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FojrmNo. 1£1 f\ ff f^ I Urhcq Correspondence To Governor Eccles FEDERAL RESERVE B0ARD n a te November i s , 1955. Subject: Reduction in Federal Housing from J. M. Daiger , Jjj Administration Interest Rate. r. Following the White House conference about which I wired you on Thursday, I suggested to Mr. McDonald that the President's statement to the newspaper men about mortgage interest rates would afford an appropriate background against which to announce another reduction by the Federal Housing Administration. In ac- cordance with this suggestion, I prepared a memorandum in the form of a press release for Mr. McDonald to consider. As you know, I^flf^expected to be in New York today, but I remained over at Mr. McDonald's suggestion to attend a meeting at his office this morning to discuss the proposed reduction in interest rate. It was decided at this meeting to put the reduction into effect. The public announcement will therefore probably be made sometime this week. I am attaching a copy of the revised memorandum as the basis of the discussion this morning. 19—852 lmftpy Suggested pre»8 release. draft (,Jfffl&) 11/lS/SS immmo BY WE m%sui, HOUSIBO Effective tit the opening of business tomorrow morning, th« aaximua interest rate authorised on mortgagee to be Insured by the Federal Bousing Administration v i l l be reduced to 4 | |>«r cent p®r amstais, plus a sa3tiaiaj serric* charge of an©-half of 1 p#r cent per unnuia, on d®craasin^ bsil«ocee« tills* v i l l b© a reduction of one-half of 1 per e«nt in th« a&3dJR»s authorised interest rfcte, which i s n-nr £ per cent ft »©rTlc© cliarg® of oae-h&lf of 1 per cent, A fldmilar raductioa of ane~hf&lf of 1 per cent *** »»d« ^B ^tme £4, 19SS# The insurance presiua, v^iieh is&s redueed on June £4, 2935 to a flat r&te of one-h^lf of 1 per cent per easus on the original f»ee of the mortgage ressfeins tmchA&g«d at thftt r^te* Leading infititutions say, in their discreti<mt elect to charge & loner rate of interest thsa 4-^ per cent or to eliainate the ooe^half of 1 per cent service charge, &«cordirg to local eosspetitiT© eoudltiofui ia the mortgage anrk®t or in keei^lug with the ctreuMteaces of tmy p^rti&aX&r loan transaction* the Federal Adninlfttratiost prescribes the Tasxiatua rate of Interest that be borne by mortgagee which It finda acceptable for insurance* It does not, however, make that rate mandntoiy, am* does it wish to discourage lending at e Xotmr r&te on either insured or uninsured aortgages* Applications for mortgage i»ssurnnee filed with any office of the Federal ffousisf Administration prior to this date and sow pending will be acted txpos in the usual saimer and in accordance with the tmrm tinder w&ieh «n«sh &|3pll@sti<m8 &re alre«% dr«wa« Applies* tions filed after this date «©d fcnmd acceptt&ble will be approved stablest to the condition that the mortgage shall sot bear interest *t m rate la e*ee#* of 4§ per ceatf pln«. M M P M t f of 1 P®** ®«at »®rvi©# charge* In asking a further reduction at this U s e ia the m&xiwan rate of interest to be charged o» mortgages which it accepts for la* awance, the Federal Rousing Aaainletratioc Is slsply giving recogni-. tion to a condition that has already come about in the mortgage market, the tread of charges for mortgage locuas has been continuously ever since a reopeniog of the mortgage narket bccsste evident in the early pert of ^sis fmT* For soae a^cths no* loans haTe been freely offered and advertised at rates below the is&xien^s permitted tey the Federal Hoysing Adninistratlon on mortgagee which It insures* Many loans insured by the Federal Housing Adainlstratlofi h&Ye bees asde at lower rentes, &nd a still larger number of loans have been aade at l o w r rates even without the protection &#forded t»y mortgitge iasurimee under the provision* of the &&tio»&l Housing Act* In fact, ft nushsr of iastitutioe*, notably life insurance trust companies, building and loan associations*. bfeak#r8» h&re given &e a r©ii«on for sot ln#«riag loses with th« Federel Honsijog Madnintr&tloii Uieir willinga««s to lend on long tera and at H lam rate of iaterest without suoh l&tt&raseft* It is to be noted, though, is this connection th&t th««« inatltutions would be able to lesd at & still lower rat© if the? insured their eligible lofcn*, for the in&ur&uce would relieve thea of the necessity and ex* pence of building tip reserve* &g&in«t lo«ee# en theee lo^na. iaaif^gtly, acsrtgfc.ges that donfam to the ^pparaiaal standards of the Federal H O D S ing *dainiatrfction &nd that carry prorisiona wherefcy the full fesount of any usp&id prineipel^ plus interest et I p@r cent per tnnua, la gi^ranteed by the United States Govomaent, should not carry &s high & rate of interest &s stortgngeft not insured fcy the Federal Housing Adaliii«tr«tloii« Anotli«r factor to be taken lato aecoynt by lending institutions is the status that aortg&ges so Insured would have as collateral f®r advances bgr the Federal reserve bunks under the pro* visions of the Booking Act of 19S5, k factor which mortgage borrowers should take into account, furthermore, i® that the annusl premium paid to the Federal Mousing Administration covers the cost of insuring a aortg&ge up to twenty years. without reneml feeft of any kirn, tmd up to SO p®r cent of the prfideal value of the property* This preftlun is sot to be regarded wholly us an ©x|>enee, but as covering both the cost If the insurance iand tfe© ticouauxz.tion, in a soatiu&l irmsr&nee fund, of to be applied 1 B the later year© of the mortgage tovurti the unpaid of the pri&eipal* The further reduction in the aaxisus Interest rate atuthor* by the Federal Housing Mninlatr&tion Is s^de at thi« tims for several rcwiBojiu, Is the firet pl&eef it is ixt &ceord®G©® not o»ly rlth the treod of stortgag© interest rates generally, but also i&th the iendeaeeu that have «har*eterize4 Vb* yi&Xds <m th® aeverfel type« of inreitaeat \30ually carried in the portfolios of fln&act&l institution* la the second place, it is designed to iiidnce hom@-builder8 and hoa#-bi^f»re to seek fmad© morm fr®@ly from private lesding ia* stitutisias, i^ich con h&v© in the aggregate & great &wtpln» of fosds available far mortgage lei^iing. this shouidi have the effect of diaiaishlsg the pressure for goverm^atal leading in the urfe&UHBortgst field. In the third .pl&ee, the reduction is expected to encourage Materially the planning of ami eonstrtietlon during the wiater acmths, and thtss give & strong impetus to further recovery of r®«idential construction during the n^xt buildi&g ©eaaon. fhe reduction shauld therefore operate not only to the adviantag® of home-builders andi and hoae-buyerss, but to thefcd¥tait*geaf the eoristruetiOB which is still Ifcfgiag far behind the recovery experienced !y business generally, and «ils© t& the advantage of the e$imtryfs leading In* etltutio®«# which have be#n experiencing great difficulty in finding an outlet for their surplus funds. The new aaxiBRai interest r^te ot 4 | per cent, plus e service charge of aae-hidf of 1 per cent still affcards to leading inatittttl.ma & higher return than is available on any cw&r*fele type of investment* According to the compilation «ede hy the Board of QavnrnvtM of the Federal leserve $7Bteat the eurrent average field os a selected list of corporate bonds rated A&& is approximately 5.77 per cent, on corporate hm&* r&ted Aa 4*03 per centt and on corporate bonds rated A 4«££ per cent* the sane source gives the mirrent aver&ge yield on & selected list of 8Kmielp&l bonds as 5*10 per cent, and 011 United Steles Treasury M o d s &s 2»75 per cent* Mortgages insured ^ the Federal Boeing ^dninistration ere la aauy respects eoaperftble to the gov^nsaent-guar&nteed bocuis of the Hoaw» Oimers* toes Corporation esd the Federal ¥®rm Mortgage Corporation* The longer maturities of these issues currently yield approximately £*89 per e«ntf which is equivalent» feft^r aaklng ^llowence for tftx«exe»>?tlon provisions, to a yield of approxisately 3.40 per cent to corporate lenders* The l^figer aatorltle© of Federal t*«& B»ak bc^is currently yield epproxisetely 5*0^ per cent, which to corporate leaders, is equi¥*lest to S.SQ piV ceat after aeoouett is taken of the tsjc-eateaption
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