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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

FOR THE PRESS
A p r i l 8 , 19U8
Attached i s t h e t e x t of a l e t t e r from the Board
of Governors t o Senator Charles W Tohey, Chairman of t h e
#
Senate Committee on Banking and Currency, concerning gene r a l housing l e g i s l a t i o n , p a r t i c u l a r l y S. 2317 and amendments t o S» 866, f o r release i n morning newspapers of F r i d a y ,
A p r i l 9 , 19U8.




BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
A p r i l 5 , 19U8.
Senator Charles W. Tobey
Chairman, Committee on Banking
and Currency
Senate O f f i c e B u i l d i n g
Washington, D. C#
Dear Mr. Chairman:
The Board has been advised t h a t your committee i s c o n s i d e r i n g
general housing l e g i s l a t i o n , p a r t i c u l a r l y S. 2517# i n t r o d u c e d by Senator
McCarthy, and amendments t o S. 866 proposed by Senator Flanders.
The Board i s i n sympathy, of course, w i t h the major o b j e c t i v e s
of such l e g i s l a t i o n , and i s i n accord w i t h some of the p r o v i s i o n s of these
b i l l s . We f e e l , however, t h a t i n view of the broad r e s p o n s i b i l i t i e s of t h e
Federal Reserve System i n the f i e l d of c r e d i t , we should c a l l a t t e n t i o n t o
s e v e r a l u n d e s i r a b l e f e a t u r e s of t h e proposed l e g i s l a t i o n , some o f which we
have had occasion t o comment on p r e v i o u s l y .
I n t h i s connection I am enc l o s i n g a copy of our statement of November 25, 1947 on Housing Finance t o
t h e J o i n t Committee on the Economic Report.
The prospect f o r i n f l a t i o n i s evefi g r e a t e r now than i t was l a s t
November. There i s s t i l l a shortage of many goods i n r e l a t i o n t o t h e l e v e l
of income, and, because of the imminent r e d u c t i o n i n t a x e s , coupled w i t h our
commitments under the European Recovery Program and the recent program c a l l i n g f o r a l a r g e i n c r e a s e i n m i l i t a r y expenditures, the Government must
a n t i c i p a t e a d e f i c i t r a t h e r than a s u r p l u s . There i s thus a d d i t i o n a l reason
f o r t h e Government t o take a l l steps p o s s i b l e t o reduce i n f l a t i o n a r y pressures,
p a r t i c u l a r l y those generated by an excess of c r e d i t .
For these reasons t h e Board i s opposed t o some of the p r o v i s i o n s
of t h e b i l l s b e f o r e your committee which would i n t e n s i f y i n f l a t i o n a r y
pressures by making a d d i t i o n a l c r e d i t a v a i l a b l e and thus i n c r e a s i n g the demand f o r b u i l d i n g l a b o r and m a t e r i a l s . I n a d d i t i o n , some of t h e i r p r o v i s i o n s would reduce the c a p a c i t y of the f i s c a l and c r e d i t agencies of t h e
Government t o cope w i t h e i t h e r f u r t h e r i n f l a t i o n or f u t u r e d e f l a t i o n .
The Board i s p a r t i c u l a r l y concerned about t h r e e proposals cont a i n e d i n these b i l l s ; f i r s t , c r e a t i o n of a Government-financed secondary
inarket f o r mortgages a l r e a d y u n d e r w r i t t e n by t h e Government; second, cont i n u a t i o n of t h e u n d e s i r a b l e mortgage-insurance program under T i t l e VI o f
t h e N a t i o n a l Housing A c t ; and t h i r d , a d d i t i o n t o T i t l e I I of the N a t i o n a l
Housing Act of a permanent program of excessively easy mortgage c r e d i t *
C r e a t i o n of a Government-financed secondary market would be d i r e c t l y i n f l a t i o n a r y a t t h i s t i m e , because, by making a v a i l a b l e 1500,000,000
f o r t h e purchase of mortgages, i t would represent added Government spending




Senator Charles W. Tobey

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2

A p r i l 5, 19U0

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and increased demand f o r new housing which i s already excessive, considering the. a v a i l a b l e supply of labor and materials* Furthermore, one of the
objectives a t the time the Government mortgage insurance and guaranty
programs were i n s t i t u t e d was to eliminate the need f o r d i r e c t mortgage lending by the Government, p a r t l y by removing some of the risks to lenders and
increasing the n e g o t i a b i l i t y of mortgages. I f p r i v a t e lenders are unwilling
to hold or buy guaranteed and insured mortgages, perhaps the solution i s to
improve the q u a l i t y of the mortgages or increase the return to levels which
make mortgages a t t r a c t i v e compared w i t h other investments*
T i t l e VI of the National Housing Act, by making c r e d i t available
on excessively easy terms, has contributed to the large r i s e i n house prices
and building costs, and has encouraged buyers to go too deeply i n t o debt.
We believe t h a t both builders and buyers should have larger equities i n
t h e i r properties i n an i n f l a t i o n a r y period l i k e the present, and t h a t i t is
both f e a s i b l e and desirable to return to the terms offered under T i t l e I I as
f a r as mortgages on houses f o r owner-occupancy are concerned. The Board has
no objection to the continuation of T i t l e VI f o r r e n t a l housing, provided
safeguards are maintained against excessive loans i n r e l a t i o n to value*
Several of the proposed changes i n T i t l e I I of the National Housing
Act are subject to the same c r i t i c i s m as the present T i t l e VI program.
Mortgages on small houses f o r 95 p s r cent of value and running f o r 30 years
are excessive and so also are UO-year mortgages of 90 and 95 per cent of
value f o r r e n t a l housing*
Basically, these three proposals are of a type which would be
appropriate f o r combating a serious d e f l a t i o n , and are the opposite of those
appropriate i n an i n f l a t i o n a r y s i t u a t i o n such as we face today. Measures
such as these should be reserved to cushion d e f l a t i o n should i t l a t e r develop.
Otherwise, the only measures a v a i l a b l e would be d i r e c t Government lending or
subsidies, on a large enough scale to protect the r e a l estate and housing
market from a serious collapse such as developed i n the early t h i r t i e s .




Sincerely yours,
(Signed)

M* S, Eccles,

M. S. Eccles,
Chairman pro tenu