Homebuilding Hooverized

Last summer Senator Simeon Davison Fess of Ohio, chairman of the Republican National Committee, decided that the time was ripe for him to build a new home at Yellow Springs. He had savings tucked away in three building & loan associations which would serve as a starter. He went to a banker friend and asked him for a $6,000 mortgage loan. Throwing up his hands in horror the banker declared: "Oh, Senator, we can't make any more loans at present. While we're sound, we must remain in a liquid condition." Senator Fess, disappointed, went to the building & loan associations to draw his cash. At each he was told he could not have it because the institution was too overloaded on real estate to make the advance. Woefully declared the G. 0. P. chairman: "That case is typical throughout the U. S. That spells Depression" (TIME, Sept. 14).

New Plan. Last week President Hoover, close to whose heart are the U. S. Home & Family, moved in a large way to supply the Yellow Springs banker with $6,000 to lend Senator Fess, to ease the strain on the three building & loan associations sufficiently for the G. 0. P. chairman to withdraw his savings, to put jobless men to work on a new Fess home, and on perhaps 200,000 other homes. The President's purpose was to thaw out the frozen mortgage market on small homes so that people could start new building and thereby contribute to an industrial revival. Three months of conference with bankers, large & small, with real estate men, with building & loan officials, with Government experts preceded the announcement of his newest economic plan.

H. L. D. B. The President proposed that Congress set up another Federal agency operating at first on Federal funds. In each of the twelve Federal Reserve Bank districts would be established a Home Loan Discount Bank, supervised by a Federal Home Loan Board in Washington. Each Home Loan Discount Bank would have an initial capital of from $5,000,000 to $30,000,000, with the total capital of all twelve limited to $150,000,000. Building & loan associations, savings and deposit banks, farm loan banks and the like would subscribe to H. L. D. B. capital stock. What they failed to contribute the U. S. Treasury would make up. Each H. L. D. B. would rediscount prime first mortgages of $15,000 or less on urban or rural homes. The subscribing members of each H. L. D. B. would turn in real estate paper and get back from the H. L. D. B. 50% of each short-term mortgage, 60% of each long-term one. Such rediscount loans would be limited to 25% and 30% of the "sound appraisal" of each home property covered. The H. L. D. B. would make no original mortgage loans to individual home-seekers, nor would it touch commercial property or apartment houses. For additional working capital each H. L. D. B. would be authorized to issue bonds, secured by the rediscounted mortgages it held, at a 12-to-1 ratio on its capital stock, or $1,800,000,000 for the whole H. L. D. B. system. Banks could use these bonds as surety for Federal deposits. The money they thus secured from the H. L. D. B., loan associations and private banks would be expected to distribute on mortgages to prospective home builders, thus pumping new life and credit into the real estate market and building industries.

Mr. Homeman's House. When perfected, the system would work thus: John Homeman has $15,000 in cash and a desire to build a new $30,000 house. He goes to his bank or loan company, borrows the other $15,000 on a mortgage. John Homeman's mortgage the bank or loan company promptly takes to the H. L. D. B., where it gets $7,500 on it for the next home-seeker in line. By advancing $7,500 the H. L. D. B. has in effect released $30,000 in new money fanwise to Industry.

Purpose. Among the reasons the President gave for his plan, the all-compelling one seemed to be to relieve "the financial strains upon sound building & loan associations, savings banks, deposit banks and farm loan banks . . . [and] thereby to relieve pressures upon home and farm owners. . . ."

Huddling. Day after day for months the plight of small banks frozen up with real estate loans has been borne into the White House. Their business was at a standstill, they were all but broke. By National Credit Corp., with which the H. L. D. B. has nothing to do, the President sought to have the banks help themselves privately out of their frozen security loans. With his Home Loan Discount bank system he sought to do the same thing for the makers of non-commercial real estate loans. The prime difference: N. C. C. is a private organization; H. L. D. B. calls for Federal backing and control.

Between 20 and 30 billion dollars, the President estimated, is tied up in mortgages on deflated U. S. real estate. New credit of $1,800,000,000, he believed, would loosen up this sluggish mass of assets, help Industry. Where some 200,000 homes are built each year in normal times with an expenditure, including initial furnishings, of $2,000,000,000, now hardly half that number are going up. Of the fanwise effects of his plan the President said:

"A considerable part of our unemployment is due to stagnation in residential construction. There has been some overbuilding in certain localities in the boom years. But even in these localities the inevitable need is obscured by the tendency of the population to huddle temporarily due to unemployment. . . . The revival of residential construction would provide for employment in the most vital way."

Inflation? "There is," continued President Hoover, "no element of inflation in the plan, but simply a better organization of credit." On this point few impartial economists were ready to agree with their President. They argued that, without any change in real estate values, the Hoover plan did create new credit where credit has ceased to exist. In the case of John Homeman: $7,500 in bonds issued by the H. L. D. B. would pry loose the $15,000 mortgage from John Homeman's bank. And the mortgage would pry loose John Homeman's $15,000 cash which he had been saving to build with. Moreover, against tens of thousands of John Homeman mortgages which it had rediscounted, H. L. D. B. would put out hundreds of millions worth of bonds which did not exist before. By "no inflation," all that the President could have meant was that home real estate had been unduly deflated --a flat tire which he was trying to pump up to normal rather than a full tire pumped up to the popping point.

Treasury into Business? President Hoover did not anticipate that the loan associations and banks, already strapped, would be able to subscribe fully for H. L. D. B. stock. Therefore the U. S. would make up the difference from the Treasury. It was this fiscal fact that compelled President Hoover to take his plan to Congress for authority. Most G. O. P. Senators and Congressmen, conscious of many would-be home owners in their States who might be benefited, gave the Hoover plan their qualified endorsement. Even House Democrats admitted it had "possibilities of constructive service." From Virginia's Senator Carter Glass, who has combated every move to squeeze mortgages into his pet Federal Reserve System, came the only menacing growl: "I can't see that the Government should be particularly eager to take the money of American taxpayers with which to embark in the real estate business."

Happy Fess. Within 24 hours after his announcement the President received no less than 32 long and expensive telegrams, enthusiastically endorsing his scheme. Paul Shoup, Southern Pacific Co. president sent: "Hearty congratulations. . . ." Happiest of all, however, was sandy-haired little Senator Fess. Exclaimed this would-be homebuilder: "I strongly approve. ... I heartily favor ... a most wholesome influence!"

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