The President's News Conference

HOME LOAN DISCOUNT BANK SYSTEM

THE PRESIDENT. I have what I regard as rather an important statement, and I am giving it to you for release for the morning papers because I think it will require a little thought on your part. And rather than read all of it to you I thought I would sketch it and leave you to study it.

It is a proposal for the establishment of a system of home loan discount banks, and is the result of some 3 months of conferences with various groups interested in that subject from all parts of the country. So that what I say to you is background and is, in fact, merely a condensation of the statement itself.

The proposal is for four purposes: That is, for the present emergency purpose of relieving the financial strains on the building and loan associations, savings banks and the deposit banks, and the farm loan banks that have been giving credit through small mortgage loans on small farms and homes. Its purpose is to relieve the pressures on homeowners and farm-owners and to put these various types of institutions in the position to assist in the revival of construction in many parts of the country, with a resultant increase in employment. It also has the purpose of safeguarding against such experience in the future as we have been going through in the last 6 months in this particular. And it has the long-view purpose of strengthening those institutions that are promoting homeownership, particularly the building and loan associations. The immediate credit situation has, for the time being, restricted rather severely the operations of all this type of institutions in relation to small mortgages, and they have not only been unable to extend credit for new mortgages on farms and homes, but have been unable to renew mortgages and to give consideration to those in difficulty in these times. So that there has been a great deal of resultant hardship to borrowers and an unduly large amount of liquidation of real estate.

A good deal of the unemployment in the country is due to the breakdown in residential construction. We normally build a matter of 200,000 homes a year--new homes--which represents an expenditure estimated with the furnishings and everything else of a couple of billions, and it is a good deal more than one-half diminished--probably diminished by two-thirds at the present time. So that if we can revive the activities of various institutions that have to deal with these questions, we should obtain a considerable revival of employment in that quarter.

I want to point out to you that this statement is very carefully prepared and this I am giving you is just background. And I hope you will study it over.

The farm mortgage situation presents a great deal of difficulty. A large part of it is being taken care of by the insurance companies and Federal land banks, but a considerable segment has been taken care of by the smaller banks and other institutions where there is a good deal of pressure. So the plan itself is to establish 12 home loan discount banks, one in each Federal Reserve district, under the direction of a central board in Washington. The capital of these banks to be initially from 5 to 30 million, depending upon the needs in the various districts. The proposed banks are not to make initial or direct mortgages, but to loan only on obligations of loaning institutions secured by mortgage loans as collateral in such a fashion as to assure the expansion of the functions of those institutions. The building and loan associations, and savings banks, and deposits banks, and the farm loan banks, et cetera, may become members of the system on evidence as to eligibility as fixed by the board. The mortgage loans eligible for collateral shall not exceed $15,000 so as to limit it to urban and farm property used for home purposes. The maximum amount to be advanced against mortgage collateral not to exceed more than 50 percent of the unpaid balance on unamortized or short-term mortgages and not more than 60 percent on the unpaid balance of amortized long-term mortgages. On that basis, with proper appraisal of the property, these loans by the discount bank would cover from 25 to 30 percent of the appraised value of the property. Discount banks in turn to issue bonds or short-term notes to the public for investment. Those bonds or notes would thus be secured first by the notes of the borrowing institutions borrowing from the discount bank, and then the collateral, and further secured by the obligations and capital of the discount banks, so that they would have a firm security. It is suggested that they should be made acceptable for security for governmental and postal savings bank deposits.

If the aggregate initial capital of these banks should amount to $150 million, they would have on a 12 to 1 ratio any issue of securities, which by the way compares with 20 to 1 in the Federal land banks. They would have an ability to finance a matter of $1,800 million of discounts.

Now, it is proposed to find the initial capital for these discount banks in the same fashion, so far as it is applicable, as the capital was found for the Federal Reserve banks. In that case an organization committee is set up in each district. The capital stock shall be offered to the institutions participating, and that capital stock if undersubscribed shall be subscribed temporarily by the Government. It is proposed to follow that line in this case, and that institutions which might join afterwards and thus make use of the facilities, to purchase a certain amount of the stock held by the Government in the same fashion that they purchase the stock of the Federal land banks, so that in a short time, as was the case of the farm loan banks, the capital all went over to private hands. So that the Government, if at all, would only be temporarily in the business.

Now, the details I have given here are somewhat to give clarity to the central idea rather than inflexible conclusions. The whole plan is necessarily subject to the action of Congress, and a great many parts of it will no doubt have further development.

There is no element of inflation in this plan, but simply a better organization of credit facilities. This proposed setup does not in any way displace the National Credit Association, because that occupies an entirely different field of action from that which is proposed here. It is somewhat difficult to get any statistical ideas as to the volume of credit of this kind current in the country, but it is generally estimated at anything from 200 to a million (?) ¹ from one quarter or another of small size mortgages. And the margin required in order to unfreeze the situation and get the various institutions active to get work restarted in these directions, and to loosen up in agricultural land credits is probably not very much--largely a question of assurance to those institutions that they would be able to secure cooperation in an emergency rather than perhaps actual capital.

¹ The question mark appears in the transcript. Press accounts indicate that the estimate of small mortgages given by the President was $20 to $30 billion.

In any event, the program is the result, as I have said, of many months of discussion with various groups, and it has been submitted in all parts of the country in its general outlines, and I have received a very wide measure of approval of the principal ideas which were circulated amongst various types of institutions, such as building and loan, savings banks, and others.

The necessity for institutions of this kind are not so great in the Northeastern part of the United States as in the rest of the country. In sections with larger supplies of capital, they are not so pressed in the present situation as the area outside of the Northeast.

That is all. I have marked it for release for tomorrow morning's papers.

Q. Mr. President, will you please tell us if the Members of Congress have been shown this ?

THE PRESIDENT. To some extent, but not at great length.

That is all.