Mr. RIEFLER. Yes. In approaching this problem of new construction, especially in the residential field, the debt problem looms very hard. We went through a building boom from 1922 to 1929, in which we added enormously to our mortgage debt. That building boom was not financed in a sound way. In general the mortgages were not amortized mortgages. They were not the kind that are self-liquidating, that pay themselves off. They were frequently renewal mortgages, 3 to 5 years. People expected not to pay them off, but to renew them by refunding in the market. They had high charges and the cost of renewing them when they did come due was very high. The result was that while conditions were good the debt burden increased, and then when the depression came the lenders became excited about the value of their security and asked for heavy curtailments at the very time when people were least able to curtail. It was the sort of financing which is bound to develop into a very serious crisis.

As a result of that the mortgage market froze around 1930 and 1931. It was impossible to renew mortgages in general in the market. They had to be renewed by the existing creditors, and the whole thing collapsed.

Now we feel that if we are going to get new construction started where and when and as it is needed we will have a facilitate the introduction of a mortgage instrument which will be the soundest thing in the market, the most approved standards, which will be amortizing and paying off. We would like to create a market for that kind of mortgage.

Senator COUZENS. Is not this plan, though, adding another billion and a half to the debts of the Nation?

Mr. RIEFLER. It is adding a billion and a half to the debts or the credits of the Nation. As I like to phrase it for myself, a debt and a credit are both the same thing, the same sort of legal transaction. If a borrower has borrowed more than he can pay it is a debt. It is not economical. It does not regenerate activity. If he is borrowing what he can repay, it becomes a credit; if it adds to the wealth of the Nation it gives employment.

Senator COUZENS. Yes; but in that connection may I ask, have you any information as to the sum total of debt reduction since the depression began?

Mr. RIEFLER. In this field, no; not a great deal. It is very difficult to get it. That is the purpose of the intensive survey of the real property inventory organization. That material will be available in the midsummer, in which we will have extremely accurate figures on that, much better than we have ever had before.

Senator COUZENS. Since the depression have you been able to, in your large past experience, determine the difference between credit and debt?

Mr. RIEFLER. The difference between credit and debt shows up when the difficulty begins.

Senator COUZENS. That is what I am getting at. What I am trying to do now is to indicate the difference between credit and debt at this particular time.

Mr. RIEFLER. No; I have not.

Senator COUZENS. You have no facts, however, to indicate what the proportion would be?

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Mr. RIEFLER. No; we have not.

Senator COUZENS. Is there any way of getting at that?

Mr. RIEFLER. It would be very difficult to do it. It is a qualitative judgment. It would be very difficult to do it statistically.

Senator COUZENS. There does not seem much use then to make a segregation between credit and debt if you cannot tell us now.

Mr. RIEFLER. I think that is really the basis for the credit standards that Mr. Deane was describing to you. If the credit is advanced of the type and condition which is shown that it can be repaid, it does not get into difficulty. That certainly is credit.

Senator BARKLEY. But the credit feature of it passes out of the picture before the debt may pass out. As long as it is employing men and buying material it is a credit, but after that it is absorbed and exhausted and it is debt without credit.

Mr. RIEFLER. Not if it is really improving property and giving use. Senator BARKLEY. Well, possibly that is true.

Mr. RIEFLER. Yes.

Senator COUZENS. But when payment stops it becomes then a debt instead of a credit; is that right?

Mr. RIEFLER. No; I say it is a debt when the payments become onerous and burdensome.

Senator WAGNER. As a result of renovation the upper floor is rented at a higher rent and it is easy to pay up and liquidate it. Mr. RIEFLER. Yes.

Senator COUZENS. That has not been our experience over the last few years. That is what I am trying to get at.

Senator WAGNER. That has not been done over the last few years. Mr. RIEFLER. Yes; these figures show a perfectly enormous demand for modernization and renovation. It is also perfectly clear that a great many people are not in a position to assume this year, certainly, the debt burden of doing that. There are many reasons. This program is designed for those who can provide that activity this year to facilitate their undertaking their modernization and renovation. Those that cannot and should not will get added jobs by this and will probably be unable to undertake it the next year or year after.

Senator BARKLEY. In addition to that, if we can assume that the amount of the debt incurred in improving property adds that amount to the value of the property, then the debt and the credit cancel each other out.

Mr. RIEFLER. Correct.

Senator BARKLEY. And according to the doctrine of compensation of Emerson, nothing is ever lost anyway. It is not always true financially.

Senator ADAMS. How far in your consideration did this element enter into it? That is, many people during the boom days overbuilt. They built homes and they built buildings which they could not afford even though they continued their then income and their then employment.

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Mr. RIEFLER. Yes.

Senator ADAMS. How far does that enter into your calculation? Mr. RIEFLER. That is why we feel that the demand for new construction at the present time is local and spotty. At every point

this is safeguarded so that that will not remain. What we want to do is to create conditions in which the building industry can go ahead and provide higher standards of residential facilities on a sound basis to people who can afford it and at costs and prices which they can afford to pay, and we will not get a resumption of that kind of unsound and speculative building cycle.

Senator ADAMS. It is very difficult to meet the problem of the man who has put more into his home than he can possibly pay out. He cannot avoid the depreciation. He cannot meet it.

Mr. RIEFLER. No. To make new mortgage money effective, and to get resumption of activity in the mortgage market, we are proposing to set up an insurance feature to insure the lender on the best type of home-mortgage instrument. These will be model home mortgage instruments, and not distress instruments. In other words, any lender will be able to apply for insurance of a home mortgage which comes within the standards set up. The standards are designed to be the highest type.

In the first place, the lender himself must be one who is satisfactory to the board that is running this. We want to be sure that the lenders are accredited institutions who are capable of servicing a loan properly, and who are not engaged in speculative building.

In the second place, the mortgage itself must be a home mortgage on an owner-occupied home, except for the slum-clearance features which I will describe later. But the general residential home mortgage must be a home mortgage on an owner-occupied home, in which the owner also meets the sound credit standards, similar to those Mr. Deans described in connection with the rehabilitation-credit instrument.

In the third place, it must be an amortized mortgage. It must provide in its terms for a complete repayment over a period of years, so that it will not come up for renewal and it will not be subject to renewal charges of any kind. That is, the owner gets the mortgage and agrees to pay it off. You would remove from the mortgage market the problem of meeting maturities and renewals, and also from the borrower the expenses and fees that go with that. Finally, because of its insurance feature, because it is an insured mortgage, the interest rate must be lower than now is prevalent in the market. In general we think that this type of mortgage, particularly in the East, where mortgage money is more plentiful, will sell for around a 5-percent interest rate. In certain sections of the country, where money is scarce and mortgage rates are particularly high, we are permitting it to pay as high as 6 percent.

Senator ADAMS. What type of charge, if any, will be made for the insurance?

Mr. RIEFLER. The insurance feature is worked out on a net cost to the borrower. This insurance does not cost the Government anything, except that the Government underwrites the whole transaction. What happens is that the borrower will pay to the lender, who will transmit on to the insurance corporation a charge of usually 1 percent on the original outstanding value of the mortgage each year. That will be segregated in a separate insurance fund. That is a very high insurance rate, but it will be segregated in a separate insurance fund with the insurance premiums of other mort

gages of similar risk characteristics, the same year of maturity, the same general residential type of property, and the same general locality, and the same appraised value of the property, so that the risks will be segregated. Any loss on the fund will be charged against that particular segregated risk fund.

Senator ADAMS. Though there may not be a liability on the whole fund for that.

Mr. RIEFLER. Yes. But when the mortgages in that fund have been paid off, the excess is turned back to pay off the indebtedness of the borrower, so that he is paying a high rate for his insurance and getting it back. It is a mutual principle.

Senator ADAMS. It is a dividend.

Mr. RIEFLER. He gets a dividend back. That high rate is for the protection of the Government, but in the end it is no more than the actual cost of the insurance. The way this would work is that any lending institution can apply for this insurance on their prime loans. They bring it in, and the mortgage must conform to these requirements-amortization in not more than 20 years; an interest rate in general of not more than 5 percent, although 6 percent will be allowed in those localities where the mortgage market demands it. The property must be of a kind which is beneficial to the market and does not lead to overbuilding in a particular area. The borrower must be an owner-occupant who is of good financial standing in relation to his loan. If that happens, they can insure the property with this Government insurance corporation. The borrower will pay to the lender-the whole insurance is between the lender and the corporation-the lender and the borrower maintain all of their existing relations, except that the mortgagee turns over to the insurance corporation the insurance premium each year. If the property gets into default, the lender can still foreclose or defer foreclosing, as he does at present. There is no compulsion on him to realize on the insurance fund,

If, however, he decides to realize on the insurance fund, he must turn the property over to the Government corporation free and clear, and will thereupon receive a debenture, guaranteed by the Treasury, carrying not more than 3-percent interest, and due 3 years after the mortgage would have matured. In other words, we are not insuring lenders so that they can make money turning over bad loans. They do not get the full insurance out of it.

Senator ADAMS. You are insuring the principal and not the interest.

Mr. RIEFLER. We are insuring the principal and a low rate of interest, enough to cover their reserves, but not enough to make it a profitable operation. At the same time, that debenture which is turned over will be for the principal of the loan as of that date, if it were amortized and paid up to that date, plus permitted outpayment by the mortgagee for taxes. If he has carried taxes for a year or two, and has had permission of the corporation to carry taxes, that might also be covered into the face of the debenture.

Senator ADAMS. Are those details worked out in the bill or are they the plans?

Mr. RIEFLER. These are the plans. These are the rules and regulations. At the same time the mortgagee will submit a certificate of

claim for his extra expenses in connection with foreclosure, and when the property is sold by the insurance corporation, or realized upon, they will honor those certificates of claim if the property gives enough to honor them, and if it does not, they will still honor them up to their own participation in the sale. Suppose a property is mortgaged for $15,000. The mortgage is insured for $10,000. After 5 years this mortgage becomes delinquent. It is then amortized down to, say, $8,000. The mortgagee turns the property over to the corporation and receives a debenture for $8,000. He also puts in a claim for $800 additional costs of foreclosure and expenses incurred in connection with the foreclosure. He will get, on turning over the property on this insured mortgage, a debenture yielding not more than 3 percent and maturing 3 years after the mortgage would have matured-that is, in that case maturing in 18 yearsfor $8,000. He will also get a certificate of claim for $800.

If the property is sold for $9,000, the insurance fund reimburses itself for $8,000, honors the certificate of claim for $800, and turns $200 over to the original owner. If the property should be sold for only $6,000, however, and the insurance fund takes a loss, they would then honor that certificate of claim for only $600 instead of $800. They would honor it out of the insurance fund, but prorate it with their own participation.

Senator ADAMS. It is not wiped out like a second mortgage.

Mr. RIEFLER. No. The purpose of that is to prevent this insurance from inducing mortgagees to foreclose immediately on any technical delinquency. It is worked out in such a way that the mortgagee gets the same protection if he does not foreclose on a technical delinquency that he would without the insurance, but he also has no protection against carrying an unsound loan too long.

Senator ADAMS. Then you are not providing a Government guaranty for the loans, but an insurance fund.

Mr. RIEFLER. That is it. It is completely an insurance fund. We are proposing that in the case of new construction these loans be insured for 80 percent of the appraised value of the property. That is to eliminate the second-mortgage market. One of the worst features of the speculative boom was the financing of homes through second-mortgage financing, because we could not give our sound trustee institutions a mortgage to cover the complete financing that was sound enough for them to carry. That meant we had a plethora of money for financing at high costs during good times, and when the crash came even good propositions could not be financed, because there was no second-mortgage money. So we feel that it is very much sounder to have all the financing, both that customarily carried by first and second mortgages, in one instrument, and have the borrower pay a premium sufficient to insure the instrument and carry the risk of that second-mortgage financing.

In the case of existing mortgages the bill proposes that the soundest of existing mortgages can also come into this, because we want to get movement and liquidity into the mortgage market. But they can come in at only 60 percent of the appraised value, under the same plan. However, it would not include the 80-percent principle which would cover the second-mortgage financing.