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10, 1955
Governor Eccles


otters for discussion at

J, M. Daiger

tomorrow's luncheon.

I think thst Wtm McDonaldf s invitation to you &n& ae to meet
him at luncheon tomorrow with Mr# Walsh and Mr. Catherine is due in part
to his desire to have Walsh and Catherine hear your views on the FHA
and in larger part to his desire to for® a sort of working alliance
with you on the 1956 program*
In the conversation at last week's luncheon, you hit out
pretty hard at the FHA set-up, particularly from the standpoint of
the operating personnel in the regional and local offices* At the
same time you evidenced a good deal of support for some of the ajeasures
that the Freed-Moley group has been pressing, not so much through the
FHA as through the Federal Hone Loan Bank Board and the Department of
CosraerceHence I should like to analyse briefly these two aspects of
the matter—the FHA set-up &nd the 19S6 program—before we get into the
discussion of them at tomorrow's luncheon*
Hie bulk of the FHA business under Title II has cone thus far
from the member banks of the Federal Reserve System, the banks generallyf
sember and non-memberf account for about 70 per cent of the business,
but most of this is from the member banks. The member banks also have
among then the largest vol\ame of funds currently available for mortgage
investment—considerably more tfa&n is held by any other class of institutions*

-1 Because of these very practical considerations, I have
argued th&t the obvious way to advance the FRA program is for the
FHA to have the kind of set-up that, on the one hand, will win the
confidence of a isuch l&rger nuaber of banks and thus result in a
much larger and More widespread number of approved-mortgagee banks,
and, on the other hand, will create ejaong prospective borrowers a
larger demand among these banks for the FRA type of mortgage loan.
It is my opinion that the FHA does not have this type of eet-up,
and I should therefore like you to press this view tomorrow, as dealing with a situation that definitely needa to be met quite apart froa
the 1956 prograa.
Sonse of the best mortgage men I know have stated without
qualification thfet the FHA has established a sounder system of appraisal practice than any private institution has ever devised*


tell me that they have adopted its standards regardless of whether or
not they insure their loans with the FHA. They count the standards as
one of the notable contributions of the New Deal to the field of aort~
gage financing.
In other words, a loan made according to FRA standards jj a
prise investment. It is such an investment even without the ultimate
guaranty afforded by the Federal Government.
But to establish the standards is one thing and to enforce
them is another and quite different thing. Too many banks, * am afraid,
have the impression that the practices of the FHA are lax and that this

laxity is due to high-pressure promotion methods which put the emphasis
on volu»e rather than on quality*

Instead of regarding the FHA. as

affording a good business jaech&nisa through which toqpen up more freely
on mortgage loans, the banks are impressed by the fact that the regional
and local offices are under great pressure fro® Washington for volume at
any price* The inevitable result, as X see it, is to defeat the retj
objective that the fill is preoccupied with—namely, volume.
The point about this that I would call particularly to your
attention is that the responsibility for whatever laxity there aay
be is right here In Washington, not In the regional and local offices*
I think that you say tend to overemphasize the shortcomings of the
regional and local personnel and to ascribe to these men faults that
are largely due to the kind of pressure they are under from headquarters*
I know, of course, that the FHA got off to a political start, but it
also started with the fallacious notion, in Mr* Moffettfs classic phrase,
that the FHA is • purely a selling proposition*11
In its approach to the banks, the FIIA has in s?- opinion relied altogether too much on the inducement of high interest rates*
Manifestly, a low interest rate for a long-term loan was the potent
means that the FHA had for creating a demand among borrowers for the
FHA type of loan* The groundwork for this demand was laid in the
publicity that preceded and accompanied the passage of the Housing
Act* But after a year and a half of FHA operation the 5 per cent rate
contemplated in the Aet as the maximum except under unusual circum

stances has not yet materialised, though & lower rate would now be
easily possible if the 5 per cent rate had been established at the
Like the high-pressure promotion and the tendency toward
laxity that is its counterpart* the high rates of interest m i n tained by the TH& have in ay opinion been & deterrent rather than
fin Inducement where the banks are concerned. The rates of Sg, 3,
and 5£ per cent, which the FHA has established from time to tirae,
have been wholly out of line with the prevailing rates on highgrade investments. The result here, 1 think, h&u been to cheapen
the FHA type of mortgage in the minds of bankers and to raise the
question, at least subconsciously, whether there is not after all
some doubt as to the quality of the mortgages insured If the FHA»
In other words, I have argued that the banks would place
& much higher value on the ultiss&te guaranty of the Federal Government on th© FHA type of mortgage if the return on these mortgages
were in line Tilth the return on other prise long-term investments •
I have said that th© FHA cannot "bribe* banks into making loans by
offering a rate a point or half-appoint above the a&rket* but that
it cauld induce them to lend by using & low r&te to enph&slse high
If y«l agree with this vie* from a banking standpoint, I
should like you to eaphasiae it toao row as well as the need for

- 5 making the practices of the FHA conform to its much-advertised
The point about the Freed-Stoley program to which I would
particularly cull your attention in th&t it is directed to the
• uts* rather than to the "ins." It looks toward mortgage finenoing
through the building and loan associations and toward housing promotion through the Department of Commerce* Its emphasis on the
building and loan associations is due to its drawing & ads taken
analogy between them and the British bulldir^ societies, disregarding the fact that the widespread holding of available funds for mortgage lending in this country is among the banks and that the funds of
our building and loan associations are pretty such depleted.


differences between McDonald and Freed and personal relationships between Freed and one of Secretary Roper's assistants account in large
part, I think, for the proposal to take FHA out of the housingpromotion field and turn that work over to the Department of Commerce.
The points about the Freed-iJoley program that I aa in accord with are, first, the emphasis on the type of housing for which
there is virtually an unlimited market, and, second, the opportunity
for larger units to operate profitably in the low-cost houtslng field.
These are the two aspects of the British housing program that have
been chiefly responsible for its magnitude &nd its success.
The Freed-Moley group gives a greatly mistaken impression,
in my opinion, in attaching primary importance to the low rate of
interest and to the small down-payment, and especially in regarding

the latter as readily adaptable to the situation in this country*
The housing booa In Great Britain began when the interest rate
chargedfcgrthe building societies was close to 6 per cent, the
rate fell to 6j per cent after the booa was well under way and
reached 4^ per cent only in the latter part of lest year, two and
a half years after the boomimQaafoacn&maaakiL was started.
As to the 10 per cent down-payment, that is made possible
by the size and financial responsibility of the British building*
companies* These companies "go on the mortgage" in the sane way
that our automobile dealers, for example, are parties to automobile
sale-contracts with finance companies* The British builders leave
part of their investment in the mortgage with the building society
until the mortgage Is paid down to about 75 per cent* We do not
yet have operators who are capable of doing that* Our home-building
is carried on by thousands of small developers and contractors
operating on a shoe-string, whereas most of the building in Great
Britain is done b; a handful of big companies.
The best explanations of the British booa that I have
seen are those given by the Westminster Bank and by the London

The gist of their explanation is that the housing boom

is attributable to great advances in wages, to great reductions in
the prices of food and clothing, to the successful operation of un~
eaployaent insurance, and to the resultant increased purchasing

- 7 -

power flowing into the housing field*
Finally, the essential example to be drawn for us is
th&t the housing boon in Qrmt Britain in a boom in low-cost
louses* The price rang© is fross f£tSQO to |4,000, and the average
is about fS,0Q0* My argument, In substance, is that we have on
enormous potential market among fwailitte that Oft* buy house© on
a dowa-p&yaent of 1800 to f 1,000 end & monthly payment of |30 to
$40 under the FHA s©t~up»

these would be houses in & price r&n$c

of 14,000 to 15,000* I think that this Is the very best that *e
cioi do on a large scale under our existing cost structure.
Much &6 I should like to see ft further reduction of
the interest rate, and certain M X II th«it the mortgage ae*rket
would accept it, I do not see how it can become an iaportsnt
factor except in relation to the type of house© for w M c h there
is n lergs tt&rket* It is prlabriiy th# tott?l cost of the house, not a difference of hsJtf-*»poiat or one point in the Interest
rate, that <i#teraiBies whether or not the borrower o«n carry the
monthly ciwa*ge#
Which is & troy Q€ saying, in short, thut govfsrnaental
proimg&ndm ia\d govcrmaentul induceoects should b& focus&ed on the
prioe elites vhere the potential volume Is*