Mr. THOMAS. I think perhaps some series were sold at par. There may have been some sold at prices ranging slightly under or over par, depending on the market. There was a very great demand for those certificates from the public during the years that they were issued.

The CHAIRMAN. What was the rate of interest?

Mr. THOMAS. On the mortgage-participation certificates I think 512 and 6; maybe some a little lower than that.

Mr. PECORA. As a matter of fact, was there not an arrangement by which the Trust Co. received all interest over and above the rate, at the rate of 534 percent?

Mr. THOMAS. What is that-534 percent?

Mr. PECORA. Yes. Where the mortgage bore interest at the rate of more than 534 percent, the Trust Co. received for its services in connection with the issuance and sale of these participating certificates in those mortgages all interest over and above 534 percent paid by the original mortgagor?

Mr. THOMAS. No. I think you are confused there. I think what you are getting at is that any differential that there may have been between the rate of interest on the mortgages and on the participation certificates was considered to be a return to the Trust Co. of the cost of servicing the mortgages during their entire life.

Mr. PECORA. That was in addition to the commissions and fees it received for the servicing of the mortgage loans in the first instance, which you said was around 2 percent?

Mr. THOMAS. It was in addition to the fee received for the making of the mortgage; but this very small differential there did not anywhere near cover the actual cost of servicing those mortgages for 5 or possibly 10 years, taking care of all of the collections on those mortgages. There was no other fee charged.

Mr. PECORA. You charged an investment fee of 1 percent?

Mr. THOMAS. That was for making the investment in the trust. But I mean no other fee charged against these participation series for servicing all the mortgages.

Mr. PECORA. You say that investment fee was for making the investment. It was charged in those transactions where the Trust Co. as trustee purchased from itself the certificates which the Trust Co. itself had issued?

Mr. THOMAS. That is right.

Mr. PECORA. Do you know how many of these mortgage participating certificates are in default?

Mr. THOMAS. No; I do not.

Mr. PECORA. Have you no idea?

Mr. THOMAS. That is a very difficult thing to say, because, strictly speaking, they are not any of them in total default. We are paying on the mortgage participation certificates whatever we collected on the underlying mortgages.

Mr. PECORA. But are not those underlying mortgages, many of them, in default?

Mr. THOMAS. There are undoubtedly some; yes.

Mr. PECORA. To what amount?

Mr. THOMAS. I do not believe I have those figures.

175541-34-PT 11-18

Mr. PECORA. Those figures, as contained in exhibit no. 105, and which we have compiled, show that as of January 1 of this year the principal amount of mortgages in default was $6,918,698.56, and defaults in payment of interest aggregating $823,639.74 have also occurred up to January 1 of this year.

Mr. THOMAS. Is that on the mortgages or on the participation certificates?

Mr. PECORA. The participation certificates, so far as I can make out the form of Mr. Van Every's statements.

Mr. THOMAS. Of course that does not mean that that is the amount of mortgages in default.

Mr. PECORA. No. That is only with regard to participation certificates.

Mr. THOMAS. I have the information here on two or three series, if you wish it.

Mr. PECORA. Identify the series, and I will see if I can confirm them by an exhibit prepared by Mr. Van Every.

Mr. THOMAS. These memorandums are quite old. They show the amount of defaults in the mortgages at the end of 1931. Would you want that?

Mr. PECORA. No. Have you not got the figures down to date?
Mr. THOMAS. No; I have not.

Mr. PECORA. According to exhibit 105, consisting of Mr. Van Every's signed statements here, on January 1 of this year there were past-due certificates of the principal amount of $8,176,700, and there was past-due interest on those certificates amounting to $1,168,104.01. Does that conform to your general recollection?

Mr. THOMAS. I really do not recall. I assume that is right, if that is what Van Every gave you.

Mr. PECORA. Were any of these participating certificates sold to any trusts while any default had occurred in any of the mortgages underlying the certificates?

Mr. THOMAS. Not to my knowledge.

Mr. PECORA. Do you know A. J. Colvin, connected with the Trust Co.?

Mr. THOMAS. C-o-l-v-i-n?

Mr. PECORA. Yes; A. J. Colvin.

Mr. THOMAS. I think he is one of the boys in the mortgage department; yes.

Mr. PECORA. I want to show you another set of statements signed by Mr. Colvin, and others signed by Mr. Van Every, all certifying to certain facts with regard to the issuance of participating mortgage certificates of the kind we have been discussing and with respect to whether or not any mortgages in the series referred to in this exhibit were, at the time of sale, in default. Will you look at it and tell me if you have any reason to doubt the accuracy or authenticity of it?

Mr. THOMAS. I have no reason to doubt the correctness of those statements.

Mr. PECORA. I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Set of statements signed by A. J. Colvin and by Mr. Van Every, certifying to certain facts with regard to the issuance of participat

ing mortgage certificates, were received in evidence and collectively marked "Committee Exhibit No. 106, Jan. 31, 1934.")

Mr. PECORA. According to Exhibit No. 106, just received in evidence, out of six certain issues of these participating certificates having a face value of $4,250,000, there were sold by the Detroit Trust Co. to itself as trustee for various trust accounts certificates aggregating a face value of $1,508,900, and at the time of the making of those sales to trust accounts defaults had occurred in the payment of principal and interest in the underlying mortgages to a total figure of $141,960.78.

Mr. THOMAS. Principal and interest?

Mr. PECORA. Both principal and interest; yes. Are you familiar with those facts?

Mr. THOMAS. No; but I assume that they are correct.

Mr. PECORA. How do you account for that having been done, now, Mr. Thomas? Here was the Trust Co. acting as trustee for various trust accounts, purchasing from itself as the issuer these participating certificates, charging the trust accounts an investment fee of 1 percent and purchasing those certificates at a time when, according to its own records, there had been defaults in payment of principal and interest in the mortgages underlying the certificates.

Mr. THOMAS. Well, I think you must remember that if you consider a mortgage in default, if the principal payment is not made on the day it is due, there always have been and always will be those defaults.

Mr. PECORA. Don't you consider that a default?

Mr. THOMAS. It is a temporary default; but you know as well as I do that the mortgagors do not always all pay their principal and interest payments on the due date. Is that interest the amount of interest that was not paid the day it was due on the mortgages?

Mr. PECORA. Those defaults, aggregating in amount $141,960, were defaults in both principal and interest, and those defaults are estimated at the expiration of the usual periods of grace.

Mr. THOMAS. What would that be? After a 90-day period or a 60-day period?

Mr. PECORA. Whatever the mortgage provided for that would be fixed by the terms of the underlying mortgage.

Mr. THOMAS. Of course, it is hard to say how serious it was without knowing exactly the facts with respect to the mortgages at that time. I am sure that the Trust Co., as soon as they were cognizant of the fact that a considerable number of mortgages were going into default, would immediately refrain from placing any more of those participation certificates in trusts.

Mr. PECORA. Well, apparently, according to the exhibit last offered in evidence, they sold to trust accounts managed by themselves one million five hundred thousand and odd dollars of these participation certificates at a time when defaults had previously occurred in the payment of both principal and interest on the underlying mortgages. Surely the Trust Co., as the issuer of those certificates, would have a complete record of those defaults if any had occurred, would it not?

Mr. THOMAS. Yes.

Mr. PECORA. And it had all the information and data that it would need in order to enable it to determine whether or not it was selling participating certificates in those mortgage pools that included mortgages that were in default, had it not?

Mr. THOMAS. Yes; they would have that information.

Mr. PECORA. The facts with regard to the sale of these participating certificates to trust accounts after defaults had occurred in some of the underlying mortgages have been set forth in an exhibit prepared by the auditor of the Trust Co., Mr. Van Every, in exhibit 106, which is in evidence. How do you account for those things having occurred?

Mr. THOMAS. Well, I think that probably about that time when mortgages generally began to default in substantial amounts, the Trust Co. did make an investigation, or members of the mortgage department did, and I think the policy was discontinued. There may have been a few sales go through during that interim.

Mr. PECORA. A few sales, when the amount shown is $1,508,900 sold to trust accounts alone?

Mr. THOMAS. What was the date of those sales; do you know? Mr. PECORA. Various dates. They all appear in Exhibit No. 106. For instance, let us take the third page of Exhibit 106, signed by both Mr. Colvin and Mr. Van Every. Mr. Colvin, I understand, is attached to the mortgage department of the Trust Co. It says [reading]:

In series F-2 trust participation no. 11,231, the mortgages were delinquent as follows: On October 17, 1931, principal, $19,926.45; interest, $5,620.43.

And then, over Mr. Van Every's signature, is the following statement [reading]:

The above date, October 17, 1931, was approximately the date of the last sale of certificates of this issue to trusts. The total par value of certificates of this issue sold to trusts amounted to $185,700 out of a total issue of $1,000,000. The amount of commission or service charges collected from the mortgagors at the time the mortgages were made, at the rate of 2 percent, and 3 percent outside the city, was $20,000.

So that as far back as October 1931 according to these records compiled by representatives and employees and officers of the Trust Co., sales of participating certificates were made by the Trust Co. to itself as trustee to trust accounts at a time when underlying mortgages represented by the certificates were in default both as to principal and interest.

We find a similar situation existing on March 2, 1932, according to Exhibit No. 106. Suppose you study that exhibit, Mr. Thomas, for your present purposes.

Mr. THOMAS. That is a very small percentage of defaults, Mr. Pecora, as to the principal of the mortgage in each series compared with the total of the mortgages.

Mr. PECORA. Whether it is small or large, Mr. Thomas, the practice itself is one which should not have been permitted to occur in any one instance, is it?

Mr. THOMAS. Yes; you are right. I do not think that if the trust investment department had knowledge of these mortgages being in default they would have put them in the trust. I agree with you that they should not have.

Mr. PECORA. The trust department should have had knowledge. All the material and all the data giving such knowledge and information were in the Trust Co.?

Mr. THOMAS. The mortgage department. Possibly they had not made an examination of these various mortgages behind the series and had not conveyed the information to the trust investment department at this time. I do not know as to that.

Mr. PECORA. There is now no market value for any of these participating certificates, is there?

Mr. THOMAS. There is very little market. I guess there are a few traded in.

Mr. PECORA. According to Mr. Van Every's statement embodied in exhibit no. 105, there is no market with regard to all of the 35 series of participating certificates issued.

Mr. THOMAS. I think he means there is no general market, which is

true.

Mr. PECORA. In every instance, in answer to the question "Present market value of certificates" his comment is, "No market." That covers all 35 series.

Mr. THOMAS. Of course, we have hopes and expectations that those mortgage-participation certificates will work out very well. If we are able to get the assistance that we hope to from the Home Loan Corporation we feel that the ultimate work-out of these participation certificates will be very favorable; at least, as well as the average.

The CHAIRMAN. Are you accepting, where you have mortgages, the bonds of the Home Loan Corporation?

Mr. THOMAS. We have not yet. We are considering that with respect to all of our mortgages, Mr. Chairman.

Mr. PECORA. Mr. Thomas, a statement has been prepared based upon an analysis of the data embodied in Exhibit No. 105 purporting to show, with regard to the 35 series of mortgage-participation certificates issued by the Trust Co. for the aggregate amount of $25,000,000, that, as already indicated, the amount sold to trusts administered by the Trust Co. was $5,589,500; that as of January 1 of this year the amount in default of those certificates as to principal was $6,918,698.56, and as to interest, $823,639.74; that the amount of commission or service charge made and collected by the Trust Co. in connection with the making of the mortgage loans underlying these certificates for all these 35 series aggregated $526,575.62; that as of January 1, 1934, the principal amount of certificates past due was $8,176,700, and the amount of interest on these certificates past due on that date was $1,168,104.01.

Will you look at this statement that has been so prepared and based upon that exhibit and see if you have any critical comments to make about it? For that purpose you may also compare it with the underlying and supporting data consisting of exhibit no. 105. Mr. THOMAS. I believe the record is incorrect in respect to the first part of your statement.

Mr. PECORA. What is that?

Mr. THOMAS. You started out by referring to the $5,000,000, approximately, in trusts.

Mr. PECORA. Sold to trust accounts.