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Mr. TABER. And the other rate is what?
Mr. Myers. The rates for land-bank loans vary, depending on when the mortgages were made, but the average rate on land-bank loans is 5:05; the reduction by statute is to 3.5.
Mr. TABER. That is 192 percent?
Mr. MYERS. A little over $2,000,000,000, which makes the amount of interest a little over 30 million.
Mr. CANNON. What percentage of ultimate loss is indicated by your delinquencies?
Mr. MYERS. It is absolutely impossible to predict.
Mr. CANNON. Is that taken into consideration when you make your estimate of 1 percent margin between the cost of your money and the rate of interest on loans?
Mr. MYERS. All we are saying is that the Corporation is being deprived of income necessary to enable it to pay costs and losses, and the losses may run beyond the income, even if collections are made at the contract rate of 5 percent.
Mr. CANNON. Under the present trend the indications are that they will pay all losses and still remain solvent?
Mr. MYERS. Assuming a 5-percent rate?
Mr. MYERS. Five percent allows a margin of 2 percent on Commissioner's loans.
Mr. CANNON. The Government rate is 3% percent or 4 percent? Mr. MYERS. The land-bank rate fixed by statute is 3% percent this
Mr. CANNON. Your percent there is 5.05? Mr. Myers. The average rate on land-bank loans is 5.05, and this bill-Public, 209, Seventy-fifth Congress-reduces it to 3% percent. Therefore, I take it there is no argument that the appropriation has to be made.
The land-bank Commissioner's loans owned by the Mortgage Corporation bear interest at 5 percent according to their terms. The legislation referred to provides that the rate shall be reduced to 4 percent for 2 years.
Mr. WOODRUM. And it takes $8,000,000 for that?
Mr. CANNON. You made the statement that 1 percent was considered the minimum?
Mr. MYERS. Yes, for land banks.
Mr. Myers. Yes, on first mortgages, limited to 50 percent of the appraised value of the security offered. Sixty-two percent of the Commissioner's loans are second mortgages, and both first and second mortgages are made up to 75 percent of the value of the farm property. You cannot make loans up to that percentage without having heavy losses.
Mr. CANNON. But you have made provision for those losses in the amount which you would have received had Congress not passed this law reducing the rate of interest? That has been taken into consideration; has it not?
Mr. MYERS. Up to this time we have collected interest at the rate of 5 percent on commissioner loans; we have paid expenses; we have provided valuation reserves and reserves for losses of $27,000,000 on loads of about $830,000,000. The losses on those loans cannot be determined, but they are certain to be heavy, even with satisfactory conditions.
Mr. CANNON. But you consider today that you are buttressed against them at the present rate of interest?
Mr. MYERS. Five percent is the maximum interest return on loans. that can be expected, because of the law under which we operate. Federal Farm Mortgage Corporation bonds have been issued with the understanding that the rate on Commission loans would be 5 percent. There is a reasonable chance that if the Corporation collects 5 percent on its loans it will be able to take care of costs and losses, and the ultimate loss to the Government will not exceed the original capital of $200,000,000.
Mr. TABER. That would be 25 percent of the total amount of the commissioner loans now outstanding?
Mr. MYERS. Roughly.
Mr. Ludlow. We appropriated in 1937 $24,000,000 to keep the capital of these land banks unimpaired on account of the interest differentials, did we not?
Mr. Myers. It was $30,000,000 for reduction in interest. The $24,000,000 appropriation was made for the purpose of subscribing to the paid-in surplus of the banks based on extensions and deferments granted.
Mr. Ludlow. Well, there was a carry-over there from 1936. How much was that carry-over into 1937?
Mr. MYERS. About $3,000,000 on account of interest reductions. We have estimated the interest pretty closely.
Mr. Ludlow. How much will you have available for this purpose in 1938?
Mr. LEMASTERS. We have actually a deficiency of $25,800 at the present time. We have no carry-over whatever.
Mr. MYERS. On estimates of about $88,000,000 since interestreduction legislation was first enacted, we are short $25,000, an error of three hundredths of 1 percent.
Mr. Ludlow. And how much do you estimate will be required to pay this differential in 1938?
Mr. Myers. $31,700,000.
Mr. Ludlow. As against an actual expenditure of how much in 1937, altogether?
Mr. MYERS. $32,531,000.
GENERAL TREND OF CONDITIONS
Mr. LUDLOW. A very slight reduction. Now, on that point, are not conditions becoming much better? Do they not show a pretty natural improvement?
Mr. MYERS. Conditions are improving. However, in 1936 we experienced severe droughts, as you know, and we have very heavy concentration of mortgage loans in the drought territory, much of which area has not yet harvested a crop.
Mr. Ludlow. Therefore they are not meeting their principal obligations?
Mr. WOODRUM. You will not find very much of a desire to pay off loans when they get money for 34 percent, will you?
Mr. Myers. In the year ending June 30—these are round figureswe collected approximately $100,000,000 in principal payments on land-bank and Commissioner loans, most of which were voluntary and not required. But in large areas of the West borrowers could not meet either principal or interest, because of conditions beyond their control-because of the drought.
Mr. WOODRUM. How much have you in arrears now, principal and interest?
Mr. MYERS. Of the land banks or the land-bank Commissioner loans?
Mr. WOODRUM. Each.
Mr. MYERS. Of the $830,000,000 of Commissioner's loans, 23.8 percent, or $197,900,000, were delinquent as of June 30. Of the $2,052,000,000 of Federal land-bank loans outstanding, approximately, or 11 percent were delinquent as of June 30, 1937. The amount of the unpaid maturities on Federal land-bank loans was, roughly $7,400,000 and on Commissioner loans, $13,900,000.
Mr. TABER. That is principal delinquency?
Mr. Myers. The principal maturities unpaid on land-bank loans are approximately $1,000,000; and on Commissioner loans, $2,150,000. Both of these amounts are included in the totals on delinquencies just given.
Mr. TABER. Were those deficient as to principal or just interest?
Mr. MYERS. Most of the delinquencies are interest. Only on a comparatively small number of loans are principal payments due and unpaid. "We find a very good attitude on the part of the farmers with respect to the payment of the debts that are within their capacity to meet.
SUFFICIENCY AND BASIS OF ESTIMATES FOR PAYMENTS TO LAND BANKS
Mr. TABER. You said that the average rate of interest due on the land-bank mortgages was 5.05 percent. What is the average rate of interest paid on land-bank bonds?
Mr. MYERS. 3.5659 percent.
Mr. TABER. And I think you said to us that the amount necessary to carry these mortgages was about 1 percent?
Mr. MYERS. Yes, sir.
Mr. TABER. Therefore, if instead of appropriating 114 percent, we appropriated 1.1 percent, approximately, which is the difference between your interest requirement that you have had to pay out and the amount of interest you will receive, you would really have money enough, would you not? That is, we could cut $8,000,000 off of this $30,000,000 and still let you be right side up, according to your own figures? Mr. MYERS. The situation is this
Mr. TABER. Am I not correct? Let us get your own figures; 3.65 is what you are paying?
Mr. MYERS. 3.5659.
Mr. Taber. 3.5659. Then I was too liberal with you; 3.5659 is what you are paying, and 3.5 is what they will pay you, under these circumstances?
Mr. MYERS. That is right.
That is about onetenth of 1 percent that you would be behind. Then you have got to have 1 percent to cover your mortgage, and 1.1 percent would be plenty of margin, on that basis, would it not? I am just trying to be fair with you, and I want you to be fair with us.
Mr. MYERS. I will. I will tell you all the facts.
Mr. TABER. Then, if we put you where you would have 4.56 percent
Mr. MYERS. Because the land banks are not Government-owned corporations. Some $115,000,000 of their stock is owned by farmers, through farm-loan associations. Every mortgage carries a contract rate that cannot exceed by more than 1 percent the rate on bonds issued to finance it. Those bonds, in most cases, are not callable for 10 years, and mature in 30, and provide the funds for long-term mortgages. During the past 3 years we have called and refunded a large amount of high-interest-rate land-bank bonds, and the resulting interest savings have gone to pay losses, to strengthen the banks, and will ultimately belong to the borrowers. But the contract rate between the land bank and the borrower cannot be changed unless an appropriation is provided to pay the banks for the interest of which they would thus be deprived.
Mr. TABER. Now, wait a minute. Let us see if this does not work out. This money
Mr. Myers (interposing). May I finish my statement?
Mr. Myers. The land banks have no beneficial stockholders except farmers. Heavy losses have been sustained on loans made in the early twenties. As soon as possible the land banks intend to pass the savings from bond refinancing back to the high-rate borrowers, but that has not been possible up to now, because of droughts and delinquency and the fact that the financial condition of the land banks could not be jeopardized without making it impossible for them to continue to sell bonds at low rates of interest to obtain funds from which to make new loans to farmers currently.
Mr. TABER. In other words, the profits which the borrowers are ultimately supposed to be entitled to because of the stock that they subscribed, is the reason why we should appropriate the 1.5 percent. When a man is getting a reduced rate himself, it seems to me it is rather unusual to expect the Government to guarantee him the profit that he might realize because he paid a higher rate of interest. That seems to me rather a farfetched idea.
Mr. Myers. The contract rates of interest on outstanding Federal land bank loans range mostly from 4 percent to 5.5 percent, and it is my understanding that the contract rate cannot be changed except by agreement between the parties concerned. It cannot be changed, I believe, by an act of Congress. The average contract rate is 5.05 cent. Since the banks by operation of this law are deprived of their contract rate of interest, it is necessary for the appropriation to be made for the amount of interest of which they are deprived.
Mr. WOODRUM. Is the item of $31,700,000 to reimburse the Federal land banks figured on the basis of the present outstanding loans?
Mr. MYERS. Yes, sir; plus the estimated amount of new loans to be made during the coming year, less repayments.
Mr. WOODRUM. Plus the estimated fluctuation in loans paid off in 1938?
Mr. MYERS. Yes, sir. It is a very close estimate and there is no possibility of changing it.
PAYMENTS TO FEDERAL FARM MORTGAGE CORPORATION ON ACCOUNT
OF REDUCTION IN INTEREST RATE ON MORTGAGES
Mr. WOODRUM. Governor, referring to this item of $8,350,000 to reimburse the mortgage corporation, is that for 1 year or 2 years?
Mr. MYERS. It is for a 1-year period. It is roughly 1 percent for 1 year on $830,000,000; our estimate is $8,350,000.
Mr. WOODRUM. Will you need all of that this year, or can you get along with some of it and let experience demonstrate what the situation is?
Mr. MYERS. We have presented the situation as we see it. The Mortgage Corporation will need all of its income to take care of costs and losses, and it is doubtful if the losses can be met out of income over the life of these loans. With a 24-percent delinquency, and with the future uncertain, I would not even presume to estimate what the losses will be. We are attempting to deal leniently and fairly with deserving borrowers, but we are protecting the interests of the Goverment, and the losses on second-mortgage loans and on first-mortgage loans up to 75 percent are bound to be high.
For example, over 70 percent of our delinquencies in the Mortgage Corporation fall in three districts—St. Paul, Omaha, and Wichita. The territory served by the Corporation in these districts included some good farming country, but it is also the territory which has suffered most from the drought. In the drought regions there have been many cases of abandonment and neglect. Loans were made in 1933 and 1934 in large volume to assist in refinancing the farmers' debt, and conditions that have transpired since then have discouraged many of our borrowers, and, as I say, many of them have neglected or abandoned their farms so that it has been necessary for the banks to acquire them.
Mr. CANNON. But in making your estimates, you have taken into consideration the fact that delinquencies have been declining?
Mr. MYERS. Delinquencies have been increasing in the Mortgage Corporation up to now.
Mr. CANNON. My understanding of your first statement was that they have been declining. Possibly that was in connection with the land banks.
Mr. MYERS. Land-bank delinquencies have been declining steadily
Mr. WOODRUM. What was the cause of this increasing delinquency in the Mortgage Corporation?
Mr. MYERS. Largely because their loans are quite highly concentrated in risky areas. They have been made to men most heavily in debt, whose properties are heavily mortgaged for a high percentage of the value of the farm. Delinquency is almost certain to be higher in this character of loans.
for 4 years.