savings resulting from refunding operations and because of a reduction in bonds outstanding. Property expenses, however, rose by $9,324,417 due to the increase in property owned. The larger property expenses were mainly responsible for the slight increase in total operating and other expenses. Property income exceeded property expenses by $3,192,239 during the year.

After provision for losses in the amount of $34,921,056 during the year, the deficit for the operations of the fiscal year 1939 was $18,517,548 as against $19,847,666 in the preceding fiscal year.

Cumulatively from the beginning of operations to June 30, 1939, the total operating and other income of the Corporation was $699,782,645, and total operating and other expenses $612,121,506, leaving a net income-before deduction of losses in the liquidation of assets and provision for losses which may be sustained in the process of liquidation-of $87,661,139. After deduction of $147,223,168 for such losses and loss reserve provisions, the net deficit as of June 30, 1939, stood at $59,562,029.

As was pointed out in previous sections of this report, the Home Owners' Loan Corporation, in an emergency operation of unprecedented magnitude, refinanced more than one million mortgage loans which had been in default or at the point of default. From the outset, it was to be expected that a number of HOLC borrowers would not be able to carry the cost of home ownership, despite the liberal terms provided by the Corporation, and that the liquidation of defaulted

loans and the disposition of property acquired might be attended by losses. The liquidation experience made by the Corporation to date has confirmed that view.

Sound business practice requires the setting aside of reserves to which such losses may be charged. The Board of Directors of the Corporation has, therefore, determined that each year specified amounts be set aside from income, the accumulation of which is intended to approximate eventually the total losses which may be sustained in the liquidation of mortgage loans, delinquent interest, and property. Under this provision, reserves were accumulated at the rate of approximately $2,900,000 per month during the fiscal year 1939.15

Analysis of reserves and charges to reserves

As shown in the above table, the balance of reserves for losses on mortgage loans, interest, and properties decreased by $10,485,177 during the fiscal year 1939 because losses charged off during that year exceeded the provisions for such losses.

BONDS OUTSTANDING

In addition to its capital of $200,000,000, the Home Owners' Loan Corporation has been authorized to issue bonds up to $4,750,000,000 to carry out the purposes of the Act creating the HOLC. Additional bonds may be issued to refund outstanding obligations. The gross amount of bonds issued through June 30, 1939, was $5,766,675,875.

"By Board resolution of November 15, 1938, retroactive effect was given to a charge to reserves for losses sustained prior to June 30, 1938, in the amount of $11,211,150.83 previously charged directly to profit and loss. This amount included $7,749,213.71 for loss on capitalized value of property sold, $3,459,202.24 for commissions and selling expenses on property sales, and $2,734.88 for loss of interest on foreclosure sales, redemptions, etc. Of the total of $11,211,150.83, losses in the liquidation of assets applicable to the fiscal year 1938 amounted to $10,880,999.10.

Of this amount, $2,383,222,325 was for refunding outstanding issues and $480,048,525 was retired, leaving a net bond liability outstanding of $2,949,305,025 on June 30, 1939, as compared with $2,952,993,850 on June 30, 1938. In addition to bonds retired to June 30, 1939, there was available to the Bond Retirement Fund $149,217,560, and $19,706,646 was earmarked for transfer to the fund in July, for a total of $168,924,206 which may be used for the retirement of bonds. All unmatured bonds outstanding are guaranteed by the United States Government as to principal and interest.

The Corporation continued making exchanges of 24 percent bonds for 2% and 3-percent bonds when favorable market conditions permitted. The cumulative amount of exchanges to June 30, 1939, involved over $1,400,000,000 of the Corporation's bonds, and will result in a net saving in interest to the HOLC of approximately $20,600,000. Of the cumulative total of exchanges, over $247,000,000 were completed during the fiscal year 1939.

On June 1, 1939, a total of $325,254,750 Series F, 11⁄2-percent bonds matured, of which $319,669,300 was refunded through an exchange offer into $127,867,400 Series K, %-percent bonds due May 15, 1940, and $191,801,900 Series L, %-percent bonds due May 15, 1941, and provision was made for payment in cash of the balance, amounting to $5,585,450. On May 18, 1939, an announcement was made that 24-percent Series B bonds of 1939-49 would be redeemed on August 1, 1939, and an offer was made to the holders of same to exchange these bonds for Series M, 11⁄2-percent bonds of 1945-47. A total of $687,266,800 Series B, 24-percent bonds was accepted for exchange, and the balance amounting to approximately $217,000,000 was paid off in cash on and after August 1, 1939.

As a result of exchange and refunding operations, the average interest rate on all bonds was reduced from 2.527 percent as of June 30, 1938, to 2.098 percent as of June 30, 1939. A detailed statement of bonds issued, refunded, and retired to June 30, 1939, and bonds outstanding on that date, is presented in Exhibit 62.

PROGRESS IN LIQUIDATION

During the fiscal year ended June 30, 1939, the Home Owners' Loan Corporation made substantial progress toward liquidation. This is particularly significant in that it reflects the accelerating rehabilitation of the hundreds of thousands of distressed borrowers who, when refinanced by the Home Owners' Loan Corporation, were on the average delinquent two years in both principal and interest and between two and three years in taxes.

When the Corporation ceased its refinancing operations, it had loans in the total amount of $3,093,450,641 on its books. Subsequent advances to original borrowers for various purposes and interest converted to principal increased this amount to $3,173,730,305 as of June 30, 1939.

At the end of the fiscal year 1939, there had been repaid on this principal $601,002,640, or 18.9 percent of the gross amount of original loans and advances; and $644,515,428, or 20.3 percent of the gross amount of original loans and advances, had been transferred to property and similar accounts representing, for the most part, properties acquired or in process of acquisition. This left a net balance of original loans outstanding, plus advances, of $1,928,212,237 on June 30, 1939. At the end of the preceding fiscal-year period, such net balance stood at $2,214,064,317.

Original amount of loans closed..

Reduction of original loans

Advances to borrowers and interest merged with principal in extension agreements..

To an increasing extent, the reduction of original loans and advances has been effected by loan repayments in full. Through June 30, 1939, the loans of 53,676 original borrowers, in the total amount of $125,638,128, had been voluntarily repaid in full prior to the expiration of the loan contract. Of these, 18,769 loans aggregating $46,478,954 were repaid during the fiscal year 1939.

The following table gives a summary of all terminated accounts, including, in addition to the above-mentioned payments in full by original borrowers, a number of accounts terminated by other methods:

Cumulative number and amount of accounts terminated to June 30, 1938,
and June 30, 1939

A more comprehensive measurement of the progress in liquidation is the amount by which the Corporation was able to reduce the balance of its total debtor and property accounts.16 At the end of the fiscal year 1938, the balance of these accounts stood at $2,781,359,590. During the fiscal year 1939, the Corporation received $179,222,497 in principal repayments on original loans and vendee accounts, $21,475,577 proceeds from property sales, and charged off as loss on principal $45,380,102, for a total of $246,078,176. During the same period, $94,671,523 was added to borrower, vendee, and property accounts in the form of advances or capital charges to property, mainly for reconditioning. As a result, the balance of debtor and property accounts on June 30, 1939, was $2,629,952,937, a net decrease of $151,406,653 during the year.

All together, through June 30, 1939, the Corporation's gross investment in loans and properties-aggregating $3,335,226,769 at that date has been reduced by $705,273,832, or 21.15 percent of the total. Of this reduction, $648,636,965, or 19.45 percent of the gross total investment, is accounted for by sums actually received by the Corporation in the form of repayments on debtor accounts and of proceeds from property sales; $56,636,867, or 1.70 percent of the gross total, represents losses sustained in the liquidation of loans, interest, and property.

Reduction of total debtor and property accounts through June 30, 1939

The progress in liquidation varies considerably among the different regions as indicated in Chart XLVI.

As of June 30, 1939, the San Francisco region, including the Pacific and Mountain States, led with a reduction of the Corporation's gross investment by 28.48 percent, including losses sustained in the liquida

16 Debtor accounts include original loans and advances to borrowers, subsequent additions to the original loans, and intere t converted to principal by extension; they also include vendee accounts originating from property sales of the Corporation, and advances to vendees. Property accounts represent the book value both of property owned and property in foreclosure on which a foreclosure judgment has been obtained or foreclosure sale has been held subject to redemption period; they include unpaid interest on the loan accounts transferred to property accounts, the cost of initial repairs and improvements, and acquisition costs, taxes, etc., applicable to the period prior to the acquisition of absolute title.