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I TO: Mr. E c c l e s FROM: J . M. Daiger Bay 15, 1957 Dear Mr, Young; Apropos of the conversation at luncheon on Thursday, X am sending to you herewith a copy of a letter that X wrote to Mr. Allie S. Freed a few months ago* It was in response to a request from hi® for suggestions as to how the financing of large-scale housing opera* tions might be brought about. I should appreciate your reading this letter without regard to the fact that it happens to have been written to Mr. Freed, or that it happens to refer to a piece of legislation with which I had a good deal to do. The money-aarket approach to the problem of housing finance is what X should like you to consider, Under our fora of economy, we get housing only by long-tena credit, even though we do not always use long-term credit instrtsaeats. The financing mechanisms, therefore, are of priaary importance. The financing mechanisms of urban mortgage credit, which broke down completely in 1952, are still, as far as large operations are concerned, in a serious state of disrepair, X think the enclosed letter indicates why this is so and what kind of rehabilitation is called for. There are of course other aeons than those outlined In the letter by which such a rehabilitation might be accomplished. As to the question that X first discussed with you—namely, whether the diversion of industrial expansion to lower-cost areas was feablble—I have only recently begun to look into this on the basis of the studies of comparative housing costs lately completed, but not yet published, by the Vational Bureau of Economic Research. I should like very arach to discuss this with you again when X have gone into it further In the light of the obstacles that you pointed out. With appreciation of your kindness, I am lours very truly, Owes D. Young, Esq. General Electric Coapany 750 Lexington New York, N. Y. J. If. Dalger Special Assistant to the Chairman to Sir, A l l i e §• freed Coataittet for Eeonoalc Answering now the question that jon rals«*d on your recent v i s i t to Washington, when ig^r engagements were siseh I was unable to see you. I would s*y that the Goisaitteti for Economic Recovery night troll give »tm® ihowght, aaong: i t s housing studies* to th« adspt&tlcm of Title© XI m& I I I of the Housing Act to the requlre»«ntt of l»rg»«^cal« hmisiEg on the on® h&nd and the aferkct for hig^i-grad# l i s t e d on the regarded the for» in which these title© were orlgitsfell^ enaoted or sube©q«©ntl^feJKSBdf&das workfebl# from the point of view of lArgenieftle housing operfttlone* The f«ot that & few smeh -project® i u m been fl^&Roed in spite of the hftiti>isriTig rtrstrictionii of the l e t has In no ray ay vl«trf but oi5 the aoutrary has farther oonflraed i t } for the methods employed h&rit been extreaely eunberAose sad neoeaaarlly @f e makeahift character. $ the I@^)f8 the eotmtrj hj&d nua^rous m i operating for the sost part with l i t t l e or no ptifclie regulation ®r supervision* Mmp of then WOT© for a l l praoticid purposes national aes®ciatious # Th®j ss&da 1©SBS over geographic arema that h&d no r<&l®tioiD to state lla«s> or even to particular section© of the oountry* Loans mtre nade <m virtually every type of urban property, «^ud distributed throughout the oouatry b^r aeans of one or another fora of bond Theue companies flo\irish©d# hmsev^v, not by r#»ort t© th* isaln eapltml aerfcets* bat by © oosqnititlve blddlng-up of inttreot rat*® to satisfy the demand ot lnexparlenesd Investor© for high-yield mortgage bonds* This demand was i t s e l f a prodisct of the high*pr«ssiire (selling and Indiserlain&te baying that the fever &nd economic i l l i t e r a c y of the period X E other word«, smaeh of the l&rge-acsle construction of the 19£Q*« had its real origin cm the side of financial promotion r&ther tlmn on the eid« of industrial development. Ton have heard m© descrit* this activity* &s veil &n smich of the current revival of residential construction, &a an effort to carry oa as Industry without real «Rtrepr«ttmira~~th©t is, without eonpanie© sufficiently capitalist, staffed, &&& othariis-© equipped to aaotcae the risk* and sj&nagsaisit of lerge-jseffle housing an ©ggentifil prerequisite of large-scale Industrial of course, in tithar a huge personal fortune or, what is wore to the paint, aceesa to the aaln capital mar)c#te through which lnvMtaent seeurlties er<§? originated and distributed^ and auk&equeatl^ listed for trading on the Sew fork Stoek ETcehange* fhi» access, howev®!-, my hm direct or i»dir«ct, according to the nature of the transactions involved* I D the ©as« of lj&rg»-»©ftl<* housing, the involve aortgages* on separate propertiesj bwt the mortgages, though theaaelves too large for sost Ixuttltotlotui to aequim for their own portfolios, and too large for &ay ozw institution to hold is great voluas, are nevertheless not large enough indivldtml!!^ for economical flosineing in the form, of boisd issues* For this reason, access to the sain capital saarketa can be hsd for such mortgages only indirectly through debentures that would be the obligation of nartgagfe'flneaalng iostittitlona of sufficient sise mud standing to contend the confidence and support of thos« aarkets« Sneh aa investasmt isstrooMKit as I sBVS would seen to me to be potentially just jrash a key to operations Igr Xjnrgfjwisjdt houslisi eo^?&tti#s *$, for fiaan@o*co®pftny paper proved to be tint le#j to XergiHMBle pro* duction in sutoaoblles and amMrcnui oth«^ pro4ucit» t&ieh hou0«s—-fro® bungalows to fi^a^rap© p paid for (or leased) on the laAttllanmt p The mechiwaisua most adaptable to the erection of kind of instrument for finascing large-scale housing is, in ssgr opinion, the combination of the mortgage insurance provided for in Title It of the Houaitif Aot with the debenture financing provided for in title III* I would emphasise the ter» *adftptabl«* ~sin the preceding ae&tenee* howeiror, foee&use I r®£&r& the present fora of the two titles, ae I did the f®tn in whieh they n»re originally enacted, «fl autilfeted as& lapr&atieeble, and hence requiring iapcartent A« to Title II, the limitation on both (n) the aaou»t of aortg&&es incurable aod (1?) the d&t© by which aaortg&ges ssust be insured if mortgagees are to hsv® this benefit of the goyerssumtid gi3*r®iit^ 1 B «v«nt of <Uf«uXt» nmm? did ;mmk# @©tist from & financial point of view* Cte© or th® oth@r ^ight b# defended on the greniBd of prudent ©xp«riaent&tion# but the two in cotabinction defy reason in 1957 ao l*»s than th«y did in As to Tltl© I I I , the mm% to b# aftld. for i t i s tfcftt I t points the way to tb« kind of deb^ature-ifiaulag in*tit«tion which itionfsd abovs. The national sortgagft assoclatidos c-->rin thia t i t l e wo^ld N haaper#d not only ^sr th« dual Hstlt&tioii Ju«t referred to as unduly iMlriftiiNt Titlt I I , bat 1B addition bj th* l&ck of legal guatkoriiy to s&ke any lo&ne fi»d by the tmpr&ctie&l l i s i t s t i o n on the ratio of to oaplt*!* Th® pos«ibility of prudent ©f prlv&t^ caplUOL t^ffil«r Title I I I ww fwlbil tiso y«!».TS «igo# wheB the ainlsum capital requirement for & aorfcg&ge as^oci&tioa iw^a reduced froa #5,000,000 to fg,000,000. 1 do not w»m to f t t m t t that aaeaiing tLtXM I I and I I I of the Housing Act will elone accoapli^h the larget-sc&le operations which the Coaadttee for Beono&ie Beeovery been agitating* Far fro& lt» What I do aean to Is that* if the Cosaitt*!© wishes to see the fiTsanciag of operations <8wade feasible on a aouncior and HNM eoonomical than »&« available in the iS&O'a, i t will IttflPt to look toward a method of financing th&t in the 1920* s h&d not been thought of at a l l , ai34 thut very f«« persona Imve thought of r e a l i s t i c a l l y r XdSO*«« You will of course understand that this letter written i s responM to yo«r re<|i3e©t for «y would th©irefore ask you to treat i t accordingly
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