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Mr. HOPE. How do you figure that? You are giving a lower interest rate than the present law provides, yet you say the subsidy would be less. What is the basis for that estimate?
Mr. BLACK. That is due to a later provision in this bill, which requires that certain 4-percent bonds now outstanding in the hands of the Farm Mortgage Corporation be retired and replaced by lowerinterest-rate obligations; also under present law the subsidy is the difference between the loan contract rate and the statutory reduced loan rate; under this legislation the subsidy is the amount of the annual interest on bonds in excess of 2 percent per annum.
Mr. HOPE. Which section is that?
The CHAIRMAN. I wonder if it would not be wise to let the witness go on through the bill with his explanations? I think we will dodge all around if we do not. I think it would be better to have a brief explanation right on through without interruption, and the members make notes and save their questions till he concludes. All this will have to be gone into in detail, and I think some of the questions might be answered by the later provisions of the bill.
Mr. BLACK. Section 3 provides for the guaranty of farm-loan bonds, both as to principal and interest, by the Federal Government. There is one question that should be raised in connection with that section, and that is whether it is desired to have joint-stock land bank bonds still outstanding so guaranteed. I would infer, from the general wording of the bill, that that was not the intention, but if it is not the intention, probably a statement to that effect should be included in that section.
The CHAIRMAN. All right. Just go on through the bill and let us get a general picture first and then we will go back to the various items.
Mr. BLACK. Section 4 deals with the refinancing of farm-loan bonds. That is the matter that you have raised, Congressman Hope, the withdrawal of the 4-percent bonds from the Farm Mortgage Corporation.
Section 5 abolishes the stock liability of the national farm-loan associations on stock held in the Federal land bank.
Section 6 provides for the retirement of such capital stock held by national farm-loan associations or by direct borrowers from the bank, and provides likewise for cancelation of the stock held by farmer borrowers in the farm-loan associations themselves.
Section 8 has to do with the duties and future organization of the national farm-loan associations.
The next section has to do with the setting up of certain farm-debtadjustment committees. These committees can be appointed separately or the board of directors of the national farm-loan associations may serve in that capacity.
The latter part of that section has to do with the adjustment of debts incurred for the emergency crop, feed and seed loans that have been made to farmers over a period of some twenty-odd years, some of which have not been paid; they are still obligations of the farmers who
may have borrowed the money some 20 years ago and have not been able to repay it.
Mr. Doxey. Could I interrupt you right there? And the reason I do that is I want to mention the bill introduced by Senator Wheeler and now before our subcommittee We have not had a chance to go into it thoroughly. Does that bill make any recommendations with reference to that type of obligation? I do not know whether you are familiar with the Wheeler bill or not, but that is a bill dealing with that problem.
Mr. BLACK. The Wheeler bill as it was introduced last summer is incorporated in all its essential aspects in this bill. The question that you asked was also included in the Wheeler bill of last summer.
Mr. Doxey. And you have the same provisions in this bill that are in the Wheeler bill?
Mr. BLACK. Yes, sir.
Mr. BLACK. His whole bill has been incorporated in this one, practically as it was written last summer.
Mr. Doxey. Well, you understand the Wheeler bill I am talking about is the one that provides for the cancelation of those loans that the Farm Credit has made out through the drought-stricken area.
The CHAIRMAN. That is a different proposition.
Mr. Black. Yes; that is the one that is referred to here in paragraph (c) of section 9.
Mr. Doxey. The reason I interrupted you is I have not read this bill, and I just wanted to get it clear in my mind whether this bill specifically referred to was incorporated in the Wheeler bil
Mr. Black. For those dates; yes; and particular bills; that is correct.
Section 10 has to do with the refinancing of mortgages of any farmer who may be indebted to the land bank or Farm Mortgage Corporation and provides machinery whereby farmers who have excessive debts may get that debt adjusted.
Section 11 has to do with a part of the mechanism for doing that,
Section 12 has to do with certain leasing arrangements. A summary of this section, as I visualize the operations, would be something like this: A farmer who has an excessive debt, who has been unable to pay the debt, or possibly could not pay it, would apply to his local debtadjustment committee, which might be the farm-loan association. If the farm-loan association, after examining him, his character, and capacity to carry a debt, would recommend that the debt actually was too high and that no farmer under ordinary circumstances and under average conditions could be expected to succeed with that debt load, the farmer would deed his farm to the Farm Mortgage Corporation, relinquishing all ownership in it, and the farm then would be leased back to him with an option for purchase at the close of any particular period of time up to 5 years. At the end of 5 years, presumably the productive value of the farm would be established. If the farmer had demonstrated during the leasing period that he had the capacity to carry on and regain ownership of the farm, a repurchase price would be agreed upon, he would again become the owner of the farm.
That, very briefly, is the provision of the last section of this bill.
One of the later sections also provides that the payment of any obligation or indebtedness described in the preceding section may be made upon a so-called "variable payment plan,” in which the actual payments made each year would represent a share of the crop, rather than a fixed amortization payment.
Section 15 provides for the reamortization of Commissioner loans up to 40 years.
Section 16 provides that deficiency judgments will not be taken except in cases of willful or negligent action on the part of the mortgagor. The final sections of the bill are the customary penalty provisions.
The CHAIRMAN. I understand, Dr. Black, the thought it that as fast as they are called, the outstanding land-bank bonds will be superseded with new-type bonds?
Mr. Black. Yes, there are no bonds immediately callable. The first issue is callable in 1943, and others up to 1946.
The CHAIRMAN. They are all callable not later than 1946?
The CHAIRMAN. Of course, when they are all called and other bonds issued, the amount of the subsidy would be decreased.
Mr. BLACK. Our accountants estimate, from a hurried study, that after the refunding operations were carried through, and after 1946, assuming that the bonds could be refunded at present current interest rates, there should be sufficient income to carry the operations of the banks without subsidy. Of course, there is one chance that is being taken: If interest rates do not remain low and it becomes necessary to refund on a higher basis, while in the meantime the loans have been rewritten on a basis of 3 percent, there is some hazard being assumed.
The CHAIRMAN. But in any event the subsidy would be much less than the present.
Mr. Black. I should think so; yes, sir.
The CHAIRMAN. Are there any further questions by members of the committee?
Mr. HOPE. I have not found anyone yet that knows what the interest rates on Government obligations are going to be in 1946, or any time thereafter.
Mr. BLACK. No, that is correct; no one can predict that with certainty.
Mr. HOPE. We really do not know anything about it, then, do we, so far as knowing what it might cost the Government after that time?
Mr. BLACK. Not with 100 percent certainty. That is the situation that has always faced the land banks anyway. It so happens they started in the early days with what seems now a very high interest rate, and made a lot of loans at that rate. They have been able to refinance during the past 20 years at lower rates, with the result that they have been able to get a somewhat larger margin than was contemplated by Congress when the act was originally passed. The average margin in the banks now is about 172 percent instead of 1 percent, which Congress contemplated when the bill was origihally passed. That was due to the fact that many loans were written at 5 percent, and then later the bonds were called and refinanced at somewhat lower rates. But it is true that no one can predict with certainty what the rates on Government obligations will be in 1946.
Mr. HOPE. Has the Treasury Department been consulted about that angle of the matter? Have they participated in the writing of this bill?
Mr. BLACK. So far as I know, they have not.
Mr. HOPE. Is this a departmental bill from the Department of Agriculture? Mr. BLACK. No, sir. Mr. HOPE. Was it written down there? Mr. BLACK. No, sir.
Mr. HOPE. Does it have the approval and endorsement of the Department of Agriculture?
Mr. BLACK. The bill has not been considered from that point of view, and that is why I want to refrain from approving or disapproving it. I do not know what report the Department would make on it, if the Department is asked for a report.
Mr. Hope. And you are not today either approving or disapproving? Mr. BLACK. That is correct.
Mr. HOPE. And it has not been submitted to the Bureau of the Budget either for a report?
Mr. Black. No, sir; the Department has not been asked for a report on it by the committee. When it is so asked, it would naturally refer it to the Bureau of the Budget.
Here is one feature of the bill that I think the committee should be completely aware of. It does represent a break from the old theory of financing farm mortgages. It eliminates the stock held by farmer borrowers and changes the long-standing procedure from that of obtaining loans from an organization in which farmers have a certain financial interest, to a 100-percent Federal loan.
Mr. PIERCE. Then the borrowers get the full amount of money? Mr. BLACK. Oh, yes.
Mr. HOPE. But it does away entirely with the cooperative features in the present Federal Land Bank System, does it not?
Mr. BLACK. So far as the stock ownership in the banks is a cooperative aspect, it does; yes.
Mr. HOPE. That is, the borrowers have no interest whatever in the land bank?
Mr. BLACK. They would have no financial ownership interest in the institution.
Mr. FLANNAGAN. Doctor, does this bill attempt to cover the whole Farm Credit structure? Mr. BLACK. No; it would not, as it is written. It has no bearing
. at all upon the cooperative banks, upon the production credit associations or upon the intermediate credit banks. There would be no change whatever in the operations of those institutions. It would involve a complete recasting of the Land Bank System.
Mr. FLANNAGAN. Does it tend to put the emergency crop-seed loan in?
Mr. Black. It is not mentioned in the bill
Mr. FLANNAGAN. What I had in mind, it looks to me like there is an overlapping of activities between the rehabilitation loans and the emergency seed-crop loans, and those activities ought to center in one department.
Mr. BLACK. There has been discussion of that for at least 2 years that I know of. Last spring, a year ago, I think, or thereabouts, the Farm Credit officials felt that it would be desirable to consolidate those activities, but there are certain objections to it, and consolidation is not contemplated at the moment.
Mr. FLANNAGAN. What position would the local farm-land bank associations have in this case, under this bill?
Mr. BLACK. Well, it is a little difficult to be sure exactly how they would develop, but the way I read this bill they would do almost exactly what they do now; that is, take applications, and make recommendations for loans. They would assist in the closing of the loan.
They would assist in collections, and in the refinancing program contemplated by this bill. Nothing is to be done without specific recommendation of the local committee.
Mr. FLANNAGAN. Would it get rid of some of this high-handed stuff that the Federal land bank has been pulling off on the local associations?
Mr. Black. Well, I do not know just what you mean. (Laughter.]
Mr. FLANNAGAN. Well, I can give you plenty of instances where they just overrode the local associations, telling them if they do not do so and so, they will just be wiped out, cut off the pay of the secretary treasurer and just operating in a high-handed manner, down in my district. I think the same thing prevails in other districts.
Mr. BLACK. The income of local associations, as I read this bill, would certainly not be less than it is now. I think that this bill contemplates that they would actually be doing more than they are now, and if they do more than they are now, they will have to receive compensation for it.
Mr. FLANNAGAN. Well, I want to see those local associations remain in the picture.
Mr. BLACK. They would have to remain in the picture under this. Certainly in any Nation-wide plan the local associations are extremely helpful. The Department has found that out in connection with the administration of the A. A. A. program. It is impossible to administer a wide-flung program without strong local organizations.
Mr. FLANNAGAN. Does this bill give the land banks additional power over the local associations?
Mr. BLACK. No; I would say that it does not.
Mr. COFFEE. Dr. Black, did I understand you to say that the local associations would have more power under this bill?
Mr. BLACK. It would appear to me that they would be doing more things under this than they are at the moment.
Mr. COFFEE. What interest would members have in the local associations or these local committees? What interst would they have in the local farm loan associations if their stock was retired and paid for?
Mr. BLACK. Only the same type of interest that they would have in any association during this kind of work. They would receive payment for their services.
Mr. COFFEE. What would they be paid?
Mr. BLACK. The bill provides for certain payments to the committees, and the banks have always paid the local association for certain work, such as collections and servicing of farms owned.
Mr. COFFEE._$3 a day is what is provided, is it not?
Mr. COFFEE. Do you think you could get anyone who is competent for that amount of money to take an interest in making sound loans and making collections on loans?
Mr. BLACK. The association, of course, has never done that. The secretary-treasurer has done that and the income provided in this bill would not be less than it is at the moment, so they would have sufficient money, I presume, to employ a secretary-treasurer.