Mr. COFFEE. How much would the secretary-treasurer be able to make?

Mr. BLACK. It would depend entirely upon what the income of that association was, and that would depend upon the volume of loans. I do not think one could generalize.

Mr. COFFEE. What happens to the borrowers who own stock in these local associations?

Mr. BLACK. Their stock would be paid in full.

Mr. COFFEE. How much money would that cost to retire all of the stock?

Mr. BLACK. Very little actual cash, because the stock is all paid for by borrowers, by increasing the size of their loans, and it would be merely a cancellation of stock and cancellation of a corresponding amount of face value of the loans.

Mr. COFFEE. Of their indebtedness?

Mr. BLACK. Yes.

Mr. COFFEE. What would that amount to?

Mr. BLACK. Around $113,000,000.

Mr. COFFEE. In other words, the Federal Government would be called upon to subsidize that expense?

Mr. BLACK. No, it would be a bookkeeping transaction, a bookkeeping transaction entirely, because the capital stock would be wiped out and a corresponding amount of loans would be wiped out. It would appear as a credit on the farmer's loans. If he had a $10,000 loan with $500 of stock in the association, the amount due on his loan would be reduced by $500.

Mr. COFFEE. New loans that are to be made would be in the discretion of this local committee drawing $3 a day for their services? Mr. BLACK. It is recommended there in the first instance, as they are now, and all loans would be appraised and made by the bank. Mr. COFFEE. But they would have no financial interest in seeing that that loan was properly made?

Mr. BLACK. They would have no financial interest in it, no.

Mr. COFFEE. In the event that these loans were made excessively high, the Federal Government would be called upon to subsidize the Federal land banks to a larger extent than now on the losses that accrue. Do you not think there is a possibility that in the event Congress should refuse to vote further subsidies, this whole system under this proposal might fall?

Mr. BLACK. That has been true from the time it was first started. I think it would be no more true now than it was then. The system has been heavily subsidized from the start.

Mr. COFFEE. But at the present time every local association, all the farm borrowers, have an interest in the local associations, and as a consequence they try to safeguard the Federal Land Bank System in order to preserve their own investments in their local association, and when that financial interest that they now have is eliminated, it seems to me that that would open the way for unsound loans to be made, and greater losses would occur.

Mr. BLACK. That is the principle of the present system. In actual practice there are relatively few loans that are reduced by the local association to a point below what the bank would have been willing to loan. The keyman in keeping the value of the loan at the right level is the appraiser, and in a very large proportion of cases, I do not

know what percentage, but extremely high, the appraiser's recommendation is below that of the local association's recommendation. Mr. COFFEE. On what percentage of the value of the land would the loans be made?

Mr. BLACK. There is no change in that. The land-bank loans would still be made for 50 percent of the value, plus 20 percent of the building value, and commissioner's loans would be made up to 75 percent.

Mr. COFFEE. But, as I understand it, the commissioner loans would be made and amortized on the same principle and the same basis as the Federal land-bank loans and at the same rate of interest, and that the loans would be made for 75 percent of the value?

Mr. BLACK. They could be.

Mr. COFFEE. Would the intention be to carry the two loans? What would be the object in providing for both loans in the event both are the same and both handled in the same way?

Mr. BLACK. I think that is a point that the committee should consider, certainly, because we see no essential difference in the organizations. Doubtless some economies could be made and perhaps some efficiency gained by consolidating the banks and the corporation and making a single corporation.

Mr. COFFEE. What is the cost at the present time of administration and providing for losses on Federal land-bank loans?

Mr. BLACK. The administrative expenses, as I recall, total of about $21,000,000 per year for the two institutions, that is for the 12 Federal land-banks and the Federal Farm Mortgage Corporation.

Mr. COFFEE. Could you give us that in percentage, as to the loans outstanding? I notice you provide here in this bill that the margin shall be only 1 percent.

Mr. BLACK. The expenses were fifty-four hundredths of 1 percent. Mr. COFFEE. That is the administrative expense?

Mr. BLACK. Yes. The losses were twenty-seven hundredths of 1 percent losses actually charged. The estimated losses on real estate held was two-tenths of 1 percent. The actual margin between the interest rate on loans outstanding and the interest paid was 1.56 percent.

Mr. COFFEE. That is the margin?

Mr. BLACK. Between the actual bond rate and the actual interest rate. This applies to the land banks.

Mr. COFFEE. Over what period?

Mr. BLACK. This is for organization to date, through 1939. That is what they have averaged from the organization.

Mr. COFFEE. And your total expenses run about eight-tenths of 1 percent?

Mr. BLACK. Expenses fifty-four hundredths and losses twentyseven hundredths, and the estimated losses two-tenths. So that would be eighty-one hundredths of 1 percent for expenses and actual losses, and two-tenths of 1 percent is estimated further losses.

Mr. COFFEE. Could you give the percentage during the last 10year period?

Mr. BLACK. I could, but I do not know that we have it right here. Mr. COFFEE. Or any recent period.

Mr. BLACK. We can place that in the record.

Mr. COFFEE. I think that would be advisable.

Mr. BLACK. Probably you want it currently too, as well as average?

Mr. COFFEE. I think that would be desirable. Have you similar information as to the land-bank commissioner loans?

Mr. BLACK. Yes; we have similar information on that. We could put that in the record also.

(The statements follow:)

Analysis of operating margin of Federal land banks

1 Percentage calculations are based upon average first-mortgage loans, purchase-money mortgages, and real-estate sales contracts outstanding during period.

2 Loan fees, interest on investments, and net gains on securities transactions have been excluded from this item.

3 From interest on bonds and notes there has been deducted the total interest received on investments and net gains on securities transactions.

Analysis of operating margin on farm-mortgage business of Federal Farm Mortgage Corporation

[Excludes interest income on consolidated farm-loan bonds purchased or exchanged, and notes, together with the interest expense on an equal amount of Federal Farm Mortgage Corporation bonds]

1 Percentage calculations are based upon average first-mortgage loans, purchase money mortgages, and real-estate sales contracts outstanding during the period.

Loan fees, interest on investments, and net gains on securities transactions have been excluded. The remainder consists of interest on mortgage loans, purchase-money mortgages, contracts and other items and miscellaneous income.

8 To interest on bonds and notes has been added net losses on securities transactions less interest received on Federal intermediate credit bank debentures.

Mr. BLACK. For the period from January 31, 1934, through December 31, 1939, on the mortgage corporation operating expenses, losses on mortgage loans and real estate, and reserves against real estate owned outright, at the end of the period averaged about 3 percent per year of the amount of loans outstanding during the period.

Mr. COFFEE. Inasmuch as that averages approximately 3 percent, do you think that the 1 percent margin is sufficient, as provided in this bill, to make the organization self-sustaining?

Mr. BLACK. That is on the commissioner's loans. I really do not know.

Mr. COFFEE. This bill, as I understand it, would provide substantially that they could loan 75 percent of the value of the security.

Mr. BLACK. Essentially it would; yes. As a matter of fact, of course, the loans do not average nearly 75 percent, but about 80 percent of the land bank loans are made with some amount of commissioner loans.

Mr. COFFEE. One more question in connection with the local Federal land-bank associations. In some of these associations, their capital is unimpaired. Is not that the situation with a number of them?

Mr. BLACK. There are some associations with capital unimpaired; yes. A considerable number, about 1,325 out of 4,000

Mr. COFFEE. Can you give me the approximate number of associations whose capital is impaired to the extent that their stock is practically worthless?

Mr. BLACK. Do you want it in number or in percentage?

Mr. COFFEE. I think perhaps in percentage would be better.

Mr. BLACK. One-third of the associations have no impairment; 32 percent are impaired 100 percent or over; in between that, 5 percent are impaired 5 percent or less, 4 percent from 6 to 10 percent, 6 percent from 11 to 20 percent, 4 percent from 21 to 30 percent, 6 percent from 31 to 50 percent, 5 percent between 51 and 70 percent, and 5 percent between 71 and 99 percent.

Mr. COFFEE. The effect of this bill would be to reimburse those stockholders in associations that are impaired 100 percent, to the same extent that it would the stockholders in the associations with no impairment of capital?

Mr. BLACK. That is right. That would be the effect of it.

Mr. ANDRESEN. Dr. Black, how long has it been the policy of the Department to add onto the principal the amount of the debentures or the amount of stock that the borrower was required to take?

Mr. BLACK. You mean to the amount of the loan? That was done from the start. Almost never has the stock been subscribed for by a payment in cash. The loan is merely increased by that amount. Mr. ANDRESEN. As I understand it, you loan 50 percent on the land?

Mr. BLACK. Yes.

Mr. ANDRESEN. Twenty percent on the buildings?

Mr. BLACK. Yes.

Mr. ANDRESEN. And then am I to understand that they have added on the 5 percent amount of stock?

Mr. BLACK. No; it is included in the loan. Suppose a farm is worth $20,000. The man wants a $9,500 loan. He needs $9,500. The loan would be written for $10,000, and that additional 5 percent

would be the amount necessary to purchase the stock. That has been almost the invariable practice from the beginning.

Mr. ANDRESEN. That is the first time I have ever heard of that practice. Ordinarily out in Minnesota and through the St. Paul Federal Land Bank they have taken 50 percent of the land value, 20 percent of the buildings. Then when the farmer paid for the stock it was deducted from the principal sum, and if it was a $10,000 loan, they held out $500.

Mr. BLACK. That is what this amounts to.

Mr. ANDRESEN. So it was not, in fact, added on?

Mr. BLACK. You can look at it either way. If he applied for a $10,000 loan, then the $500 would be deducted and he would get $9,500.

Mr. ANDRESEN. Is that the practice now when loans are made?
Mr. BLACK. Yes.

Mr. ANDRESEN. Are any loans being made at the present time? Mr. BLACK. Yes, they are being made at the rate of $50,000,000 a year by the land banks.

Mr. ANDRESEN. The Federal land bank or farm credit system, principally the Federal land bank, has been a separate institution until it was transferred to the Department of Agriculture? Is that correct? Mr. BLACK. No; it was separate until 1933 when the Farm Credit Administration was established. Then it with other loaning agencies was placed under the Farm Credit Administration.

Mr. ANDRESEN. But it still maintains its identity as a farmerowned and farmer-controlled agency?

Mr. BLACK. No more than at present.

Mr. ANDRESEN. The Federal land banks?

Mr. BLACK. No more than at present.

Mr. ANDRESEN. Well, the farmer borrowers and stockholders elected the majority of the members of the board of directors. Mr. BLACK. That is still the case.

Mr. ANDRESEN. And control the policies?

Mr. BLACK. That is correct.

Mr. ANDRESEN. Or at least determined the control of the policies. Mr. BLACK. Yes, sir.

Mr. ANDRESEN. Has there been any change in the policy of the administration of the Farm Credit Administration since it was taken over by the Department of Agriculture?

Mr. BLACK. No.

Mr. ANDRESEN. Do you have any requirements now in connection with new borrowers who make application, that they must comply with the A. A. A. program before they can get a loan?

Mr. BLACK. Not the slightest.

Mr. ANDRESEN. And you do not anticipate that any such policy will be put into effect?

Mr. BLACK. No, sir.

Mr. ANDRESEN. We have had considerable difficulty out in our section over the administration of the St. Paul Federal Land Bank. You have not, of course, been in the organization so very long, and may not be familiar with it, but during the last 3 or 4 years it has been very difficult for any legitimate borrower to get consideration from the St. Paul Federal Land Bank. I notice that some of the members of the committee here are making similar complaints, and