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10, 1955 Governor Eccles FHA 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* They 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 t» 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 outset. 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 quality* 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 standards* 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. Personal 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 Economist. 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, fe.no 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*