State Banking Commission and State supervisor of building and loan associations had threatened to restrain from such conversion. The broader interpretation of the decision is that it will encourage conversion by hundreds of other State-chartered associations throughout the country, including one or two States where, as in Wisconsin, the State banking authorities have previously threatened to oppose conversion. Conversion, however, is purely optional in any instance, and is undertaken only upon the initiative of the majority shareholders in an association. There have been no disputes, with regard to conversion steps, between the Federal and State authorities. Such differences as have occurred in some Board few States have' been between local associations desiring to convert, and State officials who wished to prevent such conversion. The position of the Federal Governm'etit toward conversion is merely permissive! Pending fust such a decision as that now rendered as to the constitutionality of the law by which Federal savings and loan associations are provided for, the directors and shareholders of many State-chartered institutions had previously postponedsteps toward conversion, which they may now be expected to take, in'view of the manifest safeguards which the federally-chartered associations assure the shareholder and the benefit which such an association may enjoy due to the fact that the United States Treasury is empowered to purchase its shares, thus increasing its loanable resources. In his written decision, handed down on September 11, 1934, Judge Charles L. Aarons, of the circuit court of Wisconsin, points out that, in his opinion— 1. The language of section 5 (i) of the Home Owners' Loan Act does not imply the need of legal consent by the State to the proposed conversion of State savings and loan associations into Federal savings and loan associations. 2. Congress has the power to incorporate savings and loan associations, as affirmed by the Supreme Court with respect to the establishment of the National Bank of the United States early in the last century, the national banking system after the Civil War, and the more recent establishment of Federal land banks and joint stock land banks. Page Twenty-seven FEDERAL HOME LOAN In this connection, Judge Aarons stated: " The purpose of this act, as well as the Federal Home Loan Bank Act of July 22,1932, and the Federal Farm Loan Act, is apparent throughout their content, and from the debates in public committee hearings and in Congress. The ultimate purpose of these acts is fundamentally the same—the rehabilitation of the people of an entire Nation suffering from the most calamitous burden of debt, contraction of credit, and economic and financial depression known in American history. Congress, by its expressions, apparently believed that Governmentsupervised institutions making long-time loans on homes and receiving savings in exchange for the issue of income shares of stock can be useful in increasing the market for Government obligations and in being employed as fiscal agents for the Government—even though its ultimate Page Twenty-eight BANK REVIEW purpose was to stimulate a return of wholesome economic conditions." 3. Congress has the power to authorize the voluntary conversion of State building and loan associations into Federal savings and loan associations without the consent of the State, and without the necessity of a State enabling act to permit building and loan associations, organized under Wisconsin statutes, to convert themselves into Federal savings and loan associations. 4. The voluntary conversion of State associations into Federal associations does not infringe upon the just authority of the State, even though the State should withhold its consent. 5. The requirement that conversion may be effected by favorable action by 51 percent of the votes cast at a legal meeting, as contained in section 5 (i) of the amended Home Owners' Loan Act, does not conflict with any provision of the Wisconsin statutes. U. 8 . GOVERNMENT PRINTING O F F I C E : I B M FEDERAL HOME LOAN BANK DISTRICTS • BOUNDARIES OF FEDERAL HOME LOAN BANK DISTRICTS FEDERAL HOME LOAN BANK CITIES.