Statement Proposing the Establishment of the Home Loan Discount Bank System.

THE PRESIDENT said:

"I shall propose to Congress the establishment of a system of home loan discount banks for four purposes:

"1. For the present emergency purpose of relieving the financial strains upon sound building and loan associations, savings banks, deposit banks and farm loan banks that have been giving credit through the medium of small mortgage loans upon urban and farm properties used for homes. Thereby to relieve pressures upon home and farm owners.

"2. To put the various types of institutions loaning on mortgage in a position to assist in the revival of home construction in many parts of the country and with its resultant increase in employment.

"3. To safeguard against the repetition of such experiences in the future."4. For the long-view purpose of strengthening such institutions in the promotion of homeownership particularly through the financial strength thus made available to building and loan associations.

"The immediate credit situation has for the time being in many parts of the country restricted severely the activities of building and loan associations, deposit banks including country banks, and savings departments, savings banks and farm loan companies in such a fashion that they are not only not able to extend credit through new mortgages to home and farm owners, but are only too often unable to renew mortgages or give consideration to those in difficulty with resultant great hardships to borrowers and a definite depreciation of real estate values in the areas where such pressures exist.

"A considerable part of our unemployment is due to stagnation in residential construction. It is true there has been some overbuilding in certain localities in the boom years. But even in these localities the inevitable need is obscured by the tendency of the population to huddle temporarily due to unemployment. The real need steadily accumulates with increasing population and will become evident and insistent as we come out of the depression. The high importance of residential construction as a matter of employment is indicated by the fact that more than 200,000 individual homes are erected annually in normal times, which with initial furnishing contribute more than two billions to our construction and other industries. This construction has greatly diminished. Its revival would provide for employment in the most vital way. As a people we need at all times the encouragement of homeownership, and a large part of such action is only possible through an opportunity to obtain long-term loans payable in installments. It is urgently important, therefore, that we provide some method for bringing into continuing and steady action the great facilities of such of these great national and local loaning concerns as have been under pressure and should provide against such difficulties in the future.

"The farm mortgage situation presents many difficulties to which this plan would give aid.

"I have consulted with representatives of the various groups granting credit on mortgage loans for the home and farm as well as Government officials and other economic agencies, and as a practical solution from the various needs and the various ideas advanced I propose the following general principles for the creation of an institution for such purpose:

"(a) That there be established 12 home loan discount banks (if necessary) one in each Federal Reserve District under the direction of a Federal home loan board.

"(b) The capital of these discount banks shall be initially of minimum of 5 to 30 million as may be determined by the Federal board upon the basis of the aggregate of such mortgage loans and probable needs of the particular district.

"(c) The proposed discount banks to make no initial or direct mortgages but to loan only upon the obligations of the loaning institutions secured by the mortgage loans as collateral so as to assure and expand the functioning of such institutions.

"(d) Building and loan associations, savings banks, deposit banks, farm loan banks, etc. may become members of the system after they have satisfied the conditions of qualifications and eligibility that may be fixed by the Federal board.

"(e) The mortgage loans eligible for collateral shall not exceed $15,000 each and shall be limited to urban and farm property used for home purposes.

"(f) The maximum amount to be advanced against the mortgage collateral not to exceed more than 50 percent of the unpaid balance on unamortized or short-term mortgage loans and not more than 60 percent of the unpaid balance of amortized long-term mortgages, and no advance to be made on mortgages in default. Such loans are to be made on the basis that there are sound appraisals of the property upon which such mortgages have been made. In other words, given sound appraisals, there will be advanced in the case of short-term or unamortized loans 25 percent of the appraisal and in case of amortized long-term loans, 30 percent of the appraised value of the property.

"(g) The discount banks as their needs require from time to time to issue bonds or short-term notes to investors to an amount not to exceed in the aggregate 12 times the capital of the issuing bank. The bonds of these discount banks would be thus secured by the obligations of the borrowing institutions, the mortgages deposited as collateral against such obligations and the capital of the discount banks. These bonds to be acceptable for security for Government and postal deposits. The result would be a bond of high grade as to quality and security.

"(h) If the aggregate initial capital of the discount banks should in the beginning be fixed at $150 million it would be possible for the 12 banks to finance approximately something over $1,800 million of advance to the borrowing institutions which could be further expanded by increase in their capital.

"(i) It is proposed to find the initial capital stock for the discount banks in much the same way, in so far as is applicable, as the capital was found for the Federal Reserve banks--that is, that an organization committee in each district should first offer the capital to the institutions which would participate in the service of the bank. And as was provided in respect to the Federal Reserve banks, if the initial capital is not wholly thus provided, it should be subscribed by the Federal Government; and further somewhat as was provided in the case of the Federal land banks other institutions using the facilities of the discount banks should be required to purchase from time to time from the Government some proportionate amount of its holdings of stock if there be any. In this manner any government capital will gradually pass over to private ownership as was the case in the Federal land banks.

"The above details of the proposal are put forward as suggestions in order to give clarity to the central idea rather than as inflexible conclusions. The whole plan would necessarily be subject to the action of Congress and many parts of it will no doubt need development.

"There is no element of inflation in the plan but simply a better organization of credit for these purposes.

"This proposed institution does not in any way displace the National Credit Association which occupies an entirely different field of action."