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EMERGENCY HOME OWNERSHIP ACT  HEARINGS BEFORE THE  SUBCOMMITTEE ON HOUSING OF THE  COMMITTEE ON BANKING A.ND CURRENCY HOUSE OF REPRESENTATIVES EIGHTY-SIXTH CONGRESS SECOND SESSION ON  H.R. 9371 (Superseded by H.R. 10213)  JANUARY 25, 26, 27, 28, AND 29, 1960  Printed for the use of the Committee on Banking and Currency  UNITED STATES GOVERNMENT PRINTING OFFIC!I 50876 Federal Reserve Bank of St. Louis  WASHINGTON : 1960  COMMITTEE ON BANKING AND CURRENCY BRENT SPENCE, Kentucky, Chairman PAUL BROWN, Georgia CLARENCE E. KILBURN, New York WRIGHT PATMAN, Texas GORDON L. McDONOUGH, California ALBERT RAINS, Alabama WILLIAM B. WIDNALL, New Jersey ABRAHAM J. MULTER, New York EDGAR W. HIESTAND, California HUGH J. ADDONIZIO, New Jersey PERKINS BASS, New Hampshire WILLIAM A. BARRETT, Pennsylvania EUGENE SILER, Kentucky LEONOR K. SULLIVAN, Missouri PAUL A. FINO, New York HENRY S. REUSS, Wisconsin FLORENCE P. DWYER, New Jersey MARTHA W. GRIFFITHS, Michigan EDWARD J. DER WINSKI, Illinois SEYMOUR HALPERN, New York THOMAS J. ASHLEY, Ohio CHARLES A. V ANIK, Ohio WILLIAM H. MILLIKEN, JR., Pennsylvania J. T. RUTHERFORD, Texas JOSEPH W. BARR, Indiana JAMES A. BURKE, Massachusetts WILLIAM S. MOORHEAD, Pennsylvania CLEM MILLER, California BYRON L. JOHNSON, Colorado DANIEL K. INOUYE, Hawaii ROBERT L. CARDON, Clerk and General Counsel JOHN E. BARRIERE, Majorily Staff Member ORMAN S. FINK, Minority Staff Member  SUBCOMMITTEE ON HOUSING  ALBERT RAINS, Alabama, Cllairman HUGH J. ADDONIZIO, New Jersey GORDON L. McDONOUGH, California WILLIAM A. BARRETT, Pennsylvania WILLIAM B. WIDNALL, New Jersey LEONOR K. SULLIVAN, Missouri PERKINS BASS, New Hampshire THOMAS L. ASHLEY, Ohio EDWARD J. DERWINSKI, Illinois MARTHA W. GRIFFITHS, Michigan J. T. RUTHERFORD, Texas JOHN E. BARRIERE, Staff Director JOHN J. McE_WAN, Jr., Assistant Staff Director ORMAN S. FINK, Minority Staff Member KENNETH W. BURROWS, Economist  n Federal Reserve Bank of St. Louis  CONTENTS H.R. 9371. A bill to amend the National Housing Act to halt the serious slump in residential construction, to increase both onsite and offsite job opportunities, to help achieve an expanding full employment economy, and to broaden home ownership opportunities for the American people __ 2 Emergency Home Ownership Act, section-by-section summary _________ _ 4 Statement ofAlbert, James M., Miami, Fla __________________________________ _ 274 Andrus, Cowles, chairman of the Committee on Real Estate Mortgages, American Bankers Association _________________________ _ 346 Bartling, Martin L., Jr., president, National Associatior, of Home Builders; accompanied by Herbert S. Colton, general counsel; and Joseph B. McGrath, legislative director ________________________ 59, 96 Ba~g~man, J. Stanley, president, Federal National Mortgage Asso16 c1at1on __ -------------------------------------------------Boykin, Hon. Frank W., a Representative in Congress from the State 258 of Alabama-----------------------------------------------Brinkman, Oscar H., executive secretary, National Apartment Owners 204 Association __ ---------------------------------------------Brown, Hon. Edmund G., Governor of the State of California ______ _ 118 T., a Representative in Congress from the State_ Cahill Hon. William of New Jersey ______________________________________________ Campbell, Wallace J., director, Washington office, Cooperative League of United States of America __________________________ _ Carey, James B., president;. International Union of Electrical, Radio & Machine Workers, AFL-CIO, ana Industrial Union Department, CIQ_______________________________________________________ Coogan, Thomas B., president, Housing Securities, Inc., New York,_ N.Y ______________________________________________________  247 355  327  261  Driver, William J., Chief Benefits Director, Veterans' Administration; accompanied by Philip N. Brownstein, Director, Loan Guaranty ,Servic.~~ Veterans' Administration __________________________ -- "47 Elliott, William J., El Paso, Tex ____________________________ ~- __ 268 Flynn, Frank P., Jr., cochairman, legislative committee, Home Manufacturers Association_________________________________________ 98 Greer, Herschel, Mortgage-Bankers Association _________________ 112,129 Holden, John R., legislative director, AMVETS___________________ 364 Keyserling, Leon H., National Housing Conference ________________ 143, 179 Lewis, Edward, Birmingham, Ala________________________________ 289 Mason, Norman P., Housing and Home Finance Administrator______ 7 Morgan, Robert M., vice president and treasurer, The Boston 5 Cents Savings Bank, Massachusetts ______________________________ :.. __ 365 National Retail Lumber Dealers Association _____________________ _ 363 Netzorg; Lei:mar:d R; Western Forest Industries Association, Portland, Oreg_______________________________________________________ 253 O'Leary;.YDr. James J., Life Insurance Association of America _______ 313,320 Porter, tton. Charles 0., a Representative in Congress from the State of Oregon__________________________________________________ 250 Rains, Hon. Albert, chairman, at the opening of hearings on the Emergency Home Ownership Act _____________________________ _ 5 Rivers, Hon. L. Mendel, a Representative in Congress from the State of South Carolina _________________________________ ~-_________ 257 Sadkin, Herbert, president, All-State Properties, Inc., Long Island,_ N,Y ______________________________________________________ 266 Scott, Robert E., chairman of the Realtors' Washington Committee, National Association of Real Estate Boards; accompanied by John C. Williamson, secretary-counsel, Realtors' Washington Committee______________________________________________________ 297 Federal Reserve Bank of St. Louis  m  IV  CONTENTS  Statement of-Continued Share, Leslie, president, Hamilton Construction Co., Detroit, Mich __ Shishkin, Boris, secretary, Housing Committee, AFL-CIQ _________ _ Snyder, Jerome, president, Signature Homes, Los Angeles, Calif_ ____ _ Soloway, Arnold M., Americans for Democratic Action ____________ _ Spiering, Chester H., developer and builder, California, Oregon, Washington, N evada ___ c ______________________________ ______ _ Stalford, Alfred D., legislative chairman, Cooperative Housing Builders of America _________________________________________ _ Stone, Donald L., president, Stone & Schulte, Inc., San Jose, Calif_ __ _ Tolan, John H:i. Jr., Barrett Homes, Richmond, Calif_ _____________ _ United States i::iavings & Loan League ___________________________ _ Weitzer, Bernard, national legislative director, Jewish vVar Veterans of the United States of America ______________________________ _ Zimmerman, Julian H., Commissioner, Federal Housing Administra-_ tion ______________________________ _________________________ Additional data submitted to the subcommittee byAddonizio, Hon. Hugh J.: "Tight money seen affecting buying plans," article from National Association of Real Estate Boards ________________________ _ Bartling, Martin L., Jr., National Association of Home Bmlders: Attachment A. NAHB policy statement for 1960 _____________ _ Attachment B. A proposal for a central reserve facility to aid in stabilizing the mortgage market __________________________ _ Home building and the economy-recent, experience and current outlook; and the experience during the recovery in 19,58--59 and the outlook in early 1960 ________________________________ _ Table 1.-U.S. housing starts by type of finance and comparative data for FNMA program 10 mortgage acquisitions __________ _ Table 2.-Program 10 assistance by States ___________________ _ Table 3.-Selected data on FNMA program IO-Distribution of $1 billion special assistance authorization __________________ _ Table 4.-Trends in homebuilding activity in selected metropolitan areas, end of 1959 versus end of 1958 __________________ _ Bass, Hon. Perkins: Big surplus due to ease lending-officials estimate $10 billion extra will be available at reduced rates, article from New York Times, of January 20, 1960_ ----------------------------- "Whose tight money?" editorial from the New York Times of January 23, 1960 _______________________________________ _ Carev, James B., AFL-CIO: Federal Reserve Board Index of Industrial Production from 195059 (chart) _____________________________ ________________ _ Flynn, Frank P., Jr., Home Manufacturers Association: · General Homes, Inc., Fort Wayne, Ind.,_____________________ telegram of January 22,_ 1960 _____________________________ Harnischfeger Homes, Inc., Port Washington, Wis., telegram of January 22, 1960 ________________________________________ _ Robert Smith Wilson Homes, Inc., Bridgeton, Mo., telegram of January 22, 1960 ________________________________________ _ Southern Mill & Manufacturing Co., Tulsa, Okla., telegram of January 21, 1960 ________________________________________ _ Southwest Homes, Inc., Houston, Tex., _____________________ telegram of January 22,_ 1960 ______________________________ Griffiths, Hon. Martha W.: Ira1960 Hotchkiss Co., Detroit, Mich., letter _____________________ and data, of January 12,_ ______________________________ FHA's boss doesn't see it, our way, article from Miami Herald of December 20, 19."9 ____ - _- - ____ - __________________________ _ Keyserling Leon H., National Housing Conference: Benefits of high-growth rate contrasted with low, 1960-64 (chart)_ Economic growth needed for economic health (chart) ___________ _ Growth rates, U.S. economy, 1920-59 (chart) __________________ _ High growth rate, 1960-64 (chart) ___________________________ _ "The new inflation" emerged as economy moved from growth to stagnation to recession, 1952-58 (chart) ___________________ _ $199 billion production deficit, 1953-59 (chart) ________________ _ Federal Reserve Bank of St. Louis  Page  270 184 272 107 212 134 208 245 369 370 10  312 60 65 69 76 77 77 78  353 353 331 103 103 103 103 103 292 294  162 151 147 161 157 153  CONTENTS  V  Additional data submitted to the subcommittee by-Continued Porter Hon. Charles 0.: "Homebuilding Drop Means Trouble for Oregon," article from Page Milwaukie (Oreg.) Review, of January 21, 1960_______________ 252 Rains, Hon. Albert: American Veterans Committee, letter of February 2, 1960________ 372 "Builders Critical of Money Policy," article from Evening Star, January 23, 1960_________________________________________ 92 California Savings & Loan League, Pasadena, Calif., letter of February 2, 1960_________________________________________ 374 "FHA Charge Held Usurious in Maryland," article from Evening 95 Star, January 7, 1960_____ ___________ __ ____ ______ _________ "Home Builders Flay High Interest Policy," article from Evening Star, January 21, 1960____________________________________ 93 National Association of Home Builders, Washington, D.C., letter and supplemental statement of February 1, 1960_ ______ 95 National- League of Insured Savings Associations, Washington, D.C., letter of January 27, 1960___________________________ 374 375 Phillips, Nash, Odessa, Tex., letter of January 27, 1960________ State of New York, Department of Audit and Control, Albany, N.Y., letter of January 28, 1960___________________________ 372 United Association of Journeymen & Apprentices of the Plumbing & Pipe Fitting Industry of the United States and Canada, letter of February 1, 1960____ ______ __ __ __ ___ _________ ___ __ 371 Veterans of Foreign Wars of the United States, Kansas City, Mo., letter of January 26, 1960____________________________ 373 Yarbrough, Joe C., El Paso, Tex., letter of January 26, 1960____ 374 Share, Leslie, Hamilton Construction Co., Detroit, Mich.: Dwelling permits issued, Detroit metropolitan area, 1954-59 (chart)__________________________________________________ 272 Schwartz, Dan, Perma-Bilt Homes, East Bay, Calif.: Qualifications for conventional loans (chart)___________________ 237 Shishkin, Boris, secretary, Housing Committee, AFL--CIO: Labor's Economic Review, September 1959____________________ 192 Spiering, Chester H., developer and builder: Letters from Arcata, Calif., dated January 15, 1960, November 30, 1959, and November 17, 1959 ____________________ 213, 217, 218 Zeiler, Paul R__ __ _____ ___ __ __ __ __ ____ ____ ________ ___ ______ 222 Widnall, Hon. William B.: "Buoyant Builders: They Dispute Glum 1960 Forecasts, See Starts Near Last Year's Pace," article from Wall Street Journal of January 25, 1960____________________________________ 181 "Review and Outlook-The Government's Prefab Market," article from Wall Street Journal of January 28, 1960__________ 291 Zimmerman, Julian H.: Monthly survey of opinions of FHA, release on adequacy of longterm mortgage funds_____________________________________ 24 Secondary market prices for FHA-insured 5¾ percent new home mortgages_______________________________________________ 33 Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT MONDAY, JANUARY 25, 1960  HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING OF THE CoMMITTEE ON BANKING AND CtTRRENCY, Washington, D.O. The subcommittee met at 10 a.m., in room 1304, New House Office ~u~lding, Hon. Albert Rains ( chairman of the subcommittee) pres1dmg. Present: Messrs. Rains (presiding), Addonizio, Mrs. Sullivan~ Mr. Ashley, Mrs. Griffiths, Messrs. Miller, Widnall, and Derwinski. Mr. RAINS. The committee will be in order. Ordinarily I do not in the opening of hearings on legislation make any detailed statement, but for a little background this morning I have here a brief statement that I think I want to read in part, and include in the record in its completeness. In my judgment, despite a temporary spurt in December housing statistics, there is nothing too rosy about the housing outlook. Too much is being made in my judgment of the fact that there was a slight upward trend in the seasonally adjusted rate of housing starts in December. From all the expert opinion we have, been able to get together-and the purpose of this hearing is to assemble even more-it appears that we can look for a substantial decline in housing this spring unless we take some corrective action. It is clear that all of the decline in housing, or practically all the decline in housing, has taken place in the FHA and VA sector, which produces a large majority of the lower priced homes, and this is what impresses me most. We know that in some parts of the country, and it is getting to be almost general, builders are finding it impossible to proceed with their new building plans because of the outrageous discounts being charged by lenders in connection with FHA and GI loans. All the trouble is not confined to the FHA and VA housing either, because we are submitting a report which was put together by the various housing agencies and the regional offices throughout the country, pointing out not only the danger, but the prevalence of second mortgages. That ought to make it clear to anybody that of the 900,000 units financed through conventional lending last year a substantial proportion were backed up by second mortgages of some type. They are backed up by second mortgages simply because the discount rates are so extremely high on FHA and GI loans, and the lack of mortgage credit for insured loans. Federal Reserve Bank of St. Louis  1  2  EMERGENCY HOME OWNERSHIP ACT  Two years ago, almost overnight, we passed an emergency housing bill. We waited until the ox got in the ditch before we moved. The purpose of this hearing is to move before the ox gets in the ditch and make some provision for adequate, or at least a modicum of mortgage credit throughout the country. I am not going into the details of this committee print on second mortgages, but it is clearly evident that it is a dangerous practice, and that it is growing. There is before the committee a bill which I introduced on the first day of the session. It is a short and brief bill aimed primarily at providing additional mortiage credit, and that is the bill which will be considered by the comnuttee in its hearings, and is the bill to which the witnesses who have come will address their remarks. (H.R. 9371 ·and summary are as follows:) [H.R. 9371, 86th Cong., 2d sess.] A BILL To amend the National Housing Act to halt the serious slump in residential con• structlon, to increase both on-site and off-site job opportunities, to help achieve an expanding full employment economy, and to broaden home ownership opportunities for the American people  Be it enaoted by the Senate and House of Representatives of the United States of A~erioa in Congress assembled, That this Act may be cited as the  "Emergency Home Ownership Act". SEo. 2. (a) The Congress hereby finds that the present policy of the Federal Housing Administration, insofar as it limits mortgage insurance under its regular residential housing program to cases involving loans made by corporate mortgagees and other commercial lenders, is preventing the effective operation of the program, particularly in the smaller towns and communities of the Nation. It is therefore declared to be the intention of the Congress and the purpose of this section to make mortgage insurance under the Federal Housing Administration's regular residential housing program more readily available in smaller towns and communities by specifically providing that individuals as well as commercial lenders may be approved as mortgagees for purposes of such program. (b) Section 203(b) of the National Housing Act is amended by adding at the end thereof the following new paragraph : "Nothing in paragraph (1) or any other provision of this section shall be construed as prohibiting or preventing the approval of an individual as mortgagee for purposes of insurance under this section." SEO. 3. The first sentence of section 203(c) of the National Housing Act is amended by inserting before the period at the end thereof the following: "And provided further, That in the case of any mortgage with respect to which insurance is granted or a commitment issued under subsection (b) during the one-year period beginning on the date of the enactment of the Emergency Home Ownership Act, the premium charge shall be one-fourth of 1 per centum per annum on such outstanding principal obligation". SEo. 4. (a) Section 301(a) of the National Housing Act is amended by inserting before the semicolon at the end thereof the following: ", and by aiding in the stabilization of the mortgage market". (b) Section 304(a) of such Act is amended by striking out the last three sentences and inserting in lieu thereof the following: "The Association shall, from time to time, establish and publish prices to be paid by it for mortgages purchased by it in its secondary market operations under this section. The Volume of the Association's purchases and sales and the establishment of purchase prices, sales prices, and charges or fees in its secondary market operations under this section shall be so conducted as to promote the interests of the national economy by aiding in the stabilization of the mortgage market to the maximum extent consistent with sound operation, and within the reasonable capacity of the Association to sell its obligations to private investors. The Association shall buy at such prices and on such terms as will reasonably prevent excessive use of the Association's facilities and permit the Association to operate within its income derived from such secondary market operations and to be fully self-supporting. Notwithstanding any other provision Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  3  of this section, advance commitments to purchase mortgages in secondary market operations under this section shall be issued only at prices which are sufficient to facilitate home financing, but which are sufficiently below the price then offered by the Association for immediate purchase to p,revent excessive sales to the Association pursuant to such commitments." SEC. 5. Section 302{b) of the National Housing Act is amended by striking out "and" immediately before "(3)" and by inserting before the period at the end thereof the following: "; ( 4) during the one-year period beginning on the date of the enactment of the Emergency Home Ownership Act, the Association (except as provided in clauses (1), (2)_, and (3), and subject to the authority of the Association to set a limitation on the age of mortgages which it will purchase) shall purchase any mortgage (or participation therein) described in this subsection which is offered to it unless the loan is in default or in imminent danger of default or title to the property is defective". SEC. 6. Section 302(b) of the National Housing Act is further amended by inserting before the period at the end thereof (and immediately after the clause added by section 5 of this Act) the following: "; and (5) during the one-year period beginning on the date of enactment of the Emergency Home Ownership Act the Association shall, not sell any mortgage ( or participation therein) held by it." SEC. 7. The first sentence of section 303(b) of the National Housing Act is amended by inserting before the period at the end thereof the following: " : Provided, That with respect to mortgages which are purchased ( or with respect to which commitments to purchase are made) ,by the Association during the one-year period beginning on the date of the enactment of the Emergency Home Ownership Act, such contributions shall be equal to 1 per centum of such unpaid principal amounts". SEC. 8. The second sentence of section 305(b) of the National Housing Act is amended by inserting before the period at the end thereof the following: "; except that with respect to any mortgage which is purchased ( or with respect to which a commitment to purchase is made) during the one-year period beginning on the date of the enactment of the Emergency Home OwnersMp Act, the price to be paid by the Association shall be not less than the unpaid principal amount thereof at the time of purchase, with adjustments for interest and any comparable items". SEC. 9. The third sentence of section 305(b) of the National Housing Act is amended by inserting before the period at the end thereof the following: " ; except that with respect to any mortgage which is purchased ( or with respect to which a commitment to purchase is made) during the one-year period beginning on the date of the enactment of the Emergency Home Ownership Act, the charges or fees so imposed by the Association for its commitment and purchase shall not exceed 1 per centum of the unpaid principal amount of the mortgage, and (unless the commitment was issued before the beginning of such one-year period) not more than one-fourth of such charges or fees shall be collected at the time of the issuance of the commitme.nt with respect to the mortgage, with the balance of such charges or fees (whether the commitment was issued before or during such period) being collected at the time of purchase". SEC. 10. Section 305(g) of the National Housing Act is amended by inserting immediately after "$13,500" the following: " ( or $13,500 per dwelling unit in the case of a mortgage insured under section 213) ". SEC. 11. Section 305(g) of the National Housing Act is further amended(1) by striking out "Provided, That" and inserting in lieu thereof the following: "provided, That the Association may by regulation increase such amount by not more than $1,000 in the case of mortgages covering property located in geographical areas where it finds that cost levels so require: Provided, further, That'' ; and (2) by inserting after "shall not exceed $1,000,000,000 outstanding at any one time" the following: ", which limit shall be increased by $1,000,000,000 on the date of the enactment of the Emergency Home Ownership Act". SEC. 12. Section 305 of the National Housing Act is further amended by adding at the end thereof the following new subsection : "(h) Notwithstanding any other provision of this Act, the Association is authorized to make co,mmitments to purchase, and to purchase, service, or sell, any mortgage (or participation therein) which is insured under section 203(i); but the Association shall not enter into any such commitment or make any such Federal Reserve Bank of St. Louis  4  EMERGENCY HOME OWNERSHIP ACT  purchase unless (1) the property involved was approved for mortgage insurance prior to the beginning of construction, and (2) no service charge (otber tban the normal origination fee charged to the mortgagor) was imposed or collected in connection with the making of the loan. The total amount of purchases and commitments authorized by this subsection shall not exceed $50,000,000 outstanding at any one time." SEc. 13. With respect to any mortgage insured by the Federal Housing Administration or any loan guaranteed or insured by the Veterans' Administration, where the commitment of the Federal Housing Administration or the certificate of reasonable value of the Veterans' Administration was issued more than sixty days after the date of the enactment of this Act, the originating mortgagee shall report to the Federal Housing Administration or the Veterans' Administration, as the case may be, the amount of any fees, charges, or discounts (except for the normal origination fee charged to the mortgagor) paid by the builder, seller, broker, sponsor, or any other person in connection with or for the purpose of arranging the mortgage or loan.  EMERGENCY HOME OWNERSHIP ACT  ( Section-by-section summary) In general, it is the purpose of the bill to halt the serious slump in residential construction, to increase both on-site and off-site job opportunities, to help achieve an expanding full employment eoonomy, and to broaden home ownership opportunities for the American people. The first section of the bill provides that the act may be cited by its short title ( the Emergency Home Ownership Act). Section 2 amends section 203(b) of the National Housing Act (the regular residential housing mortgage insurance program) to make it clear that FHA may insure mortgage loans made by individuals as well as those made by corporate and other commercial lenders, in order to make the program more effective in smaller towns and communities. Section 3 amends section 203(c) of the National Housing Act so as to fix the premium charge for mortgage insurance granted under th2 regular residential housing program, during the 1-year period beginning on date of enactment, at one-fourth of 1 percent. Under existing law the FHA Commissioner has discretion to fix this charge at any point between one-half of 1 percent and 1 percent. Section 4 amends title III of the National Housing Act to provide that it shall be one of the purposes of the Federal National Mortgage Association, in its secondary market operations, to aid in the stabilization of the mortgage market. Section 5 amends section 302(b) of the National Housing Act to require FNMA, during the 1-year period beginning on date of enactment, to purchase any mortgage which is offered to it regardless of the type of housing covered, so long as title to the property is good and the mortgage is otherwise eligible and not in default. FNMA's authority to limit the age of eligible mortgages would not be changed. (Under current regulations, eligible mortgages cannot be more than 4 months old.) Section 6 amends section 302(b) of the National Housing Act to prohibit FNMA, during the 1-year period beginning on date of enactment, from selling or otherwise disposing of any mortgage which it may hold. Section 7 amends section 303(b) of the National Housing Act to fix the amount of FNMA stock which a person is required to purchase when selling a mortgage to FNMA, during the 1-year period beginning on date of enactment, at 1 percent of the unpaid principal amount of the mortgage. Under existing law FNMA bas discretion to fix this requirement at any point between 2 percent and 1 percent of such unpaid principal amount. Section 8 amends section 305(b) of the National Housing Act to require that FNMA, in the performance of its special assistance functions, during the 1-year period beginning on date of enactment, shall not pay less tban par for any mortgage. Section 9 amends section 305(b) of the National Housing Act to provide that the maximum charges or fees which FNMA may impose for its commitment and purchase of a mortgage under the special assistance program, during the 1-year period beginning on date of enactment, shall be 1 percent of the unpaid principal Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  5  amount of the mortgage, with one-fourth being collected at the time of commitment and the remainder at the time of purchase. Under existing law, FNMA has full discretion to fix these charges and fees. (Under current regulations,these fees totals total 1 ¼ percent with one-half of this amount collected at the_ time of commitment.) Section 10 amends section 305(g) of the National Housing Act to make it clear that mortgages on cooperative housing insured by FHA under section 213 are -~ligible for purchase by FNMA under its Program 10 special assistance operations. ( See sec. 11.) Section 11 amends section 305(g) of the National Housing Act to provide an additional $1 billion for FNMA's Program 10 operations. This program was established by the Emergency Housing Act of 1958 under FNMA's special assistance function for the purchase of mortgages on new construction. This bill retains the present ceiling of $13,500 per mortgage ( or per dwelling unit in the case of sec. 213 mortgages) but adds the further provision that the association may by regulation increase the amount by not more than $1,000 in high-cost areas. Section 12 amends section 305 of the National Housing Act to create a $50 million special assistance fund for the purchase by FNMA of mortgages which are insured under section 203 (i) (and which cover new construction). No such mortgage could be purchased from the new fund if any service charges other than the usual origination fee had been imposed. (Under current regulations, FHA permits a special service charge of one"half of 1 percent on the outstanding balance of the mortgage to be added to the monthly carrying cost on loans of $8,000 or less.) Section 13 requires the originating mortgagee under an FHA-insured mortgage or a VA-insured or guaranteed loan to report to the agency involved the amount of any fees, charges, or discounts paid in connection with such mortgage or loan,  Mr. RAINS. I see we have new members of the committee, and we have members on Mr. vVidnall's side who are not here yet. I am glad to welcome to this committee Mr. Rutherford and Mrs. Griffiths. Mr. Derwinski and Mr. Bass will be here shortly. The subcommittee now has 11 members, and we are glad to have the additional members, because we need your help and we know it will be valuable to us in trying to solve some of the housing problems. ( The full opening statement follows:) STATEMENT BY CHAIRMAN RAINS AT THE OPENING OF HEARINGS ON THE EMERGENCY HOME OWNERSHIP ACT  There is nothing in the present housing situation to furnish any real basis for optimism or complacency. l!'ar too much is being made of the fact that the seasonally adjusted annual rate of housing construction rose during th.e month of December, the latest month for which statistics are available. The blunt truth is that the preponderance of expert opinion tells us we can expect a substantial decline in housing this spring unless we take corrective action. We know further that all of the decline in hous,ing starts during the past year has taken place in the FHA and VA sector which produces the large majority of lower priced homes. We know that in some parts of the country builders are finding it impossible to proceed with new building plans because of the scandalously high discounts being charged by lenders in connection with FHA and GI loans. In these areas builders are being faced with an impossible situation. If they build under the FHA or GI programs, the discounts are so high that they cannot earn a reasonable profit. Or, in order to continue in business, they are forced to pass these discounts on to the home buyer through higher prices. ,Nor is all of the trouble confined to housing produced with FHA and GI financing. I am making public today the results of a survey of VA and FHA field offices which tells the disturbing story that in many areas of the country the volume of conventionally financed housing is being artifically and precariously maintained by a widespread use of second mortgages, land sales contracts, and other forms of mortgage financing which are costly and potentially dangerous to the,home buyer. Federal Reserve Bank of St. Louis  6  EMERGENCY HOME OWNERSHIP ACT  My emergency homeownership bill, by providing $1 billion for FHA and GI loans, would be a powerful stimulus to overcome the shortage of funds for FHA and GI loans. By passing this bill the Congress would be taking a forthright step to help homeowners avoid the use of these questionable forms of financing. . . Last fall, at our request, a survey was made of all FHA and VA field offices to get their expert opinion on local conditions. The reports from these administrative officials are far from reassuring. In many of our major homebuilding markets second mortgages and land sale contracts dominate the conventional loan field. For example, Los Angeles, San Francisco, Phoenix, Fort W'orth, New Orleans, Tampa, Washington, D.C., and Cleveland are among the many areas which report that 50 percent or more of the conventional loans involve either second mortgages or installment contracts. The usual second mortgage is for a very short term, from 3 to 5 years, and the monthly payments force the homeowner to pay an unduly high percentage of his income for housing. Also, his home is especially vulnerable to foreclosure if he loses his job or suffers reduced income. The lana sale contract device is often equally bad because the buyer does not even have title to his home and in many States he would face eviction almost immediately if he lost his job or found his income reduced. As would be expected, most of the reports indicate an increase over a year ago. Moreover, there has undoubtedly been an increase since this survey was taken last fall. Scattered through these reports are references which point 1up the dangers of such practices. For example, the VA office in San Francisco estimates 60 to 70 percent of the conventional loans carry second mortgages and attributes this to "the increasingly tight mortgage money market." The same office makes this further comment on the problem: "In summary, we feel that the substantial increase in secondary financing in this are has created an unwholesome situation that could be disastrous to homeowners and investors alike, should we experience any prolonged period of unemployment or material reduction in wage earners' incomes." In Los Angeles, the FHA office estimates 75 to 85 percent of the conventionally financed new homes use second and even third mortgages as well as other devices. In nrand Rapids, land sale contracts are more common than second mortgages and the FHA Director there states : "Practically all landi contract sales carry an inflated price in anticipation of later discounts. These range from no discount to 5, 10, 15, 20, and sometimes 30 percent." In connection with land sales contracts, the VA office in Phoenix remarks: "The reason for the relatively widespread use of the installment contract instead of taking back the second mortgage is to circumvent the right of redemption law which exists in this State." Commenting on the difficulty in getting complete information as to these prac-. tices, the VA regional office in Seattle, Wash., remarked: "Since secondary financing was one of the principal causes of the collapse of the mortgage market in the early 1930's, lenders are loathe to admit these practices exist."  Mr. RAINS. The first witnesses this morning are our distinguished friends :from the various agencies involved in the housing programs: Mr. Norman P. Mason, Administrator, HHFA; Mr. Julian H. Zimmerman, Commissioner, FHA; and Mr. J. Stanley Baughman, President, FNMA. If you gentlemen will come around, we will let you proceed with· your statements, and afterward we will proceed with questioning. ·I think the best thing to do would be :for each of you to read your statements in the order we have you on the list of witnesses, and then remain :for questioning as a group. · Mr. Mason, we are delighted to have you here with us, and you may, · proceed with your statement. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  7  STATEMENT OF NORMAN P. MASON, HOUSING AND HOME FINANCE ADMINISTRATOR  Mr. MAsoN. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before your committee to discuss R.R. 9371, the emergency homeownership bill, introduced by your chairman Mr. Rains. I have with me today the President of the Federal National Mortgage Association, Mr. Baughman, and the Federal Housing Commissioner, Mr. Zimmerman. They will give you their comments on the provisions of the bill relating to their respective rresponsibilities. I will restrict my testimony to the bill as a whole and to some of its principal provisions. The executive secretary of the Voluntary Home Mortgage Credit Committee, Mr. Graves, is also with us and will assist in answering any questions you may have concerning the program of that Committee. We are here to assist your committee to the very best of our ability in working toward the goal we all have in common, to service the public better. We welcome the opportunity of presenting our views and the experience of the agencies which have operated the housing finance programs and which, like yourselves, have continually studied themto increase their effectiveness. The Housing and Home Finance Agency recommends against the enactment of R.R. 9371, and I have been authorized to a.dvise that the enactment of the bill would not be in accord with the program of the President. The bill, an emergency measure, is designed to increase housing production and to avoid a feared drop in production. The bill includes the authorization of $1 billion of expenditure by the Federal National Mortgage Association for the purchase of mortgages on uew housing under its "Special assistance" functions. Mortgages in amounts up to $13,500 would be eligible for these purchases, and in high-cost areas, mortgages up to $14,500 would be eligible. The bill would make other major changes in operations of both the FNMA and the Federal Housing Administration. I firmly believe that this legislation is not desirable, and particularly so at this time when the housing and overall economic situation is entirely different :from that prevailing in the spring of 1958 when another emergency bill was enacted. The annual rate of housing starts last month, seasonally adjusted, was 1,310,000. In contrast, the housing starts were running at a rate well below 1 million at the time that the 1958 act was under consideration. Then, the economy was in a recession. Now, we are in a time of rising prosperity, and there is every indication that this will continue. Based on the latest available figures, industrial production is rising and is approaching the alltime high reached before the steel strike. Last month unemployment was reduced, which is unusual for December, and the number of gainfully employed, seasonally adjusted, rose to 66.2 million-a new high record. As the President's state of the Union message points out, "Today our surging strength is apparent to everyone." Federal Reserve Bank of St. Louis  8  EMERGENCY HOME OWNERSHIP ACT  We believe that the enactment of this legislation at the present time would lead to housing cost increases. In 1958, when srmilar legislation did help serve an antirecessionary purpose, construction costs rose sharply. The rapid increase in housing starts was a significant factor in bringing about a 5-percent rise in residential construction costs between the second quarter of 1958 and the third quarter of 1959. The enactment of the pending legislation is not necessary. The residential construction industry will share in the general prosperity in 1960, as it did in 1959. For the year 1959 as a whole, private starts totaled 1,341,000, close to the allt1me record. The yearend rate of 1,310,000 demonstrated the buoyancy of the housing market. We recognize that arranging financing, when the economy in general is making heavy demands on the money market, presents a real problem to homebuilders and home :eurchasers. However, it is our judgment that this credit situation will permit a high level of homebuilding during 1960. Although an increase is expected in loans to finance the expansion of business plants, equipment, and inventories in 1960, there should be a great increase in the availability of loanable funds. This will result primarily because the Treasury, which was a heavy net borrower of funds in the money market in 1959, is expected to borrow less money in 1960 than it repays. Furthermore, the rising incomes of our families should generate greater savings. Not only will consumers be saving more but there will be larger repayments on the outstanding consumer debt which expanded rapidly in 1959, so that the net expansion of consumer debt should be smaller in 1960. These elements should increase the supply of loanable funds and relieve some of the pressure on the mortgage market, not in a matter of days, but as the months progress. The result should be more ready availability of mortgage funds for builders and home buyers. There was a sign of this development in December when, for the first time in several months, there was no increase of discounts on FHA-insured mortgages in the private secondary mortgage market. There is another factor which would help make mortgage funds easier to obtain. The President has asked that the restriction be removed on interest rates on Treasury borrowing where the term is 5 years and longer. If the Congress does this, the mortgage money market could react favorably. When the Treasury has to finance all o:f its needs :for a term shorter than 5 years, it has to do so at higher rates than on long terms and this attracts :funds that individuals would otherwise put in savings accounts which are a prindpal source of mortgage credit. The so-called Magic Fives are a good example of· this. The bill would establish an additional revolving fund o:f $50 million for the purchase by FNMA of section 203 ( i) mortgages on new housing in outlying areas when the amount of the mortgage is $9,000 or less. However, no such mortgage could be purchased if any service charge is made other than the usual origination fee. This would prohibit the purchase of mortgages with a one-half percent service charge which FHA now permits in connection with mortgages of $8,000 or less. We understand that the proposal is based upon the assumption that this charge is excessive and that this Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  9  requirement in the law would relieve an unreasonable burden on the borrower. We believe that it is desirable to particularly encourage and assist the financing of lower cost homes. Permitting the use of the service charge is part of our effort to bring more lenders into this field. Expenses of a lender are proportionately higher on mortgages in lower amounts, because many of the lender's expenses are about the same regardless of the size of the mortgage. Without a service charge or some comparable compensation, a lender naturally invests in higher amount mortgages. We require proper servicing and the service charge helps compensate for expenses of maintaining the soundness of the mortgage by checking the condition of the property from time to time and helping the mortgagor to work his way out of any credit difficulties. We believe the removal of the service charge from all these mortgages would only drive away private investment to the ultimate detriment of lower cost home construction. The proposed expenditure of $1 billion under the "Special assistance functions" and $50 million for section 203 ( i) mortgage purchases, over and above what is already contemplated in the President's budget for fiscal H>60, would place an added burden on the whole financial structure of the Government. The President's budget already contemplates an investment of about $1.9 billion in FHA and VA mortgage loans, including purchases in all FNMA programs. This amounts to about one-fifth of the total of such loans made during the year. To increase this expenditure as the bill provides would mean the necessity of more Government borrowing. In turn, the issuance of more Government bonds would increase the national debt and add to inflationary pressures. This sort of program would not seem to best serve the homeowners of our Nation who are the very people we both want to help. We are also _opposed to the provision of the bill that requires, for 1 year, that FNMA pay par for all mortgages purchased under its "Special assistance functions." The Administration has consistently opposed such a requirement which was in effect for a period prior to August 7, 1958. The special assistance functions were designed to encourage private investment in special categories of home mortgages which had not yet gained full acceptance in the general mortgage market. As often stated, the program was intended to encourage rather than supplant private investment. Where these mortgages have a market value of less than par, the par-purchaS'l requirements make it impractical for private investors to compete in the purchase of even the more desirable ones, and through ownership to get actual experience as to their desirability as investments. In the long run, more funds would be available. for these selected categories of housing mortgages if private capital were actively encouraged to invest in and become familiar with them. The extension of special assistance functions under the bill to all low-cost mortgages eligible for FNMA purchase would, of course, broaden the effect of the par-purchase requirement and decrease any interest on the part of private investors. Federal Reserve Bank of St. Louis  10  EMERGENCY HOME OWNERSHIP ACT  Furthermore, these special assistance functions are presently operating satisfactorily without a par-purchase requirement. Mr. Baughman and I have both been pleased to note that FNMA's special assistance pricing policies have not been the subject of any general complaint since the par-purchase requirement was repealed last year. Another provision of the bill which we believe to be undesirable is the proposed 1-year suspension of all mortgage sales by FNMA. Economic circumstances vary from time to time both nationally and locally, and varying circumstances may also be present with respect to different mortgages or blocks of mortgages. A flat prohibition on all mortgage sales could well interfere with FNMA actions that are desirable and that represent sound business practices. In the case of FNMA's secondary market operations, such interference would be especiially objectionable because it unfairly affects the interests of the private shareholders. As Mr. Baughman will point out, the prohibition would also lead to undesirable results in FNMA's special assistance and liquidating functions. The history of FNMA's operations indicates that it has used good judgment in the timing of its sales. The bill contains another very undesirable provision which would require the temporary reduction of the FHA insurance premium for home mortgages to one-fourth percent. It would not be prudent to set the rate other than on an actuarially sound ba:sis. Although the bill would make this reduction effective for only a year, it would constitute a harmful and dangerous precedent for destroying the soundness of the mortgage insurance program, which has from its inception been designed to be sound and self-supporting. Mr. Zimmerman will explam the disadvantages of this provision in greater detail. In the light of the present trend in the volume of housing starts and mortgage money rates, we feel that it would be beneficial to permit the industry to continue to move ahead under the same rules it has had. Too frequent changes are especially discouraging to the many small builders and small lenders whom we all want to encourage to use the program for the good of the American people everywhere. This concludes my prepared statement. I am sure Mr. Baughman and Mr. Zimmerman will be glad to continue ,at your pleasure. Mr., RAINS. Thank you, Mr. Mason. We will hear all the statements before we ask any questions. Mr. Zimmerman, Commissioner of FHA, you may proceed with your statement. STATEMENT OF JULIAN H. ZIMMERMAN, COMMISSIONER, FEDERAL HOUSING ADMINISTRATlON Mr. ZIMMERMAN. Mr. Chairman and members of the subcommittee, it is a privilege to appear before you as Federal Housing Commissioner in order to testify concerning the provisions of H.R. 93-71 which pertain to Federal Housing Administration programs. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  11  FHA was established in 1934 to facilitate sound home financing, encourage improvement in housing standards, and facilitate the flow of money into home mortgages. FHA does not make loans, plan or construct housing but insures loans made by private lenders. FHA is self-supporting and pays all expenses out of income received from fees and mortgage msurance premiums. As of October 31, 1959, FHA had written insurance totaling close to $60 billion.. Since 1934, home ownership has increased nearly 50 percent, a noteworthy accomplishment in light of the fact that it mcreased less than 7 percent in the previous 50 The year 1959 was one of the biggest in FHA history. Existing home mortgages insured set an alltime record with 305,000 units. This was almost 20 percent higher than the previous record year of 1958, during which 256,000 units were insured. The 200,000 units of new homes insured was exceeded only by the 225,00 units in 1950 and the 204,000 units in 1948. The volume of 304,000 units of one- to four-family units which were started under FHA inspection during 1959 was second only to the 328,000 units in 1950. In total, 550,000 units were insured in 1959 on new homes, existing homes and proJects. This is a 21-)?0rcent increase over 1958. Section 2 of H.R. 9371 seeks to mcrease the flow of mortgage funds to smaller communities by making explicit provision for approval of individuals as FHA mortgagees. We are opposed to this provis10n. FHA has long recognized the importance of stimulating the uoo of FHA programs and developing appropriate outlets for mortgage funds in smaller communities and outlying areas. In 1956, an industry committee met with FHA to discuss the problem presented by smaller communities, and remedial measures which could be taken. The judgment of the committee was that the principal deterrents to wide usage of FHA in smaller communities were-first, the lack of familianty of smalltown lenders with FHA procedures and forms, and, second, delays caused by the distance from the FHA offices. We believe the solution lies in devising a system which meets the basic problems. FHA has made considerable progress in this direction. First in 1957 the certified agency program was inaugurated on an experimental basis in seven offices. Just recently it has been given full operational status in nearly all field offices for towns of 20,000 population and less, distant from our offices. This program permits local lenders, appraisers, and inspectors to process cases. Over $300 million of loans have been insured in the past 2 years, principally in the smaller towns and remote areas. Second, the fee appraiser program was inaugurated in 1958 to speed up service. To date, over 392,000 fee appraisals have been made. There are over 5,000 FHA approved fee appraisers. The time saving in small communities has been tremendous. Third, use of fee inspectors is now being considered. Fourth, FHA works closely with the Voluntary Home Mortgage Credit Program to facilitate the flow of private funds for residential mortgage loans into small communities and remote areas. Over $180 50876-60-2 Federal Reserve Bank of St. Louis  12  EMERGENCY HOME OWNERSHIP ACT  D?-illion _of FHA loans have ibeen pla_ced through this program, principall~ m towns under 25,000 population. While FHA now has legal authority to approve individuals as mortgagees, it has not done so for several reasons. First, the FHA system of mortgage insurance requires a single monthly p3:yment, which includes principal, interest, mortgage insurance premmm, taxes, fire insurance, etc. We believe the single monthly payment feature has been one of the major conveniences which has made the long-term amortized mortgage so popular and practical. FHA requires mortgagees to maintain in an escrow the mortgagor's monthly payments for taxes, fire insurance, mortgage insurance premiums, special assessments, etc. FHA has protective requirements with regard to the maintenance, custody, and accounting of these escrow funds which we believe make the program uneconomic for an individual investing on a relatively small scale. Second, FHA, for protection of home buyers, requires that insured mortgages be held b,r mortgagees who are equipped, by experience and facilities, to service mortgages properly. This requirement poses no problem in the case of corporate mortgagees, which have legal succession and continuity. However, individuals, because of the personal problems of death, divorce, insanity, etc., present an entirely different picture. In the event of long, drawn-out litigation involving the estate of a deceased mortgagee, who would service the insured mortgages? Who would maintain the trust fund escrows, pay the taxes, fire insurance, special assessments et cetera? To whom would FHA be responsible for payment of de~ntures in the event of loss? Who would be responsible to FHA for payment of mortgage insurance premiums? These and other questions point up the many new problems that would be created if individuals were approved as mortgagees. Third, under the present FHA procedure, individuals can and do frequently invest in FHA mortgages. The most common method of 11.ccomplishing such investment is through an approved mortgagee which has trust powers. Under this procedure of the FHA program, an individual can create a trust, using his own funds and authorize a _co~porate trustee which is an approved mortgagee to h?ld mortgages m its trust capacity with the individual as the beneficiary of the trust. We have had very few requests by individuals for approval as mortgagees and these requests have been met in almost all cases by using the existing features of the FHA program. Fourth another procedure, which we believe will offer opportunities for private investment in FHA mortgages, permits approved mortgages to offer to the general public participa,tions in FHA-insured mortgages. ':!-'his plan ~as only recently been placed in effect and is attractmg widespread mterest. We agree that ~xtending ~he benefits of_ FHA !nsurance in smap. communities reqmres attention and we will contmue to study this problem. We do not believe it desirable or necessary, however, to approve individuals as FHA mortgagees. Section 3 of H.R. 9371 stipulates that for a 1-year period any mortgage insured or commitment issued under section 203 (b) of the National Housing Act shall provide for annual insurance premiums Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSIITP ACT  13  o:f one-fourth percent o:f outstanding balance. We oppose this action, either as a temporary measure or as a permanent provision. The section 203 program has always been looked upon as one which should be financially self-sufficient. The use o:f subsidies has been rejected as a long-range element in this program. Treasury :funds were allocated initially to establish the insurance :fund and to cover early operating expenses. In 1954, all Treasury :funds were repaid with interest. Section 203 was made a mutual program so that it could operate at minimum expense to borrowers while at the same time collecting a premium adequate to cover expenses under :foreseeable conditions. The mutuality :feature permits unneeded premium and other income to be returned to the borrowers in the :form o:f participation dividends if losses and expenses are less than those assumed in the premium computation. From 1944 through October 31 1959, these dividends amounted to $98.7 million. At the same date, there was in the participating reserve account available :for :future dividends $121.1 million. The aggregate o:f these two amounts equals 29 percent o:f section 203 premmm collections. The size o:f these payments reflects the very :favorable loss experience which has been experienced during the past 25 years. The importance o:f these mutuality provisions cannot be overemphasized. Through application o:f this principle in a sound actuarial manner, net insurance costs o:f the program can be economically and equitably distributed according to the size and term o:f the insured mortgage and the length o:f time insurance contracts are in :force. This permits equitable recognition o:f the increased risk in the early years o:f the mortgage. We believe that section 203 should continue to be a self-sustaining program with minimum premium costs to borrowers. A mandatory premium reduction to one-fourth o:f 1 percent would not meet this standard. On the basis o:f both cumulative experience to date and experience in recent years, a premium of this size would be barely adequate for the operating and administrative expenses o:f the section 203 program. Reserves would be inadequate for sustaining any significant losses. Accordingly, losses from cases paying one-fourth percent premiums would need to be absorbed by premiums from other cases or by Treasury subsidy. I:f the one-fourth percent premiums were limited to cases committed or insured during a certain time period, as in H.R. 9371, the losses from these cases would necessarily be subsidized by the remainder o:f the cases, which would not be equitable. H, on the other hand, the reduced premium were applied to all cases, the premium income would clearly be inadequate :for the losses which would occur in the event o:f a real estate depression. It has been suggested that a reduction o:f premiums would stimulate housing construction. The latest Census Bureau report indicating private starts in December at an annual rate o:f 1,310,000 non:farm units raises a strong question as to the need :for such stimulation at a time o:f generally full employment. Reduction o:f the mortgage insurance premium should not be employed as a counterbalance to increased interest rates. Interest is income o:f the lender which varies primarily with changes in the cost Federal Reserve Bank of St. Louis  14  EMERGENCY HOME OWNERSHIP ACT  of money. Insurance premiums, however, are income to FHA which must be adequate for section 203 expenses and losses. Insurance premiums, in my judgment, should not be manipulated for unrelated purposes. It has been suggested that the one-fourth percent premium be used for a 1-year trial period. Such a period would clearly provide no loss experience and nothing would be learned about administrative problems which is not already known or cannot be as well established without the trial period operation. For actuarial purposes, the combination of established expenses for administration of the mortgage insurance program plus assumed losses under depression conditions can determine with ample efficiency the appropriate scale of FHA reserve requirements. These reserve requirements indicate the flow of premium income required for financially sound operation under the assumed conditions. The dividend procedure provides an efficient and equitable means of returning to mortgagors any premium savings which result from more favorable experience than that assumed. FHA actuarial assumptions for determining reserve requirements have been made on a conservative but not unreasonable basis. A few years ago a very comprehensive examination of the FHA reserve assumptions was made by independent experts employed by the national associations of several major classes of mortgage lenders. A book entitled "The Mutual Mortgage Insurance Fund: A Study of the Adequacy of Its Reserves and Resources," published by Columbia University Press, prepared by Prof. Ernest M. Fisher and Prof. Chester Rapkin of Columbia University, summarized the results of this inquiry. Let me quote to you a few pertinent passages from their volume: The periodic calculations made by FHA in evaluating the reserve position of the mutual mortgage insurance fund represent an ingenious application of what is known as the prospective method of actuarial science (p. 56). * * * FRA has chosen amounts [for reserve calculation] * * * which appear to be reasonable and within the range of probability (p. 5). * * * the foreclosure and property acquisition rates employed by FHA in making its acturial calculations * * * are certainly not unreasonably above or below those indicated by the experience studies ( p. 151) . * * * the loss rates assumed by FHA are not inconsistent with the experience data * * * (p. 86). On net balance, it app,ear.s that the FHA calculation [of reserve requirements] is based on premises that should make adequate provision for contingencies of major depression magnitude.  FHA does not consider that either this objective review of its reserve requirement standards or its own basic studies should be accepted as a permanent settlement of the proper level of FHA premium charges. FHA actuarial reviews are recurringly made of the status of FHA reserve requirements and of the premises on which these requirements are based. These matters are also examined from time to time in the course of General Accounting Office audits of FHA accounts. Until such studies or discussions show a sound basis for premium reductio~ for al_l mo~g:age insurance ?ontracts in the section 203 program without imper1lmg the financial adequacy of the insurance fund, we believe the present statutory provisions for premiums should remain unchanged. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  15  Section 13 o:f H.R. 9371 prescribes that, with respect to FHA and VA mortgages, the originating mortgagee shall report any :fees, charges or discounts paid by the builder, seller, broker, sponsor, or any other person in connection with or :for the purpose o:f arranging the mortgage or loan. The only exclusion :from this requirement would be the normal origination :fee charged to the mortga.gor. We oppose this provision because it is both unnecessary and undesirable. FHA assembles regularly :from its field offices opinion reports concerning local mortgage information as to the current prices for various types o:f FHA-insured mortgages being sold in the secondary market. In these reports, the effects o:f any financing :fees and charges other than discounts are taken into account. FHA publishes monthly the composite o:f these reports for a basic type transaction. Reporting o:f this basic transaction is amplified by rel?orts relating to advance commitment transactions, transactions dealmg with section 203 mortgages on existing homes and with mortgages insured under other programs, and by reports on the adequacy o:f the flow o:f mortgage :funds for FHA-insured mortgages. Special reports are sometimes required :from field offices. Furthermore, Directors are expected to report unusual :facts whenever conditions seem to occasion such comments. I:f addition knowledge o:f this kind is considered desirable, FHA already has ample authority to require whatever reporting by mortgagees or FHA offices might seem appropriate. Such reports can be assembled and analyzed within a :few days to provide timely knowledge o:f current mortgage market conditions both in individual regions and in the Nation as a whole. Flexibility in the assembling o:f discount information is :feasible in such procedures and can best provide a current understanding o:f market developments without extensive policing or rigid adherence to legally imposed requirements. In contrast, the proposed provision would impose a substantial reporting burden on mortgages. They would be required to report information which may not be within their knowledge, such as construction loan interest, brokers' :fees, etc. The information received by FHA would be so voluminous as to defy systematic recording and analysis except at prohibitive costs. Our present system requires only the correlation o:f the summaries submitted by 75 field offices reporting uniformly. The proposed requirement would necessitate the correlation o:f over 500,000 reports per year :from a diverse group of mortgagees. Because the reporting would be at the time of insurance, summaries based on these reports would lag so far behind actual market developments they would make little or no contribution to the current administration of FHA programs. Compliance with reporting requirements as applied to current market practices would be so expensive and complicated that mortgagees would be discouraged from participating in the programs. In our opinion, this increased resistance to participation in FHA programs would probably be the main consequence of a statutory requirement for the reporting which is proposed by section 13. Administrative costs to FHA also would be substantial. Benefits in the :form o:f increased knowledge would be decidedly limited. No new Federal Reserve Bank of St. Louis  16  EMERGENCY HOME OWNERSHIP ACT  or additional protection or benefit to home buyers would be created by such a reporting system. For these reasons, we oppose the provisions of section 13. Thank you, Mr. Chairman. Mr. RAINS. Thank you, Mr. Zimmerman. Now, Mr. Baughman, we will have your statement. STATEMENT OF J'. STANLEY ::BAUGHMAN, PRESIDENT, FEDERAL NATIONAL MORTGAGE ASSOCIATION  Mr. BAUGHMAN. Mr. Chairman and members of the committee, I am J. Stanley Baughman, President of the Federal National Mortgage Association. I appreciate the opportunity afforded me by your Subcommittee on Housing to appear before you at this time to present our views concerning the chairman's bill H.R. 9371. Of the bill's 13 sections, sections 4 through 12 relate directly to FNMA. The Federal National Mortgage Association purchases, manages and sells FHA and VA housing mortgages. Such activities, by their nature, are of a business type. FNMA itself is a corporation-a mixed ownership corporation. All of the common stock is owned by private shareholders, and the preferred stock is owned by the Treasury. Importantly, there are three independent portfolios of FNMAowned mortgages, dating from November 1, 1954. These three portfolios result from three separate operations predicated on different purposes and objectives. The three are ( 1) a privately financed activity, which in time is to become privately owned, called the secondary market operations, (2) the special assistance functions, which are operated exclusively for the account of the Government with Treasury money, to accomplish various broad national housing policies or objectives, as determined by the Congress or the President, and (3) the management and liquidating functions which provide mainly for managing and liquidating the portfolio of mortgages resulting from the Association's overall operations prior to November 1, 1954. During the calendar year 1959 the consolidated purchases of mortgages by FNMA aggregated $1.9 billion. That compares with $1.1 billion in 1957, the next largest year. We estimate that the comparable figure for 1960 will exceed $1.4 billion, of which about $1.1 billion will be effected through the privately financed secondary market operations. Section 4 of the bill would effect a direct amendment of the FNMA Charter Act's provisions relating to the privately financed secondary market operat10ns. The present statutory purpose is to provide supplementary assistance to the general secondary mortgage market-by providing a degree of liquidity for mortgage investments, thereby improving the distribution of investment capital available for home mortgage financing.  The change would addand by aiding in the stabilization of the mortgage market.  The amendment would also strike out of the corporate charter the present basic criterion governing purchase prices, which states: In the interest of assuring sound operation, the prices to be paid by the Association for mortgages purchased! in its . secon~ . market operations .under this . section, should be established; from time to time, within the range of Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  17  market prices for the particular class of mortgages involved, as determined· by the Association.  The implications of these proposals should be matters of grave concern, in our judgment, especially because in our opinion they are unnecessary. FNMA's continuing purchases of mortgages in sizeable volume under the secondary market operations, which again in 1960 are expected to exceed $1 billion a year, made within the range of' market prices, are already contributing significantly to the promotion of stability in the general secondary mortgage market. Such a consequence is natural and inevitable. We think, in addition, that the proposals are unwise. They are unwise because they imply that the privately financed secondary market operations, with respect to which there are corporate share.nolders numbering more than 5,800 are intended to accomplish a typically governmental objective of planned "aiding in the stabilization of the mortgage market." It would obviously be wrong to require FNMA in its relationships to these private shareholders, with no voting rights, who hold an equity investment of more than $54 million, to perform any act that may not be consistent with their interests. Such a possibility is implicit in the proposed deletion of the present requirement that purchase prices shall be "within the range of market prices." These proposals could not be adopted without giving private investors generally the impression that FNMA's corporate purposes and organization lack essential stability. The reactions of investors would adversely affect the market value of the capital stock, issued and to be issued; and would make more difficult future sales of corporate debentures of the secondary market operations. There are now outstanding more than $1.6 billion of such secondary market operations debentures, having terms up to 10 years. SECTION 5 OF H.R. 9371  Section 5 would affect FNMA's overall operations, including not only the Government-financed special assistance functions but also the secondary market operations. It would require FNMA, for 1 year, to purchase any offered mortgage unless (a) in default, ( b) in imminent danger of default, or ( c) the title to the property is defective. Occasionally, as you know, FNMA has declined to effect purchase of a mortgage offered to it. The concern of the seller is understandable, because all such mortgages are either insured or guaranteed by an agency of the Federal Government. In every instance, however, the reason for the declination has some essential relationship to the marketability of the mortgage in the general secondary morto-age market. The proposal in the bill properly recognizes that the Government insurance or guarantee with respect to home mortgages does not protect the owner of the mortgage against underlying defective title. Similarly it recognizes that FNMA should not be required to purchase a mortgage in default or in imminent danger of default. In this same field, however, are other cases differing only in degree-in which the mortgagor's credit standing is unfavorable, generally hav- Federal Reserve Bank of St. Louis  18  EMERGENCY HOME OWNERSHIP ACT  ing become so subsequent to its consideration a number of months earlier by the FHA or VA. For example, the mortgagor may unwisely have overwhelmed himself with obligations for installment purchases, he may have become unemployed or have developed marital difficulties, or he may even have died. The proposal in the bill does not recognize situations such as one in which the mortgagor has wantonly abused and neglected his property that constitutes the security for the loan. Or the property may have been abandoned and become the subject of serious vandalism. There have been cases in which physical environmental problems of a serious nature have arisen, including flooding, sewerage difficulties, and drainage problems. Shifting tel'lrain or landslides may have damaged or destroyed the properties constituting the mortgage security. I think it is entirely possible to have FHA. mortgages which, because of local proximity of the property to the lender or other individual circumstances, are wholly acceptable to particulrur investors-and are FHA insurable-but which would not be and should not be expected to be acceptable to mortgage investors generally. In such an mstance, FHA insurance has performed a valuable function. But neither the FHA insurance nor the VA guarantee can assure the marketability that, at least under the privately financed secondary market operations, is properly FNMA's criterion. Under the secondary market operations, the present charter requirement for reasonable marketability is necessary and, of course, 1s entirely prudent and in conformance with accepted business principles. Both the private shareholders and those who hold outstanding debentures are entitled to rely upon a continuation of such management policies. In addition, the needed assurance of continuity of operations would be lacking unless FNMA-owned mortgages were reasonably resalable. Under the special assistance functions, it is not now required that mortgages necessarily be readily acceptable to investors generally. FNMA's declinations are few. We think the proposed amendment is not needed. Under this heading there is never a final declination for credit reasons except after the case has been carefully considered in the principal office of the corporation here in Washington. In general, I must recognize there may possibly be instances h1 which we have in error declined to purchase some particular mortgage or mortgages. I say now as I have said before to many mortgage lenders, and to some members of this committee, that whenever we are furnished with information concerning any such situation, it wi11 receive my immediate personal attention. Section 6 would also affect FNMA's overall operations, including not only the Government-financed functions but also the secondary market operations. The amendment would require that FNMA, for 1 year, "shall not sell any mortgage." Such a proposal that would prohibit all sales of mortgages is, in our opinion, extremely unsound and impracticable. Especially in the secondary market operations, FNMA must have the requisite degree of business flexibility to be responsive to constantly changing situations in the general secondary mortgage market. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  19  Essential continuity of FNMA's operations is predicated to a considerable degree on effecting its sales at times when and in places where excess investment funds ate seeking mortgage investment. In this manner, FNMA has funds in readiness for its mortgage purchases at times when and in places where there are shortages of mortgage investment fonds. Again, as to the secondary market operations, the proposal is not consistent with accerted business operatrng principles. As to the specia assistance functions and the management and liquidating functions, it is perhaps conceivable that circumstances could arise which might justify discontinuance of sales. Indeed, on at least two previous occasions FNMA has suspended sales from what is now the portfolio of the management and liquidating functions; However, no legislation was needed then or now to accomplish that result. Speaking broadly, it is unlikely that FNMA will sell any substantial amount of mortgages from any of its portfolios under current conditions in the general secondary mortgage market. Also, there are a multitude of technical situations in which it is important that small-scale sales be effected, such as family problems and refinancing transactions. It will also be r~alled that under its secondary market operations FNMA provides a means by which mortgagees can raise cash on their mortgages and at the same time retain potential control over the mortgages for a period of time. Thus, if a mortgagee wishes in effect to borrow funds on the security of motgages, it may sell the mortgages to FNMA and request an option contract. The option contract gives the mortgagee the contractual right to repurchase the mortgage at any time during the following 9 months at the same price. Under the proposal in the bill, this existing procedure under which FNMA in effect can make loans on the security of mortgages would necessarily be discontinued. Section 7 of the bill would accomplish an amendment of the corporate charter that would have a direct and immediate effect on the secondary market operation's financing arrangements. It would provide that, for 1 year, the required stock subscription rate should be 1 percent of the amount of mortgage purchases or commitments. The subscription rate is now 2 percent, under the existing charter provision which permits the corporation to determine a rate between a minimum of 1 percent and a maximum of 2 percent. The objective of the 'bills' proposal is undoubtedly to reduce the cost of doing business with FNMA. FNMA's stock that is subscribed for at $100 per share is quoted in the current market at between $50 and $60 per share. Adoption of the proposal, which could be effected by the corporation without need for legislation, would thus reduce the transaction costs of those that sell mortgages to FNMA by somewhat less than one-half percent. Let us examine the other side of the coin, which undoubtedly should also be of interest to mortgage sellers. The bill's proposal would reduce the rate of buildup of the corporation's capital through stock subscriptions by exactly 50 percent. For ~ample, if a $10,000 mortgage transaction be assumed, the dollar difference between subscription rates of 2 percent and 1 percent would be $100. Federal Reserve Bank of St. Louis  20  EMERGENCY HOME OWNERSHIP ACT  S?lce borrowing potential is 10 times capital, payment into FNMA's capital _o:f the $1qo would have provided, in addition, $1,000 o:f such borrowmg potential, or a total o:f $1,100 that would have become available for additional purchases of mortgages. In present circumstances, it has been our judgment that the existing 2 percent stock subscription rate is reasonable and provides for the continuous progressive accumulation of suitable amounts of necessary ~NMA capital in relation to the increasing demands for mortgage m vestment funds. The advantages of assuring the availability and continuity of the secondary market operations by retaining the 2-percent stock subscription rate appear far to outweigh the current slight cost reduction to mortgage sellers that would result from reducing the rate to 1 percent. Section 8 of the bill would impose for 1 year, under the Governmentfinanced special-assistance functions, a requirement that all mortgages be purchased at "par" or 100 percent of the unpaid principal balance, without regard to interest rates; and section 9 would establish inflexible limitations on fees, which could not exceed (a) 1 percent in the aggregate1 and (b) one-fourth of 1 percent for a commitment. The admimstration has consistently and firmly opposed any requirement for purchases at a fixed "par" rate, as you know. If there be kept in mind the real purposes that the special-assistance functions are designed to serve, we cannot but question whether mortgages bearing differing interest rates, varying as to current new FHA and VA mortgages from 5¼ to 53/4 percent, can consistently be purchased at any single uniform price-whether that price be "par" or some other amount. Certainly they are not purchased on such a basis by institutional investors. For the information of the committee, FNMA's current special assistance purchase prices are as follows: 99 for home mortgages bearing 5¾ percent, 97 for home mortgages bearing 5¼ percent, and 99 for multifamily housing mortgages bearing 5¼ percent. The special-assistance functions provide for the purchasing of selected types of mortgages pending the establishment of their acceptability in the general mortgage market. If the establishment of such acceptability is to be advanced, special-assistance purchases should be conducted in circumstances that are planned to encourage private investment in the same types of mortgages. If the circumstances were to include fixed-purchase prices that were disproportionately high in relation to the mnrket, FNMA's purchases would necessarily supplant or deter private investment. Because the circumstances often involve the purchase by FNMA of mortgages that are valued by investors generally at less than "par," adoption of the proposed pricing requirement, supplemented by the proposed limitat10n on fees, would create a situation in which the mvestment of non-Government funds in such mortgages would become impracticable to any large extent. This result would follow even though the mortgages were of the more desirable types eligible for special assistance. Also, investors that are in a position to make available either mortgage credit or other ~ypes of credit will not prefer the mortgage field whenever mortgage mvestments are not reasonably competitive with Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  21  other types of investments. If the Federal Government, acting through FNMA, under its special-assistance functions, were to establish mandatory and inflexible purchase prices supported by Treasury funds, it would thereby tend strongly to preempt that part of the mortgage market covering the special-assistance types of mortgages. In addition, the proposed provision that would establish FNMA's fees below those of other mortgage institutions would further aggravate the situation, in our opinion. Specifically, the usual fee for purchase commitments is 1 percent, but under the bill FNMA's maximum commitment fee could not exceed one-fourth of 1 percent. In consequence it is our view that under the bill the Government, in its endeavor to be helpful to special types of home purchasers, would be unwittingly reducing the total credit actually available for those special types of home purchasers. In the long run substantially more financing will be available for the S.Pecial-assistance types of mortgages if we help to maintain an enVIronment favorable to private investment funds. As Mr. Mason has already pointed out the bill would authorize substantial additional Treasury financing by FNMA under the special assistance functions. Mr. Mason has stated the position of the administration, that is, such outlays of Government funds in the present circumstances of general economic well-being would be unwarranted. With respect to the existing overall special assistance authorization of $950 million that is expressly subJect to Presidential discretion, the administration will recommend other legislation increasing that amount by $150 million. REPORT ON SECONDARY MARKET OPERATIONS  I should like to close my testimony today by commenting briefly on the performance and accomplishments of the privately financed .secondary market operations. To finance purchases of mortgages in recent months we have been required to borrow substantial amounts of money in the face of almost continuously increasing borrowing costs. During 1959, 10 issues of debentures aggregating $1.34 billion were marketed at rates varying from 3.7 to 5.35 percent for obligations of 1 year or less, and from 4 to 5¾ p(}rcent for those of more than 1 year. The most recent offering, amounting to $200 million for a term of 9 months, carried a rate of 5.35 percent. When selling costs and commissions of approximately one-eighth of 1 percent are added to these rates, and when this cost is compared to the net return realized from mortgages bearing even the current higher interest rates of 5¼ and 5¾ percent, it becomes clear that FNMA must have management discretion to adjust prices and fees to avoid losses and to assure continuity of operations. In this connection the Congress has wisely made provision in the corporate charter not only that purchase prices should be "within the range of market prices," as I said earlier, but also that purchase prices and fees should be adjusted in response to changing market conditions to avoid excessive volume and to assure that the "operations should be fully self-supporting." In our opinion, the past 3 years have generously demonstrated the immense effectiveness of FNMA's secondary market operations in Federal Reserve Bank of St. Louis  22  EMERGENCY HOME OWNERSHIP ACT  meeting the pressing financial requirements of the housing industry. FNMA has been continuously in the market for the purchase of FHA and VA mortgages during the full 5-year existence of the secondary market operations. In 1958 when the market eased and the need for liquidity of mortgage investments lessened, mortgages were purchased by private investors from the portfolio of the secondary market operations. FNMA issues a standby type of commitment that has been the supporting basis for many mortgage lenders to make construction loans; that procedure has materially :facilitated advance planning of home construction. As I have indicated, we have also provided the medium by which mortgagees could raise cash on their mortgages and at the same time retain potential control over the mortgages for a period of timecould, in e:ffect, borrow on the security of mortgages. Significant and worthy of special note is the fact that FNMA's secondary market operations are becoming increasingly the means by which private investment :funds not heretofore available for mortgages are being made available for that purpose, an aspect of these operations that is often not realized. Among the funds referred to are those of foundations, personal trusts, public and prjvate pension and retirement trusts, and the like. Investments by such entities in the debenture obligations of the FNMA secondary market operations, which finance the bulk of our purchases, constitute in effect investments in mortgages. Through this medium the managements of these private :funds may invest in mortgages, and at the same time avoid the considerable operating and management burdens of mortgage ownership. At December 31, 1959, FNMA's purchases of mortgages under the secondary market operations amounted cumulatively to $2.676 billion. During calendar year 1957, when the money market was tight, the purchases exceeded $1 billion; in 1960, as I have said, purchases are again expected to exceed $1 billion. Since the inception of the authority to make commitments in August 1956, we have entered into commitment contracts aggregating $325.9 million. The cumulative amount. of sales mortgages at the end of calendar year 1959 was $476.9 million. FNMA's present financial position under its secondary market operations is :favorable. The capital, surplus, and borrowing authority-the borrowing authority being 10 times the sum of the capital and surplus-provide currently a total purchasing potential of about $3.1 billion. Of this total, approximatel;t $900 million is not employed at this time and may be considered available for mortgage purchases and commitments. This amount, taking also into consideration additional amounts that will be provided by further common stock subscriptions, by additions to surplus, and by the resultant tenfold borrowing leverage, together with the proceeds of some portfolio liquidation, should be sufficient to meet expected needs, in our opinion. . We believe that FNMA, acting within essential limitations, has been rendering the greatest possible assistance in the problems of home financing. In our opinion the experience we have gained fully justifies the conclusion that the existing underlying principles incorporated by the Congress in the FNMA Charter Act were soundly conceived. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  23  Mr. RAINS. Thank you, Mr. Baughman. As I listened to those rather glowing reports, I got the impression that you oppose every section of the bill with the possible exception of the enacting clause, isn't that right? I also get the impression, Mr. Mason, of a rather uneasy feeling. I have been around Washington long enough that when I hear the agencies give glowing reports that don't gibe with the reports I get out in the grassroots, I have a feeling something is going to happen. I don't know exactly what it is, because as I understand your statements, you think everything is well in the homebuilding field, is that right? Mr. MAsoN. We feel we are not now in a position to need emergency legislation, certainly. Mr. RAINS. Well, drop "emergency" and just call it legislation. Mr. MASON. We feel that currently, with the information we have to work with, with the information we get from the grassroots, from our 75 FHA insuring offices, from the offices of the Veterans' Administration, from the offices, the regional offices of the Housing and Home Finance Agency, that people are getting money to start housing, and that housing is proceeding at a pretty normal rate. Mr. RAINS. Well, let's see if we can get a few common bases for consideration. In the first place, you would agree that the interest rate on home mortgages that people are having to pay throughout the country today is the highest in many many years 1 Mr. MAsoN. It is the highest in quite a long while. Mr. RAINS. It is the highest in the histroy of FHA, is it noU Mr. MAsoN. I wouldn't know exactly. Mr. RAINs. Secondly, I have before me a number of speeches you have made in the past, and you would agree that one of the real dangers involved in high interest rate, tight money periods-and the report we have here today is made by the field offices, of course~ not by us-is the danger and ever increasing prevalence of seconct mortgages, isn't that correct W Mr. MAsoN. Mr. Rains, I agree with you. Mr. RAINS. I was looking through this report, and I hope the members of the committee will look through it. The committee staff didn't write it, it is compiled by the various FHA and VA field offices, and I find even in cities like Chicago they have taken 20 percent to 40 percent discounts on second mortgages-and I thought they had plenty of money in Chica~<>--but that is what this report says. At the same time, housmg starts went up a small amount-they ~tually d~pped ~ December, of course, b~t rose on a seasonally adJusted basis, you will agree people are paymg more for those mortgages because of a tight money market than they have in many years. That is correct, is it not j Mr. MAsoN. Yes, but the rate of paying more stopped in Decem• ber, which we thought was another sign indioative of, perhaps, more availability of financing. Mr. RAINS. I. saw that statement in your testimony. How general 1s that i Mr. MASON. This is the result of, as you know, our studies from our field offices of the Federal Housing Administration, and Mr. Baugh· man's offices in Fannie Mae. Federal Reserve Bank of St. Louis  24  EMERGENCY HOME OWNERSHIP ACT  Mr. RAINS. Are you telling the committee now that interest rates are now stabilized, .and that they are going to stay at present levels? Mr. MAsoN. I did not say this, but I said in the month of December the rate did stabilize itself for that month, which we think is a hopeful sign. I think this stabilization takes time. I don't believe it happens overnight. Mr. RAINS. Well, it stabilized in the main because so many people were unable to get mortgage credit, is that correct or not i Mr. MAsoN. I don't-Mr. RAINS. You don't agree with that 1 Mr. MASON. I don't agree with this. I think we got unbalanced and worried during the fall. I think in a time such as we had last fall we had many leaders that were overambitious in their idea that the market was going to be a tight market, and that they could get anything they wanted, and I think that condition is straightening itself out to some extent. Mr. RAINS. Mr. Zimmerman, I notice that your .agency just put out a release in which you said that 46 of your 73 insuring offices claimed that adequate funds are available for section 203 mortgages in their I was just wondering if that didn't mean that the other 27 offices reported that they were not adequate. Is that correct or not i Mr. ZIMMERMAN. Well, that is correct. This "adequacy" term that is used in this kind •of reporting goes to a very broad area from ma.ximum term mortgages to those of higher quality, less terms, both as to years and to downpayments. Mr. RAINS. I understand what it does. Do you have a list of the 27 offices which reported it is not adequate i Mr. ZIMMERMAN. I will furnish it for the record. (The data referred to above is as follows:) In a monthly 1;mrvey of opinions of FHA Insuring Office Directors concerning the current housing situation in insuring office cities, one question reads as follows: Are adequate long-term mortgage funds generally available for section 203(B) : [ ] Yes. [ ] No. In response to this question, the following insuring offices replied "No" as of January 1, 1960: Zone I: Jamaica, N.Y. Zone V: Zone II: Shreveport, La. Philadelphia, Pa. Tulsa, Okla. Richmond, Va. Dallas, Tex. Charleston, W.Va. li'ort Worth, Tex. Zone III: · Houston, Tex. Birmingham, Ala. San Antonio, Tex. Jacksonville, Fla. Zone VI: Miami, Fla. San Francisco, Calif. Boise, Idaho Knoxville, Tenn. Helena, Mont. Memphis, Tenn. Reno, Nev. Zone IV: Portland, Oreg. Springfield, Ill. Des Moines, Iowa Grand Rapids, Mich. Minnapolis, Minn. Omaha, Nebr. Cincinnati, Ohio Columbus, Ohio These responses reflect the opinionl!I of the Directors· concerning thei-r local market conditions. Since no objective standards can be given as basis for form- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  25  ing these opinions, it is probable that conditions of equal stringency may be appraised as providing adequate funds in one locality and not providing adequate funds in another. The significance attached to the opinions from individual offices should be tempered by a realization of the subjective character of the questionnaire response$.  Mr. RAINS. Mr. Mason, I read your statement with a great deal of interest, and on page 4 you said that because of the hoped-for prospect of a balanced budget, there will be no more need for magic fives. Do I gather that you personally thought the magic fives was an unwise financial step i Mr. MAsoN. I thought it was unfortunate, certainly, that the Treasury had to go into the market that would normally be long term market because of its restriction on its method of financing. I thought that it took money which normally would have gone into savings, or which was in savings in some cases, and it had to do this because of the restriction on the interest rate which kept it out of the long term market. Mr. RAINS. I realize this only has an indirect bearing on housing but are you sure that it was necessary for the bonds to bear the rate of interest which they carried~ Mr. MAsoN. Mr. Rains, this I couldn't comment on. Mr. RAINS. But you will agree that whatever rate they should have borne, it certainly Jolted the mortgage market, did it not~ Mr. MAsoN. I think it is always unfortunate when you take money that should normally go into savings, which normally goes into mortgages, and pull that mto Government, paying for Government expenses. This year, if we have the balanced budget, which I am sure we will have or hope we will have, then we won't have this situation. Mr. RAINS. Now, isn't consumer buying of durable goods-doesn't that exert great pressure on the mortgage market i Mr. MAsoN. It certainly does. Mr. RAINS. Let's not pin it down and say if we balance the Federal Government budget-and a lot of people think that-we have solved all the problems of tight money inflation. You don't mean to say that? Mr. MASON. It is one factor, and on consumer credit, this is another factor, as you know. The anticipated rate of expansion of that market is, supposed to be less this commg year. Mr. RAINS. I agree, but it is an important factor, also, and one we want to achieve, but I don't like to hear the statement that all we have to do is just balance the Federal budget and we have solved all our financial problems. Mr. MASON. I couldn't agree with you more, Mr. Rains. Mr. 'RAINS. In a recent press release which you sent out something struc~ me as ~dd; since Mr. Baughman is sitting there by you, I hope you will clear 1t up. The Housing .Administrator also undertook to assure absolute impartiality and integrity in the operation of the Federal National Mortgage .Association by naming Julian B. Baird, Under Secretary of the Treasury, and Dr. Raymond J. Saulnier, Chairman of the President's Council of Economic .Advisors, to be regular members of the FNMA Board, and by appointing a standing industry advisory committee to FNMA. Federal Reserve Bank of St. Louis  26  EMERGENCY HOME OWNERSHIP ACT  Now, you weren't really concerned at that time with the impartiality or integrity of FNMA when you issued that statement1 Mr. MASON. I have never been worried about the integrity of FNMA, but FNMA is getting increasing ownership by the public, as Mr. Baughman's testimony indicated, and I think it is important with this increasing ownership that there be just as wide a representation on the Board that sets the policies of this organization as there can be so that people have confidence in the operation of this organization, that they be people of known standing and reputation, that there be a· chance at least to get industry opinion, which is what the Advisory Committee is for, so that we have in the public's mind the teeli~g of an organization that is run with a feeling of knowing what 1s gomg on. Mr. RAINS. But I couldn't help but have the feeling from the appointment of these distinguished gentlemen that you were giving closer control to the fiscal monetary agencies, one from the Treasury and one from the Economic Advisory Committee. Mr. MAsoN. Before we have had people simply from the staff of the Housing Agency on the Board. It was my feeling, and this is my feeling, that the putting of people of known reputation on the Board would make or give the public the feeling that there was nothing to hide in FNMA. There was nothing to hide anyway, of course, but the broader this understanding is, the better it is. Now, it is not true that putting Mr. Saulnier or Mr. Baird on this Board in any way changes the administration's policies as they affect FNMA. These people would have an effect on FNMA operations because they are part of the financing part of Government to which FNMA looks for its policies. Mr. RAINS. Well, Mr. Mason, one of the things that has always troubled me about FNMA is the ever-increasing desire on the part of the Treasury to take hold of it completely, and I somehow think that these gentlemen might take a less sympathetic attitude toward mortgage credit than they should. Do you expect that kind of situation 1 Mr. MAsoN. Mr. Rains, we expect exact!;r_ the opposite. Mr. RAINS. You expect the opposite. Well', you realize, of course, there is a lot of feeling on Capitol Hill that the Treasury sets a lot of policy for the Housing Agency, and very frankly we don't think that ought to be, and I just wondered if this was a move to give the Treasury even more control. Mr. MAsoN. Mr. Rains, I should like to have it clearly understood that this is not that kind of a move. Mr. RAINS. Mr. Zimmerman, I listened carefully to your statement. Some of it I could agree with, and some of the technicalities I think we could iron out, but one thing troubled me. You didn't tell us that FHA is in danger of breaking the usury laws in three or four of our States. It is fantastic to me to think that the interest rate on Government-insured loans has gone up so high that States are condemning it because it is in violation of the usury law. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  27  What do you intend to do about Maryland and Tennessee, and if rates rise a little further, Alabama, and a few more than won't be able to get FHA loans except in violation of the usuary statutes j Mr. ZIMMERMAN. Mr. Chairman, I would like as courteously as possible to disagree with the chairman's statement that FHA was breaking the usury laws in any State. Mr. RAINS. I am not charging you. I simply say the mortgages insured by FHA for some reason are becoming so high in interest rates that they are in contravention of usury statutes. Mr. ZIMMERMAN. These statutes over the country vary as the chairman knows, and we simply move the interest rate ceiling administratively within this statutory 6 percent ceiling. In any jurisdiction where they have State laws that make it impossible, or illegal to take full advantage of the ceilings so determined, FHA would certainly expect the lender to act responsibly and legally. The chairman mentions the States of Maryland and Tennessee. Going first to the State of Tennessee, the lower court has handed down an opinion regarding this question of exceeding the usury lim-· its, and has held that the 0.5 percent insurance premium was not to be considered interest rate, and therefore did not have the effect of violating the usury, and this now, of course, will go to the high court in Tennessee. In Maryland, the present status of this question is simply that the attorney general has rendered an opinion consistent with this Tennessee case, and so far as insurance premium is concerned, in my own judgment, although I think that this is a matter that must obviously be resolved in each State, I don't believe that the insurance premium will be so considered. Now, the question as to the 0.5 percent service charge, I think this is quite a different thing. Mr. RAINS. Mr. Zimmerman, I bring that out merely to point up one thing, that everything is not well in the field of housing. When you go back 5 years ago and recall what the interest rate was on FHA loans at that time, and VA loans, and now we find ourselves with much, much higher interest rates. If interest rates do continue to increase and if discounts do continue to increase, and they certainly will, there can be no doubt about that, what are we going to do j Are we going to permit 10 percent discounts on FHA loans, are we going to reach a 20 percent discount, or is there no end in sight j . Mr. ZIMMERMAN. I would prefer the Administrator take that question, but let me say, Mr. Chairman, that speaking for the three of us down here we ar~ certainly hoping that this kind of development does not occur, and I personally don't believe that it is going to occur. The best information available to us confirms what the Administrator said. In the last 6 weeks very noticeable stability has come into the mortgage market field. We, I think, in FHA have the best information reported from over the country that I know anything about. We approach it in many different ways. The publicized reporting procedure, as you know, relates to a 25year, 10-percent down, immediate delivery mortgage. We use this class because this particular quality of mortgage in either tight money or loose money conditions is marketable, and so we always can test the market on that basis. 50876-60-3 Federal Reserve Bank of St. Louis  28  EMERGENCY HOME OWNERSIDP ACT  Sometimes in a tight money market you can't tell what the maximum term mortgages would sell for, because they don't sell very well, but on the basis of this type of reporting that we have, there has been a noticeable strengthening and a noticeable and significant stability in the last 4 or 5 weeks. Now, this isn't an attempt on my part to project into the spring. I think this is more properly an area the Administrator can speak to, but on the basis of present facts we don't envision this type of everincreasing interest rate trend that the chairman suggested. Mr. RAINS. That we have been witnessing. Mr. ZIMMERMAN. Yes. Mr. RAINS. We can agree on one thing, I am sure, that if it should continue there is only one way to stem it, unless you just want to tell people they can't have houses, and we don't want to do that, none of us, I know, and that would be to provide some means of increasing the mortgage credit supply. · Mr. ZIMMERMAN. Yes, sir; I believe that there is increasing resistance on the part of the market, on the part of the consumer as interest rates increase. I suppose this is a truism, and as conventional rates approached and exceeded the 6-percent level, I think that it was very apparent that there is marked resistance to interest rates at this level, and should the interest rates continue to increase, I think that there would be a noticeable downward trend in the level of construction, and the only way that that decline could be stemmed would be by some device or means to increase the flow of money into the mortgage market. Mr. RAINS. I notice in your statement, Mr. Zimmerman, your figures on mortgage discounts cover only 25-year FHA loans with 10 percent down. Isn't it true that discounts are even larger on 30-year loans with minimum down payments? Mr. ZIMMERMAN. Yes, because the price is related to quality, and I think particularly in a tight money market, the maximum term mortgage would not be considered the same quality as the one we report on publicly, although our reporting procedures get the information on these other classes and qualities of mortgages, and we have it available for the chairman. We just don't publicize it. Mr. RAINS. You do get such reports from the field. Mr. ZIMMERMAN. Yes, we do. Mr. RAINS. As a matter of fact, and this is my information, in many areas the purchasers are denied the benefits of the 30-year term because even though it is FHA-insured, lenders don't want to make that type of loan. Isn't that correct? Mr. ZIMMERMAN. Well, I think it is true, Mr. Chairman, that in this kind of money market the lender generally becomes more selective as the demand exceeds the loanable funds that he has, and to the extent that is true, I think that probably your question has to be answered in the affirmative. Mr. RAINS. Mr. Baughman, on page 6 of your statement, you oppose the provision in the bill which would prohibit the sale of Fannie May mortgages for 1 year. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  29  I know you realize that the reason that is in this bill is that there is considerable concern up on Capitol Hill about your going- ahead and selling those mortgages after the Senate passed a resolution asking you not to, and after, on this side.-well, I will only s_peak for myself, I have made the statement for the record that I didn't think it would be done and I didn't think it would be necessary to pass a bill to prevent ,it. How much money did the Government lose on that transaction? Mr. BAUGHMAN. Well, I don't think they lost anything on the transaction, Mr. Chairman. Mr. RAINS. I have heard they lost $8 million on the transaction. Is that correct or not? Mr. BAUGHMAN. I don't believe that is the fact. I sent you a complete report of the transaction. Mr. RAINS. I couldn't quite interpret that down to dollars and cents. It is a little technical for me. Mr. BAUGHMAN. There is a difference of opinion as to how you approa'ch this. Some people figure it on future loss of incomeincome that would presumably have been received if the mortgages were kept in the portfolio and permitted to run to maturity. That is true of any sale of a mortgage. Once you sell a mortgage, you don't get future income. Even taking that into consideration, considering future income, I think that the report that I sent to you-I did send you a copy of the complete report-I think it showed the future income after the date of the sale, would have approximated the difference between the 3.5 percent net mortgage rate and the 2¾ percent bond rate, and would have amounted to approximately $6 million. However, we did get on the transaction premiums amounting to 3.8-$3,800,000, so that cut the $6 million figure down to $2.2 million, if you want to figure it that way, which I don't think is a good way to figure. Mr. RAINS. I think that sounds a little more accurate to me than the information I had, but there was entailed for the Government a. loss, and listening to Mr. Mason a while ago, he admitted the factthough he said it possibly had to be done.-that the so-called magic fives took some of our mortgage credit away from housing, and yet by that action didn't you take about $300 million away which went into bonds instead of mortgages? Mr. BAUGHMAN. I am sorry again you didn't read my report .. Every member of the committee, incidentally, has a. copy of the report. We were interested in that, how the exchange a.ff ected the mortgage market, and whether the current purchases by institutional investors of mortgages would be affected as a result of the transaction. We had, I think, 42 successful offerers in there, bidders. We did not ask the savings and loans whose offers constituted only 4 percent of the total, because naturally they do go in for mortgages and nothing else. We called up 20 of the 30 banks and insurance companies. They represented $178 million of the $188 million approved offers. Of the 20 people we contacted, 18 said definitely it would have no effect on their immediate purchases of FHA and VA mortgages. Two of them said it would have some slight effect. A great many of them, if you Federal Reserve Bank of St. Louis  30  EMERGENCY HOME OWNERSHIP ACT  will read the report, indicated that the mortgage market would benefit by the exchange, because the money that they would get as a result of the payments on the mortgages would go back into the mortgage market, and they thought in that way it would help. Mr. RAINS. You know, I have never found anybody else who shares that opinion in the housing business. It has always been my understanding that any Government action that siphons off mortgage credit for bonds, no matter how simple it may be, is a threat to the mortgage credit that might go to housing. Mr. BAUGHMAN. Mr. Chairman, I think you have to remember that these funds which were invested in these 2,¾'s were frozen. Now, the question that you raise is whether or not once they get the money from the mortgages they put it back in the bond market or keep it in the mortgage market, and that is what we tried to ascertain. I think if you will look at the report, that is where it is indicated 18 out of 20 said it would not affect the mortgage market. Mr. RAINS. They obviously wanted the mortgages. Mr. BAUGHMAN. I think the benefit that the bondholders had in the sale was that it provided liquidity for these bonds. These bonds were for 25 years, and they had no way of getting liquidity out of them except by exchanging for l.5's, which had a market price of something like 87 or 88. Where they benefited from repayments, they immediately started to get back their cash on their mvestment in the bonds by exchange of the bonds for mortgages. Mr. RAINS. You do not have any plans for any kind of action again this year, do you? Mr. BAUGHMAN. That depends upon the administration. I would say, I suppose, that we do. Mr. MASON. Mr. Rains, we are talking about another issue. vVe have not made up our minds. Mr. RAINS. vVe are going to have a real fight over that, Mr. Mason, if you put it in, because Congress doesn't understand how you can get a bookkeeping advantage when you pay that high a figure for it. You will have to do some real explaining on Capitol Hill with that one, so I am going to insist, Mr. Barnghman, that we keep that section in the bill. I hate to see it tie your hands, but I don't think the Congress wants that kind of swapping going on. Mr. BAUGHMAN. Mr. Rains, as far as the 1961 budget is concerned, the President's budget does not contain any provision for any swaps during fiscal 1961. Mr. RAINS. Of course, that is between now and July-what about swaps between now and July 1? You don't have any contemplat~d that you know of? Mr. BAUGHMAN. Between now and July. Mr. MAsoN. Mr. Rains, what Mr. Baughman says is there is nothing after the first of July, but the budget this year does contain the provision for the current year. Mr. RAINS. Well, I want to know do you have any trades in prospect between now and July 1? Mr. ~AsoN._ I said to you, Mr. Rains, to this effect, that we are cons1dermg this. We have not made up our minds. _Mr. RAINS_. W~ll, that means I am going to have to hurry up here with our leg1slat10n. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  31  Mr. Baughman, on page 9 of your statement, you seem to indicate that the only purpose of special assistance is to support new types o:f mortgages pending their acceptability in the general mortgage market. Section 301 (a) (b) (2) directs Fannie May to buy home mortgages generally as a means of retarding- or stoJ?ping a decline in mortgage lending and home building activities which threatens materially the stability of the higher level national economy questions. Is that correct i Mr. BAUGHMAN. You are speaking of special assistance i Mr. RAINS. Yes. Mr. BAUGHMAN. Yes, sir. Mr. RAINS. In your statement I got the impression that supporting mortgages on new programs was the only :function in your special assistance program. Mr. BAUGHMAN. That is by law what we are required to do. We recognize they are not marketable mortgages. We buy them. Mr. RAINS. It also provides this other function, and that is that you are directed to buy home mortgages generally as a means of retard• ing or stopping a decline in mortgage lending and home building activities which threatens materially the stability of the high level national economy. That is also a directive to you, is it not i Mr. BAUGHMAN. I would say that is permissive under certain circumstances. In other words, when circumstances are such that they want to put that into effect. That, I would say, covered the bill in 1958.  Mr. RAINS. I have some more questions, but I am going to pass on now to Mr. Addonizio. Mr. AnooNrzro. Thank you, Mr. Chairman. In answer to one o:f Mr. Rains' questions, I believe you said that you do not condone the second mortgage process, is that correct, Mr. Mason i Mr. MAsoN. That is correct, Mr. Addonizio, the second mortgage particularly on low-cost housing o!Lll. be a real danger to the American public. Mr. AnooNrzro. In view of that, Mr. Mason, if the Home Loan Bank System were under your control in the Housing and Home Finance Agency, would you take steps to control these second mortgage practices l Mr. MASON. Mr. Addonizio, I haven't considered this, because they just escaped :from our control so recently that it doesn't seem possible that they could be put back. I think it would be very desirable i:f there were some way to avoid second mortgages generally. Mr. AnooNrzro. Do you agre with the fact we are presently in a. tight money market that will probably continue for some time i Mr. MAsoN. I am inclined to think that we are beginning to get out of the tight money market, Mr. Addonizio. We have been in one during the fall months, but I am inclined to think that we are moving out o:f it. Mr. AoooNrzro. I believe that Mr. Zimmerman still agrees we are in one because just a week or so ago I picked up one of my newspapers back home, and he indicated that we were in a tight money market, so evidently he disagrees with you. Mr. MAsoN. Well, what he means is we have been in one, I am sure. Federal Reserve Bank of St. Louis  32  EMERGENCY HOME OWNERSHIP ACT  Mr. AoooNIZIO. After your correction, I am sure that is probably what he does mean. Mr. ZIMMERMAN. I think I can give an answer which will satisfy you, sir. These things don't happen overnight. Sometimes I hear the phrase "bottoming out" used, and I think that as I speak in terms of increased stability, or a leveling off, what we are seeing in the last month or 6 weeks is this "bottoming out," this added stability, this stopping of the spiraling uptrend. Now, while this continues, and certainly it will continue for a period of time, I am sure that the Administrator agrees with me this is a tight money condition, but these are very hopeful and significant signs that we are speaking about. Mr. MAsoN. None of these people are scared of me, Mr. Addonizio. Mr. RAINS. Might I ask a question i Mr. AoooNIZIO. Surely. Mr. RAINS. You know we are going to be here until July, anyway, and we are going to be -watching to see if your predictions come out right, but as I read the papers and talk to mortgage bankers over the country, they tell me with the settlement of the steel strike and the rebuilding of the corporate inventories the extreme competition they are going to have for mortgage credit is about to cause the exact opposite, and I am talking about the mortgage bankers of America who are not going to support this bill. But this is what they tell me that is going to make the mortgage market continue tight, and that it has now slowed down to a walk. Is that true or not i Mr. MAsoN. Could I just say, Mr. Rains, that these are the forces that are working your way, that is the way your bill is written. Mr. RAINS. I wish they weren't working, it is not my way. Mr. MAsoN. I withdraw that, your way, I am sure it is not your way, but the condition you are trying to correct. There are forces working the other way, however. Mr. AoooN1z10. Mr. Mason, in your statement you are quite optimistic about the future of housing, and as I listened to you and read your statement, I judged that you estimate there will be in the vicinity of 1,310,000 housing starts in the year 1960. Mr. MAsoN. I made a guess back in late October, Mr. Addonizio, and my guess was 1,200,000 at that time. Mr. AoooNIZIO. Well, I just wanted to warn you about this. I remember back in 1958, the Secretary of Labor made a guess about the number of unemployed, and said if it went above that figure he would eat his hat. I was wondering if it went below the figure of 1 million, would you eat your hat for us i Mr. MAsoN. Mr. Mitchell ate a hat made out of cake or something, so the penalty was not very bad. Mr. ASHLEY. On that basis, you will acquiesce i Mr. MASON. With the same kind of hat. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  33  Mr. AnooNIZIO. Mr. Zimmerman, on page 2 of your statement, you oppose section 2 of the bill. That is the section that has to do with making individuals eligible to make FHA loans. Now, isn't it true that this is presently in operation in the GI loan program, and that it has been working well? Mr. ZIMMERMAN. Yes, I think that it is. I am not as familiar with that as I intend to become, because we seek the same objectives that are obviously intended by this provision. Any way that we can encourage increased flow of money into this market we are interested in. The main thing that we are saying, and I attempted to point out in my testimony, we presently have this authority, and we simply haven't at this time felt that just the broad approval of individual mortgagees was the best way to attain the objective. There are some very serious problems which I attempted to relate going to the extent that the bi11 provides. Mr. AnnoNIZIO. Mr. Zimmerman, I also got the impression from your· answers to Mr. Rains' questions about discounts that you are not presently at least in favor of control of discounts. · Mr. ZIMMERMAN. Well, that is right, sir. This has been-Mr. AnnoNrzro. In other words, you are still of the opinion that everybody should keep getting soaked as much as they can? Mr. ZIMMERMAN. I didn't understand. Mr. AnnoNIZIO. You are presently of the opinion that everyone should just keep getting soaked as much as they can. Mr. ZIMMERMAN. I would have to answer that phase of your ques• tion in the negative, to the extent that it exists. FHA, as you know, has on two different occasions been required to make the effort to control discounts, and the most recent discount controls were removed by the Congress in the emergency housing bill of 1958, and I think for sound reasons. It is a very difficult and unrewarding task, and I seriously question whether such a mandatory requirement serves the purpose intended. Now, I think that we will all have to generally agree that it is not possible, as a practical matter, for the Commissioner of FHA to sit down there in the Lafayette Building and do much about what these mortgages are going to cost. A lot of other forces are involved over which we have no control, and as interest rates increase, we are disturbed, and we are always hoping, as I think we now see some indications, that it will start to reverse and go the other way. Mr. AnooNIZIO. You indicated also, I think, that you had some reports available so far as discount rates are concerned. Mr. ZIMMERMAN. We have complete reporting. Mr. Anoomzro. Will you make them available to the committee? Mr. ZIMMERMAN. We certainly will, sir. ( The data referred to above is as follows:) Secondary market prices for immediate delivery of FHA-insured 5%,-percent new home mortgages with down payments of less than 10 percent were reported to average $95.8 per $100 of unpaid mortgage amount on January 1, 1960 com• pared with a price of $95.9 on December 1, 1959. Prices reported for this item by FHA insuring office directors are intended to apply to mortgages with the minimum downpayment and maximum term for which secondary market sales are being made. Federal Reserve Bank of St. Louis  34  EMERGENCY HOME OWNERSHIP ACT  The following shows these prices by FHA administrative zones:  Jan. 1, 1960 Dec. 1, 1959 ~~~.f,?"~mmtic_::::::::::::::::::::::::::::~::::::::::::::::::::::::::::::: $~: ~ $~: ~ Southeast ___ ---------------------------------------------------------------95. 95. North Central________________________________________________________________ 96. 05 96. 05 Southwest___________________________________________________________________ 95. 4 95. 5 West________________________________________________________________________ 95. 4 95. 7 ---1 - - - -95.-9 U nited States________________________________________________________ 95. 8 These prices, while not based on records of actual transactions, reflect the best information available to the Directors of insuring offices which process home-mortgage insurance cases. In the compilation of the zone and national averages, a weighting procedure is used to take account of the probable volume of transactions in each insuring office jurisdiction.  Mr. AoooNrzIO. Mr. Widnall. Mr. WmNALL. We certainly appreciate your testimony here today, and I for one on the committee believe that there is a lot of truth in what yoh say in the opposition you make to this bill. It is amazing how bills come in with the tag line "emergency," and we ought to be discussing dispassionately a housing bill, and not with the term "emergency" with the connotation appendixed to try to generate support. Mr. Addonizio made the remark, I believe, that his information was that he felt that housing starts this year would total over 1 million; is that it? Mr. AoooNl'ZIO. That was not my estimation. I was just quoting a figure. I was trying to get Mr. Mason to eat his hat if he predicted over 1 million housing starts, and it went below that figure. Mr. WmNALL. Well, I will say this to you: I will eat my hat if it goes below a million, and you eat it if it goes over a million. Mr. ADDONI'ZIO. If we can have the same kind of hat that Mr. Mitchell had. Mr. WIDNALL. On page 2 of your testimony, Mr. Mason, you said you ,are authorized to advise that the enactment of the bill would not be in accord with the program at present. How do you feel that this proposal would affect the budget? Mr. MASON. Well, a billion dollars certainly would affect the budget of this country, and that is what this measure asks for. Mr. WmNALL. In other words, it is your contention it will pull out of the market a billion dollars of savings that could be used in other directions, the Government would have to go into the market in order to borrow an additional billion dollars? Mr. MASON. That is correct. Mr. WmNALL. On page 3, you stated in 1958 with similar legislation it did help serve an antirecessionary purpose. Construction costs rose sharply. Do you believe that if this legislation is enacted, construction costs will rise again ? Mr. MAsoN. In view of the current rate of housing starts, it is quite obvious it would. Mr. WmNALL. So that what is held out to the people as a means to save them money can in the end cost them a great deal more because of increased price of the house? Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  35  Mr. MASON. It can cost them more. I wouldn't say a great deal, perhaps. Mr. WmNALL. You say in 1958 it showed a 5-percent rise in cost of residential construction. Mr. MAsoN. That is correct. Mr. WmNALL. As I understand it, you are strongly opposed to a reduction in the FHA insurance rates at this time. Mr. MAsoN. Yes, Mr. Widnall. We think that any setting of the FHA insurance rate should be done as a result of actuarial studies, not just setting it by simply setting it. Mr. WmNALL. By wishful thinking, in other words. We have never had to experience any marked run on the fund since that insurance fund was set up; isn't that so 1 Mr. MAsoN. That is correct. Mr. WmNALL. There has never been any major impact on the funds? Mr. MASON. That is corroot. Mr. WrnNALL. So that in the judgment of the Administration, it is felt that it would be most wise to maintain as secure a fund as possible until some actuarial figures really show that you can reduce to whatever figure will be fair at the time. I would like to ask Mr. Baughman a couple of questions. Mr. MASON. Mr. Widnall, before you go on, could I ask the chairman a question? As Mr. Rains knew, I had a date at 1 o'clock. They moved the date up to 12 :30. Will I be through to make a 12 :30 appearance? Mr. AnnONIZIO. I hope to be through by 12 :30 also. Mr. MASON. Thank you very much. Mr. WrnNALL. Under the "Special assistance" functions, Mr. Baughman, you say it is perhaps conceivable that circumstances could arise which might justify discontinuance of sales. On at least two previous occasions, Fannie May suspended sales from what is now the portfolio, etc. What factors led to that decision? Mr. BAUGHMAN. I think it was the mortgage market situation at that time. These are the Government-financed programs, not the secondary market operations, and as a matter of policy we just suspended sales temporarily. Mr. WmNALL. What was the actual reason for that decision at the time? Mr. BAUGHMAN. Well, I think it was the condition of the mortgage market and the tremendous loss the Government would have to take if any mortgages were sold-a combination of the two things. Mr. WIDNALL. On page 7, you say the option contract gives the mortgagee the contractual right to repurchase the mortgage at any time during the following 9 months at the same price. Can you give any specific examples of that taking place? Mr. BAUGHMAN. Yes, we have a program within the Association where if a man wants to sell mortgages to us with an option to buy them back within 9 months, he may do so by putting up one-half point fee at the time that he sells the mortgage to us. The mortgages are reserved for the full 9 months, and if within that time he elects to Federal Reserve Bank of St. Louis  36  EMERGENCY HOME OWNERSHIP ACT  repurchase them, they are available to him at the same price at which he sold them to the Association. Now, if you couldn't make any sales from the portfolio, you see, that would eliminate that particular phase of our operation, which has been helpful to some people. Mr. WIDNALL. To what extent--do you have any figures on that? Mr. BAUGHMAN. I think it is 7 or 8 million dollars. Mr. WmNALL. Which would be eliminated? Mr. BAUGHMAN. Yes, sir. Mr. WIDNALL. If this bill were enacted. Mr. MAsoN. Yes. Mr. WmNALL. Now, on page 9, you saidBecause the circumstances often involve the purchase by FNMA. of mortgages that are valued by investors generally at less than "par," adoption of the proposed pricing requirement, supplemented by the proposed limitation on fees, would create a situation in which the investment of non-Government funds in such mortgages would become impracticable to any large extent.  This would then, in the end, tend to create a larger demand for emergency housing funds, so to speak, special assistance funds? Mr. BAUGHMAN. It would increase the amount of mortgages Fannie Mae would be required to buy. I think a good example is that customarily the trade requires a one-point commitment fee when they give a commitment to a seller of a mortgage at some future date. This bill is 1recommending one-quarter of a point commitment fee, so you see how competitive we are. There would not be any competition at all. Naturally they would all come to Fannie Mae instead of going to the private market for their commitments. Mr. WmNALL. This is the sort of thing that snowballs, and once you start it then another person comes in and says, "Well, he got it, we need it, we can't get it through private investment funds," and so you have more and more demand on the Treasury to provide the special assistance funds. Mr. BAUGHMAN. That is correct. He couldn't get it from the private market at all at a quarter of a point. Mr. WmNALL. So it is extremely important if we go into this program at this time that we be assured there is an absolute need for it. Mr. BAUGHMAN. That is right; we should encourage private investment wherever possible. Mr. WmNALL. I think it is rather interesting- that we were on a committee trip this fall and talked to the mimsters of finance in a number of countries, heads of credit organizations, banks, people in g-overnment, and I found that they unanimously thought we were mdulging in a very foolish practice here in the United States by keeping the 4¼-percent fixed ceiling on the financing of long-term Government debt. They couldn't understand why we did it. They felt it was something that was causing a rise in interest costs over here. They tell me in making this observation that today they realize that their operations are hinged on the security and the stabilization of our own economy. If anything happens by way of serious inflation within the U.S. economy, the repercussion would be felt all over the world, and I was very interested in that part of your testimony today in which you said this would have a bad effect if something wasn't done about it. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  37  That is all I have at this time. Mr. AnooN1zro. Mrs. Sullivan. Mrs. SULLIVAN. Gentlemen, I am glad that you are here early again this year to testify on a housing foll, and perhaps we can get one accomplished before September of 1960. Mr. Mason, I just have one comment I would like to mention. A. few weeks ago you issued your annual report for the year 1958, and in the chapter on housing supply and needs, it is estimated that there are still 3.4 million nonfarm homes which are dilapidated, and 4 or 5 million which lack adequate plumbing. Now, this means that we are entering the decade of the sixties with some 8 million substandard homes still m use. Do you think that in the face of these glaring needs that we are building enough units per year 1 Mr. MAsoN. Mrs. Sullivan, we are extremely hopeful as a result of the census that is now being taken this coming year to get new and better figures on the houses which are less desirable than they should be. The figures that we have naturally are compilations based on the earlier census, and regress each year. You are correct that we are as concerned as anyone that there should be an adequate number of houses built. We don't believe that we should build so many houses in 1 year that we get beyond our ability as an industry to deliver the materials and the labor to build these houses, and we have not reached that point even with our excellent results that we did this year, but the creation of 1,300,000 houses this last year was helpful. The thing that is doing the most to stop this condition you speak of is modernization, and this is the real field, because many of these houses in this group that you speak of are houses that are perfectlywhat is the woi;d-salvable, it doesn't make sense to me, but that is the word the dictionary says we have to use: that can be made into decent living quarters for Americans, and this is a goal that does not show in our figures at the present time. Mrs. SULLIVAN. In other words, many of those can be rehabilitated. Mr. MASON. Some of the have been, Mrs. Sullivan, but we don't know how many. Mrs. SULLIVAN. Mr. Zimmerman, from your arguments against the reduction of the FHA insurance premiums, do I gather that it is your opinion that the premium can never be reduced i Mr. ZIMMERMAN. No, quite the contrary, Mrs. Sullivan, we are probably-well, every year:, with the volume of business that FHA. is doing, we are coming closer to the time when the mortgage insurance premium could be reduced somewhat on a sound basis. It is simply that on the basis of the present status of the :fund, our present operating expenses, strictly on the basis o:f present conditions, it would not in our judgment at this time be possible to reduce the premium on a sound basis. Mrs. SULLIVAN. I think you mentioned that you are constantly reviewing that with the hope o:f some day lowering it, but you don't want to do it for 1 year because o:f the effect it might have on those who have had to pay the rate. Mr. ZIMMERMAN. That is right. I think the time will come, and it may be in the :foreseeable :future, or in the immediate future, the Federal Reserve Bank of St. Louis  38  EMERGENCY HOME OWNERSHIP ACT  next year or two when it would be wise to lower the present floor from a half of 1 percent to, perhaps, the quarter of 1 percent, leaving it, I think, to the administrative judgment of FHA. I simply don't believe at the present time, and I had some pretty good recent experience on this, I don't believe at the present time, since we are so certain that we couldn't reduce the premium on a sound basis, that we should have the authority to reduce it because I have learned that when Congress takes this kind of action prior to the time when we can follow through, then most people, a lot of people feel that I in some way am attempting to thwart the will of Congress, which isn't true. The recent experience I refer to is in the lower downpayment aspect of last year's bill, and Senator Sparkman and I had an interesting colloquy on this. He pointed out it was administrative authority he was attempting to give, and he couldn't understand why I objected to having the authority to implement a lower downpayment if and when the need occurred, and the report doesn't show it, but I kind of stumbled a bit and didn't put up much of an argument. As soon as we had that authority there was reaction that it should be done, when in my judgment it shouldn~t. This is why I am saying I don't believe now is the time to do it. I hope in the near future it can be done soundly. Mr. J\iAsoN. Mrs. Sullivan, could I add to Mr. Zimmerman's remarks the fact that we have in the :FHA mutuality which does reduce this below the half percent cost to the person who has the mortgage. In other words, they get a dividend when they pay up their mortgage if there have not been losses during that period that would use up the half percent. Mrs. SuLLIVAN. Thank you very much. Mr. DERWINSKI. I have a question. I think you should be complimented as a group for your effootive presentations, especially since you have completely abolished the term "emergency" as applied to this housing bill. May I just ask a question, Mr. Mason~ I am sorry the chairman has left, because I was hoping that he would also comment on some of my questions, but in discussmg the pressure of rising interest rates, you mentioned, I believe, the growing opposition of purchasers to the rise in interest rates. That is a rather obvious development, isn't it? Mr. llisoN. This always happens, Mr. Derwinski. Mr. DERWINSKI. It would lead me to believe, then, that one of the problems facing, say, the homebuilding industry is the fact that they are now faced with a more selective market, people aren't compelled as they were, perhaps, 10 or 11 years ago to purchase any home that was available, they now can afford to be selective in their purchases, isn't that soi Mr llisoN. And the builders will certainly confirm this to you, si,r. This doesn't mean, however, that there is not a strong and active market, because there is a good demand for housing at the present time and at the present terms. . Mr. DERWINSKI. I have figures to indicate that last year the honsmg starts ran about 400,000 above new family formations, which indicates that we are progressing satisfactorily toward settling the housing problems of many families across the country. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  39  Do you think that will continue to be the case? Mr. MAsoN. Yes, and I will point out to you, too, sir, when a family is formed it does not immediately become in the market for a new home. New home buying normally happens several years after the family is formed. Mr. DERWINSKI. Again in diSC'llssing this so-called emergency with you, the chairman made mention of the fact that he was fearful of further Government control and regulation of the housing industry. This would lead me to believe, of course, that the obvious problems that this bill might present to us are contrary to his mvn philosophy, but I will have to take that up with him when he returns. There is one point I would like to have you clear up for us. This billion dollars that is to be provided in this bill, wouldn't it actually come from the same sources that are now investing in the homebuilding industry? Mr. MAsoN. It comes out of the Government. The Government borrows this money, it com~s from the Treasury. The Treasury Department has to borrow it from whatever sources they can. Mr. DERWINSKI. It wouldn't be creating $1 billion of new money to pour into the homebuilding industry. I also note that according to the figures for 1944 through 1958, the percentage of private debt that is invested in mortgages has risen from slightly over 12 percent to 25 percent. Would these figures indicate that the homebuilding ~ndustry is r~ceiving mor~ than its fair supply of funds for i~s purposes m relat1onsh1p to the private debt of the country? Mr. Zimmerman, would you care to comment on that? Mr. ZrMMERMAN. I am sure both the Administrator and I would say it wouldn't be more than their fair share. We are just pleased that it is increasing. Mr. MAsoN. We had this made by a private economist. Mr. DERwrNSKI. The point I make is that there has been an increasing percentage of the private debt of the country placed in the one- to four-family mortgage debt, which certainly means that adequate funds are available to meet the requests of people for home financing. Mr. MASON. Of course, the savings and loan industry in this country is rapidly growing, increasing in size, and in the month of November, for instance, it accounted for 39 percent of the mortgages placed. That would indicate that private funds increased. Mr. DERWI:NSKI. Now, just one last point. It seems to have been the historical pattern here in Washington to liberalize mortgage terms whenever a so-called emergency arises. Now, when we liberalized mo~age terms either by reducing downpayments, or by extending the hfes;pan of the Joan, in effect aren't we tying up funds over a longer period of time than that would normally be flowing back into the market at a more rapid pace in terms of reducing the payments made, and therefore reducing the turnover of funds available to lenders each month? Mr. MAsoN. I presume to a certain extent that would be true. Mr. DERWI:NSKI. In other words, actuallJ when we liberalize terms, what we do is, to my understanding, at least, what we do is slow down the pace of repayment, and in a great percentage of these cases the new funds for mortgage lending comes in repayment of funds rather than new savings, isn't that so? Federal Reserve Bank of St. Louis  40  EMERGENCY HOME OWNERSHIP ACT  Mr. MAsoN. Yes, Mr. Derwinski, your supposition is correct. Mr. DERWINSKI. Thank you. Mr. AoooNrzro. Mr. Ashley. Mr. AsHLEY. Mr. Mason, in your statement, you state that you believe it is desirable to particularly encourage and assist the financing of lower cost homes. I know you are sincere in this. Earlier in your statement you say it is your iudgment that the credit situation created a high level of homebuilding for 1960, and presumably these statements can be taken together, and you are optimistic about the construction and availability of mortgage credit for the purchase of homes for our medium-income families, 1s that correct? Mr. MAsoN. Yes, that is correct Mr. Ashley. Mr. AsHLEY. Well, I confess I have a difficult time understanding the philosophy or the rationale of my colleague who asked you some questions, and of yourself, when he asked you and you agreed that there is adequate mortgage credit available, and that the increase in this credit over the years has been commensurate with the demand. Wouldn't one question have to be at what price is this credit available? Mr. MASON. Certainly the price governs whether it is available or not. Mr. AsHLEY. There certainly is plenty of money today if you want to pay 8 or 9 percent, or 12 or 15 percent, isn't that correct? Mr. MASON. There is money available at lower rates also. Mr. AsHLEY. Well, I would like to just say that in this period of prosperity that we are in I agree with the business and financial editor of the Christian Science Monitor who comments that there are small clouds on the horizon, and I would like to just summarize a few of Mr. White's points and then ask you about them. He wants to know whose prosperity, and he goes on to point out that there are some clouds on the horizon, and he points three of them out. First, he says, inflation has not been defeated, and he goes on to pinpoint that he is talking about cost inflation principally because of the steel settlement and the pattern that that has set. Secondly, he goes on to point out, and it is undeniable, the consumer debt is certainly rising. Third, he says this: Tight money remains. In view of rising consumer debt, mcreased spending by the Federal Government, State and local governments, and by consumers, businesses, and institutions, the Federal Reserve System's tight money policy is regarded by most impartial economists as a necessity. They would not themselves ease money now. In fact, these interest rates are due to go higher. Lending organizations expect to pay more for their money. They expect to charge more for money. Now, this is important, and I just wondered. You, I take it, are in disagreement with Mr. White's evaluation of our economic future? Mr. MASON. Mr. Ashley, I would ask you at what date Mr. White wrote this, and what date he had his information on which he based it. Mr. AsHLEY. This was last Wednesday, last Wednesday's Christian Science Monitor, January 20. Mr. MAsoN. I am not questioning Mr. White's right to arrive at a decision, but I think that all of us arrive at our decisions based on the Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  41  information that is ava,ilable to us at the time, and I am not saying that the price of money is going to drop. I had not said that. Mr. AsHLEY. But you do say there will be a great increase. Mr. MAsoN. I feel we have arrived at a plateau for prices, and that funds will be available at this price. Mr. AsHLEY. But you say in your prepared statement on page 4 that there should be a great increase in the availability of loanable funds at a reduced interest rate, isn't that correct? Mr. MAsoN. But I said also this would not ha,ppen overnight, but over a period of years. Mr. AsHLEY. And if you are wrong on this, Mr. Mason, then certainly this failure of judgment jeopardizes the entire building industry, the future for American homeowners throughout 1960, wouldn't that be correct? Mr. MASON. This is the penalty of being in a position such as I am in. One has to look at the facts that are availaible to him and a,rrive at a decision. It would be just as bad for the American public if I guessed wrong the other way. Mr. AsHLEY. Now, throughout most of 1960, until this situation develops as you hope it will, isn't it true that the low- and mediumincome families are going to be hurt worse among the citizens of our country as far as their ability to purchase homes and to get decent, safe, and sanitary shelter? Mr. MAsoN. You mean worse than the rich people 1 Mr. ASHLEY. Well, this is always the case, of course, but who does tight money hurt most? Here again I might quote this from Mr. White's article, too. He said, In the past month this observer has met young couples with children who run smack into the tight money problem. They are credit-worthy couples, the husbands are employed. but can they add $5,000 to the cost of their home in interest, and can they be assured of getting the mortgage even if they are willing to pay the high interest?  This is what I am getting at. For a person who is making $25,000 or $30,000 perhaps this isn't so much of a problem as it is for somebody who is making five or six thousand. Mr. MASON. Mr. Ashley, the programs of the Federal Housing Administration are geared to people of the moderate income which you speak about, and the man who is hurt worst by a lack of financing is the man who desperately needs a home and doesn't have it, such as the condition when our boys came home from the war. Today our Americans generally are not in this position, they are in the position of getting a better house, which is very desirable, and a very worthwhile thing to be working toward, but the man who really hurts in this condition is the man who doesn't ha,ve a decent place to live. We ha,ve some of these. You cannot genernlize, I know, but the number of these is much smaller, Mr. Ashley, than it has been. Now, I don't want to be put in the position, now, of saying that I am in favor of high interest rates. I am looking at this situation as it is, and saying that we will have a better supply of money, this is evident now. There isn't going to be any great rush. As I told some people just the other day, there will be nobody knocking at their door asking them to borrow money, though I find there is even some of that Federal Reserve Bank of St. Louis  42  EMERGENCY HOME OWNERSHIP ACT  going on, but this is not a general situation. This· situation is improving, and since all o:f our figures indicate this, I have to tell the committee this or I would not be :following my responsibility properly. Mr: .ASHLEY. Mr. Zimmerman said awhile ago that he was making an observation when interest rates go up they are greeted by resistance on the part o:f the home-buying public. How else could 1t be different~ O:f course that is one aspect o:f a tight money policy. The other is that as interest rates go up, the lending institutions get more selective. Wouldn't this also be true, and as is pointed out in Mr. White's article, even i:f the people want to come up with the increased payments that result from higher interest, perhaps the loan isn't even there, perhaps they can't even get the money. Mr: MASON. The lender becomes selective when the supply o:f money is short, it is the supply o:f money that makes him selective. Mr. .A.sHLEY. I would like to ask one :further question. You say on page 3 o:f your statement, Mr. Mason, that when similar legislation was passed in 1958, as in any recessionary purpose, that construction costs rose sharJ?ly. you saymg that this was the result o:f the action taken by the Congress~, Mr. MAso;N. Mr. Ashley, in 1958, the action o:f the Congress came. on the heels o:f a change m the economy which o:f course the committee couldn't or the Congress couldn't have :foreseen in its procedure Q:f pa,ssing the legislation. The legislation did come on top o:f an expanding building industry, and this did result in an increase in buildmg costs larger than would have been the case i:f the legislation had not been there. The legislation did help to bring the whole economy o:f this country back into a better situation than it had before. Mr. .A.sHLEY. I think it is interesting that between 1952 and the present date interest rates have gone up on FHA. homes by 35 percent, :from 4¼ to 53/4, and according to the information I have, construction costs have gone up by 15 percent, in this same period. Mr. ~DDONIZIO. I:f I may interrupt, Mr. Mason has to go over to the White House at 12 :30, I understand. Mr. MASON. I would be happy to have my General Counsel sit in and take my place. Mr. .A.oooNIZIO. I would appreciate it i:f the others would remain and certainly we would appreciate it if your General Counsel sat in for you, Mr. Mason. Mr. MAsoN. Thank you, Mr. Chairman. Mr. .A.sHLEY. I have no further questions. Mr. .A.oooNIZIO. Mrs. Griffiths. Mrs. GRIFFITHS. I had a question o:f Mr. Mason which I would be glad to put to his General Counsel. Mr. BROWNFIELD. I am Lyman Brownfield, Mr. Mason's General Counsel. He has asked me to sit in here, and to bring back his papers. Mr. .A.oooNIZIO. I hope you can answer the questions. Mrs. GRIFFITHS. I am particularly surprised at this statement at the bottom of page 4 where Mr. Mason gets in a plug for higher interest rates on long-term Government loans. How long have higher rates been paid on short-term loans, do you know 1 Mr. BROWNFIELD. That is a Treasury question, generally. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  43  Mr. BAUGHMAN. I think that has occurred within the last year and a hal£. Mrs. GRIFFITHS. I would like you to explain to me why you think if long-term loans go up to 5 percent it will make more mortgage money available, explain the mechanics by which it will be done, please. Mr. BAUGHMAN. I think you are talking about the money market, now, not the mortgage market, and I am not an expert on it at all. The difference 1s that there are certain investors--take pension funds, for example--who are interested in long-term financing, and do buy that type of investment. They are not so much concerned with short term. Mrs. GRIFFITHS. Where is their money now ? Mr. BAUGHMAN. Well, they invest in long-term corpora.tes, for example, they are mostly long term. Mrs. GRn'FITHS. In your opinion they are going to withdraw that and put it in Government bonds? Mr. BAUGHMAN. No, I think that there is a field of investments in long-term, medium-term and short-term money, and I think what the Treasury has indicated is that they should get into the long term, because they think there is money out there that they can get at reasonable rates. Mrs. GRIFFITHS. What is going to happen to the places where these prospective investors are moving over into the long-term Government loans? Now they have their money invested elsewhere. When they withdraw their money, who is going to invest in that position? Mr. BAUGHMAN. Mrs. Griffiths, I think you always have to bear in mind that the investment funds of these type of investors, whether long ~rm, short term or intermediate term, grow from time to time. Take, for example, pension funds. Those funds continually grow all the time. It is new. money that is getting into the investment funds all the time. People are paying in every day, every month, and those funds are growing. That is where the funds come from on new investments. Mrs. GRIFFITHS. Do you think that they are going to continue to invest if they can get 5 percent on Government bonds? Mr. BAUGHMAN. Yes, I feel that these long-term investors will invest in long-term Government bonds. Mrs. GRIFFITHS. You mean the people who have been investing in the corporates, do you think that they are going to continue doing that if they can get 5 percent on Government bonds? Mr. BAUGHMAN. Some of the corporates, of course, range in prices, too. Some of them are higher than Governments. It depends upon the security. Mrs. GRIFFITHS. Well, now, in my judgment an increase to 5 percent is certainly going to raise the entire interest rate on the entire money market, and the result is going to be that mortgage money is going to be paying-if it is available at all-a higher rate. · Now, if it does pay a higher rate, do you anticipate, and I presume counsel should answer this question, if it pays a higher rate do you anticipate that there will then be 3,dequate money available? Mr. BROWNFIELD. Adequate money for the mortgage marketi Mrs. GRIFFITHS. Yes. 50876-60---4 Federal Reserve Bank of St. Louis  44  EMERGENCY HOME OWNERSHIP ACT  Mr. BROWNFIELD. That depends on the definition of the word •'adequate." Last year there was adequate financing for 1,341,000 housing starts. The housing starts in December were at an annual adjusted rate of 1,310,000 so at the present time, Mrs. Griffiths, there is adequate financing to take care of that, because the;r all have their financing arranged when they start that, and the indications are that after 1959, which was the biggest year we have ever had dollarwise in the homebuilding industry, even with the dollar adjusted for its decrease in value since 1947, and was the second biggest year we have had in terms of starts, that, 1960 is going to be pushing on its heels, and it is anticipated there will be adequate money for that. We do not expect that if the Treasury goes into the market on long terms instead of short terms that there will be less money available. We think, as a matter of fact, there will probably be more. Mrs. GRIFFITHS. Higher priced money i Mr. BROWNFIELD. No, we don't expect so. Mrs. GRIFFITHS. What kind of reasoning do you base that on, what kind of reasoning did you go through to decide that it will be cheaper money i Mr. BROWNFIELD. The judgment is based upon a difference of opinion from your conclusion that the price of the long-term Governments would fix the interest rate of the entire market. Mrs. GRIFFITHS. Oh, I am just asking, isn't it competitive~ Mr. BROWNFIELD. On the contrary, the feeling is that the $200 million or so that came out of sa.vings banks to go mto the short-term 5-year "magic 5's," would not have come out to go into a 20-year bond. Those people want more liquidity than.they. get out of.that. More money came· out of the savings available for mortgages on the short terms than would come out of that pool of funds on long term. If the money from savings is left to come out for mortgages, the adequacy of mortgage funds is that much better. We figure that there will be less interference with the money available through normal channels of saving for mortgages if long terms are issued than there will be if these short terms are used. Mr. WmNALL. Would you yield at this point i Mrs. GRIFFITHS. No, not just now. I want to ask, if you are wrong and the interest rate goes up on mortgage money, do you anticipate that this will lower the demand for housing, or will it increase 1t, or will it remain the same i Mr. BROWNFIELD. Well, I don't think it will have any effect at all upon the demand for housing. The question would be whether there would be more resistance to meeting that demand, and naturally all of those forces have some influence on it. There are a number of forces operating in this area which, taking them all together, we think add up to a little bit of easing on the resistance rather than increasing the resistance. Mrs. GRIFFITHS. Could you name them, please i Mr. BROWNFIELD. I think Mr. Mason went over some of them, at least. They have to do with the change in the status of the consumer debt which rose very shar_ply last year, and which is not scheduled as far as anybody can anticipate to have that kind of an action this 1  year. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  45  The Government went into the market for a lot of money last year, which it is not anticipated it will do this year, and that makes a big difference in the total supply of money available. Mrs. GRIFFITHS. Isn't there about $78 billion of long term still coming due this yead Mr. BROWNFIELD. Well, there are refinancing operations of course going on all the time, but last fiscal year the Government, as I recall, went in for about $12 billion of new money in addition to $5 or $6 billion in the first half of this fiscal year. Mrs. GRIFFITHS. Wouldn't the $78 billion at 5 percent have a tremendous effect on the money market? Mr. BROWNFIELD. You mean the $78 billion budget? Mrs. GRIFFITHS. Refinanced at 5 percent. Mr. WmNALL. Would you yield at this point? Mrs. GRIFFITHS. Let him answer that. Mr. BROWNFIELD. It is not my understanding that the pressure this year will be anywhere near what it was last, and that that is one of the points where it is going to ease. I don't have in my mind the exact difference in figures between what they had to refinance this year and last, but I am sure the overall difference is much in favor of an easing of the money market, and Mr. Baughman probably has closer to the exact figures than I do. Mrs. GRIFFITHS. Well, Mr. Baughman, could you answer thaU Mr. BAUGHMAN. I think, Mrs. Griffiths, one of our points is not quite clear which is whether it is money now in use, or whether it is new money. I think Mr. Brownfield attempted to answer that. On refinancing, the money is already invested, it is purely a replacement of the n:ioney now invest;ed. Mrs. GRIFFITHS. At a higher rate. Mr. BAUGHMAN. At a higher rate, but going back to the use of money, when you go out £or new money-it is true, as Mr. Brownfield said, the Treasury in the last 18 months went into the market for new money to the extent of something like $12 billion to cover the fiscal 1959 deficit and, in addition, for tempora,ry new money to the extent of $6 billion-that was $18 billion of new money that came out of the money market. This year, the Treasury does not anticipate going in for any new money, so what will be involved is refinancing, if that makes it clear. It is the money mar-ket you are talking about. Mrs. GRIFFITHS. In place of making it clearer, in a way you disturb me. If, as you say; this money is already invested, you are not going to call in any funds from new investors, in fact you are just going to pay these people to reissue the whole thing at 5 percent, this increases the budget, and you take it all off the taxpayer. Mr. BAUGHMAN. If they pay a higher interest rate, it will cost the Government more money in interest, that is true. Then you get back to the supply of money, and I just want to say one thing further on the money market and the mortgage market. Today there are quite a few demands in the money market, as you know, from various sources. Whether that is going: to continue forever, or whether there is going to be a change, we will have to wait to see. At the present time there is demand from a great many sources. Mrs. GRIFFITHS. Well, I would like to say that I really feel that the Federal Reserve Bank of St. Louis  46  EMERGENCY HOME OWNERSHIP ACT  statement is wrong, and that you are wrong. I hope you are right, but I think you are wrong. I think that i£ this interest rate goes up to 5 perecnt, you are going to set a nice little pattern, you will make a competitive market £or money, you will make housing higher, you will increase the budget, you will let loose more forces of inflation, and I don't agree with you that there is plenty 0£ mortgage money now and that people are in general in such fine shape. I am from Detroit, and I get quite a few letters from builders that they consider the situation really drastic. Thank you. Mr. WrnNALL. I just wanted to make this point to my collegue, that nobody is talking about financing at 5 percent on a long-term basis. The proposal is to take off the 4¼ percent interest rate ceiling, and let the competition £or money set the rate. Mr. AoooNIZIO. Mr. Miller. Mr. MILLER. There are a number 0£ us in Congress of the opinion that this administration believes i£ there must be a tight money policy, the best place to pay the price is in the housing industry. Mr. McChesney Martin said as much at the Senate veto hearings, and I am interested in finding out from responsible FHA officials whether or not they believe the housing industry should be the one that walks the plank if there must be a tight money policy. The chairman, Mr. Rams, let you get off that question. He said i£ stability does not prevail, he presumes you will come in and ask us for some assistance. But I am wondering, would you? Mr. ZrMMERMAN. Well, I will answer the question from FHA's point 0£ view, and mine as Commissioner. . I£ this is the administration's policy, then there has been quite a breakdown in communication, because m the year that I have held my job, this has not been a practice followed by me. . It is true that what conditions exist mfluence the administrative actions that we take, and as the market gets tight, as it has and as we have been discussing all morning, then in the exercise 0£ the discretionary authority which Congress has given me to move the interest rate ceilings which we wiU I?ermit borrowers to be charged, I simply respond to these very clear signs, and I do it independently and without regard for these other factors that you have reference to, and I think that this is the way it should be done. I don't believe that the administration of this FHA interest rate ceiling should be geared to countercyclical devices or used as a tool to respond or react to other Federal Government financing problems. Mr. MILLER. That is fine as to FHA. But as to the policy·of the HHF A generally, I believe Mr. Martin has said something has to give in tight-money situations, and he, by the expressive of his hands at the time, indicated it might as well be the housing industry. I just wondered whether or not this is to be agreed upon by the administration 0£ the Housing Administration, i£ that came about? Mr._ BROWNFIELD. Speaking 0£ communications, Mr. Zimmerman's office is _a couple 0£ blocks away ~m ours but I am in the back end 0£ the sixth floor and Mr. Mason is on the front end of the sixth floor and tha~ pdlicy hasn't reached me; that is, I have not heard of any such policy. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  47  We see all these forces playing, and it is my understanding that in the housing field we recognize that we are susceptible to the interplay of these forces as they are in other segments of the economy, but I have not heard anything said that we are supposed to regard ourselves as being the shock absorber. Mr. MILLER. If this stability period ends and you get a rising interest rate, then you would come in and ask Congress for emergency measures to deal with it? Mr. BROWNFIELD. That is an abstract question that I don't think I can very well answer in the abstract. It would depend on what the situation was at the time. Mr. MILLER. I was hoping for a policy statement by Mr. Mason. Thank you. Mr. AonoNIZIO. Are there anv further questions? If not, may I thank you gentlemen for being· here and giving us the administration's viewpoint as to the effects of the bill. The committee will be in recess until 2 o'clock tl1is afternoon, when our witness will be Mr. Philip Brownstein, Director of the Loan Guarantee Division of the Veterans' Administration. (Whereupon, at 12 :40 p.m., the subcommittee recessed until 2 p.m. the same day.) AFTERNOON SESSION  (The subcommittee met, pursuant to adjournment, at 2 p.m.) Present: Mr. Addonizio (presiding), Mrs. Sullivan, Messrs. Ashley, Rutherford, Miller, and Widnall. Mr. AnnoNIZIO. The committee will c01r...e to order. Before we begin, I would like to state that the chairman, Mr. Rains, unfortunately is busy this afternoon with a very important group. He asked me to begin the meeting and that he would try to get here some time later this afternoon. I also hope other members of the committee will be present. Our witnesses this afternoon are ,Villiam J. Driver, Chief Benefits Director, and Philip N. Brownstein, Director, Loan Guaranty Service, Veterans' Administration. ·will they please come forward? STATEMENT OF WILLIAM 1. DRIVER, CHIEF BENEFITS DIRECTOR, VETERANS' ADMINISTRATION; ACCOMPANIED BY PHILIP N. BROWNSTEIN, DIRECTOR, LOAN GUARANTY SERVICE, VETERANS' ADMINISTRATION Mr. DRIVER. Mr. Chairman, I have a statement which, if it pleases the Chair, I will read into the record. I welcome this opportunity of discussing recent housing developments and the provisions of the bill which you have under consideration. Before doing so_., I would like to summarize what the veterans housing loan program llas accomplished to date. As of the end of December 1959, the Veterans' Administration had guaranteed or made more than 5½ million home loans to veterans, totaling more than $48 million. More than 1 out of every 4 of these Federal Reserve Bank of St. Louis  48  EMERGENCY HOME OWNERSfilP ACT  loans has been 'repaid in full and only about 1 out of every 100 has resulted in foreclosure. In addition to the benefits derived by veterans from these loans, the pr:ogr:am has had a very significant impact on the home building and related industries, and, in turn, on the national economy. During the last 10 years, that is, 1950 through 1959, there have been about 11,600,000 new nonfarm private dwellmg units started in the United States. During the same period, GI loans for the purchase of new homes have exceeded 2,300,000-or the equivalent of nearly 1 out of every 5 new dwelling units started. Thus the benefits to veter:ans and the national economy under this program have been quite substantial. Before discussing the specific provisions of the bill before you, I think we ought to take a look at housing developments during the latter part of the 1950 decade. During 1957, nonfarm private dwelling units started, dropped below 1 million for the first year since 1949. This also was a year of declining GI home loan activity. This decline in housing production prompted the enactment of the emergency housing legislation of April 1958, which set up the Federal National Mortgage Association's special assistance program 10 to purchase low cost Federal Housing Administration and Veterans' Administration mortgages in the secondary market and authorized an increase in the maximum GI loan interest rate from 4½ to 4%, percent. During 1958, nonfarm private dwelling-units-started again rose above the million mark and in 1959 attained a total of 1,341,500 units-surpassed only by the record total of 1,352,200 units started in 1950.  Although GI home loan activity spurted for a few months following the enactment of the 1958 legislation, it was of short duration as in terest rates generally continued to rise and the FNMA special assistance fund became fully committed. While another increase in the GI loan interest rate was authorized in mid-1959, this time to 5¼ percent, GI home loan activity has not kept pace with other segments of the home mortgage industry as the interest rate on GI loans has not been competitive in the mortgage investment field. With current demands for investment capital continuing at extremely high levels, there seems to be little likelihood that GI loans with a 5¼-percent interest rate will attract much favorable attention from investors. Section 11(2) of the bill which you are considering would have some effect on the GI loan program. This section provides an additional $1 billion for FNMA special assistance fund for the purchase of low-cost properties with FHA and VA financing. We are, of course, interested in any proposal which will assure a reasonable fl.ow of mortgage funds for GI loans so that the home-financing needs of veterans will be met. However, an increase in the special assistance authQrization would not solve the problems which confront us in administering the GI loan program. Neither would it solve the problems of many veterans who would like to make use of their entitlement. This is particularly true of a considerable number of the World War II veterans for whom eligibility expires on July 25, 1960. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  49  The amount proposed to be authorized for special assistance is now confined to new construction and the maximum mortgage 'limitation is $13,500 with an authorization for a $1,000 increase in high cost a~. Thus the veteran who would like to buy an existing house continues to be faced with a problem of financing. Furthermore, the average GI loan for the purchase of new homes in 1959 was in excess of $14,000. In many areas the moderate price 1range of new residential construction is considered to be $15,000 to $18,000. This would mean that veterans seeking :financing in the moderate or upper price ranges in most areas will have to take their place with nonveterans in competing for alternative types of mortgagefi.nancing. It has been our expenence that the GI loan prog1I"am has operated most successfully during these periods when the mortgages were an attractive investment media to private investors. The relief afforded by Government funds is at best partial and temporary. The best way of stimulating a reasonably active flow of investment capital into the GI loan program would be to make the loans sufficiently attractive to private investors in relation to competitive investments. This would necessitate statutory authority which would permit the Administrator flexibility in fixing the interest rate at a competitive level. The President in his budget message last week again recom:mended, as he did last year, that the VA Administrator be given authority for fixing the interest rate similar to that which has been granted the Federal Housing Commissioner. The other provision of the bill which would affect the loan guarantee program is contained in section 13. This would require originating mortgages to report to the FHA or VA the amount of any fees, charges or discounts other than the origination fee charged to the mortgagor, paid in connection with or for the purpose of arranging the mortgae loan. Undoutbedly this provision 1s motivated by the reports of substantial discounts on Government underwritten loans. We, too, deplore a market condition in which the origination of VA guaranteed loans is dependent upon the willingness and ability of the seller or builder to absorb a very substantial discount. Under these conditions it is not possible to have the program function in the manner intended. However, the requirement that the discount be reported will not correct the basic cause. The discount is employed as a mechanism to bring the yield on a submarket rate security in line with that obtainable on comparable investments. The most effective way of reducing the discount but augmenting a flow of investment funds 1s by jncreasing the interest tate which the security instrument bears. The requirement that the discount be reported will not make available any increase in the supply of mortgage funds. Nor is it likely that the discount charged will be reduced. An investor who would be concerned about reporting the price for which the mortgage is acquired would not be likely to reduce the discount, but rather would probably invest in other securities yielding the higher return. The future activity in the GI loan program depends upon one of the following: (a) An increase in the supply of investment funds ( or a lessening of the demand) which will result in the GI loan with a 5¾-percent interest rate again attracting investor apJ?eal. This seems quite unlikely in the months immediately ahead. (b) The VA Ad· Federal Reserve Bank of St. Louis  50  EMERGENCY HOME OWNERSHIP ACT  ministrator being given flexibility in the matter of fixing a competitive interest rate. Even assuming an improvement in the available money supply this authority would be highly desirable since it would afford looway as called for by market demands to raise and lower the GI loan interest rate in order to meet prevailing conditions. The Bureau of the Budget has advised us that there is no objection to the submission of this statement. Mr. ADDONIZIO. Thank you, Mr. Driver. I ,a.gree with you when you say that the GI loan program has done a really remarkable job in providing veterans with homes. I was just curious as to how your program compares in size with the FHA program. Can you give us some idea about it? Mr. DRIVER. You mean today, Mr. Chairman? Mr. ADDONIZIO. Yes. Mr. BROWNSTEIN. On a cumulative basis, we have guaranteed about 5½ million loans totaling $48 billion. This is in the 15 years that the VA has been in existence. During the 25 years that the FHA has been in existence, they have insured on residential properties about the same number, close to 5.5 million, totaling about $41 billion. Mr. ADDONIZIO. Mr. Driver, on page 3 of your stafoment, you say that the $1 billion loan fund proposed in the bill before us would not solve the GI loan problem. Don't you agree with me, though, that if it would not solve it, at least it would make more GI loans available? Mr. BROWNSTEIN. Mr. Chairman, it would make available enough money for roughly 90,000 loans, and unquestionably a good many of those loans would be GI. vVe have found, however, that this program operates effectively only during those periods when we can stimulate investor a,ppeal in the GI loan program, and while the proposed authorization would make available a certain number of loans to some veterans, it would still leave unsatisfied a very large segment of the veteran group who sti,U would like to make use of their entitlement. Mr. ADDONIZIO. From reading your statement here, I come to the conclusion that you feel the answer to the GI loan problem is a higher interest rate; is that correct? Mr. BROWNSTEIN. This is not the total answer, Mr. Chairman. However, I do believe that it is important to recognize that although there may be differences on what ought to be done in the general area of interest rates, to single out this one program and say this is where we hold the line leaves the program in a completely untenable position. Mr. ADDONIZIO. If Jou raise the GI interest rate, wouldn't other rates go up accordingly, with the result that you would find yourself in the same position? Mr. BROWNSTEIN. Well there are those who hold this view, that increasing the rates on Government guaranteed and insured loans would result in raising the general level of rates. But, again, I believe that if the program is to operate, it is essentirul that the rate be competitive with that obtainable on other types of investments, and to hold the rate in this one area makes it virtually impossible to operate a successful program. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  51  Mr. AnooNIZIO. Of course, the interest rate is under the control of another committee, so I guess it is rather useless to talk about it here. I also realize that, if my memory serves me right, the pl'Ogram, itself, expires on July 25 of this year. Mr. DRIVER. For the World War II veterans, yes. Mr. AnooNIZIO. Now, if that be so, and because of the fact we are in a tight money situation, it would seem to me that a lot of World War II veterans that are entitled to this loan wiU be frozen out unless we extend the program, and I just want the record to show, of course, that I am for the extension of the program. Mr. WIDNALL. Mr. Driver, how many entitlements are outstanding at this time? Do you have any estimate? Mr. BROWNSTEIN. Do you mean how many World War II veterans have not used it? Over 9 million, Mr. Widnall. Mr. WmNALL. And 5 million some-odd have used it? Mr. BROWNSTEIN. 5½ million have used it. Mr. WmNALL. Would you have any way of knowing how many would actually like to use their entitlement that are not using it now? Mr. BROWNSTEIN. A good many we know have acquired homes through FHA or conventional types of financing. The study done by the Bureau of Census in 1956 showed that 43 percent of the veterans who purchased their homes with mortgage loans had acquired them with VA guaranteed loans; 18 percent used FHA loans and 39 percent financed with conventional loans. Now, we do find, however, that many the the prospective homebuyers today are homeowners, and they are moving up in their economic levels, and their families are growing so that they require larger homes. Unquestionably a very large percentage of these 9-plus million, maybe as many as 60 percent, though this is something we don't have a firm figure on, now own homes, but as they move around, and as they move up in income levels many of them would be coming back into the market. Mr. WmNALL. So that actually you can't say there are 9 million veterans who are looking for homes? Mr. BROWNSTEIN. Oh, no, sir, clearly not. Mr. WmNALL. I notice in your statement that the average mortgage, or the average cost of the home was in excess of $14,000, the average GI loan. Now, how does that relate to the figures for the previous years 1958 and 1957? Mr. BROWNSTEIN. It is up in both years, Mr. Widnall. I don't have with me the precise figures for those 2 years, but will include it in the record. Mr. WmNALL. Did you notice in the operation of your own program, after that emergency program went through back in 1957 that there was an upping of construction costs? That was mentioned this morning by Mr. Mason. Mr. BROWNSTEIN. I now have those figures, Mr. Widnall. In 1957, the average purchase price of a VA guaranteed home was $13,533. It was $13,841 in 1958. Now, so far as the increase is concerned, probably the best source is the Boeckh Index of Construction Costs, and that would have shown an increase. Federal Reserve Bank of St. Louis  52  EMERGENCY HOME OWNERSHIP ACT  Mr. WmNALL. Well, do you notice any immediate impact as a result of the last emergency housing bill? Mr. BROWNSTEIN. We did have an increase in our activity, but there were two things that happened. Not only was there the special assistance authorization, but in addition the VA rate was increased from 4.5 to 4.75, and we got a lot of private lenders who again became interested in the program at that time. Mr. WmNALL. Thank you. That is all. Mr. .AnooN1zro. Mr. Rutherford? Mr. RUTHERFORD. Is there any justification for the expense and cost of operation of a separate housing bill and housing administration for veterans? . Mr. DRIVER. I think it would be important to break it down into two pieces, to discuss the vVorld War II veteran, and secondly the Korean veteran. So far as the Korean is concerned, it would be fair to say, with the economic circumstances in effect, there is still a readjustment need for those veterans in the housing field. Insofar as the World War II veterans are concerned, Mr. Widnall discussed that, or touched on the subject of how many of them remain who want housing under the GI program. If we relate the question to the idea of readjustment for them, too, then I think in fairness and equity to those who have not already obtained loans under the GI program you must say that anyone who has been disrupted from getting it because of his service in the war, that there would be a need for the program for them, too. Mr. RUTHERFORD. On the basis of readjustment, or the basis of "he didn't take advantage of it at the proper time, and he had his reasons"-because of tight money, the availabilit_y of it. In other words, if he didn't take advantage of it on a personal basis, how long? This is indefinite. Mr. DRIVER. I don't think I could say, and I wouldn't certainly take the position we are holding this open indefinitely because of a personal whim he didn't take advantage of it. I think the program is predicated on the principle of adjustment. Mr. RUTHERFORD. If you are going to base it on that, on the basis of readjustment, what length of time is considered in studying the problem, what is the period of readjustment for a man who is disrupted from owning a home because of service in the war? . Mr. DRIVER. Congress fixed that period to July of this year, and I think certainly you could hardly quarrel with the specifics and say that that is wrong, except to point out that there have been innumeri:tble times, such as there are now, when it is practically impossible to take advantage of the beneficial effects of the law because of conditions beyond the veteran's control. Now to the extent that that might figure in your thinking in lengthening the program, I would assume you could then defend a readjustment period for some longer period. Mr. RUTHERFORD. Could we, without the matter of veterans 1 I think the mortgage bankers, builders, and everybody else is riding this veterans' bandwagon, claiming to be for the poor old veterans, and say all they want to do is put a roof over their head. Of course, when the veteran goes out there, the mortgage banker and everybody else has the dollar flag up there. "It is cash on the barrelhead when you come to see us." Federal Reserve Bank of St. Louis  53  EMERGENCY HOME OWNERSHIP ACT  The mortgage bankers just came out and said in fact their legislative program should be extended to 1965, the VA housing. What I am saying is this: What was the possibility of coordinating and putting one housing for all FHA, VA, and such, and cut out the duplication of administration and give the veteran a real break, take it away from the title of "Veterans' Housing," and let all Americans obtain a house, liberalize it1 and not have two separate programs. Mr. DmvER. That is perfectly possible. I think the intention was to segregate the veteran because of his war service and to give him an advantage in the home-buying field. Mr. RUTHERFORD. I recognize the origin date and the purpose behind it. Mr. DRIVER. That purpose still has to be in our minds today if we feel a GI housing program is essential. You must remember that today in this country we have approximately-and this is for all wars-about 22 million living veterans, with about 77 million people either being veterans or dependent on a veteran for support, so that there is a very large area, and I am speaking now from the standpoint of investors, builders, or what have you, where they could find interest in the housing field. The Congress, I would assume, would have to think in this area: Do we still at this point, for the World War II veterans, feel there should be a separate entitlement with special privileges, or special benefits attached to it which other people in the population do not get? Mr. RUTHERFORD. Are they so special, though? What percentage of your people who are eligible for VA benefits in housing have obtained FHA in preference over VA? Mr. DRIVER. It is demonstrable there are advantages to the GI buyer over the person buying under FHA or connntional financing. I would also like to indicate here that the position of the Veterans' Administration taken officially is not for an extension of the World War II program, but rather for the duration of it, as presently authorized, and certainly for the duration of the Korean program which has several years to run, that the program be made competitive so that the veteran, for the advantages which are inherent in the program, will be able to get housing and not just have a meaningless law on the books with no practical effect. That is why we advocate that the interest rate be made competitive so that there will be something for him to get. Mr. RUTHERFORD. So that my position can be made clear, I am for a housing program for all America, plus the fact that I am for some preference to a man who did render service to the country in time of war. In fact, I would even go so far as to say the man who bore the brunt of battle should get extra preference over the man that just passed under the recruiting sign and came back and paraded around m organization conventions, and such as that, but I am just wondering whether, while we are for the veteran, we might sometimes be politically smart. I am wondering if we are fair to the veteran home buyer in having so much administrative cost, the duplication of the program, or wliether we couldn't have the same thing you ha,ve, a preference, without two different types, with the veteran getting a Federal Reserve Bank of St. Louis  1  54  EMERGENCY HOME OWNERSHIP ACT  preference, whether we couldn't have one housing program with theveteran getting preference under that pa,rticular housing program. Mr. DRIVER. You could have that, there is no question about that. I think, though, that it is fair to say that when we do have a veterans' program, whether it is in housing or whether it is in the area of compensation, that it is essential, if it is to be administered along a certain line with a certain principle in mind, because it is a, veterans' program, that the Government has found that it should be in one agency. I think that that is fair, and I would certainly agree with this. Of course it could be placed in some other agency with a general program for everyone. Mr. RUTHERFORD. This period of readjustment I think is getting ridiculous, from the basic reality of readjustment, just because a man had war service 15 or 18 years ago. Mr. DRIVER. We are still in the readjustment period Congress established. We are not in favor of extending the period, but we do believe that for the duration the periods have to run we should make the benefit attractive enough so there is a real gain to the veteran. As it is now, without a competitive rate, he isn't getting it. Mr. RuTHERFORD. If we are going to have a veterans' program, let's, make it work efficiently, let's make it work in such a manner where the veteran is not the scapegoat of the whole housing industry, and where those who prey on the veteran cannot do it under this program. I think the veteran should get it. He is not getting it under the program now. Mr. DRIVER. Not today, because the rate doesn't compete. Mr. RUTHERFORD. The rate does not mean the more availability of mortgage money. It hasn't in the past. It doesn't mean by any stretch of the imagination if you increase the rate that the money will become more available, that mortgage money will become more available. Mr. DRIVER. "\,Ve have done our greatest business only at a time when the rate was competitive, and we feel that if it is not competitive, we will not do any volume of business, and thereby the veteran will not get the benefit. If we were to increase the rate by some percentage from what it is now, and other rates went up, we would be in relatively the same position, but I think there are factors that would affect the others from going up. Mr. RU'I'HERFORD. This special assistance program here, don't you think that will have the effect on other mortgage money available that it will loosen up that money, that it will come mto the market in competition against your direct funds? Mr. DRIVER. I don't think it would to the extent that veterans would be treated equitably in all parts of the country. We think it would not have the same general good effect that a healthy, competitive interest rate would have. Mr. RUTHERFORD. What is a healthy, competitive rate? Mr. DRIVER. One that would attract investors in the market to the same general extent that it is attracted in other fields, conventional financing or FHA. Mr. RuTHERFORD. If we increased the interest rate on this, it is just going to be a stairstep, it will spiral the rest of them, and there won't be any limit, because the boys who lend the money are interested Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  55  in the return on their money. You are reaching for 100 percent, and when the American dollar doesn't get but 10 percent here it _goes overseas, and you are not going to attract money at anything less than 10 percent, if that is what you are shooting for, because that is eventually what you are going £or is a IO-percent minimum. Mr. DRIVER. Specifically in Government we have two programs, two interest rates. One is lower than the other, the GI is lower, and ,obviously is at a disadvantage. I£ they were both the same, at least that difference would be wiped out. Now, how far beyond that conventional rates might go is something for the future. Mr. RuTHERFORD. vVe tried it on FHA, and it didn't materialize. 'The discount is just as great, with 15 percent less mortgage money .availability. Mr. DRIVER. I£ our rate were at least competitive, for example, with the FHA rate, we would have mor~ uniform, widespread application under the GI program. Mr. RUTHERFORD. What is your explanation of why there is a differential between the two rates, other than the opinion of Congress 1 Mr. DRIVER. I think the opinions of individual Members of the ·Congress and other people today in many cases is that because this. is a GI program, the veteran should be given an advantage, and we ~hould try to keep the rate down. Now, this of course is good philosophy if you are interested in something special for the war veteran, but if in doing that he gets no benefit, it seems to me that one washes out the other, ·and where :vou are erring on the side of good intention, you are solving nothing from a practical standpoint. Mr. R-c-THERFORD. ·well, I will be frank with you. One thing that galls me, and I think the members of the subcommittee are aware of 'it, and somethimes I might leave the impression that I am antiveteran. I am anti these fat cats who pass resolutions against the vet.erans, and who are constantly using the veterans as a scapegoat for economy in Government, ·and then in their resolutions within their convent'ions are always interested in continuing some veterans program that will line their pockets. Now. the mortgage bankers association just came out in their scandal sheet where they are for this program. At the same time they also come out in the local clubs where they are opposed to the continuing ·cost of the veterans' program. You will also find they are possibly also opposed to GI education. At the same time, the college organizations for some reason or other have taken the veterans' program and are utilizing it to continue the fulfillment of dormitories as well as the college itself. In other words, it disturbs me greatly that here the veteran is being used, he is being used for a program of those who are flying the flag high for the poor old veter~n, and they are just using him as a third party, as a vehicle for more business. Now, the only thing I want to do is just come out and start being honest about this "durned" thing. If you are for a veterans' program, let's be for it, but this old foolishness of coming out and saying that we are opposed to a GI bill of rights on the one hand, and then coming out for the continuation of the program on the other hand for one thing-for material benefit only-just about galls me. Federal Reserve Bank of St. Louis  56  EMERGENCY HOME OWNERSHIP ACT  What I am trying to say is this: I want the veteran to get a house, but let's put it all under one housing program, giving him preference under that housing program so that we won't have the GI house, with the boys running these big full page ads, for the veteran who does not want the program or is paying his share of the program, that the whole veterans community will not be stigmatized because of this socialistic trend in that particular aspect of it. That is all I am askiing. . to re1·1eve f rom h"1m t h"1s part1cu . 1ar t h"mg. The h ousmg . am trymg program itself, or the education program itself, has been taken from the veterans and from the veterans organizations and is being used by those that can materially gain from it. I think the best program 1s under one housing program. I think the readjustment period for World War II has under any reasonable criteria passed, and I think it is time now that we come under one housing program. Mr. DRIVER. The law, of course, states that it will close in July, but we must still, I think, speak on principle. If we are to have a veterans program, if he is to receive a preference, our feeling is that something should be done to make the program workable. Now, when you talk about education, whether people are for or against it, I think that the Government's position in favor of a readjustment program for war veterans has been consistently supported. Our opposition in tliis area, and from others I have heard, has only been in the area concerning the so-called peacetime veteran. Mr. RUTHERFORD. I think the housing program is good and education is good. I just don't like it being prostituted. Mr. DRIVER. We would agree. A readjustment program of real benefit to the veteran is our point. Mr. Ann0Nrz10. Mr. Ashley. Mr. AsHLEY. Mr. Driver, on the last page of your statement, you saythe future activity in the GI loan program depends upon one of the following~ (a) An increase in the supply of investment funds, or a lessening of the demand, which will result in the GI loan with a 5¼-percent interest rate again attracting investor appeal. This seems quite unlikely in the months immediately ahead.  Were you here this morning and did you hear what Mr. Mason had to say on this subject~ Mr. DRIVER. I heard part of it. Mr. BROWNSTEIN. I was here, Mr. Ashley. Mr. AsHLEY. How do you think that gibes with his statement on page 4 of his statement to the committee m which he says  It is our judgment that this credit situation will permit a high level of homebuilding during 1960. Although an increase is expected in loans to finance the expansion of the business, plant equipment inventories in 1960, there should be a great increase in the availability of loanable funds.  Mr. BROWNSTEIN. Even if there is an increase in the availa;bility of loanable funds, Mr. Ashley, I certainly see nothing in the months ahead that would indicate that the GI 5¼ percent loan is going tocommand any great attention from the standpoint of investor appeal. Mr. AsHLEY. In other words, you don't think that a 5¼ interest rate will attract any action, that the program will attract any action~ is that right~ ,. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  57  Mr. BROWNSTEIN. It will not attract any reasonable amount of action, and I didn't hear Mr. Mason say he believed there would be any substantial decline in the current interest rate levels which it would take in order to make the 5¼ percent loan attractive. Mr. AsHLEY. Well, the statement is perfectly clear, there is going to be a great increase in the availability of loanable funds, but not so grieat: · terpret at10n . th at mterest . . t h at wh at rates w1·11 d rop; 1s s 1t your m you are saying? Mr. BROWNSTEIN. I don't see anything that is going to cause interest rates to drop to the level where a 5¼ percent loan will result in general attraction to investors. Mr. ASHLEY. Well, of course what you are saying, the way you interpret Mr. Mason, whose position, of course, is that we shouldn't consider any of this legislation because it is not needed, because there will be plenty of loanable funds-the way you interpret this, then, is that there would be plenty of loanable funds at this high interest rate which can add up to $5,000 on the price of a medium-priced home; is that right? Mr. BROWNSTEIN. I don't believe I should try to interpret Mr. Mason's statement. Mr. ASHLEY. Is there any other way of interpreting it? Mr. BROWNSTEIN. So far as we are concerned, there is nothing in the picture that indicates to us that investors are going to be interested in an;y large volume of VA 5¼ percent loans, and let me say that even if lightning should strike, and this should occur, it would be highly desirable for us to have the authority to fix rates upward or downward as market conditions require. Mr. ASHLEY. Well, I am not in such great disagreement with your position on that, as a matter of fact, but I think it is extremely interesting that your position is at variance with that of Mr. Mason, or if it isn't at variance, that you force him into the position, by :your interpretation of stating to the committee that there will be availability of mortgage funds, but at such a high interest rate that the average homebuyer will be assessed an extra three, four, or five thousand dollars or upward in interest rates alone. There 1s no other interpretation. Mr. BROWNSTEIN. All I can do is repeat the conviction that we see nothing in the current market that leads us to any conclusion that the 5¼ percent GI loan is going to attract appeal. Mr. ASHLEY. Let me say I couldn't agree with you more, not possibly. Mr. AoooNIZIO. Mrs. Sullivan? Mr. SULLIVAN. No questions, Mr. Chairman. Mr. AoooNIZIO. Mr. Miller. Mr. MILLER. Mr. Driver, with VA's selling at 10 points discount, and with the FNMA, all things being equal, at 9 pomts, and with a 12 percent profit for the builder, is it not possible that some of this discount is getting into the price of a home? Mr. BROWNSTEIN. Well, Mr. Miller, our instructions to all of our field offices are and always have been that we will not recognize any part of the discount payable by the builder in our reproduction costs. Federal Reserve Bank of St. Louis  58  EMERGENCY HOME OWNERSHIP ACT  Now that is not to say that appraisal is a sufficiently exact science, that one always can appraise out any single element. However, to the extent that it is possible to do so, we do it. I think that what really happens, Mr. Miller, is this, instead of the builder adding it to the price, he just leaves the program, and that is why we find it drying up. Mr. MiLLER. Thank you, Mr. Chairman. Mr. AnooNIZIO. Are there any further questions~ If not, may I thank you gentlemen for your statement. The committee will be in recess until 10 o'clo~k tomoi:row morning. (Whereupon, at 2 :45 p.m., the subcommittee adJourned until 10 a.m., Tuesday, Jan. 26, 1960.) Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT TUESDAY, JANUARY 26, 1960  HousE OF REPRESENTATIVES, SUBOOMMITTEE ON HOUSING OF THE CoxMIT.rEE ON BANKING AND CURRENCY, W (1,8hington, D.O. The subcommittee met at 10 a.m., pursuant to adjournment, in room 1304, New House Office Building, the Hon. Albert Rains, chairman of the subcommittee, presiding. Present: Mr. Rains (presidmg), Mr. Barrett, Mrs. Sullivan, Mr. Ashley, Mrs. Griffiths, Messrs. Rutherford, Widnall, and Miller. Mr. RAINS. The committee will please come to order. Our first witness this morning is Mr. Martin L. Bartling, Jr., president of the National Association of Home Builders. You may come around, Mr. Bartling. With Mr. Bartling are our friends Herb Colton and Joe McGrath of the National Association of Home Builders' staff. Mr. Bartling, I want to congratulate you on the efforts made by your great organization. I was out in Chicago last week, as you know, and everybody I saw at your convention had on a "Bartling button". I think it did very well indeed in selecting you, Mr. Bartling. We are glad to have you here. You may proceed with your statement. STATEMENT OF MARTIN L. BARTLING, J'R., PRESIDENT, NATIONAL ASSOCIATION OF HOME BUILDERS; ACCO:MPANIED BY HERBERT S. COLTON, GENERAL COUNSEL; AND JOSEPH B. McGRATH, LEGISLATIVE DIRECTOR  Mr. BARTLING. Mr. Chairman and members of the subcommittee, my name is Martin L. Bartling, Jr. I am a homebuilder from Knoxville, Tenn. At the annual convention of the National Association of Home Builders, held last week in Chicago, I had the honor to be elected president of the Association for the current year. In that capacity, I appear before you to present the views of the organized homebuilding industry on H.R. 9371, the Emergency Home Ownership Act. As this subcommittee knows, NAHB is the trade association of homebuilders. Its membership now totals over 43,000 organized in 342 affiliated local and State homebuilder associations. This hearing provides a welcome opportunity to present to you the views of our association as formulated just last Wednesday in the annual policy statement for 1960 adopted for the association by the unanimous vote of its 504-man board of directors. 50876-60-5 Federal Reserve Bank of St. Louis  59  60  EMERGENCY HOME OWNERSHIP ACT  In accordance with our usual practice, this policy statement is based on reports from the association's standing committees which were then developed by our resolutions committee meeting in almost continuous session during our 5-day convention. Its recommendations were then further discussed by our executive corru:nittee and, finally, the statement was approved hy our board as an accurate expression of the concensus of their free debate during the entire meeting. As a result of this lengthy and, we believe, thoroughly democratic process the statement was, as I have indicated, unanimously approved. Those of you who are familiar with the vigor, va.riety of views, and vocal strength of our membership will agree with me, I am sure,. that obtaining ~nanin~ty on these comrilicated and importap.t matters represents no mcons1derable accomplishment. I should hke to offer our ~i+tire policy statement for inclusion in the record of this hearing. A,cppy is attached to this testimony marked "Attachment A." Mr. RAINS. It may be included, Mr. Bartling. ( The policy statement referred to is as follows :) ATTACHMENT  A. NAHB  POLICY STATEMENT FOR  1960  The nutnber and kind of homes available to American home buyers in 1-900 ,again will be determined largely by Federal fiscal and credit policies. We face a year in which homebuilding will decline while the rest of the economy booms. $carce and expensive mortgage credit accelerates steady retrogression from the low down payment, long-term mortgage-predominantly responsible for homebuilding's phenomenal progress in the past quarter century-to financing meth· .ods proven unsound 30 years ago. Home buyers are the Nation's largest private users of long-term credit. They-and the thousands of small businessmen who build homes for them-are of course as deeply concerned as are our fellow citizens that the soundness of the American dollar be maintained. But we have grave doubts both of the .effectiveness and the fairness of a governmental anti-inflationary policy which relies solely on monetary restraint. The attempt to control excessive total demand for credit and to stimulate savings through ever-rising interest rates has obviously failed. Meanwhile it has inhibited economic growth and placed the greatest burden on those who can affort it least. Interest ra.tes approach-and in some cases exceed-the legal limits of usury. One major group of Americans has been successfully "controlled"-the tens of thousands of modest-income home buyers who only a short time ago could have bought homes well within their means but are now disqualified by the high cost of credit. Home buyers are hurt first and worst by the impact of "tight money." All this makes as little sense as raising the price of bread to combat a food shortage. Homebuilders and home buyers are convinced there is something fundamentally wrong-however worthy its stated objective-with a national policy which, in the name of "curbing inflation," denies to creditworthy, moderate-income families the opportunity to own their own homes while allowing credit to continue freely available for many less essential uses. The National Association of Home Builders is fully aware that, when the total credit sought by the economy exceeds the available supply, the Government must in the interest of all the people dampen exuberant demand. But we are equally convinced that, when this becomes neces,sary, the Nation is best served by equitable application of the credit brakes and by full use of all the vast powers of the Federal Government to assure for all a fair share of available credit. In 1957 the same combination of restraints now imposed on our industry caused a severe drop in construction that triggered a general business recession. Unless imm.ediate effective action is taken to distribute more fairly the impact of "tight money" this pattern will inevitably be repeated. If the credit system is not soon modernized to permit b.omebuilding access to credit as befits Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  61  its place .i1;1 th~.economy, we can 'See no alternative.but a severe decline in home construction or for .Congress again to authorize the purchase, under appropriat!l safeguards; . of large amounts of mortgages in areas. where mortgage money is reasonable prices. · · The 42,000 members of .the National Association of Home Builders therefore declare their policy for 1960 as follows : . . . I. Government housing policy.-We urge a clear definition of current Government housing policy to the end that programs of the Government in this area can be better coordinated in the interests of housing for the American people. The best interests of homebuilding are no longer adequately served by the present governmental housing agency complex-taking into account the size of the homebuiiding industry, its position in the economy, and its capital need$ and requirements. The problem of building and financing homes for the predicted. "population explosion" of the decade just starting inake essential a·voice for homebuilding at the highest governmental policy level. We recommend a Cabinet department for housing and related matters. II. Modernization of the credit system.-It must be recognized that the credij; structure of the United States is today vastly different and more complex than when the Federal Reserve System was established prior to World War I. The time is long .past due for a complete reexamination by a commission of Gov ernment and industrial specialists of this whole complicated, important field to determine whether-and what-additional tools are needed to provide a fairer and more rational distribution of our available credit resources. The immediate difficulties of "tight money" obscure the fundamental problem that savin~s .which should flow into mortgages are being increasingly diverted into the :stock market through mutual investment funds (which enjoy favorable tax. treatment not available to real estate investments) ; into consumer credit; and more recently into Government bonds through the "magic 5's." Residential mortgage financing must be given a place in the total credit picture commensurate with the vital importance of the vast homebuilding industry dependent on it. We have long urged further modernization of the residential mortgage system. The practical and progressive management of FNMA-under the most difficult conditions-has been deservedly praised by the Congress and financial observers ; but there should be a true central reserve facility adequate to render fully effective an types of mortgage lending in today's dynamic economy. III. Mortgage finance.-High interest rates and the high costs of money have been and are a major factor in the rising cost of housing. The highest interest rates in three decades-now at a level which causes lenders and Government agencies concern for possible violation of State usury laws--have failed to reduce discounts. Increasingly some lenders are exploiting current conditions by exacting unconscionable charges. Inevitable reaction against these excesses will further increase pressure for governmental controls and for direct governmental lending. Pending effective means to apportion available credit equitably to our industry and to other desirable uses, we urge lending institutions-and th'eir trade associations-to cooperate with us in avoiding abuses which in the end can only discredit home financing and hurt the home buyer. The soundness of the low downpayment, low monthly payment mortgage suited to the pocll:etbooks of American home buyers has long been amply proven. We shall work for increased ratios of loan to value and longer terms on conventional loans. We pledge our cooperation and support to the savings and loan industry to fight an increased tax burden which would further curtail the proportion of total savings flowing, into mortgage lending institutions. We shall, further cooperate with commercial banking leaders to improve the understanding that segment of the industry of the problems of the homebuilding industry. Commercial banks should have the same tax treatment on earnings from longterm mortgages as now provided to thrift institutions. As interest rates have increased and credit has become less available the trend away from FHA new home financing has unfortunately been accelerated by increasing impatience with impractical FHA regulations and procedures. The evident shift from stimulating new construction to the financing of existing construction indicates that FHA procedures should be reviewed to the end that FHA returns to acting the part given it when the National Housing Act was first enacted. It is essential that FHA immediately revise its regulations and procedures in order that it may again become a fully effective force for home ownership in America. Federal Reserve Bank of St. Louis  0  by  62  EMERGENCY HOME OWNERSHIP ACT  Certain growth areas in the United States must d'epend on mortgage investment funds from older established areas on Government-insured or guaranteed loans. The continuing confiscatory charges current today will force a recession of building in such growth areas because the home builder cannot absorb these high charges and stay in business. Such a development will bring about serious economic. dislocation in all industries in these areas, and this in turn will cause a serious dislocation of the entire economy. To prevent this, we propose the following alternative courses of action. First, the Congress could authorize the national service life insurance fund to invest a reasonable proportion of its funds in long-term FNMA debentures for use by FNMA, through a special function for that purpose, exclusively to purchase VA mortgages for new construction at an interest rate equivalent to the FHA rate .and at prices at or as near par as possible considering the interest rate on the mortgages bought, the interest rate can-ied by such debentures, and the minimum administrative cost to FNMA in making and servicing such mortgages. Second. legislation could be passed recognizing that if homebuilding must endure discounts, where and while they prevail they must be recognized for what they are-a part of the cost of producing a home-and therefore added to the mortgage. Third, as a last resort, the only remaining alternative is for Congress to provide to FNMA, by appropriation, an adequate fund for use in areas where home mortgages are not otherwise available, at prices which the building industry can absorb while providing an adequate supply of moderate priced homes, and under regulations which will prohibit a disproportionate use of such funds by any single builder. FHA should immediately make operative those provisions of the Housing Act of 1959 not yet placed into effect. We urge that FHA develop a form of mortgage insurance to finance the development of land. To prevent demoralizing uncertainties of last year the Congress should (a) provide adequate continuing FHA insurance authority, and (b) permit FHA to use its earned income flexibly in accordance with its workload. ,ve commend the sound approach of the Home Loan Bank Board in its regulations governing the experimental field of lending for land development. IV. Researoh.-Research can be effective only if its results are used in re-vamping outmoded codes. As one of the basic objectives for which it was formed, NAHB, in cooperation with material and equipment manufacturers and all others concerned with homebuilding and home financing, has constantly worked to improve the quality and lower the cost of homes to the buyer through its national housing center exhibits and committee activities, its annual exposition, and the daily activities of its research institute. As the latest step in this broad and continuing program, our research institute during the year opened its research laboratory. We shall continue to explore ways in which this association can work ,vith manufacturers for better, more economical materials, and better ways to design, build, and merchandise homes. We regret that high interest rates and inordinate discounts during the past year have diverted from the home buyer the savings effected by better technology. V. Urban renewal.-We commend the growing trend, both at Federal and local levels, to develop and test new tools and techniques for the conservation of our present useful housing inventory through rehabilitation. Unless this process is speeded, clearance and redevelopment cannot long enjoy the support of public opinion. We have stated before-and now repeat-that only as urban renewal projects are developed in unit sizes within the capacity of the local builder can this program succeed in its fundamental purposes. The increasing demands for relocation housing require immediate study of this difficult problem. VI. Oommunity facilities.-As we face the prospect of dramatic population expansion, we once again call attention to the needs of our local communities for the necessities and amenities which make possible both urban and suburban life. These have been pointed up by our community growth conferences throughout the past year. The time is drawing late for the preparation of the water, sewer, and storm drainage installations--as well as the public parks, recreation areas, and schools--which will be needed. Federal and State aids must be developed to prevent municipal chaos. VII. Rental housing.-As the proportion of multifamily housing to total construction has risen the importance-both eeonomically and sociologically-of modest rents has increasingly been ignored. In rental housing, as in other Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP .ACT  63  segments of building, "tight money" breeds unsound and potentially dangerous financing. We earnestly hope that FHA's current study of its housing operation will reinvigorate this activity-particularly in the moderate rental field. It is particularly necessary that FHA recognize the predominant importance of tax considerations to attract investors to rental projects. Real estate rental corporations must receive the same favorable ''partnership tax treatment" provided in 1958 to all other small corporations. During the past year NAHB's rental housing service expanded into a complete association department fully prepared to speak for this specialized branch of the residential building industry. Our activity on behalf of those who build, operate, and occupy rental properties will increase in keeping with the growing importance of multifamily housing. VIII. Labor.-Technological advances in homebuilding to satisfy the certain expansion of consumer demand for housing require cooperation of labor. Apprentice training of skilled workmen must be expanded to provide the willing hands needed in the next decade. Outdated opposition to advances in new methods of construction, new materials, and increased mechanization at the -construction site must be abandoned. The Nation will demand increased productivity and elimination of featherbedding practices in housing. This can be done only if labor, builders, and manufacturers work together in enlightened self-interest. We vigorously oppose any legislation that would weaken the secondary boycott sections of the Taft-Hartley Act. We will continue to support legislation which would eliminate those legal immunities in our Federal laws which exempt trade unions from obligations now required of business concerns, particularly in regard to coverage by the Federal antitrust laws, engagement in political activities, and responsibility for other civil obligations. IX. Public housing.-The growing realization that public housing has failed. now shared with us by many of its former proponents, has resulted in an active search in which we are participating for a more acceptable effective private enterprise substitute to aid in the provision of homes for the decreasing number of low-income families. It is time to stop building further public housing.  Mr. BARTLING. To be brief and save the time of the committee and yet at the same time to present to you a correct expression of our views, I should like to use as part of my testimony this morning direct quotes from the preamble and certain other sections of our policy statement which concern residential mortgage finance and bear upon H.R. 9371, the bill now before you. Naturally, the conditions in the homebuilding and mortgage finance markets prevailing in one area of the United States may not neces~ sarily prevail everywhere, since ours is a large countrv. Accordingly, my testimony and our policy statement: from which I will now quote, necessarily represent a synthesis of many points of view from widely varying areas .. The number and kind of homes available to American home buyers in 1960 again will be determined largely by Federal fiscal and credit policies. We face a year in which homebuilding will decline while the rest of the economy booms. Scarce and expensive mortgage credit accelerates steady retrogression from the low downpayment, long-term mortgage-predominantly responsible for homebiulding's phenomenal progress in the past quarter century-to financing methods proven unsound 30 years ago. Homebuyers are the Nation's largest private users of long-term credit. Theyand the thousands of small businessmen who build homes for them-are of course as deeply concerned as are our fellow citizens that the soundness of the American dollar be maintained. But we have grave doubts both of the effectiveness and the fairness of a governmental anti-inflationary policy which relies solely on monetary restraint. The attempt to control excessive total demand for credit and to stimulate savings through ever-rising interest rates has obviously failed. Meanwhile it has inhibited economic growth and placed the greatest burden on those who can afford it least. Interest rates approach-and in some cases exceed-the legal Federal Reserve Bank of St. Louis  64  EMERGENCY HOME OWNERSIDP ACT  'li::mits of usury. One major group of Americans has been successfuliy "controlled"-the tens of thousands of modest-income buyers who only a short 'time ago could have bought homes well within their means but are now disqualified: by the high cost of credit. Home buyers are hurt first and worst by the impact of "tight money." All this makes as little sense as raising the price of bread to combat a food ·shortage. Homebuilders and buyers are convinced there is something fundamentally :wrong-however worthy its stated objective-with a nationa,l policy which, in the name of curbing inflation, denies to creditworthy, moderate-income families -the opportunity to own their own homes while allowing credit to continue freely available for many less essential uses. The National Association o( Homebuilders is fully aware that, when the total credit sought by the economy rxceeds the available supply, the Government must in the interest of all the people dampen exuberant demand. But we are equally ·convinced that, when this becomes necessary, the Nation is best served by equitable application of the credit brakes and by full use of all the vast powers of the Federal Government to assure for all a fair share of available credit. In 1957 the same combination of restraints now imposed on our industry caused a severe drop in construction that triggered a general business recession. Unless immediate effective action is taken to distribute more fuirly the impact of tight money, this pattern will inevitably be repeated. If the credit system is not soon modernized to permit homebuilding access to credit as befits its place in the economy, we can see no alternative but a severe decline in home construction or for Congress again to authorize the purchase, under appropriate safeguards, of large amounts of mortgages in areas where mortgage· money is unavailable at reasonable prices. High interest r,ates and the high costs of money have been and are a major factor in the rising cost of housing. The highest interest rates in three decades-now 'at a level which causes lenders and Government agencies concern for possible violation of State usury laws-have failed to reduce discounts. Increasingly, some lenders are exploiting current conditions by exacting unconscionable charges. Inevitable reaction against these excesses will further increase pressure for governmental controls and for direct governmental lending. Pending effective m01Ws to apportion available credit equitably to our industry and to other desirable uses, we urge lending institutions-and their trade associationsto cooperate with us in avoiding ·abuses which in the end can only discredit home fin·ancing and hurt the home buyer. Certain growth areas in the United States must depend on mortgage investment funds from older established areas on Government-insured or guaranteed loans. 'The continuing confiscatory charges current today will force a recession of building in such growth areas because the homebuilder cannot absorb these high charges and stay in business. Such a development will bring about serious economic dislocation in all industries in these areas, and this, in turn, will cause a serious dislocation of the entire economy. To prevent this, we propose the following alternative courses of action. First, the Congress could authorize the national service life insurance fund to invest a reasonable proportion of its funds in long-term FNMA debentures for use by FNMA, through a speciJal function for that purpose, exclusively to pirrchase VA mortgages for a new construction at an interest rate equivalent to the FHA rate and at prices at or as near par as possible considering the interest rate on the mortgages bought, the interest rate carried by such debentures, and the minimum administrative cost to FNMA in making and servicing such mortgages. Second, legislation could be passed recognizing that if homebuilding must endure discounts, where and while they prevail they must be recognized for what they are-a part of the cost of producing a home-and, therefore, •added to the mortgage. . Third, as a last resort, th1; o~ly remaining alternative is for Congress to provide to FNMA, by appropriation, an adequate fund for use in areas where home mortgages are not otherwise available, at prices which the building industry can absorb while providing an adequate supply of moderate-priced homes. and under regulations which will prohibit a disproportionate use of such funds by any single builder. * * *  l!l, addition to what I have a!ready presented in quoting from our pohcy statement, I should also hke to present to the subcommittee our Federal Reserve Bank of St. Louis  65  EM,nRGENCY HOME OWNERSHIP ACT  support for certain provisions in H.R. 9371 upon which favorable resolutions were adopted as recommended in our convention com~ tnittee reports. In some cases these expressed existing policy or were of such a detailed nature that their inclusion within our policy state~ ment was not warranted. We support the amendments contained in H.R. 9371 which would-( 1) Provide FHA with authority to insure mortgage loan$ made by individuals (sec. 2 of the bill); ·· (2) Require FHA to reduce its mortgage insurance premium from one-half of 1 percent to one-fourth of 1 percent for a period of 1 year following enactment (sec. 3 of the bill); (3) Require FNMA for 1 year after enactment of the bill to buy any FHA or GI mortgages offered to it (sec. 5 of the bill); ( 4) Require FNMA to reduce its secondary market stock purchase requirement from 2 to 1 percent ( sec. 7 of the bill). Further, it has for some time been NAHB policy-requiring no specific reiteration of this year-to support those provisions in H.R. 9371 which would make clear that FNMA's objective should be to seek maximum stabilization of the mortgage market within the limits of the funds available to it (sec. 4 of the bill). We also support this provision. It is our understanding that there will be further hearings later in this session. Therefore, I have not touched on a number of other items which we would like to bring to your attention at the proper time. However, I would like to submit to you now-for preliminary study by the subcommittee-our proposal for a Central Mortgage Reserve facility. As you know, this is a subject on which there has been widespread discussion during the last several years. We have advocated such a facility in general terms before this subcommittee in previous years. This proposal was developed by our economics and planning for in~ dustry committee, headed by our past :president R. G. "Dick" Hughes, of Texas, and it was aJ?proved unammously by our board. Mr. RAINS. It may be mcluded in the record. (The information referred to is as follows:) ATTACHMENT  B.  A PROPOSAL FOB A CENTRAL RESERVE FACILITY LIZING THE MORTGAGE MARKET  To Am  IN STABI-  (NABB, January 1960) The need for a Central Mortgage Bank is now well established and its creation js long overdue. Systems for the conversion of mortgages into more acceptable investment instruments have been used in other fields for many years. Mortgage bonds are still in use for industrial borrowing and the railroads make excellent use of equipment trust certificates in :financing the mortgages on their rolling stock. The modern FHA or VA mortgage is an excellent instrument for the home buyer, but remains a difficult investment instrument for all but a few types of investors. Competitive seekers of investment funds have developed many new devices tailored to meet the demands of every type investor and have placed mortgages at a further disadvantage. This is a proposal to stabilize the mortgage market through a Central Mortgage facility empowered to issue notes and debentures backed up by its mortgage portfolio. Through such notes and debentures of various maturities anq size it would reach the broad general investment market. To stabilize the mortgage market the Central Mortgage Bank would be empowered to sell mortgages from its portfolio, and to issue advance commitments for the purchase of mortgages. It would also have the power to make short-term loans against the collateral of insured and guaranteed mortgages. Federal Reserve Bank of St. Louis  66  EMERGENCY HOME OWNERSHIP ACT  The justification for the Central Mortgage Bank is the need for another instrumentality in the mortgage and finance field 80 that the mortgages can complete effectively in the open market. It must be remembered a Central Mortgage Bank is not a panacea for all money problems. Operated properly, it is a device to stabilize housing finance by both curtailing overexpansion of housing, as well as preventing serious disruption of housing in times of money stringency. In addition, even when money is readily available, there are many fields in many areas where housing is badly needed and financing is not available for home ownership. While it is anticipated that the Central Mortgage Bank will operate at a nominal profit, its motivation shall be to provide a needed service in the economy, and not basically as an operation for profit. OWNERSHIP  The Central Mortgage Bank should be an independent Government corporation of mixed ownership with stock sold to its members as a requirement necessary to do business with the facility ; also, 80 as to qualify as an independent Government corporation. The Government should provide the necessary initial capital for it to properly perform its functions. It should have a chairman and a board of 12 directors, appointed by the President, for staggered terms and representing the 12 Federal Reserve districts, and also broadly representative of the housing industry and the public. The Board should meet periodically and set the policy for its operations. COORDINATION WITH MONETARY AND FISCAL AUTHORITIES  The activities of the Central Mortgage Bank should be coordinated with, but not controlled by, the Federal Reserve Board and the Treasury. The importance of homeownership and the home building industry to the American economy are such that the Central Mortgage Bank should have major status in the Government structure. In the event serious conflicts arise, they should be resolved by the President. Basic to any ultimately satisfactory solution of our mortgage problem is the modernization of the whole credit and monetary structure of the Nation. In the long run it will undoubtedly be necessary to provide for a single responsible, overall coordinating authority to make certain that the financial powers of the Federal Government are not operated in an inconsiderate or, perhaps, even competitive way. We should recognize the absolute necessity that the allocation should be determined in the final analysis by free bidding in the marketplace, but that such an important user of long-term credit as home building has now become, does not go into the marketplace under handicaps. The need for a major overhaul of our money and credit structure has long been apparent and is underlined by the major economic changes that have taken place in the last generation. For example, since 1940 alone: (1) GNP has increased from $100 to $485 billion. (2) Consumer debt has increased from $6 to $46 billion. (3) The mortgage debt has increased from $17.4 to $133 billion-and a new report from U.S. Savings and Loan League indicates this mortgage debt will reach $310 billion by 1970. (4) Home ownership has increased from 41 percent to 60 percent plus. Home ownership will continue to increase in popularity if we continue to provide proper opportunities for mortgage credit. MANAGEMENT AND OPERATIONS  The board of directors of the banks should set the buying price for mortgages from time to time and the posted prices should reflect all the cost to members doing business with the facility. Purchase prices, fees, and charges should be set by the board. Its prices, fees·, and charges should be based upon its ability to secure funds by the sale of its debentures and through its prices and fee structure stabilize and ,improve the mortgage market to the full extent of its ability, operating within income of its debenture sales. The prices paid for mortgages should at all times be at a level that permits and encourages the usual investors in mortgages to continue their a.irect purchases from originators. The bank could, by raising and lowering prices and fees, exercise control over the volume of its purchases. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  67  Of necessity the board should have the authority to set interest rates on FHA and VA loans within maximums established by Congress, such rates to be as low as possible, consistent with the average cost of the money raised by the sale of its notes and debentures in the open market with a differential purchase of operating expenses and the accumulation of a sensible reserve. ELIGIBILITY OF LOANS  The banks should buy any mortgage insured or guaranteed by the FHA or VA that is not in default at the time of submission and in which there are  .no title defects. DISCOUNT FACILITY  The board shall set from time to time the term charges and interest rate for making loans against eligible mortgages and should stand ready at all times to make such loans. These loans should be for a renewable term of 6 months with such margin as the ·board may require, and shall be made with full recourse to the borrower. This function shall be available to stockholder members, and shall function to stabilize the mortgage market through assisting existing lending institutions by standing ready and willing at all times to loan money to any existing lending institution for short terms. Indenture trusts that may be created should be given authority to borrow from this bank. NOTES AND DEBENTURES  The board shall have the authority to issue at its discretion notes and debentures for sale on the general market, and at no time shall the total amount of such outstanding notes and debentures be in excess of the acquisition cost of the insured and guaranteed mortgages in its portfolio. The legislation creating the central mortgage bank should also amend the National Banking Act and such other leg;islation as is necessary to make such notes and debentures legal investments for all federally operated and supervised institutions. These debentures should also be eligible for purchase by the Treasury at the direction of the President or by act of Congress when, at their discretion, such action is necessary to support the market or stimulate the construction of housing. Inasmuch as the notes and debentures are fully backed by loans guaranteed and insured by agencies of the United States, it should be possible to classify all debentures issued as insured debentures, as was done in the case of the maritime loans. There is even some justification for having notes and debentures of the central mortgage bank fully guaranteed by the U.S. Government as is done in the case of public housing bonds. MEMBERSHIP  The right to sell loans or to buy advance commitments, to use the discount facility, or otherwise deal with the central mortgage bank, would be restricted to members owning and holding a prescribed amount of stock. This amount should be set by the Board, but to encourage wide use, the initial requirement as set by Congress, should be nominal and not based on the members' assets. It ls believed this is essential to encourage participation in the initial operations, and after the bank is functioning, members may be required to increase their holdings based on the volume of their transactions, but all at the discretion of the board of directors. The stocks should not be transferable and the bank should stand ready at all times to repurchase at par any outstanding stock that may be offered. BRANCHES  The central mortg;age bank should operate in Washington, and all its fiscal affairs handled from this city. However, such branches as may be necessary to the proper conduct of its operations may be set up at the discretion of the board; SUMMARY  Essentially, the central mortgage bank is to be a fiscal device for converting hard-to-sell mortgages into notes and debentures acceptable in the private marketplace. Such universally acceptable notes and debentures will have the ability to attract all sources of investment funds. In addition, the establishment of a central mortgage bank with rediscount powers would encourage Federal Reserve Bank of St. Louis  68  EMERGENCY HOME OWNERSHIP ACT  those !'enders who already have the facilities for making and servicing mortgage loans to use more of their resources for mortgages. The central mortgage bank would stand by to aid, assist, and stabilize these lenders by making loans to them on their mortgages should the need ever arise. There is no intention, in creating a central mortgage bank, of opening a back door to the Treasury for general use of Treasury funds to support the mortgage market. As in the case of most other Government credit agencies, Government help may be necessary at certain times. We can no longer rely on the hope that private enterprise alone can provide a successful debenture-issuing facility on a scale necessary to stabilize the mortgage market. Actually, th'e margin between a high-rated bond and a suitable interest rate on mortgages provides little or no leeway and no profit possibility without huge discounts. In addition, private corporation bonds or debentures would not be highly rated. The problems of doing business in various States, together with the Federal requirements as to the issuance of securities, offer very little hope in this field. The independent Government corporation provides the highest rating for bonds, crosses State lines easily, offers the greatest stability and security to the operation, and eliminates the demand for higher profits and inc:r.eased dividends. This is a proposal for a new device necessary to the economy and to develop homeownership and redevelopment operations, relieve the problems of the remote areas, minority groups, and eliminate the unnecessary criteria imposed by investors, even on insured and guaranteed mortgages.  Mr. BARTLING. We respectfully submit this proposal for the record and for the attention of the subcommittee at your earliest convenience. It is attachment B to this testimony. We will be happy to make available our studies on the subject and to place at your disposal the entire facilities of our organizations, hoping that it can be developed into acceptable legislative language this year. It may be helpful to the subcommittee for me to comment briefly upon the present status of the home building industry and its prospects for 1960 as we see them. In 1959 private housing starts totaled 1,341,500. While private housing starts for December were surprisingly strong at a seasonally adjusted annual rate of 1,310,000, it is worth noting that they were down very sharply from December of 1958 when they were at an annual rate of 1,432,000. Moreover, it has become clear for the past 3 months that there is a drastic shortage of advance commitment funds for FHA and VA loans, particularly in certain growth areas. On the west coast, in the southwest and south such funds are now virtually nonexistent. It is not an easy task to forecast conditions which, because of the long leadtime in our industry, will not be reflected in housing starts until 6 to 18 months in the future. Nevertheless it is clear that the trend for the industry as a whole is down. You will recall, I am sure, that the seasonal rate of homebuilding declined from a peak of 1.4 million in early 1955 to less than a million in 2 years and that this decline foreshadowed-and we believe importantly contributed to-the ecenomic recession of 1957. We would not like to see that pattern repeated. The views of our economics department are set forth in an analysis entitled "Home Building and the Economy-Recent Experience and Current Outlook." I believe this analysis is of major importance to the subject you are considering and I should like to offer this document for the reoord. Mr. RAINS. It may be included in the record. (The information referred to is as follows:) Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  69'  HOME Bun.l>ING AND THE ECONOMY-RECENT ExPEBIENCE AND CuBRENT 0uTLOOK  National Association of ·Home Builders, Nathaniel H. Rogg, director, Economics Department, January 25, 1960 To: Members of the epic committee. From : Dick Hughes. Attached hereto is an analysis of homebuilding in the economy prepared for your use at my request, which focuses attention particularly on the recovery in 1958 and the job done by FNMA's special assistance program 10. I would like to add my own comments to the appraisal of the special assistance program during this period. 1. The availability of FNMA program 10 funds available early in 1958 dramatized for the building industry the major turn around that was taking place in mortgage credit. It gave builders courage to use land and building facilities which had been lying dormant or partially dormant for nearly 2 years, and they started to work immediately-some with some without commitments. If it had not been for program 10, it would have taken a much longer time for the building industry to realize what changes were actually taking place in the mortgage market and the recovery would, undoubtedly, have been slower. 2. On the other hand, without the changes in the monetary and fiscal policy, program 10 could have been dangerous. It might have encouraged increased_ starts for which mortgage funds and buyers would not have been available when the houses were finished. Tbus, program 10 without the changes in the monetary and fiscal policy might have created a very undesirable condition. It could have led to a situation benefiting only the select group fortunate enough to get commitments under this program: The unfortunate builders who, for one reason or another, were unable to participate in the program, and also unable to find any other mortgage market place would have been very resentful. 3. It took both program 10 and the courage and heart which it gave builders to get started quickly, and the changes in the Government's financial policy to bring about the 1958-59 housing boom. 4. On the other hand, because both came at the same time they probably stimulated a 1959 level which placed strain on the supply of mortgage funds and was, in part, responsible for the current mortgage money crisis. As one illustration of this, I would like to call your attention to the fact, that mortgage fund requirements net for 1959 are about $15 billion, as against the $11 billion anticipated at the beginning of the year and $10.4 billion in 1958. HOMEBUII.DING AND THE ECONOMY-THE EXPERIENCE DuRING THE RECOVERY IN 1958-59 AND THE OUTLOOK IN EARLY 1960 THE BACKGROUND  At the beginning of 1958 the economy was in the middle of a recession which had begun about a half year earlier. From a high point of $454 billion in mid1957, the gross national product dropped to $433 billion in early 1958. National income, sustained by transfer payments, social security, unemployment relief, et cetera, remained relatively stable, but the index of industrial production ba•tNlec1ined ·about 14 percent. Housing starts had begun their decline considerably before the general fallback in economic activity, starting to drop all through 1956 and 1957, and reached a low point in a seasonally adjusted rate of 915,000 by February of 1958. As a matter of fact, throughout much of 1957 and early 1958, the rate had hovered between 915,000 and a million. This, then, was the background as we moved into the early part of 1958: An economy still in the grips of the sharpest and shortest postwar recession and a housing volume which had been at low levels for more than 2 years. While the recession lasted slightly more than a year, the decline from the prior peak was more intense than that of the recessions of 1949 and 1953. If we can apply time periods, it would appear that the overall recession began in the spring of 1957 (although the statistics did not reflect this for some months) and ended about July of 1958. Beginning about mid-1958, the statistics reflected very rapid economic recovery. Gross national product started moving up quarter by quarter and by mid-1'959, it had reached a total of $478 billion, up $45 billion from the 1958 Federal Reserve Bank of St. Louis  70  EMERGENCY HOME OWNERSHIP ACT  low. The index of industrial production moved up comparably and by June of 1959, it was nearly 30 points or about 23 percent ahead of the low for the previous year. On the money and credit side of the ledger, there were very significant changes. The Federal Reserve shifted to a policy of active ease at the end of 1957 and moved to stimulate·business through: ·1. Open market operations. 2. Changes in the rediscount rate. 3. Changes in the reserve positions of the banks. Beginning in October 1957, through the spring of 1958, the Federal Reserve System purchased $1.8 billion in Government bonds from the commercial banks which had the effect of releasing a potential monetary expansion of more than $10 billion for business loans and investments. Beginning with mid-November 1957, the rediscount rate was lowered by a series of successive steps from 3½ to 1 ¾ percent by May of 1958 : November 15, 1957, dropped to 3 percent. January 24, 1958, dropped to2¾ percent. March 7, 1958, dropped to 2¼ percent. April 18, 1958, to 1 ¾ percent. The Federal Reserve Board further eased the money market by reducing reserve requirements for all member banks. This was done in four successive steps over a 2-month period. For example, central Reserve city banks fared as follows: February 27, reserve requirements lowered from 20 to 19½ percent. March 20, reserve requirements lowered from 19½ to 19 percent. April 17, reserve requirements lowered from 19 to 18½ percent. April 24, reserve requirements lowered from 18½ to 18 percent. Overall, the effect of the lowered reserve requirements was to free about $1.5 billion of bank reserves and thus increase commercial bank lending and investing potential by approximately $10 billion. This ts, of course, an oversimplified explanation of the dollar effect of massive changes in Federal Reserve Board policy-since reserves were also affected by a net outflow of gold, a seasonal decline in currency and circulation, and various other complex factors. But these actions by the Federal Reserve Board produced immediate changes. Money became readily available in early 1958. Banks shifted from a negative reserve position with the Fed to one of net free reserves of $500 million. During 1958, bank loans and investments rose over $17 billion and the total volume of currency in circulation and deposits increased by $15 billion. Short-term interest rates fell sharply and the rate on 91-day Treasury bills was below 1 percent by May. The yields on outstanding long-term Government issues fell to 3.05 percent in April 1958, a decline of 18 percent from the high of 3.73 percent in October 1957. Government fiscal and budgetary policies also aided business expansion. Fiscal year 1959 saw a budget deficit of nearly $13 billion. Thus, Federal budget policies by deficit financing in time of recession poured additional funds into the economy. As a matter of fact, the budget situation resulted in a somewhat embarrassing position : It made necessary continued Federal borrowing through the latter half of 1959 and put the Federal Government in the position of competing in the capital markets when the markets were already overburdened with demand. In summary, the latter part of 1958 saw a considerable turnabout in economic activity with a very sharp shift in money and credit policies which had the effect of pumping additional billions of dollars of credit and of Federal expenditures into the economy overall. 1958: The rate of homebuilding increases by  r,"/ percent within 10 months  Perhaps the most dramatic changes to take place anywhere in the economy in 1958 occurred in residential construction. Depressed for more than 2 years, hovering somewhere around the million rate ever since 1956, and at a 7-year low in February 1958 of 915,000, homebuilding rebounded vigorously in 1958, and by December the seasonally adjusted rate reached 1,432,000, an increase in rate of better than a half million units. The vigor of this rebound is eloquent testimony to the fact that homebuilding volume in the preceding years had been far lower than was required to meet the needs of our dynamic economy. · What happened to bring about the extraordinarily rapid change? It is clear that one basic difference is that funds became available beginning in early Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  71  1958 to finance this increased volume of homebuilding, and that such funds were not available during 1956 and 1957. We have already discussed actions by the monetary authorities to free credit for business loans through lowering of bank reserve ratios through open market operati9ns. Mention has also been made of the changes in the rediscoun,t rateand the lowering of interest rates all along the line. The banking system in·creased loans and investments by at least $17 billion during 1958 as a result. Specifically with reference to homebuilding alone, a whole series of actions: were· taken of which the most significant was FNMA's program 10, providing· $1 billion of par funds for the purchase of FHA and GI mortgages, beginning April 1, 1958. In additionMinim um downpayments on FHA and GI loans were lowered. The VA interest rate was increased to make it more competitive. A new program was undertaken by the Federal Home Loan Bank Board to make loans available on a 5-year basis to member assodations. Some $200 million was released by the President for use in FNMA special assistance programs ( other than program 10). Some $325 million of FNMA funds was made available for the purchase of mortgages on elderly and military housing. It is obvious, however, that of the actions taken which affected housing alone, the FNMA program 10 was the most significant. It is important to assess this program so that we may understand just what happened. How much of the homebuilding recovery was attributable to changing economic conditions and how much to program 10 is, at best, debatable. It is clear, however, that program 10 alone could not have done this job. And there is the additional possibility that some of the units started under program 10 would have been started, even without the program. WHAT DID FNMA'S PROGRAM 10 ACTUALLY DO?  Tables 1, 2, 3, and 4 attached indicate the -sweep and significance of this program. Under it, commitments were issued for 83,000 units covering about $1 billion in FHA and GI lower priced mortgages ; through 1959 some 70,000 such mortgages had been acquired. 'l'able 2 attached shows a percentage distribution of housing starts during 1959 by States, and a similar percentage distribution of program 10 activity. It should be noted that despite the widespread use of program 10 in many communities,. the bulk of its effects were concentrated in five States which used nearly half of the program. In tum, these same States accounted for about 37.5. percent of all -starts. In some 15 States using the program, 10!l8 than 50() units per State were covered by commitments, and in 6 other States no commitments at all were issued. On the basis of commitments issued, Texas was the largest single user of the program accounting for over 15 percent of all commitments, followed by Michigan, Oalifomia, Florida, and Arizona. Th'ere"will .probably: be an attrition of over $100 million in the original commitment volume. However, this volume stimulated new-home bnildfng in 1,556 communities in 45 States. As table 3 indicates, 646 lenders participated in the program and over 3,800 builders were encouraged to move ahead with new housing programs as a result. Thus, its direct effects were widespread and measurable. At the same time, a comparison of the 12-month period, shortly after this program became effective (May 1958 through April 1959), with th!:! prior·l2 months (see table l), reflects an increase in privately financed units of over 286,000:;\of this increase, it is estimated that only about 65,000 units were covered by FNMA program 10, or less than one-fourth of the total increase during the period. On further examination, .of the increase in this 12-month period, about onehalf was in FHA units (143,000), 116,000 were conventionally fina:uced, and 26,000 of the increase were started under the VA program. As table 1 indicates, most of the FNMA mortgage acquisitions were VA mort-gages. (The statistics let us down somewhat at this point since many homes started under FHA applications, were sold to Gl's and showed up in FNMA'111 portfolio as such, a:lthouih they would not show up as such in the statistica m VA starts.) In any event, and no matter how the figures are analyzed, it is clear that the volume of -new units started during 1958 and 1959 was far in excess of the direct effects of. program 10. Reports from all over the country during 1958- indicated a ready availability at good prices of mortgage funds. Without basic chaDges Federal Reserve Bank of St. Louis  72  EMERGENCY HOME OWNERSHIP ACT  in the mortgage money picture, and the overall economy described earlier, special assistance alone could not have lifted the homebuilding economy out of -its slump. Nevertheless, here is what program 10 did do: 1. It provided part financing for over 70,000 new homes. 2. It provided such financing for 3,847 builders in over 1,500 communities all over the Nation, although it was most heavily used in areas of major concentration in the South, Southwest, and West. 3. The par purchase support program, under program 10, probably influenced lenders into making funds available for other types of homebuilding at somewhat better prices. While this is difficult to prove statistically, nevertheless, all through 1958 field rePorts indicated continuing improvement in mortgage prices. While much of this, undoubtedly, reflected the general easing of mortgage credit, some of it also reflected the fact that FNMA support was available in the marketp~ace for certain kinds of mortgages. 4. Program 10, undoubtedly, focused attention on the lower priced house. Since it was limited to mortgages under $13,500, the competition from such lower priced FNMA-financed units influenced a lower price throughout the market, regardless of the method of financing, not alone for units financed through FNMA. The experience in recent years suggests that when money is tight, the median sales price of new homes rises, primarily because tight money affects first the volume of lower priced homes. This is what happened in 1957, when, as the table below indicates, the median sales prices rose by nearly $1,000. In 1958, largely as a result of the redirection of effort through program 10, the median sales price dropped by nearly $1,000, a decline which continued through 1959 as the table below shows. Median sales prices of new homes Bureau Year  1954 __ --------- ---------- ---- - --- --- ----- ------------------------ -- -- ------- 1955 ____ ------- -- ------- ------- -- ---- ---- ------ -------------- -------- --- --- -1956 __ ----- ----- -- --- -- --- --- --- ---- ----- - --- -- -- -- -- -- --- --- -- -- -- -- - --- ---1957 __ ----- --------------- ---------- --- -- ------ -- -- -- - --- -- -- -- -- --- -- - ---- -1958_. _-- -- __ -- -- ------- -- --- -- -- --- -- -- --- -- --- ------- --- -- -- --- -- -- -- --- --11159 ___ --- -- --- -- ---· --- -- --- -- . - -- -- --- - -- -- --- --- --- --- -- -- -- -- -- -- --- --- --  of Labor Statistics  surveys  $12,300 13,700 14,500  (1)  (1)  (1)  NAHB Builders'  EQ()nomic Council  surveys  $13,500 14,600 15,100 14,100 13,900  • No BLS surveys or any other Government surveys as to prices of new homes have been made since 1956.  5. Finally, it is not possible to assess the full impact of special a~l.Sta.nce in terms of the number of units alone. Undoubtedly, a large -part of -the overall improvement in homebuilding was psychological. The knowledge that the Government was actively supporting the mortgage market by speefal assistance purchases at par heartened many builders to the point where they were willing to undertake the speculative risks involved in new homebuilding enterprises. l;n summary, program 10 bad a very direct and measurable effect on 1958 homebuilding, Its mortgage purchases provided par financing for 22.8. percent of 'the increase of 286,200 in housing starts in the 12 months aftc;\r it went into effect, it directed attention toward the production of lower priced bomes, and Jt provided an important psychological lift early in 1958 for ail industry harassed ·and depressed for the 2 preceding years. On the other band, there is always the possibility _that some of the units built with mortgages purchased under this program might have boon built in any event. · . _ . .. . '· Its effects were felt in :m:any areas of the counqy, but·by and large, greater 'use was made of it fa a relatively.few growth areas.. Although many individual buiiders participated, 'the great majority did so on a very small scaje; µnfortunateJy, the data available do no_t permit analysis of this as~ct in any detail; · '·1n a:&sessing its impact during the 195&.recovery;·there 1,!l reason .t_o belleve Jhat:it.would have been fat ~ore helpful t,o the _homebl!-ild~ng in,d:rtst;ry;ha~ ·b~n ~'!:1 ·a year earlier, m 1957, ·and by the time it d~-d go-lnto etrect m ". ,·-·· .·. ·. . · . . . . ..· .' ... ·-·•···· .· Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  73  1958, its direct results were not nearly so significant as were the overall changes in the economy, and particularly the improvements resulting from changes in money, credit and fiscal policies. THE 1960 OUTLOOK  As we move into 1960-most indicators are. pointing upward-including the cost of money and price levels generally. The ending of the steel strike removes one major economic uncertainty. There is reason to believe that in practically every field of activity-except homebuilding-the economy will set new production records in the coming year. As a matter of fact, 1960 will probably be the first postwar year in which the dollar volume of all new construction will fall below the level of the previous year, and this is primarily because of the decline anticipated in homebuilding volume. The current recovery in the economy began in about mid-1958. It has been going on for a year and half. The steel strike in the latter part of last year moderated some of the upward pressures, and consequently, may result in lengthening the boom a little longer than has been customary for postwar booms, which have generally lasted from 2 to 3 years. This one still has at least a year to go. Homebuilding volume is declining because it is bumping against a tight-money ceiling. We have had some scattered reports of sales difficulties with some indication that the softness in sales reflects high interest rates and the difficulty in qualifying clients. In general, however, from all signs, housing demand as we move into 1960 is still strong. Vacancy rates are relatively low according to the Census Bureau. There are no general indications of large inventories of unsold houses. The 1959 fall residential property study by NAREB concludes: "The volume of housing demand is greater today than it was a year ago." It is now clear, however, that any forward surge in housing volume is definitely stalled until the current tight money situation is eased. The prospect for any quick changes are not particularly bright. Business expansion-now that the steel strike is over-will probably accelerate. New plant and equipment spending should be up at least $4 billion over last year ; requirements for consumer credit, particularly installment credit, will undoubtedly be high. There are many factors involved in the tight-money situation. As a side comment, it is worth noting that homebuilding is the largest single user of longterm credit in the country. As a matter of fact, 1959's mortgage tightness was aggravated by the very high volume of new mortgage funds required for homebuilding. In early 1959, most experts anticipated net new mortgage requirements of about $11½ billion. When the 1959 totals are finally available, it is likely that the increase will be in the order of $15 billion, nearly 40 percent more than had been expected at the beginning of the year. Thus, the increase in homebuilding in 1959, beyond levels anticipated, was in itself one of the factors in making mortgage credit costly and difficult to obtain. On top of this, the shift by the monetary authorities from a policy of "active ease" to one of ."restraint," failure of savings to keep pace with the demand for long-term funds, and the Government's refinancing difficulties all contributed to tight money. The truth of the matter is that the homebuilding industry suffers from the economic consequences of growth-its own growth as well as that of the econ!)my. As each· of the postwar expansions has gotten well underway, shortages of long-term funds became apparent and had had their most immediate impact on :residential construction. Tb.ere are two ·bright spots in the 1960 credit picture. One, in 1960, the likelihood of a budget surplus means thaJt Government funds· needs will not be a major factor in the 1960 capital markets as they were indeed in 1959. Another factor ( of somewhat questionable luster) tending toward some ease for mortgage credit in the capital markets, is that housing volume itself has been coming down. ThlliS, those who survive will be competing for funds with a smaller number of rivals and against a smaller demand than in 1959. In summary, on mortgage credit, we have probably seen the worst of the tightening, but there is litrt:le likelihood of any immediate easing of the cost or availability of long-term· credit for homebuilding under current monetary and financial policies. Housing starts throughout 1959 held up somewhat better than had been anticipate<}, considering the money problem. Although tight money became evident in the economy by the end of the first quarter of 1959, its impact on starts did Federal Reserve Bank of St. Louis  74  EMERGENCY HOME OWNERSHIP ACT  not show up until the fall. By October, the high volume of forward financing commitments, taken out early in 1959, had largely been worked off; housing starts in that month dropped 11 percent. They rose slightly in November to a level of about 1,200,000. Although December data are not available at the time of this writing (January 8, 1960), it is likely that December starits will be close to the November figure. Thus, we are moving into 1000, at a level of about 1,200,000 or some 200,000 less units than the level at which we moved into 1959. Current indications are that starts will fluctuate at around thiJS level, or somewhat lower, and will continue relatively soft through the first half of this year. In terms of a national summary, the picture looks like this: A 10- to 12-percent drop, with starts for the year very likely in the range of 1,150,000 to 1,200,000, or somewhere between 170,000 and 225,000 less than 1959. The 1959 total is approximately 1,370,000, a gain over 1958 of about 160,000 units. Of the 1959 total, close to 900,000 have been conventionally financed, an increase of 150,000 in this category from any previous year. lit is this factor which permits us to do some estimating for the period ahead with a little more confidence. Indications are strong that somewhere close to this level conventional finaneing should be available during 1960. Thus, we can probably count on about 900,000 conventional units in 1960. The 1959 Government-insured and guaranteed volume is about 450,000 units. Thus, we would need only half the 1959 FHA and GI starts volume to bring 1960's starts to the 1.150 to 1.2 million range. Examining it in this manner, we find a pattern emerging for 1960. There will be a vital market drop. But the 1960 decline will be largely a GI and FHA decline. But it will be a serious decline in these sectors. If past patterns hold, it will be a decline in lower priced sales units. It will be a decline in certain geographical areas, notably in the South and the West that had depended on such financing. The drops in these areas will be more serious than the national decline. It will be a decline in sales units, since rental housing volume will probably hold at close to the 1959 level. Thus, even though the national volume is not catastrophically off, there will be major business problems concenterated in certain sectors of homebuilding-in the South and the West-and in the volume of lower priced homes available for sale with GI or FHA financing. Builders whose business is largely concentrated in these types of housing will, undoubtedly, find major problems as the year wears along. In addition. we have before us something of a time bomb with a long fuse. The fuse was lit early in 1959 as money tightened drastically by May. Planning ahead for 1960 was seriously disrupted. Psychology in this situation is an important factor. If builders "feel good" about the outlook, experience indicates they will make bigger plans, start more houses, sell harder, and generally do better. All our surveys indicate that they "don't feel so good." They are expecting that the time bomb will eventually go off. What we are dealing with in the homebuilding field is a continuing slump and softness. The best prospect for any real improvement for homebuilders in the mortgage money markets would probably come from a moderate recession. If an emergency can be defined as something which comes suddenly and passes quickly, then what we have is no emergency but a chronic state of inadequacy in the mortgage markets. A volume of 1.2 million units in 1960 is certainly no indicator of crisis· at the same time it is scarcely cause for self-congratulations. There is reasmi. to believe that some 200,000 additional units could be built and sold in the boom- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  75  ing economy of 1960, if mortgage funds were available at reasonable prices. Certainly this added volume would place no great strain on the supplies of material and of labor. It is 200,000 less units than were built in 1950 when our population was 25 million fewer than today, and when our gross national product was only $284.· billion, compared with the over $500 billion expected this year. A volume of 1.2 million was exceeded in at least 4 of the last 10 years. Such a volume, while certainly no catastrophe, is hardly the measure of a growth industry, and it is certainly far below any estimate of the volume required for any substantial improvement in American living standards. At best, it means that some hundreds of thousands of average American families who might otherwise be in the market will have to postpone their purchase of a new home on terms which they can afford. A volume of 1.2 million is barely adequate to meet the requirements arising from the estimated level of new family formation and to replace the units that will probably be lost to the supply from demolition and other causes. It is certainly not adequate in 1960 to allow for any substantial improvement in the housing of our families. A volun1e of 1.2 million means that we will merely be holding our own, and holding our own at this time is simply not good enough. At best it means that homebuilding will be limping into the decade of the sixties far in the rear of other industries in an expanding America. HOMEBUILDING ACTIVITY IN 17 SELECTED METROPOLI'rAN AREAS AT THE END OF 1959  We have examined month-by-month homebuilding activities in some 17 selected metropolitan areas throughout the country in an effort to see whether any particular pattern exists, either by type of activity or on ·a regional basis. In the course of this analysis we have looked at building permits and proposed new units in both the VA and FHA programs. The results of this review are sutnmarized in table 4, which compares these items for the last 3 months of 1959 (in which data are now available) with the same period of 1958. The 1958 period was one of rising activity. As is appa1rent from the table, the 1959 period reflects or foreshadows declines. The building permits and patterns are by no means clear, particularly on a regional basis. On the west coast, Los Angeles and San Diego show an increase, while other cities are down. On the east coast, New York shows an increase, Washington holds steady, and Detroit, where FHA and GI programs are important factors, was off 33 percent, and other east coast cities are down. Chicago, which relies heavily on conventional financing, showed a 20-p,ercent drop in permits; Kansas City showed a nearly comparable drop, while in the Mountain States, Phoenix •and Denver held relatively steady, and Albuquerque, which boomed throughout most of 1959, reflected a very heavy drop of 30 percent. On new units in both the FHA and VA programs, virtually all areas showed the same pattern-relatively large declines over 1958--with the surprising exception of. San Francisco, where proposed new units in the VA program showed a 14•percent increase (units in FHA applications were down, however, by 27 percent). In both the FHA and the GI programs, more than half the selected ·areas showed a decline in new units in applications or in appraisal requests of 30 per• cent or more. Since these particular statistics foreshadow homebuilding activity in the months ahead (at l~ast in these programs), there is good reason to anticipate declines in FHA and GI activity all over the country in the early months of 1960 at least. 1  110876-80--6 Federal Reserve Bank of St. Louis  76  EMERGENCY HOME OWNERSHIP ACT  TABLE  1.-U.S. housing starts by type of finanoo and comparative data for FNMA program 10 mortgage acquisitions [1,000 units] Private starts, seasonal adjusted annual rate  1957-January -··'··· February __ .. _. March .• _._._. April_._ .. ___ ._ May_··-···-·· June_ ........ _ July_ ........•. August- ..... _. September __ .. October._--·-November..• -December._. __ 1958-January __ ..... February_._._. March __ -·---April_._ •.. _. __ May ....•.... _ June ...• - ..... JulY------··-·· August __ ...... September ... _ October_._··-· November. __ .. December_ .. _. 196~January __ •···· February...... March .......• te,rlL .....•.• ay .•...•.... Jnne .. ••·•·•·· July......•....  t~~ber.·_·.:-~ October.- ..•..  November __ .. _  Total.. ..••.. 12 months total: May 1957 to April 1958 __ -··-·····-· May 1958 to April 1969 •••........ __  962 935 933 962 994 995 1,015 1,056 1,012 1,020 1,009 1,000 1,020 916 918 983 1,039 1,057 1,174 1,228 1,255 1,303 1,427 1,432 1,364 1,403 1,403 1,434 1,370 1,368 1,375 1,340  1,323 1,180 1,210  ----------  Private starts  FHA  VA  Conventional  FNMA program 10 mortgage acquisitions 1 advanced 4 months Total  60.1 63.1 79.3 91. 4 96.9 94.6 93.9 96.8 90.2 88.4 76. 7 62.5 62.9 61.0 77.3 94.3 101.3 101.3 108.6 114.6 110.9 112.9 107.0 89.5 84.1 93.6 118.1 139.4 133.6 131.1 127.2 125.1 117.0 102.1 90. 7  7.7 9.3 11.3 12.1 14.9 15.3 15. 7 17. 7 16. 4 18. 7 15.0 14.2 13.3 11. 3 16.5 22. 7 26.0 28.0 29. 7 30.5 31.9 34. 7 25.8 25.0 19.8 20.0 30.0 33.5 34.3 34. 7 31.4 31.1 29.6  26.0 20.4  12.0 9.9 11.4 13.5 12.0 13.0 12.3 11.6 11.8 9. 7 6.4 4.6 4.1 2.8 3.1 4.8 6.0 8.6 10.6 13.2 14.4 14. 7 11.0 9.0 6.9 6.2 9. 7 11.0 10.3 11.0 10.6 9.9  10.0 9.4 7.9  40.0 43.9 56.6 65.8 69.9 66.2 65.9 67.6 62.0 60.0 54.3 43.6 45.5 46.9 57. 7 66.8 69.3 64.8 68.3 71.0 64. 6 63.6 70.2 55.5 57.4 67.4 78.3 92.8 88.9 85.5 85.1  84.l  FHA  VA  0.8 1.7 2.2 4.1 6.4 7.2 9.4 9.1 7. 7 6.6 5.5 4.6 3.6 1.1 .3  0.3 .6 .7 1.0 1.6 1.8 2.4 2.2 2.0 1. 7 1.3 1.3 .8 ,4 .1  0.6 1.3 1.4 3.1 4.8 6.4 6.9 6.9 5. 7 4.8 4.2 3.4 2.7 .2 .2  70.3  18.1  52. 2  65.4  16.9  48,6  ,1  ,1  77.6 66.6 62.4  ---------- ---------- ---------- ----------  ----------  994.4  191. 7  96.2  706.3  ----------  1,281.2  334.9  121.2  823. l  Increase: 1959 over 1958 __ -· -·········  286.8  143.2  25.0  116.8  t All data for FNMA mortgage acqnisitions have been,adva.nced ,4,mORths In order to give fair c~Plltlson with estimated time the home actually appeared In new starts data. May 1958 data actually'lriclu'des-a few units which were started In e11rller months. Acquisitions were split about 2&-76 percent between FHA and VA but these were originally committed about 50-50 with VA buyers eventually 11redomlnatlng. Federal Reserve Bank of St. Louis  77  EMERGENCY HOME OWNERSIDP ACT  2.-Program 10 assistance by States-Distribution of program 10 commitments to purclw,se mortfJ'O,ges compared to U.S. housing starts  TABLE  State  Alabama ••.••••••••.••••• Alaska ••••.•••••..•....•• AriZona •••••••••.••.•..•• .\rkansas•••••••••.••...••  g~i ~~~~============== Connecticut .•••...•.•.••• Delaware....••........••• District of Columbia ••••• Florida..•••.•••••.•••.•••  Estimated Percent of FNMA percent of U.S.pri• program 10 vate starts commit• (1958) ments 1.4 .1 1.8 .6 16.6 1. 5 1.3  .3 .3 8.3  2.4 0  5. 7 .6  8. 7  3.8  .1  0  0 6.6  2.1  1. 4  Illinois •....••••••.•••...• Indiana •.••••••••.•••••.• Iowa .••....••..••.•••...• Kansas ..•••••••••••••..•. Kentucky •.•••.••.••••.•• Louisiana ..••.•••••••..•• Maine ......••••••••••••.• Maryland ..•...•••••••..• Massachusetts ...••••••••• Michigan..•...•...•••••.• Minnesota.........•••••.•  4.8 2.2 1.1 1.2 1.2 1.4 .3 2.2 1.6 3.6 1.6  3.4  ~:O~!'..i::::::::::::::: Montana.•.•.•.•••••.••••  2.0 .2  i:i;~:t:::::::::::::::::: Idaho •.•••.•••.••.•••...•  TABLE  .2 .2  .6  .3  .4  3.1  1.1 1.8 1.1 2.8  Estimated Percent of percent of FNMA U.S.pri- program 10 vate starts commit• (1958) ments  State  Nebraska................. Nevada.................. New Hampshire.......... New Jersey............... New Mexico.............. New York................ North Carolina........... North Dakota............ Ohio..................... Oklahoma................ Oregon................... Pennsylvania............. Puerto Rico.............. Rhode Island............. South Carolina........... South Dakota............ Tennessee................ Texas....................  .7  Utah..................... Vermont................. Virginia.................. W ashlngton. ... ••. ..•.•.. West Virginia............ Wisconsin................ Wyoming................  .1  TotaL..............  0  .6  0  9.8 1.0 1. 5  o. 3  0. 6 .4  •8 0  .2  o  3.1 1. 0 6. 3 1. 5 .2 4. 8 1. 1 .7  4. 0 •3  1. 8 .1 4. 2 2. 8 1. 4 •3 .5 O  3. 6 .1 .3  .8 .3 1. 6 7. 2 .7 .1 2. 3 1. 6 .7 1. 9 .2  .7 O 2. 7 15. 4 1. 8 O 3. 5 1. 5 .2  100. 0  100. 0  •3  •7  1-----1----  3.-SeZected data on FNMA program JO-Distribution of $1,000,000,000 special assistance authorization Number-of contracts  Valueof con• tracts  9, 723  $1, 000, 019, 000  Contracts to buy mortgages..................  Mortgages actually purchased•••••••••••..•...••••••.•.....  FHA ......•..•..•..•.•...•...•.•....•..•.•.•..••.•.... Percent FHA ••••••••••••••••••••••••..••..••.••...••.. VA ..........•••••••••••••••••..•••.•••...••.•.•..••••• Percent VA .••••••••••••.•••••••••.•••••••••••.•••••••.  $841, 306, 000 $205, 108, 000  Average number-of Total mort• mortgages gages covered per contract 82,996  8.5  70,343  18,102 26 52,241 74  24 $636, 199, 000 76  Number of builders covered in :FNMA contracts to buy mortgages ______ 3,847 22 Average number of ·mortgages per builder_____________________________ Number of communities covered in FNMA contracts to buy mortgages__ 1, 556 Number of lenders holding contracts to sell mortgages to FNMA______ 646 Average number of mortgages per lender____________________________ 128  Types. of .l~ders with .contracts to sell mortgage(J to FNMA  Mortga~e compariies..-,..:______ ..;.;. __ .:.:----  Percent  ,•  ---'---------------- 74 Banks_______________________ ---·---------------· L--- •---17  Savings and loan associations_..:.,.,.,.--,,-------'-,.,--,- . Insurance companies________________  ________ .. _ .---· . .  --------- .----.  7 2  TotaL __ · ------'· -------' ------- -· ----------------, _____ .______ 100 Federal Reserve Bank of St. Louis  ''.'  78 TABLE  EMERGENCY HOME OWNERSHIP ACT 4.-Trends in homebuilding activity in selected metr01)OUtan, arttaa, end off 1959 versus end of 1958 Percentag& cha,nge-September, October, November:of. 195ll versus same months 1958 State  Metropolitan areas  FHA new  VA new homes  homes  Buildlng1------,----,---r---permits Starts Appl!- Starts Appraisal cations requests California _______ - __ -- ________ _ Los Angeles _____________ _ Percent +1 San Francisco ____________ _ -5 San Diego _______________ _ +14 San Jose __________________ _ -21 Texas ________________________ _ Dallas ____________________ _ -6 -23 Houston ___ --------------San Antonio _____________ _ +1 New York-New Jersey ______ _ New York _______________ _ +13 Illinois _______________________ _ Chicago __________________ _ -20 Pennsylvania ________________ _ Philadelphia_____________ _ -8 Michigan____________________ _ Detroit ___________________ _ -33 Florida ______________________ _ Miami-Fort Lauderdale __ -27 Ariwna ______________________ _ Phoenix ___________ -- --- __ _ 0 New Mexico _________________ _ Albuquerque _____________ _ -30 Colorado ____________________ _ Denver __________________ _ +a Missouri-Kansas _____________ _ Kansas City _____________ _ -16 District of Columbia _________ _ Washington ______________ _ +2  Percem Percem Percent Percent -14.  -19 +rn ·  +34. ,_ +a l -15 +6 -36 -16 -20 -9  ,  ' • ,  +a ,  -34 , -00 : -20 -5  -51 -t,-41 -1 -27 +68 +u. -36 _________________ _  -22 -20 -33 -20 -7li -<Ill -4ll -61 -20 -33 -7 -9  -161  ~ -48  ,  ,  -64 -12 -47 -36  (L)  · · :  -64 -42 -34 -47 -50 -45 +7  -u -44 -43. -29 -30 -45,  -aa, -31-21  -3()  -14-17" -41  1 Not  available. N0TE.-Buildlng permit coverage, VA regional offices, and FHA offices vary in areBS oovered but trendsc should be more or less comparable.  Mr. BARTLING. A limited number of copies are also available for· members of the committee. The analysis contains a pertinent and interesting history of FNMA's: special assistance program 10 enacted as part of the Emergency Housing Act of 1958. This discussion of the effects of that program and of other concurrent actions by the Government and by the Federal Reserve System will, I am sure, be of interest to you in connection with this legislation. You will find an analysis of the 1960 outlook on page 7 of this document. You should also know, I believe, that three leading economists who appeared on our economic panel last week were in agreement that homebuilding would decline at least 10 percent this yearalthough practically all other businesses will prosper. On the basis of last quarter 1959 figures, we are moving into 196() at a level about 125,000 to 150,000 units less than in the same period of time a ;rear ago. This may well become a drop of 200,000 or more,. however, 1f the lack of advance financing continues. A 10 to 12 percent drop in 1960 with starts in the range of 1.1 to 1.2 million is no cause for self-congratulation. It would be 200,000 less units than were built in 1950, yet our population since 1950 has grown by 25 million and our gross national product has almost doubled. Further, a volume of 1.2 million units was exceeded in at least 4 of the last 10 years and clearly would place no great strain on existing. supplies of material and !abor. Fmally, such a. volume 1s hardly the measure of a growth mdustry and is certainly far below any estimate of the volume required forsubstantial improvement in Amerimn living standards. Federal Reserve Bank of St. Louis  .EMERGENCY HOME OWNERSHIP ACT  79  In conclusion, tnerefore, we believe that there is presently a very igrave problem sharply and adversely affecting homebuilding in sev•eral vital areas of our country which will be reflected in later months in a sharp curtailment of housing starts. Further, even if a maximum expectation is reached in housing volume under current money market conditions on a national basis, ·the industry and the country will be maintaining a status quo that ~s simply not good enough for the future. Thousands of average Amen,can families who might otherwise be in the market will have to postpone their purchase of a new home on terms which they can afford :and the homebuilding industry will move into the decade of the sixties at a production rate far below its potential. I appreciate your courtesy and attention to our testimony. Together with members of my staff I will be happy to try to answer .any questions the subcommittee may have. Mr. RAINS. 'Thank you, Mr. Bartling. The committee appreciates :your statement. It is a very pointed and good statement. There are a few things I would like to clear up. There may be differences as to the proper procedures to try to achieve a more adequate supply of mortgage money, but before getting into that, on page 3 of your statement, in which you quote from the policy statement adopted at your convention, you say that you face a year in which homebuilding will decline while the rest of the economy booms, and then later ,on, in the closing paragraph of your statement, you go more into de;tail to poin:t that out. I was interested in noting in the Wall Street Journal this morning ,an article entitled "Buoyant Builders," and this fellow who was out there at the convention must have seen different people than those vou saw and I saw. • Perhaps you haven't read the statement, but did yon find among the homebuilders generally-certainly it is not evidenced by your resolu·tions-the idea that 1960 was going to be a buoyant building year with plenty of credit available? Mr. BARTLING. I think I can answer that, Mr. Rains. I did read the article in the Journal yesterday, and, as you know, back in Decem·ber we held a builders' intentions conference in our housing center, and based on that particular meeting we arrived at some of the con-clusions that are set forth in this statement that building will drop 10 to 15 percent based on plans builders are making at this time. With reference to the statement, I might say this: Builders are notoriously optimistic, otherwise they would not be builders. In reading the article, I noticed certain of these builders were from geographical areas where the impact of this money has not been felt as severely, and we point out in our statement it is in these growth areas where the dislocation is appearing at this time. We stand on our resolution which was unanimously adopted. Mr. RAINS. Now, on page 5 of the policy statement adopted by your association, first you suggest using the national service life insurance fund to invest in Fannie Mae debentures. l am sure you will recall about 2 or 3 years ago I was the author -of a bill that sought to do just that very thing, and that we put it in a housing bill which we presented on the floor, and we lost under a 2:to-1 vote, as you will remember, by six votes. One of the things that Federal Reserve Bank of St. Louis  80  EMERGENCY HOME OWNERSHIP ACT  received the most bitter opposition from the administration, and from some of my friends now proposing this le~islation: was this proposal to use the national service life insurance rund to buy GI loans, as a means of providing additional credit for veterans housing. I will support the proposal, I will tell you that to start with, with certain restrictions and limitations on it, but you do recognize, I am sure, that that is even more controversial in this Congress than the Fannie Mae authorization would be, do you not? Mr. BARTLING. Well, I understa.nd that any legislation of this type might bring up certain problems. However, before the appropnate committee, we hope to vigorously present our views and hope for favorable action on it. Times perhaps have changed, we hope slightly, in terms of thinking on this subject. Mr. RAINS. The point I am making is I am not opposed to the legislation, I am merely talking about the realities of life as we face them. I even remember that the veterans organizations opposed it when I had it up once before. Mr. BARTLING. Yes, sir; we have a job cut out for us. Mr. RAINS. Now, the only other suggestion which I don't understand, and which I think is a bit out of h.!:.el fra.nkly, is the suggestion that Fannie Mae make GI loans at the FHA rate, which means a half of 1 percent increase. Of course, that is in the jurisdiction of another committee and we have no say-so over it, but I think I sense that Congress doesn't much want to increase interest rates any more in the light of past experience. Also out at your convention, Mr. Bartling, I talked to many home builders, and nearly all of them told me personally that they didn't think an increase interest rate was an answer, that it just kept moving up with no end in sight. Would you say there is some truth in that~ Mr. BARTLING. Well, it has been our stand, for some time, as you are familiar, that there be a parity between the FHA and the VA program, and I must agree with you that the increasingly high interest rates have not solved the discount problem up to this time, but the differential between the VA loans and the FHA loans at the present time is such that the VA program for all practical purposes is unusable by builders because they cant afford to build under it, and if it will help to equalize the situation we have at the present time, we certainly would be in favor of a paritl situation. Mr. RnNs. Well, of course, I don t think tha.t will hav.pen. Even if the bill which you refer to on the national service hfe insurance should be adopted, I assume it would be enacted at the present interest rate, from what I hear here in Congress. Now, the second alternative in your policy statement proposes to recognize discounts in FHA and VA appraisals. Of course, isn't it true that if we were to recognize discounts that this would increase the sales price by at least 10 percent or maybe more throughout the areas in the country, because it would be added into the mortgage? Mr. BARTLING. Well, our feeling on the question of discounts and mortgages is simply this, that since at the present time and for some time in the past and perhaJ;>S some time in the foreseeable future we must endure the discount situation, we have the feeling that this is just as much a part of the cost of the house as nails or shingles or anything else. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  81  For exam_ple, the FHA presently in their valuation procedures allow in their cost valuation the cost of construction money which in most parts of the country is 1½ to 2 points. They allow the fees paid to real estate salesmen, they allow architects fees, and recognize all of what you might call the intangibles that are not directly reflected in terms of nails, boards, cement, and mortar that is in the house, and it is our contention that discounts a;re certainly as much a part of the cost of the house as the items that I have mentioned. Mr. RAms. Mr. Bartling, that is the purpose of the bill we have before us, to try to get rid as much as we can of unreasonable discounts. We are all together on the idea that it is not right or fair for the builder to be required to carry the load of excessive discounts, and the danger is always prevalent that it will in some measure be passed on to the home buyer, but when you speak of VA and FHA loans allowing discounts, that would not be anything else other than just upping the interest rates on FHA and GI loans. Now, the point I am trying to get over to you is to see which one of your proposals we can do business with. Con~ess, I am sure, is not about to adopt any proposal that will allow an mcrease in the VA and FHA interest rates, whether directly or by absorbing discounts, so as we go down the process of el~ination I come to the J?Oint that it appe3,rsto me that the home builders and myself-I don't know how the rest of the committee will be--are in ,accord that about the only answer, realistically and practically, is to adopt the Rains bill with provisions to provide some kind of adequate money supply in the mortgage market, isn't that about correct~ Mr. BARTLING. We get down to third, as a last resort, spelled out a minute ago, that in the event we are unable to do the thmgs we are seeking to alleviate the present conditions in the market that we have no recourse but to have Congress recognize these disaster areas and situations, and as this last resort provide assistance of some nature. We further specify that we hope this be done, if it does become necessary, on an equitable basis, one that will provide a fair share of available funds, and at prices that will be consistent with market conditions at that time--in other words, a fair proposition insteadwe are not asking for a par purchase, but something close to it, recognizing the other costs that are considered. Mr. RAINS. Mr. Bartling, it is clear to you, and the home builders, that Government fiscal and monetary policies are likely to adversely affect the home building industry this year, you say that early in your statement. Mr. BARTLING. Yes, sir. Mr. RAINs. And further1 if we are to face the needs, we must have some kind of legislation which will help to provide for mortgage credit for the home building industry in this country. Mr. BARTLING. That is correct. Mr. RAINS. I appreciate your statement, and I will now turn it over to Mr. Addonizio for further questions. Mr. Addonizio. Mr. AoooNIZIO. Thank you, Mr. Chairman. Mr. Bartling, were you present here yesterday morning~ Mr. BARTLING. No, sir; I arrived at noon. I read newspaper reports of the testimony yesterday. Federal Reserve Bank of St. Louis  82  EMERGENCY HOME OWNERSHIP ACT  Mr. AnooNIZIO. May I say, you probably know it by now, that the Administration has opposed this bill. I believe that yesterday Mr. Rains pointed out that the only section they probably agreed with was section 1. Mr. BARTLING. Yes. Mr. AoooNIZIO. They feel very strongly against pouring this money into the credit market. As a matter of fact, I was left with the impression that all they want to see happen is that interest rates go up, and that we do not put any control on discounts or anything else. They base it mainly on the fact that the housing starts for December of 1959 were such that the bill is not needed. Now, isn't it true that this is not a true reflection of the situation in December of 1959 i In other words, a builder plans and gets his commitments and his money months ahead of time before. he starts actual construction~ Mr. BARTLING. Mr. Congressman, our feeling on this is, based on the very best and latest available knowledge, that housing starts based on our own individual surveys, builders' plans and intentions for the year ahead will decline somewhere between 10 and 15 percent, and as you pointed out from the start of a project, acquiring of the land all the wa.y through to the actual completion and offering for sale, this involves, depending upon conditions in parts of the country, a leadtime from a minimum of 6 months up to as much as 18 months in many areas, and I agree with you, sir, that the sta.rts do not adequately reflect the coming trends based on our information. Mr. AnooNrzro. And it is a fair statement to say that as of this moment that the actual housing picture of starts will not have full impact on the housing figures for some time to come. .Mr. BARTLING. I imagine these will begin to show up perhaps in the next 3 months, will become more significant than they are at the present time. Mr. AnooNrzro. Mr. Bartling; Mr. Mason, with reference to a question that I asked him about tight money policy, indicated that he did not agree with the fact that we are presently in a tight market. He said we had been in one and that we are presently coming out of it. Do you agree with that i Mr. BARTLING. No, sir, I haven't seen these areas in which money is freely available to our industry. There may be isolated cases in certain parts, but generally speaking there is a very severe shortage at the present time. I might say this, that in the State of Tennessee where I live we are in the 6 percent usury situation at the present time; Our State is being used as a guinea pig by the lenders to determine what is usury, and we have a peculiar situation in our State law that if usurv is involved, then the person holding the mortgage on the house merely makes a gift to the homeowner, and there is no recourse. As a result, practically all of the insurance companies have pulled out of Tennessee, at the present time, and one company I do business with, with rather la.rge ~olume mortgage loans, presently is completely out of the market and I might say I am out of the market, too, on some houses because I have no money to sell them with. It is a very serious situation. Mr. Aooomzro. One of the other arguments that they made against the bill was the fact that if this money is put into the program, con Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  83,  struction costs will go up. They pointed to the action tha,t the Congress had taken in 1958 when we were in that recession and said that was what happened then. Now, isn't it true, actually when that program was enacted in 1958, and I am not disputing now whether construction costs went up or not, but what I am trying to show is that actually the average cost of an FHA house went down. In other words, the builder built more lower-priced homes. Mr. BARTLING. The medium-price dropped roughly $1,000, if I remember my figures correctly, and you are quite correct that the greatest impact at the present time is in the field of the moderate to low-income purchasers who presently, under present conditions, are not having housing made available to them at prices they can afford. Mr. AnooNIZIO. And actually the 1958 recession was the effect of the credit policies in 1957, so perhaps if we don't do something here now we may find ourselves in a similar situation some time in 1960. Mr. BARTLING. We point out that we are fearful of this kind of thing, and home building seems to follow a pattern, leading to events that take place in the future as it has in the past, and we go on record as stating that if something is not done to alleviate this situation, this conceivably could happen again. Mr. AoooNIZIO. On page 3 of your statement, you state that the home buyers are the Nation's largest J?rivate users of long-term credit.. I was wondering ,whether you could give us something to pinpoint that a little bit more, perhaps m dollar amounts or percentage. Mr. BARTLING. That can be furnished to you. It is in the attachment that our economist has. I could ask him for the total amount. Mr. RoGG. We used $15 billion of long-term credit net last year. The figures aren't in yet, but it will be about 25 percent of the total domestic investment. Mr. BARTLING. It is pointed out to me that on page 7 of the economics department report we have the 1960 outlook with certain of these figures made available, which is an attachment. If it isn't sufficient,. we will be glad and happy to give you what you need. Mr. Aooomzrn. Further down on page 3 of your statement, you say, and I quote you now, that "interest rates approach and in some cases exceed the legal limits of usury." That· is a rather strong statement. In effect you are saying there are a lot of people that are doing something illegal, and I was wondering whether you had some specific instances of where this might be taking place, or is it in certain areas of the country? I am not aware of it up in New Jersey where I come from. Mr. BARTLING. Well, I am sure we can present documentation on which our statements are based. Our concern, as we have tried to point out here is that in many, many areas of the country-specifically there are 12 States now with the 6 percent legal limit, and in these cases they are on the borderline, and as a matter of interpretation of discounts where other charges are considered, then we are in the usurious condition. Mr. Colton points out that under interpretations under the 203 (i) program, the half point service charge is being considered as a violation of the usury charges, and as I understand it, some lenders are operating with their eyes open to this feeling it is safe and nothing Federal Reserve Bank of St. Louis  84  EMERGENCY HOME OWNERSHIP AC:T  will happen. Others have withdrawn from the market, or else. have reduced the interest charge and increased the discount to compensate for it, but we consider it a very grave situation, and I might say. this, that one of the things that worries us is that we seem to be leading into the type of situation we had back in the 1920's and early 1930's for which the FHA was created to solve these problems, and we seem to be going back into some of these practices which are not desirable at all. Mr. ADDONIZIO. Thank you very much, I have no further questions. Mr. RAINS. Mr. Widnall. Mr. WmNALL. Thank you, Mr. Chairman. Mr. Bartling, I think you have made an excellent statement. It contains some things I can agree with you on and some with which I would quarrel. On page 3, you say interest rates approach and in some cases exceed legal limits of usury. Do you have any specific examples of that? Mr. BARTLING. I refer back again to the comments I made to Mr. Addonizio that the attorneys general in many States have ruled that under the 203 ( i) program, and other programs, certain of the charges made do violate, when they are added to it. Some States. have legal limits of 8 percent, 12 percent, and so forth, and obviously they have a long way to go before they do it, but the principal concern, and where these become actualities are in the 12 States at the present time that have a 6-percent legal limit, and these are our problem areas on this usury question. Mr. WmNALL. What States are those? Mr. BARTLING. I can provide you with those. I can name a :few: Georgia, Tennessee, and Maryland. I should have brought those with us. Mr. RAINS. Will you give us those for the record? Mr. BARTLING. Yes, we will get those for you. ·Mr. WmNALL. I am interested in the application of the laws of those States as they affect housing starts in comparison with the States that do not have that limit. Mr. BARTLING. I am sure that information can be developed rather quickly for us by our economist, because he has been working on similar studies, I don't have it at the present time, but perhaps we could furnish this. Mr. WmNALL. Have any steps been taken by the Government of any of those States to change the laws or to enforce usury laws? Mr. BARTLING. Yes, sir, I mentioned earlier the State of Tennessee has been selected as the one State in which to settle this question because of the peculiarities of its laws. The case was entered in late December in Memphis into the chancery court last week. A ruling was given from the chancery court that the one-half of 1 percent mutual insurance premium was not considered a violation, and it is now moving on to the supreme court, and we anticipate sometime in the next 2 weeks that the supreme court of Tennessee will rule on this question as to whether the insurance premium is a violation of the usury laws or not. Mr. WmNALL. Well, in that case the interest rate was 5%, percent and one-half of 1 percent added for FHA insurance. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  85  Mr. BARTLIKG. l\fade it 6¾. Mr. 1VmNALL. I would think there would be real substance :for the lower court decision, because, after all, the homeowner gets money back out of that one-half of 1 percent when he pays the mortgage off. He has an investment there. Mr. BARTLING. It was anticipated such a ruling would come forth, but until it was clarified legally, very few of the insurance companies were willing to place money in our State because, as I say, if usury is proved, the person making the mortgage makes a gift to the home buyer of the house, and they have no recourse. As a result, we have temporarily ceased operations to a large extent in our State. Mr. 1VmNALL. Do you have any figures to show how many housing starts were made by the 43,000 members of your association in 1959? Mr. BARTLING. Yes, sir, we do have. Mr. vVmNALL. What is the total? Mr. BARTLING. Nat, do you recall exactly what those were? Mr. RoGG. In the neighborhood of 950,000. Mr. BARTLING. Right at a million. ::\fr. 1VmNALL. In 1958, how many members did you have in your association? Mr. BARTLING. In 1958, we had somewhere in the neighborhood of 40,000; from 39,000 to 40,000. Mr. 1VmNALL. And what were the number of housing starts in 1958? Mr. RoGG. 1,209,000, sir. Mr. WmNALL. Do you have the figures on 1957? Mr. RoGG. I think it was 1,240,000, but I am not certain. Mr. 1VmNALL. Would you place the accurate figures in the record for me? Mr. ROGG. Yes, sir. Mr. 1VmNALL. And how many members did you have in your association in 1957? Mr. BARTLING. At that time it was fairly close to the same number, around 38,000 or 39,000, in there. I could place that in the record, also, the exact number-it was close to 40,000, as I remember. Mr. WmNALL. Now, with this condition as you describe as unwholesome to homebuilding, what has happened to your builders? Have you been losing members, have they been gomg into bankruptcy, or how have they been affected by this unwholesome condition? Mr. BARTLING. We have gained members this year. We have gained roughly 3,000 members in our association. According to the Dun & Bradstreet figures I read, the building profession has a higher ratio of bankruptcy generally than other businesses or professions. There have been many marginal builders in many areas, I am sure, deeply hurt and put out of business by the unavailability of funds with which to operate, but I do not have figures in terms of our association of how individuals were affected m this respect. Mr. WmNALL. Now, I understand with your rather tepid approval of this bill offered by Mr. Rains, as a third alternative, you do not recommend the purchase of mortgages at par by Fannie Mae. Mr. BARTLING. No, sir; we do not. Federal Reserve Bank of St. Louis  1  1  86  EMERGENCY HOME OWNERSHIP ACT  Mr. WmNALL. So you believe that supply and demand could in.: every instance, so far as purchasers are concerned, ltffect the price· of the mortgages~ Mr. BARTLING. If I remember our deliberation correctly when thiswas debated, it was our feeling that Fanny Mae special assistance provisions have broadened operations to come into these emergency or disaster areas as a floor. In other words, if conditions reach a point where it is clearly evident to the agencies involved that building will' cease, then Fannie Mae should come in at prices that will permit the· start of construction again in reasonable quantity. Mr. WmNALL. Do you have any suggestion of your own as-to what the U.S. Government should do by way of credit policy? On behaff of the association you have been rather critical of the present credit: policy. Mr. BARTLING. I might answer you in this way, Mr. Widnall. We· feel that within the Government, the Federal Reserve Board, the· FDIC, the Treasury, and other aspects pertaining to our monetary· system, that they have wit~in their pr'?vince th~ !)Owers, administrative powers to take certam steps which can mfluenre the flow of funds to certain types of objects. For example, I remember, I believe it was in 1958, the Federali Reserve Board at that time frowned on some construction loans be•ing made by the commercial banks, not as an official type of thing,, but merely one of these suggestions of raised eyebrows, and all' of a sudden we found by the mere fact the question had been raised' builders were having a hard time getting construction money from the· commercial banks. We feel that, for example, consumer credit at the present time seems to be expanding by leaps and bounds. There seem to be no, restrictions whatsoever on financing anything that you might want that I know of at the present time, but as an actual fact it is very,, very difficult, as you know, to get commercial banks, for example, to, take an active interest in many areas in the mortgage market just because of the simple fact that in the past the mere fact has been questioned that they have certain percentages on their books, and so• forth. We feel that they have vast powers of persuasion which they can use more effectively to get a more equitable across-the-board type of approach to it. Mr. WrnDALL. Has your association taken any steps to put on record their own views with respect to consumer credit?. Mr. BARTLING. No, sir; we have not faced up to that question as yet. I assume you are referring to a selective credit control type of thing. We do not feel that it is necessary at this time. We feel as we say in our statement that the Government can, by their actions .. encourage certain things which would help the mortgage market if at such time no other alternative seems to be possible we would studythis very seriously and come up with some conclusions and recommendations at that time. Mr. WINDALL. Mr. Chairman, at this point I would like to read into, the record a section from the "Employment Growth and Price Lever Staff Report of the Economic Committee," from page 365: Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  87  Prior to 1953, housing does not appear to have been influenced very much ~by general credit controls for the simple reason that relatively little use was !made of such controls. The pronounced impact on housing since 1953 is chiefly ,due to the existence of a rather peculiar but very simple mechanism, due to restrictions on the interest rates that might be charged on mortgages insured l>y the Federal Housing Administration and guaranteed by the Veterans' Administration, a rise in yield on-co~petitive types of investment, such as corpoTate or Government securities has· tended,to attract the-supply of investment funds away from these mortgages. On the other hand, when credit conditions nave eased, the supply of domestic funds has tended to flow back into Govern:!IIlent supported mortgage programs. This is the essence of the mechanism, although the picture is clouded in detail by statutory and administrative changes in the interest rate, and in the allowable terms, downpayments, on FHA-in:sured and VA-guaranteed mortgages, by use of discounts 11s giving a means of some flexibility to the yields on insured and guaranteed mortgages, and on variations given to support of the mortgage market by the association.  There follows a discussion of what had taken place over a period ,of time from 1951 to 1959, and the relationship of housing starts to "interest rates showing a decline at one point in 1958 of FHA-financed ,starts of 45 percent, of VA-financed starts of 92 percent, and in the ,same period the conventional starts were rising 8 percent, and there is a very clear comparison of the market for mortgages, the relationcShip to interest rates in connection with the housing p~m. Are you familiar with this report~ Have you seen itl Mr. BAltTLING. In a general sort of way. I have one comment. It tends to overlook the geographic differences and dislocations that •occur in our market. Mr. RAINS. Will the gentleman yield j Mr. WIDNALL. Yes, sir. Mr. RAINS. I read that report, and I am surprised :you want to put it in the record. It makes a very good case for the kind of thing we :are trying to do here, which is to smooth out the fluctuations in the supply of monetary credit. Mr. WmNALL. Mr. Chainnan, I think you missed my point on this. I read that due to ceilings on interest rates that may be charged on ·mortgages insured by FHA and VA, a rise in yields on competitive type&-Mr. RAINS. If the gentleman will yield, that is still a staff report; we have boys that can write better ones than that, but all that can mean for purposes of your argument is if we tak-e ceilings completely ,off and let interest rates rise to usury levels, we don't need legislation. We are not about to raise interest rates when they are the highest in history. Mr. Ai>DONIZIO. I said earlier that was the impression that was left ·here yesterday. Mr. WmNALL. Mr. Chainnan, I think you read into the remarks things that you might wishfully want to read into them. I am sure ·no one advocated changing the usury ceilings, or advocated raising interest rates, but they do advocate the ability of flexible rates to meet supply and demand. Now in Mr. Bartling's testimony a few minutes ago, he said that he ·believed that the VA and FHA program should be operated on the same basis as far as interest rates, as I understood his testimony. Mr. BARTLING. That is correct. Mr. WmNALL. And he evidently feels that the VA program could get off the ground and do a better job in the event that took place. I :heartily agree. Federal Reserve Bank of St. Louis  88  EJ.\,IERGE~CY HOME. OWNEll,S~U, 4C'.1'  Mr; BARTLING. That is right. : Mr. WmNALl'.,. That is all. Mr. Il.41Ns. The only flexibility with relation to interest rates is that it hits high ceiling, so _that you can't have flexible interest rates. No matter where you place the ceiling, it flexes up to that. The only thing I know that is flexible is farm prices that have flexible supports, and they always flex down while everything else flexes up. Mr. Barrett, do you hav~ any questions 1 Mr. BARRETT. No questions. Mr. RAINS.· Mrs. Sullivan 1 Mrs. SULLIVAN. I want to apologize, Mr. Chairman, for not being here to hear Mr. Bartling's statement. I had to attend another meeting and got here as soon as I could. Mr. RAINS. Mr.. Ashley. Mr. ASHLEY. One or two questions. I am sorry, too, I wasn't here when you read your statement. I have had an opportunity, . . . . . however, to go over it myself. Yesterday when Mr. Mason was testifying, he said m his statement as follows:  the  Alth~ugh an i_nerease is expected in loans to finance the expansion of business,plants, equipment and inventories in 1960, there should -be a great increase in the availability of loanable funds-  and he went on to imply. that because of the policies being followed by the administration that presumably this great increa,se in the supply of loanable funds will be available at reduced interest rates. Now against that there is a rather considerable body of opinion which includes a good many of the bus~ness and financial editors of papers throughout the country, and Mr. White of the Christian Science Monitor had this to say in last Wednesday's edition of the Christian Science Monitor. He said: In view of rising consumer debt, increased spending by the Federal Government, State and local governments, and by consumers, businesses, and institutions, the Federal Reserve System's tight money policy is regarded by most impartial economists as a necessity. They would not themselves ease money now. In fact, says :Mr. White, interest rates are due to go higher. Lending organizations expect to pay more for money, they expect to charge more for money.  I wonder what the position of your association is. What do you look :for as far as the credit picture is concerned~ Mr. BARTLING. Well, we don't anticipate at the present time or in the near future any general loosening of credit. There seems to be nothing in the picture at the moment that would indicate that all of a sudden the gates will open and we will be given money on. reasonable terms. The :forecasts referred to or some of the statements are rather "iffy," if in the future certain things happen, and so :forth, perhaps this will ease it, but I see nothing, and I think our association sees nothing at the present time that would indicate any general loosening of the credit situation for some time to come. The pressures on other parts of our economy are too great. Mr. ASHLEY. If that is the case, would you say that considering the leadtime that is necessary and that the other peculiarities of your industry, would you say in view of the prospect creditwise that you just enunciated that it is unreasonable :for members of this subcom- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWN.ERSHIP AC'l'  89  mittee to regard-·as. the legislative ·proposals that we -are considering in the nature of emergency proposals? . Mr. B~TLING. :Well, our feeling is, a~ we h3;-ve specifi.calls: stated here, that if certam thm~ can't be. done :immediately to do this, then ;it will become in-:our opmion in the nature of an emergency, and I might point out again that the _emergency varies geograp~ically. . In other words, we have certam areas of our country which are hit much harder than other areas of the country. The statement would not apply to every community in the United States, but specifically to certain growth areas, particularly, where the problem is most acute. Although this is generally true, we have problems all over, but the severity changes with the· locality. Mr. ASHLEY. You did point out in your statement, too, that a :falloff of 200,000 or 150,000 in housing starts in the year's time can, as it has· in the past, lead to recessions that a:ffeot the entire economy, isn't that true ~ Mr. BARTLING. I would like to insert some figures that I have used which I think have a bearing on what you are talking about. These are some figures developed by Mr. Rogg on housing starts, and if I remember these figures correctly back in 1925, we were building hofflleS•·at the rate of 110 per 10,000 population. In 1958, ·we were building at the rate of 89 houses per 10,000 population, and my interpretation of this is. that we are going forward backward in terms of our housing market. Considering the growth in our population, our gross national product, I personally feel that we are underbuilding tremendously, and as I look ahead to the future, I view with considerable alarm the problems that will :face us a few years from now if we don't attempt to bring the whole question of housing into focus now. We really will have problems when the measures become so great we need to build 2 million a year just to satisfy and stay even. It is a very serious thing ahead of us. Mr. ASHLEY. In other words, unless the right action is taken now, intelligent action is taken now, there will be an emergency of many kinds, not only as far as the economic implications are concerned, but as far as absolutely critical shortage in shelter is concerned. Mr. BARTLING. I think we are facing a critical shortage, looking ahead to th& golden sixties, it may not be so golden for the people who want to buy homes. Mr. ASHLEY. I think you have a telling number of points in connection with your statement. Thank you very much. Mr. RAINS. Mrs. Griffiths. Mrs. GRIFFITHS. What was the best year in the housing industry in the fifties-1955? Mr. BARTLING. The best year that we go back to is 1950, if I remember my figures, and I could be hazy on these, this last year was next to 1950. I make the statement I made a moment ago, if we go back 10 years, and this was in starts, we are really not solving the problems of our country in terms of making housing available to the people who want it and demand it. Mrs. GRIFFITHS. What has been the price increase of the average house from 1950 until today? Mr. BARTLING. Mr. Rogg, do you have those specific figures in the report? Federal Reserve Bank of St. Louis  1  90  EMERGENCY HOME OWNERSHIP ACT  It has been relatively slight, I might say, compared to other parts of our economy. Mr. Rooo. I don't have the 1950 data with me. We go back to 1953. Of course, we are talking about different types of houses. The house of 1950 was more typically a 2-bedroom house, today's house is more to be three or four bedrooms with two baths, but talring the average house in 1953, the medium price is $12,300. According to the figures we have developed this year, the 1959 typical or median house price was $13,900. Mrs. GRIFFITHS. How much of this is attributable to increased interest rates 1 Mr. Rooo. I don't think I could answer that question offhand. Mrs. GRIFFITHS. Could you supply it i Mr. Rooo. Yes. Mrs. GRIFFITHS. What is the capacity of the housing industry to produce? How many could you start i Mr. BARTLING. Someone might quarrel with my figures, but we have demonstrated on at least four occasions during the last :few years that we can sustain housebuilding at the rate of close to 1,400,000 without any strain in terms of men or materials, leaving money out of it for the moment. It is my personal feeling that there would be no problems to sustain during the year ahead, or the next few years, a rate of 1.6 million without too much trouble. Mrs. GRIFFITHS. What was the number of starts in 19501 Mr. Rooo. 1,395,00. Mrs. GRIFFITHS. Thank you very much. Mr. RAINS. Mr. Rutherford. Mr. RUTHERFORD. Thank you, Mr. Chairman. Mr. Bartling, it has been told here that 1960 has been presented to be rosy. In the event it doesn't materialize, an:d, of course, we all hope for the optimistic viewpoint, what has been presented to you or your organization as an alternative if it doesn't matevialize, as to your recommendation i · We have already been told the administration is very much opposed to this bill, they say the economy will be on the upswing, to sit back and wait for it because it is coming. Now what representations have they made to you and your organization as to your proposals in helping the housing industry i Mr. BARTLING. I regret to say up to this point, none. Mr. RUTHERFORD. They have made no comment. Have they presented any alternative program i Mr. BARTLING. Not to my knowledge; no, sir. Mr. RUTHERFORD. In connection with the remarks on the peak performance of your industry, what is the saturation year with production-as Mrs. Sullivan brought out the other day, the delay in housing-as well as the new population 1 What is the lengt.h of this housing construction, because we hear quite frequently, although I might say this, the administration leaders did not submit this conclusion the other day that we had reached the saturation point now, that there are still houses needed, and I appreciate the fact they do recognize this need. What is the estimated point of saturation at a peak performance of, say, 1.6 million~ Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  91  Mr. BARTLING. Oh, the saturation point, that is something in which we embark in a whole new field. There is a market in this country, if :financing, land, and so forth could be made available, for at least a quarter million units of minority housing, for example. We have the many thousands of small communities throughout the United States which presently are not building houses under the FHA or other types of programs-in other words, building houses by the old-fashioned way, you might say, of a few here, a few there, and there is really no house building. I personally tl;tink that a figure of 2 million houses a year would be no problem, or actually may be even greater than that. Consider for a moment the tremendous urban problems, the problem of blight and decay in our cities, the tremendous job that has to be done in every large city in the country. This is all a part and parcel of it. Our problems are enormous to live up to the boast that we are the best housed people on earth. Mr. RUTHERFORD. Realizing you might have reached saturation in some localities, but what is the potential length-in other words, when will we reach utopia, you might say, as to 90 or above percent of the American people being properly, adequately, and subtantially housed? In other words, what is the life of your industry basically on the peak performance rate? Mr. BARTLING. I have some figures here which have have been given to me which says that the rate of replacement today would take almost 200 years to replace at the present rate, replace the standing stock of housing. In other words, I think in answer to your question, this Utopia neyer will arrive, as hard as we might work. We will always have this problem ahead of us. Mr. RUTHERFORD. The basic point I was trying to bring out, as you accomplished there, is that this is not an industry or a problem that can be solved within a short period of time, or a reasonable period of time, or in our lifetime. Mr. BARTLING. That is correct. Mr. RUTHERFORD. Frequently you 'hear we are about to reach the saturation point, there is no need for any increase, emergency bill or anything else, that we are reaching the level of the saturation point in the housing. To comment on Mr. Widnall's analysis awhile ago of starts, and your membership, I noted in your remarks in regard to that that you are gaining membership, possibly, and losing starts. I tJ'hink it is a significant statement that usually when builders-it does not necessarily indicate whether or not they are producing and producing profitably-it means they are in trouble, and when an organization or a group of people get in trouble, then they start organizing and getting into groups that can be of benefit to them. Mr. BARTLING. You are correct in that. Mr. RurHERFORD. As long as everything is rolling along fine, they are getting all the money they need and labor is fine, why pay the membership dues, why go to conventions, why trouble yourselves with organizations, because who needs the organization? 50876--60--7 Federal Reserve Bank of St. Louis  92  EMERGENCY HOME OWNERSHIP ACT  But when they are in trouble, they come to the organization. This is the same in building, mortgage bankers, or any other group, so I think it is significant that your starts are dropping and your membership is increasing, indicating that the home construction industry is in trouble individually, and they recognize it by increased membership in an organization tJhey feel might be of substantial help to them in solving this major problem. Mr. BARTLING. I must agree with you. Mr. RuTHERl10RD. Thank you, Mr. Chairman. Mr. RAINS. We are running late on time, but Mr. Widna:11 has one more question. Mr. WmNALL. I was interested in the average price figures that you gave awhile back. What was the first one-was that 1953? Mr. RoGG. 1953, sir. Mr. W ID NALL. You say it has gone up aibout $1,000 since 1953? Mr. RoGG. About $1,700, the median price. Mr. WmNALL. I find that difficult to understand when in my own area during that period of time house costs have gone up far more than that, and I think in most every area I have been that is true. Do you have a breakdown that you could put into the record? Mr. Rooo. Yes, sir. Mr. WmNALL. Do you have any information that relates to wlhat factors have entered into that increased cost? Mr. RoGG. No. Unfortunately, as you well know, the statistics in this field are pretty dismal, and we have official Government figures from 1954 through 1956, and from that period on, nobody has made any survey of the median sales price except our own association, and we have relied upon our own surveys £or this thing. We have tried time and again to get the Government to continue its series on this, but without any success. Mr. WmNALL. Would you put into the record what you have year by year? Mr. RooG. Yes, sir. Mr. RAINS. I want to include at the end of Mr. Bartling's testimony two newspaper articles, each from the Evening Star, one on Thursday, January 21, entitled "Home Builders Flay High Interest Policy," and the other on Saturday, January 23, entitled "Builders Critical of Money Pohcy." Just for the record, I would like to include from the Star, also, of January 7, an article bearing on the usury charges, "FHA Charge Held Usurious in Maryland." Mr. Bartling, and gentlemen, we want to thank you; you have made a very fine presentation. Mr. BARTLING. Thank you, Mr. Chairman and members of the committee. ( The newspaper articles referred to above are as follows:) [From the Washington (D.C.) Evening Star, Jan. 23, 1960]  BUILDERS CRITICAL OF MONEY POLICY (By Robert J. Lewis, real estate editor of the Star) CHICAGO, January 23.-When allowed free play, the force of circumstances seems continually to aline home builders' interests with important economic and social aims of the average citizen. That happened again this week at the Builders' National Convention, when the Eisenhower administration's high-interestrate policy ran into a rough going-over. The big issue was what is happening to the most basic symbol of the American standard of living. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  93  Builders thrive and make money only when the living standard is on the up;grade--and they know it. The basic symbol of that standard, here and abroad, is the American home and its general availability. ·when an economic policy makes it impossible for hundreds of thousands to have the opportunity of homeownership, then builders find themselves forced to be concerned. True, they are concerned primarily because the existence of their industry is based on an opportunity to build and sell. But it is this very natural concern for venture opportunity that forces them, willy-nilly, into a defense of opportu:. nity for average people. As a powerful industry, builders are thus committed 100 percent behind the idea that every family deserves the economic right to own a home that is spacious enough, clean enough, and modern enough to serve as a symbol of the good life in the United States. POSITION IS  CLE.AR  It is in this relationship to the aims of average families that the building in-  dustry's harsh protests this week against the Eisenhower administration's tight money policy are most telling and significwnt. As businessmen, builders are ideologically favorable to sound money, and all that. But, almost to a man, they made .clear that they think the current money policy is a mistake, and that the longer it is pursued the greater a mistake it will be. That conviction they expressed eloquently wnd unmistakably, and almost with a stump speaker's vehemence. "All this," they said, in a reference to the high-interest policy, "makes as little sense as raising the price of bread to combat a food shortage." STATEMENT ISSUED After debating the matter thoroughly for 3 days, they issued a statement that delivered the following series of verbal blows in an unprecedented attack on administration policy : 1. "The attempt to control excessive total dema111d for credit and to stimulate savings through ever-rising interest rates has obviously failed.'' 2. "Interest rates approach-and in some cases exceed-the legal limits of usury.'' 3. "Home buyers are hurt first and worst by the impact of tight money." 4. "Scarce and expensive mortage credit accelerates steady retrogression from the low-downpayment, long-term mortgage--predominantly responsible for home buildin.g's phenomenal progress in the last quarter of a century-to financing methods proven unsound 30 years ago.'' 5. The administration's policy "has inhibited economic growth and placed the greatest burden on those who can afford it least." 6. "Tens of thousands of modest-income home buyers who only a short time ago could have bought homes well within their means, are now disqualified by the high cost of credtt.'' 7. "* * * There is something fundamentally wrong-however worthy its stated objective--with a national policy which, in the name of 'curbing inflation' denies credit-worthy, moderate-income families the opportunity to own their own homes while allowing credit to continue freely available for many less essential uses." 8. "High interest rates and the high costs of money have been and are a major factor in the rising cost of housing.'' For the moment, builder.s as an organization are content to have expressed their disappointment clearly. This is in the apparent hope that someone--somElwhere--will heed the warning. But there is little doubt that many are in a mood to go further if money is allowed to become even, more tight, and more expensive, than it is today. [From the Washington (D.C.) Evening Star, Jan. 21, 1960]  HOME BUILDERS FLAY HIGH INTEREST  POLICY  (By Robert J. Lewis, Star staff writer} CHICAGO, January 21.-The high-interest rate policy being pursued by the Eisenhower administration stood condemned here today by the National Association of Home Builders in tp.e severest and most sweeping criticism by this 40,000-member group of a maJor Government economic policy since New Deal days. Federal Reserve Bank of St. Louis  94  EMERGENCY HOME OWNERSHIP ACT  Convention delegates assailed the policy for having "obviously failed," for boosting rates beyond the "legal limits of usury," for having forced a return to financing methods "proved unsound 30 years ago," and for bearing down most unfairly on small businessmen and moderate-income families. It was the consensus of observers at the homebuilders sessions that if the Messrs. Stevenson, Humphrey, Symington, Kennedy and other Democratic hopefuls fail to study the protest, they will be missing a bet. For it reflects a deep disenchantment on the part of the industry with a basic administration policy now being pushed vigorously in Congress with a request for an unlimited interestrate ceiling on long-term Government bonds, an effort widely interpreted as heralding a new round of rate increases. HELD INEFFECTIVE  In its protest adopted yesterday, the association pointed out that home buyers are the Nation's largest private users of long-term credit. For the Government to rely on pushing interest rates still higher as its chief anti-inflationary ,activity is both ineffective and unfair, the organization said. "The attempt to control excessive total demand for credit and to stimulate :savings through ever-rising interest rates has obviously failed," the builders' :Statement said. "Interest rates approach-and in some cases exceed-the legal limits of usury. One major group of Americans has been successfully 'controlled'-the tens of thousand of modest-income home buyers who only a short time ago could have bought homes well within their means but are now disqualified by the high cost of credit * * *." NEW RECESSION ?  Warning ·that a new business recession could be the result, the statement said: "In 1957, the same combination of restraints now imposed on our industry caused a severe drop in construction that triggered a general business recession. Unless immediate effective action is taken to distribute more fairly ,the impact of 'tight money,' this pattern will inevitably be repeated." Mortgage banker members of the association and other conservative elements sought unsuccessfully in board sessions to soften the criticism, but were able to head off outright endorsement "at this time1' -of the Rains bill to provide $1 .billion in Federal mortgage-buying aid. They succeeded in accomplishing this chiefly with the argument that builders should not, as an organization, be placed in the position of wanting a "handout." But the Rains bill issue was never allowed to come to a direct vote and builders left the way open for their organization to support the bill. In a press conference last night after his election as new NAHB president, Martin L. Bartling, Jr., Knoxville, Tenn., said homebuilders would testify befoo-e the Rains committee January 26. GOALS OUTLINED  He said they would seek : 1. Legislation to allow the national service life insurance fund, the GI life  ·insurance reserve, to use "a reasonable proportion" of its funds for purchase of 'Federal National Mortgage Association debentures so that FNMA could buy GI mortgages and thus aid the GI housing market. 2. Legislation to allow "points" charged by lender for making mortgage loans t,o be included in the mortgage ,amount that must be paid off by purchasers. 3. As an alternative, they will seek passage of an amended Rains bill to pro'vide "an adequate fund for use in areas where home mortgages ,are not otherwise available at prices which the building industry can absorb while providing an adequate supply of moderate-priced homes." National officers chosen also included W. Evans Buchanan, a former president of the Home Builders Association of Metropolitan Washington, who will be the new national treasurer. He has been serving during the last year as national secretary_ Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  95  [From the Washington (D.C.) Evening Star, Jan. 7, 1960]  FHA CHARGE HELD UsUBIOUS IN MARYLAND BALTIMORE, January 7.-A service charge on certain FHA loans violates Maryland's usury laws, says the attorney general. The opinion was issued at the request of John D. Hospelhorn, deputy banking commissioner. Assistant Attorney General Joseph S. Kaufman said ,the application of the one-half of 1 percent service charge to certain mortgages carrying 5¾, percent interest brings the overall charge to more than the legal interest rate of 6 percent. "We believe that the service charge to the extent that it exceeds the legal rate of interest on FHA guaranteed loans is usurious," wrote Mr. ~aufman. "In connection therewith we can find no legislative sanction for this practice; therefore, there is no exemption from the constitutional or statutory usury provisions." Mr. Hospelhorn said the extra one-half percent charge is allowed only on FHA-insured mortgages of $8,000 or less. He said the Washington area prob-ably would be little affected by the ruling because most of the mortgages in that area are for more than $8,000. He could not estimate how many mortgages in the State would be affected by the ruling. He said the charge is a "permissive'' one and is not charged by all lending institutions. '!'he commissioner also said that only mortgages written since September 23, 1959, would be affected. Before that, the l!..,HA loan interest rate was 5¼ percent and the extra one-half percent did not raise the total to the maximum 6 percent permitted by Maryland law. Mr. Hospelhorn said unless Mr. Kaufman's opinion is overruled by the courts, the ruling will prevent lending institutions from charging more than a onequarter percent service charge. The commissioner said he asked for the opinion after the issue was raised by a Baltimore lawyer who represented several lending institutions.  NATIONAL ASSOCIATION OF HOME BUILDERS, NATIONAL HOUSING CENTER, Washington, D.O., February 1, 196(].  Hon. ALBERT RAINS, Chairman, Subcommittee on Housing, Committee on Banking and Curren(Y/;, House of Representatives, Wa.~hington, D.O.  DEAR MR. RAINS: During the course of my testimony on January 26 on behalf of the National Association of Home Builders, I was asked to supply informa-  tion in response to questions as outlined below. Attached is a supplemental statement containing the requested information. 1. Members of the subcommittee were interested in the current situation with respect to violation of usury laws by the FHA interest rate plus additional charges. A summary of the information now available to us is contained in the attached statement. As indicated in the attachment, the situation is sufficiently serious to give rise to the statement in our testimony that •'interest rates approa,ch-and in some cases exceed-the legal limits of usury." 2. We were also asked for a comparison of the memberS'hip of our association with the total housing start figures in recent years. A tabulation containing this information is enclosed. We find no basis for correlation or indeed any rela-• tionship between the two sets of figures, however. In our opinion, the NABB membership has continued to increase through the years because of the increased services we have been able to give to the membership during a period of time when housing starts have widely fluctuated. 3. A question was also asked with respect to the percentage of the increased sales pri,ce of new homes which could be ascribed to an increase in interest rates. A memorandum containing information on this point is also part of this suppli,-, mental statement. 4. We were asked for information on the sales prices of houses. A memorandum covering this information is also enclosed. 5. Also enclosed as part of this statement are suggested amendments to H.R. 9371 which would carry out the recommendations contained in my principal Federal Reserve Bank of St. Louis  96  EMERGENCY HOME OWNERSHIP ACT  statement with respect to conditions to be imposed upon the use of FNMA special al!lsistance. The first amendment relates to the price to be paid for mortgages, and the second would authorize FNMA to limit the use of funds by area t;tnd by builder or mortgagee. It would be appreciated if this letter and the accompanying information may be inserted in the record at the close of my testimony. I appreciate this opportunity to be of assistance to members of the subcommittee. Sincerely, MARTIN L. BARTLING, Jr., President. SUPPLEMENTAL STATEMENT BY MARTIN L. BARTLING, JR., ON BEHALF OF THE NATIONAL ASSOCIATION OF Hmm BUILDERS  1. Uswry laws and the FHA Members of the subcommittee were interested at the hearing ,January 26 in the current situation with respect to violation of usury laws by the FHA interest rate plus additional charges. There is now a real question with respect to usury in 12 States and jurisdictions having a limit of 6 percent on mortgage interest as part of their usury law. These States and jurisdictions are Delaware, Kentucky, Maryland, New Jersey, New York, North Carolina, Pennsylvania, 'Tennessee, Vermont, Virginia, Virgin Island8, and West Virginia. · In addition, it is possible that the question of a violation might arise in States having a usury ceiling of 7 percent g,hould a mortgage discount be considered interest. The following five State8 have a 7 percent limit: Illinois, Iowa, Michigan, North Dakota, and South Carolina. All other States have a limit of 8 percent or higher. Test rulings have already been given in a limited manner involving FHA's situation. For example, the attorney general for the State of Maryland has ruled that the FHA interest rate of 5¾ percent plus the permissible extra onehalf percent service charge on low-cost housing loans is a violation of Maryland's usury law. In Tennessee a lower court decision in a "friendly" suit has held that the extra one-half percent FHA monthly insurance premium is not interest and therefore does not violate Tennessee's usury statute when added to IT'HA's 5¾ percent interest rate. It is expected that a ruling from the Tennessee Supreme Court will be obtained in order to clarify fully this question for Tennessee and other States that will look to the Tennessee decision as a precedent. In Tennessee and other States insurance companies and savings banks have withdrawn from making new FHA loans for fear of violating the usury statutes. As a result, there are today no new funds for FHA insured loans in these States nntil the legal situation is fully clarified. There has been no test case yet, of course, which would call for a legal decision upon the question of a mortgage discount as a charge or cost of mortgage money and whether such a discount when added to the interest rate would violate the usury statutes. Whatever the outcome of the legal proceedings, however, it is clear that investors will not today make FHA single family home loans except at an effective yield (reached through a combination of FHA's intereg,t rate and the mortgage discount which is charged in addition) in excess of the legal limits of usury in a good many States. This, of course, is precisely the situation which gave rise to the statement in our testimony that "interest rates approach-and in some cases exceed-the legal limits of usury." ill. NAHB membersMp and, total housing starts, 1946-59 Year  1946 __ ---------------1947 __ ---------------1948 __ ---------------1949 __ ---------------1950 __ -- -------------1951- _ ·--------------1952 __ ----------------  Total memhers 11,089 12,651 14,383 15,490 19,005 24,598 25,906  Total housing starts 670,500 849,000 931,600 1,025,100 1,396,000 1,091,300 l, 127,000  Year  1953_ ----------------1954 __ ----------------  1955 ___ -------- ------1951\ __ ---------------1957 ___ ---- ----------1958 __ ---------------1959 '-----------------  Total members 28,759 32,631 36,598 40,398 40,851 40,148 42,424  Total housing starts 1,103,800 1,220,400 1,328,900 1,118,100 1,041,900 1,209,400 1,376,900  1 Late nosting in our membership records department shows that the total going into 1960 will be well over 43;000, Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  97  3. Sales prices and, interest rates Congresswoman Martha W. Griffiths asked what portion of the increased sales price of new homes could be ascribed to the increased interest rates. Strictly speaking, changes in interest rates have no effect whatsoever on the house ~ales price since the sale price is presumably arrived at by an independent appraisal process which does not include the interest rate on the mortgage as a factor. However, the interest rate on the mortgage is a very vital factor in the eventual cost to the borrower. For example, take the case of a $12,000 mortgage for 30 years. In the case of a mortgage Which was written at 4½ percent, the monthly mortgage payment is $60.84. If the effect of interest rate has risen by 1 percent in the period and the mortgage is written at 5½ percent, the effect of mortgage payment is $68.16, or an increase per month of $7.32. Over the 30-year ,period this amounts to $2,635, a very substantial sum indeed, but not one which enters into the immediate sales price &f the house. The consequences of an increase in interest rates, however, and of tight money generally, go beyond the situation described above. We learned upon examining the consequences in the drop of housing in early 1956 until early 1958, that we had a very severe drop in housing starts and that most of the decline was really a loss in the lower priced FHA and GI houses. As a matter of fact, practically all the decline between the housing starts in mid-1956 and the volume in early 19u8, was a drop of a quarter of a million in the production of lower priced GI homes. The median sales price rose from 1956 to 1957 not because of any major change in building costs, but because of a shift in the types of houses that were being produced with fewer moderate and low-priced houses in the total production volume on which the statistical median was based. It is the inability to obtain financing for the moderate priced house suited to the needs of average families which is one of the truly unhappy results of a tight money policy, not matter how well-intentioned it may be. Incidentally, the figures l"eflect a fairly sharp increase in median price of new house in 1950 to date. It should also be borne in mind that we are talking about entirely different types of products. The 1950 house was more apt to be a two bedroom, one bath house, whereas the 1959 house is much more apt to have three or more bedrooms and to have more than one bath. The 1959 house is a larger, better built house with more insulation and provides greater amenities. The upgrading in family living standards has been responsible for a constant rise in the amenities of the new house, and consequently, the comparison of sales prices over a period of years is apt to make a misleading impression unless these other changes are also borne in mind. 4. Sales prices of new homes Congressman William B. Widnall requested that information be inserted in the record on sales prices of houses from 1950 on. Government data on the sales prices of new houses are available only on a very limited basis, as shown in the table below. We have made an estimate for 1950 which is based upon data supplied by the Bureau of Labor Statistics in 10 metropolitan areas, so the 1950 figure is also an NAHB estimate. The ·other figures which NAHB described as a source were developed on the basis of regular surveys we made of our membership. In the last few years there have been no other ruajor surveys of sales prices. We have also included in the table a series on median FHA value of new homes. It should be remembered that the FHA data cover only a limited portion of the housing market and generally omit the very low and the very high priced homes. Federal Reserve Bank of St. Louis  98  EMERGENCY HOME OWNERSIDP ACT Median sales price of new homes  Year  1950 __ -- -- -- --- -- -- -- -- --- -- -- --- ----- -- -- -- -- __ --- -- --- ------  1954 ___ -- ----- -- -- -- -- -- ___ -- --- -- _-- __ -- -- -- -- -- _-- -- ----- -- _ 1955- __ -- -- _-- -- ---- -- ___ -- -- -- _-- -- -- _-- -- -- -- -- -- _-- -- --- --1956 __ --- --- -- -- -- -- -- -- -- _-- _-- -- --- -- -- -- -- -- --- -- -- -- _--•- _ 1957 _ - -------------------------------------------------------1958 __ -- -- -- -- ---- ---- -- -- ___ --- -- _--- _-- -- -- ----- __ -- _-- ----1959 __ - -- -- -------- -- -- -- -- --- -- _-- ----- -- -- ---- ----- _--- _---1  Bureau of Labor Statistics surveys  $10,000 12,300 13,700 14,500  (f>:~  NAHB builders' economic council surveys  --------------------------$13,500 14,600 15,100 14,100 13,900  Estimates of FHA property value  $8,286 10,678 11,742 13,203 14,261 14,207  --------------  No BLS surveys, or any other Government surveys as to prices of new homes have been made since 1956.  5. Suggested amendments to H.R. 9371 Page 5, line 19, section 8, strike all following the word "than" and substitute "such price as the Association finds consistent with the production and marketing in the area, at a reasonable profit, of homes financed by mortgages in the maximum principal amount set forth in subsection (g) of this Section." Page 7, line 1, add immediately before the semicolon: "the Association shall by regulation (i) restrict use of funds provided under this subsection to areas in which it finds mortgage funds would not otherwise be available at a price and on terms consistent with the production of an adequate supply of moderately priced homes, and (ii) prevent disproportionate use of such funds by any builder or mortgagee: And provided further, That."  Mr. RAINS. The next witness is Mr. Frank Flynn. You may come around, Mr. Flynn. Our witness list shows that Mr. Knox was going to be here, but he is sick with the flu, is that right, Mr. Flynn 1 Mr. FLYNN. That is correct, Mr. Rains. We are sorry that he was unable to be here. He called yesterday, he is in the hospital. Mr. RAINS. Well, we hope he gets along fine. We are glad to have you here. You may proceed with your statement. STATEMENT OF FRANK P. FLYNN, JR., COCHAIRMAN, LEGISLATIVE COMMITTEE, HOME MANUFACTURERS ASSOCIATION  Mr. FLYNN. Mr. Chairman and members of the committee, my name is Frank P. Flynn, Jr. I am president of National Home Acceptance Corp. of Lafayette, Ind., and I am testifying in behalf of the Home Manufacturers Association as cochairman of our legislative committee. As the chairman mentioned, Pete Knox was scheduled to testify for our association but is hospitalized, and I am testifying in his place. With me this morning is Mr. Pat Harness, our executive vice president. The Home Manufacturers Association is composed of companies which produce the great bulk of prefabricated, or factory-built homes in the United States. Last year our companies manufactured an estimated 135,000 units, an alltime record. We are in a unique position to keep a close ear to the housing market because our companies sell to over 6,000 different builders, who in turn erect the house and sell it to the consumer. Home manufacturing concerns now ship regularly to every State in the Union, including Alaska and Hawaii. This is truly one of America's great growth industries, with new plants being started at an ever-increasing rate in this country. We appreciate the Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  99  opportunity to again comment on legislative proposals before this subcommittee. I think some explanation is in order for this subcommittee to understand more fully exactly how the home manufacturer fits into the housing picture. Most of our companies supply houses-and in about half the cases-mortgage money through our mortgage acceptance corporations, to our homebuilder customers. We find the average home manufacturer will have about 25 to 40 builders that he serves on a continuing basis. Large home manufacturers will service a much la.rger number of builders and many of our companies sell and service several hundred builders, each. Because we are in such close contact with so many builders in so many different States, our companies must be familiar with market conditions and housing problems. This subcommittee will hear many opinions and suggestions from capable witnesses regarding the tight money situation. All of them should be considered by the subcommittee. Let me say at the beginning of my statepient, however, that we find the problem to be simple: there isn't enough mortgage money for home buyers at prices they can afford. My own firm operates in most States in the United States. VA home loans, at nothing down and 30 years to pay, command an 11-point discount in many areas; FHA loans of a similar nature require 7 points. At these prices it should be obvious to everyone that builders can't oontinue to build in the FHA-VA market. ,The problem of adequately housing the Nation's low-income families is becoming increasingly acute. Traditionally, the low-income family has little cash reserves. The imposition of a cash downpayment in any amount, plus the required payment of closing costs, presents to such families a very big problem. Most low-income families do not accumulate any sizable cash reserve, living from week to week on their weekly paycheck. However, their housing needs represent a great, unfilled demand. It has never made any sense to members of our association or to our thousands of builder-dealers for the builder to be required to absorb the loan brokerage charge required by the lender. We believe it quite unfair to expect the builder to lose any or all of his profit because FHA and VA will not recognize the discount as a cost of doing business. These charges, within reason, certainly should be reflected in FHA and VA appraisal in the same manner as land, labor, and materials that go mto the total cost of the property. I might point out that the Internal Revenue Service certainly recognizes these as part of the cost of building or acquiring property. We recommend that such costs be included in the FHA appraisal and loan. Last Friday our association staff asked several of our member companies to describe the mortgage situation in the marketing areas. Here are some of the answers, and we have the telegrams which may be inserted in the record. From a company based in Oklahoma: Mortgage situation our entire sales area quite critical. Discounts too high and indications point higher. Construction money so tight only lumber company captives and volume builders can move. If situation continues much longer many small builders and some prefab operators are going 11:o be forced out of business. Federal Reserve Bank of St. Louis  .100  EMERGENCY HOME OWNERSHIP ACT  From a company based in Missouri: FHA advance commitments available at 1 to 2 point advance fee backstopped at 88. Great need for FNMA special assistance funds at par. Would prefer a $15,000 ceiling instead of $13,500 to cover bulk of offerings. Special problems include discount situation, placement of loans on older homes, opinion here that FNMA has not been operating as secondary market but as primary market.  From a company based in Wisconsin: VA and FHA in small communities need boost through FNMA. Also increase in FHA 213 sales type demand requires special assistance. VA, loans for future delivery currently most acute problem because of VA rate which must now equal FHA at all times.  By that I think they mean the yield; the investor wants a comparable yield on the two types of mortgages. From a company based in Indiana: In our area operations Ohio, Indiana, Illinois, Michigan, West Virginia, Kentucky-funds for VA loans extremely limited if available average 10 to 11 percent discount which most of our dealers cannot afford to pay therefore most dealers operate on FHA only. This cuts sales because FHA payments are higher and disqualify many purchasers. Only FHA quotation recently requires 7 percent discount.  From a company based in Texas: Prevailing discount on 203(i) loans is 9 percent. FNMA refuses to buy 203 ( i) loans in small towns. Low cost housing needs help.  My own company finds there is fairly adequate mortgage funds for FHA at four to seven point discounts in our operating areas. There is very little VA money at less than 11 points which is impractical. Lenders impose very strict mortgagor qualifications in order to restrict volume. Lenders are reluctant to give commitments for a 12month period. Indications are that money will become tighter. Market for the $13,500 house is rather slow. The customer who can qualify for mortgage payments wants a better house at a better location than can be sold at this price. Like the weather, everyone talks about tight money but no one does anything about it. The board of directors of the Home Manufacturers Association has studied the proposals embodied in H.R. 9371, the Emergency Home Owership Act introduced by the subcomittee chairman. I 1'"ill list, item by item, those proposals which my board of directors has endorsed. I want to emphasize as strongly as possible, however, that our association considers such legislation as only an emergency measure and would much rather support long-range answers to long-range problems, such as creation of a Central Mortgage Bank, which we recommend and which we support. We should make clear in connection with this Central Mortgage Bank that it might be much more practical to amend the functions of the Federal National Mortgage Association because this existing organization could, with minor amendments, serve the function as provided for in the Central Mortgage Bank, and I think it is very important, as critical as the need for FNMA is that we don't permit it to be sabotaged while all of our attention is directed to this Central Mortgage Bank. Since we don't have a Central Mortgage Bank in operation and since home buyers and home builders currently are faced with the tightest money market in recent years, we support the proposal for Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSffiP ACT  ]01  a $1 billion special FNMA support program to purchase mortgages on lower priced new homes. We support this measure with great reluctance. We dislike stopgap measures, but the practical fact remains that low and medium cost housing production will drop an estimated 25 percent this year, we believe, if mortgage money for home buyers at reasonable costs is not available. If Congress should vote more funds for a FNMA No. 10 program, we strongly recommend suitable safeguards so that distribution or availability of funds is on an equitable basis. We further support these additional items in the Emergency Home Ownership Act : FHA to insure loans made by individuals as well as corporate a1id commercial lenders. Reduction of the FNMA stock purchase requirement from 2 percent to 1 percent. Reduction of maximum fees and charges which FNMA may impose under its special support programs. Creation of a $50 million special assistance fund for purchase by FNMA of FHA 203 ( i) mortgages. FNMA to purchase all mortgages offered as long as the title to the property is good and the mortgage is otherwise eligible and not in default. We have heard much about the possibility of raising interest rates on home mortgages. FHA interest rates already are at the legal limit in some States, as was commented upon by Mr. Bartling, before. We hope a solution other than higher interest rates can be found by this subcommittee as a way to channel funds into low and middle income housing. I would like to point out to the chairman and members of this subcommittee that my association does not feel that the FNMA special support program would be a subsidy. We do not view such a program as a grant. We view such a support program as one which within a reasonable period would be fully repaid with interest to the Government. The program could and should be so administered so that it costs the Government nothing. For the past 3 years our association has recommended to this subcommittee that housing legislation should be enacted to include provision for FHA to insure loans for subdivision development and for street and utility installations. Our observation is that one of the urgent needs for the future of housing is financing facilities for better planned community or subdivision programs. Unless such a program can in some way provide insured financing help for the small builder to develop land or purchase it on credit, homebuilding could very quickly become in the 1960's a monopoly of the relatively few well capitalized large land developers; and the healthy competition that the small builders given these large operators will cease to exist. The method of solution of this urgent problem is not nearly as important as the recognition of it. There are many ways that insured credit can be channeled into land development. Good credit tools already exist for financing the construction of a concrete foundation and there appears to be no good reason why they cannot be Federal Reserve Bank of St. Louis  102  EMERGENCY HOME OWNERSHIP ACT  used to finance a concrete street. Both are an integral part of the finished home. Last year in testimony before this subcommittee, Mr. Knox outlined in detail a plan for FHA insurance for land improvement. Our association stands ready at all times to work with the committee staff and FHA on solutions to this problem. I would like to say that home manufacturers are becoming more and more familiar with this problem. Several home manufacturers have established funds for land acquisitions and improvements. Our own firm has recognized the importance and value of this and have provided through debenture offerings and capital $25 million for such purpose. The fact remains, however, that the average builder and small businessman-developer is faced with a very serious threat to his survival due to skyrocketing costs of land and land improvement. Our association, therefore, strongly recommends provisions be made for FHA to insure mortgage loans on land which is to be improved for residential use in accordance with a land development plan approved in advance by FHA's land planning division. In closing, Mr. Chairman, I would like to say to you personally and to the members of this subcommittee that the Home Manufacturers Association is appreciative of the role this subcommittee has played in housing in recent years. We feel you are the champion of good housing laws and are in the front line of defense in seeing that home buyers remain in a competitive position with other borrowers in the fight for available credit. Thank you for this opportunity to present our views. I will at this time try and answer any questions which you or other members of the subcommittee may have for me. Mr. RAINS. Thank you very much, Mr. Flynn. I have only a couple of questions, but I might say two of the suggestions which you mentioned are going to receive the very careful consideration of this subcommittee before the year is out. One is the Central Mortgage Bank, which might be incorporated in some form in another· bill, and the other is authority for FHA to insure loans for land and site development. We have studied this some and expect to study it more. 1:Ve are aware of the problem and hope that we can be of help in solving it. On page 4 I was pleased to note the emphasis you put, and so many people fail to put, that FNMA's program 10 is not a subsidy. You state very frankly what all of us know to be the truth. These loans are to be repaid to the Federal Government with interest, and therefore, the program would be operated at no expense to the Government. I want to express my appreciation ~or th31t statement, and I wish the public generally could understand 1t a little better. When did you say you made those-;-they ":ere not in your statement-<1uick surveys you made i Was 1t last Friday~ . Mr. FLYNN, Yes, the requests were made last Fr1day, and the answers came in Saturday and yesterday, and they will be entered in the record, if you wish, Mr. Chairman. Mr. RAINS. We would be glad to have them. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  103  (The matter referred to follows:) P.  s.  TULSA, OKLA., January 21, 1960. KNOX,  Oare of Pat Harness Home Manufacturers Association, Barr Building, Washington, D.O.:  Mortgage situation our entire sales area quite critical. Discounts too high and indication point higher. Construction money so tight only lumber company captives and volume builders can move. If situation continues much longer many small builders and some prefab operators are going to be forced out of. business. SOUTHERN MiLL & MANUFACTURING Co., RALPH P. LYNCH.  HOUSTON, TEX., January 22, 1960. l'AT HARNESS,  Home Manufacturers Association, Barr Building, Washington, D.O.:  Retel prevailing discount on 203(1) loans 9 percent FNMA refuses to buy 203(1) loans in small towns. Low-cost housing needs help, help, help. SOUTHWEST HOMES, INC.,  l\'I. L. WESTBROOK, Ewecutive Vice President.  PORT WASHINGTON, WIS., January 22, 1960. PAT HARNESS,  Homes Manufacturers Association, Barr Building, Washington, D.O.:  Reurtel January 21 Harnischfeger homes in 10 Midwestern States mortgage market for future delivery harder to obtain but larger builder-dealers have adequate commitments. Conventional money being used for better housing projects and large city projects. Harnischfeger banking connections and reputation contribute substantially to this situation. VA and FHA in small communities need boost through FNMA. Also increase in FHA 213 sales-type demand requires special assistance. VA loans for future delivery currently most acute problem because of VA rate which must now equal FHA at all times. HABNISCHFEGER HOMES, INC.,  F. W. KEIL, Vice President. FORT WAYNE, IND., Ja'll,Uary 22, 1960. CONRAD PAT HARNESS,  Home Manufacturer's Association, Barr Building, Washington, D.O.:  In our area operations Ohio, Indiana, Illinois, Michigan, West Virginia, Kentucky, funds for VA loans extremely limited. If available average 10 to 11 percent discount which most of our dealers cannot afford to pay. Therefore most dealers operate on FHA only this cuts sales because FHA payments are higher and disqualifies many purchasers. Only FHA quotation recently re-• quires 7-percent discount. WM.B.F.HALL,  General Homes, Inc. BRIDGETON, Mo., January 22, 1960. CONRAD HARNESS,  Home Manufacturers Association, Washington, D.O.:  Report on mortgage situation St. Louis area follows: Discounts FHA immediates 3 to 6 points, futures 5 to 8 points, VA-10 to 12 points, conventional-1 to 3 points at interest rates of 6 to 6½ depending on equity. FHA advance commitments available at 1 to 2 point advance fee backstopped at 88. Great need for FNMA special assistance funds at par. Would prefer a $15,000 Federal Reserve Bank of St. Louis  104  EMERGENCY HOME OWNERSHIP ACT  ~iling ins~ead _of $13,500 to cover bulk of offerings. Special problems include d1SGQunt s1tuat10n, placement of loans on older houses, opinion here that FNMA has not been operating as secondary market but primary market. .  ROBERT SMITH WILSON HOMES, INC.  Mr. RAI~S. I have no more questions at this time. I am gomg to start with the better-looking part of our committee Do you haye any questions, Mrs. Griffiths? · Mrs. Griffiths. No, I have no questions. Mr. RAINS. Mrs. Sullivan? Mrs. SULLIVAN. None except I say I think you have made a very good statement. Mr. RAINS. Mr. Ashley? Mr. ASHLEY. I have no questions. Mr. RAINS. Mr. Barrett? Mr. BARRETT. No. Mr. RAINS. Mr. Addonizio? Mr; ADDONIZIO. Yes, I have some questions. Mr. Flynn, you said that your organization supports this bill with great reh_1cta11;ce. Don't yo1_1 feel that in view of the present money market situation that this 1s probably the best answer for solving your industry's problem? Mr. FLYNN. That is correct, Mr. Addonzio. The reluctance, or the thought that we intend to convey is that we feel that it is unfortunate that the solution to these problems which arise periodically by necessity has to be an emergency measure. At the risk of being facetious, the home building industry is somewhat in the position of a tennis ball, we are batted back and forth, and while it is probably flattering to be a segment o:f the industry that can be used as a contra.cyclical device, it is a little difficult to create any long-range pli;mning. An industry as important as the housing industry not only from economic standpoint, but from sociological standpoints, should be able to plan ahead, should be able to take advantage of intelligent long-range programs which would in turn lower the cost of housmg. There is no doubt a great deal of waste and attendant higher prices and loss of efficiency because of the fact that one year we are held down to perhaps stop inflation, and the next year we are given a shot of adrenalin in order to help to recover from the fact that the cycle is swung too far the other way. I think it is an expensive situation, frankly. Mr. ADDONIZIO. Of course, I agree with you very thoroughly, but the fact remains it will be some months before a general housing bill could be enacted by Congress. In view of that, couldn't you just support this bill with a little bit more enthu~ias~? Mr. FLYNN. Well, I am more or less test1fymg on behalf of the board. Personally, I am for anything that makes more housing possible. I don't have some of these restraints, I guess. Mr. AsHLEY. Are you saying you reflect the enthusiasm of your board? Mr. FLYNN. No, the reluctant approval of this is the expression of the board, Mr. Ashley, and there again it is not the provisions, it is merely the fact that this is the way it has to be done. Mr. RAINS. It is merely the fact that instead of this you wish you had something bigger, better, and longer; isn't that correct? Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  105  Mr. FLYNN. That is correct, Mr. Rains. Mr. RAINS. Are there any further questions? Mr. AnnoNrzro. Mr. Flynn, on page 3 of your statement, you indicate that housing production will drop an estimated 25 percent this year if the situation remains the same as far as mortgage money is concerned. A re you talking about the general housing business, or just your particular industry? Mr. FLYNN. No, that is in general, sir. It will be true. That isn't the housing business, overall. The most severe impact will, of necessity, be in the low and medium cost, because that is where the potential customer must resort to an insured loan program, he doesn't have the money to pay $1,000 or $2,000 or $5,000 down. Mr. AnnoNrzro. One other question, I was particularly amused by your statement on page 3 where you indicate, like the weather, everyone talks about tight money but no one does anything about it. I would like to just show for the record at least that the chairman, Mr. Rains, is trying to do something rubout it, by the introduction of his bill and the fact that we are considering it and I am sure he has the sympathy of several members of this committee. Thank you Mr. Chairman. Mr. RAINS. Mr. Widnall. Mr. WmNALL. Mr. Chairman, I might say some of the witnesses have just shown sympathy toward tJ:ie bill, but not endorsement. I hope you have more support on your side. Mr. FLYNN. Mr. Chairman, if I may interrupt, I don't want our position to be misunderstood. We still unqualifiedly endorse the bill. The reluctance in no way removes the fact that we endorse the bill. Mr. WmNALL. Mr. Chairman, I would like to ask a couple of questions. It is estimated that this bill for a billion dollars would cause 74,000 housing starts. Do you think this will solve in any way the problem of the building industry~ Mr. FLYNN. Well, Mr. Widnall, 74,000 starts would help just that much more. There would be just that many more starts, and, of course, it would be concentrated in the area where the tight money policy is creating the most effect, so that while it won't solve theproblem, it will alleviate it. Mr. WmNALL. That might also be said in the areas where the interest limit has its greatest effect i Mr. FLYNN. That is correct. Mr. WmNALt, On page 2 you speak a:bout including the discount in the amount that will_ b~ reflected by FHA and VA appraisals, You say these charges W'lthm reason-what do you mean hy "within reason"? Mr. FLYNN. I realize that that is rather an intangible point, and we recognize that so long as the science of appraisal is as definite as it is there would have to be some limitation on how much could be included in the valuation,, because it would create a siituation where a house was built ~n1er a 7 per:cent loan, for example, might have no discount, and If it were bmlt under FHA, the valuation would have to represent some portion of that discount, but the inttmtion is that if we are to continue these discounts that if a builder for example, wa,s in a position perhaps to operate at half his profit r;ther Federal Reserve Bank of St. Louis  106  EMERGENCY HOME OWNERSHIP ACT  than all, if some portion of this discount could be included that it would at least permit him to continue a program, in other words, to stay in business, maintain his organization, during periods of these excessive discounts. It isn't the answer, I will admit. Mr. WroNALL. I don't like discounts any more than you do, and certainly builders are entitled to a fair profit. I would like to know, though, what you consider a reasonable or a fair discount---2, 4, 5 percent? Mr. FLYNN. Well, I would say that the intention of most ruilders, and by custom they want to make a 10 percent profit. If the diiscount is 10 points, and none of that is allowed in the VA or FHA valuation or loan, it means that he is working- for nothing. If, for example, 5 percent of that discount could be allowed, the builder then could at least operate on a 5 percent profit, and in many instances would be induced to continue his operation and provide housing. Mr. WmNALL. On the land credit program, don't you believe actually this would inflate land costs and lead to tremendous speculation in land far more than exists today if a man had no risk involved in purchasing land? Mr. FLYNN. Under the plans proposed it wouldn't involve land speculation. It would operate, frankly, in more or less the same manner as the 207, or 213 programs, where advances for the utilities, which are part of the project, are included. I could selfishly say that personally I would just as soon not have this, because we are in a competitive position or other large builders are where they can take advantage of this language, but from the standpoint of the industry as a whole, it should be possible for small builders, small operators, to be able to acquire and develop land. The safeguard that I mentioned is the fact that this loan would not be approved until the project, itself, was committed on by FHA. There would be a reasonable assumption that the houses would be built during the period of the loan, and consequently a person couldn't afford to buy it for speculation. He would have to have his entire program laid out, and it would be used by a legitimate builder and land developer, rather than a land speculator. Mr. WmNALL. Just one other question, a short one. On page 2, you say VA home loans at nothing down and 30 years to pay command an 11 point discount in many areas. FHA loans of a similar nature--what FHA loan has no downpayment¥ Mr. FLYNN. We mean the minimum terms. It would be a 3-percent minimum, and 30 years in contrast to some lenders who will make a 20-year loan with 10 percent down, and in most cases the discount will be smaller. Mr. WroNALL. I just wanted to clarify your testimony on that point. Thank you very much. ( Statement off the record.) Mr. RAINS. Thank you very much, Mr. Flynn. You have made a good statement. Our next witness is Dr. Arnold Soloway, professor of economics at the Graduate School of Boston College, appearing on behalf of the Americans for Democratic Action.. Come around, Mr. Soloway, and proceed with your statement. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  107  STATEMENT OF ARNOLD M. SOLOWAY, AMERICANS FOR DEMOCRATIC ACTION Mr. SowwAY. Mr. Chairman and members of the committee, my. name is Arnold M. Soloway. I am an economist, editor of "Business Scope" and other publications of the Institute for Business Science. I taught for 10 years at Harvard University, and I am currently a visiting professor at the Graduate School of Boston College. I am also a director of several private corporations, and I am a member of the national board of Americans for Democratic Action. I appreciate your invitation to appear here to present ADA's views on support of H.R. 9371. As I am sure this committee is aware, ADA has long considered improved and expanded housing facilities among our highest priority national needs. We have long shared with you, Mr. Chairman, the vision of a decent, safe and sanitary home for very American family, and long hoped that a Government and a Congress might devise a housing program that would advance the country significantly toward that goal. We do not approach the problem of housing from the standpoint of the housing industry, or any other special-interest group. Our concern is with the critical need for a vigorous, broad-scale attack on the housing problem: to provide decent living conditions for our rapidly expanding population, for renewals and replacement of substandard housing, for elimination of slums-the most costly and debilitating blight in our whole society. Competent estimates of the number of new dwellings needed each year just to replace substandard housing and to house a growing populationj range upward from 1.75 million a year now to 2 million or more a few years fro/ID now. Yet in no year since the war has the construction of new homes exceeded 11/2 million, and in half those years, it has not been much over a million. It is clear enough why in the past decade we have made so little net ·progress toward eliminating substandard housing in the United States. And now, as we look ahead to the coming year, the prospect is that not more, but fewer, dwellings will be built in 1960 than in 1959. Instead of rising to a million and a half or more, the outlook is that home building will fall again below a million and a quarter; thus adding that much more to the accumulated housing deficit. The housing issue is, of course, pregnant with drama, but I shall spare this distinguished committee my meager talents in that direction. In view of the real magnitude of the housing shortage we £ace, however, I think it is clear that H.R. 9371 represents only a modest step in the right direction. This bill cannot solve our national housing problem. It cannot correct the fantastic imbalance in the flow of our Nation's resources. It will not shift much of our national e:lfort from the building of race tracks, gadget factories, bowling alleys and the like, into vital housing production. But it will help avoid a potentially serious recession in the housing industry, and it will provide additional support for stabilizing the output of residential units. In these limited terms, it is a 50876--60--S Federal Reserve Bank of St. Louis  108  EMERGENCY HOME OWNERSHIP ACT  sound, practical and conservative measure-and we support it as such. I think it is also £air and pertinent to say that if the whole legislative climate was not so heavily oppressed by the narrow, short-sighted and misplaced preoccupations of the present administration, this committee might well be discussing a measure of more £ar-rea'Ching consequences, more nearly adequate to the problems we £ace. The fundamental issue with respect to R.R. 9371 is, of course, whether or not the Congress should take steps to ease the terribly tight squeeze on mortgage money. The essence of the bill, therefore, is in section lL which provides for another $1 billion for FNMA's mortgage purchase program on new construction. While I heartily support all the sections of the bill, my remarks will refer primarily to section 11. Just last Thursday, January 21, Mr. George Champion, president o-f the Chase Manhattan Bank, told the American Bankers Association, meeting in Chicago, that money is now tighter than at any time since the 1920's-and will remain tight for the foreseeable future. This view was seconded by other leading banke,rs present, and overwhelmingly reflects the opinion of money market principals, economists and others. This view is held with such widespread unanimity because it is based on two rather obvious factors (1) business activity generally is expanding and (2) the Federal Reserve authorities are as firmly committed to "leaning against the wind" as ever. , In short, the demand for loanable funds is increasing as business activity increases; the supply of funds is being held under extremely tight control by the Federal Reserve because it is still haunted by the specter of inflation. Obviously, the Federal Reserve's obsession with the threat of inflation is the basis of current monetary policy. This obsession, of course, has also victimized the makers of our national fiscal policy. I sha11 put aside the temptation to attack the basic misconceptions which underlie this costly inflation phobia, but a few particular aspects are directly germane to the issue under discussion. To be fair to the Federal Reserve authorities, it must be granted that they have been charged with primary responsibility in the war against inflation. We have made monetary policy the chief weapon of price-level control. Furthermore, we have restricted our use of monetary policy to so-called general control over money and credit. We have, so far, avoided selective controls. The reason, apparently, is the mistaken belief that general credit controls are impersonal and nopdiscriminrutory-that. they only a:ffect the total supply of funds, leavmg to the market the Job of allocating credit. This- reliance on the market presumably satisfies our thirst for noninterference with free enterprise. Selective credit controls, on the other hand, imply some degree of decision on priorities-a power of discrimination which the Federal Reserve is. not really willing to assume, and which doctrinaire free enterprisers consider_ un~ee~ly for the central bank. The alleged nond1scrimmatory feature of general credit controlour tight money policy-is merely an illusion. Tight money has different_ effects on ~~fferent classes of borrowers. I~ our economy was highly competit1ve---to the extent that the theoretical assumption Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  109  of pure competition were substantially in force-a general tight money policy would still not affect all classes of borrowers equally. vVe might accept this natural discrimination as a reflection of an effective market choice. But our economy, as you well know, is laced with all kinds of rigidities : monopoly and near-monopoly conditions exist in many important sectors, and Government controls and subsidies cause other imperfections. The fact is that market forces work only very imperfectly, and the power of attracting loanable. funds today is not distributed in a manner reflecting consumer choice in any meaningful sense. Certainly the money markets, themselves, are far from being truly open and competitive. In fact, no one really denies that money market imperfections contribute substantially to the stickiness of interest rates, and that credit rationing by the money market is substantially affected by monopolistic elements in the economy. The idea that free market forces of supply and demand determine the interest rate is very misleading. The fact is that the supply of money is very largely under the control of the Federal Reserve authorities. We simply do not have a free market for funds. It is not correct, therefore, to argue that market forces of supply and demand really determine the interest rate. The key point, for our present purpose, is that residential construction is the one area of the economy where tight money has its most discriminatory impact. The statistics on this score are overwhelming, and the explanation is simple and well known. Most of the money paid out in the purchase of a new home comes from borrowing. The amount of cash people can put up is usually quite small-a :fraction of the total purchase price. Thus, when a lender, to spread his money around and take advantage of higher yield or shorter term investments, cuts his mortgage offering by, say, 10 percent, he may raise the down payment requirements by more than 50 percent. The result is that when mortgage money is hard to get and expensive, housing starts must go down. And since mortgage funds fluctuate in cost and· availability as money is tightened or eased, the ups and downs of the housing market can be traced directly back to the turns of Federal Reserve monetary policy. The fact that the supply of mortgage funds is controlling element in housing construction means that the fluctuations in housing demand are relatively minor. That is, within the range of interest costs and income fluctuations we have experienced since 1945, the demand for new housing has remained fairly stable. What has choked off housing has been the unavailability of mortgage funds as money tightens and the supply of credit is directed away from mortgage financing to other uses. So, we go on our merry way allowing the money market to support more and better race tracks, bigger and glassier office buildings, innumerable, splendiferous motels-and a decent place to live for an American family in this age of opulence remains beyond our capacitie~, or interest. Tp.e E~se!lhower. adIT?-inistration has ~:i,de the housing mdustry the chief victim of its tight money pohmes and the stepchild of the money markets. It has left the housing industry to scramble for what it can get, at interest rates that are pricing Federal Reserve Bank of St. Louis  110  EMERGENCY HOME OWNERSHIP ACT  more and more American families out of the market for new homes. As I have previously stated, H.R. 93'71 will not, unfortunately change all this. But it will, through FNMA's increased mortgag~ purchase power and the other provisions reducing net borrowing costs, provide some helpful ease to the housing sector of the economy. It will redress some of the fantastic imbalance in the use of our resources. It will make possible more new housing that we desperately need. The primary objection to this bill, so far as I have been able to ~isce:r:n, is based on some ~isbegotten notion that it represents an m~at1onary threat. On this score, allow me to make two main pomts. 1. Our economy in 1960 is not, and will not be, operating under the stimulus of generally excessive demands. We are not faced with inflationary pressures such as those which pushed prices up during the war and readjustment periods of the 1940's and earlv 1950's. Even optimistic forecasts of a gross national product of $510 billion for the year-reaching a rate of perhaps $520 billion in the fourth quarter-allow that unemployment will remain at 4 percent or more of the civilian labor force. Nor are even localized booms likely to caUSf bottleneck pressures on prices. While all indications point to a continued rise in plant and equipment spending, for example, we are not faced with the same kind of capital goods boom that we had in 1955-56. The economy will not be overstrained. 2. Helping the housing industry would not be inflationary at all. First, the industry faces a definite cutback in housing starts next year as a direct result of tight money policy. It will be substantially underemployed. The fact that housing starts held up well through last year should not be taken as contrary evidence. Most builders already had funds committed to them. There is always a definite Jag between the imposition of credit tightening and the visible effect on housing. This year will be different unless mortgage money is made available now. Secondly, a depressed housing industry is of little or no help in fighting price inflation. The resources-labor and materials-that are unemployed do not, in any significant measure, get transferred into other uses. During 1955-5'7, unemployment was high in the construction industry, building supplies were generally more tha:n abundant, and prices rose. On these two points alone, both of which are amply documented in any number of thorough analyses, there should be no objection to H.R. 9371 because of any alle2"0d inflationary threat. The sum and substance of H.R. 9371, then, is to provide some help for an important and underemployed sector of the economy. The approach is essentially that of selective aid to compensate in part for the discrimination engendered by a general tight money policy. It is a modest measure, a reasonable measure. It will not solve our national housing problem, but it may prevent it from getting ever more desperate. It is certainly not a dan~rous measure either from its potential effect on the price level or for any other reason. We hope very much that it will be passed by the Congress and enacted into law. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  111  Finally, Mr. Chairman, with all respect to your bill, we are compelled to say that whatever it may do to stimulate homebuilding, it does not come to grips with the conditions that have prevented our housing programs and our housing industry from meeting the housing needs of the American people. No one knows better than you that we require a comprehensive program on a scale not yet attempted in this country. These programs would need to be spurred by government-National, Stat~ and localthough not by any means entirely financed by government. The components of the present program do not add up to such an effort; the housing acts, including those of 1949 and 1954, have not accomplished what was hoped for them. Some of your 1959 proposals had great promise, and President Eisenhower's vetoes of them will come to be recognized as among his most uninformed and shortsighted acts. The consequences of not making an all-out effort are all too clear. The administration proposes to stand pat in 1960 while we lose another 2 years to the slums. Mr. Chairman, time is not working for us in this battle. Not only does our housing supply grow older, but we have an enormous increase in demand in the offing. In less than a decade the first of the big postwar baby crops will be grown men and women, forming families and having babies of their own. Beginning in the early 1970's we can expect something of the order of 2 million new families a year. This is an additional reason why housing seems to us to be an urgent and nondeferable need, and why we hope you will not confine your efforts this year to the bill now before you. Thank you very much, Mr. Chairman, and members of the committee. Mr. RAINS. Thank you, Doctor. I might say in response to the concluding paragraphs of your very fine statement that this committee has no intention of this being the only housing bill this year, and we recognize that a great many of the problems which you indirectly point out will have to be met in another bill, or in other bills, but we do feel, as I am glad to see that you do, that there is a need and a need now for this particular type of legislation. For one, and I am sure most of this committee, nothing would please us better than to get a long-range truly comprehensive housing program that will do the job and get the program in action. I want to thank you for your statement. Are there any questions i Mr. AooONIZIO. Mr. Chairman, I would like to compliment Dr. Soloway on his statement. It certainly was very outstanding, as far as I am concerned. Dr. SoLOWAY. Thank you verymuch,sir. Mr. A.Doomzrn. I agree wholeheartedly with what you have said. May I ask you this one question, Dr. Soloway': As you know, in 1958, we poured a billion dollars into Fannie Mae, and that is simply what we are trying to do here today. The administration, Mr. Mason, and others have indicated that in 1959 we had 1,300,000-some housing starts, and as a result of that 1960 looks very rosy. Federal Reserve Bank of St. Louis  112  EMERGENCY HOME OWNERSHIP ACT  Is it a :fair conclusion to say that perhaps the 1959 picture was made that way because of the action that this committee and this Congress took in 1958 ? Dr. SOLOWAY. I don't think there is any doubt, Mr. Addonizio, that that is a :fact-that it was the action you took in 1958 that spurred homebuilding, particularly in the early part of 1959, and gave us as good a record as we achieved. I think the description of looking at the housing picture as rosy is one I also object to personally, because I think even at 1.4 million, it is anything but rosy. It may be fine for the housing industry which has bee'n so ably represented before you here today, but in terms of the national need, it is still very insufficient, and I might say that the composition of housing is also terribly import~nt.. I thi~ there !:ias been proba~ly a lot more construction in housmg m the m1ddle-h1gh a:nd high-price ranges than there has been in the low- and middle-income housing through private financing that we need even more desperately than anything else. Mr. AnnONIZIO. Thank you, Mr. Chairman. Mr. RAINS. Mr. Widnall? Mr. WIDNALL. No questions. Mr. RAINS. Mr. Barrett? Mr. BARRETT. No questions. Mr. RAINS. Mrs. Sullivan? Mrs. SuLLIVAN. I think Dr. Soloway has made a very accurate and clear picture of what is :facing us in this problem, and I am glad to have heard your testimony. Dr. SowwAY. Thank you very much, Mrs. Sullivan. Mr. RAINS. Any questions, Mr. Miller? Mr. MILLER. No, sir. Mr. RAINS. Thank you very much for appearing before us, Doctor. We will stand in recess until 2 o'clock, at which time we will have His Excellency the Governor of California, Mr. Pat Brown. (Whereupon, at 12 :05 p.m., the subcommittee recessed until 2 p.m., the same day.) AFTERNOON SESSION (ThP subcommittee met, pursuant to adjournment, at 2 p.m.) Present: Mr. Rains (presiding), Mr. Addonizio, Mrs. Sullivan, Mr. Ashley, Mrs. Griffiths, Mr. Rutherford, Mr. Widnall, Mr. Bass, and Mr. Derwinski. Mr. RAINS. Our first scheduled witness is Governor Brown of California. He will be here, but has been slightly delayed. Since we have a full agenda, the committee will proceed with the next witness, and will suspend later to hear the Governor. Our first witness will be Mr. Herschel Greer, president of Guaranty Mortgage Co.; with him is Mr. Sam Neal. Come around, Mr. Greer, you may proceed with your statement.  STATEMENT OF HERSCHEL GREER, MORTGAGE BANKERS ASSOCIATION Mr. GREER. Mr. Chairman and members of the committee, my name is Herschel Greer, I am president of the G~aranty Mortgage Co._ o:f Nashville, Tenn., and I have been engaged m the mortgage bankmg business in that city for the past 30 years. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  113  I appear before you this morning on behalf of the Mortgage Bankers Association of America, I am the chairman of the legislative committee of that association this year. The Mortgage Bankers Association of America is a national trade association, membership in which is held by life insurance companies, commercial banks, savings banks, and other types of institutional investors in mortgages. However, the backbone of the association is represented by the membership of mortgage companies which originate loans in the localities which they serve and which sell those loans to nonlocal investors. The mortgage banker, therefore, is in the position of acting as the man who brings buyer and seller together and who thereafter represents the investor in its dealings with the borrower throughout the life of the loan. The mortgage barurnr is thus in the position of requiring for the continuity of his operations a steady and reliable market for real estate mortgages, whether those mortgages are so-called conventional loans or loans which are insured by the Federal Housing Administration or ·guaranteed by the Veterans' Administration. Any serious withdrawal from the market of institutional investors or fluctuations in the desire of investors to purchase loans is of the greatest concern to the mortgage banker. His servicing obligations run for the life of any loan he has already made. He must therefore sustain overhead and personnel expenses which do not vary signifi. cantly from year to year but tend to remain constant. A major dropoff in new business or substantial loss of revenue from this source jeopardizes his rubility to carry out his obligation under the servicing contracts. I should like to make it very clear that neither the mortgage banker himself nor the Mortgage Bankers Association of America likes "high" interest rates. The mortgage banker does more and better business when rates are low and if he had any choice in the matter he would always prefer this kind of an economy. But the mortgwge banker does not have any control over the situation and when for reasons beyond his control, the interest rate structure increases, the mortgage banker, if he is to serve both his own interest and the interests of borrowers who come to him as a source for funds, must endeavor to meet the demand of those who invest in mortgages for a market yield. Thus, a market rate of interest, whatever that may be, is what the mortgage banker legitimately strives for in the placing of loans on residential real estate. The gyrations in homebuilding in recent years have been frequent and violent. Such repeated changes do not encourage the development of a strong industry; they do not encourage continuous investment; they do not encourage capital growth or research or technical innovation. Such variations make forward planning tremendously difficult, and they interfere with efforts to reduce costs. In short, this situation has no more virtue for us than it offers to this committee. Almost everyone now recognizes that the real severity in the fluctuations in housing activitiy is concentrated in the areas where FHA or VA financing is prevalent. But it seems hard to arrive at any agreement as to why the fluctuations should be concentrated in these types of loans. Federal Reserve Bank of St. Louis  114  EMERGENCY HOME OWNERSHIP ACT  There is a tendency to use the term "tight money" as the scapegoat of the difficulties, and it is argued that this "tight money" situation is brought about by unseasonable activities of the Federal Reserve or the Trerusury or by other outside discriminatory influences. Mortgage bankers believe that the real reasons for the problems in :financing residential construction with FHA-VA mortgages principally mvolve two matters, first, the controls which are placed on interest rates on these mortgages, and second, the attempts to counteract the unfortunate results of the imposition of these controls by un... usual calls on Treasury financing. The past operations of FHA and VA demonstrate that when the general movement in interest rates produces a heavy discount situation in these mortgages, the flow of funds for these investments diminishes, and that when contrary movements eliminate or remove discounts, the flow of funds immediately increases. It can also be demonstrated conclusively that in the conventional home loan area, where mortgage interest rates move freely, with other interest rates, variations in homebuilding activity are reasonable. As Miles L. Colean, consulting economist for MBA and author of many publications in the housing and housing finance field, has pointed out: The attempt to support submarket interest rates on FHA and VA loans by the use of Treasury funds, instead of promoting stability, has added to the disruption. Each of the three postwar housing booms has been characterized by a heavy volume of mortgage purchases by the Federal National Mortgage Association after private funds were moving strongly into FHA and VA financing. This was so notoriously the fact in the pre-Korean war boom that Congress put FNMA out of ·business for several years. It was true again in 1954 and 1955 when the resuscitated FNMA gave support to the market when such support only intensified the boom resulting from the large flow of private funds eagerly seeking FHA and VA mortgages. It was the case once more in 1958 and 1959, when a special FNMA fund, available at a better than market price, was flooded into the swelling stream of mortgage money from private sources. Conversely, the periods of least FNMA activity have been those when, following the initial excesses, rising money costs began to work the automatic shutoff valve created by the rigid structure of FHA and VA interest rates. A reason for this is the difficulty of timing official actions to serve effectively as a balancin~ force. A good example is that offered by the 1958 experience. The action taken by Congress to pour a billion dollars of Treasury money into the market became effective in April after private credit had been easing for several months and after a revival of private FHA and VA financing was already taking place. The funds were exhausted at the height of the boom. thus contributing to the abrupt change in the availability of private funds as the interest rate structure moved well above the administered limits, especially that for VA loans. This sort of tinkering with the market also has some unfortunate side effects. ll'or example, in order to supply the mortgage market with the billion dollars that Congress instructed it to furnish to FNMA, the Treasury was forced to raise an equivalent amount in the financial market. Since Congress had also effectively prevented the Treasury from issuing long-term obligations that would be attractive to investors not primarily interested in mortgages, such as pension funds, the Treasury was forced to tailor short-term offerings that would appeal to corporate and individual borrowers. One of the inevitable results was the issue of last October, which drew from mutual savings banks and savings and loan associations savings of individuals which otherwise would hav-e remained available for private mortgage investment. It would be difficult to devise a more ingenious method for defeating an objective.  The Mortgage Bankers Association of America has, :for many years, in its published statements and in its testimony before various congres- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  115  sional committees, consistently repeated its own beliefs that legislation which in the past has, in our opinion, produced unfortunate results, should not be repeated. In this 1953 statement of policy, the association made the :following statement: In no instance, in our opinion, should the Federal Government continue its program of supporting what is in effect a submarket rate on FHA and VA loans by authorizing additional funds for the direct purchase of such loans by the Federal National Mortgage Association. Unless a marketable rate is permitted, the demand for additional FNMA funds is bound to produce a problem in the near future with the result that the Treasury will be called upon for additional deficit financing to supply these funds.  In its 1956 statement of policy, the :following appears: In the home loan field, the same law of supply and demand operates. When Congress fixes the interest rate which can be charged on an FHA or a VA loan it prevents that rate from becoming an attractive rate when the supply of money contracts. This automatically drives investors from the market at a time when they are most needed in it. It erects a barrier which blocks off from the prospective homeowner a stream of money which might otherwise be competing for his business. Obviously, Congress neither wants nor intends to control the entire money market, but so long as there are enormous areas in the market which are free to :fluctuate in response to the supply and demand of money, then investors will leave the home financing field whenever controlled rates make this field less attractive competitively. Congress will do well to face this issue squarely. Whatever its good intentions may be, it does not serve well the interest of the prospective homeowner, veteran or nonveteran, by controlling the rates on FHA and VA loans. The money market must have some means of moving up and down in the home finance field, or there will be times when investors will move out. Congress should encourage the maximum competition among investors to lend by lifting the controls over interest rates on FHA and VA loans.  In its 1958 statement of policy, the association related these earlier stated principles to proposals to extend the operations of the Federal National Mortgage Association. This statement reads in part as :follows: There remains the question of the extent to which a special source of reserve secondary credit may be desirable. In 1953, the President's Advisory Committee on Government Housing Policies and Programs concluded that there was a place for an instrumentality that could deal in insured or guaranteed mortgages, such an instrumentality could help to even out the seasonal and cyclical variations in the availability of mortgage funds, with particular reference to areas remote from the main centers of capital supply. The Mortgage Bankers Association concurs in this finding. It agrees that, if operated with restraint and with charges high enough to discourage its misuse, a secondary market facility can be an appropriate means for relieving private lenders from extreme financial losses and from preventing building activity from suffering a sudden withdrawal of credit. There is danger, however, that builders and mortgage lenders may be encouraged by the availability of a relatively painless method of escape from their own indiscretions to proceed with substantial operations in advance of ctbtaining firm commitments from investors. Such a misuse of the facility will result in an infusion of short-term credit into the mortgage system that, under" some circumstances, may have serious inflationary effects. The assocfation therefore accepts the principles that: (a) a secondary market agency should always exact some penalty in order to prevent its misuse and overuse, ( b) ill should not be used to support an artificially low level of mortgage interest rates or inherently unmarketable mortgage programs, and (c) it should involve no continuing claim on the Treasury but should provide for its support and ultimate ownership by those who benefit from it. In line with these principles, the association asserts its conviction that the first prerequisite to a sound secondary market instrumentality is the achievement of a sound mortgage insurance system operated freely in a free financial market • • • Federal Reserve Bank of St. Louis  116  EMERGENCY HOME OWNERSHIP ACT  Therefore, in line with its beliefs an<i its earlier policy, this association would oppose the enactment of those sections of H.R. 9371 which do violence to the principles enunciated and which would continue the difficulties we have already experienced, by what we consider to be an unwise effort to stimulate activity in the home construction effort by a further infusion of funds into FNMA or by an expansion of its activities below cost. The sections to which we would offer objections are section 4, and sections 6 through 12. _section 3 of the bill would require FHA to reduce its insurance premmm charge to one-fourth of 1 percent. Representatives of the Mortgage Bankers Association of America have on many occasions in the past discussed with FHA officials whether the operations of the program to date justify a reduction in the current insurance premium, now fixed at one-half of 1 percent. To date FHA officials in their discussions and by the evidence which they have produced, have demonstrated to our satisfaction that there is no reasonable method of determining whether the insurance premium can safely be reduced. Therefore, since borrowers do receive a return of that part of the premium they have paid which turns out to be an excess charge (the insurance program is a true mutual system), it would be the opinion of this association that Congress would not be wise to require FHA, over its better judgment, to reduce its insurance premium. There are other sections of the bill the purpose of which we do not disagree with; which the association can affirmatively support and would favor the enactment of with certain appropnate comments. These are as follows : Section 2 of the bill would permit FHA to approve individuals as mortgagees. The association recognizes the difficulties that FHA would face in approving an individual as a mortgagee. Approved mortgagees have many regulations with which they have to comply; they have obligations in the handling of borrowers' funds. While the association does not believe that the inability of individuals to own FHA loans has prevented in any significant way the effective operation of the FHA program, nevertheless, ·any action which would broaden the market for FHA loans, however little, should be help-fup-provided, that appropriate safeguards, both -for the FHA, which has an insurance obligation, and for the borrower, are provided. Perhaps this might be handled by a requirement ,that be-fore an individual could own an FHA loan he would have to contract for the loan to be serviced by a corporate approved mortgagee throughout its life, which cooperate mortgagee would be responsible to FHA for the handling of the loan. Whether this is the answer to the nroblem or not, a recognition that nroblems do exist, should be in the mind of the committee before section 2 is enacted. Section 5 of the bill would require the Federal National Mortgage Association, for a 1-year period, to purchase any mortgage insured by FHA or guaranteed by VA, unless the loan was in default or in iminent danger o-f default or unless the loan was beyond the age specified bv FNMA or the title to the property was defective. The Mortgage Bankers Association of America has consistently, in its discussions with FMA officials, objected to the second guessing o-f FHA and VA by that organization, and it has on many occasions Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  117  pointed out to FNMA what it regards as capricious decisions by FNMA field offices as to "·hether the association will or will not purchase a particular loan. It has always seemed to the MBA members that if one Government organization is willing to insure or guarantee a loan, the contract of insurance or guarantee should be evidence of the soundness of the loan, and that if another Government agency considers, after investigation, that loans are not soundly made, the proper corrective action is to insist that the insuring or guaranteeing organization correct its system, rather than to refuse to buy loans. A loan which FNMA refuses to buy is often so tainted that no other investor will purchase it, or it must be marketed at such a discount as to give a totally false picture of what the loan is really worth. Therefore, the Mortgage Bankers Association would support the enactment of section 5, provided that it was clearly understood that in making purchases, FNMA should the authority to reflect in the prices it paid for such mortgages, its own considerations of the marketability of the loan. Section 13 of the bill would require an originating mortgagee to report fo the FHA or VA the amount of any fee, charge, or discount paid in connection with an FHA or VA loan. While such reporting would add to the volume of other reports which an originating mortgagee must already make and increase the cost of doing business, this association believes that all of the facts in connection with the making of a mortgage loan should be available for public inspection, we would have no opposition to the enactment of this section of the bill. However, we should like to point out that the originating mortgagee should have the opportunity in making such reports of demonstrating for whose benefit the discount or fee or charge was received, that is, the report should indicate what part of such fee, charge, or discount was retained by the originating mortgagee or was required to be paid to others in order that the loan could be marketed. Thank you, Mr. Chairman. Mr. RAINS. Thank you, Mr. Greer. If you are not in too big a hurry, we will ask you to stand aside. We would like to ask you a few questions, but we see the distinguished Governor of California has come in. If you will wait for us, I have one question that I would like to ask. There are several members from our parent committee, the Banking and Currency Committee, who have come in, distinguished members. I want to recognize Mr. Brown, who is always my leader, Mr. Patman, Mr. Byron Johnson, Mr. Clem Miller, Paul Fino, and these other gentlemen are members of the Housing Subcommittee. I am going to ask now Mr. Clem Miller from the great State of California to present his great and distinguished Governor. Mr. MILLER. The Honorable Edmund G. "Pat" Brown from California. We should regard it as a great honor to have Governor Brown before the committee today. He comes here because California today is building more houses than any State in the Union, and those areas not occupied by houses have trees growing on them, and we depend on those trees for the construction of our houses. Therefore, what happens to housing in California determines to a great extent the Federal Reserve Bank of St. Louis  118  EMERGENCY HOME OWNERSHIP ACT  profit of our economy in the State of California and through much of the West. Of course, we in the West, realize the interdependence of all sections of our country. Since Governor Brown realizes the pivotal nature of the housing problem he is appearing here today to testify on this very vital bill which you have introduced. Mr. RAINS. As a fellow Democrat from the great State of Alabama, I want to welcome you and tell you that I have admired very greatly, as I am sure many other people have throughout the Nation, the fine job you are doing as Governor of the great St.ate of California. I want to tell you on this side sit the Democrats to my right, and to my left sit the Republicans. They join in this warm welcome to you. We are delighted to have you, and you may proceed with your statement at this time, Governor Brown. STATEMENT OF HON. EDMUND G. BROWN, GOVERNOR OF THE STATE OF CALIFORNIA Governor BROWN. Thank you, Mr. Chairman, and thank you Clem, for your very nice introduction. I do appreciate this opportunity to appear before your subcommittee, because the problems you are considering with respect to housing are part and parcel of the problems of a Governor in a State like California where we have such tremendous growth, and I hope before I get through I can lay down a few of the priuoiples involved in those problems. As Governor of California, with the largest overall population increase in the Nation, I want to urge just as strongly as I can the need for reexamination of present Federal policies having an injurious effect on our home construction requirements. In California, as I am sure you know, the problems that face the rest of the country are greatly magnified. The one overriding fact of life in California today is growth-exploding growth. Let me give you just one dramatic explanation of what we are facing out there. In a period from 1870 until the present time, we have developed a great university, the l.7niversity of California, and we probably have now around 50,000 students in the University of California at Berkeley and the University of California at Los Angeles. Within a period of 10 years between now and 1970, and we have to start immediately, we have to double the capacity of that university. We have to make preparations for children in the schools today, right in the grammar schools and the elementary schools to take care of 50,000 more during the next 10 years. In addition to that, we have to build 10 new State colleges, and we are about ready to; so that we will have some coordination in all upper education, we are going to have to subsidize the junior colleges that have been previously financed by the local school districts, but we are going to have to take that over to encourage them t.o build junior colleges to relieve the pressure on the universities, and when you see it in the university, we have the same problem in mental hygiene, elementary schools-we have to build one new elementary school a day for every day in the year including Sundays during the next year, 365 days, and along with that we are trying to build a water system out there. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  119  The !egislature, after a tough fight, and by bi-partisan work, by the assistance of a Republican Strute senator in southern California, working together we were able to bring together this great water program of $1,750,000. We have gotten into sectional difficulties, but not partisan difficulties. You can see thrut in a State like California, we do have tremendous problems. The population has risen from 13,035,000 in 1955 to an estimated 15,830,000 in 1960, an increase of just about 2,800,000. To make this dramatic, we anticipate having seven new Congressmen from California after the reapportionment next year. "Where they will come from, I don't know. That compares with an estimruted increase in the same period of just under 15 million for the country as a whole. In other words, we gain 3 million of the 15 million. We are growing more than the national average. The percent of the total population has risen from 7.9 in 1955 te 'an estimated 8.8 in 1960. We are not frightened or overawed by this development. As a matter of fact, we welcome it. Anybody that wants to come to our State we want to make life as comfortable as we can for them, whether it is in housing, roads, schools, or anything else, but it does take some planning on the part of government. But it does pose problems. Adequate decent housing for our people at prices and interest rates that fit their ability to buy is one of them. My daughter married and moved up to Sacramento, up to the State capital. We moved up there and bought a home. Interest rates went up. Someone told me the increased cost was tremendous merely by reason of this increased cost in interest. In my opinion, our people have the right to expect positive action by their Government to assure the economic health of the Nat.ion. They most certainly have a right to expect that Government, by its action, will not impede progress. Yet that is precisely wha,t policies of the Federal Government have been doing in recent years. Tight money and high interest rates have made it more and more difficult for the small borrower, the potential home buyer, to compete with large bidders in the money market. The big borrower has run into difficulties, ,too. The big water bond issue is an example. It has been said the fact is that interest rates are so high it will treble the cost in a period of 50 years. Whether tha,t is mathematically true or not, I am not prepared to say, but you can see the deterrent effect. Here we only have two sources of money, either to increase the taxes or to borrow the money, and if we borrow the money we have to pay these high interest rates, and those that are against growth use that as an argument against borrowing money. On the other hand, if we try to raise taxes we run into the same arguments in that direction. The only alternative we have is to move ahead with taxes or bond issues, and hope and pray that the situation takes care of itself. The tight money, high interest policies of the Federal Government have had serious economic effects not only on home buyers but on the homebuilding industry, and this is an industry which has a major impact on our entire economy. Federal Reserve Bank of St. Louis  120  EMERGENCY HOME OWNERSHIP ACT  Under conditions prevailing now, it is predicted by authorities i11 the industry tha.t housing starts will drop 200,000 from 1959, and I think it might be well to point out that this doesn't mean merely 200,000 fewer jobs for our people; it means as many as 500,000 loss oi' jobs in the State of California. I submit to you that these serious fluctuations are imposing tremendously burdensome high costs on the home buyer, and on the homebuilding industry. Furthermore, they have had widespread repercussions in other segments of our economy, causing damage and disruption among producers and suppliers of cement, lumber, bricks, steel, plumbing, everything that goes into the building of a house. Let me give you another example of the effects of these high interest rates in our own State. Applications filed for new home construction with the San Francisco Federal Housing Administration office in December of 1959 were 25 percent below the number filed in December of 1958, and this despite an increase in the population of 400,000. The true effects of that decline will not be felt until probably March or April, but at the same time there will be 5,500 fewer homes being prepared for occupancy by our people in that northern California area than there were at the same time in 1958, and the same situation is comparable in southern California., and in the great central valley. With the tremendous rise in population that I have mentioned two or three times, neither Califorma nor the Nation can afford the sho1tsighted policies which lead to such a condition. I want to note, too, that while conventio;nal home financing; is growing, with a consequent rise in the cost of money that is hurtrng home sales, the trend is away from FHA loans, and the future of Veterans' Administration loans seems to be cloudy, at best. In the 25 years of existence of the FHA, I am informed that it has financed 6,200,000 housing units. It has enabled 5,400,000 American families to become homeowners, 2,900,000 of them owners of new homes, and it has done all this while repaying to the Treasury all money borrowed, with interest. Will we be able to cite comparable figures 25 years from now, or even :favorable progress figures next year or the year after that, if the present tight money, high interest policies continue? In the past year the interest rate on a typical conventional home loan in California has risen by 1 percent, and is generally at 7.2 percent. That doesn't seem very much when expressed that way, but to the average California family it means more than a year's pay added to the cost of a $15,000 30-year loan, and when I think that in California we have mised the taxes, p~t a 3-cent tax on cigarettes, increased the tax on the horseraces, we mcreased the income tax in the range above $10,000-not very much-but every single increase is a tax 011 every individual in this State, but it is not going to the public in t~e :form of be~ter S<:hools, m~re_ m84ical_ facilities, more mental hygiene help or thmgs like that; it is going mto the banking business that very frankl~ tell m~ that they have done very well over n period of years and don t need it. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  121  Now, this is an anomoly that I can't understand, but I see it sitting there in Sac.ramento. For the Nation as a whole, the outstanding consumer debt rose 14 percent in the past year, three times the increase in personal income. At the same time there has been a great increase in the use 0£ second mortgages which is rapidly changing the entire climate £or home buyers in California. Secondary mortgages are an increasing problem, and constitute an element 0£ insecurity and instability in the housing field. As Mr. Robert MacDuff, Director 0£ FHA in San Francisco says in his staff report 0£ January 22, 1960, "Any material drop in the real estate market would probably result in panic conditions in this secondary mortgage market," and that 0£ course could have an effect upon the primary mortgage market, too. I also think it is worth noting that the decline in housing starts from 1955 to 1957 was a significant £actor in the 1958 recession. The 1958 rise in housing starts was just as significant a £actor in the recovery from that recession. The Emergency Housing Act 0£ that year permitted FNMA to invest $1 billion in home loans under the FHA and Veterans' Administration programs, and was a substantial item in the recovery. Congressman Miller knows it in the Redwood area where he comes from, when they started building homes in San Francisco and Los Angeles. You have before you today similar legislation. With your chairman, I believe we cannot wait for another recession before taking positive steps to stem the present downward trend in homebuilding. Congressman Rains has previously pointed out that each of our postwar recessions has been more severe than its predecessor. We cannot run the risk that the next will be more serious than the last by postponing action to correct any flaws that may exist in our economy. The downturn of housing is one of those flaws and we must act now. I think, too, we ought to go 'beyond the emergency financing of home loans to ease the present situation. We ought to take a long range look at the policies which have brought us to this point. The medicine of emergency financing will relieve the present pain, but more serious measures are required if we are to meet the underlying problem and the needs. I want to again express my appreciation for permitting me to read this prepared statement to you, and I know that your deliberations, no matter where they lead, wil lbe undertaken with the best interests of the Nation and of our people in mind. Thank you very much. Mr. RAINS. We want to thank you, Governor. I have only one or two comments to make. I think your statement is a most excellent one. No place in the Nation is the need more definitely pointed up than in California. The committee has had the privilege on several occasions of visiting your State to 'See the housing conditions generally. One place we· haven't been privileged to visit yet is San Francisco, but we intend to 'this :fall, so when we come out we will look you up. Governor BROWN. Let me know you are commg, and I assure you I will make it very pleasant for you. Federal Reserve Bank of St. Louis  122  EMERGENCY HOME OWNERSffiP ACT  Mr. RAINS. I want to pass around to the members of the committee any questions they have of the Governor before I ask my next question. The first gentleman could well ·be a cousin of yours, a statesman of the highest rank, my friend, Congressman Paul Brown of Georgia. Do you have any questions 1 Mr. BROWN. I have no questions, but I might say that if he keeps up a good argument like this, he could wind up in the White House. Governor BROWN. Thank you very much. Mr. RAINS. Mr. Addonizio. Mr. Annomzio. I don't have any particular questions, but I would like to point out to the Governor if he does get into the White House he may find more cousins than he realizes. Governor BROWN. This is an unexpected pleasure, gentlemen. Mr. RAINS. Mrs. Sullivan of Missouri, do you have any questions 1 Mrs. SuLLIVAN. No questions, Mr. Chairman, except that I am delighted, also, to see the Governor and to hear him, after reading about him so much. Governor BROWN. Thank you. I hope you come out to California with the chairman. Mr. RAINS. Mr. Ashley. Mr. AsHLEY. Governor, you pointed out that the present interest rate on conventional loans is 7.2 percent on the average in your State. I was in San Francisco not long ago and talked to some of the commercial bankers there, and they tell me that even at this interest rate they are not a bit interested in lending, that they are not a bit interested in mortgage credit. Is this the general situation throughout California 1 Governor BROWN. Well, I know that the banks would like to help in mortgage financing, but they just have more attractive loans, that is all there is to it, and it is a real problem. They just can't do it, they haven't the time nor the money to do it. Mr. AsHLEY. They said they might be interested if the applicant was a client of theirs, and if he had 10 to 15 percent down, and wanted a 15-year amortization period, they might possibly be able to give him some service, but, as you point out, beyond that they were quite frank in saying they could make a lot more money other than in mortgage loans. I was surprised at this. This is certainly something that we don't have yet, at least in Ohio but I was just interested to know whether this was just around the San Francisco area or whether this tends to go pretty much across the-State. Governor BROWN. I think it is general throughout the State. Savings and loans are doing a great deal of lending, there is a great deal of second-mortgage financing, as I said. I can't give you any specific figures on it, but the banks tell me that they just don't want this homebuilding loan in California. Why, I don't know. I am not enough of a banker to answer that. Mr. AsHLEY. WeJl, they weren't, either. Thank you very much. Mr. RAINS. Mrs. Griffiths, of Michigan. · · . ~frs. GR~FFITHs .. No qu~tions, but we are very happy you came, and it is very mterestmg testimony to point out, Governor Brown, your great need. I hope we can help you. · Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  123  Governor BROWN. Thank you. In connection witJh those problems of financing that we have in California, I am seeking answers. They are not easy at all, please believe me. A State can't do these things alone. National policy with respect to loans, with respect to interest rates and fiscal policy, have a direct effect upon every individual within my State. Mr. RAINS. Mr. Rutherford, of Texas. Mr. RUTHERFORD. Thank you, Mr. Chairman. I might say with due respect I cannot share in this, often-mentionedhere White House possibility, because I am from Texas and I have a candidate myself. Governor BROWN. I think it is about time for me to make a statement on that. Mr. ASHLEY. Everybody else has. Governor BROWN. I am not a candidate for the Presidency. I am just trying to lead a good group of Democrats to that Democratic convention to take care of another Californian, Mr. Nixon. Mr. WIDNALL. We are happy to have your endorsement. Mr. RAINS. Mr. Patman, of Texas. Mr. PATMAN. I have no question, Mr. Chairman, but I do want to congratulate tJhe Governor on a very fine statement. I think you brought out the real issues when you said the high interest rate is retarding construction of homes, and also schoolhouses, Governor. It was a very fine statement. Mr. RAINS. Mr. Johnson of Colorado. Mr. JOHNSON. I was interested in the Governor's statement about the need to build a school a day. We 'have just been discussing, on the House floor, the Joint Economic Committee's support for Federal aid to education. It seems to me if we were to give such aid and thus take some of the pressure off the bond market, we might get this interest rate down. It strikes me that all of us, on both sides of the aisle, are interested in a sound economic program and ought to be recommending that schools be built out of tax moneys, including Federal grants-in-aid, rather than haye ~he :federal Government tell you to go and put your local school d1str1cts m the bond market and raise the cost of these schools both to ourselves and to our children. Would you agree with that, or would you care to add to your comment about the cost to the State and local governments of the public work that you do have to finance out of debt i Governor BROWN. Well, I support the Federal aid to education in every way, I forget the name of the bi'll-the Murray-Metcalf billbecause they came to me the other day, to give you an example of what we are up against, the school people, and they want us to put a bond issue on the election in November, call a special session, for $250,000 to lend to local school districts, let the State pledge its entire credit for that purpose, and we will have to do it because you can see with building one school a day how much it costs. I can't put it on the ballot at this time because I have another one for $1,750,000, and I am afraid I will kill both of them if I put them both on the ballot at the same time. We will probably put one over, or I hope we will, and then we will move in on the second one at a special elootion in California the following year. 50876-60----9 Federal Reserve Bank of St. Louis  124  EMERGENCY HOME OWNERSHIP ACT  A governor is very reluctant to borrow money on these high interest r.ates over a long period of time, not knowing whether there will be a change in this fiscal situation maybe sometime in the immediate future, and so you hesitate. You don't move ahead with these things. Now, I realize that a government can't do everything it wants to do. We have an inflationary spiral we are trying to take care of, too, but it does seem to me there must be some other way of doing it than the high interest rate, putting the penalty on those that can least afford to pay it, those that have to borrow money. Mr. JoHNSON. There has been a $6 billion increase in consumer credit. The highest interest will be paid by those who are borrowing for the shortest terms and for the most frivolous purposes. The administration has refused to face this issue squarely, and so the banker who tells our friend that he will not make a housing loan is saying that, partly because he can get more than 7 percent on the consumer credit. The Banking and Currency Committee should raise the question as to whether we are right in permitting unrestrained use of a scarce item, capital, for frivolous purposes when education, for instance, is in need of such capital. · Would you care to comment on whether or not the Government ought to have a priority program as to which is the more important use of capital? This would be a good chance to do so. Governor BROWN. I am afraid you might get me into something I can't completely answer. It is a tough problem. I have an economic development agency out there that is helping me with it. I wouldn't be in a position to answer those economic questions today. I try to understand it. I can remember Mr. Patman coming out to San Francisco and giving some talks on money out there some years ago when we had a conference out there. It was very good, and I understood it at that time, but I can't keep up with it. I have to do a little crash work on it before I testify on these things. Mr. PATMAN. Might I add one footnote, Mr. Chairman? Mr.RAINS. Yes. Mr. PATMAN. I happen to be on the committee, and this report recommends Federal aid to education without Federal control. · Governor BROWN. That I agree with completely. I don't see any reason why that is necessary at all. Mr. RAINS. Mr. Widnall, of New Jersey. Mr. WmNALL. Mr. Chairman and Governor, we on the Republican side are also happy to have you here as a witness and welcome your remarks. Since you have just been elevated to the White House rather quickly, I would like to get some comment from you as to what you would ~o with respect to monetary restraints and other action to still inflationary pressures. I note Saturday night you were critical of the administration's monetary policy, and I think it is only fair to ask you, first of all, would you have the Federal Reserve reduce discount rates? . Governor BROWN. I really feel there should be :further control over those discount rates. How far I would go with governmental control without controlling other things I am not prepared to say, but I do believe that we could increase the gross national product, we could Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  125  get more money. I think we could cut out some of the exemptions. we have, some of the loopholes in taxation, and I think we could take up the slack in that way, and whether there should be any co·ntrols on credit, I wouldn't want to give my definitive answer on those things. I do feel that the way the administration has handled it, from all I have read, is probably the least acceptable, because the burden falls upon the people that can least a:fford to pay it. Mr. WmNALL. Do you have a similar interest rate ceiling on your own government financing? Governor BROWN. No, we do not. Of course our whole governmental financing is dependent upon the Federal financing, whatever the rates are here in the East we have to pay in the sale of our bonds. I don't know what kind of ceiling we could put on in California that would mean anything. Mr. WmNALL. Well, you last financed $100 million for 4.01 percent, I believe. Governor BROWN. That is the last bond issue we sold, yes. Mr. WmNALL. Which is considerably less than it costs us to finance on the Federal level. Why isn't it better from the taxpayer's standpoint to have it handled on the State level rather than the Federal Government level? Governor BROWN. I don't know why the Federal Government is paying more than 4.01. Mr. WmNALL. Because of supply and demand, plus the fact that it does not have free play in long-term debt financing. There is plenty of evidence to show if the 4¼ percent ceiling were lifted, we would be able to finance cheaper today on a long-term basis. Mr. RuTHERFORD. Was that a tax-exempt bond, that issue? Governor BROWN. Tax exempt, that is right. Mr. RUTHERFORD. That would explain the difl'erence. Governor BROWN. Guaranteed oy all the credit of the State of California. We have to pay 4-point-plus for the borrowing of this money. It seems to me the Federal Government should be able. to control the interest rate a whole lot better than that rather than let it move into the free money market. · Mr. WmNALL. I was shocked to learn, Governor, that under your constitution the State usury limit is 10 percent. Now, do you think that is necessary to have a 10-percent usury limit? Governor BROWN. Yes, I do. I think we have to have·usury statutes to protect the borrower, whether it should be 10--· Mr. WmNALL. Don't you think that is unconscionably high, 10 percent? . Governor BROWN. Well, I con't tell you the exact figures on the usury rate, but it is somewhere in that neighborhood, and we have raised it recently in certain fields of lending, but it has been that way in California for the last 25 years, anyway. Mr. WmNALL. .I felt when I heard about that, you being critical of interest rates paid on a national level and in the mortgage field, that certainly that does seem like a high legitimate rate in your State'. Governor BROWN. That is not the ra¼ th~t people ordinarily pay. It becomes a crime to charge more than that, and there are people that are in extremity that Iieed money, or the security is so poor that:they do get it. Federal Reserve Bank of St. Louis  126  EMERGENCY HOME OWNERSHIP ACT  Mr. RAINS. I would like to point out to the Governor., and some of our members of the Banking and Currency Committee, that the present FHA-insured loan, the credit of the Federal Government back of it, is bounding against and breaking usury laws in two States already-Maryland and Tennessee-and according to homebuilders there are I forget how many more in which Government mortgages, guaranteed by the Government, are about to violate the usury statutes. I would also like to point out-and I think I know this from my observation-that in California, not being a primary money market as New York or Chicago, is that interest rates are generally higher in California, and that you get pinched even worse in California, as we do in the South and Southwest, than you do in the metropolitan money centers of the country, isn't that correct i Governor BROWN. Yes, it is. I spoke with Governor Rockefeller 2 or 3 weeks ago, and he says he pays considerably less on their bond issues than we do in California. The reason for that I can't tell you. We have tried to sell our bonds, we have a fiscal policy in California balancing the budget, so there is no reason why we shouldn't be able to have good credit, but we had to postpone for the first .time in the history of the State $100 million worth of veterans' bonds. We have a veterans program there, and we had to postpone this for 60 days, and a construction bond issue of $50 million, because we were paying so much more than the national average so we postponed it. The second time it came up, we were ciose:r to the national average, but of course the highest we have ever paid in the history of the State of California, I think except back in 1927 or 1928. Mr. WmNALL. To come back to my previous line of questioning, Governor, the breaking of the usury ceiling in Tennessee and Maryland, when they added to a 58/4-percent interest rate, a half of 1 percent charge for FHA insurance, and that is in the courts now as to its legality. Actually they were talking at that point about a 6~percent usury ceiling, not a 10-percent usury ceiling. Mr. RAINS. Mr. Derwinski of Chicago, Governor. Mr. DERWINSKI. I will have the opportunity of attending a dinner in Chicago with your fellow Californian, the gentleman who is now our Vice President, and I think it is fair to sa.y he has t>lans to occupy the White House next January, so I know at the time you will be happy to be in Sacramento. Governor BllowN. His chance is better than mine, though not far better than that of the Democratic Party. Mr. DERWJNSKI. Also, if you don't mind a rather personal question, the rumor has been circulating about the congressional offices here that should you be elected President, you are thinking of naming Mr. Patman as your secretary-treasurer. We would miss him~ Governor BROWN. I don't want to make any commitmen~, but I can't think of anyone better. Mr. DERWINSKI. We would miss him on this c.ommittee, and I am sure the people of the country would unders~and if you permitted him to remain in Congress. I have a question, though, Gover.nor. I followed iour statement closely, and if you don't mind an observation, I don t qujte understand what direct relation it has to th~ legislation we ar~ q.i~ussfog, Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  127  to be specific just how this so-called emergency legislation would help you in Califomia. Could you be a bit more specific? Governor BROWN. I think if this legislation is passed that it will make it easier to borrow money for homebuilding in Califori1ia, and in that way it will help the entire situation. Mr. D~wINSKI. vyen, now, let's j~st_ assume for the J?.Urposes of conversation that this so-called $1 b1lhon emergency will pour $1 billion into the home-financing industry in 1960. One billion dollars would be 3 percent of t~e $32 billion that was inyested in mortgages of, $201000 and less than m 1959. Therefore, thIS so-called emergency which we are working with would be alleviated in effect by just 3 percent, and if so, it would still be with us. Governor BROWN. Well, I think even though it is only $1 billion, and with the tremendous rise in the gross national product of our country, it wouldn't be very much, but it has an expanding value, too, and anything that would help, any people that can buy new homes that can borrow money that would ease it at all, I think to that extent would be good, anyway. What is the alternative, do nothing, let it go on the way it is, keep the housing loans going down, and people not building that want to buy homes, and postponing that as against a few more, or if you say only 3 percent, I haven't those figures, but even if you are correct, 3 percent of 10 million families is a substantial number. Mr. lliRwrNSKI. Well, Governor, let me differ. First of all, the administration specifically is not holding down home construction. As a matter of fact, 1959 was the second greatest yei:tr in the history of the country in home construction. It certainly doesn't follow 1t would c~ate an em~rgency, a~d I believe yo~ will find if Y?U check nonpartisan economists you will find that it is Government mterference that causes the undue fluctuations in home financing, and you will also find that it is Government interference that generally is, if I may use your term, the "depressing effect" on homebuilding. The less Government interference we have, you will find that our private industry through the imagination of our businessmen, homebuilders, and financiers-manage to get the job done. Now, for example, we discussed earlier the problem of your banks and their seeming reluctance to participate in home financing. Of course, there is a natural reason for this. The type of investments that a bank is called upon to make limits the amount of funds it could tui'n into home financing. We understand that is the nature of banking, but you will also fuid this. We find that the higher interest plateau in California has a detrimental effect on the supply of funds that we have available in Chicago, because your savings and loan associations in California are advertising rates in Illinois that the Chicago association can't compete with; and they are drawing money from Illinois and from other cities out to California; so this is the other side of the coin. It is too bad you weren't here yesterday. You would have been interested in the comments by some of our members here. The high interest rates are blamed for all the problems in the country, and you would think that interest, as such, is basically evil. You have to appreciate the fact that there are also people receiving a return on investments; and as the interest rates go up, the people that are Federal Reserve Bank of St. Louis  128  EMERGENCY HOME OWNERSHIP ACT  investing-the prudent people who have invested their savings in those types of investments receive, in turn, a higher return; so, that it is not a one-way street, there are compensating factors. Governor BROWN. Mr. Congressman, what would you do if you were Governor, though, of California, needing these things, and you can't get any more taxes, and you find that the interest rate is slowing down the repair of the public plant~ )Ve have to move ahead on these things just like private capital is moving ahead, and we find out that the loans are moving into the private field. Now, I don't believe in governmental interference probably any more than you do unless a real emergency exists, but it does seem to me that in this situation one of the purposes of Government is to balance that wheel a little bit; and the high interest rates have attracted money into the larger plants, the people that can pay a substantial premium for the money, and the public plant that can only raise their money by taxes are either delayed, postponed, or something else. Now, you talk about nonpartisan economists. I find that there aren't very many nonpartisan economists, and I know I will share with you, like I do with ps:y:chiatrists-I cllJl't understand them, sometimes : one psychiatrist will testify they are sane, another one that they are insane, if you have had anything to do with psychiatrists in the law. The same is true with economists. I have listened to Dr. Galbraith and Keyserling. I see the President's economists and I see the President's economists that have left, so I say to you that when the penalty-when you are slowing down the right of people to buy homes and you are slowing down the public plant, the Government ought to take another look at what they are doing. That is the only thesis that I am trying to develop here today. Mr. DERWINSKI. Let me ask one more question. Mr. RAINS. Let's move along, we have two more witnesses, Mr. Derwinski. Mr. DERWINSKI. One more question, Mr. Chairman. I still would like to be shown-maybe the chairman will do it some day~just where this emergency seems to exist. How can you claim that in the year in which you had the second highest number of housing starts you have this sudden emergency ? Don't you think there is a discrepancy in the interpretation of statistics ? Governor BRJOWN. Well, when you have 400,000 more people in the State and you have more children coming along, and you have less people making applications for loans, that seems to me to be a real emergency. I think that people should be able-it is certainly a good thing for the country. It has been my observation, when they buy these homes and move into the bedroom areas of California, they become Republicans, too. They are Democrats until they get the loans and then tihey become Republicans after they get down there. You should be for it. Mr. DERWINSKI. Just one last point, i:f I might make a personal suggestion. You have been serving now a little over a year, and I imagine you have attended some of the Governors' conferences. I would suggest that you take this in the spirit in which it is given-that on your way back to California you stop in and visit Governor Hanley Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  129  of Indiana, or my own Governor Stratton, and they will explain to you tihe hard work they have put into a program whereby they could have the Federal Government .start returning some functions, even taxes, back to the States where you Governors can do a better job of administration. Governor BROWN. They spoke at the Governors' conferences and Rockefeller disagreed with them, and we Democrats sat back and listened to the Republicans dispute these problems, very frankly. I would be glad to talk to anybody that could help. Mr. RAINS. Mr. Fino, of New York. Mr. FINo. Mr. Chairman, I don't have any questions. I want to make one observation. I think I heard part of your statement, and coming from the State of New York, I was wondering whether Rockefeller would agree with you that the State of California was first in homebuilding? Governor BROWN. I think he would if he knew the facts in the situation. Mr. FINO. I think he knows the facts. Mr. RAINS. The record is that it is. The Housing Agency sets up the record that it is the Governor BROWN. I think it is true, because we have more of a moving population in California. Mr. AnooNIZIO. I thought Texas was first in everything. Mr. RAINS. Are there any further questions? I see my friend Mr. Vanik. Do you have any questions or comments? Mr. VANIK. I have no questions. Thank you very much. Mr. RAINS. Governor, we are delighted that you would take time out of your busy schedule to come here and give us your viewpoints. We have our differences, as you well know, but that is the way we try to do a good job for the people, and we hope we can. Thank you very much for coming. Governor BROWN. Thank you for your courtesy. Mr. RAINS. We will take a break for a couple of minutes. ( Short recess ,taken.) Mr. RAINS. The committee will please be in order. FURTHER STATEMENT OF HERSCHEL GREER, MORTGAGE BANKERS ASSOCIATION  Mr. RAINS. I only had one or two questions, Mr. Greer, that I wanted to ask. I would have been much happier if you could have S'Upported every provision of the bill, but I know you can't, and I very well understand, but I was pleased to see that you view some of the J:>rovisions, at least, in a favorable light, because yesterday the admmistration witnesses-I want to say I wasn't facetious when I said they were against everything except the enacting clause. In the light of the mortgage market in Tennessee, do you believe housing starts in tha,t area will fall or go up? Mr. GREER. Personally, I think they will fall off. Mr. RAINS. You have no authority I assume to speak on that for your organization. I will ask for your personal opinion again. Federal Reserve Bank of St. Louis  130  EMERGENCY HOME OWNERSHIP ACT  From the inf~rmation you have i1_1- the ~ortgage banking business, I ha'\'Te talked with many of your friends, 1s there any feelmg among individual mortgage bankers-and I don't ask for your association opinion on this-other than the fact that housing starts are likely to go down this year? Mr. GREER. The ones that I have talked to, several that I have talked to feel that the housing starts will drop this year over 1959. Mr. RAINS. That is all I wanted to know, Mr. Greer. Mr. Addonizio. Mr. AonoN1z10. Mr. Greer, your organization believes that the ceiling on the FHA and VA interest rates should be removed. Mr. GREER. Right, that is the policy of the association. Mr. AnnoNrzro. In other words, you believe in so-called flexible interest rates 9 Mr. GREER. Tha,t is correct. Mr. AnnoNrzro. Actually isn't what you mean higher interest ratesW Mr. GREER. We do not mean higher interest rates. I believe in our statement we are not for higher interest rates, 1but we believe they should be flexible and go with the market. Mr. Annomzro. And therefore that would be the highest the market demanded? Mr. GREER. At times. Mr. Annomzro. Well, aren't you concerned about the fact that you might be pricing the average home buyer right out of the market if interest rates keep going hrgher 9 Mr. GREER. I think there is a possibility of that, yes, but on the other hand-Mr. Annomzro. Interest rates since 1952 have already gone up about 35percent. Mr. GREER. But we must be competitive. Mr. RAINS. But you would rather be competitive at a lower interest rate than competitive at the top, would you not i Mr. GREER. I so stated in my statement here, that the mortgage bankers like the low interest rate; yes, sir. Mr. RAINS. This morning we had another distinguished Tennessean before the committee, Mr. Bartling, president of the homebuilders. Mr. GREER. Yes, I know him. Mr. RAINS. And he related to us the story we already knew, that the situation of the mortgage bankers, and I assume you are one of them in Tennessee, with reference to the usury law is that you don't know exactly where you are until you get a court decision; is that correct1 Mr. GREER. Thrut is correct, the chancellor has ruled that the mortgag~ insurance P~J:ment is not usury, is not considered interest, but that 1s not the decision of the Supreme Court. Mr. RAINS. Mr. Widnall, have you any questions 9 Mr. WmNALL. Just one question, Mr. Greer. If housing starts are down during this coming year from what they were last year, what do _you ~eel about the gross natio~al product f Do you thmk that that will be mcreased or decreased durmg the year 1 Mr. GREER. Mr. Neel, will you answer that for the association f Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  131  Mr. N~. I would imwgine, Mr. Widnall, in the first place I would say that the evidence that we have points to a very modest decrease, although it points to a decrease, and it is based on a lot of factors, one of which is decisions that individuals make as to what they are going to buy with the resources that are available to them, and I not being a trained economist, I don't know that my answer is entirely valid, but I would assume that the gross national product could very well increase even though housing starts fell off to a modest degree, because it would seem to me that what we are talking about is the ability of the people to finance all sorts of things, and housing is only one of those items. Mr. WmNALL. Y<;m haven't within your own group made any study of that? Mr. NEEL. No; we have not, sir. Mr. RAINS. Mr. Ashley. Mr. ASHLEY. Mr. Greer, I wonder what the position of your association was in connection with the legislation similar to this which was enacted in 1958 ? Mr. GREER. I was not on the legislative committee at that time. I think Mr. Neel could answer that, being general counsel of the MBA. I was not on the legislative committee at that time, so I could not answer that. Mr. NEEL. I think, Mr. Ashley, the association made very similar testimony to what we did this morning, we have, ever since I can recall, believed it was unwise to try to protect a rate of insurance by infusions of what we call-well, let's use a word nobody can quarrel with, additional financing in order to support a submarginal rate, which is what we believe this Fannie Mae financing is, and I believe the testimony was very similar to what we have given today. Mr. AsHLEY. In other words, you don't think it is a good device to bring about a lower interest rate level? Mr. NEEL. We have never felt that it brought about a lower interest rate level, Mr. Ashley, in any significant degree. What it is is to enable a few _persons operating in the market to have an outlet for loans with mmimum down payments and longer maturities, but an insignificant part of the total market, and once that short infusion was over we don't think it had any significant effects to date. Mr. ASHLEY. In retrospect, is it the position of your association that the legislation in 1958 was a good or bad thing? Mr. NEEL. Well, with respect to the operations of Fannie Mae, we would say that it was not a good thing, if this is what you are referring to, although may I also point ouJt that so far as the operations of Fannie Mae in general are concerned, that is the existence of the agency in the true secondary market, we have supported that. It is simply the funds available to the agency to buy loans at unmarketable rates whi~h we hav~ objected to, not the Ol)erations of the agency as a supportmg operation. Mr. AsHLEY. This is interesting to me. There isn't a mortgage bitnker in the Toledo area that I think would share the position that you have just enunciated, which seems rather strimge. If there were more time I :might go into the question with you as to how your policy is arrived at, because I think that might be interesting to the committee. Federal Reserve Bank of St. Louis  132  EMERGENCY HOME OWNERSIDP ACT  Is it the position of the association, or is it the thinking of your association that new starts in the next year will decline? Mr. NEEL. As an association official, Mr. Ashley, we haven't ofli~ cially made any prognostications. I would say that the majority' of people in the business would agree with Mr. Greer's personal conclusions that a modest reduction in starts in single family houses is probably in the cards, but we haven't made any predictions; we don't do that. Mr. ASHLEY. Would it be the position of these same individuals that this is a good or bad thing? Mr. NEEL. Well, it would be hard for me to say. I don't think that the members of MBA as such have any desire to see housing starts curtailed. They have a desire, on the contrary, I think, to see that this is a healthy industry, and as Mr. Greer has pointed out this means at least a quasi-adequate supply of funds for a generally rising product. Mr. ASHLEY. You feel it is necessary to cul'ltail inflation, and I daresay most of the members of your association would tend to agree with the policies of the administration, and I was just wondering if there wouldn't possibly be a point at which there would be a rub if they really and truly feel that it is not in the national interest to have a decline in new housing starts then they would have to review their thinking, perhaps, with respect to policies that should be followed. Mr. NEEL. Yes, I think that is a fairly reasonable statement. Our feelings have always been that housing and housing finance ought to have the same access to the pools or resources of credit as other forms of credit, and what we have said consistently, I think consistently, is that any artificial barriers that the Congress throws in the way of giving access to people who want to buy houses, access to the same funds that others have, operates to restrict their ability to buy houses. Mr. AsHLEY. Do you think that housing, as an industry, is getting, in a period of tight money, the same opportunity as, say, consumer credit, or the credit that is available to industry? Mr. NEEL. In other than the Government guaranteed and insured programs, I think it does, Mr. Ashley, and I think that the statistics on nonfarm recordings of conventional loans would bear this out. It is a consistently rising pattern with modest variation. The disruption and the discrepancy in these figuresMr. AsHLEY. But aren't a lot of those backed up by second mortgages? I would have to ask that in response to your answer, and I would further have to ask for whom is this credit buying homes today? Is it for the medium income family, or is it for the higher income family? Whose needs are we meeting? Mr. NEEL. I think we are meeting very many of the needs of the lower income family, Mr. Ashley. Mr. AsHLEY. Without a second mortgage? Mr. NEEL. I think there are a lot of second mortgages, and we take a very dim view of the second mortgage business, but the fact that you can get second mortgages without restriction which I say we do not view with favor, the fact that these are available is the means by which people are able to take advantage, and to compete with.this other money. I don't say it is a good thing. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP AC'l'  133  Mr. ASHLEY. You don't make a convincing case that the building industry is getting a fair shot at total available credit in a tight money period. They are not, because of the conditions that you add to that with respect to second mortgages, and so forth. I think that it would appear on the basis of your colloquy that certainly industry would have a better shot at credit, and that other sectors of our economy, as well. Mr. NEEL. Well, I think I would agree with you that a corporation operating under the conditions that it operates under finds it far easier to have access to the available sources, there is no question about that. Now~ we would have to try to define what the word ":fair" is. All that I know is, for example-I do have one set of figures you might be interested in, from January through November, 1959, 3,489,000 mortgages of $20,000 or under were recorded with a total valuation of $29,748 m:illion. This figure exceeds the previous record annual total, and indicates a year-end total of close to $32 billion, so that about all I can say is that in 1959, more mortgages of $20,000 and under were recorded than any other similar period in the history of the country. Now, this implies that some share of funds, whether it is "fair" or not, we might argue about, but some reasonable quantity of money is going into mortgages somehow. Mr. AsHLEY. $20,000 and under 1 Mr. NEEL. That is what these figures are, yes. Those are the only figures we have available. That is the way they come in from the Bureau of Labor Statistics. Mr. AsHLEY. We heard this morning that the median price house has gone from 1953 to 1959 from $12,100 to $13,800. Perhaps you were here and heard that this morning. So with respect to the $20,000 figure, we shouldn't perhaps necessarily assume that that is the median priced house. Mr. NEEL. No, these figures aren't broken down. Mr. ASHLEY. I am glad to have the figures in the record. Thank you, sir. Mr. RAINS. Mr. Derwinski. Mr. DERWINSKI. I would like to compliment you gentlemen on a very fine presentation. I think your statement, Mr. Greer, is very logical and effective in explaining to the committee your position as well as your consistency. Mr. Ashley, for your information, every year since 1944 the percentage of mortgage debt to all private debt has been increasing. In other words, from the practical standpoint this means that the home financing industry, the home building industry has had more and more share of the national funds available each year, so they aren't suffering in respect to competing-Mr. ASHLEY. Your conclusions are wonderful. That may be true, but you can't say therefore they are not suffering, and therefore the picture is not as you it. I don't agree with you. I think that your figures may be accurate, but your conclusion is your own. Mr. DERWINSKI. We will I am sure debate that later in the committee. Federal Reserve Bank of St. Louis  184  EMERGENCY HOME OWNERSHIP ACT  On page 4 of your statement, at that point I think you were quoting a recent statement I imagine in some publication, and you make the point, as I viewed it, that the Emergency Housing Act of 1958 actually had an effect after the recession had terminated and the revival commenced. Mr. GREER. That is right. Mr. DERWINSKI. Now, let's assume that there might be an emergency in 1960. Would not perhaps the same procedure follow~ In other words, this so.-called emergency housing bill of 1960 seems to presume an emergency. Now, wouldn't it follow that the emergency may have passed before the effect of the legislation would have been felt~ Mr. GREER. It may. We don't feel that the emergency exists at the present time. Mr. DERWINSKI. Thank you. Mrs. GRIFFITHS. Mr. Chairman, may I ask a question i Mr. RAINS. Mrs. Griffiths. Mrs. GRIFFITHS . Mr. Greer, to what do you attribute the fact that housing starts will fall this year~ Do you think it is because everyone who wants ·a house has one, or because everyone who can pay for one has one, or to what do you attribute it 1 Are there fewer people~ Mr. GREER. I think the tight money situation has something to do with it. Mrs. GRIFFITHS. Thank you. Mr. RAINS. Thank you, gentlemen, for appearing. Our last witness is Mr. Alfred D. Stalford, president of the Institutional Mortgage Co. of Miami, Fla. Mr. STALFORD. Before testifying, I don't claim to be a cousin of Governor Brown, yut I will point out our main office is in Beverly Hills, Calif. Mr. RAINS. We are glad to have you. STATEMENT OF ALFRED D. STALFORD, LEGISLATIVE CHAIRMAN, COOPERATIVE HOUSING BUILDERS OF AMERICA  Mr. STALFORD. Mr. Chairman and members of the committee, we are very pleased to have this opportunity to present to the committee our suggestions concerning the legislation which is now before yoThe following statement has been prepared and is being submitted to the commitwe -by Alfred D. Stalford as legislative chairman and on ·behalf of the Cooperative Housing Builders of America, a non~rofit co:ryorati<;>n, wh?se mem~ership consists of t~e majo! coop~rative housmg bmlders m America. The membership of this specialized group has constructed in excess of $250 million of homes during the past year. In addition to my position as legislative chairman of our association, I am also president of Institutional Mortgage Co. of Beverly Hills, Calif., with offices in San Francisco, Phoemx, and Miami, and our own mortgage sales office located in New York City. Institutional Mortgage Co. is the largest originator of FHA section 213 mortgages in the country. We have been one of the leaders and proponents of the section 213 program. Our company is servicing in ex- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  135  cess of $240 million Government-insured and guaranteed mortgages, and we are currently originating new mortgages at the rate of $50 million per year, of which a major proportion of our originations are loans insured under the section 213 program. It is with this ,background of ,both the members of our association and my extensive experience in the field of mortgage :financing that I appear before your committee to present this testimony. It is to be further noted that our association membership consists of builders currently operating in almost all regions of this country and further that my mortgage lending operations have been geographically distributed in the States of California, .Arizona and Florida and, accordingly, our views are presented at a nationwide level rather than any particular localized section of the country. Our membership has constantly strived to provide better quality housing at lower prices in an attempt to help meet the tremendous demand for middle-income housing at prices and on terms that a vast majority of our population may enjoy homeownership where other Government-aided programs or conventionally :financed housing projects have not been able to adequately meet their needs. The major problem confronting ou homebuilders today is the increasing cost of obtaining mortgage money for their developments. This country has been experiencing an increasing tightness of money since the summer of 19591 and the availability of mortgage money has been drastically curtailed as interest rates have risen on all forms of Government and corporate debentures to a .point where Government guaranteed mortgages at a restricted interest rate have become less and less attractive to the banks, insurance companies, and savings and loans of this country. The increase to 53/4 percent interest rate for FH.A. insured home loans as approved in the Housing .A.ct of 1959 as passed last September has unfortunately proven to be "too little, too late." .Although at the time the Housing .Act of 1959 was first introduced, and testimony given before your subcommittee just 1 year ago, the 5¾ percent interest rate on FHA home loans would have proven adequate and loans bearing that interest rate could have, sold at prices close to par, mortgage money was considerably tighter by September of last year and those mortgages were selling- at a discounted price of between 95 and 96 at the time of adoption of the, Housing Act of 1959. I am sorry to report to your committee that those same loans that: were selling at prices of 95 to 96 last September are now selling in the secondary market at prices of 92 to 93 on a nationwide basis in areas other than the northeastern section of our country. I am speaking of mortgages on properties located in other than the northeastern section. As most economists predict even higher interest rates in the months ahead, there is no question that )Jlortgagejrices will go still lower in order to make the yield attractive an competitive with other forms of investment. The policy of the Treasury in oft'ering shortterm debentures of less than 5-years duration at a 5-percent mterest rate had a devastating effect on the savings deposits of the savings banks and savings and loans of our country when small investors recogniz~ th~ opportunity to switc~ their savings from. savings accounts yieldmg 3½- to 4-percent mterest to comparatively short Federal Reserve Bank of St. Louis  136  EMERGENCY HOME OWNERSHIP ACT  term Government bonds paying a 5-percent return on investment. We, therefore, find that the Treasury is not only making mortgage loans unattractive :for investment by our savings institutions by offering Government issues yielding better than a 5-percent return but further making these issues attractive to the small investor has caused deposit runoffs in almost every savings institution in this country thus further depleting the amount of savings available for investment in mortgages. We have not really felt the impact that tight money will play in cutting back new housing starts as most builders have obtained advance commitments from their lending institutions and mortgage companies during the past year which have enabled them to continue new starts at a fairly high level. However, these advance commitments are fast becoming depleted and we believe that the real cutback in housing will be felt with far greater impact during the first quarter of 1960 than was experienced in the last quarter o:f 1959. It is our opinion that the housing start figures of the last :few months in no way properly reflect the sharp cutbacks which are predicted by our membership during 1960 unless additional special assistance funds are made available for FNMA to help level out the peaks and valleys of the building industry. Our association would like to go on record at this time as being bitterly opposed to the administration's policy of stimulating housing in times of high unemployment and general business slowdowns and casting aside the problems of the building industry in times when other elements of our economy are enjoying normal production and expansion. · It' has been recognized that the housing industry was a major factor in pulling this country out of the recession experienced in 1956 and 1957 through the benefits o:f the Emergency Housing Act of 1958 which was adopted on April 1 of that year. That Housing Act referred to provided a twofold purpose by providing FNMA special- assistance funds at favorable mortgage prices to those builders willing to build houses with mortgages of $13,500 or less and that it provided the much needed mortgage money at a realistic price and provided much needed housing for middle-income families. It was most unfortunate that the Emergency Housing Act of 1958 failed to include provision for FNMA to purchase FHA section 213 loans of $13,500 or less, which we brought to the attention of your committee in our testimony 1-year ago and which oversight we are happy to note has been corrected in H.R. 9371 now under consideration. We would like to compliment Mr. Rains for his foresight and recognition of this major problem of tight money now confronting the building industry in his proposing what we believe to be a much needed interim housing bill known as R.R. 9371 as one of the first pieces of legislation introduced into the House of Representatives this early in the 2d session of the 86th Congress. His recognition of the problems facing the building industry during the time Congress was adjourned, and his early introduction of what we agreed to be an emergency measure is, indeed, to be commended. Section 2 of the bill may very well prove to be an important step forward in making FHA mortgages eligible for ownership by in Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  137  dividuals, pension funds, and associations which do not meet the present FHA requirement of being a corporation. Section 3 providing for the reduction of the FHA mortgage insurance premium from ½ percent to ¼ percent was one of the legislative proposals submitted in our testimony before this subcommittee 1 year ago and one in which we were highly in accord considering the extremely favorable actuarial experience enjoyed by FHA in the past and the generally accepted belief that the mortgage insurance premium could be reduced to ¼ percent without endangering the safety factor and reserves developed by FHA. We are hopeful that the adoption of this reduced premium for the 1-year period following the enactment of this legislation will be the :forerunner of an authority to the FHA Commissioner to have the permanent authority to reduce this premium to ¼ percent as conditions permit. This reduction of ¼ percent in premium will reduce the initial monthly payment on a $13,500 mortgage loan by $2.80. Although this may sound to be an insignificant savings, I wish to assure this committee that every few dollars of additional carrying charge per month has made more and more families ineligible to qmilify incomewise to purchase new housing. Section 4 spelling out that one of the purposes of FNMA, in its secondary mortgage operations, is to aid in the stabilization of the mortgage market will reaffirm to the industry the important role that this agency has played and we are hopeful will continue to play in being one of the few glimmering rays of hope for the mortgage industry through this tight money period. Although the secondary market operations of FNMA cannot be expected to do the whole job, this agency has been literally a lifesaver in providing an even flow of mortgage funds when money has not been made available in adequate supply from the lending institutions of this country. I can assure your committee that if it were not for the secondary market operations of FNMA, the home building industry would be in a chaotic condition today. Although we do not like to be so heavily dependent upon the flow of mortgage money from one source, namely FNMA, we must resort to the facilities of that agency in increasing proportions when the Administration's policy of increasingly tight money and higher interest rates has diminished the available supply of mortgage money from our Nation's lending institutions. Section 5 providing during the 1-year period following the enactment of this law that FNMA purchase any mortgage which is offered to it so long as title to the property is good and the mortgage is otherwise eligible and not in default will prove to be an important aid in permitting mortgage originators and homebuilders to more reliably depend on the eligibility of a mortgage for purchase by FNMA under its secondary market operations. To emph:;1size this point, under FNMA's secondary mortgage operations it issues no advance commitments ( ot:!her than standby commitments at lower prices) to purchase any loan and it becomes necessary .for a origin:>tor such as my company to originate each mortgage after completion of construction, obtain FHA's insurance endorsement. :md then and for the first time be in a position to offer each such loan to FNMA for pur- Federal Reserve Bank of St. Louis  138  EMERGENCY HOME OWNERSHIP ACT  chase, not knowing in advance if the loan is acceptable to FNMA from either a credit or location standpoint. Considering that either the FHA or the VA have approved both the credit of the purchaser and the location of the property in addition to similar approvals from the mortgage originator, we do not believe that this will in any way adversely affect the quality of the 'loans to be acquired by FNMA. Section 6 prohibits FNMA, for a 1-year period, from selling or otherwise disposing of any mortgage which it may hold. We favor this proposal as any sales of mortgages from its portfolio will compete with the sale of newly originated mortgages during a period of an exceptionally tight mortgage market. Since lending institutions generally limit the ratio of mortgages to total assets in their portfolio, any mortgages that are acquired from FNMA by either a purchase or exchange would in direct proportion reduce the amount of loans that tJhose institutions would otherwise purchase in the secondary market. Section 7 would reduce the FNMA stock purchase requirement under their .secondary market operations from 2 to,1 percent of the amount of loans sold to that agency. We favor this proposal as this will directly reduce the cost ?f financing to the builder which savings in turn could be passed on to the ultimate consumer. Section 8 requiring FNMA to pay not less than par for any mortgage under its special assistance functions would be highly desirable in helping to reduce the cost of housing to the ultimate consumer. The discount that a builder must pay on his mortgages is part of his construction cost and the reduction in discount provided by this section results in substantial reductions in sales price of houses and, accordingly, reduction in the amount of mortgage to be undertaken by home purchasers. Section 9 reducing FNMA fees under special assistance programs from 1½ to 1 percent would likewise reduce financing expense to the builder and again would affect savings to be passed on to the consumer. Section 10 amends the National Housing Act to clarify that mortgages on cooperative housing insured by FHA under section 213 would be eligible for purchase by FNMA under its program 10 special assistance operations provided the average mortgage per unit comp'lies with the $13,500 per unit limitation. As we stated above, our association brought to the attention of your committee in our testimony 1 year ago the fact that FNMA did not include in its special assistance program 10 section 213 loans even though the average per unit did not exceed the $13,500 limitation because Congress did not specifically include section 213 loans. As section 213 has been an important factor in providing middle-income housing, we believe that this inclusion of section 213 at this time to be a very important part of this legislation before you. We wish to further point out that the additional $25 million allocation approved by Congress in the Housing Act of 1959 for additional special assistance aid in purchasing cooperative housing mortgages under program 6 has yet to be made available by FNMA because of the failure of the Administration to release these funds. The builder sponsored fund under special -assistance program 6 providing for the purchase of cooperative housing mortgages has been Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  139  depleted for the past several months and the $12½ million allocation of the total $25 million fund provided by the Housing Act of 1959, is now sorely needed but has not been made available. Section 11 provides an additional $1 billion total for FNMA program 10 special assistance operations. We believe this fund to be desperately needed and if such amount is approved by Congress and released to FNMA by the administration, it will serve as a very import~nt aid to the homebuilding industry in providing an adequate contmuous flow of mortgage funds to meet the needs of families in the middle-income bracket. Statistics have shown that the average priced house was substantially reduced in late 1958 and early 1959 as a direct result of the $1 billion fund provided for program 10 for FNMA under the Emergency Housing Act of 1958, and we have every reason to believe that this same experience will be repeated again in 1960 if this legislation now being considered is adopted. We also favor the provision increasing the $13,500 limit by not more than $1,000 in high-cost areas to adequately include under this program housing to be built in urban areas where high-cost levels prevail. Thank you. Mr. RAINS. Thank you, Mr. Stalford. I am glad to see that you support the provisions of our bill, and knowing tha,t you have got to catch a plane, or having been told that, at about 5 o'clock, we will keep our questioning brief. Mr. STALFORD. I have ample time, sir. Mr. RAINS. I note from your statement that you are the president or director of a large banking institution with offices in Beverly Hills, Calif., San Francisco, Phoenix and Miami. You were here a moment ago when Mr. Greer and Mr. Neel testified that mortgage bankers are in opposition to providing any FNMA special assistance. Would you say, Mr. Stalford, it would be fair to say that a considerable number of mortgage bankers generally throughout the country disagree with the official position stated by the Mortgage Bankers Association~ Mr. STALFORD. Publicly they agree with the MBA position, basically because they would rather find another means of providing mortgage money for their customers rather than FNMA. Mr. RAINS. You would rather do that, would you not~ Mr. STAU'ORD. Yes, but I am always realistic to know that we are not just going to push a button and all of a sudden have a billion dollars of extra funds fall in the laps of the savings and loans and life insurance companies. Mr. RAINS. I would like the record to show that I favor your position. I wish it were not necessary, but when you face the facts and the realities in existence, you have to do the best you can, and under the circumstances you feel this bill is the best that we can· do~ Mr. STALFORD. Yes, under the circumstances. In our testimony just 1 year ago, we favored additional funds for program 6 of FNMA for cooperative housing, in the absence of a freer money market, and one which permitted mortgage rates to hold to a much lo:Ver level than they are now. When the investable funds of our lendmg 50876-60-10 Federal Reserve Bank of St. Louis  140  EMERGENCY HOME OWNERSHIP ACT  institutions of our country find Government bonds and corporate bonds more attractive than mortgages, then we have to resort to Government assistance to help us over the tight situation. Mr. RAINS. Mr. Addonizio1 Mr. AnnONIZIO. I have one question, Mr. Chairman. Mr. Stalford, on page 4 of your statement you point out·that the advance financing take:n out last year is rapidly being depleted, and therefore you believe the real cutback in housing will begin to show up in statistics available for the first quarter of 1960. Of course the Administration witnesses told us yesterday that the money market conditions were going to ease up, and that housing would not fall off very much. I am sure that you feel that their position is overly optimistic, and certainly not justified by the facts as you see them. Would you care to comment about that i Mr. STALFORD. Yes, I would. First of all, the Administration is using a housing start figure for the month of December that I personally don't feel properly reflects the situation. As I point out, builders usually obtain mortgage commitments from their lenders many many months in advance. I think the more significant figure, had the Administration testified the other way, would have been that they would have produced the figure of the falloff in new applications for FHA loans and for VA appraisals. I am not going to accept, sir, necessarily the correctness of the figures that we have been using, that we have had 1,300,000-plus starts a year. I use my own company as an example, and our own association, and we have a pretty good cross section of the country in our dealings, and we find a severe cutback in housing sales the last 2 months of last year, and I think that this is a direct result of increasing mortgage discounts forcing the builders to raise their prices to a point where the monthly carrying charge is getting beyond the paying ability of our home purchasers, and this is the greatest thing we have to face in the building industry today is having to pass these mortgage discounts on to the home purchaser in the form of an increased sales price, in turn an increased mortgage amount, and in turn an increased monthly carrying charge at higher interest rates. Mr. AnnoNizro. Thank you. Mr. RAINS. Mr. Widnall. Mr. WmNALL. What amount of your own mortgages have been placed by Fannie Mae i Mr. STALFORD. In the year 1959, or let's take our service in portfolio of over $240 million. Approximately $50 to $60 million of it is for Fannie Mae. We have used Fannie Mae's facilities to a much greater extent in the year 1959 than previously. I would like also to bring one thing to the attention of your committee, rund that is the effects of the Emergency Housing Act of 1958 really poured into the first half of 1959, because the $1 billion fund made available by Congress was not let out by Fannie Mae at one time, but was let out m pieces, and many of their commitments for parts of that $1 billion were not issued until late in 1958, which reflects themselves in housing starts in 1959, so the Emergency Housing Act of 1958 Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  141  is without question entitled to a good share of the credit for housing starts in the year 1959, and without the emergency act before us, or some similar substitute, you are going to find that the starts in 1960 have got to be a failure. Mr. WmNALL. On page 10 you said you wished to point out the additionitl 25 million allocation approved by Congress yet to be made available by Fannie Mae-this is the first I .had heard of that. I wasn't aware of that. Has any reason been given you 1 Mr. :STALFORD. It is contrary to the policy of the Bureau of the Budget to make those funds available to Fannie Mae to release on to the public, in the same manner as they doled out the billion dollars under the emergency act of 1958-well, I shouldn't say in the same mainner, because here they have completely withheld the full $25 million. Now, that is only a drop in the bucket, and I can't be convinced this is going to upset the economy of our country to carry out the wish of Congress, but nonetheless the Budget Bureau has decided that we had better not release these funds because they are liable to carry out your intent. Mr. AnnoNIZIO. Does FHA or rather Fannie Mae agree with the Bureau of the Budget 1 Mr. STALFORD. FHA has nothing to do with it, it is Fannie Mae. Let us say that it is Fannie Mae's policy to accept the policy of the next higher agency, namely the Bureau of the Budget. Mr. AnnoNIZIO. Thank you. Mr. RAINS. I had to leave the other day before we got through with Mr. Mason, and that was one of the things I wanted to ask Mr. Baughman about. I w1;1,nt to see the language involved in that. After all, Congress is supposed to write the laws, not the Bureau of the Budget, and I for one am ,getting burned up with the idea that the Bureau of the Budget can say what will and what will not be done after the Congress acts on it. I think we all ought to-whether we like the measure or not, insist when Congress passes the law, it be put into effect. Mr. WmNALL. I have one more question. You say the policy of the Treasury in offering short-term debentures of less than 5 years' duration-has the Treasury any choice 1 Mr. STALFORD. No, I agree with you, Mr. Widnall, that the policy is created by circumstances, and I am not blaming the Treasury. I am blaming a situation that has in turn caused a tight money market for mortgage financing. There is no question in my mind that this ceiling of 4¼ percent on long-term Government bonds is having an adverse effect on the supply of mortgage money. Mr. RAINS. And that causes me to ask a question. Why didn't it have an adverse effect on it back when we didn't have the high interest rates we have at present 1 Mr. STALFORD. I think between the Federal Reserve and the Treasury, the supply of money is made limited, or is not adequate to meet the expansion needs of this country, and now there are such heavy demands upon the money market for things like Governor Brown spoke about, expansion. Mr. RAINS. I agree that the demand is on, Mr. Stalford, but I am not willing to agree that the initial fault is with the Congress. I Federal Reserve Bank of St. Louis  142  EMERGENCY HOME OWNERSHIP ACT  want that clearly understood, because we have taken no action one way or the other that fixed the cards so that we are told that the only way out is to take off the ceiling on interest rates. Mr. STALFORD. It may appear that Congress is the one responsible,. but I think there are too many other policies going down the line within the administration that are adversely affecting the whole situation. Now, an easy source or an easy way to blame someone is to say Congress isn't releasing that 4¼-percent rate, and accordingly wehave got to compete with mortgage money with short-term high-interest-rate bonds. Mr. RAINS. Of course, that is a side issue for housing, but it is going to be a very important one in this session of Congress, I am well aware of that. Mr. STALFORD. It has its effect on our supply of money; that is the unfortunate part of it. Mr. RAINS. I want to thank you, and I hope we didn't keep you too late to catch your plane. I appreciate your coming, and you made a good and excellent witness. Tomorrow the committee will meet at 10 o'clock in room 429 of the Old House Office Building, which is the Education and Labor Committee Room. Our committee room is having new lights put in it and we can't meet there. The day after tomorrow we will be back in this same room, but tomorrow we will be in room 429 of the Old House Office Building. The committee will now stand in recess. (Whereupon, at 3 :55 p.m. the subcommittee adjourned until 10 a.m., Wednesday, January 27, 1960, in room 429, Old House Office Building.) Federal Reserve Bank of St. Louis  EMERGENCY HOMEOWNERSHIP ACT WEDNESDAY, JANUARY 27, 1960  HousE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D .0. The subcommittee met;_ at 10 a.m., pursuant to adjournment, in Boom 429, Old House uffice Building, Hon. Hugh J. Addonizio presiding. Present: Mr. Addonizio (presiding), Mr. Barrett, Mrs. Sullivan, Mr. Ashley, Mrs. Griffiths, and Mr. Widnall. Mr. AnnoNIZIO (presiding). The committee will be in order. Before we begin, might I just announce the fact that our very distinguished chairman, Mr. Rains, unfortunately is home ill with the grippe and can't be here this morning. He asked me to convey his regrets because he very much wanted to be present to hear the very fine testimony that we expect to hear from all of our witnesses who are here this morning. Our first witness will be Mr. Leon H. Keyserling, who is representing the National Housing Conference. Mr. Keyserling, will you come forward, please i I regret there aren't more members present, but I am sure before your statement is finished some of them will be here. STATEMENT OF LEON H. KEYSERLING, NATIONAL HOUSING CONFERENCE  Mr. KEYSERLING. Mr. Chairman and members of the committee, I very much appreciate this opportunity to appear here on behalf of the National Housing Conference, an organization which has been a devoted friend of the American people interested in better housing for two decades or longer. I am appearing also as an independent economist, interested in the relationship between housing and the economic and human problems we have to deal with. I looked through the testimony of the Administrator of the Housing and Home Financing Agency, delivered 2 days ago, in order to try to discover the rationale of his opposition to a bill which seems to me to be as needed and as sound and as important as the bill before you in all its parts. In this connection, may I s,ay that I am not here for any partisan purpose whatsoever. One of the things I recall most pleasantly is that I was one of the participants in the joint efforts of the late Senator Wagner and Senator Ellender and the late Senator Taft to develop a comprehensive housing program :for the American people Federal Reserve Bank of St. Louis  143  144  EMERGENCY HOME OWNERSHIP ACT  without regard to partisanship. And going back all the way to 1933, which is a long time ago-Mr. AnooN1zro. Might I interject to say that the other day there was colloquy between the members of the committee indicating there was no such thing as a nonpartisan economist. Do you agree with that~ Mr. KEYSERLING. Well, it depends on how you define politics. I am not nonpolitical, in that politics plays a part in the lives of free people, and in that sense we all should be political. But today I am going to be nonpartisan. I referred in opening to the testimony of the Housing Administrator. I tried to find in that testimony the reasons why anyone should be opposed to this bill, and it became very clear to me that that testimony did not deal primarilr, with the housing problems of the coun try; it did not deal primarily with the housing needs of the people; it did not deal primarily with how much housing we need, or of what kind, or at what costs. I dealt with another very important subject, and therefore I ·am going to devote my attention, primarily, to that subject. It dealt with the argument that this bill is economically and financially unsound for a variety of reasons. To summarize these reasons, as I gather from the testimony of the Housing Administrator, the argument is, first, that we may look forward cheerfully to getting an adequate level of housing from the viewpoint of the operations of the economy as a whole, and from the viewpoint of our requirements for economic activity. In fact, the Administrator of the Housing and Home Financing Agency said that the recent level of housing production of about 1.3 million housing starts was very near the highest on record, that about that much was going to be achieved in the future, and that this was exceedingly good. He made it very clear, although there is some contradiction in his testimony, that by and large he feared that a larger volume of housing construction would be inflationary. He also made it clear that he thought that there was not much concern to be expressed about the high interest rates on housing, the high carrying cost to the homeowner. There is some conflict on this score, too, because in one part of his testimony he says we must retain some of the premium charges, which this bill seeks to reduce or remove, in order to bring out an adequate volume of housing finance; and, on the other hand, he seems to say that he wants to guard the country against the inflation which results from high housing costs. I therefore would like to call to the attention of the committee that the opposition to this bill is not a housing opposition; it is an economic Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  145  opposition. The testimony of the Housing Administrator is really in capsule form, and I say this with no disparagement, the view of the Federal Reserve Board and Treasury Department and the view of the Budget Bureau.. The ?~okkeepers have taken over our national e_conomic and financial pohc1es ; and the bookkeepers are opposed to do111g those things which in my judgment are essential to a sound economy, to a sound management of our financial affairs, and to recognition that in the final analysis the wealth of the country is based upon production and employment and meetin~ the needs of the people. The opposition to this bill is a bookkeeper s opposition. Now, since I am familiar with bookkeepers, I am going to show that these particular bookkeepers are wrong, at least I am going to try to show it to your satisfaction. Basically, I am going to challenge them on all points. I am going to challenge them first on their view that we have had or are likely to have an adequate level of housing construction from the viewpoint of the needs of the people. Second, I am going to challenge them on their view thtat the level of housing construction recently or prospectively is high enough from the viewpoint of the appropriate part which residential construction should play in the maintenance of the maximum employment and production objectives of the Employment Act of 1946. Third, I am going to challenge them on the ground that their policies are not designed to prevent an inflationary spiral in housing costs, but instead are admirably designed to promote just that kind of inflation. And on this basis, I am going to indicate that the provisions of this bill are designed to accomplish the opposite effect, to move us toward a more adequate level of housing, more adequate level of production and employment, and less inflation. Of course, this bill is not proposed to be a complete housing program. There are ma:ni elements in a complete housing program with which this bill doesn t deal. However, the provisions of this bill, I feel, are sound, and I will not address myself to the details of the bill but rather to the general setting in which the bill finds itself. Now, the first point I want to make is that it takes a year or longer to build housing, and people live in housing for a great many years. Therefore, to consider the housing problem in terms of just a few months or a few weeks is one of the most irrational aspects of the whole mistake which some people have gotten into of considering all of our economic problems in terms of a few weeks or a few months, and taking positions based upon sudden changes in the economic situation of a short-range character, so that what they propose would Federal Reserve Bank of St. Louis  146  EMERGENCY HOME OWNERSHIP ACT  be too late by the time they could get it effectuated, even if it were  right initially. My basic position is, and this is corroborated-agam as evjdence of nonpartisanship-by Mr. Alan Dulles of the Central Intelligence Agency. In fact, it is COIToborated by ahnost anybody who has informed intelligence about our economic problems. My position is that we in the United States have been caught, ever since the end of the Korean war removed the automatic galvanizing effect of wartime stimulation, in what I call a long-term departure from full employment and full production. We have had some upturns, we have had some downturns, but we have averaged a very poor economic performance, which in the view of the new technology has given us a gradually rising level of chronic unemployment. One way of expressing this is to say that the American economic growth rate has been very much too low in terms of our own potentials, very mueh too low in terms of the Soviet challenge, very much too low in terms of yielding the public revenues which are neede<l at existing tax rates to meet our great public needs. So we have already become a second-class power in one thing at least of vital importance, and are on our way to becoming a second-class power in many other things simply because we are not evoking througJ,i private _and p~blic economic policies the level ?f employment and production which our technology and our growing labor force and our improved skills and our gifts for management and our private enterprise system and our free government entitle us to. Very briefly, I want to show you our first chart, which deals with this problem of how far we are falling behind in the development ~f the economic potentia~s of the countl'Y., a~d lest you think I am gomg far astray, I am gomg to relate this directly to the problem of housing construction. Federal Reserve Bank of St. Louis  147  EMERGENCY HOME OWNERSHIP ACT  GROWTH RATES, U.S. ECONOMY, 1920-1959 Average Annual Rates of Change in Grass National Product (in Uniform Dollars)  Long term  War Eros  Depression "Ero"  9.1"4  "Historic"  Long term "Historic" Exel. Depression ond Wor Eros  7:20/o  _j_  3.0%  JL .  1920-'58 (Exci. 1929-'47 ond 1950-'53)  1920-'58  -5.50/o -8.7%  Periods other than Depression and. War  Period -of Peace and War 4.7"4  C7ZI  _I_  1947·'50  1953·'58  1947-'53  Post World War II  Post Korean Wor  3.0%  Pil  1920-'58  1.3%. 1920- '29  Long-Term"Histvric" Post (Eld. 1929 •'47 World War I and 1950~53} Federal Reserve Bank of St. Louis  Detail of Post Korean War Period 8.0%  -3.0"A,  148  EMERGENCY HOME OWNERSHIP ACT  This first chart, to my mind, is a very useful thing to be considered on the basis of the .Administrator of the Housing and Home Finance Agency's opposition to this bill. You will recall that the first point of his opposition was that we needed something of this sort in early 1958 because we were suffering from excessive unemployment, but don't need it in early 1960 because the economic situation is entirely different. He calls attention to the statement in the President's Economic Report that we are in a great surge forward. He calls attention that employment in December was higher than ever before, according to his statistics. The trouble with his position is that this whole argument of "higher than ever before" is not taking account of the growing needs of the country. It is perfectly possible in early 1960 to have a higher level of employment than ever ·before, and still to have an intolerably high level of unemployment, based upon the fact that your civilian labor force is bigger than it was before the last recession. As a matter of fact, the national economic policies which give us a recession every other year, and then a recovery every other year, will always at the top of the latest recovery be able to claim that we are higher than we were at the top of the previous recovery, if you are only looking at the employment figure. But when you look at the unemployment figure, when you look at the plant disutilization figure, when you look at whether we are keeping up with the technology and productivity and growing labor face of the American economy, we are not higher than ever before. We are merely, today, in a particular stage of a long-term record of very low economic growth, gradually accruing more chronic unemployment. Even conservative businessmen are now worrying about the problem of whether the next recession will come in late 1960, or whether by virtue of the steel strike the next recession will be delayed until 1961. This is not just my appraisal. This is the general appraisal which you will find even in the conservative business journals. In other words, there is recognition that we have not moved up at all on the problem o:f getting enough distribution, enough flow to our people of hard goods and soft goods, and military goods, too, to obtain full use of our growing productive powers. As this first chart shows in the bottom part, I have taken year by year the rate of economic growth of the American economy from the end of the Korean war, and I picked that period for a very natural reason that war automatically galvanizes the economy. Since the war, we have been in a cold war period which is very likely what we will have for a long time to come, and, therefore, it is the situation most similar to what we now face. In 1953 to 1954, as is shown on this bottom sector here, our economy went down about 2 percent. In 1954-55, it went up 8 percent. It was Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  149  recovering from the recession, and a lot of people started shouting that our main problem was inflation, that we had to have tight money, that we had to have a repressive budget, that we had to cut down on the volume of housing. I remember debating this with the Federal Reserve Board people in 1955, and they were vehement in the view that this recovery rn 1954-55 was of enduring significance. I said, at the time, that the then current policies would soon force us backward into a lower rate of economic growth, into an increase in unemployment, and into a higher level of unused resources than we had before, and this happened. · From 1955 to 1956, our growth rate shrank to 2.5 percent. From 1956 to 1957, it shrank to 1 percent, and let me say that, when the growth rate was only 1 percent, some people were still screaming that we were higher than ever before, because we had gone up 1 percent when we needed to go up 4 or 5 percent to prevent unemployment from rising. Then, bang, in 1957-58 we were in a bigger recession than the last one, and our economy took a 3~percent dip. Then, in 1958 to 1959, we were in another recovery; the roller coaster is moving upward again, and some people again can't see over the hump to the next dip. If we take the whole period from 1953 through 1957, a 7-year period, we have had only an average annual 2.3-percent rate of economic growth in real terms; and against that 2.3-percent rate of economic growth-I won't bother you with the details, but in summary-we averaged better than 3 percent over the last 50 years, so we have been falling very far short of our 50-year average. More important, the 50-year average has nothing to do with the new technology, the new technology in the factory, the new technology on the farm, the new requirement that we grow faster to hold our own and to meet the worldwide challenge. If we look at the 7-year period immediately prior to 1953, which is probably most relevant to our new technology, we grew about 4.7 percent a year, so we have done less than half as well as that since 1953. This is corroborated by Mr. Rockefeller, if you like him; by Mr. Dulles, if you like him; and by Mr. Nixon, if you like him. They are all accentuating this point that we are not using our technology and are not growing adequately. Now if we do no better in the future, if we average only a 2.3-percent annual rate of growth over the next 4 or 5 years, with this tight money policy, this repressive housing policy, this restrictive credit policy, and I might say this shortsighted budgetary policy, we would repeat the experience of the past few years. This means that- we could be on our way down again in 1961, possibly, or by 1962. And you can find this concern expressed in the yellow pages, the red pages, and the blue pages of every business magazine. 1 Federal Reserve Bank of St. Louis  150  EMERGENCY HOME OWNERSmP ACT  This is not an extreme view. This is the viewpoint of sober business commentators, because they see that we have not turned ourselves to the problem of how we are going to use our new technology. In this context, housing is one of the most important ways to combine the economic goal of finding domestic markets for our productive power with the social and human and personal goals of providing a commodity of which we in the United States are shorter of than of almost any other commodity which enters into our standard of living. We still have some malnutrition in the United States, but we don't have a shortage of food, and we don't have ve-ry many people with malnutrition relative to the size of the populat10n. We have also a general sufficiency of clothing. But at least a fourth of our people are ill housed now; it may have been a third a generation ago. So we still have this tremendous family need, and we still have the fact that, on the economic side, housing is one of the best ways of using our manpower, our financial resources, and other productive resources, to avoid creeping paralysis of our economy. This next chart shows just what has happened from the very low growth rate we have had since the end of the Korean war. The top section shows we ought to have grown 4 or 5 percent a year, to absorb the growing labor force and the growing technology. The middle section shows the difference between the needed growth rate and the actual growth rate, and the area in between is the production lag, which has been about $200 billion measured in uniform 1958 dollars. In other words, that is the production shortfall over the 7-yea.r period. The bottom section shows how unemployment has risen. I have taken two things, Census Bureau unemployment and the full-time value of part-time unemployment which the Census Bureau doesn't count, but which more and more people are recognizing you have got to count, because if you lay off 5,000 people in a factory for half a. week each instead of laying off 2,500 for a full week, it is the same loss of production, and the same loss of wages and the same amount of unemployment. So, taking both into account, we had in 1959 about 5 million unemployed, 3.8 million full-time unemployment, and 1.2 million the full-time equivaJent of part-time employment, as against 2.8 million unemployed in 1953, and 4.1 million in 1957. Federal Reserve Bank of St. Louis  151  E~ERGENCY HOME OWNERSHIP ACT  ECONOMIC GROWTH NEEDED FOR ECONOMIC HEALTH 4-5% a Year 3 - 4% a Year PLUS  +  About 1% a Year  Growth in Eff iciency  Growth in Number Wont ing Work  Need ed Growth in Total Notional Production  PRODUCTION HAS LAGGED Billions of 1958 Dollars  600 550  --  500 450 ·400 350  lliiliilillifilfilfilill22&ITfilfilfilillfilfilfilfililiiliiillill  300 1953  1954  1955  1956  1957  1958  1959 (est.>  UNEMPLOYMENT REMAINS HIGH True Level of Unemployment Mill ions of Workers  --,  6.2  ~~ ~@ 4 .1  W✓~,;;w  5.o ·-----True Unemployment  r-:;-: :,;:;,:,»-,;;;; 1.2 :« t-.-;,.-; 0.·x  2.8  . Ient ....Fu11-T.,me Equ1va of Port -Time Unemployment  4 .7  3 .8 2 .9 1.9  1953  1957  1958  • 1959 estimated on bos ,s of actual figures for first ten months . Federal Reserve Bank of St. Louis  1959 ( est i •  ·•· ·Full·Time Unemployment  152  EMERGENCY HOME OWNERSHIP ACT  At the depth of the recession, of course, unemployment was still higher. But we are gradually accumulating, over the years, about half a million additional unemployment year by year, averaging off the troughs and the peaks. And in a few years, our true level of unemployment, instead of being 4.8 as in December 1959, is going to be very much higher, if we maintain only this 2.3 percent rate of growth. It is inevitable. Now, on this n~xt chart I have made a very detailed breakdown of the economy, which involves an explanation of why we have gotten into this trouble. In very simple terms, there are three elements in our economy. You have got private investment, which demands manpower, plant, materials. You have got priva,te consumption, and you have got public consumption which some people call public spending. These three things, your private consumption, your private investment, and your public consumption, exert a take upon the economy which has in totality to be eqmvalent to your productive resources if you are going to keep these resources fully employed. In other words, you can't have production without distribution. Now, what I have done here is to break down this 15 million manyears of excessive unemployment over the past 7 years, and the $200 billion production shortfall, into its main components. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  $199 BILLION PRODUCTION DEFICIT, 1953-1959, DUE TO INADEQUATE LEVELS OF PRIVATE AND PUBLIC OUTLAYS In 1958 Dollors  TOTAL NATIONAL PHOOUCT/ON (G.N.P.)  PERSONAL CONSUMPTION EXPENDITURES  I  I I  $ 199.3 SILLION TOO LOW  :  $ 127.1 BILLION TOO LOW  I  ---------------------------,---------------------------I  1  PRIYATE BUSINESS INVESTMENT  ( GOYERNMENT OUTLAYS FOR 6000.S ANO SERVICES '  ( Including Net Foreion}  I I  I  I I I  I I I I  I  I I  ·,I $ 51.8  BILLION TOO LOW Federal Reserve Bank of St. Louis  $20.4 BILLION TOO LOW  153  154  EMERGENCY HOME OWNERSHIP ACT  The most significant part of the shortfall, fur the purpose of this housing discussion, is that I find that private business investment, which I am not against, which I am for, was almost lp52 billion too low over that 7-year period. Total national production, almost 200 billion too low. Private spending by consum13rs and the Govequnent take, almost 148 billion too low. The 148 billion and the 52 billion add up to the 200 billion. It doesn't matter that some economists might arrive at different figures. You can change the 200 to 175, and change the 52 billion to 45 and the 148 1billion to 130 billion, for example. The basic principle is the same. We have had a deficiency in the amount of activity needed to keep ourselves fully employed, and $52 billion of it, according to my estimate, anyway, has been a deficiency in private investment. · Now, what part of this shortfall in private investment has been housing investment i This is the nub of the matter so far as housing is concerned. This is why it is, I believe, so wrong for the man charged with the housing responsibilities of the Federal Government to talk about a 1.3 million rate of housing ( which incidentally is not going to be maintained in 1960) being adequately hi~h, and to express concern that a higher level of housing would be mflationary. Such an approach applies to the housing problem the whole wrongful philosophy that high and growing unemployment and low economic growth and the denial of the economic needs of our people-and I may add of our national defense needs-are the only alternative to a destructive inflation. In other words, this wrongful approach smacks of the notion that we have to have a recession every other ye~r, .and rising unemployment, to prevent infl.ation2 and this is the nub of the argument against the stimulation to housmg which this bill would provide. Anyhow, of this $52 billion shQrtfall in private business investment, I compute that aibout $30 billion of it is a shortfall in housing construction over this 7-year period. Now, how do I get that j Why is the housing figure so high 1 The housing figure is high because private business investment is made up of investment in plant and equipment, investment in inventories, investment in new kinds of construction other than housing, and in· vestment in housing. Now, there are hmits to how much more we could haye had of investm®t in plant and equipment. We should have invested some more if we had a stable ra~ of growth, but in view of the expansion of our plant facilities relative to our consumption take, query as to just how many billion~ more could hav~ been absor~d i11 p~ant ~nd equ!pp:tent, particularly m view of what 1s called the mcreasmg productivity of cwpital, whereby every million doll~rs you invest i11 tools and equipment provides tnore increase in production by automation than that invested in plant and equipment 10 or 15 years. 1tgo. Federal Reserve Bank of St. Louis  EMERGENCY,HOME OWNERSHll' ACT  155  There is a li:rnit to how much you can build up inventory a;ccumulations, because inventories have to be sold, and there is a certain limit to other kinds of construction.. Housing is the thing that has fallen furthest behind in terms of need, and in the final analysis our economy exists to meet needs. I, therefore, estimate that about $30 billion on this investment deficit is probably attributable to housing, and you see how it squares out. That $30 billion, over 7 years, 1s something in t'he neighborhood of a little more than $4 billion a year, if my figures are correct. If you had invested a little more than $4 billion a year additional in housing-private housing I am talking about now, not Government spending, and this bill doesn't deal with Government spending in spite of what Mr. Mason says by implication-if you had $4 billion more investment in housing a year, you would have had a level of housing construction on the average about 20 or 30 .percent higher than you actually had. This would have come closer to any responsible judgment of a long-range housing program consistent with new family formation, population growth, adequate supply to prevent shortages, and improvement of housing conditions. One of the great things done earlier by Senator Taft and others was the insistence that the Housing Agency devote itself to longrange studies of basic housing needs, so that they could derive for the benefit of the Congress, which has to make the judgments, what kind of housing program in what quantities would meet the housing needs of the people and meet the economic needs of the country. I see none of this in the Administrator's recent testimony. I see only the economic argument that housing construction has been high enough by the economic test of avoiding inflation. I think this is entirely wrong. We have had a deficit of about $30 billion in housing construction since 1953. This translates itself into a deficit,· if you take $10,000 a unit, which is very low, of something like 3 million dwelling units; or, if you take it on a yearly basis, somewhat more than 400,000 units a year. This figure squares very well with what would have had to be added to actual construction since 1953 by the test of an adequate housing supply. Now, let's look at the situation in late 1959. In late 1959-because in late 1959 we are not back anywhere near to full employment and full production-we still have, as I said, 4.8 million unemployed on a true basis in December 1959; which is muc'h too high, and· 3,6 million on a Census Bureau basis, which is also much too high. We still had, in the fourth quarter of 1959, a short fall in national production coming to more than 10 percent of our full productive capability. In other words, we have an overall slack in the American economy, even now, of more than 10 percent, so we are nowhere near back to full employment and full production, and, moreover, we are at the 1  50876-60-11 Federal Reserve Bank of St. Louis  156  EMERGENCY HOME OWNERSHIP ACT  crest of a boom which is unlikely to last more a year or so without better policies. Now we have the long-range problem, looking ahead. I want to talk first about the problem of inflation here, because the main argument is that this bill is inflationary. Now, there are many things on which economists are not in agreement, but there is one thing on which they are coming more and more into agreement, and that is that the whole idea that the way to stop inflation is to cut back on a level of economic activity consistent with full economic growth and with meeting the needs of the people has been exploded. In World War II, we had too much pressure on our resources. We had a 9-percent annual rate of growth. We had our farms pressed to the utmost to produce all they could. We had our plants pressed to the utmost. We had people out of the labor force, and were putting in new people, inefficient workers, secondary workers. The economy was tremendously pressed, and therefore we had inflation because the economy was racing too fast. Naturally, economists and financiers, not being too reflective, reached the conclusion tha,t the way not to have inflation is to go slower. This is true up to a certain point, but suppose the efficiency rate of operation of the economy is about .5 percent a year, and instead of going 5 you are only going 2.5 percent, or 1.3 percent as we were doing between 1953 and 1958, and you still say the way to stop inflation is to go slower? The kind of inflation we have had in this recent period is not inflation from the inefficiency of going too fast, but inflation from the efficiency of going too slow. You take a plant, a big plant in a big industry, that is producing at 50 percent of capacity, and they retain 70 percent of the workers, for perfectly good and human reasons. You divide the 70 into the 50, and you get a low productivity figure. This has nothing to do with technology, that is merely high cost resulting from going too slow. What the next chart shows is this: There has been an inverse correlation, in recent years, between the rate of economic growth and the amount of price inflation. In other words, when the economy was growing 3.5 percent a year, you had a great deal less price inflation than when the economy was growing only 1 percent a year, and when the economy started receding you had more price inflation than when the economy was growing 3.5 percent a year. Federal Reserve Bank of St. Louis  157  EMERGENCY HOME OWNERSHIP ACT  "THE NEW INFLATION" EMERGED AS THE ECONOMY MOVED FROM GROWTH TO STAGNATION TO RECESSION, 1952-1958 PRODUCTION AND EMPLOYMENT j:::.:::.:::::::j Total Notional Production in 1957 Dollars, Average Annual Rote of Change.  E888J  Industrial Production, Averag e Annual Rate of Change.  k?v -4  Unemployment as Percent of Civilian Labor Force, Annual Average.*  4 .Z¾  3.8%  1952-1955 GROWTH  m  Elm ll'B/I  6.4¾  3.9%  1.7%  1.4%  P2l  FSm  1955-1957  1957-1958  STAGNATION  RECESSION  Federal Budget Expend itures, Fiscal Yea rs in 1957 Dollars, Average Annual Rote of Change. Non-Federally Held Money Supply, Average Annual Rote of Change. Federal Surplus(+) or Deficit(-), Fiscal Years in 1957 Dollars, Annual Average.* 5.8%  A  3.6 %  -1.4%  0  -$2.8 Billion  -$6.5  Bil lion  1952-1955  1955-1957  1957-1958  GROWTH  STAGNATION  RECESSION  ( Average Annual Role of Change l  ~ Consumer Prices  t•:•:•:•:•:•J Wholesale Prices  2.5%  1.1%  0.3'%  ~  -0.2%  *  3.t¾  3.6%  ~EEJII  -  Industrial Prices  2.7% -~  1.4%  IT:;) 0.3%  1952-1955  1955-1957  1957-1958  GROWTH  STAGNATION  RECESSION  The annual overooes (as differentiated from the o-.ierooe annual rotes of chonoe) ore for the peri ods 1953- '55 and 1956- '57 inclusive, and 195 8 . Federal Reserve Bank of St. Louis  158  EMERGENCY HOME OWNERSHIP ACT  There has also been an inverse correlation between the expansion of the money supply and the amount of price inflation, and between the condition of the Federal budget and the amount of price inflation. This is because, under an administered price system, which is not like the old supply and demand system except for the farmer-the farmer's prices have been deflated-there is an effort to compensate for an inadequate level of production and employment by a higher rate of price increases to accomplish a profit objective through scarcity rather than through abundance. This new principle has been very applicable to housing. Housing has been one of the biggest inflationary items in the cost of living. And this hasn't been because there was too much housing being produced. It has been because there was a housing shortage which enabled rents to go up at an extremely fast rate, and similarly the imputed rent attributable to home ownership. And the second factor has been the interest rate spiral, which has been perfectly unconscionable in the case of housing. So the two factors which make for inflation in housing, higher charges for every dollar that you use, and shortage of the housing supply, have both resulted from the fallacious idea that too much housing was being built and you had to cut it back. This has been the source of the housing inflation. So housing has been. the most symbolic and significant and concrete demonstration in detail of the trouble we have gotten into in the economy as a whole, through falsely thinking that scarcity of money, scarcity of credit, scarcity of supply, is the remedy for inflation. This is not the fine spun theory of an economist; this is written into the record of what 'has happened. Now, when you come to the arguments of those opposed to this bill, I don't only feel that they are "Tong; I can't even tell just where they stand. I have been listening to the Federal Reserve Board and the Treasury and the Housing Agency make two conflicting arguments since 1955. First, they say the tight m<?ney policy will fight inflation by cutting back the volume of housmg. Second, they say that the tightmoney policy will bring out more funds for housing, by offering higher interest rates to investors and by encouraging more saving. Now, how do you reconcile those two arguments? You can't, and you can't do it today any more than you could in 1955. If you read through the testimony of the Administrator in detail, this dichotomy in logic runs all the way through it. On the one hand, he is worried tha.t more housing will be inflationary and push up oosts, and on the next page he says that he really is for more housing; that if you don't pass this bill, the American people will save so much, and the Government's reduction of the national debt will increase credit funds so much, that we will get all the funds we need to have more housing. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  159  Which of these two thin!!S does he really mean 1 . Now, on the basis of the record and on the basis of experience, I can't tell which the opponents mean, but I can tell which objective they are driving toward. They are driving toward the objective of a throttling off in 1960 of an adequate level of housing construction at costs within the people's means, on their silly theory that this is the way to f\ght inflation. This is their basic position, despite the trimming and despite the inconsistencies, and I say this position is .fundamentally wrong. It is wrong from the economic point of view, it is wrong from the employment point of view, it is wrong from the housing point of view, and it is wrong from the fiscal point of view. Now, as to the argument that there will be enough funds for housing in any event. Again, I don't know whether they are for higher charges or for lower charges. The Housing Administrator argues that if the ceiling on long-term borrowings by the Government is removed, that interest rates will go down. This seems to be an argument that we should have lower interest charges. Yet on the very next page, he opposes .some of the proposals made in this bill to reduce some of the charges on the ground that you need the higher charges to coax investment. So I don't know exactly where he stands on that. Then I am very surprised to find a national administration, which talks about stability, opposed to the bill's 1-year provision with respect to par, and the basic ground on which they oppose it is that housing investment has to be speculative and has to fluctuate enough to coax out capital. Now, this is really basically the same as the argument that has been made, over the last few years, that it is the function of the Government to make the bonds of the Government a speculative commodity. And I have heard the Federal Reserve Board and the Treasury, as a part of the tight money policy, come before congressional committees and argue that they want a Federal bond to be more speculative than a stock. They don't say it in exactly those words, but they say that they want to keep the public guessing as to whether the bond that somebody buys for a hundred dollars is worth $102 or $87 a few months from now. In other words, let's have a :financial crisis every time you try to finance your most fundamental obligations as a Nation, and this in the name of stability. · I Just fail to see economic merit or fiscal merit or budgetary merit or housing merit in the opposition to this bill. Now, let me just talk a minute about how big the stakes are in this issue. We have in this country a raging new technology. People don't realize it. I remember, a few years ago, I was going around the country, and people were saying the cure to the problem of increasing productivity on the farm is to get people jobs in industry, and I saict., Federal Reserve Bank of St. Louis  160  EMERGENCY HOME OWNERSHIP ACT  "How are they going to get jobs in industry in view of what is happening in industry i" Now they are saying, "Well, there isn't room for them on the farm; there isn't room for them in industry; they will get jobs in offices; they will get jobs in the white-collar occupations. This is the great change that is taking place in the structure of the labor force." Well, I heard one of these talks, and I came back to my office where there had been six elevator girls in the building, but :now there weren't any; they had automated it. They had only a starter, and the starter said, "In a few months I will be automated out, also." The same thing is happening in officework that happened on the farm and in the factory, and it is happening faster and faster. Instead of talking about 1,300,000 housmg units a year-which we are not going to have in 1960-as being wonderful because it is higher than some previous time, we should ask ourselves what kind of housing program will not only meet the needs of the people but will give us the opportunity for expansion in this vital field which will help to absorb our full productive powers. Now, I have made some estimates on this. If we go ahead in the future at a 5-percent growth rate, we will have about $350 billion more national production between now and 1964, in the aggregate, than if we average the 2.3 percent we have averaged over the past 7 years. With $350 billion more of national production, under our progressive tax system, the Federal, State, and local governments will have $100 billion more of tax revenues with which to meet our national security needs, our education needs-I am not talking about Federal aid to education, although I am for it; I am talking about all levels, because the wealth comes from the people, and tax revenues represent wealth coming from the people-we will have $100 billion more in public revenues at the higher growth rate with existing tax rates. These two charts illustrate this discussion. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  161  HIGH GROWTH RATE, 1960-1964, WOULD YIELD $350 BILLION MORE TOTAL PRODUCTION THAN LOW -RATE Billions of 1958 Dollars  100.--------------------------,  650  600  Totot Notional Product (G.N. P.) at High Growth Rote (Average Annual Rare of 5%, '\.. After Full Employment Restored) "  i50  500 (Average Annual Rate of 2.3%, The Actual 1953J59 Rate)  450  400~----~-----~----~-----~ 1960 1961 1962 1963 1964  HIGH GROWTH RATE WOULD PROVIDE EMPLOYMENT FOR MANY MORE PEOPLE Millions of Persons so.-------------------------, 75  Civilian Employment at High G. N. P. Growth Rote  \ 70  '  Civilian Employment at Low G. N. P. Growth Rote  65  so~----~-----~----~-----~ 1963 1964 1960  1961  1962  NOTE: Year 1959 is used as projection base year for this chart Federal Reserve Bank of St. Louis  162  EMERGENCY HOME OWNERSHIP ACT  BENEFITS OF HIGH GROWTH RATE CONTRASTED WITH LOW GROWTH RATE 1960-1964 AS A WHOLE In 1958 Dollars  I AVERAGE PERSONAL · I TOTAL FAIi/LY INCOME CONSUMPTION I WAGES AND IMulliplo Penon Familiul EXPEND/TURES I SALARIES I  I 1  GOVERNMENT  l TRANSFER PAYMENTS lTO INDIVIDUALS  I  I  I  I  I  I I  I  a,;;;J;~r:rJ. l  "  ;  C  '-  I  I I  ~ I  I I  I I  $5,200 Higher  $225 Billion Higher I  : , $165 Billion t Higher I I  I  I  1  I  $ 40 Billion, Higher  --  FARM :IJNINCOHPORATEDI GROSS PR/I/ATE PUBLIC OPERATORS' 1 BUSINESS AND I DOMESTIC REVENUES, NET INCOME : PROFESSIONAL I INVESTMENT FEDERAL,STATE I INCOME : (Including NII Fo~oign) AND LOCAL I I  I  ~'="  ~---·  I I ""'  I  I  -c  I  Jr.:i· ·  I I  I  I I  $40Billion Higher Federal Reserve Bank of St. Louis  $20Billion Higher  : I I  $55Billion Higher  -$100Billion Higher  EMERGENCY HOME OWNERSIDP ACT  163  Now, what part does housing play? I figure that in order to meet these targets of national growth, in other words, to avoid the 19 million man-years of unnecessary unemployment that we will have over the next 5 years if we grow at a 2.3 percent rate rather than a 5 percent rate, we have got to elevate the level of housing construction in this country of a nonfarm character to at least 1.7 in 1961, and to 2 million after that, and add on 130,000 to 180,000 units of farm housing per year. We need an effective housing program in this country for practically all income groups, at costs withm their means, on a stable expansion basis as the country grows, coming somewhere within the range of 2 million units a year. In order to get this, we have to meet the fundamental problem that we have inflated the cost of housing beyond the means of the people, and one of the biggest elements in this is the higher cost of money. You are all too familiar, for me to have to cite it, with the increasing cost that is involved when the effective rate on housing loans, starting at 4 percent or 4¼, has gone up to 6 or 6.5 percent. We don't even know what it is any more, because when I was before the Senate Finance Committee 2 years ago, I asked them to do what I couldn't ·get us a private economist, to ask the Treasury and the Federal Reserve Board just to figure out how much of a burden the increased interest costs were imposing upon the homeowner, the farmer, the small businessman, the American public generally, and State and local governments. We have never been able to get it, and we are just flying blind on a constantly increasing spiral of interest costs. And now we are told that, if the ceiling is taken off) if instead of Congress as this bill proposes adopting definite legislation in one small area to force some of the costs down a little bit by national policy, if we take the ceiling 'off, the costs will come down. I was before the Finance Committee in 1957 when they proposed to take the ceiling off on savings bonds. I said that, from the viewpoints of equity, it ought to come off. Why should the savings bondholder be penalized? But from the viewpoint of economics, you don't stabilize by taking off ceilings. You don't get lower interest rates by taking off ceilings, and you don't get lower interest rates by a congressional vindication of a policy designed by the Federal Reserve Board to force up interest rates. Sure, the interest rates under the ceiling are higher than they were before, but not because of the ceiling. They were higher than they .ever were before in 1955, and in 1957, and again in 1959. The only time they began to go down was when we had a recession. I urge you to reject these spurous, pretentious economic and financial arguments against this bill, which seem to me designed to confuse and bedazzle rather than to simplify. This bill is designed to do something about housing within the means of ordinary people a little bit-and this bill is just a little bit, it is just a starter. The opposition's trying to insert the fear that this bill may be dom.g something which is economically or financially unsound. I don't think it is economically or financially unsound. I think it is alert to the economic and financial conditions of the country. We must reject the idea that we can stop because we are higher than before, because we have more employment than we had 4 year1:1 Federal Reserve Bank of St. Louis  164  EMERGENCY HOME OWNERSHIP ACT  ago or 8 years ago, more housing than we had 4 or 8 years ago. We have more people than we had 4 or 8 years ago, more machinery, more science; we have more of every kind of productive power. The question is whether we are going to use it, and if we don't use it, the American economy is going to be characterized in the future as in the past by a rising level of unemployment of plant and manpower. We will have little ups and downs, with the recessions and the upturns, but the long-term trend will be an increase in unemployment, and this bill is therefore a ste:p in the right direction, and I thank you very much for your attentiveness in listening to me. Mr. AnooN1z10. Well, Mr. Keyserling, let me first of all compliment you for a very fine, complete and interesting statement. As a matter of fact, I think it was so complete that any of the questions I had in mind you have already covered, but just let me point out for the record that, first of all, you represent a nonpartisan citizens group; is that correct i Mr. KEYsERLING. In one sense I never represent anything but my own independent thinking, and if you folks want to check on that, I say this in a semifacetious way, go back to 1952 and see the position I took on the tight money policy when I was the top economic man in the Democratic administration and I came before the Joint Economic Committee and debated whether or not this so-called tight money accord was desirable. In 1952, I was against the beginning of this tight money policy, with all the force at my command, and I stated for the record exactly what was going to haJ?pen. This has nothing to do with partisanship. There were at that time too many Democrats for this tight money policy, and not enough Republicans against it. 1\fr. AoooNIZIO. I simply state that to indicate that you don't come here with any particular ax to grind. Mr. KEYSERLING. It makes absolutely no difference to me, personally, whether the money policy gets tighter or looser. In fact, I might benefit a little if it gets tighter, because everybody who is far enough above the national average in income-and I am probably above the average though I am not rich-everybody who lives partly by lending the savings of other people, benefits by this transfer of national income from those who need to those who get. Today, we have come to a pass in the American economy when great financial institutions have the gall to insert ads in the papers around the country that the way to stop inflation is to repress the wages of wage earners, further deflate the incomes of the farmer, and pay these institutions twice as much interest for lending us our own money. I say we have come to a sorry pass of economic understanding when they can get away with that kind of thing. It would have been unheard of 20 years ago for the great insurance companies to put ads in the papers saying the way to stop inflatio:µ is to inflate our own unconscionable profits by having the people whose moriey we are using- pay us more for the money we lend to them. Mr. AnooNrzIO. When Mr. Mason was before our committee representing the administration, he indicated to me that he thought we were not presently in a tight money situation. He said that perhaps we had been in one, and that we are slowly, gradually coming out of it. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  165  Do you think that to be true? Mr. KEYSERLING. No. The President of the United States sent a special message to the Congress a week or two ago, in which he said that the interest ceiling ought to be removed because interest rates were higher than they had ever been before. How can you say we are out of the situation when the President just a week or two ago has said that the interest rates are higher than ever before? Now, if you want to say every time they are higher than ever before that we have reached the top, and we must be going down because they are higher rthan ever before, that is one way of saying it. But I think it would be more reasonable and logical to say that, i£ every few months you are hitting a new peak in rnterest rates, you 'are not over the hump, and they are going to go still higher. And I predict with great confidence, if we don't have another recession or until we have another recession, they will go still higher. And under this policy we will get another recession, and then they will retreat for awhile. Then, as the price of recovery, they will start going again higher, assuring the recovery will not be enduring, will not bring unemplo;fment down to tolerable levels, and then we will be on our way to still another recession a little later on. This policy is not good economics. The increase in our money supply has not been keeping pace with the technological and productivity capabilities of the country, and the tight money policy, far from reducing the rate of inflation, has over the span of the years increased the amount of inflation, because it has been based on a shortage idea, and an administered price system. You don't get a reduction in prices through shortages of employment and production. Th~ steel industry-and _I have nothing rarticularly against the steel mdustry-has gotten its break-even pornt down to 40 percent. I wish the American £armer could make a profit at 40 percent of sales of his products. I wish the average professional man could do well when idle 60 percent of the time. The steel industry has got prices so high that their break-even point is 40 percent, and when they were operating at 60-odd percent over the year their profits were almost the highest on record, but still they talk about their high costs and allege that their labor costs forced up their prices. We are moving into an economy based on scarcity rather than an economy based upon abundance, and this can be good only for the plunderer, not the people in general. Mr. AonoNrzro. And, of course, the answer is not the loosening up of interest rates. They talk about flexible interest rates. Mr. KEYSERLING. Well, flexible farm prices flex only downward, and flexible interest rates flex only upward. I don't see any fluctuation. They are all much higher than they were, and the President says they are at an all-time peak, 'and now the argument is take off the ceiling and they will get lower. This I don't comprehend. Mr. AnnoNrzro. Now, it has been charged that in some areas this is strictly a bill designed to help homebuilders. Do you agree with that? Federal Reserve Bank of St. Louis  166  EMERGENCY HOME OWNERSHIP ACT  Mr. KEYSERLING. No, of course I don't agree. You can't, under the American form of economy, in a fundamental sense, help consumers without helping producers and vice versa, if it is real help in the long run. That is the essence of an economy where our interests are mutual in the long run, though we sometimes don't realize it. As a matter of fact, this bill W01Jld also be better for the bankers and insurance companies in the long run, because while in the short run they are making inordinate gains through this high-interest-rate policy, in the long run, where there is a $200 million loss of national production and 15 million man-years of unnecessary idleness, they make less in the long run than they would if in the short run they hadn't overstuffed themselves so much. When there is a recession, business profits are very volatile and go down very fast, and even banks don't do so well 1f the recession lasts long enough. I am a believer in the theory of mutuality of interests m the American economy. This bill is good for homeowners and homebuilders, and it is good in the long run for homebuilding financers, and that is why I am for it. Mr. AoooNIZIO. I believe you mentioned, Mr. Keyserling, that the dropoff in home building construction during 1957 contributed in great measure to the recession of 1958. I wonder if you would highlight that a little more i Mr. KEYSERLING. I don't think the drop in homebuilding was as severe an initial contributory cause as the drop in investment which came from an inadequate expansion of consumption, including homebuilding, inadequate to absorb the product of American factories and :farms. In other words, you had a much more serious drop in fundamental bdsiness investment in plant and equipment than anything else. But you have to ask why that drop occurred. There are those who talk about high interest rates promoting savings, and that savings will go into investment in plant and equipment, and thus provides employment. Now, I had this out with the Federal Reserve Board and the Treasury in early 1957, before the Senate Finance Committee. They were arguing for high interest rates, they said we needed more investment in plant and equipment, and they said high interest rates would induce American people to save, and savings would go into investment. I said, "Why do you want to stimulate investmenH" In early 1957, we were moving directly into an economic recession. There weren't any shortages any more, we were overproducing everything, and when they were challenged, the only thing they could find in short supply was one specific kind of lead pipe, as you may recall. Otherwise, we were in oversupply on everything, and they were talking about a tight money policy to stimulate savings so you could have more investment I What nonsense that turned out to be. I said. "What you need to stimulate is the demand exerted upon our productive facilities, the demand exerted by private consumption, of which housing is a very important element." Housing creates a demand for steel. for furnishings, a demand for other metals, it creates a demand for almost everything in the broadest sense. I Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  167  said, "This is what your problem is, plus I think we also nee4 a higher level of public demand for the things· we need as a nation that can't be provided privately." This economy in 1957 was s1;1ffering from too low a level of demand, and we had a lo~ de~and mflation not a high demand inflation, an unemployment mflation, n~t an ove~mployment inflation, and the recession came because we didn't have a high enough level of demand. The recession didn't come primarily because of the falloff in hons• ing, but because we weren't building a high enou_gh exp:i,nsion in ho~sing and other consumer takes to support our mcreasmg productive power. So I would say that, while if you just looked at the figures casually, you wouldn't say that housing was the most important, if you looked at it in a realistic way, I would say that housing is about the most important single example of our failure to expand our technological growth and the growth in labor force. Correspondingly, if I were asked what are the areas in which the American economy might expand enough to take up the slack, I would place housing at the top, or very high. We don't want to take Uf the slack with boondoggling, or expand with things the people don t need; we want to equate the expansion of things people need with the things that will create employment. We don't want to create employment for useless things. We wish we didn't have to create employment by armaments, because they are useless in a sense, but we do have to. Housing, more than food, clothing, automobiles, or any one thing, is the way we can build an expansion of employment and production to meet this technological tlirust, and at the same time produce a useful commodity which is in greater short supply in the United States than any of the other basic elements in the cost of living, with the possible exception of medical care. · Mr. .AnooN1zro. Mr. Keyserling, one more question, and! then I will pass on. This so-called tight money policy of this administration, does it affect all parts of our economy equally, or does it discriminate against the small borrowers and small businessmen and home buyers i Mr. KEYSERLING. If you take a long enough period of time, it affects everybody, but as one economist said, in the long run we will all be dead. In the long run it affects everybody, because it hurts the whole economy. In the short run, it helps the strong at the expense of the weak. In the short run, it transfers money away from the small homeowner, the small busiJ:?.ess~an, ~he small purchaser of d~rables, the farmer2 everybody who 1s primarily dependent upon credit and the terms ot credit. It transfers mcome away from them to those that either are less depen~ent up~~ credit _or more dependent upon lending than upon productive act1v1ty, so 1t does hurt the weak, the vulnerable, the mass, to the benefit of the few. I _think that the greatest economic improvement in the past 25 yea~, agam regardless of party-we hear about the tremendous economic improvement through social security, the tremendous economic improvement through collective bargaining, and various other things that ev~rybody is for, Repul;>licans and Demo.crats,. and I think they are all rmportant. But I thmk the greatest smgle improvement that the American economy made since the ghastly twenties is the reduc- Federal Reserve Bank of St. Louis  168  EMERGENCY HOME OWNERSHIP ACT  tion in the cost of money, which reduced the toll exacted by the person who merely accumulates other people's savings and lends them to the enterpriser, the producer, the workers, the farmer, and the businessman as a businessman rather than as a financier. I remember, when I was a young man, I went home from college. There was a bank in my town, and It had in bronze on the front of It: "Interest Rate on Savings, 6 Percent." Just think of it, interest rate on savings, 6 percent. The only trouble was this was in 1926, 3 years before the depression, and the bank was closed. The reason the bank was closed was because the economy couldn't stand an. interest rate of 6 percent for the purpose of lendin,r mone:y. We lowered the mterest rate on rarms, homes, productive enterprise, and everything. This wasn't inflationary. This was one of the greatest things that was done to bring about the very improvements in the mass standard of living, and in the opportunities for business, which the President cites in his Economic Report of a few weeks ago as the great advances in the American economy over the past 20 or 30 years. I think the reversal in this, the reversal toward a higher interest rate policy, is a reversal of the most important single economic improvement that was made in the American economy, and I heard some defenders of this tight money policy saying before one of the committees last year, "My goodness, interest rates aren't high, they aren't as high as th_ey were in the 1920's." I said, "Who wants to accept the 1920's as the measuring rod of what kind of balance or unbalance w.e should have in the American economy~" Interest rates aren't as high as in the 1920's. Well, as a matter of fact, they are now beginning to be as high as in the 1920's. Mr. AnooNIZIO. Mr. Barrett. Mr. BARRETT. Mr. Chairman, I have one or two questions. Did you indicate that we need about 2 million starts a year in housingi ·Mr. KEYSERLING. Well, as I say, about that figure. Some say 2 million, some say 1.7 million, some say 2.1 million. There is no automatic railroad timetable accuracy in these kinds of things. I do say, within a band, that we need somewhere between a little below 2 million and a little above 2 million. Mr. BARRETT. Taking your basic figure at 2 million a, year, how many years do you think we would need to provide adequate holl.S[llg, excluding deterioration~ Mr. KEYSERLING. I don't think, with the proper growth of the American economy, both as to family formation and income growth, that we would ever have to get below that figure. I think we would reach a point, as we liquidated more of the substandard housing, where the rate of increase would have to slow down, but I don't think we would ever come to the time where we would have to go below that figure. Tn other words, I wouldn't follow the argument that a lot of people make that you have got to go slower to spread it out. I remember, back in 1955, when we were recovering from that recession, and when an awful lot of automobiles were sold. A lot of people were saying that we should have had a still tighter credit policy and spread out Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  169  the sale of those automobiles over more years, and we would have been better off. This was ridiculous, and here is why. If you had spread it out over more years, since it happened that this industry was one of the big factors in the recovery from the recession, if you spread it out you might not have recovered. Secondly, by spreading it out over more years, you merely spread unemployment out over more years. You can't meet this problem, except by absorbing year by year your increased technology as the economy grows. Now, the same way in housing. People say let's build 1.3 million units this year, and there will be more next year. This is under the scarcity assumption that you have a limited market that has no relationship to our technology and what the economy ought to be doing. The 2 million figure is much closer to what we ought to do on a long-range basis, thinking of a gradual improvement in housing conditions with the gradual improvement of our technology and our incomes, and our national aspirations which go along with it. I think it is a sound, long-term figure. Mr. BARRETT. Your 2 million takes in the replacement of old and blighted areas i Mr. KEYSERLING. Why, of course it does. Here is what it really gets down to. Whether you talk about 2 million, or 2½ billion, or 1½ million, gets to the question of how rapidly you want to substitute decent housing for foul housing. This is in a sense subjective. Even the people in the United States who live in the worst slums are housed better than the people of India. And many are housed better than people were housed in the United States 50 or 100 years ago. But this has nothing to do with the case. You have to measure what is an adequate housing standard against the productive condition of the country, just as you have to measure poverty in that way. Some of my friends write books about an affluent society. I disagree. We have millions of people in the United States who are poverty struck by American standards. They are better off than :people were in the great depression, or better off than people in Africa, or parts of Western Europe, but by the market needs of the American economy and what we can produce, they are still in poverty. Eighteen million multiple-person families in the United States have incomes of less than $4,000 a year; they are in :i?overty by my definition; they are not affluent. The same thing applies to housing. What c.onstitutes a good standard of housing depends upon the state of your technologY, and your productivity. Two million housing units a year would, among other things, provide for new family formation. It would also reduce substandard housing at a pace that would not be fast measured against the speed at which we need to reduce it if we are going to find markets for our productive power. We can't expand domestic consumption of food much mo~e rapidly than_ our population gro_ws, and we can't expand consumption of automobiles much more rapidly than our population grows, or television, radios, or washing machines. Mr. BARRETT. Excuse me. I do not wish to prolong this discussion. I want to defer to some of the other members. Thank you very much for answering my question. Federal Reserve Bank of St. Louis  170  EMERGENCY HOME OWNERSHIP ACT  Mr. Anoomz10. Mr. Widnall. Mr. WrnNALL. Mr. Keyserling, I always find you very interesting to listen to, and you are very convincing. In fact, you have almost got me convinced, now, but I find in my own mind a difficulty in distinguishing between your own interpretation of what a persons says and what they actually say. Now, as an example, you say the Treasury, or the financial managers, say "Let's keep the public guessing," and your quote "Let's have a financial crisis every year." ; Whoever said that i Mr. KEYSERLING. Well, now let's separate the two statements. First, manifestly the Treasury has never said, "Let's have a financial crisis every year," and I don't think that I said that. I said that we have had a financial crisis almost every time-Mr. WrnNALL. You said they said that. Mr. KEYSERLING. If I said that, I ret:m.ct it. I don't want to argue with you; I respect your patience and tolerance in listening to me, just as you say you enjoy hearing me, and I won't argue about it. If I said the Treasury said they expect a financial crisis every year, I retract it. What I intended to say, and what I believe I did say, was that a financial crisis almost every time we have had to issue Government obligations has resulted from this policy; and I think that is so. Now, coming to the first point-as to whether they have said we must keep the public guessing: This they have said. I refer to the Chairman of the Federal Reserve Board. And I refer not only to Mr. Mar-· tin, but also to the former Under Secretary of the Treasury, who has now gone over to London to get us excited about exchange rates, Mr. Burgess. And I refer to former Treasury Secretary Humphrey. They all said that they favored a monetary and fiscal policy which kept the market guessmg. This was one of their arguments against the particular kind of stabilization of the Government bond market which I think is desirable. And it was one of their arguments, though not by any means their only argument, against Federal Reserve sup-, port of Treasury operations, because they said that support would enable bankers and the traders to know what the Federal Re.serve· Board is going to do, and that they shouldn't know. . I don't think I am incorrect rn saying that this has been their· philosophy. You see, the trouble is that they have applied to Government the concept of business to a degree where it shouldn't be applied. The Secretary of the Treasury also said, in the course of one colloguy, while I was saying that the Government has something to do with the interest rate on Government bonds, he said that the Government hasn't anything more to do with the rate of interest on bonds than a corner grocer has to do with the price of bananas. Mr. WrnNALL. Mr. Keyserling, I have my answer on that. I thought it was important to clarify what you interpreted them as saying, and what actually was said. Now, at another point and along the same line: You said the insurance companies took big ads in the papers, "sayinp the way to stop inflation is to inflate our unconscionable profits.' This is what I understood you to say. Now, did they say that in those adsi Mr. KEYsERLING. Again I think we are quibbling over a hair. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  171  Mr. WIDNALL. I am not quibbling; you are putting things into the record that people are going to read. Mr. KEYSERLING. Yes, and I will put it into the record again, for I think the people should know what I am saying. Mr. WmNALL. Your opinion is respected by a lot of people. Mr. KEYSERLING. Well, I think it should be. The insurance companies, of course, do not put an ,ad in the paper saying that the way to stop inflation is to pay "us twice as much for lending you your money," in so many words. This, of course, is my language, not theirs-my expression of shock at what they are in substance saying and doing. Mr. WmN.ALL. That is your interpretation. Mr. KEYSERLING. Oh, no, not iny interpretation. This is my commentary upon what they are actually doing. They are urging that the way to stop inflation is to lift the interest rates on lending-that is, the tight money policy. In other words, they put into the papers that the way to stop inflation is to support the Federal Reserve policy-that is, to increase the income per dollar lent of those who are lending money-and they are the biggest lenders of money. And tha,t is all I am saying in substance. Now, of course, when I say it is a curious thing that they should have the gall to tell the American people that the way to restrain inflation is to repress wages and farm income-which is also their position-and to inflate the amount of money paid to those who lend us our money. This isn't their language; this is my commentary upon their behavior. Mr. WmNALL. If you have an ad that would indicate that, I wish you would put it in the record. Mr. KEYSERLING. You mean an ad they put in the papers that higher interest rates are desirable~ Mr. WmNALL. That is what you said originally. Mr. KEYSERLING. I think my position is clear. Mr. WmNALL. I think it is important to clarify it for the record. Mr. KEYSERLING. I can certainly put ads in the record where the insurance companies have advocated higher interest rates, or policies designed to achieve higher interest rates. Mr. WIDNALL. You have some very fine charts here, and you sta,rt talking about a $200 billion loss to the economy ; and as you proceed with your testimony, you keep coming back to this as though this is an accomplished fact we have now lost $200 billion-talking along that line. This is your interpretation, again, but _you keep talking about it and repeating it to the point where it stands out as though everybody acknowledges now we have lost $200 billion in the economy. I think that should be pointed out, too. Mr. KEYsERLING. Well, I think, as I said, some people-and I am talk~ng rubout the pe?ple who_h~ve analy~e~ this-some people might say it isn't $200 b1lhon, that 1t 1s $220 b1lhon, others might say $180 or $160 billion, but there is agreement among more and more competent people that the figure is within these ranges. . If you go over the whole range of people who are studying our economic performance, I don't care whether you take the Rockefeller studies or whether you take what has been said by the Central Intel50876-60-12 Federal Reserve Bank of St. Louis  172  EMERGENCY HOME OWNERSHIP ACT  ligence Agency, or whether you take what is said by the National Planning Association, or whether you take what is said by the Committee on Economic Development, they are all converged on the point that since the Korean war we have had an amazingly low-or whether you take what is said by Business Week-they all converge on the point that we have an extremely low rate 0£ economic growth since the Korean war, and an intolerably high level 0£ unemployment, and they have translated this into quantitative terms. Some 0£ them come up with a $200 billion loss, that is my figure; others a little more, others a little less. A figure 0£ this kind, I say again, is not the same as saying it is 234 miles on the clock from Washington to the Washington Bridge in New York City. It isn't as exact as that. It is an effort to portray generally the kind 0£ problem we have to deal with. But I haven't seen any figure less than $150 or $1(30 billion. Mr. WrnNALL. I agree with you when you increase interest rates it increases the cost 0£ housing. Now, doesn't it also work that when you increase the amount per unit in a Government program, you increase the cost 0£ housing, that when you raise it from $8,000 to $9,000 a unit, that the $9,000 becomes a floor rather than a ceiling; isn't that true? Mr. KEYSERLING. I would say yes and no. I would say to a degree it is true, but there always has to be realism in adjusting the ceiling to what present costs actually are. This is one 0£ the £eatures 0£ inflationary spiraling. In other words, as 0£ any given point in time, it would be true that a higher ceiling would tend to encourag~ building up to a higher ceiling, but on the other harid i£ you set a ceiling a number 0£ years ago that is entirely irrelevant and unworkable in terms of present costs, you have to lift it if you are going to get housing at all. Mr. WrnNALL. The housing cost, the cost factor contains many things besides interest rate. Mr. KEYSERLING. Sure it does. Mr. WrnNALL. Wages, material, profits, additional planning that goes with it by way of development, or something on that order, and they all are factors, but of course the tight money policy is becoming the goat on all 0£ this, and this is something that those 0£ us who are on the administration's side are trying to talk about and bring to the attention 0£ the public. At another point in your testimony, you said we could accomplish all 0£ these things under, and I quote, a "progressive tax rate." Now, that is le£t hanging in the air. What do you mean by a progressive tax rate? Mr. KEYSERLING. You misunderstood me on that. I didn't propose a change in tax rates. I merely said that i£ you had $350 billion more 0£ national income, your taxes at existing tax rates would increase relatively more because, under a progressive tax system, when your economy sinks below foll production and when your incomes fall, your taxes £all £aster. In other words, when I said $350 billion more 0£ national production would yield $100 billion more 0£ taxes under a progressive tax system, I was not talking about a different tax system, I was merely trying to explain why $350 billion more 0£ national income would yield $100 billion more 0£ taxes. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  173  Some people might say that looks too high. The fact is, over the past 7 years, if you take my $200 billion figure as to the total production shortfall, the tax loss to Federal, State and local governments out of that $200 billion loss in national production has been about $65 billion. You wouldn't think it would be that high, but the reasoon is that as business volume sinks below normal revenues, tax revenues fall faster. I didn't mean that I was proposing a different progressive tax system. Mr. WmNALL. This bill as proposed would build approximately 74,000 units. What do you think the priorities ought to be in the use of those 74,000 units i Mr. KEYSERLING. I don't know exactly what you mean. Mr. WmNALL. Well, should it be single family, multiple family housing, or what type of housing~ Mr. KEYSERLING. I wouldn't be prepared to answer that as to this particular 74,000 units. Mr. WmNALL. I asked you that as a representative of the National Housing Conference, not as an economist. Mr. KEYSERLING. Well, I would say I would answer that this way, and then I want to say one word more about the interest rate thing, if II wou mayl.d say t h at 1"f t h"1s commit . t ee were now consi"dermg . 1egis . 1at·ion that dealt with the housing problem in a way approaching its totality, and were seeking as the Taft-Ellender-Wagner inquiry did, between 1944 and 1949, to develop an overall housing program of private housing, middle income housing, low income housing, subsidized housing, conventional housing, and new admixtures to meet the entire housing needs of the American people-then the question of priorities, how much for this group or that group, ,would be extremely important. But I say very frankly to this committee that, while I am for this bill, and I hope you won't take umbrage at this, this does not begin to meet in full the housing needs of the American people. It touches so limited a portion of it that I think the general impetus which it gives to a larger volume of constructtion at somewhat lowered costs, to more reasonable financing terms, to some additional· Government backing of the mortgage market, I think these are all steps in the right direction_, but the bill is not of a scope where I could say in terms of this particular bill just whom should it hit. I think it will help, within the area that it covers, to prevent costs from rising quite so rapidly, and therefore it will tend to help bring housing within the reach of lower income groups than otherwise would be reached, and I think that is eminently desirable because the great bulk of construction now is not serving the middle and low income people. Mr. Al>DONIZIO. Might I point out, too, that we don't necessarily have to take the premise that this will only build 74,000 units, because if this money goes into the market, it will attract certain private lenders, and there may be many more starts. This certainly was true of the bill that we enacted in 1958, isn't that so~ Mr. KEYSERLING. That is right. Mr. AnooN1z10. Mrs. Sullivan. Federal Reserve Bank of St. Louis  174  EMERGENCY HOME OWNERSHIP ACT  Mrs. SuLLIVAN. I have no questions, Mr. Chairman, but I do want to say, by way of passing, that I understand this is not going to be the Housing Bill of 1960; this is just a little shot in the arm to get more housing started. Mr. AnooNrzro. Mr. Ashley. Mr. AsHLEY. Did I understand you to point out, Mr. Keyserling, that the recessions that we have had during the 1950's have been getting progressively more serious? Mr. KEYSERLING. Yes, this is undoubtedly true. The recession of 1953-54 was more serious than the recession of 1949, and the reces-sion of 1957-58 was more serious than 1953-54, and the reason is that we are sweeping the problems under the rug. We are gradually accumulating a larger disparity between our power to produce and our ability to consume, under the existing distribution of income as it is a:ffected by private action and public policy. Because of the supports which have been built into the economy over the years, we haven't yet had a test serious enough to give us a big depression. But we should take note, very serious note, of the fact that the recessions have been recurring with increasing frequency and increasing depth, and I see no reason to believe that this will be reversed unless we have a change in our attitude toward housing and toward many other things. Mr. AsHi,EY. As far as this bill is concerned, you have heard the statements of the administration officials who have testified, or you have read them, I presume, and you are aware that Mr. Mason predicts for the coming year that money will become increasingly plentiful, and that interest rates will go down. Does this make sense to you in view of the monetary and fiscal policies that have been followed? Mr. KEYSERLING. What does the stock market think about it? To interpret the stock market is not easy. But insofar as the stock market interprets the judgment of sober businessmen and large investors as to what is goin~ to happen, the recent behavior of the stock market certainly hasn t indicated they think money is going to get easier, or that the spread between the yield on stocks and the yield on bonds and other forms of interest-bearing obligations is going to become more favorable to stocks. If the stock market trends mean anything, and I think sometimes they do, they mean that the general view of the business community is that money is going to get tighter, and I share that view. Mr. AsHLEY. I was interested in your comments on the kind of inflation that we have been having. You said with respect to homebuilding, for example, and other lines of economic activity, that this is caused by the increased cost of money, and also by relative inefficiency based on half-hearted production. Is this essentially what I understood you to say? Mr. KEYSERLING. I want to say something in all fairness to Mr. Widnall over here. I have not intended to take the position, and I don't think I have taken the_ J?OSition anywhere1 a~d I think this would be borne out by my wr1tmgs and my publications and everything else, that the cost of money is the only factor in the economic trouble we have been in. If I took this position, it would be really ridiculous. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  175  There are many factors. Bad farm policy is a factor, our wageprice-profit relationships are a factor, and I don't want to go into them here. Our lack of long-range planning in our Government budget and our Government monetary policy are other factors. There are all kinds of factors playing upon our economic difficulties, and I have discussed them all at various times in proper relationship. ' When I come before a committee, because you can't deal with the whole world of problems, I have to concentrate upon the factors that are relevant to what the committee is considering. There is not much use here in my talking before this committee at this moment about whether wages have been too high or too low relative to prices. I have strong feelings on that subject, and it is very important, but there is no use getting into that this morning. I have very definite feelings about our horrible farm policy, but there is no use getting into that this morning. I do feel that the tight money policy has been a very important factors in our poor economic performance and in the inflationary trend, and since this bill deals with that, and since the testimony of the Housing Administrator bears upon that point, I have dealt with that and placed emphasis upon it. Now, in the next place, I think the tight money policy has a symbolic significance which outweighs its detail significance. If the tight money policy were measured only in terms of its quantitative impact upon the economy, I think it would have a serious effect but not an all-prevailing effect. What I am more concerned about is that the tight money policy is an embodiment of a philosophy which is extended into other areas of economic policy, namely, the philosophy that the way that this great and dynamic economy meets the problem of inflation and economic health is not to do things, but to stop doing things. Now, there are times when you have to stop things. In a war, you stop civilian housing and automobiles. But the whole idea, over the last few years, has been that our main economic problem has been to stop us from going too fast in housing, too fast in resource development, to stop us from growing too fast in the expansion of social security, to stop us from going too fast in the expansion of national defense. I think all of this is based upon a fundamental misappraisal of what the problem of the American economy is in periods other than total war. I don't think our problem over the past 7 years, or prospectively over< the next 7 years, is going too fast. It is going too slow. Mr. AsHLEY. Let me ask you this. With respect to the inflation that certainly has taken place in the price of homes for American people, do you think that this is attributable in large measure to the fact that there haven't been enough homes built? Mr. KEYSERLING. There is no question about that, and that is the diff~rence between what I call the long-range view and the short-range vrnw.  Every productive activity imposes some strain upon the economy.  It may be an inflationary strain in that it increases demand for goods and labor. But we have got to distinguish between a one-shot operation and a long-term operation. In other words, even if the annual volume of Federal Reserve Bank of St. Louis  176  EMERGENCY HOME OWNERSHIP ACT  homebuilding needed to get the supply of housing for the consumer and the demand for housing in balance imposed some inflationary strain in its initial phase, you have also to take into account this question: How are you ever going to solve the long-range problem, and it is childish for national economic policy to deal only with the problem of the months, and never with the problem of the years, if we don't start vigorously to overcome the shortage~ We had the same kind of problem when I was in the Government during the Korean war. Mr. Baruch, regarded as a great economic savant because he helped fight a war more than a generation earlier, was saying at the beginning of the Korean war that we should finance the whole war effort out of cutback of consumer goods; freeze everything, he said. I said, "If it is true that we have a long-range :problem, if we are going to have for many, many years to carry a high level of armaments, we have got to expand our production base so that we will be able to carry both military supplies and civilian supplies." .They said that would be inflationary, and I said, "Sure, it will exert some pressure in the short run, but if we don't do it, we will be plagued with a problem of inflation for 25 years." We did it, and it was inflationary in the short run. It would have been less inflationary if we had obtained from the Congress the controls we sought. But by 1951, not mainly because of controls but mainly because we had expanded the production base, the price inflation stopped, we had ample supplies to meet both the war need and the civilian need, and we didn't cut back on either, and we were fit for a long-term struggle, and the inflation stopped. Housing is the same thing. You can always make a spurious case that, if you speed up anything, it may exert some fressure. But housing is inflated now because we don't have enough o it, not because we are producing- too fast. Mr. ASHLEY. ~Vhat should be the annual increase in the money supply~ Mr. KEYSERLING. The annual increase in the money supply should about approximate the annual growth potential of the country, which is a combination of growth in labor force and growth in productivity. I think it is now about 5 percent a year. Mr. AsHLEY. And just a couple of fast questions, if I may. First, let me ask whether you are concerned about the national debt, and specifically do you think the Federal spending should be curtailed during a boom period such as the one we are in in order to produce a budget surplus which can be applied to our debt i Mr. KEYsERLING. This committee has had ample warning of the condition of my terminal facilities, and if you want me to get into a general discussion of the economics of the national debtMr. AonoNizrn. I would like to state that we are running a little behind time and the Chair would appreciate it if we could move a little faster. Mr. KEYSERLING. I don't want to duck your question, I can answer that question, but if you want me to talk about Federal spending and taxation and the national debt, going to be quite an undertaking. Mr. AsHLEY. I do have one question. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  177  Mr. KEYSERLING. I don't want to seem flippant, but you asked a big question. Mr. ASHLEY. Perhaps it would be better if the answer were submitted for the record, but I would be interested in it, because I think that your views are so persuasive on the necessity for expansion, but at the same time there is certainly this other problem of an increasing debt that has to be faced. Mr. KEYSERLING. To put it in a nutshell, I think that we have many great national priorities, and to make the reduction of the national debt a top priority, from the viewpoint of national fiscal policy, is not a good ordering of priorities if I may let it at that. Mr. ASHLEY. That is all, thank you, Mr. Keyserling. Mr. AnooNIZIO. Mrs. Griffiths. Mrs. GRIFFITHS. I would! like to ask you, Mr. Mason made a statement that if the ceiling were lifted on long term Government bonds that this would make mortgage money available. I understood you to say you didn't agree with this, but I would like to know whether you understand their reasoning. Mr. KEYsERLING. I understand it, by process of interpretation, as Mr. Widnall would say. I don't understand it directly by reading it; 1 don't think anybody can. As to the reason why you can't understand it directly by reading it, let's apply it to your very question. You raise the question as to whether the Housing Administrator took the position that lifting the ceiling would make money available. Mrs. GRIFFITHS. He did, it is in the record. Mr. KEYSERLING. All right, he did; but why~ Did he take the position that lifting the ceiling would make money more available by making the interest rates higher or by making interest rates lower~ Now, the President's position, as I understand it, and I hope I am fair to him, is that removing the ceiling would make more money available by making interest rates lower. I don't agree with his conclusion that removing the interest ceiling would have either of these two results, but that is his conclusion, that by giving the Government more flexibility, the taking off of the ceiling would make interest rates lower. But how making interest rates lower, under Mr. Mason's philosophy, would make more housing money available, I don't qmte see~ because on the next page of his testimony, where he is talking about the premium, he argues that you have to :pay enough for the money if you are going to get it out. And certainly, the position taken by the housing people in the Government all the way through, year by year, has been that you have to pay more for the money to get the housing investment, and that the main reason why we haven't gotten a high enough level of housing investment is that we haven't paid enough for the money, and that therefore the rates ought to be higher. This argument is used to reinforce in every request they make to, raise interest rates all along the line. I say there is inconsistency in these positions. Basically, I think I understand the position, because I think the basic position-which is not Mr. Mason's position, I want to be fair to him; he is speaking forthe Treasury, the Federal Reserve Board, and the Budget Bureau about a bookkeeping analysis, not a housing analysis-the basic position is that a higher level of housing construction would be threatening Federal Reserve Bank of St. Louis  178  EMERGENCY HOME OWNERSHIP ACT  the stability of the country, and threatening the value of the dollar, and threatening the crusade against inflation, and therefore the basic position is that we should not have a higher level of housing construction. I think that is the basic position, and I think it is basically wrong. Mrs. GRIFFITHS. Thank you very much. Mr. MILLER. On that very point, I ask the spokesman for the administration whether they regarded the housing industry as the place most likely to inhibit this growth which they feared, and they denied that that was the case. Specifically on that point, do you think that the testimony of the administration officials indicates that they regard the housing industry as the place where they can best cut back and inhibit the inflation which they are afraid of! Mr. KEYSERLING. I don't think they are too clear on that. If you just read Mr. Mason's testimony, and it is a little confusing for the reason that I have given, Mr. Mason says as clearly as any one man could say in English that· he fears this bill because it would provide a higher level of housing construction, and that a higher level of housing construction would raise costs. He says just as clearly as one man could say in English on the next page that we don't need to worry, because there are going to be plenty of funds for a higher level of housing construction; the American people are going to save more when the interest rate ceiling is taken off; the surplus position of the Government and the retirement of the national debt is going to provide more funds. So, I can't tell by reading the testimony whether he is saying that we don't want a higher level of construction and therefore don't want the bill, or that we will ~t a higher level of construction without the bill and therefore the bill is not necessary. And I challenge anybody, on a reading of Mr. Mason's testimony alone, to find out which of these two things he means. Mr. MILLER. Would you say that the administration generally believes that the housing industry is a good place to start m inhibiting inflation? We have had definite information to that effect. Mr. KEYSERLING. I would say that the Federal Reserve Board and the Treasury and the Budget Bureau have had what I would almost call an irrational aversion to housing for several years. They have always thought of it as one of the first places to dampen off real or imaginary inflationary factors. And I have said this to my good :friend Mr. Martin: "Look, in the first place, you are completely misanalyzing the causes of inflation; this inflation hasn't been caused from overstrain upon our resources, and therefore a higher level o:f housing would not be inflationary, it would be anti-inflationary in the long run." "Second," I have said, "'V'hat are your national priorities 1 Even i:f a higher level of housing exerted too much pressure on resources, why don't you cut back on something else, since liousing is one of the things the country most needs 1" Look at the ridiculous nature-if that is not too strong a wordof Mr. Mason's testimony. He argues that we shouldn't have more housing now because we are highly prosperous, and weren't in 1958. Well, suppose the managers o:f our national fiscal and monetary policies were more and more successful in helping to make us pros Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  179  perous. Then, by their lights, we would have less and less room for housing, on the ground that we were prosperous arid that housing would be inflationary. When I was discussing the matter with a former member of the Council of Economic Advisers, somebody said we should build more schools, and he said "No," it would be inflationary because the country is so prosperous. I said, "Suppose it stays prosperous, would we never be able to afford the schools we need or pay the teachers what we should, but if by the grace of God we have another depression, would we then be able to afford it? What kind of economics is this?" If we are as prosperous as the administration says, we need to improve housing more than many other things, and the Reserve Board should have a selective control policy to pinch the things we don't need instead of those we need most. The trouble is that the tight money policy and the kind of credit controls we now have has stopped everything that was going too slow and didn't stop anything that was going too fast. Mr. AonoNIZIO. Thank you very much for being here, Mr. Keyserling. I want to thank you for your very fine testimony. (Mr. Keyserling's prepared statement reads as follows:) TESTIMONY OF LEON H. li:EYSERLING 1 ON H.R. 9371 BEFORE SUBCOMMITTEE ON HOUSING, HOUSE BANKING AND CURRENCY COMMITTEE  Mr. Chairman and members of the subcommittee, I appreciate this opportunity to appear in support of the emergency homeownership bill. I am here today as an independent economist, concerned with the well-being of the American people and the sound functioning of the American economy. I speak also on behalf of the National Housing Conference, of which I am a board member. FIVE BASIC REASONS FOR PROPOSED BILL  I favor the proposed legislation because it represents an important step toward these essential and interrelated objectives: (1) to reverse the long-term American economic trend, since the end of the Korean war, marked by an exceedingly low average annual rate of economic growth and an unduly high average annual level of unemployment of plant and manpower; (2) to reverse the prospect that, under current national economic policies, another economic recession looms ahead, possibly as early as 1961; (3) to reverse the national trend, during a number of years, toward sore neglect of the housing needs of the American people, especially those in middle-income and low-income groups; (4) to reverse the so-called tight money policy which. in my sober judgment, is an economic monstrosity and a social abomination; (5) to reject the economic philosophy which Government spokesmen, including the head of the Housing and Home Finance Agency, have very recently advanced in opposition to· this legislation, a philosophy which I believe to be founded upon highly inaccurate factual observations and dangerously erroneous practical conclusions. The proposed bill will not, of course, accomplish all of these purposes by itself, nor any one of them in full. It does not purport to be a full-blown housing program, responsive to our total housing needs. But it moves, generally speaking, in the right direction. I shall not deal with the details of the bill, but rather with the broad economic reasons why I favor it. THE ROLE OF HOUSING IN OUR POOR ECONOMIC PERFORMANCE 1953-59  From the beginning of 1953 through the end of 1959, our average annual rate of overall U.S. economic growth, measured in real terms, has been only about 2.3 percent. This contrasts with at least 4½ percent needed to maintain the maximum employment and maximum production envisaged by the Employ1 Former Chairman, Presill'ell!f:'s Council of lllconomi<; Advisenr, co.nsulting eeonomis:t. ~n,d atfomey, and ·president of the Couference on Economic Progress. · Federal Reserve Bank of St. Louis  180  EMERGENCY HOME OWNERSIDP ACT  ment Act of 1946. In consequence, we have during this 7-year period as a whole had a shortfall of about 15 million man-years of employment opportunity, and a shortfall of almost $200 billion in total national production. This has had an immense adverse effect upon private economic progress. It has had also an immense a!dverse effect upon the public revenues which are needed to pay for national security and essential domestic public programs. A shortfall in investment, especially in housing, has played a very important role in the overall shortfalls in our economic performance since 1953. To illustrate, the shortfall of almost $200 billion in total national production, during the past 7 years, has included a shortfall of almost $52 billion in gross private investment, including net exports of goods and services. Upon much more detailed analysis, it appears that at least $30 billion of this $52 billion investment .shortfall was a shortfall in private investment in nonfarm residential construction. This is quite aside from a deficient level of public investment in .slum clearance and low-rent housing. I arrive at this $30 billion figure by apportioning the $52 billion private investment shortfall in line with a sustainable pattern of optimum overall economic growth. It appears that not more than about $22 billion of the $52 billion figure could have been absorbed on a sustainable basis by other forms of investment, including producers' durable equipment, changes in business inventories, new construction other than housing, etc. It appears also that about -$30 billion more of private investment in nonfarm housing, over the 7-year period, would have helped to bring the average annual level of new home construction into line with a long-term housing program geared to population growth and new family formation plus sufficient removal of substandard housing to be compatible with satisfactory speed in the improvement of overall housing standards. Thus, it appears that about 15 percent of the total $200 billion production deficiency, during the 7-year period, was directly and immediately arttributable to the shortfall in private housing investment, aside from the stimulatory effects of this kind of investment on other types of investment. A comparable portion -of the excessive unemployment, 1953-59, can be attributed to the shortfall in housing investment. HOUSING'S BOLE IN CURRENT AND FORESEEABLE ECONOMIC SITUATION  Despite the current recovery movemenrt, we have by no means restored maximum employment and production. In December 1959, the true level of unemploy-. ment, taking into account the full-time equivalent of part-time unemployment, was almost 4.8 million, or almost 7 percent of the civilian labor force, seasonally adjusted. In the fourth quarter of 1959, the annual rate of our total national production was about $58.5 billion below maximum production, indicating an overall slack of more than 11 percent in the economy. The total private investment deficit in fourth quarter 1959 was at the annual rate of about $15.3 billion, -or considerably more than a quarter of the total investment shortfall of $58.5 bil• lion. And I would say that between a quarter and a third of the shortfall in private investment during fourth quarter 1959 was represenrted by a shortfall in private nonfarm residential construction. The same economic policies, private and public, which have produced this poor 7-year record, threaten to repeat it unless these policies are drastically revised. In ilts essential characteristics, the recovery movement today is not ,different from that of 1955 or 1957. Informed businessmen are now wondering whether the next recession will come in 1961, or even a bit earlier. But none seems to believe that we have yet found the key to more stability and more growth. If the 5-year period 1960-64 inclusive should register the 2.3 annual :average rate of economic growth which marked the 7-year period 1953-59, instead of the 5-percent annual growth rate which we now need to absorb the new technology, our shortfall in total national production during this 5-year period would be about $350 billion. Our shortfall in employment opportunity would be about 19 million man-years of employment. At existing tax rates, the shortfall in public revenues would be about $100 billion at all levels of government, leaving us less and less able "to qfford" the things we most need to do. It is not hard to depict the role which private housing investment should play in ari optimum rate of economic growth for the American economy as a whole, geared to sustained maximum e~ployment and production. This rate of overall growth would lift total civilian· employment from about 65.5 million in 1959 to '69.9 million in 1961 and 73.7 million by 1964. It would lift our total national Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  181  production, measured in uniform 1958 dollars, from an estimated $470.5 billion in 1959 to $549 billion in 1961 and $637 billion by 1964. In this framework of growth, gross private domestic investment should rise from about $67.4 billion in 1959 to about $81.5 billion in 1961 and about $97 billion by 1964. However, residential nonfarm construction needs to rise much more rapidly, because this area represents one of the most significant unmet needs of the American people, and one of the largest oppo1Jtunities for the expansion of production and employment to absorb in part the consequences of the new technology in many industries. I estimate that, as a part of the above-cited overall economic objectives, privaite investment in residential nonfarm construction should rise from an estimated $23 billion in 1959 to about $27 billion in 1961 and about $32 billion by 1964. These investment goals would be consistent with the amount of housing that the American people need, reconciled with their other needs in terms of our total resource potentials. These goals contemplate the desirability of about 1.7 million new nonfarm hoU1Sing starts in 19ff0, and aboUlt 2 million in each year thereafter through 1964, contrasted with less than 1.4 million in 1959. In addition, there ought to be about 130,000 new farm housing starts in 1960, and about 150,000 thereafter in each year through 1964. With ,this sort of homebuilding program, about 12.5 million substandard nonfarm and farm housing units as of early 1958 would be reduced to somewhere between 1 and 2 million substandard units by 1965, contrasted with an estimated 10 million substandard units by 1965 if drastic efforts are not made to reverse the trends indicated by recent years. And the quantitative housing shortage, now estimated at about 2 million units, would become negligible by 1965 if the total housing effort of the Nation conforms to the magnitudes I suggest.  Mr. WmNALL. At this point I request permission to insert in the record, an article in the Wall Street Journal dated January 25, 1960, about the National Association of Home Builders' convention in Chicago. Mr. AoooN1zro. Without objection, that may be done. (The article is as follows :) [From the Wa,M Street Journal, Jan. 25, 1960] BUOYANT BUILDERS: THEY DISPUTE GLUM 1960 FORECASTS, SEE STARTS LAST YEAR'S PACE  NEAR  MOST SAY SALES ARE BRISK, CLAIM RISING COSTS WILL PUSH UP PRICES OF HOMES-DID POLITICS DICTATE GLOOM?  (By William R. Clabby, staff reporter of the Wall Street Journal) CHICAGo.-Homebuilding plans for 1960 are taking on a rosier hue. Housing starts may approach the near-record pace of 1959. Sales have been. brisk in recent weeks and some builders are finding their financing problems aren't as severe as they had expected them to be. But price tags on new homes probably will increase. These were some of the predictions of a cross section of 12,000 builders as they headed home over the weekend from the annual convention here of the National Association of Home Builders. While few builders entertain hopes of outstripping the boom year they enjoyed in 1959, a growing number figure they'll come closer to last year's pace then they had anticipated. A poll of nearly threescore builders shows that more than half plan to hammer up the same number of homes this year as in 1959. About 30 percent predict a decline but the other 20 percent are counting on an increase. DOWN LESS THAN 3 PERCENT  This group expects to begin construction on 7,196 houses this year, down. less 3 percent from the 7,363 they_ bqilt in 1959. At this rate, the Nation's builders would put up about 1.3 million units in 1960 or nearly as many as the estimated 1,341,500 erected in 1959. This .would mark the fourth best hoqsing year on record, the high of 1,352,000 was reached in 1950. . . Federal Reserve Bank of St. Louis  182  EMERGENCY HOME OWNERSHIP ACT  This forecast finds support in figures released recently by the Government on homebuilding over the past 2 months. After a 6-month decline, housing starts, on a seasonally adjusted basis, turned up in November. The upturn continued into December and in that month builders were starting work on houses at an annual clip of 1,310,000 units. That represented a gain of more than 100,000 starts from the rate a month earlier. Most housing industry executives and many economists and congressional leaders, however, are still expressing deep concern about housing. They view housing as the one dark cloud in an otherwise bright economic picture. Onl3· last week, Carl T. Mitnick, outgoing head of the NAHB, predicted that housing starts for the year would decline more than 200,000 units from 1959. He estimated that between 1,100,000 and 1,150,000 homes would be started in 1960. Federal Housing Administrator Norman Mason made a similar forecast. A few months ago, the average homebuilder might have agreed. But now, despite the severe squeeze on mortgage credit, many are raising their sights for 1960. The glowing general economic picture, the end of the steel strike and, for some, a slight easing in the tight money situation, are rapidly wiping out the builders' earlier doubts about 1960. "I don't see how we can miss this year," reports Riley McGraw, executive vice president of ABC Construction Co., Indianapolis. "We've already sold out one subdivision and just got another one underway. A week ago Sunday we had one of the largest turnouts at our model homes that we've ever had and already have sold 10 houses this month." Mr. McGraw says he's sure the company will register a big gain in 1960 from the 135 houses it built in 1959. PLANS 320-ACRE PBOJEOT  "I feel so good about this year that I just went out and bought another 320 acres for a new development," declares Ernest A. Becker, of Las Vegas, Nev. "The bank tells me to be conservative this year but I don't see how I can. We sold eight houses in the 2 weeks before Christmas and have been selling two or three a week since then. That's pretty good when you consider our big sales push doesn't begin until March." "The lookers are out to buy," says Richard Hipp, head of a building firm in Minneapolis bearing his name. "I don't know what has happened-the end of the steel strike probably has a lot to do with it. Then, too, I think a lot of folks have taken a look at their balance sheets and decided that maybe things aren't too bad. Anyhow, I've sold 10 houses since the first of the year and wish I had more land ready for building." Any improvement in the building outlook, of course, represents good news to a wide range of industries. The fortunes of such industries as glass, lumber, appliances, and roofing depend to a great extent upon the success of housing contractors. SEE POLITICAL CONSIDERATIONS  "I don't want to make any accusations against our industry leaders but I can't help feeling there might be some political considerations in the pessimistic estimates being made on housing," declares one Ohio homebuilder in attempting to reconcile a rosy outlook for his area with the gloomier national forecasts. "After all, the industry is plugging away for some mortgage aid from the Government and it wouldn't strengthen their case if they were singing about a good year coming up." One such piece of legislation before Congress, sponsored by Representative Albert Rains, Democrat, of Alabama, for the Federal National Mortgage Association would provide ·an additional $1 billion to buy Government-insured mortgages. A similiar measure was approved by Congress in 1959 and is credited with adding about 40,000 home starts to the 1959 total. Many builders already are off to a good start this year and figure only a drastic change for the worse in the Nation's economy will upset their plans. "We have 50 homes under construction and will be starting more in a few days," states Emil Downey, president of DHR Construction Co., East Hartford, Conn. Mr. Downey, who subcontracts for other builders, reports he has orders for 200 homes in his pocket and expects to wind up with 500 starts for the year. In 1959, his total was 300. Mr. Hipp of Minneapolis, has 110 houses underway and, about 75 percent of them have been sold. "My only .regret is that I haven't enough ready land.'' he adds. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  183  Somewhat surprisingly, a number of builders say financing is not the major stumbling block that they earlier had expected it to be. A big majority of the builders have their financing lined up for the first half of 1960 and many are set for the full year. TIGHTNESS IS UNEVEN  Mortgage money generally is considerably less plentiful than it was a year ago and interest rates are a good deal higher. But the tightness is uneven; builders find that lenders in smaller cities often are able--and even eager-to take care of their borrowing needs. Even in the larger cities, where lendable funds generally are less plentiful, money has eased slightly in recent weeks. Business loans of major New York City banks have declined seasonally for 3 consecutive weeks. Wholesale and retail trade firms, for example, are paying off loans obtained to finance accumulation of inventories for the Christmas selling season. But most bankers look for a renewed tightening of money soon, so builders' financing problems may grow later on. For the present, however, some builders seem unworried. "Money is expensive, of course," says Daniel T. Mistick, president of a Monroeville, Pa., building company. "But if a fellow is really interested in a house I can take care of him." Some money lenders agree that financing isn't quite as tough as it was a couple of months ago. "I won't say we have money running out of our ears but I will tell you that I'm again looking for builders," says Theodore R. Simson, president of F,irst Investment Co., mortgage banker headquartered in Columbus, Ohio. "I've got $1 million a month to place now. It's costly, but 2 months ago I didn't have any to place at any price." BANK TO REENTER MARKET  Mr. Simson, who represents 11 insurance companies and banks, says one Chicago bank indicated only last week that it was ready to move back into the home mortgage market after having pulled out completely last June. "The bank believes that money might ease up a bit this summer and wants to place its funds while interest rates are so high," Mr. Simson says. Robert H. Wilson, president of Percy Wilson Mortgage & Finance Corp., Chicago, takes a similar view. "It's a little better now on money than it was before Christmas," he remarks. "There are some indications that savings are improving." To be sure, the shortage of lendable funds is having unpleasant effects on some builders and nearly all agree that a long siege of tight money will force some changes in plans. In the South and West, where money for lending is traditionally less plentiful than in other sections of the country, builders are complaining especially loudly about financing. "This money situation is terrible," says Jack Y. Williams, · president of Florida Builders, Inc., St. Petersburg. It's a big reason, he declares, why the company is planning to slash home starts this year to about 1,000 units· in 1959 the company built more than 1,400 houses. ' "Everything depends on money but things aren't looking good," says Barney H. Morris, Beverly Hills, Calif., builder. "We're expecting about 240 starts in the first half but after that I can't say. It could be mighty rough." Last' year Mr. Morris built 600 houses in the Beverly Hills area. ' While the view on tight money varies, the builders generally agree on other aspects of the 1960 housing outlook. For one thing, they say, prices of new homes are bound to rise in the year ahead. They point to rising interest costs on the money they borrow and to higher costs of labor and materials .. "I'm done absorbing all these .cost increases," states Kenneth Borschel, Cedar Rapids, Iowa, builder. "The carpenters got a raise in September and the rest of the building trades will probably get one in May. If the steel companies can't hold wages down, I don't see how we can. It's either pass the increases along or go out of business," he concludes. Some builders already have boosted prices. For instance, Arthur C. Russell Memphis builder, has just posted $500 increases on his $25,000. homes. "i couldn't help it; everything is coming up," he declares. In the last 3 months Mr. Russell says, the costs of furnaces and sheet metal for his homes climbed from $450 to $550. The cost of plumbing jumped $75. · Federal Reserve Bank of St. Louis  184  EMERGENCY HOME OWNERSHIP ACT LAND, MATERIAL PRICES RISE  "I'll be raising my prices, too," says E. N. Williams, Denver builder. "Land prices are going sky high and we've been warned to expect increases from some of our suppliers." Nat Rogg, economist for the National Association of Home Builders, looks for prices generally to start climbing. "The price line is being thinly held at the moment," he declares, "and there's practically no depth to the defense. It won't take much to start the parade upward." Most influential, perhaps, in the trend to higher prices is the rapid rise in discounts on financing arranged by the builder. The discount is used by moneylenders to get around interest rate limitations imposed on mortgages backed by the Federal Housing Administration or the Veterans' Administration. The discount is used to raise the yield on mortgages. Here's how it works: If the builder wants to line up a $10,000 FHA loan for a buyer of one of his homes, the lender may agree to give the builder only $9,500. This represents a discount of 5 percent or five "points." Since the buyer will repay the lender the full $10,000 loan, plus interest, the yield to the lender far exceeds the 5¾, percent maximum rate permitted by the FHA. A builder tries to pass along the discount to the buyer in the price of the house, but sometimes, for competitive reasons, is forced to absorb it. In some areas, discounts are running as high as 10 or 12 points on VA-backed mortgages. This type of Government-insured lending has been hit the hardest because the maximum interest stands at 5¼ percent, below the FHA rate and further below the prevailing 6 or 7 percent rate on loans which do not carry U.S. backing.  Mr. A.DooNrzro. Our next witness is Mr. Boris Shishkin of the AFL-CIO. Will you please come forward, Mr. Shishkin ~ We are running a little behind schedule, so we would appreciate expediting this as much as possible. STATEMENT OF BORIS SHISHKIN, SECRETARY, HOUSING COMMITTEE, AFL-CIO  Mr. SmsHKIN. Thank you, Mr. Chairman. I appreciate the opportunity to aP.pear before this committee, and I welcome the opportunity of testifying before our good friend, Mr. Addonizio, in the chair. I do want to say, however, that I am very sorry to note that the chairman, Mr. Rains, of this committee is not with us today not only because we are considering Mr. Rains' bill, but also because Mr. Rains has been one of the foremost champions in this Congress over the national housing policy that is responsive to the public interest, and I feel that his proposed bill is very much in line with that record of his, and I also would like to note that Mr. Addonizio has been very much with Mr. Rains in furthering that policy. . I am here to represent the American Federation of Labor and Congress of Industrial Organization. We are a nonpartisan organization representing around 14 million wage earners in the United States. I have with me, Mr. Chairman, Mr. John Edelman, national represenJtative of the Textile Workers Union of America, and a member of the housing committee of AFL-CIO, and Mr. Bert Seidman, an economist of the AFL-CIO, who are with me in this appearance. We are here to testify in support of H.R. 9371, the Emergency Home Ownership Act, introduced by Chairman Raines of this subcommittee. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  185  I would like to say at the outset that I, too, have studied Mr. Mason's testimony before this committee, and I think I can explain some of the contradictions that appear in it. I think it is quite apparent to anyone who has worked as closely in the field of housing with the Housing Agency and its administrators as I have that the voice is the voice of Mr. Mason, but the hand is the hand of the Bureau of the Budget. In other words, Mr. Mason was trying to convey his interpretation of the administration's policy with respect to housing. I think that he, as any Housing Administrator, just does not believe in that kind of policy, because anybody who has the responsibility under law to administer a housing program and is told to come and oppose a program which he knows is necessary doesn't have his heart m it. With regard to the general discussion that occurred here this morning, I would like to say, also, that I think that one of the problems of this administration has been that it has placed interest ahead of principal, and this comment is not original with me. In the first session of the U.S. Congress if you will look up the record, you will find that John Randolph of Roanoke, Va., had flung that charge at the Tories at that time because they were placing interest ahead of principal, he said, and I think it is deplorable that we have to revert to the record of the First Congress to say the same thing 170 years later, because the position with respect to interest as against the basic principles of public welfare I think is a Tory stance, and it does not go in 1960 to have this dichotomous philosophy in programs of public welfare. I would like to commend this committee for directing its attention at the very outset of this congressional session to the immediate threat of a disastrous decline in housing activity. I think that is clearly imminent. Proper action taken now can forestall this threatened downturn. Moreover, if such emergency action is immediately followed' by enactment of comprehensive, forward-looking housing legislation, the stage could be set :for a much needed expansion of the Nation's housing activity. Let me say a word about the housing outlook. According to the Department of Commerce, 1,341,500 housing units were started by private builders in 1959, about 200,000 more than in the previous year. However, the seasonally adjusted annual rate of private housing starts reached a peak of 1,484,000 in April 1959 and has declined since then by more than 100,000. In fact, by October it was down to 1,180,000. Although the seasonally adjusted annual rate in December 1959 was up somewhat to 1,310,000, the winter starts rate is seldom a particularly accurate measure of housing activity. In any case, even the December rate was below the average for the year 1959 and sharply below the high point reached in April 1959. Let me also point out, Mr. Chairman, that even if we were to maintain a rate of 1.3 million starts per year, this would be a million starts or about 45 percent less than the minimum required to meet the Nation's total housing requirements. I am submitting with my testimony the September 1959 issue of our AFL-CIO publication, Labor's Economic Review, which on page 50 shows in detail estimates of new housing needs for the period Federal Reserve Bank of St. Louis  186  EMERGENCY HOME OWNERSHIP ACT  1960-75. These estimates indicate total requirements of at least 35 million new housing units by 1975 or a minimum of 2.3 million units a year. I respectfully request that this publication be incorporated in my testimony as part of the record of this hearing, at the conclusion of my statement, if I may. Mr. AoooNrzro. You may do that without objection. However, I note that there are some charts which we may not be able to have duplicated, but we will do the best we can with it. Mr. SmsHKIN. I appreciate that, Mr. Chairman. Thank you very much. This estimate shows that even the recent level of housing activity, erroneously described in some quarters as a housing boom, is far less than what is needed. Unfortunately, there is every indication that even this inadequate pace will not be maintained in the coming months. "Builders See Belt-Tightening Era Ahead" is the banner headline in the real estate section of the Washington Post of January 16, 1960. The news story under the headline reports-that spokesmen for builders predict a 10 to 12 percent decline in homebuilding in 1960. The New York Times of January 22 reports: Builders from all parts of the country believe that in 1960 fewer homes by far will be built than in 1959. They see no encouragement in Government reports showing that home construction in November and December was greater than could be expected if a building recession was approaching. The consensus today, as the National Association of Home Builders' Convention drew to a cloee, was that unless emergency legislation is enacted, there will be a sharp downturn in housing starts, and that the 1959 total of 1,341,500 housing starts will not even be approached.  It is difficult to understand the Eisenhower administration's complacency regarding the housing situation because Federal housing officials also anticipate a. housing decline. According to the Wall Street Journal of January 15, 1960, Housing Administrator Mason and other Government housmg officials have forecast a drop in private housing starts in 1960 to 1.2 million or even 1.1 million. The handwriting is already on the wall. Housing starts last month were 10 percent below December 1958 but the combined FHA applications and VA appraisal requests were 23 _percent less than the level of a year ago. This could mean a substantial drop in housing starts in the months ahead. The low level of housing starts and the even lower level anticipated cannot be attributed to a reasonable satisfaction of housing needs. The major reason for the dismal prospects for housing construction is the disastrous tight money policy adamantly pursued by the Eisenhower administration. Substantial discounts, which are simply disguised interest payments, piled on top of sky-high interest rates are keeping 'large numbers of families out of the housing market. The present effective interest rate on FHA-insured mortgages is an effective 6¼ percent-5% percent official interest rate plus one-half of ,1 percent mortgage insurance premium. However, as of January 1, 1960, the average discount on FHA-insured new home mortgages for section 203 sales housing was 3.6 points with a range from 2 to 7 points. This means, therefore; that to the 6¼ percent effective interest rate should be added an additional one-half percent represented by the average discount, which would mean that the real interest rate averaged 62/4 percent. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  187  In the places where the discount was seven points, the effective interest rate was nearly 7¼ percent. These are breathtaking figures, Mr. Chairman. Even where home buyers have been willing to pay unreasonable discounts and excessive interest rates there have been many cases where they have have been unable to obtain necessary mortgage funds. Here is what has been reported by the Survey Research Center of the University of Michigan based on their study during the fourth quarter of 1959, a recent study just completed: Plans to buy a house for owner occupancy during the next 12 months rose substantially from the summer of 1958 to the summer of 1959 but declined sharply by October and November 1959. The major reason for this decline is to be found in the increase in interest rates and the tight money situation.  In the months since this survey was conducted, the situation has undoubtedly become even worse. It is estimated that for every home that is built, one man-year is required onsite in actual construction. An additional man-year is required offsite in factories producing bricks, lumber, steel, cement, electrical equipment, furniture, and many other products needed to build and eqmp new homes. A decline of 200,000 in housing starts next year, therefore, would result in addition of 400,000 persons to the ranks of the unemployed at a time when unemployment is already much too high. Moreover, as I am sure the members of this commitee are well aware, residential construction plays an important role in determining the overall level of economic activity. This fact was sharply pointed up during the two most recent recessions, 1953-54 and 1957-58. In both of these recessions a drop in housing activity preceded and helped to precipitate the general economic setback. The seasonally adjusted annual rate of housing starts dropped from 1,486,000 in August to 918,000 in July 1951 and remained at very low levels until mid-1954. Housing starts were also relatively high during the· latter part of 1954 and into 1955 but then dropped below an annual rate of 1 million in early 1957. In both periods, the low level of housing activity played an important role m bringing on the ensuing recessions of 1953-54 and 1957-58. Certainly it would be a tragic mistake to disregard now the lesson of the last two recessions. Therefore, it is essential that every possible measure be taken immediately to forestall a downturn in homebuilding not only to prevent the housing shortage from becoming worse, but also to bolster the overall level of economic activity. In urging enactment of the bill you are now considering, we would also ·remind the committee of the beneficial effects resulting from enactment of the similar Emergency Housing Act of 1958. The volume of mortgage funds which this legislation made available for moderatepriced housing was probably the most important factor contributing to the rise in homebuilding activity durmg the latter part of 1958 and the first half of 1959. Prompt passage of the proposed Emergency Home Ownership Act would undoubtedly have similar desirable effect in the months to come. Let me add here, Mr. Chairman, that as far as the future outlook is concerned, I would like to note and observe that the current recovery from the lower depths of this recession which is now underway will, 50876 0-60-13 Federal Reserve Bank of St. Louis  188  EMERGENCY HOME OWNERSHIP ACT  we hope, be sustained. I am not a prophet of doom, and I never have been, and I have appeared before this committee over the years, but I would like to point out that I see nothing to sustain the course of this recovery beyond August or September unless special measures, are taken, such as this legislation that is now before you to bolster up the econoI}lic course. For that basic reason I think it is quite essential for us to act now. Let me turn now to the analysis of special provisions of H.R.9371. I would like to point out the sections which we regard as being particularly important. However, in doing so, I do not wish to convey an impression that failure to mention other provisions in any way indicates that we are opposed to their adoption. Section 11 would make available $1 billion for purchase by the Federal National Mortga,ge Association under its so-called program 10 of FHA-insured and VA-guaranteed mortgages of $13,500 or less, except in high-cost areas where the maximum mortgage would be $14,500. That is the only exception. Section 8 provides that FNMA shall purchase these mortgages at not less than par. Section 9 reduces the maximum charges or fees FNMA may impose under the special assistance program for a 1-year period to 1 percent of the unpaid principal amount of the mortgage. The effect of these sections would be to make possible construction and sale of a substantial volume of moderate-priced housing that otherwise would not be built. It would also provide assurance that homebuilders would not be required to pay unreasonable discounts and charges over and above already excessive interest rates. We strongly favor these provisions and we especially commend the emphasis on moderate-priced housing contained in this bill. Experience following the enactment of the Housing Act of 1958 provides assurance that enactment of these provisions will result in a steppedup rate of building with a probable decrease in the price of the new homes built. According to the National Association of Home Builders, the median price of new homes fell from $15,100 in 1957 to $14,450 in 1950. This drop in sales prices of new homes was largely the result of the wise decision of the Congress in the Emergency Housing__Act of 1958 to encourage construction of moderate-priced housing. That wise decision should certainly be repeated at this time. Section 10 of the bill makes it clear that mortgages on cooperative housing insured by FHA would be eligible under the bill's authorization for FNMA's program 10. We understand that cooperative housing was excluded from the benefits of the Emergency Housing Act of 1958 by administrative decision. . Enactment of section 10 of this bill will prevent such an unwise decision from being repeated. It would make sure that families wishing to purchase their homes by the cooperative method will have equal access with other prospective home buyers to the funds made available by this legislation. There are many advantages in the cooperative housing approach whicih we have stressed on previous occasions. At this ·time we wish merely to emphasize that by encouraging cooperative housing, this bill will help to reduce housing Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  189  costs for moderate-income families thereby reinforcing one of the major aims of the bill. Sections 2, 3, 6, 12, and 13 are not confined to the so-called program 10 mortgages but inject worthwhile features into the broader housing program in the light of specific problems confronting home buyers at this time. Section 3 would reduce the mortgage insurance premium home buyers must pay on FHA-insured sales housing to one-quarter of 1 percent. As far as the home buyer is concerned, the so-called mortgage insurance premium of one-half of 1 percent which he must now pay is as much a part of the interest rate as the actual interest rate itself. This means that the present effective interest rate for FHA-insured mortgages-exclusive of discounts-is not 5¾ percent but 6¼ percent. On so-called 203 ( i) houses in rural and outlying suburban areas, it is actually 6¾ percent. Anything which can be done to reduce the real interest rate the home buyer must pay is certainly to be desired. There is every evidence that he FHA mortgage insurance funds will remain actuarially sound if the mortgage insurance premium is reduced to one-quarter of 1 percent. The premium paid by home buyers on mortgages insured by the FHA is held in the mutual mortgage insurance fund. · As of December 31, 1958, the amount in this fund was $438,262,624. Estimated reserve requirements were only $384,193,412. There was thus a surplus in the account of $54,069,412. The bill would reduce the premium to one-quarter of 1 percent but only for a 1-year period, presumably in order to reduce the financial burden of families seeking to purchase homes in the extremely tight. money market we have today. We are confident that this reduction could soundly be continued beyond the 1-year period. However, in order to make sure that this can be done without adversely affecting the actuarial position of a mutual mortgage insurance fund, we suggest that a thorough and detailed investigation be undertaken not only of this fund but of all FHA mortgage insurance funds during the coming year, so that the Congress in its next session will have the necessary facts to make a decision on a permanent basis with respect to the mortgage insurance premium necessary under the FHA program. The provision of section 12 which would outlaw the existing effective 6¾,-percent interest rate on 203(i) mortgages is extremely desirable. It is an outrage that a program intended to make mortgage funds available at moderate interest rates is now saddling buyers of low-cost houses with usurious interest rates. The attorney general of the State of Maryland has already ruled that the effective 6¾percent interest rate for 203(i) mortgages is illegal under the usury laws of that State. No doubt the same effect of this rate also prevails in other States. Section 13 requires mortgagees under FHA-insured or VA-guaranteed loans to report to the administrative agency the amount of any fees, charges or discounts required in connect10n with such loans. Federal Reserve Bank of St. Louis  190  EMERGENCY HOME OWNERSHIP ACT  Presumably, this section is intended to restrain the excessive charging of discounts by requiring mortgagees to report such amounts to the FHA or VA. This is desirable as far as it goes, but we believe that more than a reporting requirement is needed to prevent the gouging of home buyers through such financial practices. We would recommend that this section be strengthened by outright prohibition of requirements by mortgagees of such payments, or, if the committee will not go that far, establishment of specific moderate ceilings on the total amount of or which can be exacted by FHA or VA mortgagees in the form of fees, charges, or discounts. Section 2 of the bill would permit individuals to make FHAinsured mortgage loans. Section 6 would prohibit FNMA for a period of 1 year from selling or otherwise disposing of any mortgage which it may hold. Both of these provisions are evidently intended to increase the amount of funds available for housing under the various Government programs. In the present situation of extremely tight markets, this is obviously a desirable objective. Section 2 has the pa.rticular merit of making it possible for relatively small lenders not associated with large mortgage financing institutions to pa.rticipate in the FHA programs. This will not only help extend the program to small towns and communities but will also help to break the grip, even if only to some extent, of the large banks and insurance .companies on the FHA-insured mortgage market. This is one provision which might enable this committee to take a specific step of assisting small business in concrete terms. Now let me turn to the need for the comprehensive housing legislation which is the bill before us. The title of H.R. 9371, Emergency Home Ownership Act, clearly indicates that it is intended as a stopgap measure to meet an emergency situation. We believe that enactment of R.R. 9371 will help prevent a housing downturn which could precipitate a general f\COnomic recession. We therefore give it our wholehearted suppo•"• However, we wish to emphasize that while we strongly favor immediate enactment of H.R. 9371 as an emergency measure, it is not intended to be and is not a substitute for urgently required comprehensive housing legislation. Therefore, we urge this committee to consider nnd recommend enactment of a comprehensive housing bill as soon as possible after it repots out H.R. 9371. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  191  We hope that we shall have an opportunity at that time to present our views on the necessary ingredients of a long-range housing program geared to the needs of the Nation in the 1960's. At this time, we wish merely to state without any elaboration the main features of such a comprehensive housing program that we envisage. 1. A large-scale, low-rent public housing program to provide decent homes for low-income families. 2. An effective middle-income housing program, for which there is an urgent and pressing need. 3. A fully adequate program of housing for the elderly. 4. A Federal policy to assure every family an equal opportunity to obtain decent homes without regard to race, color, creed or national origin. 5. A greatly expanded slum clearance and urban redevelopment pr0gram. 6. Effective encouragement to metropolitan planning. 7. Other measures, mcluding encouragement for cooperative and moderate-priced rental housing; adequate housing for family farmers and farm workers; requirement of payment of the prevailing wage in any housing construction involving Federal financial assistance; and protection of homeowners against foreclosure in emergency situations. Tangible aid and positive encouragement must be given by Congress in this session to enable America's enterprise system to stel? up the urgently needed housing supply and to bring good homes within the financial reach of the average American family. We consider housing legislation to this end as "must" legislation in the present session of Congress. Approval of R.R. 9371, the Emergency Home Ownership Act, is the first step and a vital step Congress must take to discharge its housing responsibility in 1960. For, in approving this measure, Congress will not only help meet the acute need for the housing in our land, but will also provide a sure safeguard against renewed recession, unemployment, and economic distress which threaten to sap America's strength. Mr. Chairman, I would like to have the study containing our latest estimate of housing needs to be placed in the record, as I indicated before, and I appreciate very much the committee's interest and attention to this statement. ( The information referred to is as follows:) Federal Reserve Bank of St. Louis  192  EMERGENCY HOME OWNERSHIP ACT  IN IRIIF  One-fourth of · American families are still ill-housed.  To· assure a decent home  to every family by 1975, we must build 35 million homes in the next 15 yearsmore than 2¼ million homes a year. We are currently building less than  1½ million homes a y80r.  Only if we  launch a comprehensive, forward-looking housing program now will we assure de-  cent homes for all by 1975.  Still an Unmet Need:  GOOD HOMES FOR ALL In the United States we have believed for generations that the home ·rs- the foundation of our American way of life. The home environment is the first and most significant influence on each succeeding generation.  years. 1 In order to provide a decent home for evety American famiiy by 1976, we wilf have to build an average of at least 2.3 million houses a year from 1960 to 1975. This is nearly twothirds above the current construction rate.  Yet, despite our conviction as to the importance of the home, one-fourth of all occupied dwellings in the U.S.-about 13 million in all-do not meet minimum requirements for family living. An estimated additional 2 million or so dwellings are in livable physical condition, but they are located in such run-down neighborhoods that they make poor homes for growing children.  In all, we will require construction of at least 35 million houses during that 15-year periodsomewhat more than half to replace existing dwellings and a little less than half to provide houses for our rapidly growing population.  Thus, some 15 million American families are forced to live in substandard dwellings. In 1959 more than one-fourth of American families are still ill-housed.  A glance at the table emphasizes the fact that a large part of it results from our long neglect of  Let us take a look at the table on page 50 and see what it-signifies. What factors will cause this tremendous requirement for new housing?  1 This is about 200,000 higher than the current official figures. However, there are indications that the official figures now being published underestimate actual housing starts and, in addition, they do not include farm housing construction.  About 1.4 million new housing units a year have been built on an average during the past five Federal Reserve Bank of St. Louis  TO REPLACE BAD HOUSING-  49  TO PROVIDE GOOD HOMES FOR NEW FAMILIES  EMERGENCY HOME OWNERSHIP ACT  LABOR'S  193  million new housing units by 1976, a minimum of 2.3 million units a year.  ECONOMIC REVIEW  IUUEI IGITIILY IY  Who Needs Better Housing? Few would deny that it is the occupants of substandard housing who are most in need of better living accommodations. Who lives in substandard housing? A Census survey taken in 1956 provides the answer to this question. It is doubtful that the situation has signifitantly changed since then. Nearly two-thirds of all substandard houses ( dilapidated or lacking plumbing or bathing facilities or both) are occupied by families with yearly income of $4,000 or less. More than 2 out of every 5 families in this income group live in substandard houses. Thus it is clear that bad housing is very much tied to low income. A disproportionately large fraction of substandard housing is occupied by Negroes and other non-white families. In fact, in 1950, the latest. year for which nationwide data are available, nearly three-fourths of Negro families in all income groups lived in substandard housing. Only one Negro family out of four occupied a dwelling meeting even minimum standards for family living. Thus, low-income and minority families (a large proportion of which are, of course, lowincome) are plagued by the worst housing condi-' tions. Yet, as we shall see, only a tiny proportion of houses built during recent years have been available to these families.  AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS GIORGe M!ANY, PNddent WIWAM f. SCHNllZLER, S.c.-Jrea1.  Department of Research  -  Olredon STANL!Y H. RllnENIERO Aaidanf DINdoni PETER HEN~ NAT GOlDFINGEI  FRANK FERNIACH SEYMOUR IRANDW!IN IIRT SEIDMAN GEORGE TAYLOR l'"'-"rial fn9'flfft1 IIIT OO'ffl.111  ffl.111  ~J:':..1..:-:.., ..::.:.~.:-: :::.-ll•W ...._  bad housing conditions. Some 16 million American families live in houses which do not meet minimum requirements for family living. Moreover, about half this number live in houses which are suitable now but will deteriorate by 1975. Housing Needs Thus, by 1975 we will have to provide better housing for approximately 22.5 million families occupying substandard housing. Since only about 5 million of these houses can be fixed up to provide decent accommodations, about 17.5 million will have to be replaced by new construction. An additional 2 million dwellings which are not substandard will be removed from the housing supply by storm, fire and other disasters or by demolition to make way for office buildings, highways, schools and other types of new nonresidential construction.  E•timate of Neu, Horulng Nee,h 1960-75  Thus, by 1975 nearly 20 million units now occupied or to be occupied during the next 16 years will have to be replaced. Just to replace these units would require about the present level of housing construction.  ( millions of units) Substandard Becoming substanding 1960-75 Total substandard .. : Less substandard suitable for rehabilitation Total substandard to be replaced Removed by disaster and demolition (non-s,ubstandard) ... Total replacement need 1960-75 .. Increase in number of families 1960-751 Undoubling of doubled up families. . Total housing requirements 1960-75 ... Average annual requirement .  But this would not provide a single house for the new families we will have by 1975-at least 14½ million of them.• Each of these families will need a decent home and certainly be entitled to have it. Finally, an additional million units will be needed to provide separate accommodations for families now forced to double up with other families. It all add& up to requirements for at least 35 • The increase in non-farm households will be even greater since a decline in f&rm households of about 1.5 million is anticipated. Federal Reserve Bank of St. Louis  1  50  Includes one--person houaeholds.  15 7.5  2  m 14.5 1  35 2.3  194  EMERGENCY HOME OWNERSHIP ACT  authorized in 1949, the late Senator Robert Taft, one of its chief Congressional sponsors, believed that it would account for at least 10 percent of all new residential construction. Instead, the contemplated program has been literally cut to ribbons and public housing construction has come nowhere near the proportion of total housing construction Senator Taft thought was desirable.  Most Urgent Needs Neglected  In 1956 more than 8 million families with yearly incomes less than $4,000 (under $80 a week) lived in substandard housing. They represent nearly two-thirds of all families living in substandard housing. But virtually no new private housing financed with mortgages insured by the Federal Housing Adminuitration is going to familie., in thui group.  In 1949, Congress authorized construction of 810,000 public housing units over a .six-year period. In the ten years since this declaration of Congressional intent, only 245,000 units have been constructed. Thus, during these ten years the total low-rent public housing construction can have met the needs of only 3 percent of low-income families living in substandard housing.  In 1958, less than 2.4 percent of purchasers of new single-family houses under the FHA program had "effective annual incomes" of less than $4,000. • Here are the figures : Percent of Purchases Income  Less than $2,000 $2,000-$2,999 $3,000-$3,999 Total  UnderFHA  _Less than 0.05 percent 0.1 2.2 2.3+  The record on minority housing is even worse. In 1950, the latest year for which data can be obtained, 2.7 million Negro and other nonwhite families, nearly three-fourths of the total number of such families, lived in substandard housing. In metropolitan areas, housing conditions for Negro families are much better than in small communities and rural sections. Yet, in 1956, 35 to 55 percent of approximately 1.7 million rental housing units occupied by non-whites in metropolitan areas were substandard.'  Moreover, the few families with incomes in these income groups who purchased FHA houses could do so only by devoting from 28 to 31 percent of their incomes to housing expenses. Yet, experts agree that 20 percent of family income is th~ maximum which should be devoted to housing. In 1958, the average family income of buyers of single-family houses under the FHA program was more than $8,000.• But in that year only 22 percent of all families and unattuhed individuals had incomes of $8,000 or more.  Government officials estimate that since 1955, Negro families have purchased about 10,000 houses built under programs involving Federal mortgage guarantees and insurance (FHA and VA). Perhaps an additional 100,000 have been housed through the low-rent public housing program. But 96 percent of Negro families living in substandard housing have had no new housing whatsoever available to them.  It is small wonder that in 1957 a Staff Report of the Senate Housing Subcommittee concluded that "the housing industry . . . is serving primarily the upper income groups."  These facts add up to two conclusions:  Since new housing constructed by private builders cannot be purchased by low-income families, the only other direction these families can turn for decent living accommodations is housing built under the low-rent public housing program. This program is specifically intended to meet the housing needs of low-income families within their limited means.  ( 1) The overall rate of housing construction is much too low. We should be building nearly a million more houses a year to meet minimum housing needs. (2) We are building too few houses because housing legislation and housing programs have all but completely neglected the families with the most pressing need for decent homes.  When the current public housing program was  All of this means that we will not begin to build enough houses until housing programs are funda-  1 According to the Staff Report of the Senate Housing Subcommittee, FHA estimates of ''effective annual income" understate actual family incomes by 15 to 20 percent. Thus an FHA estimated "effective annual income" of $4,000 is actually $4,600 to $5,000. ' The FHA estimated median "effective annual income" was $6,803. ( See footnote a.) Federal Reserve Bank of St. Louis  ~ Percentages based on Census sample survey which did not show nationwide figures and for which percentages given for this item were subject to a relatively wide margin of error.  51  EMERGENCY HOME OWNERSHIP ACT  195  long-term loans in order to bring charges and rents within the financial reach of families in the $4,000 to $7,000 income range. 3. Similar financing for housing to meet the special needs of elderly couples and individuals. 4. A Federal policy to assure every family an equal opportunity to obtain decent housing without regard to race, color, creed or national origin. 5. An expanded slum clearance and urban redevelopment program on a sufficient scale to permit ever,Y city in America to wipe out its slums and blight and rebuild its run-down sections as fast as human and material resources will permit. 6. Effective encouragement to metropolitan planning so that artificial and outmoded boundaries do not block housing and redevelopment progress and dynamic growth of our cities.  mentally changed. They must be redirected to give highest priority attention rather than cold shoulder treatment to the most urgent housing needs. But this will require formulation and development of a comprehensive, far-reaching program.  Public Housing Low-rent public housing offers the only effective way of making good housing available to lowincome families.  This program must be aimed at providing a decent home for every family, regardless of race or income, in replanned, rebuilt and modernized cities, and rural areas as well, from which blight and slums, shacks and hovels have been completely eliminated.  Last year, families admitted to public housing had an average (median) income of $1,913. The rent they had to pay at the time they moved into their public housing dwellings averaged $37 a month. If the reader will think about housing available in his own community, he will certainly agree that there is no new housing, rental or sales, for which a family can pay as little as $37 a month. Indeed, there is virtually no decent housing at all, new or old, which would be available at such a low cost.  A Comprehensive Program  Although they may differ as to details, students of the housing problem have long agreed on the major features of the comprehensive housing and urban redevelopment program America needs. In fact, organized labor and other pro-housing forces have been urging adoption of this program for a good many years. While we have had some support in Congress, the combined pressure of the real estate and mortgage banking interests and a reactionary national Administration has thwarted any significant progress on the housing front.  Yet, for a family with an income of less than $2,000 to pay more than $35 to $40 a month for housing is to place such an intolerable burden on  it that it would be deprived not of luxuries or conveniences but of the barest necessities of life. That is why low-income families have just two possible alternatives--continued existence in disease-ridden, rotting slums or decent accommodations in public housing.  A comprehensive housing program geared to meet total housing requirements should include : 1. A large-scale, low-rent public housing pro-  Why is it that public housing rents are so low that low-income families can afford them? The answer is an effective financing formula involving a relatively small Federal subsidy, long-term, lowcost financing in the private bond market and sponsorship and operation by housing authorities set up by local communities. Public housing is  gram to provide decent homes for low-income  families. This must be the cornerstone of the nation's housing effort. 2. An effective program to make good homes available to middle-income families within their means. Such a program must provide low-interest, Federal Reserve Bank of St. Louis  52  196  EMERGENCY HOME OWNERSHIP ACT  In 1958, it took aMllt a $!!,000 income for a family to buy a new FHA house without committing itself for more than 20 percent of family income for housing expense.• According .to the Federal Reserve Board, only 20 percent of families had incomes of $7,500 or over in that year, which means that a substantially smaller proportion had incomes as high as $9,000.  usually built by private contractors who nearly always employ local union building tradesmen. It is highly doubtful that the financing formula now UEed in public housing can be substantially improved. On the other hand, more than 20 years of experience (the first public housing program in the United States was authorized in 1937) has pointed to some changes in other aspects of the program which would permit public housing to do an even better job.  It is clear, therefore, that only families at the top of the income scale can obtain new houses under the FHA program without over-extending their family budgets.1  For example, it has been suggested that in some communities, public housing could be built in small developments and on scattered sites rather than in the large "projects" which have been customary in most localities.  With the aim of better serving the housing needs of families in the middle-income range, organized labor and other groups concerned with meeting the nation's total housing requirements have urged the need for an effective program to make good homes available to workers' and other middle-income families at costs they can afford. The objective of these recommendations which have been offered since 1950 is to reduce the ever-  It has also been urged that special social and community services should be provided to help ease the adjustment of slum dwellers to decent living accommodations in public housing.  There is also general agreement that the local housing authorities which operate public housing should have a greater degree of autonomy and less detailed control from the central office of the Public Housing Administration in Washington.  • The FHA "effective annual income" was $7,500 to $8,400. (See footnote '.) 'FHA figures show that about the same income is re-, quired for existing homes purchased under the FHA program.  These improvements should be made as rapidly as possible. But improvement of the present program, however desirable, is not enough. The major defect in the public housing program is its much too r estricted scope. Although Congress in 1949 authorized public housing construction at the rate of 135,000 units a year, subsequent Congressional limitations on the program have held actual building of public housing to only a small fraetion of that rate. In 1952, the peak year since 1949, only 58,000 units were completed, and in 1955-58 completions have ranged from only 10,000 to 15,000 a year. If public housing construction is to constitute even the one-tenth of home-building that Senator Taft recommended, the annual construction rate should be at least 200,000 to 250,000. Even this amount would provide rehousing opportunities for only a fraction of ill-housed, low-income families.  Middle-Income Housing Low-income families are all but entirely excluded from the market for privately-built new houses. But even moderate-income families have great difficulty in obtaining new homes within their means. Federal Reserve Bank of St. Louis  5S  EMERGENCY HOME OWNERSHIP ACT  widening gap between the financial charges families must pay to obtain homes and the incomes of most American families.  charges ( excluding other housing expenses, such as taxes, maintenance, etc.) will be $75.60. The same mortgage at 3 percent repaid over a 50-year period requires a monthly paym_e nt of only $38.64.  No subsidy is needed for moderate-income families to obtain decent homes within their means. All that is required is that financial charges and rents for new homes be reduced to a reasonable level.  Yet, the total amount the homebuyer pays over the entire period of the mortgage is approximately the same in each case. If you add on other housing expenses, the total monthly cost is about $115 with a 5¾, percent, 25year mortgage, but only $79 for the 3 percent 50-year mortgage on the identical house. A family with an income of $4,700 can afford the more liberal terms, while it takes $6,900 to handle the higher charges.•  The current terms for FHA-insured mortgages are 6¾, percent ( 5¼ percent interest plus ½ percent mortgage insurance fee) for a maximum 30-year repayment period. Monthly financial charges can be reduced by lowering the interest rate, extending the repayment period or both. In fact, extending the repayment period without reducing the interest rate would merely place an additional burden on the homebuyer. This is because all other things being equal, the longer the amortization period, the smaller the monthly charge, but the larger the total amount the buyer has to pay over the entire length of the mortgage.  What this means is that if financial charges are reduced by lowering the interest rate and lengthening the repayment period, a much larger proportion of middle-income families could purchase homes within their means. To meet this objective, the AFL-CIO has supported a series of bills introduced since 1950. These bills have differed only in details. All of them would make available long-term, low-interest loans for cooperative, sales and nonprofit rental housing for moderate-income families. Such housing would be required to meet adequate standards of construction, space and livability, and access to community facilities and services.  From the standpoint of the homeowner, a long amortization period is desirable only at a low interest rate because only when the interest rate is low is the homeowner not unfairly burdened with high total costs. Differences in financial charges for new housing substantially affect a family's chances of buying a home. For example, suppose a family wants to buy a $14,000 house with a $2,000 downpayment? It would then be required to pay off a $12,000 mortgage.  With the launching of an effective middle-income housing program, large numbers of families now priced out of the housing market would be able to obtain houses on reasonable terms within their family budgets. Middle-income housing is an essential part of a comprehensive housing program.  If the mortgage terms are 53/4 percent interest and for 25 years, the current customary terms for FHA-insured mortgages, the monthly financial Federal Reserve Bank of St. Louis  197  Other Programs  Housing for the Elderly. -The proportion of elderly persons in our population is mounting rapidly. These senior citizens, most of whom are retired, have • The financial burden can  be stilJ  further lightened for families in the initia] years of occupancy if the principal payments art!! held to a very low level in the early years. The cost to the occupant would rise somewhat in the later years, but these increases would be offset by anticipated increases in personal incomes and other costs.  64  198  EMERGENCY HOME OWNERSHIP ACT  with resulting worse conditions for themselves as well as the families already living in those areas.  different housing requirements than they did in their younger years. They may need less space, but, on the other hand, they need special facilities and equipment. Not least, of course, they need and are entitled to comfortable dwellings which will not shut them off from the rest of the community.  Fair housing practices laws, which have been adopted in 14 states and 6 cities, will make more housing available to minority families. General housing legislation to provide more and better housing for low- and middle-income families would benefit minority families along with all others, but only if discriminatory barriers are removed.  Some older individuals and couples have such limited incomes that only low-rent public housing can meet their needs. A start has been made in the public housing program to provide decent and suitable accommodations for the elderly, but many more public housing units should be made available for senior citizens of low income.  To help provide equal housing opportunity, the Federal Government should undertake the positive responsibility to assure an opportunity to obtain adequate housing to all families without regard to race, color, creed or national origin. This will require that all housing built with the aid of Federal funds or credit or any other form of financial assistance should be made available to minority families on an equal basis with all other families.  Relatively few elderly persons can afford the houses provided in the private market today, but the housing needs of a substantial number could be met if financial charges and rents were reduced. The Housing Act of 1959, as passed by the Congress but unfortunately vetoed by the President,• had a provision especially intended to meet the housing requirements of older couples and individuals.  Urban Redevelopment. - Under a program launched by the Housing Act of 1949, hundred& of cities throughout the country are undertaking a program of modernizing their communities. In programs of slum clearance and urban redevelopment, they are buying up blighted land, tearing down slum dwellings and either using the land for parks, community centers and widened shopping thoroughfares or reselling the land to redevelopers to build modern apartments or commercial facilities. In this program, the Federal Government bears two-thirds of the "write-down" cost -that is, the difference between the purchase price of the site and its resale price for redevelopment use--and the local government, one-third.  The bill provided for low-interest, long-term loans to nonprofit corporations for construction of housing for the elderly. Unions, cooperatives, church and other nonprofit groups could be expected to sponsor special ·housing facilities for the aging under this program. It was estimated that at least $15 a month could be shaved off the 1·ents that could be achieved under the existing FHA elderly housing program.  Minority Housing.-Housing conditions a1·e especially bad for Negroes and they are by far our largest "minority." But in n1any cities, also, Puerto Ricans, Mexicans and other minority groups are confined in ghettos of slums and hovels.  Funds available for this program have been so limited that only a small beginning has been made in urban redevelopment. At least $1 billion a year in Federal funds are needed to put this program on anything like an adequate basis.  Despite the atrocious dwellings in which minority families are forced to live, the acute shortage of housing they can obtain, even of the worst quality, has forced them to pay very high rents even for the most unsanitary, decrepit kinds of shelter.  But sufficient funds are not the only requirement. It is essential that slum clearance and urban redevelopment efforts be concentrated first and foremost on bettering the housing conditions of the community and especially of its worsthoused members. This means that decent housing must be made -ivailable for families displaced by slum clearance. It means also that homes for ordinary people--and not luxury housing or new office or commercial buildings-must be the first objective in urban redevelopment.  The situation has become even worse with the large-scale displacement of Negro and other minority families which has taken place as a result of slum clearance, highway and other public construction programs. Many of these families have been forced to crowd into other slum areas 9 The final disposition of this legislation was not known at time of writing. Federal Reserve Bank of St. Louis  Metropolitan Planning.-Lasting solutions for  66  EMERGENCY HOME OWNERSHIP ACT  199  housing problems will require that we begin to build integrated communities. This means not simply the gradual removal of artificial racial barriers, although this is of course very important. It means also that housing for families in all income groups should be built in all sections of the community. Most important, it means that neither replanning and rebuilding of the interior of our metropolitan areas nor the new development of outlying suburbs will be permitted to be stifled by obsolete and out-dated physical boundary lines. If we are to develop an effective attack on housing and urban r edevelopment problems, we must realize that metropolitan areas are communities and must be treated as communities. This will require coordinated metropolitan planning. Every possible encouragement should be given therefore to the development of cooperative metropolitan area planning in order to facilitate balanced growth of metropolitan areas.  each year, this would create an additional 1.8 million jobs. The importance of this increased employment needed to expand housing construction to required levels can be seen in the fact that 1.8 million is just about half of the current unemployment of 3.7 million. Moreover, experience has demonstrated that residential construction is an important determinant of economic activity. Thus, in both of the most recent recessions, 1953-64 and 1957-58, a decline in housing activity preceded and helped to precipitate the general economic setback. According to the official figures 1•, the seasonally adjusted annual rate of housing starts fell from 1,486,000 in August 1950 to 918,000 in July 1951 and remained at very low levels until mid1954. Housing starts were also relatively high during the latter part of.'1854 and until 1955 but then dropped below an annual rate of 1 million in early 1957. In both periods the low level of housing activity had an important effect in bringing on the ensuing recessions of 1953-54 and 1957-58. Thus, if we can achieve the goal of good homes for all, it will also be good for the American  Other Measures.-These are the major ingredients of the comprehensive housing program America needs. But there are other requirements also. We need encouragement for cooperative housing; moderate-priced rental housing; an effective farm housing program and especially, decent housing for migrant farm workers and their families ; requirement of payment of the prevailing wage in any housing construction involving Federal financial assistance; and protection of homeowners against foreclosure in the event of temporary un, employment, illness or other emergency. Housing and the Economy  The main objective in expanding housing acti~ity is to improve thei living conditions of the millions of families deprived of the opportunity to obtain decent homes. But stepped up housing activity would also make an important contribution to the nation's overall economic prosperity. It is estimated that for every home constructed, one man-year is required on-site in actual construction. An additional man-year is required offsite in factories producing bricks, lumber, steel, cement, electrical equipment, furniture and many other products..  economy.  A comprehensive, forward-loolting housing and urban redevelopment program is needed now-to build homes for the ill-housed, to modernize our cities for mid-twentieth century living and economic requirements, and to help assure a prosperous economy.  We have stated that the annual rate of housing construction should be increased by at least 900,000 units. If we built 900,000 more houses Federal Reserve Bank of St. Louis  11  56  Sec footnote 1.  200  EMERGENCY HOME OWNERSHIP ACT  Mr. AnooNIZIO. Mr. Shishkin, may I say to you first of all that certainly I think you have made a very good statement, and one that I can agree with wholeheartedly. I also would like to indicate to you that I am sure it is the intention of the Chairman, Mr. Rains, and certainly I will assist in whatever way possible in bringing about a good comprehensive housing bill in this session of Congress, and it is my hope that it will embody all of the recommendations that you have, made. May I just say, too, that as far as this present bill is concerned, I agree with what you have indicated so far as the administration is concerned, and the fact that they have made far too much of the fact that the housing starts in December indicate that we can expect a very good year in 1960. I notice that you said, and I quote you now, that "winter starts rate is seldom a particularly accurate measure of housing activity." Mr. SHISHKIN. That is right. Mr. AnooNIZIO. Would you please explain to the committee why winter start figures often tend to be unreliable? Mr. SHISHKIN. \Vell, there are several elements of unreliability and uncertainty about winter starts. There are, of course, important seasonal factors involved, and even though the figures that are given here are adjusted for the seasonal rate, still the characteristic of the housing pattern over each year is shaped primarily in the spring and summer season of construction. Those are the guiding lines that are laid down as we know from a study of the past record. Mr. AnnoNIZIO. Now, the administration has indicated that the present situation does not cn.11 for this bill, and I am talking about the present economic situation. I am sure that you agree with me that the bill that we enacted in 1958 was a long step in bringing about some degree of prosperity, and taking us out of that recession we found ourselves in. Mr. SHISHKIN. I think the record will demonstrate that. Mr. AnnoNrzro. Could you pinpoint for me some of the economic features which are similar today that perhaps were prevalent prior to that recession of 1958? Mr. SHISHKIN. Well, of course, in the present situation, as we see it today, there are elements of danger in instability present. First of all, we have a large volume of unemployment with us, despite considerable progress made in the production record. In that connection, of course, we are in the midst, today, of a. rapid technological change, almost a revolution, and we are facing the problems of adjustment resulting from it. Now, if you will permit me, I would like to just mention one fact that I think illustrates this dramatically. In the United States of America today, 90 percent of all electrical bulbs, and that includes all bulbs, including radio tubes-not TV picture tubes, but radio tubes and all the electric lamps we have manufactured in the country today, 90 percent of all electric bulbs in the United States of America today are manufactured by 14 men operating 14 machines, and I think that is the kind of fact that can be readily understood and appreciated by everybody to realize what the impact of automation has Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  201  on the labor force, on production, investment problems, and everything else. We do need to face up to these realities today. They are upon us, we are in the midst of it now, and I think we need not onl.Y assure people who are unemployed today that they can regain their employment, but also that they will have a home to live in, and have it within their reach when they are employed. It is for that reason that we are emphasizing the need for the enactment of this legislation now. Mr. AonoNrzro. Mr. Mason in his testimony before the committee indicated that when we enacted the Emergency Housing Act of 1958 that construction costs of homes rose about 5 percent. Of course, I didn't dispute that, but I would like to have your views as to whether you think the administration is correct in anticipating if we enact this bill that we can_ expect higher construction costs so far as providing funds for the Fannie Mae special assistance i Mr. SHISHKIN. Well, of course, I don't agree with that conclusion. I think whatever statement might have been made there has not shown the necessary connection between the enactment of the emergency bill of 1958 and construction costs at that time. I think the cost studies that are available would not support that conclusion. Mr. AnnoNrzro. One fact remains certain, and that is we did get lower priced homes. Mr. SHrSHKIN. That is correct, and that is from the standpoint of inflation the most important element in the picture today. Mr. AonoNrzro. Mr. Barrett. Mr. BARRETT. I just want to commend Mr. Shishkin on his very splendid statement. The closing part certainly adds a very human touch to this housing situation. However, that is characteristic of y~mr presentations here, and we are certainly glad to receive your views. Mr. SmsHKIN. Thank you, Mr. Barrett. I would like to add one more human touch to this, if I may, and that is a point I made before this committee some time ago but a point that I am afraid has been lost on those who should really pay greatest heed to it, namely those in charge of this housing program under this administration, and that is that we have facts that need to be studied and examined right now, because the problem is right upon us, and that is at the end of the war we had an abnormal rise m our population curve by having produced, as the result of wartime marriages, producing a crop of war babies. We had more births, a great increase in the birth rate at the end of the war at that time, and these were war babies that came upon·the scene at that time. That happened at the end of World War II. Since that time, these children born then have grown up and now are reaching the marriage age, so within the next 2 or 3 years we are going to have the effect of that which is known, which is predictable, which is visible to the·naked eye, and these are young people that are going- to get married themselves and are going to go around knocking on the door for new homes, and unless we foresee that and make provision and take account of the need for additional housing starts to provide for that housing, we are going to have another crisis upon ns, and we will try to deal with that after it has taken place. Let's deal with the facts now, we know what the need is, and I must say in our estimates, which are very conservative, we have not Federal Reserve Bank of St. Louis  202  EMERGENCY HOME OWNERSHIP ACT  taken account of that particular factor, but we wish the committee would. Mr. ADDONIZIO. Mrs. Sullivan. Mrs. Sm,LIVAN. I have said before and I say it again today that every time Mr. Shishkin comes here to testify I learn more. You have always made very good statements, which dug in deeply to the statistics that are needed, and I feel many of us can go away enriched from what you have tqld us. I just wish that we could start his testimony some time earlier, because he always seems to be ending up when it is time to stop the hearing. I have no questions. Mr. SHISHKIN. Thank you, Mrs. Sullivan. I appreciate it very much. Mr. ADDONIZIO. Mr. Widnall. Mr. WmNALL. I don't have any questions, Mr. Shishkin, but I do believe as you do that we should take a long, hard look at the longrange picture of housing for America, and consideration of this bill certainly is not the answer to the housing problems as we see it through the days and years ahead. I am just as concerned with employment and adequate housing as you are. Perhaps my own a-pproach is a Jittle different, and my own belief, an honest belief. I think that when we talk about these various programs we have to talk about the positive and also the negative, and sometimes we don't get into the negative of them, because people are afraid to hurt feelings and face the facts of the abuses that have occurred in some of the programs that are on the books today. I think as we go on with urban renewal, for instance, we definitely have a need for it, the program should be supported, but there have been bad abuses of the program that should be faced up to, honestly faced up to, and I hope you are interested in curing those abuses the same as I. I never hear any criticism of the program, it is always "enlarge it and spend that much more." The-re have been abuses in the public-housing program, too, acknowledged by people that have been ardent advocates of public housing. I think as we go on with that program we ought to be mighty sure it isn't abused as it has been in some areas in the past. Mr. SHISHKIN. Let me say, Mr. Widnall, rappreciate very much the spirit in which he said that. I appreciate his understanding and I also want to express my agreement with him that we not only need better housing legislation, but better administration than we have today. Mr. Am>0N1zro. So there is no misunderstanding that no one has tried to claim this is the answer to the housing problem of our country this is just a long step in the right direction. Mr. 'SEIDMAN. I might say this is not a hearing dealing with other aspects of the housing program, but in past years when our representatives have testified before this committee, we have not hesitated to criticize certain aspects of programs with which we were generally in a~ement, including the urban-renewal and public-housing pro• grams. Mr. ADnoN1zro. Mr. Ashley. Mr. AsnLEY. I have just a comment, Mr. Chairman. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  203  I also would like to commend Mr. Shishkin on his statement, and to acknowledge the presence of his very capable colleagues. I am glad that he mcluded a copy for each of us of the Labor Economic Review. I have noticed on page 51 of this review the statement that in 1956 there were 8 million families having an income of less than $4,000 and that these families represent two-thirds of all of the families in the United States having substandard housing. I think it is very interesting that this goes on to relate that virtually no new private housing financed with mortgages insured by FHA are going to families in this group. We are simply not answering an extremely vital problem for families that need it most. That would certainly appear to be the conclusion, wouldn't it? Mr. SmsHKIN. Yes, indeed. I think that is a crucial point this analysis brings out. Mr. AsHLEY. I think until this problem is really faced up to squarely, there will continue to be a blight on the conscience of our country. It is astonishing to think of 8 million families in this country living in substandard housing, with no real effort being made to meet the problem. Mr. SmsHKIN. That is why we feel the stimulation of housing, as it is under this bill and as we hope it will be in the broader housing bill, will be for the families of moderate income. Mr. ASHLEY. Thank you, Mr. Chairman. Mr. AoooNrzro. Are there any further questions? Mr. SmsHKIN. Mr. Edelman is here with me. I wonder if he would like to add to what I have said. Mr. AoooNrzro. We are always glad to hear Mr. Edelman. He has always been a fine witness before our committee. If he has anything to add, we would appreciate it. Mr. EDELMAN. I would make the one obvious comment, Mr. Chairman, that since this bill has been dealing, and the testimony with respect to this bill has tended to be on a very theoretical basis, we would just simply like to make the comment, or I would like to make it on my own hook, that the very brilliant testimony that you heard in terms of economic theory presented here by Mr. Keyserling earlier not only represented an extraordinary intellectual performance but, in addition to that, perhaps the most extraordinary presentation of hard commonsense that has been offered to a congressional committee in some time. I think this fact should be somewhat underscored. I think that Mr. Shishkin could have given you the same type of discussion, as we understood the overall theory of the administration's objections to this kind of legislation. Mr. Shishkin could have indulged on this, but knowing Mr. Keyserling was making this type of presentation he underscored and made a more prosaic type of presentation. Mr. AonoNrzro. I certainly agree with you. Thank you, gentlemen, we appreciate your testimony. Mr. SmsHKIN. Thank you, Mr. Chairman, and I thank the committee. Mr. AnooNrzro. Our next witness was supposed to be Mr. Henry Du Laurence, chairman of the legislative committee of the National Apartment Owners Association, Inc. I understand that he is ill, and 50876 0-60-14 Federal Reserve Bank of St. Louis  204  EMERGENCY HOME OWNERSHIP ACT  that he has a representative here, a Mr. Brinkman. Would Mr. Brinkman please come forwrd? STATEMENT OF OSCAR H. BRINKMAN, EXECUTIVE SECRETARY, NATIONAL APARTMENT OWNERS ASSOCIATION  Mr. BRINKMAN. My name is Oscar H. Brinkman. I am the executive secretary of the National Apartment Owners Association, with offices here in ,vashington, D.C. Mr. Du Laurence, who is the chairman of the legislative committee of the association, was here on Sunday and Monday and prepared his statement and intended to appear here, but he was overtaken by fluI guess that is the official name for it-and he had to return to Cleveland and is under a doctor's care. He has asked me to appear and present this very brief statement which I don't think will take more than 5 or 6 minutes in the reading, if you gentlemen have no objection. Mr. AonoNrzro. We are very sorry to hear about his illness. I am sure the committee wishes him a rapid recovery, and I am sure you will make an able substitute. Mr. BRINKMA:S-. Thank you. Mr. Du Laurence in this statement says this association is vitally interested in H.R. 9371 and appreciates the privilege of being able to appear and give its views on the bill. As its name indicates, the National Apartment Owners Association is a national association representing rental housing, and its membership and associations are active in 37 States of the Union through either local or State associations or direct membership. There are approximately 15 million rental housing units in the Nation and therefore it is quite evident that any legislation proposed for or having to do with housing is of vital interest to this association and the property owners it represents. The association through its legislative committee has taken House bill H.R. 9371 under consideration. The first question that appeared to the committee was the name of the bill itself. It is entitled an "Emergency Housing Bill." The body of the bill indicates that some emergency faces housing and the housing industry faces a critical decline in its construction. Our investigation shows that housing construction in the year 1959 will constitute one of the highest construction years on record in the last 15 years. In addition2 our survey has indicated that there is more rental housing available tor our population than at any time si:p.ce the beginning of the Second World War in 1939. Our survey further indicates that there is, at the present time, a vacancy in rental housing in the United States of approximately 5 to 6 percent and that this vacancy ratio is growing monthly. Under these circumstances it is difficult if not impossible for our organization to see any emergency facing the American people in housing. As a matter of fact, many of our associations indicate that, if anything, their localities are overbuilt and there is ample housing both for rent and for sale for the people of their communities. The spending habits of the American people indicate that there is no crisis in housing or a great emergency in our housing needs. The Bureau of Labor Statistics figures show that Americans spend more Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  205  for transportation, that is, automobiles, than they do for housing in every State in the Union except one. If there were any great shortage of housing, these figures would be reversed and the expenditures for housing in relation to other expenses would have risen rather than declined in the last 10 years. Well-meaning people of good will consistently deplore our housing situation and demand better and cheaper housing at lesser expense and carrying charges for our low- and middle-income groups. We believe that the BLS figures mentioned above indicat~ beyond question of doubt, that this sympathy is misplaced. BL::; figures indicate that the Nation, as a whole, spends approximately between 12 to 13 percent of its income for rental housing but in many cases considerably more than that for its transportation, that is, automobiles. The historical percentage set aside for family housing needs is between 20 and 25 percent of family income. It is evident, therefore, that the demand for housing is affected not by the inability of the people to buy such housing under present financing, but by consumer preference. If people insisted on spending their earnings on cars, television sets, powerboats, yachts, and other luxuries, as BLS figures indicate, it is difficult to see what moral or sound economic right the Nation has to furnish subsidized housing at Government expense. Until people spend up to a minimum of 20 percent of their income for housing any further subsidization will be m truth subsidizing not the purchase of their housing but subsidizing their ability to purchase bigger cars, bigger television sets, bigger powerboats, bigger luxuries. This fact should be self-evident. Our investigation has indicated that many organizations more familiar with mortgage and banking principles will testify on the individual provisions of the bill. We will leave the individual provisions of this bill for their able analysis. However, we would like to sum up our findings regarding the bill's provisions. In our estimation, these provisions will furtlier stretch the rubber band of unsound finance to nearer its breaking point. The sound economic principles that have grown up over the centuries and on which this Nation has become a great financial power are being increasingly abandoned. The reduction of the insurance premiums should be based not on the ability to scatter these loans at random but on the ability to properly place and service these loans. The buying of any and all mortgages regardless of values disregards the most basic principles of sound banking and finance. Stabilizing the mortgage market regardless of the market situation has the obnoxious smell of market rigging so ardently objected to by the SEC. It is the concerted opinion of the members of this association that the P.rovisions of this bill would undermine the values and the rents of billions of dollars' worth of presently existing rental housing and that this would be one more step toward the creation of more debilitated housing and slums. Proper maintenance of rental housing depends on fair and reasonable rents. If these be undermined, debilitation and slums will follow. Federal Reserve Bank of St. Louis  206  EMERGENCY HOME OWNERSHIP ACT  The pressure for further housing subsidy must be based not on the opinions or good intentions of well-meaning individuals but on market demand. As long as present housing is meeting this market demand, further pressures for construction over and beyond these needs could only create a surplus of housing with its obvious results. The National Apartment Owners Association calls up Members of Congress to take a constructive attitude toward the Nation's biggest asset-its housing. Any actions that would eventually undermine this asset will be harmful to the future of this country, regardless of any temporary benefits that they might achieve. The National Apartment Owners Association respectfully submits that the provisions of House bill H.R. 9371 are not in the best interests of the owners of rental and private housing of the Nation, and t~erefore respectfully requests that this committee oppose its provisions. That is all of Mr. Du Laurence's statement, and we appreciate very much the opportunity to appear here and present the views of the members of this association. Mr. ADDONIZIO. Mr. Brinkman, in view of the time I am going to forgo asking you any questions, but I assure you that I will study your statement very carefully in my consideration of this legislation. Mr. BRINKMAN. Thank you. Mr. AnnoNIZIO. Mr. Barrett? Mr. BARRETT. No questions. Mr. AnnoNIZIO. Mrs. Sullivan? Mrs. SuLLIVAN. None, Mr. Chairman. Mr. AnooNIZIO. Thank you, again, Mr. Brinkman. The committee will stand in recess until 2 p.m. this afternoon. (Whereupon, at 12 :33 p.m., the subcommittee recessed until 2 p.m., the same day.) AFTERNOON SESSION (The subcommittee met, pursuant to adjournment, at 2 p.m.) Present: Mr. Addonizio (presiding), Mr. Barrett, Mrs. Griffiths, Mr. Widnall, and Mr. Bass. Mr. AnnoNIZIO. The committee will be in order. Our first witness this afternoon is Hon. Clem Miller, a member of our distinguished Houi:e Banking and Currency Committee. I understand he has several people with him that he would like to introduce. Mr. MILLER. Mr. Chairman, we certainly appreciate the opportunity to appear here today to dramatize the situation in housing on the west coast. This is not just California, it includes Oregon, Washington, Arizona, Nevada, Idaho, and Montana, and I see in the audience my good friend and colleague, Congressman Porter, who will undoubtedly give emphasis to what we have to say. We want to emphasize strongly that we are here today presenting the point of view of California. This is not just a California problem. It is a national emergency which demands the quickest possible action. Even though in other parts of the country they may be at the present time enjoying easier conditions with respect to home financing, there are strong indications that this is temporary. We also are firmly convinced that all sections of our country are interdependent. This means that when one section is in difficulty, the Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  207  dfect transmits itself instantaneously to other sections of the country. We do not feel, therefore, that we are here presenting a sectional point of view, but that we are here presenting the housing needs of the country. Yesterday, I was privileged to present the Governor of my State of California, who gave us the overall facts about the housing emergency, and requested the immediate assistance of Congress. Today, with builders and contractors who are on the ground, in the subdivisions day in and day out, we are going to pinpoint this emergency :for you ; we are going to do it with dispatch; we are going to do it in detail so that we may have a basis in this committee for taking action. Mr. BARRETT. Mr. Chairman, before Congressman Miller introduces his :friends, I would like to say :for their benefit that he is one of the most capable men ever sent to Congress from the west coast. He is admired and respected by all the members of the House and he certainly has proved a great asset to this committee. I am quite sure he will most capably represent his :friends here today. Mr. MILLER. Thank you very much, Congressman Barrett. I appreciate that a great deal. I consider it a privilege to serve on this committee and to work with you in implementing legislation. I might say that the emergency housing bill which you brought out in 1958, while I was on the outside looking in, is one of the principal reasons that I am here today. Thank you very kindly. I would like to introduce, if I may, to give you the scale of our problem, Mr. Richard Barrett of Barrett Construction Co., San :Francisco. Will you tell us what you produced last year and what you plan :for the :future ? Mr. BARRETI'. We are currently not building homes. We have given up 400 lots in Contra Costa County. We have developed 154 lots down in Santa Clara County which we are not building on, but are selling as developed lots. There is no need for us to try to fight the discount market. We have absolutely given up on the housing market except for urban renewal and redevelopment. Mr. MILLER. Mr. Barrett, what were you building last year-to give them some idea of the scale of your operations? Mr. BARRETT. On housing, we were going two to three hundred houses a year. Mr. MILLER. Mr. Dan Schwartz. Mr. SCHWARTZ. My name is Dan Schwartz, representing the PermaBilt Homes, building in the East Bay, northern California. We are building in three counties. Last year we produced 954 homes. This year we have no takeout commitments for construction at all. We have been unable to obtain it. We don't have any indication at this time as to what our production may be. Normally, at this period, we would be preparing land and getting ready our model homes for our sprin~ operation. We been unable to do this, financing being unavailable in any :form. Mr. MILLER. Mr. Jack Mason. Federal Reserve Bank of St. Louis  208  EMERGENCY HOME OWNERSHIP ACT  Mr. MAsoN. I represent Inland Empire Builders, Inc. We have been building 400 to 450 homes a. year. At the present time, we have only 177 homes that are being ready to go under construction. We have 247 lots in addition to that that are being developed, but because of the mortgaging problem at the moment, we are not going ahead with the 247. We will only go a.head with 77 until something is clarified for us. Mr. MILLER. George Goheen. Mr. GoHEEN. I represent the Goheen Construction Co., Mill Valley. We have been building approximately three to four hundred homes a year. Last year we built about three hundred, two hundred of which were in the Vandenberg area serving a missile base. We have over 250 more to do in that area. At the present time we are shut down due to the fact that financing is impossible. It is certainly needed. Mr. MILLER. Mr. Chairman, this indicates from builders who are on the spot in California what their prospects are for this year, and I am sure that you will agree that the prospects are very bleak. These are the facts. We have witnesses with me who will detail the reasons why we are on the spot in California. First is Donald L. Stone of Stone & Schulte, San Jose, on my right. On my left is Chester Spiering of Blakeslee-Spiering Co., Arcata, Calif. I also have John H. Tolan, of Richmond, Calif. All of these builders represent different kinds of housing problems from that of the smallest builder to the largest. With us we also have, to my extreme right, Mr. John Hennessy, executive vice president of Associated Home Builders in Berkeley, one of the largest constituent organizations of the National Asociation of Home Builders. We are not here representing the National Association of Home Builders, as such, but representing individual builders giving substantially what our California situation is. Mr. Stone. STATEMENT OF DONALD L. STONE, PRESIDENT, STONE & SCHULTE, INC., SAN J'OSE, CALIF.  Mr. STONE. Mr. Chairman and members of the committee, my name i~ Donald L. Stone and I am a homebuilder in San Jose, Calif. I appreciate this opportunity to present my views. To begin with, may I state that housing's position in our economy must not be underestimated. It is now contributing an estimated 4 percent to our gross national product. In the State of California, where 16.6 percent of the Nation's housing units were built in 1959, it is our third largest industry. The American families who want better homes, and the thousands of small businessmen who build homes for them, share the viewpoint that inflation is wasteful and oppose further erosion of the American dollar. But, the effectiveness and the fairness of a governmental antiinflationary policy which relies principally on monetary restraint must be questioned. The tens of thousands of modest-income home buyers, who only a short time ago could have bought homes well within their means, are now disqualified by the high cost of credit. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  209  Raising interest rates has not produced more capital. The total demand for credit exceeds the supply, and home buyers, together with the home building industry, are the first to feel the impact of tight money. I believe it is time to reevaluate the usefulness o:f an adequate and decent national housing inventory. I am told that there are over 6 million homes in the United States today which still do not have inside plumbing. At a l.3-to-1.4-million starts per year we cannot provide :for this deficiency, let alone providing homes for the new :family :formations in the era ahead when the population will be exploding. The question then seems to revolve around whether capital should flow to the production o:f less essential nondurable goods or toward the long-term asset o:f better housing. It is an American axiom that homeownership provides the incentives :for better and more productive citizens. In light o:f the above statements I feel that we must find a way to displace the flow of capital. One, we must find a way to attract shortterm investment capital into the long-term mortgage maket. Two, we must find a way to provide for liquidity of mortgages so that longterm investment capital, not now investing in governmentally insured ·or guaranteed mortgages, will confidently so invest. Three, we must reduce, i:f not eliminate, the competition that exists between the Government bond and the governmentally insured or guaranteed mortgage. Four, we must find a way to provide for more equitable tax treatment for all types o:f investors in governmentally insured or guaranteed mortgages. I feel that a Central Mortgage Reserve facility will provide another instrument in the mortgage and finance field so that mortgages can compete effectively in the open market. A Central Mortgage Bank cannot be regarded as an end in itself to the solution of all mortga~ problems but will help to stabilize the flow o:f mortgage money and level off the hill-and-dale effect caused by supply and demand. To be more specific as to what I mean as to a Central Mortgage Bank, may I refer you to the proposal as presented by Richard G. Hughes and Thomas P. Coogan which they submitted to the Economies and Planning for Industry Committee o:f NAHB, and on which committee I have the pleasure of serving. Mr. Chairman, I would like to enter my :full report :for the record, but I am going to eliminate the details which I have outlined in this report :for expediency o:f time. Mr. Ao00Nrz10. Without objection that may be done. Mr. STONE. Briefly, and to summarize: 1. Ownership: The Central Mortgage Bank should be an independent Government corporation of mixed ownership with stock sold to its members as a requirement necessary to do business with the facility ; also, so as to qualify as an independent Government corporation. The Government should provide the necessary initial capital for it to properly perform its :function. It should have a Chairman and a Board of 12 Directors, appointed by the President, :for staggered terms and representing the 12 Federal Reserve districts, and also broadly representative of the housing industry and the public. Federal Reserve Bank of St. Louis  210  EMERGENCY HOME OWNERSHIP ACT  2. Coordination with monetary and fiscal authorities: The activities of the Central Mortgage Bank should be coordinated with, but not controlled by, the Federal Reserve Board and the Treasury. Housing should be recognized for its stature in the economy and should have a major status in the Government structure. I recommend Cabinet status for housing. 3. Management and operations: The Boa.rd of Directors of the banks should set the buying/ri~e for mortgages from time to time and the posted prices shoul reflect all the cost to members doing business with the facility. Purchase prices, fees, and charges should be set by the Board, and should be based upon its ability to secure funds by the sale of its debentures. The Board should have the authority to set interest rates on FHA and VA loans within maxims established by Congress, such rates to be as low as possible to further promulgate the long-term low-interestrate easily amortized mortgage which has been predominantly responsible for the phenomenal increase in home ownership in the past quarter century. These interest rates should be consistent with the average cost of the money raised by the sale of its notes and debentures in the open market with a differential purchase of operating expenses and the accumulation of a sensible ,reserve. While it is anticipated that the Central Mortgage Bank will operate at a nominal profit, its motivation should be to provide a needed service in the economy, and not basically as an operation for profit. 4. Eligibility of loans: The bank should buy any mortgage insured or guaranteed by the FHA or VA that is not in default at the time of submission and in which there are no title defects. 5. Discount facility : The Board should set from time to time the term, charges, and mterest rate for making loans against eligible mortgages and should stand ready at all times to make such loans. These loans should be for a renewable term of 6 months with such margin as the Board may require, and shall be made with full recourse to the borrower. This function should be available to stockholder members and should function to stabilize the mortgage market through assisting existing lending institutions by standing ready and willing at all times to loan money to any existing lending mstitution for short terms. 6. Notes and debentures: The Board should have the authority to issue at its discretion notes and debentures for sale on the general market, and at no time should the total amount of such outstanding notes and debentures be in excess of the acquisition cost of the insured and guaranteed mortgages in its portfolio. The legislation c,reatmg .the Central Mortgage Ban~ sh?uld al~ amend the National Bankmg Act and such other legislation as 1s necessary to make such notes and debentures legal investments for all federally operated and supervised institutions. These debentures should also be eligible for purchase by the Treasury at the direction of the President or by act of Congress, when, at their discretion, such action is necessary to support the market or stimulate the construction of housing. Inasmuch as the notes and debentures are fully backed by loans guaranteed and insured by agencies of the United States, it should be possible to classify all debentures issued as insured debentures, as was done in the case of the maritime loans. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  211  7. Membership: The right to sell loans or to buy advance commitments, to use the discount facility, or otherwise deal with the Central Mortgage Bank, would be restricted to members owning and holding a, prescribed amount of stock. This amount should be set by the Board, but to encourage wide use, the initial requirements as set by Congress, should be nominal and not based on the members' assets. It is believed this is essential to encourage participation in the initial operations, and after the bank is functioning, members may be required to increase their holdings based on the volume of their transactions, but all at the discretion of the Board of Directors. The stock should not be trans£errable and the bank should stand ready at all times to repurchase at par any outstanding stock that may be offered. 8. Summary : Essentially, the Central Mortgage Bank is to be a fiscal device for converting hard-to-sell mortgages into notes and debentures acceptable in the private marketplace. Such universally acceptable notes and debentures will have the ability to attract all sources of investment funds, including pension funds, mutual investment funds, and real estate trusts. In addition, the establishment of a Central Mortgage Bank with rediscount powers would encourage those lenders who already have the facilities for making and servicing mortgage loans to use more of their resources for mortgages. The Central Mortgage Bank would stand by to aid, assist, and stabilize these lenders by making such loans to them on their mortgages should the need ever arise. There is no intention, in creating a Central Mortgage Bank, of opening a back door to the Treasury for general use of Treasury funds to support the mortgage market. As in the case of most other Government credit agencies, Government help may be necessary at certain times. Next, I believe, we discussed the subject of refinancing existing housing with Government insured or guaranteed loans and the effect this is having on our economy. I voiced my opinion that translation of housing equities-savings-into stock and nondurable goods seems inflationary in itself. The FHA program was initiated for the announced purpose of improving the housing conditions of the American people. In recent .vears, with the extension of the FHA program to existing dwellings, a practice has developed which was not contemplated at the time the FHA program was launched. Specifically, a vast majority of those utilizing FHA insurance for mortgages on existing dwellings are doing so as a means of refinancing for the purpose of reducing their equity so that the funds obtained may be used for other forms of consumer purchases. This has resulted in an overdraft on the available supply of money for FHA and VA financing which has distorted the fundamental FHA _concept of creating new home ownership, new jobs, and a healthy American economy. Improving the housing standards of the American people has been deemed by Congress to be in the national interest. Providing job opportunities so as to keep employment high has also been deemed by Congress to be in the national interest. Further, the income taxes from the payrolls resulting therefrom have contributed substantially to the tax receipts of the Federal Treasury. Federal Reserve Bank of St. Louis  212  EMERGENCY HOME OWNERSHIP ACT  The refinancing of older homes, except where trade-ins on new homes are involved, does not provide jobs nor taxes. To the contrary, it adds to the inflation of older homes and, to the extent that equities are converted to other forms of credit by such practice, it adds further fuel to the fla,mes of inflation. Until such time as mortgage funds are again in adequate supply at reasonable interest rates and discounts, it is thought that Congress might abolish, by law the payment of discounts on the resale of older homes under FH1 or VA except for sales involving trade-ins on new homes financed under FHA-insured 'loans or VA-guaranteed loans. This viewpoint, in discussion with many homebuilders and redtors around the country1 is not readily acceptable and, therefore, I am not urging any action in this direction but that an exfloration to determme the facts in the matter which could very wel prove that the conclusion drawn in the large picture may be biased through provincial thinking. In reference to our discussions on the subject of suggested tax legislation necessary for attracting more investment capital into the mortgage market, I would like to just briefly touch on this and possibly we can elaborate at a later date. I feel that commercial banks should have the same tax treatment on earnings from long-term mortgages as now provided to thrift institutions. And that savings and loans should not be belabored with additional tax burden which would further curtail the proportion of total savings flowing into the mortgage-lending institutions. Mutual investment trust funds should be allowed to be formed and invest in the FHA and VA program, as they do in the stock market, and receive similar tax treatment. It has been a pleasure to have this chance to give you my views on these matters. I appreciate your attention and courtesy. I will be happy to try to answer any questions that you may have. Thank you. Mr. MILLER. Mr. Spiering. STATEMENT OF CHESTER H. SPIERING, DEVELOPER AND BUILDER, CALIFORNIA, OREGON, WASHINGTON, NEVADA  Mr. SPIERING. Mr. Chairman and members of the subcommittee, it is a real pleasure to appear before you to discuss and hopefully assist you with thoughts that may better enable your preparation of housing legislation and, if possible, better establish m your minds that housing should be branded "board for board" in the national interest. I shall simply summarize my remarks contained in this statement with the request that the full statement be made a part of the record, and attached thereto is certain illustrative correspondence and exhibits. Mr. AoooN1z10. Without objection, that will be done. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  213  (The information referred to is as follows:) ARCATA, CALIF.,  Hon. CLEM  January 15, 1960.  MILLER,  Washington, D.O.  DEAR CLEM : In confirmation of our recent telephone conversation and furthering that discussion, we present the following for your consideration : We have endeavored in our letters of November 17 and 30 to Senator Clair Engle and in meetings with other builders in the San Francisco Bay area to draw attention to the most dangerous problems we feel are present in existing aYenues of home-mortgage finance, and to suggest a comprehensive, long-range legislative program that would provide stability in mortgage financing for the homebuilding industry and enable it to provide for the people of these United States a sufficient quantity of reasonably priced and properly financed homes. which today is primary in the national interest. We have kept in mind at all times the administration's lack of enthusiasm for housing bills which have been given them for acceptance, in recent years, following legislative action and approval. We believe that legislation patterned closely after the thoughts contained particularly in this letter with reference as required, to our letters of November 17 and 30 to Senator Clair Engle will demonstrate to the administration that our industry is in the national interest perhaps even more than other industries and that we have given them a forthright "feet on the ground" sound solution to the Nation's need for homes and at costs to the Government of far less than they have been experiencing. For the sake of sound permanent legislation, in our opinion, appropriation isues such as public housing, etc., which require periodic consideration should be separated from a permanent housing bill, and should be included in annual appropriation bills. In our meeting with others, we proposed the abandonment of the use of the term "special assistance program" which is the term used in recent years to indicate a partial coverage obtained for mortgage financing. This term approaches a condition connected with flood, earthquake or other disaster but in this instance is directed toward need for homes across the Nation. The group readily accepted our proposal. The bill introduced by Chairman Rains of the Housing Subcommittee again approaches this problem by the use of the titled bill "Emergency Home Ownership Act." Emergency solutions and special assistance are the most costly and time-consuming for all concerned, and are a frantic approach to a great industry's sober requirements They are always a shortterm stopgap measure requiring further attention almost immediately and inciting unreasonableness in many circles in the path of obtaining the required approvals. As this further attention is not immediately given due to the press of other congressional problems, the homebuilding industry is historically faced with a stop-and-go program, resulting in costs tha:t are carried into the product, producing inflation unnecessarily. We, in the deepest concern and feeling for one of our Nation's most necessary industries, do most seriously request the Congress to consider that inasmuch as homes are needed in every segment of our United States to house all our people and that homes have not been built for many years through the cutting of trees at a homesite and raised in a matter of hours by neighbors and that today much has taken place since that time, which we all prefer to call "Progress," and that we must now face today's and tomorrow's national requirement for homes by employing today's and tomorrow's economic measures. What manner of men are we, if we must constantly, year after year, cloak the building industries' requirements behind a banner of critical need and urgency? We know that these homes are in the national interest and since so many conditions present themselves in our vast Nation today, when we consider the term housing, should we not therefore face up to the realistic facts that like the highways, schools, airlines, U.S. mail, electric power, and many others that ·are fed through Federal aid even to the extent of special taxes as gas tax for highways, so should housing receive the necessary Government support with an honest and forthright program and not rescued each year in a half drawned condition. This support Federal Reserve Bank of St. Louis  214  EMERGENCY HOME OWNERSHIP ACT  should be sufficient to make a dollar spent by the ultimate home purchaser one that has the true value of an uninflated dollar purchase, and at the same time provide a healthy building program for those interested in providing a healthy program and not rescued each year in a half-drowned condition. This support and the builders of the Nation will welcome such solution and place every effort toward reasonably priced good living. We suggest later in this letter how this, in our opinion, is possible. The trend in recent years and continuing today has been away from FHA and VA programs and toward conventional mortgages coupled with a second mortgage, for the reason of many difficulties in obtaining FHA and VA mortgage money at reasonable discount rates. Carrying on a building program involving high discount rates is costly to the builder, expensive to the home buyer, and inflationary to the Nation. We are all aware of this, and we are suggesting later in this letter methods of curing this, hopefully for all time. Becaul'le of these difficulties inherent in FHA and VA programs at high disC'ount rates, the trend above mentioned has resulted in the fact that now conventional mortgages, coupled with second mortgages, are the larger fraction of financing for homes built today. Due to the risk to the home purchaser, the builder, and consequently to the Nation, as spelled out conservatively in ou.r letter to Senator Engle of November 17, we feel most strongly that Congress should consider two simultaneous approaches to the problem. First, to pass enabling legislation, suggested herein, to again make the time-tested and proven FHA and VA programs readily available to the home purchasers of the Nation, and secondly, to study and enact regulating measures to control these conventional financing patterns which risk disaster for the home buyer, which condit.ion prevailed and added greatly to the horror of the great depression of 1929, It was due to this calamity wherein great numbers of people lost their homes that the FHA was borll' with safeguards to prevent a recurrence of this type to home buyers. Certainly we wish to place no responsibility for the lack of a healthy operating building program upon our Congressmen, for the reason that it is up to us as an industry to clearly set forth our needs to you in Congress and thereafter continue to pursue the needs of the industry through your good offices so that the people of the United States in their good government are able to benefit by realistic legislation in housing to meet their needs. . Chairman Rains' Emergency Home Ownership Act is the initial attempt at rescue for this year. As presently written, it will put FNMA in the position of being out of funds and therefore it would be in no position to assist in stabilizing the mortgage market within a very few months after passage of this bill. This would result in the complete loss of the only present avenue for mortgage fu,nds for the greater part of the United States which includes virtually all areas away from metropolitan centers and would therefore result in near chaos ill' the mortgage market. If, however, FNMA were given sufficient funds to do the job for a year, which would amount to several times the present proposed amount in this bill, and if meanwhile legislation were studied and enacted to provide continuance and to remove FNMA from the position of selling the par loans bought during the coming year for a loss, we would then be in favor of Chairman Rains' bill for immediate p'.lssage to provide a basis for the homebuilding bu,siness during 1960. To provide the continuity under Chairman Rains' bill for FNMA, Congress for example, could provide in all future FHA and VA mortgages, a 5-year review of interest rates on the remaining balance, which plan is discussed in more detail later, effecting a reduction of discounts. (Also see our letter to Senator Clair Engle of November 30.) Further, if an allowable maximum of 3 percent of discounts were allowed to be paid by the builder but to be evidenced openly and publiclv as proposed by Chairman Rains, and if FNMA, or other governmentalcontrolled mortgage facility, were to be powered and funds authorized by Congress to recoup the loss, if any, upon the resale of these mortgages, this program would then have continuity. There should be, however, a maximum discount of perhaps 2 percent for FN1\1A above the builder's maximum participation of 3 percent for a maximu,m total of fi percent, above which FNMA could not resell these mortgages, for the reason of assuring Government's participation where the maximum dollars expended by them can be determined closely on an annual basis, and also holding against undue inflation. We must qualify our endorsement of.this bill to the extent that there are some apparent inconsistencies in the summary of the bill which we have received from Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  215  you. This we are discounting and are considering that the bill is in itself consistent. We are wondering as to what success builders in metropolitan areas will have in meeting their market and maintaining quality at a maximum price of $13,500 to $14,500, if only for the reason that the price of land would preclude the desirable locations. As stated, Chairman Rains' bill, with the above recommended modifications, is considered net>essary as another stopgap measure and is, in our opinion, satisfactory only if it can be followed with a major comprehensive housing program to be enacted by the 1960 Congress. The comprehensive legislative program should include all of the following points, in our opinion, to be effective: 1. Reconstitute FNMA as a central mortgage facility, with a directing principle that adequate and sufficient homes for our citizens is of paramount importance to the national interest, and that the primary fu,nction of FNMA would be to provide a sufficient, continuing supply of mortgage money to stablize the homebuilding business at a level as determined by the Congress to be sufficient to meet the need of our citizens for homes. Specifically, the following methods are suggested to enable FNMA to accomplish this objective: (a) That in addition to entering the open market to buy and sell mortgages, FNMA also would retain permanently a portfolio of mortgages to be used as a basis for securities issued against this portfolio and sold to the general public. This would open up markets not now available for mortgage lending, for instance, pension funds. - (b) That FNMA be empowered to adjust interest rates on FHA and VA mortgages, within statutory limits as set by Congress, regionaUy so as to minimize discounts, and to make the VA interest rate equal to the FHA interest rate. This would immediately lower discount rates in areas where they are now highest. (c) That FNMA be enabled to accept, and FHA and VA to insure mortgages wherein the interest rate would be subject to review and periodic adjustment, either upward or downward, according to the market condition as estimated by FNMA in each of its geographic zones. For instance, at 5-year intervals from origination, each mortgage could be adjusted to the then prevailing interest rate as determined by FNMA for that region, and the amortization schedule would be adjusted, so that the remaining payments would amortize the remaining balance at the new interest rate. This action, in our opinion, would greatly reduce the risk of lenders in their holding of long-term mortgages which is now facing them due to the continuing inflationary trend, and would therefore reduce the necessity for lenders to discount against predicted risks. (d) That FNMA be given authority to make, and banks be allowed to accept, loans against each bank's portfolio of mortgages, thus permitting banks to remain in mortgage lending during periods of tight money. (e) That FNMA continue its present operations of bicying and selling mortgages, providing standby services, prior commitments, etc. (f) That instead of special assistance programs and veterans direct loan programs involving full purchase of mortgages by use of treasury funds which on occasion total billions of dollars annually, Congress consider instead a program where neither the builder nor home purchaser participate in the payment of discounts on certain types of mortgages, such as low-cost homes (under $15,000), slum-clearance programs, cooperatives, housing for minority groups, and housing for the elderly. These certain type mortgages could be sold on the open market by providing FNMA with funds and the authority to use the funds to pay the discounts necessary to sell these mortgages. For instance, if a minority group housing program were to be considered at an interest rate which would involve a 6-percent discount to the open market on a $1 million program, instead of using $1 million of Federal money, this method of marketing these mortgages would require only 6 percent of that amount,· or $60,000 of Treasury money. It is also our suggestion that this method be used in all mortgages received by FNMA, other than the above certain type mortgages, but with a maximum of 5 percent to be paid in total discount wherein the builder pays no more than 3 percent and FNMA pays no more than 2 percent. This 5-percent discount should be the maximum required if other suggestions contained Federal Reserve Bank of St. Louis  216  EMERGENCY HOME OWNERSHIP ACT  herein are used, such as the 5-year review of mortgages for the purpose of increasing or decreasing the interest rate. This, in our opinion, should, in many locations cause the average discounts to be no more than the builder participation, and provide the balance as requiring the only Government support. Assuming that Government assistance could conceivably be required on 30 percent of all mortgages made during a given year involving an approximate 2 million homes, then using an average figure of $15,000 per mortgage, 600,000 homes would be involved at the 2-percent discount for a total cost to the Government of $180 million annually. This program would place in action a stabilizing influence on the industry's requirements, promoting security and continuity. This security and continuity would enable builders in general to develop the technology in the use of labor, materials, and equipment, and to develop sales tools, and merchandising methods, all of which would effectiYely reduce sales prices, increase quality, promote competition and encourage people in general within the industry to perform with quality in their sale of homes at increasing values, without commensurate increase in sales prices. This is the governmental support program, we earlier mentioned. This is the support that, by taking the top of the heavier discounts off of the builder, will enable him to continue when otherwise he could not. Yet the total cost to the Federal Government should never exceed $180 million for the general program. The cost of the support of the certain classes of mortgages to be supported at a higher level, as first mentioned, would be in addition at a figure to be determined by Congress in accordance with their view of the need, but here the cost would be only a small fraction of what has been expended in recent years. 2. That in addition to reconstituting FNMA as a central mortgage facility, that Congress consider bringing additional money into the mortgage market by revision of present banking law, so that national banks would be permitted and required to invest in a set dollar volume of new home mortgages annually, in proportion to their fotal deposits, and to retain these mortgages for a minimum period of 5 years. Each bank would have the option of either originating the mortgage, or of purchasing the mortgage from FNMA. If a national bank were to originate more dollar volume of mortgages annually than the amount to be retained by them in accordance with our suggested legislation, then that bank could dispose of the excess dollar volume to FNMA. The total dollar volume of mortgages required to be invested under this program should, in our opinion, reach $10 billion annually during the years of maximum need for new homes. To provide the funds for participation of national banks, credit curbs may be found necessary to control lending in other directions. It is our opinion that consumer credit is the lending that should be controlled for this will help to check and control in:llation. Also this would have the added advantage of making it easier for people to qualify for home purchases for the reasons stated in our earlier letters. "Every citizen can buy a car, furniture, appliances, sporting gear, and vacations on unrestricted credit, which is keeping the average American broke and in debt. Extended monthly payments for purchases such as these prevent, under the present restrictions, his purchasing the home that makes him a better citizen." 3. That the activities of the savings and loan institutions be investigated by the Congress so that restrictive legislation could be properly formulated to halt unsound practices now engaged in by many of these institutions, to the detriment of the national interest. This in accordance with our letter to Senator Engle of November 17 in which we have felt justified in considering this group for participation in mortgage loans in an amount approximating $10 billion annually. 4. That FHA and VA be instructed by Congress to further encourage homeownership by judging the qualification of buyers In accordance with performance, rather than by a set rule of income. In other words, if a citizen has a record of successful payment of his obligations, including rent or house payments, that he should not be prevented from purchasing a home because he does not flt a set ratio of income to housing expense. Again, this in accordance with our letter to Senator Clair Engle of November 17. You will note that housing starts increased in November of 1959 and again in December of 1959, so that the number of starts for 1959 approximate 200,000 Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP Am!  217  above 1958. This is the result of the $3 billion increase in loans for 1959 made by savings and loan institutions, as shown by published statistics mentioned in our letter of November 17. This money is sustaining the amount of home construction in this Nation, but it is very largely the type of conventional mortgage and second mortgage which, as above mentioned, is dangerous to the purchaser, the builder, and the Nation. In other words, although the number of new homes constructed in 1959 is up to the level of years past, but not nearly to the level needed in this decade or even today, the greater part of these homes are not financed in the manner contemplated by the Congress in establishing the FHA and VA home program, which programs are secure for all, but instead the greater part IYf. the homes built in the Nation during 1959 are financed by methods proven disastrous in the recent past. We have spent much time and effort in preparing these letters and in meeting with others at your request, and we consider it an honor and a privilege to appear with you before the subcommittee on January 27. We feel that through our previous letters, meetings, and this letter answering your request on Ohairman Rains' bill that you have obtained all of our opinions on these subjects. We urge you and others in Congress to refer not only this year, but also through the necessary time to come, to this and our other letters dated November 17 and 30 to Senator Clair Engle, to the end that items covered by us in these letters are constantly before you and others in Congress until either the recommendations of these letters are enacted into law or are satisfied by better recommendatiom• being enacted into law, so that the homebuilding industry is recognized as fulfilling the national interest, and is therefore properly supported and encouraged by permanent legislation rather than being rescued or half-rescued or not rescued at intervals, often more than once a year, with the resulting chaos in the industry and much confusion and cost to all of the people of the United States. Almost all of the people of the proper age aspire to own their own home, but regardless of owning, all persons from birth to death must be housed, which puts the homebuilding industry on a plane different from any other industry, making its needs imperative in this time of an explosively growing population. The methods set forth in this letter a·re a means for private industry and capital to provide a stable mortgage market arid a resultingly stable homebuilding industry under congressional control and governmental support at an annual expenditure amounting to far less than the Federal Government has been experiencing in recent years. Although we have no political experience or aspirations, it seems only reasonable that in this, an election year, that the passage of a bill which will contain legislation enabling the above stabilizing methods would provide to all of those responsible for its passage, an accomplishment that in the national interest is second only to an honorable and just peace, and we are confident of its obtaining voter acceptance accordin~ly. It is our belief that a measure such as this will do much to prevent or minimize recurring recessions, yet it iii not inflationary but, rather, anti-inflationary. In our opinion there is no time like the present for the accomplishment of this goal, and we urge you and others in Congress and in the administration to consider even more fully the benefits of a permanent housing bill being made law prior -to November 1960. Best personal regards. Sincerely, CHESTER  ARCATA,  Hon.  CLEM  MILLER,  H. SPIERING.  CALIF., No'Vember SO, 1959.  Washington, D.<J.  DEAR CLEM: We should like to supplement our letter to you of November 17, 1959, by amplifying our suggestions for your consideration relative to home mortgage loans to be made by Federal Reserve member banks and savings and loan institutions. . Lenders have a reluctance to provide mortgage money on a long amortization program of repayment in the face of our continuing inflation. An excellent example as to what lenders relate to their present activities in home mortgage loans may be their participation some 10 to 12 years ago in VA loans ma~e with 20- and 25-year maturities at 4-percent interest rates. Today these lenders are having to pay 3 percent on deposits and are possibly, in order to remain competitive, facing higher interest rates to their depositors in the near future. Congress could therefore provide legislation permitting lenders to review mortgages periodically at predetermined intervals. For an example, a 30-year Federal Reserve Bank of St. Louis  218  EMERGENCY HOME OWNERSHIP ACT  mortgage may be reviewed each 5 years to reamortize this loan to an adjusted interest rate for the remaining years under the mortgage without recourse to the time period prereding any 5-year review. This legislation must provide Congress with control of interest in a properly coordinated and acceptable manner. Again, as an example, many industries and our Nation at large depend upon the established cost of living index. , By following this plan, builder discounts to lenders should be minimized and in many instances eliminated. Purchasers of homes would not be saddled with these costs in their purchase prices at the time of their qualifying to buy a home and, further, this high cost would not continue to plague those through the yea~ who did qualify in their repayment of principal and interest. FHA- and Government-insured loans require an annual adjustment by lenders on impounds obtained each month from purchasers payments· to cover taxes and insurance. Therefore, we are asking that you consider the probable additional periodical adjustments which would surely benefit all and further provide stability and security necessary to lenders in their consideration of our suggestions contained in this and our letter to you of November 17, 1959. We should very much desire to continue assisting you in accordance with your request and will appreciate your thoughts from time to time in these matters. Respectfully submitted. CHESTER H. SPIERING. ARoATA, CALIF.,  Hon. Or.EM MlLLEB,  Nooember 1'1, 1959.  WaaMngton, D.<J. DEAR CLEM: We appreciate very deeply the interest and concern for our busi-  ness shown by you on your recent visit to our office during which we enjoyed very much making your acquaintance. This letter, detailing the major problems of the home-building industry as you requested, is late, we acknowledge, but it is late for the 'reason that we have put much elfort into its preparation. We have tried to keep the information accurate and factual, and to make the recommendations first, last, and always in the national interest, but also acceptable and helpful to those who are responsible for the direction and control of our national economy, as well as to those businesses that we may a:lrect. The information comes from many sources, the principal one oif which is experience gained from my position as managing officer of construction firms which have had a part in planning communities and constructing homes for some 10,000 people from 1946 until now in the States of California, Nevada, Oregon, and Washington. OUJr wonderful United States of America has a rapidly growing population. The State of California has an explosively growing population. Both of these are long-established trends intensified by the rapid lncreai,e in birthrate starting with World War II and continuing unabated therefrom and into the forseeable future. This increase in population requires an ever-increasing number of residences of all types; thus, our building industry must develop areas and build living conditions for an ever greater number of families, as well as replace old houses no longer usable, including 6 million without inside plumbing, and also replace those homes demolished for highway and industrial growth. A conservative estimate of total living units produced annually should be in excess of 2 million for the Nation and over 200,000 for the State of California. We have seen the need for new elementary schools develop across the Nation. The need has been partially filled although many schools at times have had to use double shifts. Resulting higher taxes were borne by taxpayers cheerfully at first, then with more criticism and study of need. Later the surge of students reached the high schools of the Nation, and again rapid building, double shifts, higher taxes, and more rumbles from taxpayers as taxes became even higher. Colleges have felt the first swelling of their student numbers. Extensive and expensive building programs have begun. Here, however, selection of students control to some extent the number admitted. Most of our youth still do not attend college. Those not attending college are among the first group to become employed, and soon thereafter find themselves with a family and the need of a home. These young people have attended double shift schools, and doubtless many will live with their parents at first, but when their families grow, will they be Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  219  satisfied with prolonged living with their parents or with double shift homeif. It is obviously impossible. Crime, broken homes, and all problems related to unfit living conditions will have confronted our Nation. Should something then be done to assist our plight it could only be approached in a hurried manner that would not permit logical and planned growth and of course many of the conditions would have progressed to the point of no return. Two million new living units a year are too few. In fact, are we drifting into double shift homes as we have into double shift schools? The home industry is well prepared to fill the need for the quantity of residential units required annually in every respect, except for the lack of available mortgage money. Mortgage money is difficult to obtain for the reason that all forms of investment capital are in short supply. · Wh11 i8 the richest nation on earth in this positionf-The reasons that we are short on investment capital are that a rapidly expanding population requires many things, such as schools financed by bond issues, roads, streets, water and sewer projects, and all other municipal facilities largely financed by bond issues. Industrial and commercial growth also require very large amounts of investment capital both to finance technological changes, and to provide jobs for an increasingly large working population, which capital is provided by stock issues and commercial loans. In addition to these causes, taxes take very large shares of all earnings to provide for defense, foreign aid, and other items. The money to purchase school and municipal bonds, together with commercial loans for industrial expansion have normally and historically come from the savings of all of the people, deposited by the people in banking institutions. This is also the usual source of mortgage loans. In the first years after World War II, these funds were ample, interest rates were low and discounts were not employed by mortgage lenders. As these deposited funds, which were accumulating in the banks during the war years, became depleted, savings and loan associations, life insurance companies, and other mortgage lenders became increasingly active and small discounts began to be required of builders as money became competitive. After discounts were legalized, builders and their mortgage agents scoured the country for sources of money. Discounts at various times have become heavier than builders could bear, which has broken the backs of too many builders. For instance, the cost of money for a $13,500 home has gone from a low initial cost of $100 for course of construction interest (which was the only cost required), to a present high of $1,280 which now consists of interest during course of construction, interim loan service fee, discount fee and service fee to ultimate lender, standby fees as necessary. FNMA's purchase and marketing fees and their required stock purchase. Why, with our prosperous economy, have savings not increased, to meet this  need,f-Savings deposits have in fact increased. However many opposing forces have been working with the result that the total deposits are not now in an. amount sufficient to cope with the demand for mortgage money. The most important of these are: Taxes : heavily increasing to pay for wars, defense, foreign aid, and the thousands of services that millions now find indispensable. Higher cost of living : the result of years of inflation. Short-term credit: provides purchase of virtually any consumer item, unrestricted, often ill advised and unwisely used. It has become a national habit. other sources of mortgage money availablef-All sources of investment capital are being very thoroughly exploited-Government borrowing, industrial loans, commercial loans, stock and bond issues and consumer borrowing are continuing to keep available money turning as fast as our laws will allow. <Jan our laws be changed, to help this situation?-The Federal Reserve Board controls the economy of our country by virtue of law enacted by the Congress of the United States, and in conformity with that law. The existing law provides for general control of the economy as a whole by changing of interest rates on borrowings of member banks, and by regulating the amounts member banks may borrow in proportion to deposits, and by regulating the amounts member banks may loan in various fields in proportion to their deposits, and by requiring certain amounts to be invested in Government securities. This Federal Reserve system, though applauded by many, has its difficulties. For instance, it could never overcome the last great depression. It has worked a great hardship on the building industry in recent years, for the effect of this system is 50876-60- -15 Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  :that mortgage money in general is .obtained only after most all other needs for money _have been met. This is for the reason that interest rates for mort·gages are limited by Congress under FHA and VA programs, witl). the· result that in recent years, the permissible interest rate has been less than cduld be .obtained through other forms of investment. After discounts were legalized, many lenders still preferred not to invest in mortgages, feeling tllat high discount rates would eventually produce hard feelings amongst their customers. Other lenders have set high credit standards for the prospective home buyer in order to obtain maximum security for a low rate of return. The most convincing reason, however, for the scarcity of money for home mortgages is that other investment fields offer greater profits. Government borrowings now offer approximately the same return, but on shorter terms and with no costs or risk. Consumer credit for items such as automobiles, boats, trailers, and other consumer items, to and including vacations, offers returns up to five times the return on home mortgages and with the additional advantages of very short term and high rate of turnover, but of course, instances, with larger risk. The 'result of this Federal Reserve system of economic control to the homebuilding industry is that the available mortgage money fluctuates greatly. This -results in wide fluctuations in the amount of housing construction from year to year, even from month to month. This fluctuation has no relation to need -0f the product, but is the result of the availability and cost of money. Con·gress wisely has seen this even though dimly, we believe, and has .acted in creating the Federal National Mortgage Association, or ·.as it ,is familiarly known, FNMA, calling it a secondary mortgage market. FNMA has become the primary mortgage market, and in many, if not most localities, the only mortgage market, and it has helped immensely in spite of the high discount rates it has found necessary to charge. As another segment of the mortgage loan market, the savings and loan institutions have been increasing in size and in their participation in the mortgage market. The reason for the growth of these savings and loan iniatitutions is due to two factors : 1. Their interest rates. on other than FHA and VA loans, are not controlled except by the limits of State usury laws. This allowed, and even encouraged them to pay higher interest rates to their depositors, for by so doing, they were able to attract money as it became scarcer. 2. On other than FHA loans, second mortgages at even higher rates of interest and discount are allowed by most savings and loan institutions. Discounts on second mortgages of 25 percent of the face value are not unusual. . This trend to savings and loan mortgages has continued until in the present very tight money market published statistics show that these institutions are making 40 percent of all mortgage loans. Their total deposits approximate $55 billion and this year's dollar volume of mortgage loans made by them will be 25 percent greater than last year, and will be about $15 billion in new home loans. This new money has hleped many builders to remain in business, however experienced mortgage bankers and others fear that there are some very real dangers here. These persons feel that the looseness of control, withdut FB'A or VA supervision, the high interest and discount rates involved with these first and second mortgages, and the lack of provisions in many cases for the automatic payment of taxes and insurance provides a pattern identical to the conditions prior to 1929, wherein owners lost their homes in great numbers. In summation, it is our conviction, that to meet the need in the very near future of new homes for our citizens in ever-increasing quantities, the Congress must redirect the fiscal regulating agencies so as to provide from presently available and future funds a stable assured supply of mortgage money, regulated as to interest rate, subject to the FHA, VA, or other governmental supervision for the benefit of all. In our opinion, if the present fiscal regulating policies are not changed, the building ,industry will continue its decline, irregularly fed by acts of Congress and leftovers from others. The decline of this industry which ranks first in size .now in this Nation with all its man.y suppliers including lumber, will in our opi!llion, produce another great depression. Yet at the present annual rate of production, it would take 5 years to replace all existing homes without inside plumbing, if the present rate of 1¾ million homes were applied only in that direction. We are not asking that the Federal Resei·ve Board be eliminated. We are not asking any radical change in its structure. We are suggesting that this Nation Federal Reserve Bank of St. Louis  EMERGENCY HOME. OWNERSHIP ACT  221  will benefit much if the fiscal policies under which the Federal Reserve Board works be changed so as to provide a stable basis for the building industry. We suggest this for two reasons; first that more homes are needed than can otherwise be provided, and second that the difficulties and large risks involved i:O- this industry will make the building industry the first casualty of any depression or recession, and therefore lead the Nation deeper in this undesirable direction. Every citizen can buy a car, furniture, appliances, sporting gear, and vacations on unrestricted credit, which is keeping the average American broke and ,in debt. Extended monthly payments for purchases such as these prevent, under present restrictions, his purchasing the home that makes him a better citizen.. For instance, a man taking home $100 a week can qualify for the lowest price home we can here offer, only if he has no contract credit purchases. A good credit report will qualify him to purchase virtually anything except a home, and this ability to purchase is used by man.y with blissful abandon without realizing that they are disqualifying themselves for the purchase of a home. We feel that a good credit report, successful employment verified for 2 years, and a successful record of rent payments verified for 2 years in amount equal to his home purchase payments (including principal, interest, taxes and insurance) should qualify a home buyer. For other less essential items his ability to pay should be more strictly regulated than it is now. In conclusion, we present the following suggestioos for your consideration as what, in our opinion, is the minimum of changes to existing law necessary to provide a stable base of mortgage money for all forms of housing. We propose that the desired present goal of 2 million new housing units per year, at an average loan of $15,000 or a total of $30 billion per year be obtained from three sources as follows : 1. That. the Federal Reserve Board be instructed by Congress that stability ,in mortgage lending is in the national interest, and that their member banks be required by law to invest in single or multiple dwelling mortgages in the total amount of $10 billion per year as a proportion of the member banks deposits. We feel these mortgages should be all guaranteed by VA or insured by FHA at the interest rates allowed by these agencies, and that consideration should be given by Congress to limiting the discounts and charges allowed under this program. Further, that these mortgages should be held by the initiating banks for a minimum of 5 years, with possible future extensions. To provide the funds for the participation by Federal Reserve banks, credit curbs will be found necessary to control lending in other directions; thus the desired restriction on consumer credit should be a part of this pattern. 2. That the laws regulating savings and loan institutions be reviewed in order that their potential can be realized, yet avoiding the very real dangers that some of these institutions are now courting. The depositors of those institutions are now insured by the Federal Government up to $10,000 per individual depositor. (This permits each member of a family to be a depositor.) Also, recently a private insuring agency, similar in effect to the FHA insurance, has been set up for savings and loan institutions. However, we feel that if Congress were to review this situation, that additional legislation would be found necessary to protect the home purchaser, the depositor, and the Federal Government against insurance claims on these deposits. In our opinion, this legislation should provide for periodic Federal review of all loans made by these inst,itutions to insure adequate appraisal, qualification of buyers, compliance with set limits on second mortgages and for automatic payment procedures for taxes and insurance where eq~ities are one-third or less. In other words, savings and loan institutions should cooform to establish banking procedures if they are to receive Federal deposit insurance. In this way, we feel that another $10 billion or more of mortgages yearly would be provided, and in a stable, secure manner. 3. The balance of needed funds we feel could be obtained from all other sources, FNMA, insurance companies, other banks, pension funds, etc. The above we feel not to be a cure-all, or necessarily the best solution, but it is a step in the right direction, to be taken without compounding the confusion already prevalent in the mortgage market and to provide a path alono- which "' Congress can proceed at this time. Lastly, if the home-buyer qualification regulations of the FHA and VA could be liberalized again, as above mentioned, realizing that families must otherwise pay rent, and if their home purchase is not more, or not greatly more than their accustomed rental payments, they should be able to qualify to buy a home. Also, Federal Reserve Bank of St. Louis  222  EMERGENCY HOME OWNERSHIP ACT  if the above consumer credit curbs are applied, FHA and VA will realize that home buyers will not so easily enter into financial difficulties after purchasing their homes. We fervently hope that all of the Congress of the United States will realize, that at the present, the Federal fiscal policies, both in consumer credit regulation, and in regulations directing the flow of money are preventing many citizens from becoming home. buyers at a time when many more homes are desperately needed, yet this Nati&n has always been founded upon the love of God, family; ;neighbor, and home. ·· _Respectfully submitted. CHESTER  H.  SPIERING.  PAUL R. ZEILEB Sales price________________________________________________________ $18,890 FHA value________________________________________________________ 17,000 Loan amount______________________________________________________ 15,000  Downpayment______________________________________________________ Closing costs (estimated)___________________________________________  2,990 300  Total cash___________________________________________________  3,290  INCOME  Annual-----------------------------------------------------------Bonus_____________________________________________________________  $6,180  Total________________________________________________________ Less income tax____________________________________________________  6,580 720  After tax__________________________________________________________ Payments__________________________________________________________  5,860 0  Effective income_____________________________________________  5,860  400  QUALIFICATION  l,13 of first $3,000---------------------------------------------------- $1,000 ¾ of balance ($2,860)---------------------------------------------572  Allowable housing expense____________________________________ Monthly___________________________________________________________  1, 572 13.1  PROPOSED HOUSING EXPENSE (MONTHLY)  $15,000 loan at 5¾ percent, 30-year term : Mont~ly interest)-----------------------_ $92.80 Mortgagep~yments insurance( principal premiumand __________________________________ 5.10 Taxes ________________________________________________________ _ Insurance premium ___________________________________________ _ 27.11 3.00 Maintenance __________________________________________________ _ 15.90 Utilities------------------------------------------------------- 20.00 Total ________________________________________________________ 163.91 Difference (FHA rules) -------------------------------------------- 32. 91 Income to qualify ($32.91X5Xl2 months+$5,860=$7,834.60 or $1,974.60 more annually. Present income would qualify for $82 payments (principal, interest, mortgage insurance premium), or $13,300 approximately. Mr. Zeiler wants to pay an additional $15.90, monthly, for principal, interest, and mortgage insurance premium. This the FHA will not allow unless his income increases $1,974.60 per year. Federal Reserve Bank of St. Louis  223  EMERGENCY HOME OWNERSHIP ACT  ... m e: ,..,.,,'"'.A....__.,....,_ .. .,......... .,."....... .,.  -... ---  ........ ► -•-8'•-  ....... -  au2c9  -----  •  ................................. -....................... =-': .................................... ...... .....  . . . . ...., .. CIIDIT ASSOCIATION  0,  NUMIOlDT •· •· ._ ,.. - . . ....  I" ::: ......... ~i:..=-.:..--:-:::.:....,--:=-..:.:--..:::=::.::c-: _,.,_ ..... " :t..c-.;:: ~  w Federal Reserve Bank of St. Louis  •  -  ~24  EMERGEN-OY :HOME OWNERSHIP ACT CONFIRMATION OF F,MPLOYMENT D•rc _ _ _ _ _ _ _ _ _ _ _ , 19-  10:  .  Gwn....: Pie-. regard ilii1 u au1hori1a11on 10 fum11h lhc 8-,,k ul America N T " S.A w11h chc lllforma1ion  ,.._. '- llf dtc apprtl<led ' - • which II a ,·cr1fica11on of cmi,lovmcn1 required m connccuoa wirh u applicarion farah.-loan.  Addrn,  •••h C.WO,n,a  u  WINlr •  /-?,,. I tr.................. .Z•, le"  ..... ialoreltlOII • IJelir,N  IIM, . . . . . . . .liry MIICUI Federal Reserve Bank of St. Louis  10  1w 11'....Wt' accuu«  to• for ffl'On GI Offltt..,_  1nJ  n ,..,_,.,.~ ,n •  JtH!'C'  ro  aHIH 1Prf1'•1 HI  okPUllf 1....,  EMERGENCY HOME OWNERSHIP ACT  --""',__ .... -  -  225  fill-J"e. FEDERAL HOUSING ADMINISTRATION  REPORT ON APPIJCATION  '  Mortgagor:  a--1~  _____ _  Paul B. & Belen A ?41 Jer  S.1teble Bn11d1&J PQrt]end,  0re-,._  --- ---------~  Dear Sir: Thill la to adv!N that your applioation for mortgage lnawonce identified by tba CGN number above baa be.a c:omidend aDd It determined after PIELUIIIIAJIY EUMINAnOR that it ia DOI eligible tar p-1Dg aDd that a refund baa bea initiated. Any requat for noouideration maat be -pcmiad by a ~ of Iba appzopriate ,_  D  l. 9a  ~ !law been -ble to HtablUh tllat tmir l)Z'OllJlectiw bowiillg • • - vUl beer a propar relation to tlleir Ht1ate4 ettecUw  ft& Yal,aUon $17,000. Federal Reserve Bank of St. Louis  1nc-. Federal Reserve Bank of St. Louis  FHA Fora No. ZOO,& e (Bev, 3-58)  FEDERAL HOUSING ADMINISTRATION  SUPPLEMENT TO MORTGAGEE'S APPLICATION; AND MORTGAGOR'S STATEMENT PRoPOSED MORTGAGE LoAN:  Name of Mortgagora ..P.a:ul.R... .. and.Helen..A. ...Ze.ile.i= ..................................................................................... Principal amount, $....•.•..••••••••.•.., interest at ?.':".JJ.~, service charge •.••.•••• %, payment in -~.~Q .. equal monthly inatallmenta. A credit report from~~?.Q1~~.. J;;!':~.c;IAJ:..A".~·9.!<!"RQ!L ........ agency: ~ wu ordered on .Au_g, .. ZO, .. 1959 ........, (Date)  for direct delivery to you;  QI: ia attached. Completion of FHA Form 2004f ll[ wu requeated on .. Aug... 20,.,J;!;-5-9 .............. .  Crom depository named in aeetion G, below, or O comparable information ia attached hereto. Completion of FHA Form 2004s ~ was requested on ... Ang•.. 2.0,(~1~5.9................ , from borrower'• employer, or D comparable information la attached hereto.  Commonwealth,..l:nc:(Kortsairee) •................................................ 421 S. W. Sixth, Portland, Oregon (Addr9a)  •  •  ··••uu.  By··························································································· (Name and title of officer)  (D&W)  MORTGAGOR'S STATEMENT The fo1lowing statements are submitted for the purpose of obtaining credit in.connection·with[XAn application for mortgage insurance. 0 An open-end advance. □ A member of a Corporation organized under Section 213. O A Guarantor, O A purchaaer of a property acquired by the FHA. D Other. A~-;~;~POSE OF MORTGAGE WAN (Complete applicable Schedule or Schedules below). Upon receip~f {HA 1. Financing of New Constnction..-(a.) Approximate date c:onatruction waa or ia to be ■tarted .£.QP.!m .......<'.~ (b) Date land purchased ...... l!.a.llb5.9.............................................................. (c) Purchase price . S....i:,.15.Q•. O.O (d) From whom purchued .....SPA!!!".~!!K.H!m:.1.!!.!!,..J.,;i.~~~;;;.-·;~•·;.-..;;;;;····························-··········7'·••  (e) !r~~tt:::.~ ;;:,tif~:~·~::t~d1!; !:l!~t~nd:~d ::!!d~f'~1:~::i~:fn::.!c~lo~~v~~Y~,.~i~g: ~ ~I~~ ,J.g,..l.4:0.,..0.0. financing Purchase of Property~(a) Date purchaaed ..................•.........•............•.. (c) From whom purc:haaed  (b) Purchaae price . . .  S-----  ·······••U••·······················--·········-··········------·----<Name and addreu)  3. Reftnanclns Eslating Imlebtedneaa (List in "C" below)~(11) Total amount owed..... • • • • •• (b) Are paymenta current! ······-······· (c) If not, 1tate amount(a) in default for principal, o-----····• intereat, • · · - - - - · · ; real estate taxes,,, _ _ _ _ _ ; apecial uaeumenta, $••••••• : .•••••.•••••.• (d) When waa property acquiredT - - - - - - - - - - - - - (•) Pur,.haae price,$.•.••••..•..•••••••••••.• (f) If property i1 bsin1 ■cqulred contract for dud, attach llipod or certlftod copy~ contract.  ""dor  S----- Federal Reserve Bank of St. Louis  •· 1'1naneln1 of ProPoHCI lmprov-•nl■ lo ll:xl■tlng Canolructlon a■ de■c,r!bed In Property l>e■crlptlon. Eatlmated coat to mortgagor of propo1ed improvements • . • • ..•••• ~ • • • • • •••••••••••••••••••• ..__ _ _ __ 6. Other-(ll) Describe briefty any other Intended use of mortgage proceed&•····'··· .................... _ _ _ _ _ _ • 00  18 890  (b) Amount required ••• $.••••! .............. . Propoaed aale price (if for aale) ••• $....••••••..•.•••••.•  ······················································································------········  8i. \~1'!r!.~1.sf.!."1'p';.i,!!~.1';~J1~~~~:~~-T!bove  ,H!,..~.9.9.,..9.9..  ... 2. Approximate coat of closing the transaction (including deposits for taxes and insurance premium■, S-----·······) .. S...... 3. Toto! . . . . . . . . . . . . . . . . . . . • . .' . . . . . . . . . . . . . . . . . . $1.'l.-1.9.0,..0.0.. 4. Lesa amount of mortgage loan applied for . . . . • . . . . . . • . . . • • . . . . . • •. sl.7., ..5.0.0,..0.0.. 6. Total investment required by mortgagor in cash or its equivalent . • • • ....••• , • . . . • .• • . . . . . • . • s.J.,-..6.9.Q..J)_Q__  }.9.~~.9.9..  6. Lesa amount ~lreadypaid: (a) In cash,$ ............._. .... ; (b) Equity o~h•'i:Pe\n:l~tk·coimty··Htll"c!~: • $ .......... ~.~ ••...•• (d) Date paid ............................................. , (e) To whom paid ....................................................... . (f) Nature of other eq11ity, if any listed in item 6 (b) ...................................................................•........... (g) Balance of cash or its equivalent to be invested by mortgagor • $•.••••••• -- -----(h) The amount indicated in item (g) will be provided from the following sources ·------·-··-·--······-···········•····  ITEMS ESSENTIAL FOR ELIGIBILITY 1. Do you intend to [X occupy, D rent, or D sell this property?  If for rent answer the following: Is the dwelling to be covered by the insured mortgage a part of, or adjacent or  contiguous to, any project, subdivision or group of rental properties involving eight or more dwelling units?  (Ye1Jor no)  If the answer ia "yea," do you have any financial interest in such properties?  (Ye■ or  nol  If the answer is 11 yea," furnish details as to the location of such properties and financial interest therein. 2. Do you own four or 111ore dwelling units which are subject to mortgages insured under any title of the National HClusing Act? ..... N~L... If answer is "yes,•· execute Mortgagor's Contract with respect to Hotel and Transient Use of Property, FOTm 2561, (Yuorno)  and submit with application. 3. Have you incurred or do you intend to incur any indebtedness, secured or unsecured, other than that of the mortgage loan applied for, for any purpose connected with this transaction? ....... No... If answer is "yes,» give complete details, including description (Ye■ or  of Blly security offered ................... ·····················-·-···-·◄-  no)  •  -·-······-···--·······························  4. For open-end only: Are additionaJ rooms or enclosed areas proposed? .............. . (Ye■  or no)  C.. INDEBTEDNESS AGAINST PROPERTY AT (Always show address) T1~!0 ~~.n~~~ •a:!~!~t'::°1ft~=r~nto:or :.·:e"-.-:··  .  NameandAddrea~o~.~~~:  1::::::ict::::,  .................................................................................. . ~~~.}3;!~~f)rty offered as security for the loan applied f o r ~  ---  'tr-••  r.::::.I~~!"l  'l::.":!:':/  :.-: :1.~,~pa~  ll~~ty  .  ·::::::::::~~~~-···•··•-··-·······:::::::::::::::::::::::::::::::::::: ............................ ················::::......... ·:::::::::::::: Indicate any which is FHA•insured mortgage loan above and give care nurnher if aYailable Federal Reserve Bank of St. Louis  Uae _.,.i,, otai.ment for II••• D. 2, t...,ush IL for Co-applleant other than wife, D. BMPLOYMBNT STATUS. 1, Applleant, 2. Co-applleant: (a) Employer'•name--------------(11) - - - - - - - - - - - - - - - - - (6) Employer'1addn,u_____________ (b) - - - - - - - - - - - - - - ~ -  baeln--------------  <•>  (o) Typeof (cl) Pooltionoccupled _ _ _ _ _ _ _ _ _ _ _ _ _ _  (cl) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __  (e) Nameandtltleof1uperlor____________ •(I) Number of yean in pruent-plo)'Dlellt.._______  (e) •(f)  ~ - I f !en than 2 yean attach rider giving llame detail■ with reapect to prior employment atatua. B, LIFBINSURANCB(onappl!eanl). (1) Total In force,,.................. Cuh (2) Lea amount of lo&lll on pollclea •  (3) Net cub surrender valne  F. FAMILY STATUS. Ageof Number of years married _ _ _ _ _ wife .........._ Age■ of dependent■ other than apouae ···•·······  !. . . . . .  value,..._____  • • • •  • $...,_ _ _M •S  year■  G. FINANCIAL STATBMBNT (Excluding equity and liability In connection with aubject property), (A combined statement may be made for applicants who are hu■band and wife. In other caaea a aeparate statement mu■t be flied for hi■ principal hia buinea  :!t -:°A~uc:!~'i:t!::Citie!tC::-J°!:e~a1:i:i::.,;e:~ o?l!~~!i:!:.ferivea  income from own  lJabllltlea Statement d a t e - - - - - - Aeoounta payable (except Installment aeeounta) Inatallment aeeount payable, automobile • Monthly payment • Other inatallment accounts payable Monthly payment . Earneat money depoalt on parehue Note■ payable balance due U. S. Savlnp Bonda • • Stocka and other bonda: Repa)'Dlellt terms for ..................... month• at.__ _ _ _ per month. ····----·•........ .................. Indebtedneu on i-ea.1 estate, other than 1ubject Eetlmated reaale value of real eatate owned, other property, from Schedule H than aubject property, from Schedule H • Other Important &l8eta (!lat or attach achedule) : Othet liabilitiea . Repayment terma for -··············· ...... month& at , .................. per month. TOTAL • • , , • • • , .................. TOTAL • • • • •••••••• S  Caah aeconnta (Hat) : When depoalted-  __ _________ , ··---,_..,.....  ,··----  H. REAL BSTATE OWNED OTHER THAN SUBJECT PROPERTY.  =,:---  ---,,(T,-,_.-.-.-,-...,_,-,---.-:-,-,,.. .....  B'di111oWRaale  y .....  •·-----  '  (If more than one property is owned attach separate schedule.)  ,.............  Bdl...,_  ,............... ,............... ,  .............. .  (Name and addreu or aortpsee)  ••u.....,-,  A . .11111  ~....  ar.!:'i=».. ,~:'" (a) (l,)  ,  ············-·· '····-······..· ............... Federal Reserve Bank of St. Louis  1.-~UAL INCOME, Bue pay of applicant . ,, _ _ _ __ (Baaed upon current rate of earnings, except  =~~ ~,:=:i~:1'.!;i~ ~'r:h::!:  12montha.) Overtime or other employment earnings, •---.-------------Bue pay of wife • . Annual overtime or other employment earnings • • • • • • . • • • Net income from real eatate, from Schedule H • f ..................  Income from other amountl)  aource■  (list sources and $...••....•.....•.•  $.... . $ ................. .  TOTAL INCOME  TAX EXEMPTIONS, Are you entitled to tax exemptions on subject property? Please specify.  J. ANNUAL FIXED CHARGES (past 12 months).  Federal and State income tax Premium on life in■urance . • • • . •·····-------···--~•I Security and Reti~t Contributions. S------••O•••····Payments on installment accounta • . . •  cos:;;::i1:afr~ta o~ o~h~r ~  M~J:ef:m  Payments on other loans . TOTAL FIXED CHARGES  S-----------···· --  ,  $.  ..  ................. .  ,  K. APPROXIMATE HOUSING EXPENSE (psst 12 months). (a) Mortgage payment or rent ( b) Taxes and insurance • (<) Heat (d) Water, gas, electricity $----(•) Maintenance  •  •----•  TarAL HOUSING EXPENSE  •  ,  •  •  ,  $..••••..••••••••..  WARNING a.ctknl 1010 of Title 18. U. S. C., "Federal H01aln1r AdmlnlstraUon tn.n•etJons.'" p.-oYldes: "Who.ver, for tbe purpoee of , .• lnftueneins In an,- WU the acUon of such Admlalatration , , • makea, PDRI, utten, or pubUsbn an,- statement. knowlns the same to be falae , •• shall be ftned not more tban lli,000 or tmpriaonecl not more than two yeara, or both."  (Do nol ,1.,.. cite follou,in• certlfie,dian IUUil cite Slalenaenl laa, been eo,npleted)  Thia Statement (including the reverse side hereof) ia made by the undersigned for the purpose of obtaining the beneflta of a  1 ::~~t i!e~.b~~:; true, :Uii: i::~, :.:.~~ii;,i:n:i.c:;~~d h~~:i:i~:d communicating correct, and complete. The Commiasioner and mortgagee may verify the statements contained herein by of the persona or institutions named in this stateme~t. These statements will otherwise be treated as confidential.  with any  ,... ....,..._. hanflF certllea that to bls (tllelr) best lmow..... aM Wlef, M r..trletloa apoa the •ale or ClffaJtUICJ' of the properb' eoffnd ~ tllla appllea..... n die snalld of ran, eolor, or ereetl, baa IINa lied ef reeenl at UJ' tbH 1111.....,_e11t to l'ell111a17 11, 11501 and that, 1111tD the morts... llu ..._ paW 111 fall or ... eeatncl ., ..._,_nee otlNirwlN le,_lnated, lie (Ille,-) will not Ile for neord 11117 ndrietlon ■pen tlte Nie or ecc■pane,- of the -rts.... propert,- oa tlNi ..... of nee. or crNII, er aumle _,. ql'Mlllllnt. 1aue. er eoaqpaea dedlns ndl pro1'ft'W wblcb lmpoeu DJ' a■dr. natrletlon ■Poli lta aale or eenpuaq. NO'IL-Tbe ftllns of record of ew::h • rntl'letkm or covenant; wbeequent; to February 15, 1950, will render • mo.rtaaae eoverlna the property lneliKible le1t mort1AP iMUranee.  .a.r.  (Signed) - - - - - - - - - - - M ~ • - r l -6- 4-6-..,-. (llortsuor'• pNNDt addnaa)  :·(,.;.,·  Co-Mortgagor. (Telephone number)  (Ase)  (Date)  EMPLOYMENT STATUS-PROPOSED PURCHASER OF PROPERTY ACQUIRED BY FHA The atatement in the above Schedule D u to employment and income therefrom hu been verifted by me at the IOUffll, (Date)  PRA.PtinaNe.llNc  (Property Manapr  Cit  Broker)  U. S. GOVERNMENT Pll:INTING OFF1CE : 19Sl-0-4589ol7  230  EMERGENCY HOME OWNERSIDP ACT  Mr. SPIERING. During the past 14 years we have been building in or near smaller towns, each of which has been distant 120 to 375 miles from metropolitan centers. These areas of building have been in 10 small communities in the States of California, Oregon, Washington, and Nevada. Our building has been aimed at buyers in the medium to low income bracket. When mortgage financing was available at costs that could be absorbed in the sales price of our homes and still permit a healthy even though less profitable building program, we were building better than 400 homes per year. Our experience in 1957 was near disastrous, when we suddenly faced a condition of a large inventory of unsold homes. As we worked out of this problem, the recession was taking its toll, time and again, by increasing cost of discounts. Consequently, we built no new homes in 1958 and the cost to us in sales of homes to remove them from inventory amounted to substantial losses in the sale.of virtually every home. In 1959 we built only 50 homes despite the fact that we had 179 fully developed lots in 5 different locations. We had been previously extremely successful in each of these areas. This is not a matter of lack of demand for sales but rather a lack of suitable mortgage facilities. Because of our remoteness from metropolitan areas, we were able to obtain mortgage financing with FHA and VA insuranQe through regular banking channels. FNMA, therefore, remains the only source of financing for our purchasers. Homes }?riced to sell at $14,000 require total costs for financing of an approximate $1,400. FHA and VA will not recognize these costs in values. Furthermore, in areas distant from metropolitan centers, FHA, and occasionally VA, do not cover actual costs and a reasonable profit to a builder in arriving at their values. Qualification of purchasers also becomes difficult and too often impossible. In this we submit FHA case No. 64-143820 and supporting correspondence which in our opinion warrants study and correction in this and all other like cases. This man had an annual income of $6,500, no debts, a perfect credit record, $3,300 cash and he was refused qualification despite the fact that his rental expense was greater and the only available housing is 21 miles from his job. A builder in more remote areas can and must fill existing needsbuild a larger number of homes than even metropolitan areas could absorb in times past, which is a reflection upon the present growth of our Nation. Yet this is only a hint of things to come. For within the next few years the population increase will reach the building business which together with the present trend of industry to locate away from metropolitan areas will bring a development of remote areas far beyond what we have seen or even conceived. This is in the national interest, for dispersion of industry aids defense as well as provides better living for our citizens. The problems of building in remote areas, especially in the West and South are mortgage-money problems. The supply of money is in the East and the remote and new areas are generally elsewhere. Surprisingly enough, money is not a readily exportable commodity Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  231  at least for the purpose of housing financing. In periods of abundant supply eastern money finances western homes, in addition to eastern homes.' In periods of shortage of money, eastern money finances eastern homes only and there is none left for western homes. In Boston at this time, VA financing is available without discount. In San Fra~cisco, if it is available, it is available only by paying heavy discounts and in the rural areas of the West it is not available at ali. Money is available in inverse proportion to the distance from New York. A builder that is unable to shut down must turn to conventional loans with second mortgages and all the accompanying dangers. Purchasers" are left with~ut the opportunity for the help and protection afforded by Congress m the FHA and VA programs. As I have stated adequate financing is even now available in some ureas. Others have none or must depend upon the inadequate base of FNMA. Possibly Congress should consider emergency financing for these areas on a need basis. Your bill would be an answer to builders across the Nation who find themselves now and from time to time facing financial obstacles. It is my opinion that we need a bill of this type, and I certainly support it. I would now like to address myself to the long-term problem as it relates to a permanent housing bill. 1. It is _proposed that FNMA be reconstituted as the central-mortgage facility with the usual recommended features, but in addition, the contents of these items. (a) That FNMA be empowered to adjust interest rates on FHA and VA mortgages, within statutory limits as set by Congress, regionally so as to minimize discounts, and to make the VA interest rate equal to the FHA interest rate. Thisrwould immediately lower discount rates in areas where they are now highest. (b) That FNMA be enabled to accept, and FHA and VA to insure, mortgages wherein the interest rate would be subject to review and periodic adjustment, either upward or downward, according to the market condition as estimated by FNMA in each of its geographic zones. For instance, at 5-year intervals from origination, each mortgage could be adjusted to the then prevailing interest rate as determmed by FNMA for that region, and the amortization schedule would be adjusted, so that the remaining payments would amortize the remaining balance at the new interest rate. This action, in our opinion, would greatly reduoo the risk of lenders in their holdmg of long-term mortgages which is now facing them due to the continuing inflationary trend, and would, therefore, reduce the necessity for lenders to discount against predicted risks. (a) That instead of special assistance programs and veteran direct loan programs involving full purchase of mortgages by use of Treasury funds which on occasion total billions of dollars annually, Congress consider instead a program where neither the builder nor home purchaser participate in the payment of discounts on certain types of mortgages, such as low-cost homes (under $15,000), slumclearance programs, cooperatives, housing for minority groups, and housing for the elderly. Federal Reserve Bank of St. Louis  232  EMERGENCY HOME OWNERSHIP ACT  These certain type mortgages could be sold on the open market by providing FNMA with funds and the authority to use the· funds to pay the discounts necessary to sell these mortgages. For instance, if a minority group housing program were to be considered at an interest rate which would involve a 6 percent discount to the open market on a $1 millionfrogram, instead of using $1 million of Federal money, this method o marketing these mortgages would rE'.'4,uire only 6 percent of that amount, or $60,000 of Treasury money. It 1s also our suggestion that FNMA participate in all other types of mortgages, but with a maximum of 5 percent to be paid in total discount wherein the builder pays no more than 3 percent and FNMA pays no more than 2 tercent. This 5 percent discount should be the maximum required i other suggestions contained herein are used, such as the 5-year review of mortgages for the purpose of increasing or decreasing the interest rate. This, in our opinion, should in many locations cause the average discounts to be no more than the builder participation, and provide the balance as reqJiired the only Government support. Assuming that Government assistance could conceivably be required on 30 percent of all mortgages made during a given year involving an approximate 2 million homes, then using an average figure of $15,000 per mortgage, 600,000 homes would be involved at the 2 percent discount for a total cost to the Government of $180 million annually. This program would place in action a stabilizing influence on the industry's requirements, promoting security and continuity. This security and continuity would enable builders in general to develop the technology in the use of labor, materials, and equipment, and to develop sales tools, and merchandising methods, all of which would effectively reduce sales prices, increase quality, promote competition, and encourage people in general within the industry to perform with quality in their sale of homes at increasing values, without commensurate increase in sales prices. This is in part a governmental support program. This is the support that, by taking the top of the heavier discounts off of the builder, will enable him to continue when otherwise he could not. Yet the total cost to the Federal Government should never exceed $180 million for the general program. The cost of the support of the certain classes of mortgages to be supported at a higher level, as first mentioned, would be in addition at a figure to be determined by Congress in accordance with their view of the need, but here the cost would be only a small fraction of what has been expended in recent years. 2. That in addition to reconstituting FNMA as a central mortgage facility, Congress consider bringing additiona'l money into the mortgage market by revision of present banking law, so that national banks would be encouraged and, if necessary, required to invest in a set dollar volume of new homes mortgages annually, in pro_Portion to their total deposits, and to retain these mortgages for a mmimum period of 5 years. Each bank would have the option of either originating the mortgage, or of purchasing the mortgage from FNMA. If a national bank were to originate more dollar volume of mortgages annually than the amount to be retained by them in accordance with our sug- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  233,  gested legislation, then that bank could dispose of the excess; dollar volume to FNMA. . ,. . , The total dollar volume of mortgages required to be invested under this program should, in our opinion, reach $10 billion annually during, the years of maximum need for new homes. To provide the funds for• participation of national banks, credit curbs may be found necessary to control lending in other directions. It is our opinion that consumer credit is the lending that should be controlled for this will help to check and control inflation. Also, this would have the added advantage of making it easier for people to qualify for home purchases for the reasons stated in our letters sub_mitted for inclusion in the record. Every citizen can buy a car, furniture, appliances, sporting gear, and vacations on unrestricted credit, which is keeping the average American broke and in debt. Extended monthly payments for purchases such as these prevent, under the ~resent restrictions, his purchasing the home that makes him a better citizen.  3. That the activities of the savings and loan institutions be investigated by the Congress so that restrictive legislation could be properly formulated to halt unsound practices now engaged in by many of these institutions, to the detriment of the national interest. This in accordance with our letter to Senator Engle of November 17 in which we have felt justified in considering this group for participation in mortgage loans in an amount approximately $10 billion annually. 4. That FHA and VA be instructed by Congress to further encourage homeownership by judging the qualification of buyers in accordance with performance, rather than by a set rule of income. In other words, if a citizen has a record of successful payment of his obligations, including rent or house payments, that he should not be prevented from purchasing a home because he does not fit a set ratio of income to housing expense. You will note that housing starts increased in November of 1959, and again in December of 1959 so that the number of starts for 1959 approximate 200,000 above 1958. This is the result of the $3 billion increase in loans for 1959 made by savings and loan institutions, as shown by published statistics. This money is sutaining the amount of home contruction in this Nation, but it is very largely the type of conventional mortgage and second mortgage which, as above mentioned, is dangerous to the purchaser., the builder, and the Nation. In other words, although the number of new homes constructed in 1959 is up to the level of years past, but not nearly to the level needed in thi!!! decade or even today, the greater part of these homes are not financed in the manner contemplated by the Congress in establishing the FHA and VA home program, which programs are secure for all, but instead the greater part of the homes built in the Nation during 1959 are financed by methods proven disastrous in the recent past. Almost all of the people of the proper age aspire to own their own homes, but regardless of owning, all persons from birth to death must be housed, which puts the home-building industry on a plane different from any other industry, making its needs imperative in this time of an explosively growing population. The methods set forth in this statement are a means for private industry and capital to provide a stable mortgage market and a resultingly stable home-building industry under congressional control and Federal Reserve Bank of St. Louis  234  EMERGENCY HOME OWNERSHIP ACT  governmental support at an annual expenditure amounting to far less than the Federal Government has been experiencing in recent years. Gentlemen, this adds up to a great emergency, and this industry deserves and I am sure will receive your serious attention. Thank you. Mr. MILLER. With the chart on this blackboard, Mr. Schwartz is going to give a graphic illustration on what Mr. Spiering has just testified to. Mr. ScHWARTZ. First may I point out that in a discussion of mortgage discount, the mortgage discount is the amount that we refer to which the builder has to pay in order to secure a loan for the buyer. Related into dollars and cents, in the case of 11 percent on a GI loan, it amounts to $110 on each thousand, and $11 on each hundred. This is the current discount being charged in California, when and if it is available. Going down the chart, if I may, in the case of an average $16,000 home, under GI financing, the current interest rate being 5¼, 30 years, we are forced to pay-in order to secure a loan-this 11 percent discount, which in the case of this sales price amounts to $1,760. Mr. MILLER. That $1,760, in other words, is the additional amount of the cost of that $16,000 home? Mr. ScnwARTZ. That is correct. It is a direct cost the same as the lumber, the roof, or anything else that would go into the house. It is added on just like a product that would have to go in, and it is tacked on to the sale price, and is paid in effect by the buyer over the term of the loan-plus interest. He pays interest, as well, at 5-¼ percent on the $1,760. This reflects monthly payments, on the $16,000 home, of $125 a month, including taxes and insurance. In the average case, under the GI loan program, there is no downpayment. We are selling with no downpayment. However, needed to qualify, in order to qualify a GI for this $16,000 home with the $123 monthly payments, the lenders are required that the house expense to income ratio be a minimum of 5 to 1, and so we have to find a veteran who has earnings of $7,800 per year, that is take-home pay, less any outside payments he may have to make, any purchases he may have made on credit. In effect, we know in our selling programs that the average buyer is financing an automobile or appliances or something else in his home, and we find that the average man, in order to purchase this $16,000 home, has to make in the vicinity of $8,000 a year, and we contend that this is largely due to the $1,760 that has to be tacked on to the price of the house. Mr. BAss. Is this a requirement of the VA? Mr. ScnwARTZ. The $7,380? Mr. BAss. Yes. Mr. ScnwARTZ. The VA qualification is close to this. The Veterans' Administration does not qualify on a specific formula, 4 to 1 or 5 to 1 housing income to expense. They make an economic appraisal of the individual, but having serviced thousands of loans, we find their qualifications oome very close to this, and that is the pattern that has been picked up by the lenders. It is very close to it, between 4½ and 5tol. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  235  Mr. BAss. Doesn't the bank pass on the qualifications of the GI i Mr. ScuwARTZ. That is correct, but it is twofold. In order to sell a house GI we have to get a credit commitment. We have to get a c<mlPlitm~m.t from the Veterans' Administration approving credit, in addition to credit being approved by the lender, as well, so if the lenders should relax their policy, it does no good. The credit still has to be approved, before the loan can be closed, by the Veterans' Administration, and their credit qualifications would come very close to this standard at this time. Mr. WmNALL. Mr. Chairman, I would like to ask a question. That $1,'760 that you say is included in the cost, is that included in the $16,000 sales price ? Mr. ScuwARTZ. That is correct. In other words, the house would sell-Mr. WmNALL. What does the VA recognize as the value of the housei Mr. SCHWARTZ. In effect what is happening is that in arriving at a reasonable value for the house, the VA-and we are having great difficulty in this regard, and it is one of the reasons that it is becomming almost prohibitive for the builder to go forward under the GI program. The Veterans' Administration in arriving at valuations does not recognize mortgage discount, and, as such, in order to sell GI, we have to get a certificate of reasonable value sta:ting the sales price of the house, and it is making it prohibitive at this time to sell GI even if this money were available, not being able to get this CRV. Mr. WmNALL. I understood you were selling at $16,000 including the $1,'760 discount approved by the VA as to value. Mr. SCHWARTZ. The answer to that, sir, is this, that in arriving at. valuation, the Veterans' Administration uses a cost index, that is basically set up for the 25 to 50 homebuilder. Our company, producing somewhere in the vicinity- of a thousand homes a year, is able to effect substantial savings m the purchase of land and the purchase of supplies and material which in effect is offsetting to a great degree, if not all of the mortgage discount involved. This is the way that we are able to proceed. Mr. WmNALL. How long have you been building this same type of house? Mr. ScHwARTZ. We have been building for 8 years. Mr. WmNALL. What was the original price of the same type of house before you got into this discount? Mr. SCHWARTZ. It would be hard to say. The costs of construction have increased so substantially over the years, in addition to mortgage discount, it would be difficult to say what a $16,000 priced house today would have sold for 8 years ago. I can tell you this, that without the mortgage discount there is no question that the house would be selling :for $1,760 less. Mr. MILLER. Mr. Chairman, would it be possible for Mr. Schwartz to proceed to get this chart on the record in an orderly fashion, and then submit to any questions that the members may have? Mr. AnooNIZIO. You may, Mr. Schwartz. Mr. SCHWARTZ. In the case of FHA, the interest rate is 6¼, the term is 30 years. The current mortgage discount, if it can be found, 50876-60--16 Federal Reserve Bank of St. Louis  236  EMERGENCY HOME OWNERSHIP AC'.!'  is 9 percent, or $1,383. The monthly payments, on taxes and insurance1 are $130. The downpayment being $630, again in order to qualify, $7,800 a year net after the payment of any outstanding credit expenses. I would like to go on to the conventional. We have two types of conventionals, one with a second mortgage, one without a second mortgage. First, in the case of no second mortgage, current interest rates in California are at 7.2 percent, maximum term being 25 years. The mortgage discount on conventional is 6 percent, or $762. The monthly payments, $126. Downpayment, $3,300. Needed to qualify, only $4,320. · May I point out at this time that the majority of the conventional loans are being made through savings and loan associations in the State, and their credit requirements are four times the first mortgage, only. Now, coming to another situation which is becoming more and more prevalent in the State, the last figures showing that 80 percent of the homes produced in southern California were conventional with second mortgages, and 60 percent of the homes in our area were produced with conventional, with second mortgages. In this situation we have a 7.2-percent first mortgage for a term of 25 years, on top of that being an 8-percent second mortgage with a 7-year due date, which is the average situation, with payments at 1 percent per month. Again the discount for this type of mortgage is 6 percent, or $762. However, the monthly payments are $158. The $158 comprises the ,a,pproximately $90 on the first mortgage, 1 percent of the $3,300 second mortgage, or $33, plus an average of $35 for taxes and insurances, and, of course, the big danger here is that come the end of the 7 years lightning strikes. Mr. MILLER. Would you amplify on that i Mr. SoHWARTz. At the end of 7 years the buyer is going to have to face a fantastic problem. His 1 percent a month didn't begin to pay off the $3,300 second mortgage over the 7-year period, so as of the end of the seventh year he finds he has to make a payment of $1,750 on the house that he got into with no downpayment, and this, gentlemen, we feel is a growing and very serious situation, and why has this come about i It has come about because builders such as myself and others up and down the State have been unable to finance GI and FHA, the money not being available. We have had to resort to a conventional program, doing a tremendous injustice to the people of the State of California, knowing that at the end of this seventh year there is going to be a big problem. May I point out again that this is no downpayment, the buyer being qualified on 4 to 1, first and second mortgage, needing a total of $5,756. This is your conventional program, and this is why we are selling houses. Due to the mortage discount, we can't find the man that earns $8,000 a year that wants to buy a $16,000 home. Mr. Mrr.LER. This does not include taxes and insurance~ Mr. SCHWARTZ. That is correct. The qualifications by the average conventional lender in the State of California is made on four times, in the case of the conventional without the second, four times the first Federal Reserve Bank of St. Louis  237  EMERGENCY HOME OWNERSHIP ACT  mortgage only. In the case of the one with the second, it is made by four times the first and second. In the conventional lending, both taxes and insurance are not accrued the way they are in the GI or FHA loan, but are paid semiannually by the ouyer. Mr. MILLER. Mr. Chairman, I would request permission to enter this chart as an exhibit immediately following the testimony of Mr. Spiering and Mr. Schwartz. Mr. ADDONIZIO. That may be done, without objection. (The chavt referred to above is as follows:) QuaZifiootions for oonventional loans Interest rate and term  Discount on the mortgage  $16,000 sales price Percent  Years  Percent  Monthly Monthly InpayDown come needed ments, payment to qualify insurance buyer, per Amount and taxes year  --------01. .•••.•••••••••.•••.••.•• FHA ______________________ • Conventional (no 2d mortgage) •••••••• __ •••.••••••• Conventional (with2dmortgage) _____________________  5¼  30 30  11  7.2  25  6  • 7.2  125  6  6¼  9  $1,760 1,383  $123 130  None $630  $7,380 7,800  762  126  $3,300  14,320  672  "158  None  15,756  1 Does not Include taxes and insurance which are paid separately semiannually by buyer. • Bee the following: Payment on 1st mortgage _______________________________________________________________________ 1 percent payment per month on 2d mortgage___________________________________________________ Taxes and Insurance.___________________________________________________________________________ Total. ____________________________________________________________________________________  $90 33 35 158  3 8-percent, 7-year, 2d mortgage payments at l percent per month. • After 7 years, balance due of $1,750. ·  Mr. MILLER. Are there any questions of Mr. Schwartz? Mrs. GRIFFITHS. Might I ask some questions? What do you get in a $16,000 home in California? Mr. SCHWARTZ. The average $16,000 home in the State has approximately 1,100 to 1,200 square feet, three bedrooms, two baths, it usually has a family rooni or breakfast nook, between 1,100 and 1,200 square feet. The average lot is 60 by 100. They usually have a two-car garage. Mrs. GRIFFITHS. One floor? Mr. SCHWARTZ. One floor, California ranch-type home. Mrs. GRIFFITHS. Is the lawn in when they buy it? Mr. SCHWARTZ. Depending on the situation, the builder, and how they merchandise. They are ordinarily both ways, some are given with lawns, some without, some are given with fencing, some without. It all depends on the package that 1s put together by the individual builder, the area, the land cost has a lot to do with it. We are finding, however, as a result of this mortgage discount that in order to stay m the $16,000 bracket, and in order to compensate for some of the $1,760 we are having to take more and more out of the home. Mrs. GRIFFITHS. Is the $7,380 income-does it have to be in the income of the husband only, or can it be husband and wife? Mr. ScHWARTZ. I might point out there it depends on the status of the wife. In qualifying a woman, the lenders will only take certain women's income into consideration. In the case of a woman over 35, they will consider a portion of it. In the case of a woman who can't Federal Reserve Bank of St. Louis  238  EMERGENCY HOME OWNERSHIP ACT  bear children, they will take that into consideration; and many other factors take place. Mrs. GRIFFITHS. You say you can't find people making $8,000 who want a $16,000 home. Mr. ScHwARTZ. That is correct. Mrs. GRIFFITHS. Can you find people making $8,000? Mr. SCHWARTZ. Can we find them? Mrs. GRIFFITHS. Is it easy ? Mr. SCHWARTZ. No; it is difficult. vVe know that ·we have many,. many people in the State of California that are earning $8,000. We find that these people that are ea,rning the $8,000 aren't willing to buy a $16,000 home. They feel they would like to get something better. Mrs. GRIFFITHS. But they can't afford that. Mr. SCHWARTZ. The people in the State are becoming more familiarwith the fact that they are getting less and less value in the homes that they buy, and they just don't understand ·where the money is· going-and it is going into mortgages. Mr. BAss. Might I ask, Mr. Schwartz, how many houses do you now have for sale? Mr. ScHwARTZ. At the present time? Mr. ~ASR. Yes ; as of nmv. Mr. SCHWARTZ. At the present time, by "for sale" do you mean homes completed and for sale or under construction? Mr. BAss. Homes that are completed and unsold. Mr. SCHWARTZ. I ·would say approximately 100. This is our normal inventory. We have approximately 100 homes at the present timecompleted, unsold, which is our normal inventory. It is a 30- to 45day inventory that we always have. It is like the old days of the hardware store. You have to have goods on the shelf in order to sell. These homes are located in Sacramento, in San ,Jose, in Santa Clara County, and Alameda County. Actually they are loca.t.ed in seven different locations. Mr. BAss. That is your normal inventory, you say. You are pretty well fixed, then, as far as your inventory is concerned? Mr. ScHwARTZ. I would say that our inventory is normal. You might recall my initial statement. The homes that we have on inventory now were built with the commitments taken out last year. On the completion and sale of these homes, we are finished. We have tried and tried, and we are unable to secure commitments to construct next year-this year, 1960. These homes that we have now were, built in 1959. Mr. MIT,I,ER. Mr. Schwartz, you say you tried and tried. Where ha,ve you tried? Mr. SCHWARTZ. The Government-insured mortga,ges in our State come from two main sources-one being the eastern banks, the other· being the California Savings & Loan. I have tried both these sources. I have tried through mortgage brokers to secure financing from eastern banks which we have had before, and there is no indicaition of any interest. Mr. BASS. If you were below your normal inventory, I could see where you would feel the pinch. Mr. SCHWARTZ. Mr. Bass, the current inventory I have is not really the problem. The problem is that I have no means of building homes Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  239  for the balance of this year. This is the problem, and this is wha.t we want to bring to your attention. Mr. BARRETT. Mr. Schwartz, do I properly understand that the people in general in California. feel the pains of this tight money policy as well as the builders? Mr. SCHWARTZ. There is no question about it, sir. Mrs. GRIFFITHS. Do those houses have basements? Mr. SCHWARTZ. No. Mrs. GRIFFITHS. No basements and no second flood Mr. ScHWARTz. No second floor. Mr. AnnoNrzm. Mr. Widnall. Mr. WmNALL. With respect to FHA mortgages, you have a 9 per<Cent discount that you show there of $1,383. Do they reflect that in their appraisal of the house? Mr. SCHWARTZ. No, the FHA is not permitted to reflect it in their ·appraisal. In effect, we are able to get the FHA commitments in the same method we do the GI, by volume construction, savings in supplies and material as against the cost indexes of both of these agencies which were set up, and their appraisals are made on the basis of small homebuilders of 25 to 50 homes a year. They do not reflect mortgage discount in arriving at sales prices. Mr. WmNALL. Now, how do they obtain these second mortgages? Who gets the second mortgage for them? Mr. SCHWARTZ. The second mortgage is being held and has to be held by the builder. What is happening in the case of this situation :here is that on the $16,000 home we have a first mortgage of approxi·mately 78 percent, or $12,700 of our $16,000. The builder then turns :around and carries back a $3,300 second mortgage for ,the 7-yea,r term. Mr. WmNALL. At the end of the 7-year term, he says "Pony up, or I take the house over." Mr. SCHWARTZ. That is basically it. Mr. WmNALL. You want us to bail the builder out because he is taking back the second mortgage? Mr. SCHWARTZ. We want to do what is best for everybody in the State. It is not doing the buyer justice to get kicked out of a home he has Ii ved in for 7 years. Mr. WmNALL. Hasn't the man working for 7 years normally. in·creased his income capacity, increased his power to save? And hasn't he thought at all about meeting that commitment in the future? And can't he refinance the whole thing after paying off for 7 years on his first mortgage and making some payments on his second mortgage? Mr. SCHWARTZ. This is the reason, Mr. W"idnall, that we are makmg these sales, in effect, is that people are hoping-they are hoping; they ,do not know but they are hoping that somewhere within the line over the 7-year period they are either going to save enough money, or someone is going to die and leave them the money, or something i!> -going to happen-then, at the end of 7 years they won't lose the hom&that they will have $1,750. However, we don't know that they will, and I don't think they do, ·either. Mr. WmNALL. Let me ask you another question about second mort_gages. When you place a $2,500 second mortgage on your house, do you get any payment for placing that $2,500 second mortgage, or does he purely get a $2,500 credit for the sale price of the house? Federal Reserve Bank of St. Louis  240  EMERGENCY HOME OWNERSHIP ACT  Mr. SCHWARTZ. It is in effect merely a second deed of trust against the property; and instead of making the $2,500 down payment, we are taking back the $2,500 in the form of second paper, which is paid off at 1 percent a month for 7 years, and the balance due at the end of that period. Mr. STONE. May I also interject a comment in reference to the Congressman's question? It was for this reason that FHA was originally created to produce a long-term low-interest rate, easily amortized mortgage, that homeownership expanded as rapidly as it did in the last 25 years. Today over 60 percent of the American people enjoy homes where only 40 percent of them enjoyed homes in 1940. With this increasing tendency of ,a second mortgage being placed on top of the burden of a first mortgage, homeownership is being jeopardized and thus the economy. This 1s a dangerous practice. Recently we had a survey which indicated that 43 percent of the builders across the country today are forced to utilize this type of financing. We think that this is detrimental to housing in America. Mr. BARRE'.IT. What are you referring to as a dangerous pra.ctice, tight money or second mortgages? Mr. STONE. The dangerous practice of second mortgages becoming so prevailing. Mr. BARRETT. If we didn't tight·money you wouldn't-have to go to second mortgages as frequently as you do now to dispose of your property? . Mr. S-roNE. If we had ample supplies of mortgage money, we would have Government insured capital available to us instead of the capital that is invested in less essential goods, I am sure we would not have the problem. . Mr. AnnoNIZIO. Do the builders themselves hold these second mortgages? Mr. STONE. By and large the builders discount them by selling them to an investor who will buy them, and in our area the current market for second deeds of trust is 50 cents on the dollar. Some builders hold them, themselves. For instance, a $3,000 mortgage, second deed of trust, would be sold by the builder to an investor who would buy this type of security for $1,500, cash. The investor, of course, is taking the gamble that this purchaser will either pay off the mortgage on time, and in accordance with the payments, odhat he-will sell the home and thus other capital will replace the investment which he has made. Mr. BARRE'.IT. Well, isn't it also true the average GI price-the average GI pays off his mo~age in 11 years, 10 to 11 years? It is rarely carried for the 25-year period. Mr. STONE. That is right. Today the investors in governmentally insured mortgages are presently using a yield table amortized schedule of 15 years, maximum, 12 years minimum, for determination of the average length of time that a 30-year loan will be on their books. Mrs. GRIFFITHS. What is the experience table that shows you that anybody making $5,756 a year, paying $158 a month, could pay off anything? You really have no experience; do you? Mr. STONE. I think the greatest experience that we could relate to that would be the number of people who are renting homes today for monthly payments actually in excess of this amount, for which they receive no equity. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  241  Mr. MILLER. How do you account for the high number of starts in December, though, in California 1 Mr. STONE. We have a high number of starts across the Nation as well as in California in December starts starting, but the large degree of this was the finishing up on schedule, within time to finish up on their commitments which they had purchased earlier. Also, in California, due to the fact we have had extremely good weather for building, but poor for agriculture by virtue of the lack of·rain. On the other hand, let me point out that in December of 1959, in the San Francisco district office of the Federal Housing Administration, there were 55 percent less applications for section 203 type loans than there were in December of 1958, and December of 1959 was 20 percent lower than November of 1959. Mr. AnooNrzro. May I just say this1 that certainly all of you gentlemen have painted a very bleak and dismal picture so far as the housing situation in California is concerned, but hasn't it always been difficult to get financing in California for homebuilding 1 Mr. STONE. Mr. Chairman, it was, and has been on the average more difficult in California and the southwest and southern portions of the United States, but today it is my experience, discussing with the,builders at the convention in Chicago, that this difficulty 1s now nationwide. I discussed with one builder who was 30 miles outside of Chicago, and he told me that he had just finished negotiating a contract for a VA loan at 10 points discount. Mr. SPIERING. I mentioned in my report, Mr. Chairman, that it was difficult out there because of the money being in the East, actually in the State of California, 90 percent of the financing required in the State of California must be brought in from other than the State of California. Mr. AnnoNrzro. I was wondering how the present situation compares with years just prior to this. Mr. SPIERING. It is very dismal, much, much worse. Mr. STONE. The only time we really had it easy in the last few years was during that 60-day period following the implementation of your special assistance program No. 10, when the gates of other types of investment money were relieved. True, we know this was not only from special assistance, it was due to actions by the Federal Reserve Board in lowering the discount rate three successive times and the open-market functions they participated in. The psychological effect is that the liquidity of mortgages was evidenced by the special assistance program and did give confidence to the mortgage market, and we did have mortgage money available to us for a short period of time. Mr. AnooNrzro. I didn't quite get the answer to Congressman Miller's question about the high number of starts you had in Californitt in the month of December. I was wondering whether you had some specific reasons for that. Mr. HENNESSY. The high number of starts in December is attributed to the fact that financing had been previously arranged, lots had been develoP.ed, and the good weather-that is good from the standpoint of building-lack of rain in California, lack.-of- snow in other parts of the country. Federal Reserve Bank of St. Louis  242  EMERGENCY HOME OWNERSfilP ACT  There is one other :factor I think is important. I know o:f five builders well into their 1960 building programs started in December because o:f weather situations. Mr. AonoNIZIO. You gentlemen have also indicated that second mortgages are very prevalent out there in California, and, o:f course, I don't know whether they have those so-called balloon-type payments, or what, but I know that several years ago our committee was down in the State o:f Florida looking into just this kind o:f a situation. As the result o:f our investigation, the Florida State Le~slature has passed legislation affecting this problem, so perhaps it might be something that your State legislature could consider. Now, when this committee was out in California some years ago, it was indicated to us that at that time there was an average o:f about 25,000 :families a month moving into the Los Angeles area. Is California still growing at that rate, or is it greater today, or what? Mr. MILLER. It is slightly greater, but not a great deal. We figure about 500,000 into the State per year. · Mr. AoooNIZIO. Your demand for homes out there just keeps increasing? Mr. MILLER. Geometrically. Mr. HENNESSY. It is :for that reason that this last type o:f financing is used, they have to have the housing, they have to get it some way or another, and that is the reason it is going to the second trust. Mr. AonoNIZIO. You indicated in California there is going to be a drop off o:f home construction next year. How is this going to affect the rest of the country? Mr. STONE. Well, Congressman, we see, now, the same :factors in the market that prevailed at the beginning o:f 1957. I don't think that we can truly say by virtue o:f the number o:f housing starts across the country that this is an immediate emergency as o:f right at the moment all the way across the country. However, there is an emergency for the need for adequate mortgage money invested in governmentally insured mortgages in California and we see the trend going the same way it did in 1957. All o:f the :factors are in the market that caused the same reaction. Mr·. ADDONIZIO. Mr. Stone, may I say to you that in your statement you indicated that you :felt that there should be some sort o:f central mortgage reserve :facility set up to meet this problem, and I would 1ike the record to show that the chairman of our committee has indicated in the past that this will be taken up at a later date when we consider our general housing bill, and I am sure the committee will give it every possible consideration. Mr. MILLER. Mr. Goheen, will you respond to the chairman's question regarding how the slowdown in California will affect the rest o:f the Nation~ Mr. GOHEEN. Yes, I would say that probably 30 percent of the material used in homes is produced outside the State o:f California, all throughout the Nation-steel, plumbing supplies. electrical supplies-not all of it comes from the State of California. In fact, industry has just started to move to the State of California. Therefore, any slowdown in homes is going to affect the use of materials throughout the entire country. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  243  Mr. Mn,r,ER. In amplification, Mr. Chairman, may I say that I represent a timber producing congressional district. We do not begin to supply the lumber necessary in the construction of California. homes. A great deal of it comes from the 10 States of the South. The States of New England supply a great deal of it. Mr. Chairman, our last witness, Mr. Tolan, has a brief word to say with Tespect to urban renewal, at the request of the Chair. Mr~ ADDONIZIO. Mr. Widnall has several questions before we proceed with that. · Mr. WmNALL. I have here a table submitted by the National Association of Home Builders' economics department dated January 25, 1960, "Recent Experience and Cm.Tent Outlook." They say with respect to California, in the Los Angeles area comparing September, Octoberi and November of 1959 with the same months of 1958, Los Ange es building permits up 7 percent, San Francisco down 5. FHA new homes, Los Angeles minus 14 percent starts, minus 51 percent applications. San Francisco minus 19 percent starts, minus 27 percent applications. But when you get to the VA field, Los Angeles plus 41 percent starts, minus 1 percent appraisal requests, plus 68 percent starts and plus 14 percent appraisal requests in San Francisco. Now, why is the VA program going ahead while the FHA program is going down, and the reason I ask this, and I am very pointed about this, is VA including in its appraisal some of the discounts? Mr. STONE. Mr. Chairman, if I may answer that, this is a prevalent practice on the part of the builders at least in northern California to simultaneously request, at the time they obtain their FHA commitments for housing, to request the CRV or certificates of reasonable value for the housing units which they propose to construct. This has no bearing upon the actual number of housing units which these builders will deliver to the Veterans' Administration. I had a chance to get in and look at these figures with the Veterans' Administration, and only a fraction-I was trying to think of the exact fraction, but only a fraction of these applications are delivered to the Veterans' Administration. . · · There is one real big reason why the starts in northern California, and in the San Francisco area, were up in December, and that was due to the good weather. Mr. WrnNALL. This is September, October, and November, VA starts in Los Angeles 41 percent up over the 3 months of the previous year. San Francisco area, 68 percent up. That is a big increase. Mr. AoooNrzro. Mr. Stone, no one disputes that increase, but I think you have indicated that that does not necessarily hold true for 1960. Mr. STONE. We have had, as I pointed out, an increase in housing in 1959. We have had an increase in housing in 1959. Mr. BARRETT. You had an increase in money~ Mr. STONE. A decrease in FHA and VA loans in the last 3 months is seriously concerning us, and this is what we are concerned with. We are concerned with the lack of the investor investing in long-term, easily amortized, low-interest-rate mo:r:tgages. He has disappeared from the market. I have had the most unusual condition of having New York brokers quote me figures on discount, and I would say, "All right, I will take Federal Reserve Bank of St. Louis  244  EMERGENCY HOME OWNERSHIP ACT  the commitment," and they say, "I am sorry, I cannot deliver it now, our portfolios are full." I was wondering why the quotation as to the discount and yet when you ask for delivery of a commitment their portfolios would be full. We recognize that the _portfolios are full, and this is our problem. .Mr. SPIERING. Mr. Chairman, I have been listening to your questions and also listening to the remarks of my very good friends here, and I hope again that you will realize that these men are from metropolitan centers, and they are here with a complaint. Well, we are much removed from the metropolitan centers, and we not only have a complaint, we haven't any money, and we have no way of starting homes under FHA and VA with commitments other than through FNMA. Now, I am speaking, when I say that, sir, for most of our areas in the United States, and I feel that this is true especially in the West and in the South. Mrs. GRIFFITHS. Mr. Chairman, I would like to ask what does a 7year-old, three-bedroom house sell for now~ Mr. ToLAN. It would depend on the area. You would prob.ably be. able to Jret a 7-year-old home now for about $13,500. · Mrs. GRIFFITHS. What does a three-bedroom house with 1,200 feet of floor space rent for i Mr. ToLAN. In our area, $125 to $175, depending on what went with it. Mrs. GRIFFITHS. How about a three-bedroom apartment i Mr. TouN. From $90 to $275, depending on location. Mr. WmNALL. One more question, and anybody at the table can answer it. We had testimony this morning from Mr. Shishkin of the AFL-CIO that the average price of a house in 1957 was $15,100, and it went down to $14,450 in 1958. Now what do you think was the reason for the reduction in cost i Mr. STONE. I believe that, as we have discussed this many times, the real reason was that the special assistance program No. 10 gave assurances to many builders across the country to get started into the lower bracket of housing. Simultaneously, the great lack, 2 or 3 years prior, of activity on the part of the builders to produce housing in that price bracket was largely the reason for the lowering of the average or median price of the homes built. Mr. WmNALL. You are starting to meet more competition in sales, it was becoming more a buyer's market than a seller's market, isn't that truei Mr. STONE. There is also another factor in addition to the one you pointed out, and that is that more of the people had difficulty in qualifying as the money tightened up. The credit qualifications on the part of the lenders automatically have a bearing on this. In other words, you tighten up the reins when money gets tight. Mr. WmNALL. I think you have made constructive suggestions in your statements, don't think I am trying to tear you all apart. I really want to get at this and find out what the honest answer is. Mr. S'TONE. I would like to make an additional comment, if possible. I understand that there was prior testimony which indicated that there was no need for additional housing because of the vacancy factor of about 5 or 6 percent. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  245  Might I offer for the record that it is my opinion, and I am sure it is the opinion o:f many other people in the country, that 5 or 6 percent vacancy factor is a very low vacancy factor, when you take into consideration the rehabilitation that is needed. Rehabilitating these units that may be vacant is probably the one principal reason why they are vacant. Secondarily, may I also point out that the factor o:f the famili~ who are living together, doubled up, has not been taken into consideration, and · we homebuilders don't necessarily prescribe that people live doubled up as has been advocated by the Economic Adviser to the White House. Mr. MILLER. Mr. Chairman, one last witness on urban redevelopment and renewal, ,Tohn Tolan :from Richmond, who you will recall is the son o:f Congressman John Tolan of Oakland, for many years a Member o:f this body.  STATEMENT OF JOHN H. TOLAN, JR., BARRETT HOMES, RICHMOND, CALIF. Mr. ToLAN. Mr. Chairman and members o:f the committee, I am going to talk about the subject a little bit away :from this, a little bit looking forward on what two provisions of this bill would mean to urban redevelopment areas. In California we have an urban redevelopment law, and we have defined clearance areas :for projects, and they are expanding. It is a new field, now, and I think the committee is going to hear a great deal more about it. I am interested in sections 8 and 9, reduction o:f fees, and also par purchase. I don't know that section 9 applies, because I am not familiar with the particular section, but I believe the committee is indicating that special assistance mortgages would be purchased at par. Now, I will just try to illustrate briefly what is happening in the urban renewal field. We are pioneers, the Barrett Construction Co., in sales housing in urban renewal. Rather than the very large metropolitan complex like Philadelphia, Baltimore, or the great projects m Detroit or Pittsburgh, we are building in a small city o:f 54,000, and we are building homes for sale under section 220. Mr. AoooNizro. May I point out that sections 8 and 9 do apply to urban renewal. Mr. TOLAN. I feel that that is extremely important, because our experience in building homes where the people are going to move in and own them we think is attracting an entirely different customer than the pople who are going to rent, where they can walk away if the rent is too high or amemties are not right. We try to give them good value in a home. We are building in this Richmond area, and have just built a test project o:f a hundred homes, and we built new designs. We built 62 units of row housing, which hasn't been done outside of the San Francisco area, 20 detached single :family dwellings, and 9 duplexes to see what the rental situation was, and those houses were occupied on an interracial basis. They have been occupied 20 months, and they are occupied by Caucasian families, Negro families, Philippine :fami- Federal Reserve Bank of St. Louis  246  EMERGENCY HOME OWNERSHIP ACT  lies, Japanese and Chinese families. It is three-quarters Caucasian· in a town which has 20 percent Negro scattering through it. In the redevelopment program, you have a heavy local publicinterest, you have years of planning by the Planning Commission, Redevelopment Agency, and the mayors. They have all been in to see· you gentlemen about how the program drags. Then we .oome down to. the sta.rk reality of producing a house, taking all the debt, getting some consumer to absorb it by way of taxes, and payments to principal and interest, and you have to give him a good buy. And we are giving him a good buy. We sell him a fourbedroom, two-story row house on a 30 by 100 foot lot, 1,400 square· feet, for $14,950, fenced, landscaped, lawns, trees, electric kitchens,. and one- or two-car gara.ges. Now, that we can sell due to the very broad outlook by FNMA. w·e think Mr. Baughman has really studied urban renewal, and he,. in his administration of FNMA and special assistance for urban renewal, has more than gone half way to see that sa,les type program is properly financed, but I want to say that when we set up a 220, project, the FHA valuation or replacement cost in the case of 220, will normally run higher on a tight pricing market. We are trying· to encourage people to come back to the city. We have the problem of the interracial situation, we blight surrounding us like you see south of the Capital, and one of the ways you bring them in is by value, overcoming the other obstacles. We have the house at $14,950. We have a Veterans' Administration certificate of reasonable value of $15,050 and an FHA replacement . cost of $15,650. Now, the financing works in reverse, because of the different interest rates for VA, the gross cost for FNMA take out is 4.5 percent,. and of course there you are about on the $15,000 house about $600they happen to be over our price bracket, we can take it, but the CRY is not there, because they can't recognize it. On the other hand, the FHA replacement cost is up there, and we· could increase our price. What will happen is nex-t year in this program, with the discount situation being what it is, and the variation between VA and FHA we will not be able to give the buyers a GI loan which would some 1 percent, reduce the monthly payments, and put more minimum families in. I urge thait this particular provision of the bill be very carefully exa,i.nined in the light of urban renewal, particula.rly sales housing. In the rental housing, which we have to get int-0 because the cities must realize as much as possible out of these lands to ha.lance their own municipal budgets, in those rental projects we just beginning to get into them, we think we need a longer period for rent-up, because we think these projects are really not finished, and finished properly, until rent-up. I think that should be examined. Mr. AnooNIZIO. Mr. Miller, we have several other witnesses. I don't want to cut you off, but I am sure you have impressed the committee. Mr. MrLLm. Thank you for giving us this opportunity to present to you the situation in California, and the effect it is going to have on the country. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  247  We earnestly urge the passage of this bill as quickly as it possibly ,can be accomplished. Mr. AoooNrzro. I assure you tJhe committee will give very serious -consideration to what you and your associates have said. · Our next witness is my very good friend and my distinguished col1eague from my own State of New Jersey, Congressman Bill Cahill. -STATEMENT OF HON. WILLIAM T. CAmLL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY  Mr. CAHILL. Mr. Chairman, Mrs. Griffiths, and gentlemen, I recognize time is pressi~ for the committee. Instead of taking the time -:necessary to read this statement, I would offer it for the record. Mr. AoooNrzro. That may be done without objection. Mr. BARRETT. He may be your colleague, and he comes from your State, but the only thing that sepa.rates us is the Delaware River. It seems he has some magnetic attraction over there, because in Philadelphia we induce the people to register Democrat, and when they move across the river they seem to vote Republican. Mr. AnnoNrzro. I might inform you that coming from the great State of New Jersey as Bill does, he has that magnetic personality all through New Jersey. He certainly has been able to influence a great many Democrats, including Demo~ratic Members of Congress. Mr. WmNALL. May I say something on behalf of the Republicans :at this point, coming from the great State of New Jersey myself. I -certainly want to welcome you as a colleague. I know of the wonderful job you have been doing during your first term down here, and I hope these fellows at the head table will love you in November as they do now in January. Mr. CAHILL. All I can say is it is real fun being here. I am here certainly not to discuss at length this bill, H.R. 9371, but to discuss only section 13 of the bill, and, as I say, I am going to ask that my statement be made a part of the 1record. Mr. AnnoNrzro. It will be included in the record. Mr. CAHILL. I would like to call to the attention of the committee, •other than the New Jersey members who are familiar with it, the ·action of the Legislature of the State of New Jersey which recently filed its conclusions as a result of an investigation that was made by a joint committee of the New Jersey Legislature relative to the points and discount system prevalent today, and to quote their conclusions. They said: After considering all the testimony at both the public and private hearings, the commission is convinced tbat the "point" system placed undue financial burdens upon individuals. Since the commission designated by the Legislature of tbe State of New Jersey to inquire into this problem can act only wilthin its jurisdictional sphere, the ability of the legislature to cope with the problem is necessarily circumscribed. 'The fountainhead of the evil lies with the Federal Government's treatment of the FHA and VA mortgage loan system, more particularly its approval and ·sanctioning of the pernicious "point" system. It is the considered judgment of the commission that tbe Congress be memorialized to rectify the unhealthy practices hereinbefore described. Precipitate action on lthe part of the State or any ·group of States would undoubtedly deal a staggering blow to tbe homebuilding 'industry in jurisdictions taking part in such action. Therefore, despite its feeling that the entire "point" system is a predatory practice visited on unsuspect• ing people who are least able to afford it, the commission believes that the Federal Reserve Bank of St. Louis  248  EMERGENCY HOME OWNERSHIP ACT  States singly or collectively should not take any action which might dry up the source of capital for maintaining a healthy building industry in New Jersey.  Gentlemen, in this statement I ha,ve reviewed what I consider to be the purposes of FHA and VA with suggested illustrations to point up the nefarious practice, in my judgment, that has been going on at least in the State of New Jersey, and have suggested what I conceive to be at least some remedy to the problem. I might say that I feel that section 13 of the bill is a step in the right direction, in that it causes a disclosure, but in my opinion, of course, it does not go far enough. I know that you gentlemen have the experience and the learning and the know-how, and it is only my request, but I am sure I speak for all of the people of New Jersey of both parties, all segments of the State legislature, that this system of points and discounts be given the considered opinion ,and action of this committee. Thank you very much, and I would like to offer this statement. Mr. AoooNZIO. That may be done without objection. (Mr. Cahill's prepared statement reads as follows:) STATEMENT OF HON. WILLIAM T. CAHILL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY  Mr. Chairman and gentlemen, I appreciate the opportunity of testifying before this committee on H.R. 9371. I realize that the members of this committee and many of the witnesses who have appeared and who will appear know far more about housing and the problems of interest and financing than I shall ever know. I am not here to discuss H.R. 9371 in its entirety. My purpose in requesting the opportunity to testify is to comment on section 13 of this bill, which as you know relates to the fees, charges, or discounts paid in connection with FHA or VA mortgages. The Legislature of New Jersey adopted a concurrent resolution in 1957 creating a commission to study and investigate unfair practices in connection with the making of loans secured by mortgages on residential properties. Just this month the final report of this commission was handed up to the legislature. I quote from the findings and recommendations of this board of inquirers: "After considering all the testimony at both the public and private hearings, the commission is convinced that the "point" system placed undue financial burdens upon individuals. "Since the commission designated by the Legislature of the State of New Jersey to inquire into this problem can act only within its jurisdictional sphere, the ability of the legislature to cope with the problem is necessarily circumscribed. The fountainhead of the evil lies with the Federal Government's treatment of the FHA and VA mortgage loan system, more particularly its approval and sanctioning of the pernicious "point" system. The basic overall issue is one to be considered at the national level. It is the considered judgment of the commission that the Congress be memorialized to rectify the unhealthy practices hereinbefore described. Precipitate action on the part of the State or any group of States would undoubtedly deal a staggering blow to the homebuilding industry in jurisdictions taking part in such action. Therefore, despite its feeling that the entire point system is a predatory practice visited on unsuspecting people who are least able to afford it, the commission believes that the States singly or collectively should not take any action which might dry up the source of capital for maintaining a healthy building industry in New Jersey." As a result of this recommendation and report, I introduced H.R. 9314 which has as its objective the elimination of all discounts or points in relation to FHA and VA mortgages. After introduction of this bill, I learned of H.R. 9371 introduced by the distinguished chairman of this subcommittee, Mr. Rains. I have read carefully the provision of section 13 of this bill and while I believe it is a step in the right direction, it is my opinion that it will not correct the evil of the discount system. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  249  It inight be well to review for a moment the purposes of FHA and VA. AS I recall, the FH'A was created for the purpose of giving every citizen of this cduntry an opportunity to own his own home and, thus, small downpayments and low interest rates were the order of the day. The VA was created to in some small way to repay the men who had taken 4 years out of their lives to fight for their country and to give them an opportunity over a long period of years at minimal downpayments and reduced interest to likewise purchase their own homes. These objectives have apparently been forgotten and today the only consideration seems to be the amount of return that lending institutions can get on their dollar. It is interesting to note that the VA mortgage which bore 4½ percent interest was increased in April 1958 to 4¾ percent and in 1959 was again increased to 5¼ percent. Likewise, the FHA interest rate just last year was increased so as to return to a lender 5¾ percent instead of 5¼ percent. One other fact preparatory to my observation: Under the existing regulations, the buyer is not permitted to pay any points or discounts. Now I think we all understand what the real theory of the point system is. As I understand it, points are charged in order to bring the interest rate of a VA or FHA mortgage 'up to the current yield on the money market so that the lending institution will receive the same return as they did on a conventional mortgage. While it seems strange to me that a lending institution would expect the same return on a guaranteed loan as they would on a loan not guaranteed, they apparently do. What I cannot understand and what has never been explained adequately to me, is why the lending institutions expect by reason of their discount system to obtain more from a FHA or VA loan than they do from a conventional loan. In New Jersey the interest rate is limited by law to 6 percent and thus on all conventional mortgages this is the maxium. This is not true of VA and FHA mortgages in New Jersey. Experts have told me that it takes approximately two points to raise the FHA interest rate to 6 percent over the normal life expectancy of the mortgage and six points to do likewise with a VA mortgage. In other words, one point takes care of the differential of one-fourth of 1 percent interest, thus in New Jersey there should never be any point charge over two on a FHA loan and six on VA. Unfortunately, however, as was indicated by the legislative committee and as I can attest by my own personal experience, this is not the case. Charges ranging up to 13 points have been made. As usual, the little man, trying to sell his home is the loser. Since the buyer by law cannot pay the point, the anomalous and insidious practice of charging a seller for the mortgage has come into practice and in most instances, the exact amount of the charges are not known to the seller until he enters the settlement room. In a great number of instances the seller has already used the downpayment received from the buyers for the purchase of another home and thus when called upon to pay points, he did not expect, he is left with no alternative since he does not have the downpayment to refurn to the buyer. It serves no useful purpose to belabor the evil that exists. All of us, I am sure, recognize it. The question is how it can be remedied. While I believe the bill, H.R. 9371 takes a step forward by compelling a disclosure of the points, I think there are other matters which this committee should consider. 1. Since the purpose of the VA mortgage has been prostituted, it seems to me that there is no alternative if the present practice is to continue but to abolish the VA mortgage or to create a direct loan to the veteran. Under existing practices, the veteran is the loser, not the winner and he must pay more for his mortgage than anyone else-parenthetically. 2. It seems to me that there should be some regulation limiting the amount of discount so that in no instances can there be a charge in excess of the legal rate of interest prevailing in the State where the property is located. 3. This committee should consider the advisability of providing by law that no person can pay any discount or points on a FHA or VA mortgage. The argument advanced that this will "dry up" mortgage funds is in my opinion untenable. The committee knows that savings and loan associations, building and loan institutions, and similar groups have been prospering throughout the years and have been progressively increasing the rate of return to their depositors. This has been one of the great contentions of the savings banks who argue that this is the result of inequities in our tax structure. Be that as it may, these associations have made their money from mortgages and I have no doubt that on the present rate of return of FHA and VA mortgages they can continue to attract depositors and make money in the mortgage field. '.l'his must Federal Reserve Bank of St. Louis  250  EMERGENCY HOME OWNERSIDP ACT  inevitably lead to a contribution in these investments by insurance companies, savings banks, .and others. There probably are many other solutions to this perplexing problem and I know that this committee will give every consideration to the problem. My purpose in appearing before you is to once again call your attention to the need for a solution, to point out the observations of the New Jersey Legislature and to urge for your serious consideration the complete elimination of discounts or points where a FHA or VA mortgage is illlvolved. I appreciate very much the opportunity of testifying before your committee.  Mr. AnDONl'ZIO. Before you leave, Bill, might I just respectfully point out to you that certainly if this bill is enacted, and we are able to put this billion dollars into FNMA, this will lessen the pressure on these discount rates that you are speaking about. Mr. CAHILL. I think, Mr. Chairman-Mr. AoooNl'ZIO. I hope you as a Republican will give us some support when it comes over to the floor of the House. Mr. CAHILL. I will certainly be guided by the learned advice of my good friend, Mr. Widnall, who keeps me posted on the actions of this committee. Mr. AoDONl'ZIO. Up until now we have had no sign that he will support this bill. Mr. BARRETT. Mr. Chairman, I want to commend the Congressman froni New Jersey on his splendid statement: Mr. CAHILL. Thank you, gentlemen. Mr. AoooNIZIO. Our next witness is our distinguished colleague from Oregon, Congressman Charles Porter. You may come forward. Mr. PoRTER. Thank you, Mr. Chairman. Mr. BARRETT. Congressman Porter, certainly I want to pay my respect to you as a colleague coming here to testify, and I know I can go on record supporting your position, but due to an appointment I must leave, and I just wanted to let you know why my time is expiring. Mr. PoRTER. I appreciate the gentleman's concern. STATEMENT OF HON. CHARLES 0. PORTER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON  Mr. PoRTER. Mr. Chairman, thank you for this opportunity. to appear before this important Banking and Currency Subcommittee on Housing. I want to speak briefly on behalf of the legislation the committee is considering before introducing a gentleman who has come from Ore~on to tell you about conditions there. Oregon s Fourth Congressional District, which I have the honor to represent, produces more lumber and sells more timber than any other district. Our economy produces more lumber and sells more timber than any other district. Our economy and the State's as a whole depends on lumber for 75 percent or more of its income. A healthy housing economy is meat and potatoes for Oregonians. I hope you have had time to look over a little pamphlet prepared by Nathaniel H. Rogg, economist for the National Association of Home Builders of the United States. His factual documentation of the challenge facing the housing industry is titled "The Next Decade-A Decade of Change and Choice." Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  251  He properly calls our population explosion "an enormous opportunity * * * if we face up to it properly." He feels it can be a tremendous benefit to all of us, but he correctly says the population explosion "will not automatically guarantee golden years for everyone connected with the building industry." He finds our yearly new home requirement in these years of the sixties is 1.6 million. He calls it a market floor, not a ceiling. Statistics show individual American income is rising, that the two-house family is becoming more common. What about the market of the sixties? Economist Rogg says it will be a choosy market. He lists as factors a period of capital shortages, great advances in construction technology, changes in the form of housing- and its financing machinery, great effort in the field of merchandising and production. He believes our yearly home need has a ceiling of more than 2 million by 1970. We know that in the next decade we will have 34 million more people. At the same time the relative proportions of the young and the old in our poJ?ulation are increasing. Rogg shows the greatest increase will come m the school age group from 5 to 19. This will account for half of the growth. Existing homes will require extra rooms. Older people will want smaller units. Our basic shelter requirement this decade is about 16 million units. It means the expenditure of some $230 billion. It is a big and important part of our national economy. It could be bigger. How do we meet the needs of this decade successfully? I believe we do it at a national level by realizing that homeowners and potential builders don't always have the ready cash available. I believe we must recognize the need for long-term, low-cost financing. I believe we must increase our urban renewal planning and assistance programs. As land prices for homesites skyrocket out of sight let us get to work clearing our blighted city areas. Let us replace slums with modern public housing units. Let us replace blight with beauty and utility. I believe we must accept that the Federal Government has a role to play in college housing construction. I believe we must make available more construction funds for housing for the elderly. The legislation before this committee, the emerg-ency homeownership bill, is designed to halt a threatened slump m residential construction. Housmg starts ought to be steadily increasing. High interest rates must be reduced. The financing costs home buyers now pay under the administration's tight money policy are outrageous. The Rains emergency homeownership bill, which I have also introduced, Mr. Chairman, would correct these flaws. We know housing construction is in trouble because the present tight money policy has virtually cut off the flow of mortgage credit to many sections of the country. The emergency homeownership bill incorporates a $1 billion special assistance fund for the Federal National Morts-age Association to purchase Government-backed loans on lower priced homes. 50876-60-17 Federal Reserve Bank of St. Louis  252  EMERGENCY HOME OWNERSHIP ACT  This money could be used for the purchase of FHA and GI loans on lower priced homes. This legislation would cut in half the premium a home buyer pays for insurance of his mortgage by the FHA. Federal Housing Administration reserves now are high and can support the proposed premium reduction. The $1 billion special assistance fund will be returned to the Government with interest. I strongly support and endorse the emergency homeownership bill. Now, I am pleased to introduce in a moment Mr. Leondard N etzorg, of Portland, Oreg. For the paf,t 5 years Mr. Netzorg has been counsel for the Western Forest Industries Association. A successful practicing attorney, he has considerable legal experience at the Washington, D.C. level and at State and local levels. Mr. N etzorg worked for 15 years with the Department of Interior. He is well versed in the fields of mineral and land resources, particularly timber. Part of his job is to know what is happening to the more than 100 members of the Western Forest Industries Association which he represents. Before I introduce Mr. Netzorg, I would like to have included in the record an editorial from the Milwaukie (Oreg.) Review of January 21, 1960, and I would read the last paragraph, because it sums up my own feeling on this point : When logging and lumbering-plywood, boon operations, shipping trucking, saw manufacturing, and all that lives on timber-is in trouble, we are all in trouble in Oregon; 201.5 failures led the Nation's bankruptcy roll 2 years ago, and it will happen again unless a mighty effort rolls back the selfish, reckless program of tight money which the Eisenhower-Nixon administration has sponsored.  (The editorial, in full, reads as follows:) [From Milwaukie (Oreg.) Review, Jan. 21, 1960] HOME BUILDING DROP MEANS TROUBLE FOR OREGON  Will we ever learn that high interest rates mean depression? Home building experts estimate that the Eisenhower tight-money policy, which now raises interest rates again, will cut housing starts this coming year by 10 percenit. This throws a pall over all parts of our home-short Nation, but it hits Oregon hardest of all. Dun & Bradstreet's 1959 publication of "Tlie Failure Record Through 1958" has just reached us. This volume tells how many Oregon businesses failed that unhappy year in a minor depression. What State led the Union in failures? Our Oregon, with 201.5 failures per 10,000 concerns. No other State in the Union was even close to us. Washington had 91.2 failures; the average for all 8 Mountain States was 32.7; Massachusetts was 42.8; Missouri, 26.9; Minnesota, 25.3. The reason is not hard to find. When big finance was given its reward by the administration it took a double swipe at faraway Oregon, where the economic life is dominated by lumber. Lumber lives on the Nation's new construction, and the price we pay is tragedy for 201.5 businesses out of every 10,000--and far greater numbers of others who are all but plowed under by the consequences. Have the Wall Streeters changed in all these years? We have sometimes thought so as their tune changed, but now it appears the words and spirit have not changed. They are basically the same today as they were in 1928, when tight money and high interest rares led us down the path to national ruin. The chief economist of Bankers Trust Co. of New York, Roy L. Reierson, recently lauded tight money in a New York University speech. "Interest rates in recent years," argues Mr. Reierson, "are just returning from subnormal depths. They are returning to the neighborhood of levels prevailing in 1928, a year of good business." Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  253  How blind this is to history, which a year after 1928 saw the plunge of 1929 which nearly ruined the American economy, but banker Reierson called it "good business." As the cost of loans on new houses soars well above 6 percent, the ability of young families to buy them ls sharply curtailed. The cost of a 25-year $10,000 home mortgage (FHA) has risen a thousand dollars in 2 years--and few homes are built for a mere $10,000 these days. High interest rates discourage borrowing, but by making money dear they increase the bankers' take at the higher level, at least temporarily. A community of new homes and future homes like our North Clackamas area pays two ways: ,ve find our development slowed down and the costs much higher; we find our lumber industry, which underlies all of Oregon's economy, sickenini: again, and this affects many incomes in our own area. When logging and lumbering-plywood, boon operations, shipping, trucking, saw manufacturing, and all that lives on timber-is in trouble, we are all in trouble in Oregon; 201.5 failures led the Nation's bankruptcy roll 2 years ago, and it will happen again unless a mighty effort rolls back the selfish, reckless program of tight money which the Eisenhower-Nixon administration has sponsored.  Mr. PORTER. Mr. Chairman, it is my privilege to introduce to you and your colleagues my friend, Leonard Netzorg.  STATEMENT OF LEONARD B. NETZORG, WESTERN FOREST INDUSTRIES ASSOCIATION, PORTLAND, OREG. Mr. NETZORG. Thank you, Mr. Congressman. Mr. Chairman, I am Leonard B. Netzorg, an attorney of Portland, Oreg. I appear at the direction of Western Forest Industries Associa- · tion, a trade association of lumber and plywood manufacturers located in the Western States, principally in Oregon. Others have spoken of the details of H.R. 9371. I should like to discuss it in terms of policy from the viewpoint of our recentexperiences. It has been estimated that about one-third of all the lumber produced in the United States is consumed by the housing industry. Because of the fact that our members are largely producers of Douglas fir, a timber type particularly adapted to home construction purposes, it is probable that even more than one-third of our product goes into housing. The State of Oregon, unfortunately, is essentially a one-industry area. 1Vhile agriculture and tourism are of some significance, nevertheless the economy of Oregon turns directly upon the economy of its timber industry. ,vhen our timber industry is prosperous, the State is prosperous. But when the timber industry falters, the entire State and all of its people falter. A recession or depression in the timber industry is not absorbed in Oregon by other industries that may then be enjoying a period of prosperity. A great deal of what I have to say stems from the tragic experiences of our State and our industry in 1957 and the first part of 1958, when we were in a period of tight money. Whether tight money is preferable to other forms of credit control, as an instrument to retard inflationary tendencies, is obviously a complex economic issue. The association is deeply concerned about inflation. But it does not have solutions to offer. If it is the conclusion of the Federal Government that in the public interest a tight money technique is to be adopted as an inflation control, then along with all other good citizens we are prepared to tighten our belts. Federal Reserve Bank of St. Louis  254  EMERGENCY HOME OWNERSHIP ACT  But we would prefer not to have to tighten our belts, as we did in 1957 and 1958, so many more notches than most other citizens did. We hope that we can share more equitably in any economic contraction that may ensue if the tight money policy is pursued. As a general observation, based upon our experience, it seems to us that the initial impact of a tight money policy is not a general contraction of credit. Rather, there is an initial reallocation of credit. The :proportion of investment money that would ordinarily find its way mto the mortgage market~ where interest rates are relatively frozen, is suddenly and sharply reduced. Instead of flowing into the mortgage market, this money accelerates its flow into other channels of investment. When this happens, homebuilding suddenly deflates and the timber industry of western Oregon goes into a precipitate decline. And there we stay in a state of, or close to, real depression while most of the economy continues on its upward climb, slowly decellerates to a relatively flat peak, and then gradually turns down. In the past this process has required many long months. And during those months we have found substantial Oregon communities with between 30 and 40 percent of their covered workers unemployed. Indeed, many of our workers were unemployed for so long that they drew their maximum of unemployment compensation and then found themselves without further income at all. Long lines formed in front of employment offices. Bankruptcies mounted; in 1958 Oregon led the Nation in the proportion of bankruptcies to total business units. In addition, in our industry the continuation of high fixed costs forced some of the smaller units into voluntary dissolution. From the national point of view, such dissolution of our mills seems wasteful. We are approaching a period which will see a material increase in the rate of family formation. This is more than a guess, because the population approaching marriageable age now exists. This increase in the rate of family formation, plus the expanding size of families, plus the increased rate of home obsolescence and demolition indicate that within a few years there will be a mounting demand for homes and a heavy need for the products of these sawmills. As to these mills the capital is gathered, the machinery is in place, and the skilled labor forces are assembled. It seems wasteful to dissolve these entities when it is almost certain that within a few years the Nation will have need of their organization, their skills, and their products. If the Government determines that a tight money policy is to be used to combat inflation, then we are in need of a device that will enable us to participate equitably in the deflationary consequences. R.R. 9371 would help to accomplish this. Hence, if the Government decides to continue the tight money policy, we believe that legislation along the lines of R.R. 9371 should be enacted. Mr. Chairman, I think you and the committee, and would be pleased to answer or try to answer any questions, if I can. Mr. AoDONIZIO. I have just one or two questions. You have indicated in your statement that certain things happened in 1957 and 1958 that led to the recession of 1958, and it was particularly harmful to the State of Oregon. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  255  I was wondering if perhaps you could point out now some signs of what the situation is in your State presently that would require the necessity of this legislation. Mr. NETZORG. We are anticipating at this moment. Our market is off somewhat. How much is seasonal and how much is ascribable to weather conditions in one part of the country or another I don't know. The significant figure we watch is the applications for commitments from VA and FHA. As we see those commitments, or those applications for commitments fall off, we tighten belts, we are concerned about how much we can afford to pay the Government for timber and we begin to take in sail. We are perfectly confident that as those housing starts fall off, as they must ensuing upon the falling off in application for commitments, we know we are in trouble. I do emphasize that it is unfortunate in the State of Oregon, but we are not in the position of other States and communities. There are no other industries that are going along, we don't have a pocket of unemployment in a town here and a town there; we have unemployment solid, which reflects in the retail business, the banking business, the whole service industry that exists to serve the timber industries and its employees. Mr. AnnoN1zro. It has been estimated by some of the witnesses before our committee that if the present tight money policy continues by this administration that housing starts for 1960 will drop off from 200,000 to 400,0000 units. Certainly this would have a very disastrous effect on the economy of the State of Oregon; is that correct? Mr. NETZORG. It would, in the absence of some legislation of the type now pending which would enable us to share more equitably in the contraction which ensues. Mr. AnnoNIZIO. Mr. Widnall. Mr. WmNALL. During the period that you were hurt so badly, you say, a couple of years ago, what was the percentage drop off in your normal industrial production as against home construction, because a great deal of your sales go to industry, don't they? Mr. N ETZORG. This is a guess, Mr. Congressman. I am sorry I don't have the figures here. I guess that somewhere between 40 to 50 percent of our lumber must go to homebuilding. When the homebuilding industry falls off, as is the problem of any manufacturer, it suddenly loses 40 to 50 percent of its market. Mr. WmNALL. You don't lose 50 percent, you lose a certain· percentage of 40 to 50 percent of your market. Mr. N ETZOR?· Our men are unemployed, fixed costs go on. Practica'lly all the timber we buy from the Government on contracts where the price is fixed in the past. Mr. WmNALL. Maybe I am not making my point clear. Mr. NETZORG. Possibly I haven't understood you. Mr. WmNALL. How much did your sales in other than the housing field drop off in other years ? Did they maintain the same level, or were they dropping off in the same percentage as your sales to the construction industry purely for housing? Mr. NETZORG. It is my recollection that other markets as well fell off. There was a shortage, for example, in the falling off of service of railroads. There was a great deal of lumber used in flooring of Federal Reserve Bank of St. Louis  256  EMERGENCY HOME OWNERSHIP ACT  boxcars, and that sort of thin~, and other industries that fell off tha.t .used lumber also reduced their orders. I can't give you a figure, I am very sorry, and I am not sure that :such a figure exists, but our indicator is so closely tied to these applications that we just flow right with it. Not only that, I think our bankruptcies flow right with it. I have a chart here, but I would rather not put it in the record. It is not a .happy one. Mr. WmNALL. You had a parallel falling off, or did housing start off first and the others picked up afted If you have something on that it would contribute to the record, because that would show housing really was the key to it. Mr. NETzORG. I do wish I had those figures, I do not. I will try to get them for the record if they are available. I am not sure that there is any breakdown of that sort. I will try to get it for you, though. Mr. WmNALL. Thank you. Mrs. GRIFFITHS. I have no questions, but I did enjoy your statement. Mr. .AnnoNIZIO. Mr. Milled Mr. Mn:.LER. I might say that I have the adjoining congressional district to that of my colleague from Oregon, and I can certainly bear out what he has said and what Mr. Netzorg has said with respect to the impact of the dropoff of housing on our economy. In the First Congressional District's lumber counties, 75 percent direct and another 10 percent indirect result from the lumber industry. I might say in response to the question posed by my colleague from New Jersey, Mr. Widnall, it was only the high level of spending for heavy construction in the public sector that caused the 1957-58 break to be as well contained as it was. Even so, taking off the 60 to 65 percent that we put into the housin~ markets of San Francisco and Los Angeles worked a great hardship on us. I might say, in addition, an expanding export market at the time kept 1958 from being truly disastrous in our area of southern Oregon and northern California. Mr. WmNALL. To what extent are you getting competition in the timber or lumber field from foreign countries? Mr. NETZORG. As to the particular types of products that we produce, I think our competition, the only competition that is today of any particular significance, is the Canadian. Mr. WmNALL. Is that in the plywood field? Mr. NETZORG. Plywood and lumber. We are dealin(J' with Douglas fir that comes from the Cascade Mountains. In effect, the chain starts in the First District of California, extends up through Oregon, Washington, and on into British Columbia so that the timber types are roughly the same, they are producing roughly the same type of products-construction lumber, and that lumber does find its way for a variety of reasons into the United States. Canadian markets are being contracted, I understand. I don't have figures but I understand they are losing a considerable part of their United Kingdom market, and their products are tending to come into areas such as Detroit and other areas of that sort. So to that extent, I think we are meeting some foreign competition. The balance of the foreign competition I think is not particularly significant. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  257  Mr. WmNALL. Thank you. Mr. MILLER. The key point of Mr. N etzorg's testimony is that the first signs of general economic distress is the reallocation of credit. In other words, we feel depressions early, before the rest of the country feels them. In fact right now the advice that I get from large lumber manufacturers and timber owners in the area is an extremely uneasy feeling with regard to the next quarter. This is a feeling they didn't have 2 months ago. Then, they were extremely confident about the market for the next 8 to 10 months. Would that confirm the thinking that you had in Portland and elsewhere i Mr. NETZORG. Yes, it would, Mr. Miller, and, in addition to that, I would suspect at that time that some of the more thoughtful owners are talking with their employees about making commitments and purchases, and this will result probably in a contraction of retail business before too long, simply hauling in sail, as I say. Mr. AnooNIZIO. Congressman Porter and Mr. Netzorg, may I thank you for your very helpful testimony, and I assure you that the committee will give it very serious consideration. Mr. PoRTER. Thank you, Mr. Chairman. Mr. AoooNIZIO. We will now hear from another of our distinguished colleagues, Mr. Rivers, of South Carolina. STATEMENT OF HON. L. :MENDEL RIVERS, A REPRESENTATIVE '.IN ,CONGRESS FROM THE STATE OF SOU'TR CAROLINA Mr. RIVERS. Mr. Chairman and members of the committee, I am glad to have this opportunity to speak to you on a very urgent matter-that of providing an adequate supply of decent housing at our military bases. It is true perhaps that the particular program I am speking of-FHA's new section 810-is not one of our bigger housing programs and the problem it is designed to meet may not seem to be a national problem. However, it is very serious, in fact, critical, in many places. I know from my experience on the Armed Forces Committee that good housing is a key factor in morale at Army, Navy, and Air ForCQ bases, and in the many new missile bases now springing up. I know it even more pointedly perhaps from the experience in my own district in South Carolina. Fortunately, this committee recognized the problem last year and the Housing Act of 1959 included a much-needed provision for special FHA mortgage insurance for o:ffbase housing for the families of members of the armed services and essential civilian personnel. This new program, section 810, can do much to help overcome the problem created when 3,000 or 4,000 new families are suddenly moved into a medium-sized community of around 50,000 families, as is the case in Charleston. However, I am convinced that this program will not get off the ground unless the Congress acts to make mortgage money available. This is an unusually severe problem right now when the sources of mortgage credit are drying up for all types of loans. However, it goes far beyond current conditions. It has always !been true that some time it takes considerable time for FHA money to stimulate Federal Reserve Bank of St. Louis  258  EMERGENCY HOME OWNERSHIP ACT  private capital. To meet this problem funds have been provided to the Federal National Mortgage Association to support the Capehart housing program, section 809, and other types of mortgages. Unless this kind of aid is provided promptly for section 810, I am very much afraid that it will simply sit on the statute books unused. I urge the subcommittee to include in the bill now before it a section which would set up a new special assistance fund in FNMA. I feel that if such a fund of $25 million were made available that we would see prompt action in providing the housing we need at our missile and Armed Forces bases. Let me say that we will continue to need the onbase housing provided under the Capehart program, and I hope the committee will not just rely on the meager amount which FNMA has remaining for potential aid to that program. I am hopeful that if the committee sees fit to recommend support for section 810, that it will be a separate and independent fund. Again may I say that the provision of offbase housing for military and essential civilian personnel truly represents an emergency problem in many places. Every day of delay in putting this program into action costs us dearly in morale and adds to the problems of getting and keeping key employees in our national defense program. Mr. AnnoNIZIO. Thank you, Mr. Rivers. Now Mr. Boykin, of Alabama. STATEMENT OF HON. FRANK W. BOYKIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA  Mr. BoYKIN. Mr. Chairman and members of the subcommittee, I know that all of the members of this committee understand and appreciate the critical housing problems which exist at so many military bases around the country. I am sure that you recognize the urgency of providing an effective answer. Last year the subcommittee made an extensive study of the problem. That study showed the deplorable housing conditions and the cruel shortage that often exists. Of course to some extent this is natural since these bases are often located away from metropolitan areas and are often the only "industry" in the area. As a result, the existing stock of housing 1s not adequate to meet the need. Your subcommittee recognized that the housing plight of these families is damaging to morale, discourages reenlistment of members of the armed services, and makes it difficult to hire essential civilian employees. To meet this pressing need the subcommittee developed a special program of FHA mortgage insurance to provide housing for military personnel and essential civilian personnel employed by an installation of the armed services. This program of FHA insurance was included as a new section 810 of the National Housing Act, as amended, in the bill recommended by your subcommittee and enacted by the Congress as the Housing Act of 1959. It is intended to ba, and it can be, an effective means for producing the housing needed for both military and essential civilian personnel serving of employed at certain vital installations of the armed services, particularly at the intercontinental ballistic missile bases. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  259  Mr. Chairman, when housing is needed at our missile bases, it is certainly a top priority need. Bad housing conditions at these installation can sap our military strength in spite of the billions of dollars we are spending on defense. The section 810 :program was an important step in meeting this need. However, it 1s a new program. As is always the case it is difficult to get private lending institutions interested in making such loans. As the subcommittee well knows, this was true in the case of Wherry Act housing and Capehart housing. To make certain that housing would be provided under those programs, the Congress saw to it that mortgage money would be available by providing a special fund under the Federal National Mortgage Association. This same assistance is needed for the new section 810 program. I urge the subcommittee to include in the bill which you are now considering a provision which would establish a special assistance fund within FNMA for section 810. This would be a revolving fund of $25 million available for advance commitments for this program. I feel, and I hope the subcommittee agrees, that it is absolutely necessary that these funds and this specific directive be given to FNMA in order to get this vital program under way. Mr. Chairman, may I compliment you and the members of the subcommittee for taking the first important step last year by providing FHA mortgage insurance for this much-needed housing. I hope you will see fit to take the next step-one which is essential to make section 810 actually e:ffective-and include in the bill now before you this special assistance fund in the Federal National Mortgage Association. Mr. AnooNIZIO. Thank you, Mr. Boykin. There are several other Members of Congress that desired to testify before the committee but unfortunately couldn't be here this afternoon, so without objection they have permission to place their testimony in the record. The committee will stand in recess until 10 o'clock tomorrow morning, when we will meet in room 1304 of the New House Office Building, the House Public Works Committee. (Whereupon, at 3 :45 p.m., the subcommittee adjourned until 10 a.m., Thursday, January 28, 1960, in room 1304, New House Office Building.) Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT THURSDAY, JANUARY 28, 1960  HousE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING OF THE COMMITTEE ON BANKING AND CURRENCY, Washvngton, D.O. The subcommittee met at 10 a.m., pursuant to adjournment, in room 1304, New House Office Building, Hon. Albert Rains (chairman of the subcommittee) presiding. Present: Mr. Rains, Mr. Addonizio, Mrs. Sullivan, Mrs. Griffiths, Mr. Rutherford, and Mr. Widnall. STATEMENT OF THOMAS B. COOGAN, PRESIDENT, HOUSING SECURITIES, INC., NEW YORK, N.Y.  Mr. :RAINS. The committee will please be in order. Our first witnesses this morning is a builders' panel. We have. seats set up with their names. Mr. Thomas Coogan, Housing Securities, Inc.;, of New York; Mr. Herbert Sadkin of Long Island; Mr~ William J. Elliott of El Paso, Tex. ; Mr. Lewis of Birmingham is stranded because of bad flying weather, I understand; Mr. Leslie Share, Detroit; Mr. Jerome Snyder of Los Angeles; and Mr. James M. Albert of Miami. Come around, gentlemen. We are glad to have you. It is nice to see all of you gentlemen. As I understand, and I think it would be the best way to handle it, you each give your statement, and then we will ask questions. That being true, we will start off with Mr. Coogan. Mr. CooGAN. I hope I can be of some help, because I think we need it. I think the need isn't as apJ?arent now, it is being concealed under a lot of figures that at least I, m the housing industry, do not understand. First, I want to qualify myself by stating that I am giving here my personal opinions and not the opinion of any organization I am connected with. I think this money situation is the key to housing. I have a few notes here to try and keep my thoughts in order, and the thing that has astonished me is that housing starts have kept at as high a level as they have in spite of the serious difficulties that are facing the housing industry, the problems they have in securing their financing, and the excessive cost that the builder is paying in order to secure his financing. Money is the key to housing. When we have money available on long terms at reasonable rates, we have a good supply of housing. The minute any of these factors begin to change, housing begins to Federal Reserve Bank of St. Louis  261  '262  EMERGENCY HOME OWNERSHIP ACT  slow down. Sometimes the slowing down isn't apparent. I don't think I need to explain it, but the average builder buys his land in advance, usually pays for it on time with a series of notes which put him under obligation to the buyer, and usually the amount involved is so great it J_)robably jeopardizes his entire future, and might mean ruin for him if he could not meet them, so regardless of the profit in building houses, many builders today that I have talked with are continuing to make starts simply so they can get their money back, build without any profit, without any real incentive except to be able to meet the notes on taking the land, pay off the land and so avoid bankruptcy or serious financial difficulties. This tight money is just denying housing to everybody. It is particularly denying 1t to people who need it most, both in the way of homeownership and rentals. The increasing cost of money continually raises the rentals necessary in rents and carrying charges. It is raising the problem of qualifying the home buyer, and it is placing it beyond his reach. As a matter of fact, today it is practically in many areas, or I might say most, denying the veteran the right of his entitlement that the Congress gave him years ago. The problems of securing VA financing so great that many builders are just avoiding doing anything with the Veterans' Administration housing program. I believe contrary to the general opinion that seems to be accepted in the country that control of money has nothing to do with interest rates, but I believe interest rates today are the direct result of tight money, and I think most people do. We now have an inflationary gap the opposite of the one we had in the immediate postwar period, where we had a lot of money and short supply of goods. Now we have an overabundance of goods and everybody wants to buy with not enough money to buy them with on the credit terms proposed, because now practically everything in the United States is being sold on c.redit. There has been, I believe, in order to maintain a very high production of consumer goods, there has been an unnecessary overextension of credit at inflationary prices, because people who pay on time don't seem to care what they pay as long as they pay it off in a year or two. The interest rate is not important, it is not even important to the builder on his short-term borrowing, but it is very important on his long-term mortgage credit. As a result, there is a constant demand for higher and higher interest rates, and this demand is self-defeating. We have seen this over the period of the last 10 years, a constant demand for higher interest rates, and each time the claim has been made it would solve our problems. Instead it has merely compounded our problems, and I think it is compounding the problems of the Treasury Department, because the greatest competitor the Treasury has to its financing is the insured and guaranteed loans that are on the market in such terrific volume. As a matter of fact, in my business in New York, we attempt to induce investors to sell their Treasury bonds that only yielding 2½ or 3 or 3½ percent, and switch to insured mortgages which are of almost equal dignity and bear a much higher yield, but I believe each time the interest rate is raised in the mortgage field, it automatically forces another increase in the rate the T1reasury has to pay for its financing in order to compete. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  263  We were much better off on every type o:f housing when we had the lower interest rates. All the things dependent on long-term credit have been slowing down, though the slowing hasn't been apparent yet in the statistics, which I can't account for. One of the interesting things in this fight for higher and higher yields and higher and higher interest rates is that the FHA and the VA loans have never received a price that reI?resented their true value. It is always disturbing to me to see equipment trust certificates, as happened recently, within the last 30 days, on 400 freight cars put in trust, and they sold 15-year debentures to yield 4% percent. They were picked up quickly by the investment institutions. At the same time, investors were demanding better than 6 percent yield on their FHA mortgages. That is, they were buying them at a discount which would yield better than 6 percent. At the same time, American Tel & Tel was able to beat a debenture to yield less than 5¼, and at that particular time the investors were asking considerably more than 6 percent yield on their FHA loans. The unrestricted use of consumer credit at high yields has been diverting funds into the short-term market. Last year it increased by $6 billion, approximately, and this continual fighting over the use of money, a limited supply, and I object to the use of the word ":free,, economy, because I see nothing :free in the monetary system with the Federal Reserve Board sitting on the faucet putting it out for the absolutely necessary existence of the country, and then the minute the period is over, withdrawing it again, as they did over the Christmas period. There is nothing :free about a supply of money that is kept in a completely tight situation. This is a one-way street, and it is resulting in a very dangerous competition between savings institutions of all types for savings. They are constantly raising their dividend or interest rates to depositors causing the money to :flow back and forth in a game of musical chairs, and as a result it is making these institutions demand a higher and higher yield on their investments; As this goes on, you find that the all-important thing-it isn't so much where the mortgage is located, or the type of house, or anything else, it is just how much yield will the mortga~e bring. It is bringing in-it has reached the point now, I was gomg to say I thought it would be ridiculous and couldn't go :further but that happened some time ago. We are back on what I would call complete laissez the fight for money, the law o:f the jungle. The person that bids the most for the money gets it, and unfortunately in_ the_ financial world the least responsible people are the people that will bid the most. The responsible, sound borrower, for housing, for schools, :for city improvement, all o:f the worthwhile capital improvement that add to our national wealth have to back away :from the cost today. On mortgages the rates now on conventional loans are running :from 7 to 8 percent :for first mortgages. They are asking from a 6.15· to a 6.25 field on FHA loans. The second mortgages around the country, which are growing like mad, switched to first mortgages, are Federal Reserve Bank of St. Louis  264  EMERGENCY HOME OWNERSHIP ACT  bearing 8 to 10 percent for seconds. Even these first mortgages with a 7.5 or 8 percent first mortgage are being discounted. They are called origination fees, and other sorts of terms to avoid the word "discount," but essentially, as far as the builder is concerned, it is still a discount. On conventional loans, the old statement that they don't have to be discounted is not true. Of course, the interest rate has reached the embarrassing stage where I had a builder talk to me in New York about using conventional loans at the rate of 8 percent, and he wanted to know if after he accumulated them-was going to use his own money-could he sell them. I advised him not to do it. I thought almost every investment institution, certainly the life insurance companies, would be embarrassed to have 8-percent first mortgages in their portfolio, but this is the situation it has reached in the fight for money. FHA is selling for large discounts, with Fannie Mae being the best market with the exception of a few insurance companies who through their correspondents place loans at advantageous prices, but under such criteria it is only benefiting a limited part of the housing market. Second mortgages are being discounted at from 30 to 50 percent. We have gone heavily into second mortgages. Contracts for deedsthey are in the same category, and that is a growing thing. It offers some tax advantages to the builder, but it is all placing money at extreme cost to the home buyer, and many people are buying homes today beyond their ability to meet the indebtedness they are incurring. FHA has developed in the last few years a terrific market in what we call spot loans, with the refinancing of existing houses. This bothers me or worries me. Those loans are selling from anywhere as low as 88 or 89. These are 53/4-percent loans on existing housing. This is refinancing old housing, which offers a terrific yield, and is sopping up much of the mortgage money which should be available for new houses. Many builders believe this is necessary to make the trade-in program work. I firmly believe that today the spot loan on refinancimg existing housing is again diverting money from the long-term mortgage market into consumer credit. I find many people refinancing the house after the mortgage is paid down to a certain extent, and this I believe is also dangerous. Talking about interest rates, many years ago it was said we paid 6 percent, there is nothing wrong with a 6-percent mortgage. In the old days with the 6-percent mortgage, they were 5- or 7-year mortgages beanng 6 percent, and there was no amortization. All the home buyer had to do was pay the interest quarterly, or semiannually, or annually, and when the mortgage matured he would go down and pay $500 or $1,000, and ask for another extension of 3 to 5 years, so that the actual interest charges in the old days of 6 percent were not as great a burden to the buyer as they are today on the monthly amortized mortgage, where every increase of interest rate makes a tremendous difference in the carrying charges. The attitude generally in the banks today is toward a high price for money. Construction loans are running 2½ points, 6 percent, and in the rental projects and large developments that call for substantial sums of money for short term, they are finding that the interest rate is only one function of the cost of money, there is also points along with it, and the compensa.ting balance has become quite a thing. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP A<Yr  265  I am sure the committee is aware of the fact that it is pretty generally 20 percent, and in some areas, for some customers, it moves up to 30 percent. An article in the Wall Street Journal a few weeks ago told how somebody is moving in and providing savings, charging people extra money to provide the compensating balance for them, which I think is an illuminating incident in the money market of today. If the committee doesn't have it, I would be glad to provide a copy of that for you. What is happening now is that while they are talking about 6 percent, I would like to go back, the U.S. Treasury from 1950 to 1959 has only paid an average of about 2¾ percent yield on its longterm indebtedness. This current system is something entirely new. The whole system today is that money is being put ahead of peorle. What people want is not important. There is sort of a general feeling that inflation has been made a terrific event, although to the best of my knowledge, inflation has gone on since the time history was written, and the rate of inflation, of course, is important. We in the housing industry, particularly in my own position, is that inflation is an extremely dangerous thing, but the way it is being fought is ineffectual, and it continues in spite of the present policy. Meanwhile, housing, schools, redevelopment projects, clearing the slums and everything is hanging fire waiting for some effort to finance it. This is most unfortunate, because housing like these other improvements outlasts the original mortgage. It adds to the national assets and provides a tremendous social gain. I have given to you a lot of criticism, and I would like now to make some recommendations, and I know your complete interest in covering the housing field and its importance to the economy and its importance to the people of the country that they be adequately housed. In spite of all the bragging we do, every time I go through our larger cities or rural communities, I realize that we are far from adequately housed, and there is no reason for us to brag because we have a few nice developments in the larger areas. My first recommendation is that the Central Mortgage Bank is extremely necessary to create uniformity in the availability of money. I had letters recently from _places in North Dakota and other States, even in some of our close-in States where they have demand for housing and nobody willing to provide money for FHA or VA loans in those areas. It will cure the problem of State laws. It will provide housing for the minority group, one of the most needed things today. The increase in income has affected these groups tremendously, and most of them are desirous of buying a house. There inability to do so is aggravating the normal pressures. Also, the Central Mortgage Bank would eliminate the investors' criteria which has been a very serious factor in providing the money market. . My second recommendation is that I wish your committee would do sm_nething abou~ departmental status for housing. Cabinet status, coordmate the multitudes of efforts that are completely uncoordinated, where there is nobody to represent us at the highest level, and as a result we are the low man on the totem pole, you might say, and anything anybody else doesn't want can be shoveled off into housing. Federal Reserve Bank of St. Louis  266  EMERGENCY HOME OWNERSHIP ACT  I would like to see Congress and the administration get into a campaign for savings, for people to save. I would like to see some sort of regulation or supervision of interest rates on dividends and savings to stop this hot money shifting around the country, and while it 1s shifting this way in the institutions that hold it, they are afraid it retards their interest on long-term debt. When I say campaign for savings, with a few outstanding exceptions, all the major commercial banks in this country spend all their advertising money on a spending complexion, that everybody should buy. They offer money for travel to Europe, or a new car, for boats, for just use for anything you want it for without question, but nobody in the country is carrying on a campaign for people to conserve this money, to save it, to build some reserve. I think in this method I would hope that the Federal Reserve Board would change this attitude toward housing in the real estate and mortgage field, and I know, as most people do, that all it takes is not a law or regulation, merely a change in the Federal Reserve Board's attitude. The loans that the Federal Reserve Board frowns on just aren't made, they don't have to write a letter about it, or anything else. T.hey have a definite effect, and it is not being exercised. I would like to see a review of the results of the loans on existing houses. I think in addition it is tremendously important that we amplify the FHA procedure. Builders bring in great numbers around the country, they are drifting away from FHA, turning to conventional loans, and most of the complaints are Because that over the years there has been an accumulation of bureaucracy, redtape, difficulties, and delays. I think it is high time this was recognized, and was returned to its original function of insuring mortgages, and not for stimulating sale,g of certain manufactured goods and increasing the heating plant, the electrical plant, the roofing, the insulation, and all the things now that FHA requires that makes their construction so costly. I wish FHA would concentrate on solving housing for people that need it at a price they can afford to pay. Thank you very much. Mr. RAINS. You have made a very good statement, and we will come back to you later, Mr. Coogan. The next witness is Mr. Herbert Sadkin of Long Island. You may proceed with your statement.  STATEMENT OF HERBERT SADKIN, PRESIDENT, ALL-STATE PROPERTIES, mo., LONG ISLAND, N.Y. Mr. SAnKIN. As President, of All-State Properties a publicly owned company presently building in four States, New York, Maryland, Kentucky, and Florida, I believe I have a somewhat broader view of tight money and its undesirable effects than many other builders who are building in only one area. Let me say at the outset that we have absolutely no problem in getting mortgage funds. It is only a question of whether we-and ultimately, the homebuyer-can afford to pay the price. In our own areas, funds are available at a low price of about 3 to 6 points discount from savings banks in New York ,State, to a:bout 12 Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  267  points in Kentucky, with Maryland and Florida somewhere in between. An 8-point discount-average of the above-means that there is a hidden cost of $1,200 in every $15,000 house, the cost of the mortgage money-not including the regular interest costs. Thus, at approximately $6 per thousand per month, the total additional discount cost comes to over $2,500 over a 30-year period, or almost 20 percent of the original cost of the house. Technically, the governmental agencies insuring these mortgages, make no allowance for these discounts in their valuation of housing values. Yet FNMA, a semipublic governmental institution, openly publishes prices from time to time offering to buy mortgages at the above prices, and in some cases at even more prohibitive discounts. Thus, while on the one hand the Government doesn't recognize discounts as part of a builder's cost, FNMA not only endorses this practice, but actually encourages and even goes beyond most lenders in charging prohibitive discounts in the financing of veteran and FHA mortgages. This two-faced practice must be stopped. Nobody needs to tell the Rains committee about the need for more housing in the U.S.A.; indeed, the downpayment liber:alization authorized by Congress last year has not yet been taken advantage of by the FHA. It seems to me that it is high time that an industry the size of ours and with its importance to the rest of the economy should once and for all be permitted to prosper equally with any other basic industry, and not be used as a pawn or a catalyst for all others. The coffers of the FHA are certainly testimony to the soundness of previous governmental policy in stabilizins- the housing industry. To upset such an industry in the name of mflation is a tmvesty, even if the administration policy, as presently enacted, did the job it was supposed to do. However, it does just the contrary. Tight money is supposed to act as a stabilizing influence. Perhaps in short-term credit situations it does. Again it is a process, with respect to short-term credit, of opening and closing faucets. However, in housing we are dealing with long-term credit. By increasing interest and discount rates, we are creating a higher price for the commodity, namely housing, over a long-term financing period, thus creating an inflationary policy on a long-term basis, and defeating the very purposes for which tight money is intended. In a word, the policy 1s moneywise and economy foolish. Getting specific about the bill now before this committee, I would like to smgle out a couple of provisions that will definitely help this industry. 1. The billion dollar authorization for Fannie Mae should mean homes for more than '75,000 families in the coming year. Providing adequ3:te ho~sing for over. a q?arter II_lillion people should be enough of an mcent1ve to pass this bill, but 1t means even more: That will give you what some of us call mortgage momentum-it acts as a kind of seed money, a catalytic agent that brings other mortgage money into the market behind it. 2. The lowering of the FHA insurance premium :from one-half percent to one-quarter percent is a step in the right direction. Last year, the Community Developers Council of Long Island urged a 50876-60-18 Federal Reserve Bank of St. Louis  268  EMERGENCY HOME OWNERSHIP ACT  one-eighth percent premium, in view of the reserves and profits of the FHA over the past 25, and this premium still seems sensible. However, any lowerin~ of this premium, which means a lowering of the monthly carrymg charges on the repayment of a mortgage by the home buyer, would be welcome. The purposes of the bill under consideration are all pointed in the direction of reducing consumer costs. It would therefore follow that, since we are dealing in long-term financing, a lower carrying charge over a longer period of years would tend to serve in the direction of stabilizing and cutting back an inflationary process rather than the reverse, which is presently occurring. I realize that there are those who throw up their hands in horror whenever it is suggested that the Federal Government take an active role in helping to provide more homes for more people. They don't seem to realize that the FHA has been doing this-at absolutely no cost to the Government-for a generation, and that there are times when the FHA program falls short of its purpose. It is at those times, when the building program is undercut by the lack of mortgage money, that the administration and Congress must remember the spirit of the housing acts, and provide remedial legislation and execution to make the Federal housing programs effective. That is what this bill before you helps to do, and it is why a great many builders like myself are for it. Mr. RAINS. Mr. Sadkin, I put my stamp of approval on that statement. It is as good a short one as I ever listened to in my life. The next witness is Mr. William J. Elliott, of El Paso, Tex. STATEMENT OF WILLIAM 1. ELLIOTT, EL PASO, TEX.  Mr. ELLIOTT. My name is William J. Elliott. I live in El Paso, Tex., where I have been a real estate broker and homebuilder for more than 23 years. I thank the committee for this opportunity to appear before them with reference to H.R. 9371. I appear in my capacity as a small volume homebuilder. The figures which I have been able to obtain show that there are probably more than 150,000 individuals building homes throughout the United States who devote all or part of their time to this venture. Some of these small builders build no more than 1 and sometimes 4 or 6 or 20 homes per year. I built no homes in some years and in 1959 I started 36. As yet, I have no plans for starts in 1960. Figures tend to show that 42.8 percent of all builders build less than 50 houses a year, but their dollar volume constitutes 55 percent of the total dollar volume since they usually build more of the higher priced 11omes. My remarks will be directed to conditions prevailing in the area of west Texas, which comprises Midland, Odessa, Fort Stockton, and El Paso. The conditions prevailing here are generally true throughout the entire Southwest, as I am familiar with this section of the country. I understand that the administration objects to section 1, the title of this bill, and the use of the word "emergency." I do not understand this. I feel there is an emergency. Also, section 2 of the bill would be a help to a small real estate broker, to permit individuals to make FHA homes. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  269  Section 3, which provides for the reduction of insurance premium to one-quarter of 1 percent, should also be enacted. In this connection, may I say it has always been a mystery to me why, in the operation -of the mutual mortgage insurance fund, they declare dividends which Commissioner Zimmerman says amounted to $98.7 million in 15 years. There have been a,bout 100 of these loans I know about paid off through my real estate office. The most recent was where we traded a man a house in August 1959 subject to an FHA-insured loan. We sold the house in September 1959 and arranged conventional financing. He had made one payment on the FHA note. In January of this year he was notified by the Comptroller there was a refund due him of $126. In every case I have observed the refund always goes to the last man, and the man who has made payments for 10 to 15 years does not get the dividend. If FHA would retain these funds, they could probably lower the insurance premium. Section 5, which permits FNMA to purchase all mortgages insured .and guaranteed, touches a particularly sore spot with me, because in my small operation I carried for about 3 years three mortgages fully guaranteed by the VA and one insured by FHA which FNMA refused to purchase. I do not believe it is within their province to pass again on the mortgage credit in these cases after they have been thoroughly looked into by the insuring office; or, in other words, to second-guess the VA and FHA. When we submit loans in new subdivisions to FNMA for their :approval, we must take pictures of the subdivision from certain locations in the tract. Why should this be i FNMA must certainly be informed of the very stringent subdivision requirements of FHA before they will insure these loans. FNMA is usurping the insuring •office's prerogatives. I support section 7 with reference to 1 percent of FNMA stock .subscription. We small builders never see FNMA stock anyway. Most of them I talk with have an arrangement with their mortgage •company and that company will buy or sell at 50 cents on the dollar. Since we are always short of money, we sell out at 50 cents on the -dollar and get a net check when the loan is closed. I also support sections 8 and 9 with reference to the price FNMA will pay for special assistance loans. I agree with a good many others that the Emergency Housing Act -of 1958 providing $1 billion of FNMA program 10 money led us out •of the depression of 1957 and early 1958. My own experience is that ,although I personally used this device three times, it proved very successful in bringing out the money in the private market. For example, in October 1958, which was 4 weeks after all the funds •of the special assistance program had been allocated, I got a firm •commitment for 1 year on FHA 203(i) low-cost homes at 98. I haven't sold all of these houses yet. Those I now sell, I must close and sell over the counter to FNMA at 95½ net to me, because the -commitment at 98 expired at the end of 1 year. Money has certainly ,dried up in 12 months. I think that the heart of this bill is the providing of this billion ,dollars of special assistance money and it is my opinion it will buoy ·up the private market as it did in 1958-59. Therefore, I strongly -1,upport sections 10 and 11 of the bill. For the same reasons, sect10n Federal Reserve Bank of St. Louis  270  EMERGENCY HOME OWNERSHIP ACT  12 with regard to 203 ( i) 's would seem to me to be right and proper for low-income homes. On section 13 of the bill, I see no reason why the fees charged both borrower and seller should not be fully disclosed. Mr. Zimmerman and Mr. Mason testified that they had these figures available and I see no reason why the press should not publish the same if they deem them in the public interest. I have been building in El Paso houses under section 203 ( i). The income of the families who buy range from $3,500 to $5,000 and the effective interest rate is 63/4 percent. When sales in this price class slowed down early in 1959 I found that builders building higher priced homes seemed to have no difficulty selling them, so I built four houses last year in the $30,000-$45,000 price bracket. I sold these houses before they were finished and arranged a 75 percent loan on the same ,at 53/4 percent interest. Any economy which requires that a lowincome man pay 63/4 percent for family housing whereas one who makes in excess of $10,000 can borrow at 5¾ percent, is wrong, and I hope this committee will find the solution of this problem. I thank the committee for this opportunity to appear before them. Mr. RAINS. Tha.t is a very good statement, that last phrase sounds like the Declaration of Independence, Mr. Elliott, I agree with you thoroughly. The next witness is Mr. Leslie Share, president of the Hamilton Construction Co., Detroit, Mich. STATEMENT OF LESLIE SHARE, PRESIDENT, HAMILTON  CONSTRUCTION CO., DETROIT, MICH. Mr. SHARE. Good morning, ladies and gentlemen. I am here to talk about the problems in the building industry in Detroit. I will try to confine my statements to that area, since that is the area that we can speak of from personal experience. Our organization has been in the residential construction business since 1938, and since that time we have expanded our operations to the point where we now are one of the largest production building concerns in the greater Detroit area. Our greatest field of endeavor is in low cost housing. Detroit has a serious housing problem. The housing problem of Detroit is the problem of the lower income gr:oup to achieve adequate housing for their families at a total cost within their ability to buy. Demand for housing for this income group continues great and essentially unsatisfied. We appreciate this opportunity to appear before you and present our analysis of the problem and our observations relative to the Emergency Home Ownership Act, R.R. 9371, now being considered by this committee. Since 1954, when 43,705 homes were built, the volume of home building in Detroit has declined steadily to a low of 20,125 in 1959. I have attached a chart with this report which shows this startling decline. Mr. RAINS. The chart may be included in the record. Mr. SHARE. Most Detroit builders anticipate that the 1960 figures will be below those of 1959. In our judgment, this decline is pri- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  271  marily due to our inability to keep adequate housing within the reach of the market in Detroit where the greatest unsatisfied demand exists, that is, the lower cost home. The earnings of this householder have not kept pace ,with the increase in housing costs. To date, wage increases and longer mortgage amortization terms, heretofore provided b:y Congress, have been more than offset by higher interest rates, higher mortgage discounts, higher real estate taxes and higher construction costs. Our experience has clearly taught us that sales in the low cost housing field fluctuate radically in direct relation to the cost of mortgage money, interest rates, and the length of the life of the mortgage. It is true that these factors affect the sales in all :price ranges in varying degrees, but in low cost housing, where qualifying the purchaser on the basis of mortgage credit is a most critical obstacle, these mortgage credit factors make an almost unbelievable impact. Despite the general decline in housing starts in Detroit, there is still a housing shortage in the low cost field. This was clearly demonstrated in 1958 and part of 1959 when the special assistance provisions of the emergency housing act of 1958 were put into effect. This was further demonstrated when some Detroit builders offered homes to the public under the provisions of section 213 with 40-year mortgages, which mortgages were made possible by special assistance programs sponsored by Congress. These programs aided the lowcost home buyer, and were it not for those special assistance programs, Detroit's housing starts would have been reduced by several thousand more. It is clear to us that "the volume of home building in recent years has been more responsive to the availability of reasonable mortgage credit, than it has been to the needs and demands of the people for housing." What can be done to alleviate this situation? We feel that the enactment of legislation such as is proposed in H.R. 9371 will be a si:ant step in the right direction. The provisions under this bill providing for the purchase by FNMA of mortgages at par will do much to stabilize the mortgage market and do much to reduce the discount burden that much be passed on to the home buyer. The provisions restriction the right of FNMA to arbitrarily refuse to purchase a mortgage already insured or guaranteed by FHA or VA will encourage builders to stay in the low-cost housing field. The provisions reducing mortgage insurance premiums, and FNMA, stock purchase requirements would also help reduce the cost of housing. Further, it is our recommendation that the mortgage amortization period be extended to 40 years, this for the sole purpose of reducing the necessary qualifying income. As an alternate, the mortgage amortization could be extended to 35 years, with reduced payments predicated on a 40-year amortization during the first 5 years of the mortgage. Once again we want to thank you for this opportunity to present to you our views on the home building industry in Detroit. Mr. RAINS. Thank you, Mr. Share. That was a very good statement. Federal Reserve Bank of St. Louis  272  EMERGENCY HOME OWNERSHIP ACT  (The chart referred to in Mr. Share's statement is as follows:) V).  t:.  ~  15151i - 1959  60  tr:  ~ 40  *Mac011b,Oakland & Wayne Counties  Mr. RAINS. The next member of the panel who will give us his views is Mr. Jerome Snyder of Los Angeles, Calif. Mr. Snyder. STATEMENT OF JEROME SNYDER, PRESIDENT, SIGNATURE HOMES, LOS ANGELES, CALIF.  Mr. SNYDER. Mr. Chairman and panel, I want to thank you for this opportunity to speak before you. My name is Jerome Snyder. I am president of the Signature Homes, Los Angeles. For the past 8 or 9 years, we have built 8,000 or 9,000 houses, aproximately 90 percent of which have been GI financed. I would like to confine my remarks to California, and the west coast, because I feel I am more qualified to talk about that area. As you no doubt have heard, discounts are probably as high there as anywhere in the country. If you will check your logs as to the cost of financing, you will find that there is as much as 8 or 9 points spread in the cost of VA financing in Los Angeles as opposed to, say, Boston, Philadelphia or New York. What this means, take a $15,000 house, and we are building quite a few of those right now, you will have approximately $1,600 in discounts to take out loans, $250 or $300 in interim financing, about $400 in interest charges during construction, and before you are through you have about $2,300 of financing charges on a $15,000 house. This is approximately 15 percent of the cost of the house. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  273  Now, the home buyer is willing to pa_y for nails, lumber, ranges, ovens, fireplaces, he can see these things, but then he is not willing to pay for financing costs paid for before even a shovel of dirt is turned. At a meeting of the Homebuilders Association in Los Angeles, attended by heads of the local Veterans' Administration offices, a question was asked how many builders in this room-and I want to say the room was full of the largest builders in southern California"how many builders in this room are going to build VA in 1960, providing the money market stays as it is 1" and no one raised their hand. They just can't do it. Now, this has also affected the cost of conventional financing, and right now the norm for interest rates in California is 7.2, 3 to 5 points discount. In speaking to the president of one of the largest savings and loans in the world, I asked the question, "You have always professed that the reason for discounts on Government mortgages has been to make up for an unrealistic interest rate. Then why are you charging discounts on conventional markets at 7.2 j" The answer is, "We just got in the habit of charging the point," and that is what is happening. It is like cancer, it is spreading. The commercial banks are getting the idea. They see the savings and loans making all this money, and they are getting the idea. Once commercial banks would lend at a reasonable- rate or not at all, but now they want to get on the bandwagon, and it is going to take a bill such as yours, Government legislation, competitive money to correct the situation. In 1958, with the special assistance program, we saw VA money go from 89 to 98½ in California. It was a help. As soon as the money dried up, it went back down to 91 and 98. Now, many builders have advocated that possibly VA or FHA should allow the discounts in the valuation, and I am the first to disagree for this reason. I£ these discounts were allowed, I guarantee it will be 20 points before we are through. Mr. R.AJNS. I agree with you on that. We are not about to do that. Mr. SNYDER. The savings and loans will get every dime that the traffic will bear. They have had the biggest reinvestment period of their history in California. They have been giving away trinkets, transistor radios, and God knows what else, taking in money at 4½ percent, putting it out at 7.2, and that is good business. If you will examine their stocks and see the rowth, I am sure you will agree. The insurance angle of the V loan used to be a factor, but now they want yield, and yield only. I think possibly from the constructor's stand-roint, the public has to be educated. The public is under the impression that the building industry has been subsidized by the U,S. Government for years. The average man walking down the street is under the impression that the Government makes the FHA and VA loan, not just guarantees it. There is an educational process that is necessary, and I am sure this bill, when it comes up, and people start yelling it is inflationarythose people are going to think the Government is giving a billion dollars away, not buying mortgages, investing money in mortgages, and I feel that education is quite important. Federal Reserve Bank of St. Louis  274  EMERGENCY HOME OWNERSHIP ACT  I £eel a provision of the bill should be that Fannie Mae should not be a dumping ground for savings and loans. Savings and loans should not be allowed to sell their portfolios to Fannie Mae and then go back and gouge the public again. As you can see, I am quite bitter, but I feel I have a right to be. I feel that this billion dollars, if it goes through, should go to areas of high cost where builders can prove that they can't get money at reasonable rates. I want to thank the committee for this opportunity to appear before you. Mr. RAINS. That is a very pointed statment. You sound like you would make a good man to hel! present it on the floor of the House; you are quite convincing, and appreciate your statement and I am sure the committee does. The last witness on the panel is Mr. James Albert of Miami, Fla. STATEMENT OF JAMES M. ALBERT, MIAMI, FLA .  .Mr. ALBERT. Good morning, Mr. Chairman and ladies and gentlemen of the committee. This new decade has been called by many periodicals the "golden sixties." Current conditions in the housing market indicate no gold for the homebuilder, no matter how deep he may dig. The gold appears available to the money lending interests. The cost of borrowing money for construction of interim financing and the price at which the mortgage is sold to the permanent investor is the most costly that I have met in my years in the volume housing business. A builder friend of mine who has started a group of 30 duplexes for resale informed me that his mortgage financing, arranged through a local institution, in Dade County, Fla., is costing him a 5percent fee plus the usual expenses such as abstract and title examination, tangible tax, recording fees, documentary stamp tax, survey, and so forth, and for which he will be furnished his construction. money at 6.5 percent for a period of 5 months. The interest is charged on the face amount of the loan for the 5-month period, and is deducted in advance out of the first draw. He will only be advanced 90 percent of his loan. My friend explained that other deals were available to him at lesser cost, but he was unable to get a sufficiently large commitment to serve his purpose, and although this deal is obviously expensive, the size of the commitment warranted his paying the cost. The cost of obtaining construction money on FHA and VA programs where the builder obtained a firm commitment for future delivery of his mortgages through his mortgage banker from a permanent investor ranges from a half to one and a half percent plus 6 to 7 percent interest, and this interest varies from simple interest to Dutch interest-"Dutch interest" is a term applied to the practice of charging interest on the total amount of the construction loan either from the date of the or from the date of the first draw. The deal varies with the institution and the credit standing and experience of the borrower. The condition is very serious for the builder who has been unable to sell his houses within the life of this advance commitment from the permanent investor. He finds that his standby commitment, which he was obliged to get to provide funds for the period from the time he closed his mortgage until all the paper Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  275  work was completed and to permit his mortgage banker to deliver the mortgage to the ultimate investor, could well make his building program take on a financially disastrous appearance. The standby to which I refer may be obtained £or a fee of one-half percent for a period of 6 months. His 5¾ percent, 30-year mortgage will be funded under the standby at somewhere between 90 and 92 percent of par, with an additional provision that should he be unable to find a market for the sale of the mortgages, and thereby leave the mortgages with the standby, his agreement sets forth an additional discount of 2 to 4 percent. This could mean as low as 86 percent less 3 percent for the other fees, or 83 percent for his 5¾ percent, 30-year FHA mortgage. The 5¾ percent VA mortgage standby will provide 87 to 88 percent, subject also to the 2 to 4 percent discount; namely, 83 percent less the other fees, or a net of 80. It is quite obvious that the standby is affording the builder every incentive to find another home for his mortgages. They will under reasonable circumstances issue an extension of the standby for a quarter of a percent for a period of 3, months, or a half of a percent for a period of 6 months, but this must be negotiated, and there is no assurance that the extension will be available. The builders have an alternative. They can offer these mortgages for sale to Fannie Mae. The net price, considering the stock purchase requirements and marketing fee is 92 percent for 5¾, and 96 percent for 5¾ percent mortgages. However, as you well know, the mortgage that is approved by the FHA or VA is not always acceptable under the credit criteria established by Fannie Mae. This throws the builder at the mercy of the current depressed market. The prevailing market conditions for the builder do not look very golden for the sixties. We are being confused by the number of housing starts. Statisticians tell us that we built 110 units per 100,000 population in 1950 as against 89 per 100,000 population in 1958. The 110 units per 100,000 population for 1960 should produce 1,600,000 units as compared to the 1,150,000 being prophesied by the Housing Administrator. The 1,600,000 coincides with the several projections that have been made for housing production for the next 10 years. It has been said that this total would be 16 million houses, and is based on need to provide shelter for the expanding population. There is much discussion about tight money. There is no shortage of _money. It is available to you provided you are willing to pay the price. Thank you for inviting me to appear before your committee and permitting me to tell the story in south Florida. Incidentally, I am speaking as an individual, not as a representative of any organization. Mr. RAINS. Gentlemen, each of you made a very fine presentation, and I think it is a good idea for this committee to get the cross-section reports across the country. When we invited you to come, of course, we had that in mind, that we could find out what the picture was in various areas, and that you would be speaking from your own personal observation and ex_I>erience about the bill. Mr. Coogan, I agree with you myself about most of the recommendations you make, and certainly about the situation as you pointed it Federal Reserve Bank of St. Louis  276  EMERGENCY HOME OWNERSHIP ACT  out, but I didn't hear you say in your remarks as to whether or not you support the bill now before us. Do you support the bill, do you think the bill is all right and needed at this time? Mr. COOGAN. I think it is, Mr. Rains. I am a little bit disturbed at the timing of the bill. The housing starts are remaining so high, but I do feel that this additional money is going to be necessary, particularly as you had proposed in the special assistance fund, because this spending philosophy that is prevailing upon the country, and withdrawing of savings-the savings banks in New York, which are the major investors in FHA and VA mortgages, lost about $200 million in deposits in 1959. They are currently continuing to lose deposits-, that is, withdrawals exceed new deposits-and I just don't know where the money is going to come from to finance 1960 housing without some sort of a stimulus. People are withdrawing their money to go-to spend it, or to go into these mutual funds, or speculate, or do all sorts of things, but people are no longer saving, so this additional money I think will be extremely necessary. I would like to put on safeguards to prevent it from being monopolized by the few builders who have large tracts of land. I would like to see the committee devise an equitable way of making sure the fund did the maximum amount of good by being available to everybody. Mr. RAINS. w·e expect to be able to put safeguards around it to prevent that kind of situation from occurring. In the light of what has been said, do you think the average family is going to be able to get into the market and pay the price they are apparently going to have to pay to get houses built for them this year? Mr. CooGAN. No. People with the major incomes are unable to buy the housing. We are finding that throughout the country. Going to the model houses, thousands of people flow through the house. A great majority of housing is being built above $15,000, because of many factors involved, including the cost of land, and remember, sir, that the higher the price of the house, the more latitude the builder and the mortgage company have to absorb fees. Anybody attempting to build a low-priced house is normally, even in easy money, operating in a reasonably tight situation where the profit possibilities are small, and where the cost of every item has to be watched very carefully. The thousands of people that go through these model houses just can't qualify for them. Our average income does not justify the average price of housing being sold today. Mr. RAINS. Mr. Sadkin, we don't often hear it said here, even though I believe it, that tight money policies lead to inflation. There seems to be some misguided opinion around Washington, and certainly in some circles, that tight money will stop inflation. I notice you said it led to inflation. Aside from the mere statement, what other facts do you have to convince you that tight money does lead to inflation? Mr. SADKIN. Well, with respect to housing, where we are dealing with long-range financing, you don't have the power of opening up Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  277  and closing a faucet, in the sense that if Y,OU are paying more today, an adjustment next week or next year will take care of an inequity, or if you want to give a shot to the economy you just reduce rates. In housing this can't be done because of the long-range nature of the financin'!· The history of housing shows that mortgages are paid off in 8, 10, 11 or 12 years, refinanced. The present interest rates, generally speaking today, approximate the maximum interest rates permissible in most States. There will be no incentive at all on the parts of institutions, banks, to refinance for these people in the event they want to sell their house to a prospective purchaser. Mr. RAINS. In other words, they are stuck with it, at the high interest rate? Mr. SADKIN. That is exactly right. There is no incentive to refinance. If these people can't sell their housing, and traditionally it is a question of upgrading, you move from one level to the next level, and many of our new sales are predicated on the ability of the home owner to sell his existing house. With a locked-in interest rate, at the rates we are now talking about, banks show no tendency to refinance at lower interest rates, assuming a lower rate may be in existence 4, 5 or 6 years from today. Mr. RAINS. Isn't it also true that the continual upward trend of interest rates, high discounts, tight money, has an obvious effect, it tends to reduce the number of houses that can be bought in this country, and that creates an additional shortage year after year and that is inflationary ? Mr. SADKIN. Well, peculiarlY. enough, the average forecast for the coming year is that housing will decrease, the units will decrease by approximately 15 percent. That would seem to be a deflationary type of policy where not as much money is being spent, not as much product is being produced. Unfortunately, because of the policy and because of discounts as they are constituted today, however, we are probably increasing the cost of the unit by 15 percent, or 16 or 20 percent in certain cases. Obviously the net result will be less units, about just as much dollar volume as before. The answer to that is you are now getting less product for the same amount of money, and if that is not inflationary, I don't know what is. Mr. RAINS. I believe you were the builder that built the typical American home at the U.S. exhibition in Moscow. Mr. SADKIN. That is correct. Mr. RAINS. Where Mr. Nixon and Mr. Khrushchev had their famous kitchen debate. Do you think the Russians are catching up with us in housing, merely as a matter of information? Mr. SADKIN. Well, peculiarly enough, I don't think Russian housing as it exists today is what we would consider adequate for our own standard of living. The end product is a very inferior product, but methodwise they are making tremendous strides, and methodwise they may be somethmg to look at, because of their type of construction, prefabrication processes, and so forth. Mr. RAINS. Of course, that has no bearing on the question before us, but I was interested to know. Federal Reserve Bank of St. Louis  278  EMERGENCY HOME OWNERSHIP ACT  I have some other questions, but we have other witnesses here from districts of other Congressmen, so I will pass on to Mr. Addonizio. Mr. AnooNIZIO. Thank you, Mr. Chairman. First of all, I would like to say that I think it is important that we highlight the fact that these six gentlemen are here before us this morning coming from different sections of the country. As I look at those nameplates, I notice they come from the southwest, the east coast, the mid west, the south, and the west coast. One of the big cries against this bill is the fact that it is not needed, and that this condition is only spotty in certain sections of the country, and the bill therefore is not essential. I think it is important to show that here this morning we have individuals from all sections of the country who indicate the crying need for this legislation. Now, it has been said here by certain witnesses before the committee from time to time that the opposition to this bill does not stem from the fact that housing is needed in this country, but rather stems from the fact that they look upon it as inflationary, and so forth. I was wondering, and I don't particularly care which one of you gentlemen answer the question, but if you could give us some idea of the need of this bill in the way of showing the fact that the American people really want it, and that there are individuals who still desire to buy homes. Mr. CooGAN. I think it is needed, because it is a bill that is attracting attention to the need for housing, and not merely to provide housing, per se. All of the trends in housing now are toward higher-priced housing. We have had a steady annual increase in the average cost of the hou,sing sold. The bill that the committee has worked up turns around again and devotes attention and help in the price class that is not needed in the country, and where the people are now unable to buy houses in that area below $15,000. There was much complaint in the previous special assistance fund that they couldn't build houses in this area, in many areas of the country they said we can't complete anything for $13,500, but we found even in the so-called highest cost areas builders were able to some up with a volume of houses within the limitation imposed by the Congress, so we believe it is very much needed. This bill is directed toward the actual need for housing. Mr. RAINS. If you will yield for a moment, of course I realize, and I am sure the committee does, that a billion dollars within itself in the mortgage market is a mere drop in the bucket. I forget, I believe it was Mr. Sadkin who made the statement that this type of money would create a "mortgage momentum." Now, we have been here long enough sitting on this committee that nobody needs to tell us that a billion dollars put in in this way only affects a billion dollars worth of mortgages, because the facts don't add up to that. Isn't it true that the main thing, to use your term, which I think is a good one, this bill would give the general mortgage market a bit of "mortgage momentum" which could amount to much more than a billion dollars in mortgage credit. Do you agree, Mr. Coogan i Mr. COOGAN. Definitely. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  279  Mr. AnooNrzIO. It was my intention, of course, to point that out next, Mr. Chairman. You stole my question. Mr. RAINS. I am sorry. Mr. AnnoNIZIO. The reason I wanted to highlight that point was that on yesterday my very distinguished and able colleague from the State of New Jersey, Mr. Widnall, indicated that this billion dollars would only provide for 74,000 homes, and I immediately asked the witness if it was not true that this would bring private money into the market. I was wondering if Mr. Sadkin, who made the statement, would not elaborate a little bit more so that we could inform Mr. Widnall as to exactly what the situation is, or would be, and thereby do away with some of the opposition to this bill, or at least make it a neutral opposition. Mr. SADKIN. With very few exceptions, the money markets are most available to the big urban areas where the institutions themselves are located. The need for more moderately priced housing, which is the intention of this bill, is not necessarily in these urban areas. These urban areas are generally higher priced housing. However, an institution that goes into some of these suburban areas these are intended for gets a higher rate for their money. It is a more interesting return to them for their money. At the point where this bill might take up the slack in certain areas, more money will become available to the builders in the other areas so that if you can't put your money out at 10, you will put it out at 8, 6, or 5, and it will level off at the point where the availability of money, by virtue of the impetus of this bill, will become more available, and there will be competition in the urban areas to put the money out at a reasonable rate. Mr. AnooNrzro. And that was certainly true in 1958 when we put a billion dollars into Fannie Mae. Mr. SADKIN. That is right. Mr. AonoNIZIO. Mr. Coogan, you mentioned the fact that conventional loans •are being discounted also. I think that you are the first witness that has testified in that direction, and I was wondering whether we couldn't pinpoint that a little bit more, because this is an interesting point to me. Mr. CooGAN. Well, this is another game in semantics. They don't call it discount-it is origination fees, or various things, but in essence it is a discount. It is ,a continually pushing up, as they reach the usury laws of the State. There is a general feeling I think among all banks and institutions, in the East they don't like to go above 6 percent. They don't seem to have inhibitions in the West or in the South, but they achieve the same purpose through additional fees and charges and other requirements that they place on the loan. If I may, I would like to supplement the need for the billion dollars. One very important thing we have failed to mention-Mr. AonoNrzIO. So far as the Central Mortgage Bank is concerned-Mr. CoOOAN. No, I was thinking of the billion in Fannie Mae. This volatile nature that has developed, where everybody is afraid whether the money will be available or not, has meant a disappearance of the commitment. Most banks will only commit for mortgages Federal Reserve Bank of St. Louis  280  EMERGENCY HOME OWNERSHIP ACT  that they can pick up in 120 days, ,and I think this is going to be a tremendous impediment to housing in 1960. One o:f the benefits :from your assistance, your billion dollars in Fannie Mae would be the existence o:f these 1-year commitments issued by Fannie Mae to support the market and provide a base :for housing. I :failed to touch on that, and I should have, but the ability to get long-range commitments is going to lie with the insurance companies, and most o:f the savings banks will withdraw. Savings and loans never have given long-range written commitments, and this is a very important £,actor that your bill would offer some protection. Mr. AnooNIZIO. May I also indicate, and I hope that you will agree with me, that putting this billion dollars in Fannie Mae will certainly relieve a lot o:f the pressures that bring about these high discount rates. Mr. COOGAN. There is no question about it, and as the multiplier factor Mr. Sadkin offers, we tried to figure it out. It provides, instead o:f the 70,000 houses that actually fits into the even billion dollars, something like 2 to 2½ times that much was actually the result o:f the billion dollars o:f special assistance. Mr. AnooNrzro. A great inany witnesses have also indicated that putting this billion dollars in Fannie Mae is not the answer to the problem, it will not solve this tight money situation, that actually what we should do is raise the interest rates, have the ceiling taken off. Do you agree with that? Mr. CoooAN. No. This has gone too :far already. I think i:f we had been smart enough-Mr. AnooNrzro. They would be back here next year trying to raise it again. Mr. CoooAN. I don't think there is any limit. The moneylenders are back in the temple. Mr. AnooNrzro. Thank you. Mr. WrnNALL. Mr. Share, I notice in the distribution o:f program 10 commitments, purchased mortgage compared to housing starts under the last bill, Michigan had 3.6 percent o:f the U.S. private starts in 1958, while.New Jersey had 3.1. Michigan was second in the amount o:f Fannie Mae program commitments, with 9.8 peircent, and New Jersey had nothing :from Fannie Mae. How do you account :for that? Mr. SHARE. The Detroit area Mr. Widnall, has always been tremendously dependent on the FHA and VA programs. There are several :factors, one o:f which is our :foreclosure laws, and so :forth. Detroit has alwavs had either the largest or second largest volume o:f FHA cases, notwithstanding the :fact that our total population wouldn't ordinarily support that volume. Mr. WrnNALL. Isn't it true, then, lenders are reluctant to go in there because o:f the :foreclosure laws? Mr. SHARE. That is one reason, but yet when the program 10 under the Emergency Housing Act o:f 1958 was in effect, it was amazing how many phone calls we had :for the first time i\rom mortgage people, :for some o:f the very reasons that were discussed here, such as seed money, that suddenly there was an interest :from non-Government-insured sources, or non-Government sources to place their money in Michigan. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  281  I say the foreclosure law is part of it, but it is not the whole answer. Mr. WmNALL. I understood it meant a difference of 1 to 2 points on a mortgage, because of the foreclosure laws and I wondered what efforts had been made to change the laws to bring them in line with the other States. Mr. SHARE. Well, there are several groups of us that active on committees trying to get the State legislature to change the foreclosure laws so that the period of redemption will be on a sliding scale based on the amount of equity that the purchaser has in his home, but these foreclosure laws have been on the lawbooks for many, many decades, and they are not easily changed. We are working on that, because we, too, know that financing is the key to building, and anything that stands in the way of favorable or competitive financing we are going to try to meet. Mr. WmNALL. The point I am making is there are things that can be done on the Federal level to help housmg, and there are things that can be done on the State level. I think the usury laws in some of the States could be changed. Why in California do they have a 10-percent usury law? Mr. SNYDER. Savings and loans are not subject to usury in the State of California, believe it or not. They are not subject to usury, so even 10 percent isn't the answer; and 10 percent would be a pretty ~ood deal, when you add up the points on the conventional and the mterest. Mr. WmNALL. Is anybody in the State trying to do anything about the usury laws? Mr. SNYDER. Well, I can't answer that question. Mr. WmNALL. We just had the Governor of your State testifying in favor of this bill and wanting it, and I don't find that anything is being done to try to correct the situation within the State that could be very helpful to the builders and to the purchasers, it seems tome. Mr. SNYDER. Our local organization has just formed a committee and we are going to take this problem to the State. We feel that the local institutions have abused their privilege. Savings and loansand I wanted to answer one question here. Mr. Coogan mentioned that savings banks in the East were losing deposits. It is just the opposite in California, they have had their biggest reinvestment period. All their money, commercial bimks' money, have gone over to the savings and loans, giving 1½ percent more, coupons, and God knows what else. Savings and loans were originally set up to be local institutions. Now they are $700 million organizations. The reason they were not subject to usury is because they were a local institution. Now they are giants, and they have abused the privilege terrifically. Whether or not we can get the State to slap their hands, I don't know. Mr. WmNALL. Mr. Coogan, you spoke about the withdrawal of savings to the extent of $200 million. Why do you believe people withdraw their savings? Do you have any thinking about that, as to why they withdrew $200 million in savings? These depositors were not corporations; they were people who had savings in the bank, individuals. Why do you suppose they withdrew the $200 million? Federal Reserve Bank of St. Louis  282  EMERGENCY HOME OWNERSHIP ACT  Mr. CooGAN. Well, it is the competition for dividends. I have a firm belief people pay money regardless of the interest paid. In the last 2 years, this emphasis on inflation and devaluation of the dollar, and that money wasn't going to be worth so much, has had a terrific psychological advantage, so I think the unfortunate people are drawing out their liquid savings from the institutions, the only institutions in the world where the money is available to them any business day of the year where they can get any or all of it at any time at par-the only really true savings-and they are taking it out and speculating with it. I don't care what they buy-whethe·r they buy bonds, stock, or mutual funds--they find from a reliable source of savings they are switching into a volatile market where they can get badly hurt. This is the psychology of the times; it is compounded with taxes and everything else. People are looking for capital gains, speculative profits. It is the mood of today. Mr. WmNALL. Wasn't that first set in motion by the fact that a lot of people had invested 75 cents on the dollar in savings bonds expecting to get a dollar at the end of 10 years, who ended up receiving 52 cents because of inflation? They found that out the hard way with the Government bonds, and today, when they hear people testifying, like Professor Keyserling, that inflation is a good thing for the country, and other people advocating inflation is a good thing-Mr. AnnoNIZIO. I don't believe Dr. Keyserling said that inflation was good for the country. You might have that interpretation. Mr. WIDNALL. I don't see how anybody can interpret what he said any differently, because he was for constant spending without actually talking about return to balancing the budget, whether good times or bad times. I think this makes people :fearful 0£ savings, and they get into speculation and look for higher return. Mr. CoooAN. This has been promoted in part, but inflation has always been with us to a minor degree. I am not in favor of inflation. I think we are always going to have some of it, but I think the methods used to fight inflation certainly have not been successful. Why you should keep on giving medicine to a patient that isn't working, that is actually making his condition worse-I think you need a new doctor. Mr. WmNALL. If you had the responsibility, what would you recommend to fight inflation? Do you have any ideas on that? Mr. CoooAN. I think the attitude of the Government and the Federal Reserve Board should be changed. They are allowing unbridled inflation on the consumer side of the market. When you see things such as these overdraft checks, where people can get their credit approved for $3,000, walk out with a checkbook and spend it for what they want. This consumer credit earns from 12 to 20 percent a year. We can't meet that competition in the long-term mortgage market. We are in a consumer economy. Everybody is trying to spend their money. Mr. WmNALL. You think there should be credit controls, too, to hold inflation? Mr. CoooAN. I think even without legislation or regulation, the mere attitude could change the tendency to just use it up and spend it. This consumer credit is not on consuming money that should go into the long-term field, but it is making the buyers in the housing Federal Reserve Bank of St. Louis  EMERGENCY HOME .OWNERSHIP A.CT  283  industry so loaded with consumer credit that they can't qualify for a mortgage when they do want to buy a house. They are up to their ears in debt. I bet every builder at the table will agree the big problem is qualifying the indebtedness people are carrying. . Mr. WmNALL. So the changeover of .the economy is that at one time they used to save before they bought a house; today they expect to have everything when they walk into a house-no downpayment housing and have everything placed in there. You have an icebox, a stove, that actually is going to wear out in 10 years, but you are paying for it over the length of the 30-year mortgage. That to me is one of the wicked things that has happened-paying 30 years for items that must be replaced long before then. The replacement of those items isn't taken into account, and I suppose someday somebody will offer something where the mortgage can be increased to replace the stove without the interest rate being changed. Mr. CoooAN. There has been only one outstanding exception. One big bank in New York published an ad before Christmas saying "Before you borrow, think it over. You have to pay it back." It is the first piece of publicity I have seen toward stemming the present trend of spend everything you have as quickly as you get it. Mr. WmNALL. I have one more question, Mr. Elliott. You said that at one time for 3 years you couldn't get Fannie Mae to buy mortgages of yours. What was the reason given for that? Mr. ELLIOTT. Well, they didn't approve the credit pattern of the borrower, evidently. The lending institution had approved the credit, the VA insured the note. I didn't have a prior commitment from Fannie Mae, so we sent it up over the counter for sale and they turned it down. They do that right along. That is the reason these people aren't operating under Fannie Mae and pay the half a point to get a commitment. Mr. WIDNALL. This was in connection with the credit rating. Mr. ELLIOTT. Yes, and it wasn't the special "10" money, either. Mr. WIDNALL. Thank you. Mr. RAINS. I have one statement. My friend, Mr. Widnall, made a great deal out of the usury limits in the States. If they are going to continue this hard money policy, every State will have to raise the usury limit instead of lowering it. I am opposed to one as high as 10; I am even opposed to one as high as 7 as my State has, but you are either going to have to do something about the money on FHAinsured loans, or it is going to be threatening the usury limits even in California. That is no answer to this problem, the £act that the State has a certain usury law. It points out more the need to do something about it, as I see it. Mr. WrnNALL. Within that State a lot of things can be charged conscionably while in other States they can't. Mr. RAINS. Well, suppose they lowered it to 6 percent; they would be completely out as Tennessee and Maryland are. That doesn't answer the problem at all. Mr. WrnNALL. Where are the lenders going to put their money if every State is the same? Mr. RAINS. They would put it somewhere where the usury law isn't in effect, that is where they are putting it now. In my State we 50876-60-19 Federal Reserve Bank of St. Louis  284  EMERGENCY HOME OWNERSHIP ACT  just had a short loan racket, and as I listened to what you say about California, I can't help thinking about the charges that they facing. I don't think that is any answer at all. Mrs. Sullivan. Mrs. SuLLIVAN. Mr. Chairman, I think you and the staff should be congratulated on bringing this panel before the committee, because I think they have certamly given graphic descriptions of their experiences throughout the country as to the housing and mortgage practices. Mr. Elliott, I was most interested in the FHA case that you cited regarding the payment of dividends. In other words, when the average FHA family sells its house, say after 10 or 15 years, they may not even know that they would be entitled to a refund of part of the FHA insurance program that they have been paying over the years. The amount may be as much as $100 or $200. Theoretically, I suppose, they would charge the purchaser a higher price to cover the future refund, but the truth apparently is that they don't even know about it, and I am concerned about it, and would like to ask the chairman if he would request the subcommittee's staff to study this to see if we can't get the FHA to at least inform the FHA homeowner of the refund that he may get in the future. Mr. RAINS. Mrs. Sullivan, I think you have touched upon an important point and I will request the staff to look into it and give us some recommendations. Mrs. SULLIVAN. Thank you, Mr. Chairman. Mrs. GRIFFITHS. I was particularly impressed by Mr. Snyder's statement that the discount rates have followed the interest rates up, and I would like to ask Mr. if that has been true also in Detroit? Mr. SHARE. Whenever we hear the clamor for higher interest rates to do away with discounts or reduce the discounts, we instinctively put our tongues in our cheeks, because we know temporarily the discount rate will go down when the interest rate goes up, but within a matter of a few short months the discount rate will usually be right back where it was 6 months before at a lower interest rate. That has never been the solution. Interest has gone up progressively, and discounts still stay right up there. Mrs. GRIFFITHS. Thank you very much. I, too, would like to express my appreciation for this group of gentlemen coming in here. I would like to ask you, Mr. Coogan, what statistics do you have that show that when people withdraw money from savings and loan institutions that they place them in the securities market, or do you have any? Is this just surmise, or do you know positively that this is true~ Mr. CoooAN. The banks in several large cities, particularly in New York, have tried to make a study of where their withdrawals were going. They found some of it going directly into the stock market, some into the mutual funds. At a recent meeting there was a consensus of opinion that probably 30 percent of the withdrawals went into the stock market, either directly or indirectly, that is directly to a brokerage house or through mutual funds. The rest of it they couldn't trace very well. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  285  The campaigning of the California Federal Savings & Loan, where they pay 4.5 percent and 1advertise extensively in the New York papers-I imagine the committee members have seen it-"Insured deposits paying 4.5 percent," has caused a tremendous movement of money from the East, where they are only paying 3.5, out of the banks in the East to California toward these institutions paying the higher dividend rates. Just what happens to that other 70 percent, they don't know. The home loan bank I think recently passed a regulation forbidding the use of brokerage houses by the savings and loan institutions, but as a result the western institutions have resorted to direct advertising, and now even to direct mail. One incensed mutual savings banker in New York was quite upset because he had received a direct mail ad from California soliciting. Mrs. GRIFFITHS. Shouldn't we also pass legislation to prohibit brokerage firms from giving little courses to women on how to invest their savings wisely in the stock market? Mr. RAINS. Mr. Rutherford. Mr. RUTHERFORD. Thank you, Mr. Chairman. I want to join the others who complimented you and the staff for ·bringing this cross section of builders here. I might say that their statements are refreshing, and are very frank, and avoid the usual Madison A venue couched prepared statements. I noticed one thing interesting to me, that each one of you concluded your statement by saying, "This is my individual opinion, and not of any organization I might be associated with." I am aware of some of your other association memberships that will subsequently testify-and preceding you here-opposing this bill. I think it is interesting and amusing, and I might say this. I know that Mr. Elliott, coming from my district, is vice president of the National Real Estate Board, who will subsequently come before this committee, and we will learn of that position then. I think it is interesting to the committee to be advised as to what your organizations are, strictly for the record. Mr. Coogan, would you say, without being partisan, that this administration has advertised a product of inflation rather than to try to control it? In other words, in their statements and in their attitude, they h~ve actually advertised or created an interest in inflation. They have contributed to inflation rather than attempting to control it. Mr. CoooAN. I think inflation is a very dangerous thing, but, unintentionally, the emphasis placed on it has the opposite effect, people feeling their money isn't going to be 'worth more in the future spend it today. Mr. RUTHERFORD. In other words, in their scare, in their talk of inflation, in political and partisan statements, if you don't watch out the old inflation bear will get you, they have created a climate for inflation. · You stated something which I think the committee is familiar with, certainly I am, but I would appreciate it if you would go into greater detail as to the extracurricular activities of the FHA, being a promotional organization for outside product rather than the intent for which it was originally created. Federal Reserve Bank of St. Louis  286  EMERGENCY HOME OWNERSHIP ACT  Mr. CoOGAN. I don't want to dwell on that, but I think this -is a natural development in an organization, particularly a Government organization, that develops ,vith the times. I am reluctant to criticize FHA because I think it is the most wonderful Federal institution that has been developed, the ability of the Government and industry to walk hand in hand at no cost to the taxpayer and produce the terrific housing that has been produced in America is a wonderful thing. In its early days, it was exercised on fundamentals. Recently they have been talking about the quality house, and with their developing requirements, rules and regulations, what we call minimum construction requirements and minimum property requirements, they naturally become the recipients of aH the pressures that can be exercised :for thicker roofs, larger heating plants, bigger lots regardless of the ability of the homeowner to take care of the land, the electrical requirements. I can remember when FHA first started we used to build houses with a 15-ampere service, and now I think it takes nearly 100 amperes, and you have to have an outlet within reaching distance no matter where you are sitting. These things have accumulated, and individually they come a little at a time, and each little improvement seems to be going to make a better house, but suddenly we are found with a bunch of requirements that in my opinion, and in the opinion of many builders, cost more than $500 more to build a house under FHA requirements than to build an equally good house without the requirements imposed by  FHA.  Mr. RUTHERFORD. vVould you classify these extra requirements as "lace," that the home buyer doesn't need? Mr. CooGAN. One of our problems is they not only do not need it, they cam1ot afford to buy it after we get it in. Mr. RUTHERFORD. You stated there was a trend to the construction of higher priced homes. Is this to meet the market, or is this based primarily upon the increased income, or is it a fact that there is no money available for lower income homes, or what? Mr. CooGAN. The big determining factor has been we go in cycle,s. Immediately after the war there was a real shortage of housing and limitations on the volume of materials we could choose; we could onlv · build small houses. Mr. RUTHERFORD. The trend is not necessarily because there is no need for lmver priced homes? Mr. CooGAN. There is one great pressure, and that is land cost. vVe are paying so much now for raw land, and the requirement of FHA, the municipa.lities, and others as to what you have to do to that lot before you put a house on it has gotten up so that you are forced to put a higher price on the house because of much of the land you buy. The old criteria was that the land cost shouldn't be more than 10 percent of the price iof the house. They are nmv working on 20 percent, and it is edging even higher. This is one of the great upvrnrd pressures, and then the Madison Avenue influence developed a feeling among everybody that if they don't have a bedroom for every child, if they don't have a separate dining room, a family room, and a two-car garage, they are under- Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  287  privileged, regardless of their income and the,ir ability to buy. Most of the bankers, and even FNMA as a matter of fact, frown on a twobedroom house, yet a two-bedroom house is a fine house for a lot of people. Mr. RUTHERFORD. Usury has been mentioned here, Mr. Snyder. Would you say, with the experience you have had with the savings and loan institutions that have no ceilings, that the interest rate of 10 percent is justified, though in fact they have wantionly disregarded their privilege? Mr. SNYDER. I would like to say at this point there are Federal levels that could control this. The savings and loans go and borrow from the Federal bank at 4 percent and turn around and loan to people like me at 7.2 percent. When you talk about going to the State for the answer, I think we could go to the Capital, right here, for the answer. If they a,re going to be able to borrmv money right here at 4 percent, or whatever it might be, they ought to be regulated as to what they can charge for it. Mr. RUTHERFORD. It has been stated here that on the west coast they find that discount rates will go up as interest rates increase, is that right? Mr. SNYDER. They have gotten into the habit of getting these fees, these points; they love it, they are not going to give it up unless they are forced to give it up. M!j. RUTHERFORD. Thank you, Mr. Chairman. Mr. ADDONIZIO. Before you excuse the witnesses, Mr. Chairma,n, I would just like to ask Mr. Albert a question; I don't want him to feel as though he has been left out. As he probably remembers, about 2 years ago this committee was down in the Miami area holding hea,rings on housing legislation, and at that time ,ve received testimony to the effect that the balloon-type second mortgage was very prevalent in the Miami area. As you remember also, this committee condemned that practice very strongly, and I believe as a result of that the Florida State Legislature has now passed a law prohibiting this practice. Mr. ALBERT. The act doesn't prohibit the practice of the second mortgage with the balloon, it merely requires that you flag any second mortgage with a large rubber stamp so that the buyer or the mortgage borrower under those circumstances is not a ware of the existence of this ballooned condition on this mortgage that he is signing. Mr. ADDONIZIO. In other words, they put the kiss of death on it? Mr. ALBERT. I think so, and I think it is largely due to the efforts of this committee at hearings in Miami that this came about through our legislature. Mr. ADDONizro. I am pleased to know that, and I am sure the rest of the committee is, also. Mr. RAINS. Mr. Widnall. Mr. WmNALL. This last discussion was interesting to me, because it is one of the things the State can do at its own level to help a very bad condition, and I hope something happens out your way where it is our understanding you are running into an unwholesome situation with respect to second mortgages, Mr. Snyder. Mr. Coogan, you spoke of the Central Mortgage Bank and in connection with your proposal the Board of Directors would from time Federal Reserve Bank of St. Louis  288  EMERGENCY HOME OWNERSHIP ACT  to time set the interest rates on FHA and VA mortga~es. Would they be set at the competitive level, or what did you have m mind? Mr. CoOGAN. They would have to be set at a competitive level based on the cost of money to the Central Mortgage Bank in the flotation of its debentures and notes. The Central Mortgage Bank shouldn't compete ,with other mortgage companies. The interest rate on mortgages should be at the lowest level possible, considering the current cost of money, with a small margin for operating. Mr. WrnNALL. You would set the interest rates at what would be a competitive level on both FHA and VA mortgages? Mr. CooGAN. That is correct. Mr. WrnNALL. I don't recall who made the statement, Mr. Albert or the gentleman from Texas, about being unable to sell all the inventory of homes during the commitment period and then running into difficulties. Doesn't that occur sometimes because you have overbuilt your market? Mr. ELLIOTT. Yes, it does, and I like to build in a low-cost market, but the people couldn't qualify that wished to buy these homes. We have to sell every one of our $8,250 houses from three to five times to get a buyer acceptable to the market. Mr. WrnNALL. Sometimes you guess your own market wrong when you run into this difficulty, and then you run into additional discounts months later? Mr. ALBERT. I don't feel that that is true. The fact that you have to resell these houses three to five times indicates that the problem has been created whereby the buyer cannot qualify under his present earnings in the light of current costs. Many times you run into other problems within the life of this short commitment that you are able to get. If you run into a labor strike, or i:f you have a material shortage in any particular category, or weather problems can arise, there are so many things that can affect you, and you unfortunately don't have a device where you can get an extension of these commitments. Mr. WmNALL. I understand what you are talking about with respect to labor strikes, because that happened in my own area recently where the electricians went out, and there were men with original commitments on homes at a figure they felt was all right with respect to sales, but the whole pattern was disrupted. Mr. ALBERT. No one wants to extend it when they can place the money at a more favorable rate. Mr. WmNALL. That wasn't the fault of the lending institutions. The builder made commitments on a basis he felt the houses would sell. Mr. ALBERT. It wasn't the fault of the builder, because he couldn't sell those h<:mses, so he was not overbuilding. I am trying to correct that one pomt you made. Mr. vVIDNALL. He wasn't complaining about the terms on which the commitment was made originally. ~fr. SNYDE~. He is co~plaining, but he did1:-'t have any choice. The bmlder doesn t want to sign a 6-month commitment, he would like to get a year or a year and a half. They say, "Take it, or leave it," take Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  289  6 months. He has to take it, so just because we do things in this business doesn't mean we like them. ' Mr. WmNALL. In the last year, have your commitments been shortened from the pattern that existed before i Mr. SNYDER. Absolutely. Mr. WroNALL. What has been your experience on that~ Mr. SNYDER. Our experience was that we had 18 months as a commitment, where now it is from 6 months to a year, 6, 8, 9 months, or a year. Mr. ALBERT; It has gone less than that. It used to be a :year and a half, as you say, but it is down now to 120 days to a maximum of 6 months. I haven't heard of any 1-year commitments lately. Mr. SHARE. In Detroit it is around 6 months, and v~ry often we will have 4 months during the year where you can't even dig into the ground so we are caught short. . M;r. qooGAN. In our mortgage brokeragebusinesswefi.1:1-dmostotth~ mstitut10ns now want 90- to 120-day delivery from the time they issue the commitment. It is very difficult to get anything over a 6-month commitment. Mr. WIDNALL. On behalf of the minority, I want to thank you for appearing today. I regret that out-of-State commitments have kept other members away from the hearing. It was not because of lack o:f interest. Mr. RAINS. I am sorry that Mr. Lewis from Birmingham couldn't be here, but I do want to include his statement in the record. His plane was fogged in in Atlanta and couldn't get out. ( The matter referred to follows:) STATEMENT OF EnwARD LEWIS, OF BIRMINGHAM,  ALA.  Homebuilding in Alabama faces a bleak 1960 unless Congress acts soon to provide adequate funds for mortgage money. Advance planning of housing pro• duction under the VA and FHA programs by homebuilders has dropped to the lowest level sin.ce January 1958. VA applicwtions in the whole State of Alabama has averaged a scant 147 units per month for the past 3 months. This is a mere 23 percent of the average monthly volume of 641 units per month for the preceding 20 months going back to January 1958 or a 77 percent reduction in proposed starts. In that month of January 1958, the worst on record for Alabama, there were applications for appraisal of only 20 units in the entire State of Alabama. Furthermore, FHA applications for commitments for proposed construction in the last 4 months have shown the same downturn and have been less than one-half of the preceding 12-month average. There is a strong parallel between January 1958 and the present situation. In both cases there is an almost complete absence of advance mortgage money commitments available to homebuilders with a resulting curtailment of planned housing starts. Without advance commitments of mortgage money for his customers the builder has nothing to plan with. This situation in Alabama is fast approaching a point of crises for the homebuilding industry. Homebuilders are now operating on mortgage money committed for in the first half of last year. Al! these commitments expire the builder must cease operaltions if he cannot obtain new advance commitments. The actual experience of the past 3 months has been that a new advance commitment cannot be obtained at all, although standbys are available at 11 to 14 points. These prices are so high as to make the venture unprofitable to the builders; and the builders, with good business sense, are not going to build houses when the mortgage market outlook can offer no better hope than that. From personal experience, I can as1sure you that mortgage money for advance commitments is not just tight, it is unavailable. Two trips to New York in the past 6 weeks have been made on my behalf by my mortgage banker. On the first trip I accompanied him. Savings bank after savings bank received us most cordially, but bank after bank also told us the same story. The "magic 5's," the Federal Reserve Bank of St. Louis  290  EMERGENCY HOME OWNERSHIP ACT  Government bonds issued at 5 percent interest, had taken enough of their savings accounts as to cause them to be out of investment funds for mortgages. Just as happened in December 1957 and January 1958, the VA program is dwindling to nothing and the FHA program will be drastically reduced in Alabama unless Oongress acts soon to make mortgage funds available, an,d at a reasonable price. The homebuilding industry cannot make plans on hopes that mortgage money may be just around the corner. We cannot operate on discounts that skim off the profit before we ever see it. Lenders and some eco11omists have been telling us since last September that money should loosen up in a couple of months. Elach month, however, the supply and price has, progr0$Sively tightened. In Birmingham the VA and FHA programs are the biggest fact.or in the housing market of homes under $20,000. Without these programs we could lose almost half of the total housing starts in 1960, and based on present mortgage conditions this seems to be the course we are following. We have in the Birmingham area a backlogged need for housing. Primarily because the last 6 months of 1959 brought a big drop in sales, largely attributable to the steel strike. During this period there was a big reduction in starts in Birmingham due to this drop in sales. ·with the pickup in sales in January, our normal operation would be to start construction of a large number of houses to build µp our inventory. However, with the shortage of mortgage money and with little or no prospects for mortgage money, we cannot make plans to build the houses we need. Only an early supply of mortgage money can keep homebuilding moving forward in 1960 in Alabama. The Emergency Home Ownership Act, by providing $1 billion for special assistance, can rescue the FHA and VA programs. This amount will probably be too little by itself, but from past experience it has a stimulating effect on private lenders that multiply its effectiveness. However, the provision limiting use of the funds to mortgages of $13,500 and under will not adequately meet the present problem in Alabama, in my judgment. Usually, in the past, when mortgage money tightened up, it was the lower priced houses which suffered most, while money was still available to some degree for the middle priced and higher priced homes. The situation now is that money is unavailable at a workable price for all VA- and FHA-financed homes. In Alabama, this means the majority of all homes under $20,000. The median sales price of new homes under VA and FHA has been around $14,700. This bill would have a bigger impact on housing if the mortgage limit was increased to $14,500 or even $15,000 and thus be available to a vaster market of home buyers. The provision of the bill to reduce FHA insurance premiums from one-half of 1 percent to one-fourth of 1 percent is a step that needs, to be taken. FHA reserves, according to experts, are sufficient to carry it through a major depression. Under the circumstances-, it would seem unnecessary to continue to pile up reserves and this proposed reduction in premium would be a muchneeded step to reduce the cost of financing a home. Monthly amortization payments on a $14,000 house have increased 10 percent due to the rising interest rates in the last 4 years. This lower premium will help to offset about one-third of that increased interest rate and will make it possible for more peop,le to buy homes. The provision in the Emergency Home Ownership Act requiring FNMA to work to stabilize the mortgage market is probably the most important legislative proposal for the housing industry that has been made in many years. The fluctuations of mortgage money and the uncertainties builders face from this fluctuation serve to increase the cost of doing business and thus the cost of homes. This added cost is unnecessary and wasteful of the national resources. Furthermore, the fluctuations make it possible for and encourages lenders to make demands for bigger discounts and higher interest charges. The housing industry is caught on a treadmill. We run faster to catch up to higher interest rates, but we find ourselve,s standing still in the matter of discounts, and even dropping further behind. As one of those who supported the proposals to increase interest rates and let money seek its own competitive level, I must confess to disillusionment. It has not worked and we find ourselves saddled with a mounting discount and interest charges. Higher interest rates have not and apparently cannot create adequate funds for mortgages: nor, have they improved our competitive position for investment funds available. There is just not enough mortgage money to go around without the Federal Government doing something to help provide funds. The competition to obtain money from an inadequate supply has inflated the price of money beyond reason. If the present demand-supply imbalance continues there will be no end to this inflation of housing costs. The provision of the act that requires FNMA to act as a sec Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  291  ondary market can eliminate this imbalance by providing a legitimate market alternative to builders. FNMA has not done this in the past. FNMA has gone along with the market, and has not supported it. FNMA even competes with us in the market by selling some mortgages she holds and thus helping to soak up investment money we need and further depressing the market. FNMA even refuses to accept Government guaranteed and insured loans on occasions as not being good security. This second guessing of the VA and FHA credit departments is unnecessary, expensive and ridiculous duplication and ought to be stopped. FNMA's 2-percent stock purchase requirement has turned out to be another name for discount. The intent of the Emergency Home Ownership Act to reduce this requirement to 1 percent is good, but if FNMA turns around and raises the discount one-half percent we will be no better off. FNMA must keep the price of mortgages up near par if she is to be effective as a secondary market. If she does, private lenders will be willing to pay a fair price for mortgages. This objective of a stable market could be further implemented if some balance of portfolio between bonds and mortgages were required of insurance institutions. The last provision of the act, which requires lenders to report discounts charged on mortgages will go a long way toward eliminating the abuses on discounts and origination fees. There will be a reluctance to charge unjustified fees when·-those fees will be scrutinized by the Government agencies ·involved and made available to Congress. An investigation by this committee into past practices will probably have the same salutary effect. In conclusion I want to reemphasize that in my area there is no mortgage money available for advance commitments on VA and :!!'HA loans and this has resulted in a decline in proposed construction of 77 percent for VA and over 50 percent for FHA. Almost 50 percent of the homes under $20,000 built in Birmingham are VA or FHA financed. Our present commitments are already expiring and will be exhausted in a few months. Without mortgage money we wiH have to shut down or many of us will be forced to switch to conventional loans 11ml second mortgages to stay in business. This situation will have terrible consequences to our economy and will be felt by our laborers, material manufacturers and dealers, retail businessmen, and the families of these people. The only alternative th_at cari prevent this is for Congress to supply FNMA with mortgage funds to keep our industry going until money loosens up again. To ,do so is not inflationary-it is antideflationary and will help us stabilize the cost of housing. Our labor will make wages, manufacturers and sellers of material will make profits, and the U.S. Treasury will have an increased tax collection.  Mr. RAINS. I want to thank you. It has been an interesting experiment having you come before µs. I think the committee likes_ it well enough so that we will do it again sometime. Thank you, very much. Mr. CooGAN. Thank you. We appreciate the opportunity to appear. Mr. RUTHERFORD. There might be subsequent statements submitted by people from these areas. Mr. RAINS. We will be glad to have them. Mr. WmNALL. I have an article from the Wall Street Journal, 0£ January 28, 1960, I ask permission to insert in the record. Mr. RAINS. That may be included in the record. ( The article referred to reads as follows :) [From the Wall Street Journal, Jan. 28, 1960] REVIEW A:-!D OUTLOOK-THE GOVERNMENT'S PREFAB MARKET  H's become practically axiomatic tha>t when the economy is in a slump, no matter how· mild, the politicians will rush to turn on the Federal spending spigots full force. That is a dubious procedure at best, but it is completely indefensible when the economy is-booming. · Yet that is what we are already getting, with the congressional session only a couple of weeks old. The most egregious example so far is, the housing bill sponsored by Representative Rains. Among other undesirable features it would Federal Reserve Bank of St. Louis  292  EMERGENCY HOME OWNERSHIP ACT  give the Federal National Mortgage Association a new fund of $1 billion, no less, with which to buy at face value mortgages up to $13,500 that are insured by the Federal Housing Administration or guaranteed by the Veterans' Administration. Briefly the thought is that if FNMA can pay face value, instead of less as has been customary, many more mortgage holders will sell to the agency, thus making more money available for housing starts. This, it's hoped, would send the inflated housing industry on another dizzying upward spurt. How come the housing industry needs such a mammoth new injection in these times? The argument of the bill's backers and the industry's lobbyists is that housing may face a slump this year largely on account of tight money; by a slump they mean housing starts may decline some 200,000 below 1959's 1.3million-plus. Not much of a slump in any case, but a canvass of actual builders in the Nation, published in this newspaper the other day, indicates the high 1959 figures may be equaled this year. So the "tough times" contention falls pretty flat. But let's pursue the thing a bit further. Suppose housing starts do fall below last year's. Is that a catastrophe? Must every year's homebuilding exceed the previous year's regardless of need? Is it sound public policy to do this at the expense of inflation for the whole Nation? For let there be no doubt that this bill is an exercise in inflation. Federal Housing Administrator Mason, opposing it, told Members of Congress it would put an added burden "on the whole financial structure of Government." It would mean more Government borrowing. "In turn the issuance of more Government bonds would increase the national debt and add to inflationary pressures." More specifically, he said, it would inexorably lead to higher construction costs. Moreover, the bill is needless and useless as an antidote to tight money. As Mr. Mason observed, credit generally may ease if it turns out that the Treasury, which borrowed so heavily in 1959, borrows less than it repays this year. In any case, the sensible approach to tight money is not to try to inflate the housing market still further. It is for Congress to take really corrective action such as removing the arbitrary interest-rate ceiling on new longer term Government issues, for one effect of the ceiling is to force the Treasury into short-term financing where it draws on money sources that are also the main sources of mortgage credit. But the basic trouble is that the Government, through its labyrinth of housing agencies and programs and its limitless spending, has become a prime mover and governor of the housing market. "\Ve will not be nearing a solution of that trouble until we rebuild our archaic and ramshackle housing programs from the ground up. When the Government undertakes to prefabricate any market, it may seem to benefit the sellers for a time. But the customer pays through the nose. And in the end everybody loses.  Mrs. GRIFFITHS. Might I insert a letter and data from a builder in Detroit? Mr. RAINS. That letter along with the additional information may be included. (The letter and data referred to above are as follows:) IRA HOTCHKISS Co., Hon. MARTHA w. GRIFFITHS,  __ Detroit, llfion., January 12, 1960.  House of Representatives, Washington, D.O.  MY DEAB MRS. GRIFFITHS : The building industry in Michigan is in a most perilous and chaotic state. If the facts were known, I believe residential constructions has fallen off 50 percent in the Metropolitan Detroit area. rather than 10 percent as reported by governmental agencies. The Bureau of Credits, Inc., reported that from January 2, to Otcober 20, 1959, some 70 companies engaged in various phases of construction industry filed petitions in bankruptcy, showing liabilities of over $2,237,750. The causes of the plight of the industry are-( l) Unemployment. (2) Steel strike. (3) Financing. Federal Reserve Bank of St. Louis  293  EMERGENCY HOME OWNERSHIP ACT  All of the aforementioned conditions hit our industry with a resouding blow, and we will not recover too quickly from the shock unless Congress enacts a practical housing bill immediately. I say "at once" because if the bill emerges from Congress by spring, it may be too late for us in Michigan. In Michigan, we only have 8 months of building weather--quite unlike southern California, southern Arizona. and Florida, which permit an all year-round construction climate. A builder requires at least 3 months to build his model homes which are keyed to the new housing bill, secure financing, let contracts for supplies, etc., before he can initiate his building program. The cold weather descends upon us all too soon. The steel strike is now over, unemployment diminishing and soon the pent up demand for housing will be felt. Now let us look at financing. The financing of homes is a real dilemma. A discussion on this score could cover pages, so I will promise this subject by saying the program to provide housing for the veteran and workingman is the neglected stepchild of the administration. It is interesting to note the FNMA purchase price schedule for the State of Michigan, which I am enclosing herein. The price of 4¾ percent interest VA loans sank to 91½ discount on May 29, 1959. Congress increased the interest rate to 5¼ percent and on July 2, 1959, the price rose to 95½. After the increase in interest rate, the loans sank to 91½ by October 15, 1950, in a matter of a little over 3 months. The increase in interest rate is only a troublemaker for the builder, as it only creates a false, temporary delusion. In 1958, Hotchkiss Construction Co., constructed approximately 500 homes in the Detroit area as a result of special assistance. In 1959, we only constructed 140 homes in Michigan. This was the poorest year we encountered in the past 23 years of building residences in Detroit, Mich. I recommend: 1. Appropriating $1 billion special assistance to FNMA to purchase VA and FHA loans up to $15,000 at par, without any control by the President as to release of funds. (These commitments to cover a period of 18 months to the builder who is located in winter climatic areas, and not 12 months for all States as enacted in the housing bill in April 1958.) 2. Extend the amortization of FHA and VA loans from 30 to 40 years. The monthly payment on a $13,500, 30-year, FHA loan on principal and interest is $84.43. After the loaning institution adds the real estate taxes and insurance, the payment exceeds $100. How can the workingman qualify for a mortgage? He cannot. An additional 10 years to repay the loan will reduce the monthly payment approximately $8. 3. Put the reduced FHA payments into effect at once as enacted by Congress in the 1959 housing law. For some reason the FHA Commissioner has not seen fit to deem the regulation necessary. On the subject, I am enclosing a very interesting article which appeared in the Miami Herald on December 20, 1959, wherein the real estate editor interviewed Commissioner Julian Zimmerman in Nassau. Very truly yours, IRA A.  HOTCHKISS,  Pre8ident.  STATE OF MICHIGAN  FNMA purcha8e price 8Chedule (after deducting 1½ percent to cover marketing fee and loss resulting from sale of FNMA. stock. Prices below are net to builder)  FHA5¼ percent Interest  Jan. 1, 1959 ____________________________________ _ May 29, 1959 __________________________________ _ July ----------------------------------_ Aug. 2,15,1959. 1959___________________________________ Sept. 12, 1959 __________________________________ _  i:\~·1iii~~-:=::::::::::::::::::::::::::::::: Federal Reserve Bank of St. Louis  FHA5¾ percent interest  96½ --------------  i~~  -------------,  95 -------------93½ --------------  92½  91½  96H 95½  VA4¾  percent Interest  VA5¼  percent Interest  92½ --------------  91½ -------------91½ 95½ 91 95 89½ 93½ 88½ 92½ 87½ 91½  294  EMERGENCY HOME OWNERSHIP ACT [From the Miami Herald, Dec. 20, 19-59]  FHA's Boss DoEsN'T SEE IT Ou&  WAY  ( By Frederic Sherman, Herald real estate editor) You walk into the patio of the Bahamas County Club at Nassau to say hello to a friend from New York and you bump into Federal Rousing Administrator Julian Zimmerman and the opportunity for an exclusive interview. That was the luck of this reporter last week during a housing tour and merchandising conference held! in Nassau by South Florida's Home Builders Association. The talk with Zimmerman came on a weekend when the Herald delved deeply into the current problems of Miami's homebuilders. Chief of these is the fierce competition among the big builders that is being fed by the FHA's section 213 program which offers the buyer terms of 1 percent downpayment and 40 years to pay off the mortgage. South Florida builders and mortgage men agree the section 213 program can only be used efficiently by the organization with plenty of land and money enough to generate a galloping sales program. That's why the small builder is hurting today in Miami. He can't compete. HE DOESN'T SEE IT THAT WAY  So we asked Zimmerman why the Government offered the big builder a better financing deal. Why didn't he lower the FHA's downpayment requirements on the regular home-sale program and extend those mortgages to 40 years? Zimmerman's answer was surprising. He doesn't see any reason why the small builder can't use the section 213 program which calls for a minimum start of eight houses. He doesn't think Miami's homebuilders have a good argument when they complain that they lose four out of five sales because the buyer can't qualify for the 30-year mortgages with higher monthly payments. GIMMICK ON DOW:S.PAYMENTS  Then what about the differences in downpayment requirements under the.two sections of the same Government housing program? The small-volume builder of a $15,000 house must find a buyer with about $650. WHAT'S 213 PROGRAM  The FHA's section 213 program was originally set up to enable persons of similar interests and background (minimum of eight) to form a cooperative to put up a small apartment house or build a group of houses, either single-family, semidetached, or even in a row. But it turned out to be too complicated for persons without knowledge of the building business. Now the project builders have stepped in and are using the program very efficiently. But the builder big enough to use the section 213 program can offer that same $15,000 house with a downpayment of only $150. That point seemed to get home to the Commissioner who has been reported as slightly shook up since he discovered the 1959 housing bill contained a gimmick that allowed the section 213 builder to absorb 2 percent of the downpayment. Zimmerman indicated he's going to do something about the situation next month to make sure the buyer of an FHA-insured home puts up at least 3 percent. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  295  Talk's about Government housing policy during a weekend on an island in the sun-Herald's Frederic Sherman, left, ancl FHA's Julian Zimmerman get together in Nassau Federal Reserve Bank of St. Louis  296  EMERGENCY HOME OWNERSHIP ACT SOME BUILDERS PLAY WITH FIRE  Equalizing the downpayment requirements of both FHA program;; is urgently needed to head off a scandal that could produce headlines to rival those on the windfall profits in apartment house construction after World War II. To meet the competition of the 1 percent down deal of section 213, some south Florida builders are paying a portion of the downpayment themselves. On more expensive houses, where the l<'HA downpayment runs several thousand dollars, some builders have offered to lend the buyer money on a personal note. Maybe that doesn't ,;ound horrible, but it is against the law. And in most of the cases, it is unlikely the deal could be made without the mortgage company knowing all about it. DEMOCRATS WOULD HAVE A PICNIC  The Government got into the housing business 25 years ago to make it possible for low- and middle-income families to buy a house without the threat of a foreclosure hanging over their heads. If congressional leaders ever get the idea that the FHA program is being abused, there will be an explosion. It was a Republican Congre~s that shook the political back teeth of a Democratic administration over the windfall profits. The present situation is reversed. Senator John Sparkman, of Alabama, would like nothing better than to call President Eisenhower's housing men up to Capitol Hill and try to skin them _publicly. IT'S TOUGH TO EAT YOUR WORDS  H Zimmerman were called by ·Sparkman's Senate Housing Subcommittee, it  would give the FHA Commissioner a chance to sound off about the heavy discounts on the Government-insured mortgages. Zimmerman raised the FHA interest rate to 5¾ percent after he was assured by mortgage men and savings bank officials that the move would put FHA mortgages at par. Zimmerman said just that when he made the move and now he's had to eat his words. And he's sore. It would be interesting to know what the Commissioner had to say to his fellow guests in Nassau last weekend. The meeting was sponsored by House and Home magazine and the guest list included the new presidents of almost every major association connected with homebuilding; the Savings & Loan League, the mortgage bankers, the realtors, lumber dealers. Purpose of the weekend, an annual event, is to put the presidents on a first-name basis and give their wives a chance to meet.  Mr. RAINS. I am very sorry that I have an Alabama delegation meeting at noon. I had wanted to stay to hear the realtors and the insurance company people, but they prefer to go on now rather than come back at 2. My vice chairman and good friend Hugh Addonizio will take over. Mr. ·Williamson, you may bring your realtors around. I would like to meet them, at any rate. Mr. WILLIAMSON. I have brought with me this morning Mr. Robert Scott of Elizabeth, N .•T.: Mr. Houston Carter, of Mobile, .Ala.; Mr. C. C. Cameron of Raleigh, N.C.; and Mr. Don Dixon of Lincoln, Nebr. Mr. RAINS. We are very delighted to have you gentlemen appear here. I am especially proud to see Houston Carter here from Mobile. I regret I have to leave, but we have a delegation meeting involving Alabama, and I have to go and attend it. Mr. Addonizio will take over at this time. Mr. 1VmNALL. Mr. Chairman, I would like to wekome Bob Scott from our State of New .Jersey. I know what a competent man he is in his field. I am sure he will do his best to be constructive for the commit.tee. Mr. ScoTT. Thank you very much, Mr. vVidnall, it is a pleasure to be here. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  297  Mr. AnooNIZIO. May I also welcome Mr. Scott here this mornin~. I know that I don't always agree with everything that you say, but 1t is a pleasure to see you. Mr. ScOTT. Thank you very much. STATEMENT OF ROBERT E. SCOTT, CHAIRMAN OF THE REALTORS' WASIDNGTON COlVllVlITTEE, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS; ACCOMPANIED BY JOHN C. Wll.LIAMSON, SECRETARY-COUNSEL, REALTORS' WASHINGTON COMMITTEE  Mr. ScoTT. Mr. Chairman and members of the subcommittee, I am Robert E. Scott of Elizabeth, N.J., where I have been engaged in the real estate brokerage and mortgage banking business for more than 28 years. I appear before you on behalf of the National Association of Real Estate Boards, a federation of 1,347 local real estate boards with a membership of almost 67,000 realtors in every State of the Union. On behalf of our national association, I appreciate the opportunity of expressing our views with respect to R.R. 9371~ a bill which is cited as the "Emergency Home Ownership Act.'> The bill proposes certain temporary although fundamental changes in the FHA mortgage insurance system and the FNMA Charter Act which have as their apparent objective a reversal of the predicted downward trend in homebuilding starts. We share with the chairman the anxiety, which introduction of the bill reflects, that housing starts and the sales of existing homes during 1960 may be less than that of 1959. If this be so, then it is indeed unfortunate as the housing needs of the American people are expanding rather than lessening. However, there is serious question whether such pessimism is well founded in view of the private housing starts in December which were higher than expected and boosted the year's total to at least 1,310,000, the second highest annual rate on record. While we do not wholly share this pessimism with respect to starts, we must concede that all is not as it should be to meet the housing needs of our expanding population and to replace the substandard· housing which is leaving and should continue to leave our housing inventory. Certainly there has been a sharp downturn in sales of both new and existing housing due to the absence of adequate financingof course it goes without saying-at a proper price. We will try to develop our thoughts in the ensuing pages of this testimony. The bill and these hearings are, in some respects, remmiscent of early 1958 when an emergency housing bill sped through the Congress. The objectives of that bill and this are the same. The "heart" of that bill was the $1 billion made available to FNMA to buy the regular FHA's and VA's new construction at par. All else was secondary. Indeed, that is the case with this bill-the reactivation of this FNMA program 10 to inject $1 billion of Treasury funds to "shore up" the lagging FHA and VA programs and thereby reverse the predicted downward trend in homebuilding. Thus the objectives and the central themes of both bills are identical. At that point the similarity ceases. In 1958 we were in the throes of a sharp decliner-a r@cession with a capital R. The GNP had dropped from $442.3 billion in the fourth quarter of 1957 to $432 billion in the Federal Reserve Bank of St. Louis  298  EMERGENCY HOME OWNERSHIP ACT  first quarter of 1958, the largest decline for any quarter in the postWorld War II period. Th~ indus~rial production index decli!led from 149 in October 1957 to 132 m April 1958, and unemployment mcreased 50 percent, from 5 percent of the civilian labor force in October 1957 to 7.5 percent in January 1958. FHA and VA applicatioI_1s re~ected this downward tre:nd alt?-ough conventionally financed residential mortgages persisted m their historic trend of moving in a contrary fashion for obvious reasons. The situation is vastly different today. The economic indicators I have cited above all show a heartening upward trend. In many respects the economy is taking off. At this point· I would like to interpose that our mortgage market survey of winter 1959 has this to say about the situation: Despite more selective lending possibiilties, decreased availability of funds in some areas for some lending categories and the steady upward movement in rates, the home mortgage market actually absorbed an unprecedented volume of savings during the year. For .the first 9 months of 1959, the dollar volume of home mortgage recordings nonfarm of $20,000 or less exceeded by $3 billion a like period of any other year. The 12-month total will undoubtedly estabilsh a simimlar annual record.  I also have a tabulation of the recordings of deeds and mortgages in 14 of our 21 counties of New Jersey for the period 1958 and 1959, and there has been an increase in the recordings of deeds in every single one of these counties by anywhere from 5 to 10 percent, and I note, too, from the Wall Street Journal of Monday~ January 25, the headline in the upper right corner, "Buoyant Builders Dispute Glum 1960 Forecasts, See Starts Near Last Year's Pace." H.R. 9371 proposes an emergency and temporary solution to the one sector in our economy-homebuilding-which in the opinion of most of the year-end prognosticators does not show the promise of the other sectors. Actually, confining the problem to the homebuilding sector is wrong because we are concerned in this bill only with a minor, numerically speaking, element of that sector-new construction which would normally be marketable through FHA and VA financing. I will explain as I proceed to discuss the different sections of the bill. Section 2 authorizes the FHA to approve an individual as a mortgagee instead of limiting such mortgagees to corporate entities showing a net worth in liquid assets of at least $100,000. e endorse this provision provided the origination, processing, closing, and servicing of any such loans are accomplished by FHA-chartered institutions, since it would be obviously difficult, if not impossible, for an individual to understand and properly comply with the FHA regulations in this regard. It is believed that permitting individuals to make FHA-insured mortgages will bring a considerable amount of additional money into the home mortgage field and will permit many sellers to take back fully insured purchase money mortgages and avoid paying the discounts otherwise applicable. As a matter of fact, these loans might later be salable at a premium. Section 3 would fix for 1 year the FHA mortgage insurance premium at one-quarter of 1 percent. Under existing law the minimum is one-half of 1 percent. We recommend that the statutory minimum premium be reduced to a quarter of 1 percent but that the FHA Commissioner be given the discretionary power to authorize the reduction. The insurance premium shou ld not be reduced for the Federal Reserve Bank of St. Louis  ,v  0  EMERGENCY HOME OWNERSHIP ACT  299  sole purpose of lowering the monthly shelter costs to the home owner. The sole determinant should be the actuarial state of the insurance fund. We also recommend, in addition to reducing the minimum premium to a quarter of 1 percent, that the bill be amended to require the FHA to submit a recommendation to the Congress as to the feasibility of changing over to a single prepaid premium which could be included as part of the mortgage. We believe tha.t this would prove more advantageous to the home owner and certainly could be administered more efficiently and economically than the present system. With respect to the Federal National Mortgage Association, section 4 of the bill would rewrite the basic objectives of FNMA's secondary market operations from one of supplementary assistance to the private secondary market by providing a degree of liquidity to neutralize fluctuations in the availability of mortgage funds to "aid in the stabilization of the mortgage market." This is so fundamental a change in FNMA's charter that we believe it should not be handled as an emergency measure. Rather its consideration might more properly come should the subcommittee decide to launch a thorough reevaluation of FNMA and its statutory objectives. FNMA's present approach to the market is not something that stands along in the statute. It is geared to FNMA's capitalization which has produced more than 5,000 private shareholders holding more than $50 million in common stock. It is related also to the reception which FNMA's debentures meet in the private investment market. e cannot tamper with FNMA's role in the secondary mortgage market by requiring it to buy "over the market" and expect the interest of the private shareholders to be unimpaired and the private investment sources of FNMA's borrowings to be unaffected. "\Ve reiterate our last year's opposition to this section and urge that it be deleted from the bill. Section 5 provides that for a period of 1 year following enactment of the bill FNMA would be reqmred to purchase any FHA-insured or VA-guaranteed mortgage offered to it so long as the mortgage is not in default or in imminent danger of default and the title is not defective. Presumably, FNMA would still retain the regulatory authority to qualify mortgages as to time since origination which is presently 4 months, and to fix varying prices so that any marginal or submarginal characteristics attaching to the physical property, neighborhood, or credit of the borrower would be reflected in the price. In the light of this administrative discretion retained by FNMA we believe the proposed amendment has considerable merit. However, if the amendment is consistent with sound business principles, and we believe it is, the change should not be limited to 1 year, but should be made permanent. Section 6 provides that for a period of 1 year following enactment of the bill FNMA would be prohibited from selling any mortgage from any of its three portfolios. Approval of this amendment would mean that FNMA would have to rely completely on its borrowing authority for money with which to purchase mortgages. FNMA's increased activity, a likely consequence of this bill, would mean increased reliance upon Treasury capitalization. On the contrary, the legislative history of the FNMA Charter Act is clear that  ,v  50876---60-20 Federal Reserve Bank of St. Louis  300  EMERGENCY HOME OWNERSHIP ACT  the Association would conduct its operations on a revolving fund basis. An examination of FNMA purchases and sales reveals that when money is tight its purchasing activity soars while its sales decline proportionately. For example, its purchasing activity hit its all-time high in fiscal 195"9 of $1,376,272,000, and sales dropped to $87,994,000, or about one-fourth of its sales activity during the previous fiscal year. w·e are not clear as to whether the prohibition against selling any mortgage includes a prohibition against an exchange such as that which took place last December, whereby FNMA exchanged approximately $188 million of VA 4-percent mortgages from its management and liquidation portfolio for 23/4-percent Treasury bonds. Considerable opposition developed to this exchange. However, the exchange actually benefited the mortgage market, since it permitted investors to exchange frozen assets for amortizing mortgages which provide rollover, or fresh money available for reinvestment in home mortgages--money which would not have become available until the maturity of the bonds exchanged. Section 7 fixes at. 1 percent, for a period of 1 year, the capital stock subscript.ion required of those who sell mortgages to FNMA's secondary market operation. Presumably, the purpose of this section is to make certain that for 1 year it will cost 1 percent. less to do business with FNMA. "\V-e seriously doubt that this will contribute to an upsurge in home ownership sufficient to warrant such a curb on FNMA's present authority to fix the capital stock subscription at not more than 2 percent nor less than 1 percent. In the FNMA Charter Act the Congress laid down a guide line for the Associ'ation that in determining the stock subscription it consider "conditions in the mortgage market and the general economy." If the Congress is dissatisfied with the 1 to 2 percent range and this guideline, then these should be changed. FNMA must accumulate capital in order to expand its borrowing authority without further reliance upon the Treasury. Reduction of the stock subscription by 50 percent reduces its borrowings by that same percentage. On the subject of borrowing authority, we are concerned that even without enactment of this bill the present limitation on FNM..A.'s borrmving authority of 10 times its capital, capital surplus, general surplus, reserves and undistributed earnings, is too restrictive. We urge tha,t this ratio be increased from 10 to 15 and propose this as an amendment to this housing bill. Section 8 requires that for a period of 1 year FNMA pay not less than par for mortgages purchased under the special assistance program. Our association opposes this section, although we want to make it· clear that. our opposition to the par purchase requirement is not to be construed as opposition to the purchase of any special assistance mortgage at par. However, we do oppose a requirement for support at par, or at any stated price, of all of the nine classes of mortgages which are today eligible for special assistance. A review of those different mortgages which would ~ eligible for par support underscores the unreasonableness of the provision. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  301  These mortgages would run the gamut from FHA 203's-if section 11 is approved-which are acceptable to the private market, to section 221 mortgages whose marketability has yet to be established. Between these two we have the military 4½ percent loans which are as acceptable as a Government bond at that same rate, and the section 213 mortgages· which have always been financed by private sources in substantial amounts except now and then when the Congress has required that they be purchased at par by FNMA. To require that all these mortgages be purchased at the same price presupposes that all these mortgages have the same degree of acceptability or unacceptability in the market. This, of course, is not the case. vVe believe that FNMA has done an excellent job in establishing prices for special assistance mortgages in the light of the intent of the Congress that these programs accomplish their objectives. I seriously doubt that there is any evidence that these programs have suffered since Congress decided in 1958 to terminate the mandatory par purchase requirement. Section 9 limits the charges or fees which FNMA may impose to 1 percent of the mortgage rnstead of the present 1½ percent. We note that while this section amends section 305 (b) only to the extent of reducing the fees and charges to 1 percent, it leaves untouched the criterion which FNMA must employ in fixing the amountwith the objective that all costs and expenses of its operation under this section should be within its income derived from such operations and that such operations should be fully self-supporting.  Thus the section, if enacted, would charge FNMA with conducting a self-supporting operation so long as it doesn't charge more than 1 percent purchase and marketing fees. It would seem to us that the question should be what must FNMA charge in order to fulfill the mandate that its operations be self-supportmg. The section dilutes the mandate yet leaves the language unchanged. We seriously doubt that the limitation on the fees and charges as proposed would result in increased activity in the special assistance program sufficient to warrant this tampering with the self-supporting principle. We recommend that this section not be approved. Sections 10 and 11. These two sections reactivate the FNMA program 10 which was added by the Emergency Housing Act of 1958. Reactivation is accomplished by providing an additional $1 billion to purchase FHA title II mortgages or VA-insured mortgages at par, so long as the mort,gages do not exceed $13,500 or, in the case of high-cost areas, $14,500. -W,.e do not favor enactment of this proposal because we view this form of remedy for the existing problem of relative scarcity of mortgage money as too drastic, not responsive to the basic cause of the problem, and calculated in the long run to do more harm than good to the housing industry and the national economy. We have already noted the difference in the economy now as compared with early 1958 when a similar proposal was approved by the Congress. Differing circumstances in early 1958 ahd early 1960 suggest inquiry into different objectives. The 1958 act was clearly designed to stimulate new construction in order to put people to work. The 1958 act Federal Reserve Bank of St. Louis  302  EMERGENCY HOME OWNERSHIP ACT  was hailed by both parties and the homebuilding indnstry as helping homebuilding lead us out of the recession. The present emergency bill must have a different objective in mind. If not to help reverse a recession and put people to work, what is the object? In our opinion, it is to reverse a predicted downward trend in homebuilding which is the result of the inability of the FHA and VA sectors of the market to compete in the capital market with the demands of t\e Treasury, business, and the consumer who apparently have no inhibitions and no restrictions about paying the market price for the money they need. That is the situation in a nutshell, and this $1 billion of program 10 money isn't going to improve the situation. It would simply inspire a rush on tI1e part of some homebuilders for a share of this money to build housing, most of which we are confident would be built without this type of Federal subsidy anyway. In evaluating this provision let us look back on what happened in 1958 when $1 billion was made available to purchase FHA's and V A's at par. The 1958 program resulted in contracts executed for mortgages involving 82,996 units, and the $1 billion was expended between April and October of that year with August the peak month when contracts involving 20,459 units were executed. The program was limited to new construction. To evaluate better the role of this $1 billion, one must compare the activity it generated in new construction with the activity in the existing home market during these same monhs. During ,Tuly and August, the peak months for new construction activity brought about by program 10, the applications for insurance on existing- homes were 67.1 percent and 65.2 percent of the total FHA applications, the highest 2 months of the year. Thus one must conclude that even in 1958 with the homebuilding industry galvanized into action bv program 10, there was still an abundance of FHA and VA mortgage money available for the financing of existing homes. The key to our opposition to this injection of $1 billion of Treasury funds into the housing industry's bloodstream is that it provides a, soothing balm to the industry's difficulties thereby resulting in less attention to and a lessened desire to get at the basic root of the problem. Examining the problem requires that it be limited to only the FHA sector of the market. Conventionally financed housing remains strong and showed an increase for each quarter of 1959 over the previous quarter. We can't logically extend the problem to VA because the statutory VA interest rate limit is so far below the market as to make it wholly illogical to direct any emergency measure at reactivating this moribund program without first bringing its interest rate in line with the market, or at least on a comparable level with FHA's rate. , The FHA rate has fallen far below the market for reasons which will not be met by supporting its mortgages at par witli Treasury money. There are other steps which the Congress might well consider taking which address themselves to the long-range role of the FHA in the• mortgage market. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  303  For one, £he Congress should immediately lift or remove the 4¼percent ceiling on long-term Government bonds so that the Treasury's management of the public debt would have less impact on the mort,_gage market. We recognize that this is a subject over which this subcommittee has no jurisdiction, yet it is related enough perhaps to prompt the subcommittee to take cognizance of the matter in its report on this bill. Restricting management of the public debt to the shortterm market has serious implications for all financial institutions, particulal"ly banks and savings and loan associations. The "tragic fives"-5-pereent 4-year 10-month notes of October 15, 1959-resulted in an estimated loss of about $450 million in long-term savings which •could have been available for home mortgages. A less restrictive debt-management policy is bound to inure to the benefit of the mortgage market. I believe that there would be no disagreement with the statement that residential construction in the FHA and VA sootors of the market has been affected by monetary controls more than any other sector of the economy; and, to quote from the December 24, 1959, sta.ff report •of the Joint Economic Committeea continuing high degree of sensitivity se0Ills likely as long as the ceilings on FHA and VA interest rates remain in effect.  The question then must resolve itself thus: If the Congress is to persist in controlling the FHA and VA interest rates, what changes in monetary policy must be made so that this sector of the market does not bear a disproportionate burden? Or, in the rultern2-tive: What changes are necessary in the present control of FHA and VA interest rates so that these programs will cease to be more affected by monetary controls than any other sector of the economy? In seeking solutions to either of these alternatiYos we should not forget that sometimes the effects of monetary policy may arise from private credit rationing or the disposition of the consumer to put a strain on the money market for items other than housing. This subcommittee could make a great contribution to the solution •of the first question by recommending to the Committee on Banking and Currency the approval of legislation similar to H.R. 2891, 85th •Congress, which would establish a bipartisan monetary commission, including members from public and private life, to launch a broad in,quiry into the adequacy of our financiail institutions to meet the needs ·of our expanding population and economy. The second question of what to do about ceilings on FHA and VA interest rates is an old one for this subcommittee. Such controls are regrettably part of the conventional wisdom of our times. However, I do not want to leave the subject without reading .this excerpt from the recent staff report of the, Joint Economic Oommittee : Prior to 1953, housing does not appear to have been influenced very much by :general credit controls, for the simple reason that relatively little use was made ,of such controls. The pronounced impact on housing since 1953 is chiefly due to the existence of a ralther peculiar but very simple mechanism. Due to ceilings ,on the interest rates that may be charged on mortgages insured by the Federal Housing Administration and guaranteed by the Veterans' Administration, a rise in yields on other competitive types of investments, such as corporate and Government securities, has tended to attract the supply of investment funds away from these mortgages. On the other hand, when credit conditions have eased and yields on competitive investments have fallen, the supply of invest Federal Reserve Bank of St. Louis  304  EMERGENCY HOME OWNERSHIP ACT  ment funds has tended to flow back into the Government-supported mortgage programs.  We submit therefore that pumping $1 billion of Treasury money to support these programs at par is nothing more than a costly covernp of the basic problem and merely postpones the decision as to how long the mechanism of interest rate controls will be permitted to run its anticyclica1 or contracyclical course in our economy, a course which we believe runs counter to the best interests of the home-buying public. Section 12 of the bill provides for special assistance at par of section 203 ( i) mortgages of $8,000 or less on new construction, provided the permitted service charge of a half of 1 percent is not imposed on the borrower. A separate $50 million special assistance fund is madeavailable £or this purpose. We question the wisdom of encouraging lenders to refrain from charging a fee on 203(i) loans which the law permits and the FHA considers reasonable in order to permit the originator to sell these loans to FNMA when the imposition of this usual charge would make the loans acceptable to the secondary market. Section 13 would require that the originating mortgagee report to the FHA or VA the amount of any fee, charges, or discounts paid by the builder, seller, broker, sponsor, or any other person in com1ection with or £or the purpose of a.rra:nging a mortgage. We endorse this section as a far better approach to the problem of discounts than others which have been advanced in the past. The Realtors of America fully recognize the necessity £or charges £or interim financing, standby commitments, and discounts sufficient to translate the current submarket VA and FHA interest rates into yields commensurate with the :prevailing rates in the respective areas of the country. However, it 1s believed that full disclosure of discounts might have the effect of inhibiting the charging of discounts in excess of current requirements. We wish to thank the subcommittee for this opportunity to testify on this measure. Mr. Chairman, I would like to say that this statement not only embodies the views of the Realtors Washington Committee of the National Association of Real Estate Boards, but my own, and that these views were arrived at after a very thorough section-by-section analysis of the bill by the 100 members present at the meeting on which action was taken. The vote ,vas 99 to 1, the dissenting vote being Mr. Elliott of Texas. Mr. AnnoNrzro. vVe have already heard from Mr. Elliott. Now, Mr. Scott, you indicate that the objectives and the central theme of both bills are identical, and then you go on to point out that that is where the similarity ends. Then you go on to state t!hat in 1958 we were in a recession, "with a capital R," and I am quoting you, now. I want to make it clear, certainly I donl want anyone to have any misconception, I don't believe that any member of this committee has indicated, at least while I have been present, and I think I have been at every one of the committee hearings so far, that we are presently in a recession. · I don't believe that Mr. Rains, who introduced this measure, has ever indicated that ,we are in a recession, but I think that he has said, Federal Reserve Bank of St. Louis  305  EMERGENCY HOME OWNERSHIP ACT  and I believe that a great many members of the committee agree with the fact that the signs that we see confronting us today are similar to things that we saw on the horizon in 1957, and we were not smart enough to do anything about it-in 1957-until after the recession had been with us. We are. trying to prevent a recession in this particular instance, and I think that you will have to agree with me that certainly there are things pointing up the fact that such a recession could take place if this bill is not enacted. Would you care to comment~ Mr. ScoTr. Mr. Chairman and members of the subcommittee, I have been very much impressed with the improvement in the tone of the money market within the last several days. For example, FNMA was able to go into the marketplace and borrow $100 million at 5.17 over a period of 12 years, when the last offering commanded a price of 5.30 for a period of 9 months. Certainly this is a very substantial improvement in the price of money. I think the worst is over, personally. Mr. AnDoN1z10. How do you think the actual number of housing starts will compare in 1960 to 1959? Mr. ScoTr. Well, I think the builders are more expert on that, and they seem to think they are going to be about the same, according to the newspapers. Mr. Am>0NIZIO. Not according to the builders I have been listening to. You may not have been attending these hearings, but the builders that have come before us have not indicated that, and certainly if there is a drop of anywhere from 200,000 to 400,000 units which has been indicated to us, I think t4at will mean serious repercussionst don't you~ Mr. ScoTT. Well, I am not sufficiently expert, personally, to be able to tell you whether or not that is going to be so, but from the experts to whom I have talked, they don't predict any such reduction. As a matter of fact, the Realtors Washington Committee comprises a number of homebuilders, and there seems to be considerable optimism on their part that we are going to build in 1960 substantially the same number of homes as in 1959. Now I think the key to the problem is going to be whether or not there will be a demand in some of those areas where there has been a very substantial amount of building. Mr. AnooN1z10. Mr. Scott, on page 3, I believe you approve section 2 of the bill. Now to what extent do you believe that approval of sootion 2, permitting individuals to hold FHA mortga~s, would result in an increase in the availability of mortgage funds Mr. ScO'I"I'. I think it might be considerable. I can conceive that a number of sellers might prefer to take hack purchase money, FHA mortgages fully insured by an instrumentality of the U.S. Government, rather than to pay the discount on that same mortgage if it were necessary to sell it elsewhere. I think, further than that, that money might be attracted, :private money which presently goes into other forms of investment might be attracted into this field if the public was made aware of the fact that they can invest, individually, in FHA loans, with the proviso that these mortgi;i,ges are originated, processed, closed, and serviced by an Federal Reserve Bank of St. Louis  r  306  EMERGENCY HOME OWNERSHIP ACT  J;'HA mortgagee, because we would be doing a grave disservice to the individual if we permitted the individual to make an FHA mortgage and attempt to service it himself. There are too many ramifications; the regulations are too involved for the typical individual to be able to cope with them. Mr. AoooNrzro. I note also you approve section 5 of the bill, and I take it by that that you are not satisfied with the way FNMA has been ,conducting its operations. What objections do you have specifically as to FNMA's policy? Mr. ScOTr. Well, the most serious quarrel we have with FNMAand, incidentally, we believe FNMA can serve a very useful purpose in the home finance field, not only with respect to new construction but with respect to existing homes which, after all, constitute the major share of our housing inventory-our biggest quarrel with FNMA is the fact that they have not implemented the authority that Congress gave them to issue standby commitments on existing construction. We feel, further than that, that FNMA has discriminated in the past in its over-the-counter purchases against the existing house. Statistics show that more than 90 percent of all the purchases by FNMA have been of houses less than 10 years old. As a matter of fact, more than 80 percent of them have been brandnew houses. Now this obviously has discriminated against the real tor who deals essentially in the existing house. "\Ve think that FNMA can be tailored to meet the needs of all our people, and not just the homebuilders. Mr. AoooNIZIO. Mr. Scott, on page 11 of your statement, you say in effect that we shouldn't do anything about housing, that interest rates should be permitted to run their course. Does this mean we should no nothing to prevent another recession, with all of its attendant evils? Mr.. ScoTT. Well, Mr. Chairman, we can't agree that we are in a recession. Mr. AnnoNIZIO. I didn't say we were in one, I said to prevent on(l. Mr. ScoTT. I can't see, and our association cannot see why the Federal Government should pump a billion dollars of Federal money into the reactivation of a program that is going to serve such a tiny sector of the market. For exa1Uple, in my area the FNMA office in Philadelphia, which services some five, six, or seven States during the last program 10 period, bought exactly 252 mortgages out of the thousands and thousands and thousands of mortgages that originated in that area. . During that entire program 10 period New Jersey benefited to the extent of 252 mortgages. It wasn1t of any help whatsoever in the Philadelphia purchase office area. Now I think the same thing is going to happen again. You are going to have a rush of a certain small group of builders to take advantage of this bonanza, the purchase of loans that would be salable in the secondary market at a price, and they would be unjustly rewarded to the extent that the FNMA buys these at prices above the market. Mr. AoooNrzro. May I say that I am led to believe that the bill that was enacted in 1958, even though your Philadelphia office only bought Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  307  252 mortgages, and I am told this by the New Jersey builders, that actually what the bill did, after a billion dollars was put into the market, it attracted a lot of private money into the market and therefore it helped them a great deal. Mr. ScoTT. I am in the mortgage banking business in New Jersey, and I couldn't agree less. It didn't have one bit of effect in that connection at all. Mr. AnooNIZIO. That is what makes everything so interesting here in Washington. Mr. Widnall? Mr. WmNALL. Mr. Scott, what I particularly like about your comment is that it has been so constructive in that you approve of something and you disapprove of something. We have had some very slanted opinions up until now, either wholly against or wholly for,. and I think it evidences painstaking work on the part of your own group to try to analyze the bill and come up with constructive suggestions based on your own reaction to the economy as we find 1t today. I take it from your testimony that you feel that the majority opinion that the 41/4-percent. Government bond interest ceiling should not be lifted, is operating against the interest of the home buying public. Mr. ScoTT. I am not convinced that that is the opinion of the majority party. I have talked to some Democrats who feel that is the answer to our problem. Certainly in our opinion, and we have studied it for a long time, we cannot expect to have anything like sanity in the mortgage market until there is sanity in the money market in general. Now, as long as the Treasury is required by reason of this arbitrary archaic ceiling to go into the short term market, which is a very limited market, it 1s going to have to borrow at higher and higher rates. Now, if the Treasury is permitted to go into both the long term and the short term market, which it could do if the ceiling were removed, we would then have, I believe, a reduction in the cost of borrowing by the Treasury which would bring with it a corresponding reduction in the cost of money to everybody else. Mr. WmNALL. Do you have any evidence from any of the people connected with your association that the previous program 10 resulted in new construction in excess of market needs? Mr. ScoTT. Yes, we were told that in the various sections of the country that is exactly what happened, that they tailored their starts not to the demand, but to the amount of program 10 money that happened to be available. In other words, it was there, and they took it. Mr. "\VmNALL. Do you have any specific examples of that? Mr. ScoTT. Perhaps one of the members of my panel would like to answer that. Mr. CAMERON. In North Carolina we had instances-Mr. AonoNIZIO. Would you identify yourself for the record? Mr. CAMERON. C. C. Cameron, Raleigh, N.C. We have had instances where builders actually came to mortgagees and obtained Fannie Mae commiti:nent for large quantities of these special assistance 10 program moneys, with no analysis at all of the Federal Reserve Bank of St. Louis  308  EMERGENCY HOME OWNERSHIP ACT  consumer market. In other words, they saw an advantage to obtain money at par instead of paying, possibly, 4, 5 or 6 points discount in the private market for VA loans. Naturally, after paying for the Fannie Mae commitment, the standby fee, they then decided to go ahead and build houses, although the demand wasn't actually there. We have one instance now, I don't know the exact number, but I think it is 12 houses one builder built and couldn't sell at all. The Fannie Mae commitment expired and the construction mortgagee is 110w foreclosing the mortgages. Mr. WrnNALL. Do you have any other examples of that? Mr. AnnoNIZIO. Were these houses FHA-insured that you are talking about? Mr. CAMERON. By the FHA and VA. The builder has both FHA commitments and VA certificates of value, whioh was generally true in our area. However, I would say that 95-plus percent of the mortgages turned out to be VA mortgages instead of FHA. Mr. AnnoNIZIO. Mrs. Sullivan. Mrs. SULLIVAN. I have one or two questions, please. Mr. Scott, I believe you mentioned that in the Washington area they are expecting a high rate o-f building for 1960. The Washington area is certainly not a typical example of an area for building low-cost or low-income houses, is it? Mr. ScoTT. Well, I didn't confine my remarks to the Washington area. The members o-f our Realtors Washington Committee are drawn from every State in the Union, and it was the consensus of opinion that we would have a very high rate of starts in 1960, if not equal to 1959, very close to it. Mrs. SULLIVAN. It has been mentioned during these hearings that there is quite a bit of building of the higher-priced houses, but there is very little building being done for the low-income people. Now, couldn't this additional FHA money be sort of an impetus for the building of these lower-priced houses for the lower-income groups of people who want to buy those houses? Mr. ScoTT. Well, I think that might be true. There aren't very many areas o-f the country where they can build houses for $13,500. I would say that in the areas where they need it most, they can't build at that price. Mrs. SULLIVAN. One reason they can't build at that price is that the interest rates have gone up so high. Mr. ScoTT. I am afraid that isn't the answer. In our area we can't build houses that would meet the standards o-f FHA or VA at $13,500, because primarily the cost o-f land is prohibitive, and getting higher all the time, and that is something over which this committee has no control. Mrs. SULLIVAN. I recall a few years back that your organization was using a slogan, "No slums by 1960". Whatever happened to that :slogan? Mr. ScoTT. We are still working on it. Mr. AoooNIZIO. I think they projected that date now to 1970. Mrs. SuLLIVAN. Thank you. Mr. AnnoNizro. Mrs. Griffiths. Federal Reserve Bank of St. Louis  EMERGENCY HOME OWNERSHIP ACT  309  Mrs. GRIFFITHS. I am new on this Housing Committee, Mr. Scott, and I would be interested in knowing the makeup of this realtors committee. I have always assumed the purpose of the realtor was to sell property. Do you have people on the committee who have other interests than the sale of houses or land? Mr. ScOTT. Yes, we do, Mrs. Griffiths. Every member of our Realtors Washington Committee must be a member of a local real estate board and the National Associati