SUBMISSION BY D. E. MCAVOY, SECRETARY HOME MORTGAGE ADVISORY BOARD AND CHAIRMAN JOINT HOME LOAN COMMITTEE OF METROPOLITAN NEW YORK, AT HEARINGS, SENATE BANKING AND CURRENCY SUBCOMMITTEE, SENATOR DUNCAN U. FLETCHER, CHAIRMAN, RE BILL S. 3603, NATIONAL HOUSING ACT, MAY 21, 1934

EXPLANATORY INDEX

The following article was prepared for an economic publication and submitted April 20, 1934. Their interest lay in an outline of the Home Loan Act of 1933 and in facts pertaining to its future.

The article submitted, while in narrative vein for the first several pages, then introduces, in chapter II, page 4, carefully thought-out suggestions for the future part the Home Owners' Loan Corporation can be shaped to play in providing individual, community, and its own collateral conservation.

The suggestions made are based upon a lifetime contact as a homebuilder and several years' intensive experience contacting-personally and through committee divisions-over 15,000 distressed homemortgage cases, while engaged in an organized volunteer effort to save home ownership.

The official record of the Senate Banking and Currency Subcommittee hearings, Senator Bulkley, chairman, re the Home Loan Act of 1933, contains the findings of our board transmitted by me, at the request of one of its outstanding members and chief sponsor of the act, Senator Robert F. Wagner, and this testimony covered, as well, the recommendations as to amendments had from our Long Island Division. (Hearing, Apr. 20, 1933.)

The official record of the House Banking and Currency Subcommittee, Michael K. Reilly, chairman, contains the findings of our board transmitted by me, pressing for various amendments, and particularly that of the absolute need of Congress authorizing at least 2 billions of dollars of additional home-loan bonds at this session, with 10 percent additional for repairs and modernization, as in the present act-excerpts attached. (Hearing, Apr. 24, 1934.)

RE NEW HOME CONSTRUCTION

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The latter record also contained a copy of my recommendations in regard to control of "new home construction as delivered in an address to the mortgage conference held February 1, 1934, at the Hotel Commodore, New York. It embraced a running survey of home needs and reasonable governmental control to be maintained. as to new home building, type, design, and substance of construction, in order to protect existing investments against overbuilding and communities from further infection by the "jerry " builder.

SAVING HOME OWNERS AND MORTGAGE HOLDERS BY FEDERAL AID

(By D. E. McAvoy, secretary Home Mortgage Advisory Board)

Looking westward from the Hotel Pierre, a view of striking vantage is commanded of stately Central Park. From a lofty window I scanned the attractive landscape blending in the distance with a magnificent structural

skyline. My mind's eye recalled it as a scene that in better years resembled an urban fairyland when glimpsed from the bridlepath at twilight time.

Such an impression a few may still glean in that high-spot, hour. But only those can whose economic ignoranie prevents the realization that this worldfamous skyline now sepresents but handsomely formed symbols of mortgage distress that relate in endless ramifications to human misery.

I was listening to vital queries propounded by a group of seasoned, dynamic newspapermen, the financial and real-estate editors of the New York press, for. this conference in the winter of 1932-33 had been arranged by me at their request.

An effort must be made to recall the surcharged atmosphere and nervous tempo of those distorted days, if this scene be visualized; the banking holiday had not yet occurred, and impending disaster hung heavy in the air. There was talk of a moratorium in the mortgage world-a word hitherto suppressed, outcropping like angry flood waters; the home world presented the strategic start, and the dean of this group had communicated that the editors desired the views of our chairman.

A lifelong interest in home building privileged me to serve the Home Mortgage Advisory Board, a volunteer organization, as secretary. It was quite unique in the annals of mortgage history. Comprised of social-minded men, headed by Frank A. Vanderlip, with Robert D. Elder as vice chairman, its members were Arthur W. Lawrence, Edward G. Miner, Frank C. Munson, James H. Post, John D. Rockefeller, 3d, Walter Stabler, Henry S. Thompson, and Arthur H. Titus-a board of men who had no axes to grind, no fees to collect, and no need to garner further honors.

That I could promptly serve these editors, who had been of substantial and continuous aid in the furtherance of my initial efforts to ease the mortgage situation, by arranging the meeting they desired, at our chairman's study, gave me a keen sense of gratification, and, the gathering assembled, my duty for the moment was fulfilled. I could take the part then as research student and listener, the superb park view holding my gaze, my ears harkening to the questions and informative answers.

Musing, I saw an unfolding panorama; I saw the park expand to countrywide proportions; the suburban homes flanking the proud cities, then the farms in the hinterlands-homes-homes-homes-all threatened alike, whether city, village, or farm. Winding in an everclosing spiral, in snake- and wave-like fashion, like a great landslip, I saw in fancy, a slowly but relentlessly moving mass of blightful appearance that resembled nothing else so much as murky lava.

It was slowly but surely engulfing our fair farms, villages, and citiescrushing out national family life. Like a graphic portrayal from the crayon of a powerful cartoonist, this destructive mass appeared in sudden transformation labeled "mortgage liquidation." Then I started from my reverie, realizing that these very words were being spoken: "Unwarranted mortgage liquidation caused by a faulty system; fundamentally wrong in making long-term obligations from demand deposits", our chairman was saying, and continued: "A long-term Government bond plan should be seriously explored as the solution for the home-mortgage problem. The Danish system, with amortizing bonds of 30 to 40 years' duration, has stood the test."

I realized then that the devastating scene that I had envisioned, in startling reality, was a composite picture that masterly observations were conjuring in a mind peculiarly attuned to mortgage distress. Added to the hundreds of home owners, I felt personally responsible for as a home builder who had placed many in a now destroying debt, over 5,000 or more sorely tried home owners had visited my headquarters at 33 Liberty Street, New York, for our board was cooperating with the Reconstruction Finance Corporation in the second Federal Reserve district, originally sanctioned by Mr. Charles A. Miller, president, whose warm regard for the home owner has been of lifetime note.

We had established divisions to afford similar personal contacts and mediation for the home owner from Buffalo to northern New Jersey, but our contacts had extended for beyond. Country-wide conditions were reflected through the thousands of letters, for human documents of unmistakable validity literally poured to us in response to broadcasts on national networks delivered by our chairman and myself.

The meeting terminated, but the vivid picture hung, as it still hangs, in my mind, and the thought kept recurring: If this were a physical phenomena that

threatened country-wide disaster, great engineers would be summoned; their pronouncements as to a check would be immediately accepted, even though it would irretrievably sink billions of dollars. Yet, the blight brought on by foreclosure of homes and fear of impending ones was just as effectively commencing a national destruction, I well knew, from the misery I had contacted at first hand.

Why, then, in the face of such disaster, should traditional conservatism block our Government from employing a few billions of dollars of its credits in a remedy that would not mean national loss? This thought likewise kept recurring. A quarter of a century's experience as a home builder assured me that the home owner, the present or the succeeding one, after recovery brought back a natural process of resale, would eventually repay every cent if repayment were proportioned in accord with ability to pay. The history of home mortgages for over a century attests that fact.

THE HOME LOAN ACT OF 1933, A BOON TO HOME OWNERSHIP

This was the birth of a $20,000,000,000-bond plan, covering farms and urban homes, that I presented to Senator Robert F. Wagner, a leading exponent of the home- and farm-loan problems, a few days later, after I had discussed the subject more fully with our chairman. It was released to the press after the banking holiday, for then public discussion of the perilous mortgage situation was no longer fraught with the same danger.

Subsequently I was privileged to appear before the Senate Banking and Currency Subcommittee, at the request of Senator Wagner, and testified as to the amendments essential to the home-loan bill, as introduced, which in the main embodied our theories, the farm-mortgage bond refinancing having been introduced in separate form but similar in theory.

The history of the home mortgage advisory board has been detailed here to some extent to inform the reader that its activities antedate the conception of the Home Loan Act of 1933, and that they have been as unremitting since its passage to foster this great act as they were to bring it into being.

It is also to prevent impression that the suggestions I proffer as to amendments, still necessary, are critical comments by a partially informed, partisan body, or made with any lack of appreciation of the stupendous work that has been accomplished by the Home Owners' Loan Corporation in a relatively short space of time.

I marvel that an emergency act of this magnitude, with unprecedented problems to encompass, could have been quickly fashioned to function in the remarkable way that it has in the 11 months from the date of its enactment, providing a vast highway over which the Nation of home owners and mortgageholders are traveling to their haven. It is a living tribute to democracy.

It is safe to say that over a million foreclosures have been averted because of this act and untold mortgage groups rendered solvent or so maintained, and the results of freeing into circulation $2,000,000,000 that were frozen in mortgage securities, is providing an impetus to recovery that is second only to the national morale sustained through the human and social values saved and preserved. These results stamp the Home Owners' Loan Act of 1933 as one of the most important of the entire recovery program, I believe. Under the able leadership of Hon. John H. Fahey, who assumed the chairmanship of the Federal Home Loan Bank Board in October, we have seen a truly remarkable expansion of the activities of the greatest bank with the greatest number of branches of any in the world.

Up to that date the organization of personnel and offices consumed the major portion of the time from June 13, when President Roosevelt signed the act, fulfilling his promise to bring mortgage relief to home owners in place of the gestures that had been made. This organization work was hampered by the concentrated rush of hundreds of thousands of home owners seeking relief, many with foreclosure proceedings under way; these had to be dealt with and averted by mediation until the act could function.

ABSENCE OF PRINCIPAL GUARANTY A BARRIER

The absence of principal guaranty in the act as passed proved a serious barrier in securing consents from mortgagees. At the Senate hearings, before the passage of the act, we had stressed the absolute need of principal guarantee as well as that of interest, to expedite conversion for the home owner,

since conversion was not mandatory, and to liquefy mortgageholders in order that they might then grapple more effectively with mortgage problems on properties eligible for the benefits under the act.

Happily, in January of this year, our President announced that he would ask Congress to grant the principal guaranty on home and farm loan bonds as a moral obligation. Both the Senate and the House have passed such an amendment (now in conference) and home-loan bonds have advanced, as a result, from 83 in January to over par, and consents from mortgagees, since the President's declaration, have come in literal deluge. Prior to this announcement, the consents in the Nation totaled less than 100,000; the last report of April shows over 800,000 written consents had from mortgagees. Based on the average of $2,800 per loan, this represents over $2,000,000,000, thus earmarking the entire bond issue.

AUTHORIZATION OF ADDITIONAL HOME-LOAN BONDS IMPERATIVE

Here is shown the immediate necessity for Congress to sanction the issue of several billion dollars more, for the flood of consents has only started and home mortgages total $20,000,000,000. The exhaustion of resources by many home owners with no or, at best, inadequate incomes is daily bringing into distress a new quota, for the casualties of this cataclysm have not yet been counted. The situation plainly calls for an "open-end" bond issue to be created as we recommended in April 1933 at the Senate hearings. When asked for a limit as to urban homes by Senator Townsend, I set 9 billions of dollars as to eligibility, depending upon recovery.

AMENDMENTS STILL NEEDED

While the majority of the principles and amendments advanced in my testimony were adopted fully or in part in the act as passed, there were several recommendations beside that of principal guarantee, not secured or sufficiently encompassed, that we hope may yet be adopted by amendments, classified here in enumeration of last April's submission. These suggestions were made by me as chairman of the Long Island division. This distinction lies in that the Home Mortgage Advisory Board confines itself more particularly to the fundamentals involved, while the divisions further the technical phases.

5. Appraisals to be based on valuations of 1926, plus subsequent improvements, discounted by 15 percent for the time being.

6. All homes be eligible as to valuation, with loan limit, however, not to exceed $20,000. (Valuation limit is now $20,000 in the act as passed, with $14,000 loan limit.)

9. That bonds mature in 33 years, with lower interest rate, with total annual charges not to exceed 61⁄2 percent. (Maturity is now set at 18 years in the act as passed, with interest at 5 percent and annual charges at about 8 percent or more, where grace is allowed, which is excessive and will cause widespread default.)

10. That advisory boards be set up nationally, with subdivisions of volunteer bodies to aid governmental units in social readjustments and repossession of homes possible under the act. (Included in the original Senate bill as passed, but stricken out in conference between the Houses.)

11. Survey of home needs, that reasonable control be maintained as to new home building, design and substance of construction, in order to protect existing investments against overbuilding and communities from further infection by jerry" building; to promote repairs and modernization of existing structures.

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12. Bond issue to be made open-end, to meet needs of all home owners. Two billion dollars additional bonds should be authorized at this session of Congress.

NEW PROBLEM OF THE HOME OWNERS' LOAN CORPORATION

The collection of monthly payments from home owners is the next major problem; in fact, is one already confronting the Home Owners' Loan Corporation. It is a very sensitive one and policies regarding it adopted at the outset can either make or mar this act.

Throughout my broad contact with home owners in distress I have naturally conceived ideas as to its handling. In my opinion, a department should be established at once by the Home Owners' Loan Corporation, and I would suggest it be termed "Collateral and Community Conservation", for decidedly a double goal is possible here.

STATE AND COUNTY CONSERVATORS

Under such a plan, each State agent would appoint a "collateral and community conservator", whose duty it would be to conserve collateral behind home-loan bonds by devising and putting into operation various plans to stimulate mortgage payments, differing, as widely as possible, from standard collection methods, habitually used by the average mortgage holder, which during 1930, 1931, and 1932 all but destroyed home ownership.

The "

conservator" would, in a sense, coordinate and serve the corporation as a public-relations man. He should at all times recognize that where extensions of time are granted that eventually there must be a reckoning. However, let it be duly anticipated, say, in the next 12 or 18 months, or 2 years, according to the speed of national recovery.

In the act as originated, a 3-year automatic waiver of principal payments from its date, provided the borrower was not in default otherwise, was shaped to meet the needs of those people not struck by the blight of unemployment, but with lowered incomes. The provision as to "extension of time as to payment of mortgage indebtedness" was fashioned for those who were out of employment, with other resources exhausted, and therefore could not meet even interest or tax payments for the moment.

It is not at all difficult for thoughtful people, in times like these, to realize that an amortizing plan of mortgage repayment would prove a source, ranging from great embarrassment to impossibility, to the majority of home owners during the first slow stages of convalescence that our Nation faces.

THREE-YEAR WAIVER OF PRINCIPAL PAYMENT SHOULD BE RETAINED

Therefore, I regret that the waiver of principal payment introduced by Senator Robert F. Wagner on the Senate floor was stricken out from the act by recent amendment. To force home owners, who need relief for the time being only as to principal payment, to apply for an extension of time will considerably clog the administrative works in its duties to determine justification.

The necessity of seeking accommodation may tend to discourage the individual who might otherwise make a supreme effort to meet interest and tax payments, rather than apply for relief, and possibly lead him to disregard making such an effort, since he would have the humiliation of applying as a delinquent for an “extension of time" in regard to his principal payments. Psychologically, it has always been proven a good idea to preserve and harness true pride constructively.

However, this situation is not irremediable, since the board has the right to "extend the time of any and all payments" still reserved to it. I believe that a plan should be worked out whereby the conservator should require every home owner seeking relief to make a written, self-respecting statement, as to his ability to pay; let it be over an affidavit and on honor as well as oath. Let the corporation grant him, after private investigation, an annual waiver of principal payment in whole or in part, as circumstances warrant; a fresh statement to be submitted at the end of the year, or sooner, on the honor plan, whenever an improved financial status is gained by the beneficiary.

THE SUBSTITUTE FOR FORECLOSURE

When urging the necessity of including this "extension of time of payment" in the act of 1933, I frankly stated that in my opinion only 50 percent of crippled cases would find their own restoration at the end of the grace period provided, but that no one was wise enough to determine how what troubled cases would eventuate in that fortunate category. The defeated 50 percent I pictured as finding themselves in oversized homes, calling for oversized annual charges, impossible then of yielding to them the happiness that had been the base of their purchase.