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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(Superseded by H.R. 10213)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

Federal Reserve Bank of St. Louis


BRENT SPENCE, Kentucky, Chairman
PERKINS BASS, New Hampshire
WILLIAM A. BARRETT, Pennsylvania
PAUL A. FINO, New York
HENRY S. REUSS, Wisconsin
WILLIAM H. MILLIKEN, JR., Pennsylvania
JAMES A. BURKE, Massachusetts
CLEM MILLER, California
ROBERT L. CARDON, Clerk and General Counsel
JOHN E. BARRIERE, Majorily Staff Member
ORMAN S. FINK, Minority Staff Member


ALBERT RAINS, Alabama, Cllairman
WILLIAM A. BARRETT, Pennsylvania
PERKINS BASS, New Hampshire
JOHN E. BARRIERE, Staff Director
JOHN J. McE_WAN, Jr., Assistant Staff Director
ORMAN S. FINK, Minority Staff Member

Federal Reserve Bank of St. Louis

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 __
Emergency Home Ownership Act, section-by-section summary _________ _
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
of Alabama-----------------------------------------------Brinkman, Oscar H., executive secretary, National Apartment Owners
__ ---------------------------------------------Brown,
Hon. Edmund
G., Governor of the State of California ______ _
T., a Representative in Congress from the State_
of New
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,
Thomas B., president, Housing Securities, Inc., New York,_
N.Y ______________________________________________________




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 ____________________________ ~- __
Flynn, Frank P., Jr., cochairman, legislative committee, Home Manufacturers Association_________________________________________
Greer, Herschel, Mortgage-Bankers Association _________________ 112,129
Holden, John R., legislative director, AMVETS___________________
Keyserling, Leon H., National Housing Conference ________________ 143, 179
Lewis, Edward, Birmingham, Ala________________________________
Mason, Norman P., Housing and Home Finance Administrator______
Morgan, Robert M., vice president and treasurer, The Boston 5 Cents
Savings Bank, Massachusetts ______________________________ :.. __
National Retail Lumber Dealers Association _____________________ _
Netzorg; Lei:mar:d R; Western Forest Industries Association, Portland,
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__________________________________________________
Rains, Hon. Albert, chairman, at the opening of hearings on the
Emergency Home Ownership Act _____________________________ _
Rivers, Hon. L. Mendel, a Representative in Congress from the State
of South Carolina _________________________________ ~-_________
Herbert, president, All-State Properties, Inc., Long Island,_
N,Y ______________________________________________________
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______________________________________________________
Federal Reserve Bank of St. Louis




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 ______________________________ _
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:
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 ________________________________________ _
Homes, Inc., Houston, Tex., _____________________
telegram of January 22,_
1960 ______________________________
Griffiths, Hon. Martha W.:
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








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_______________
Rains, Hon. Albert:
American Veterans Committee, letter of February 2, 1960________
"Builders Critical of Money Policy," article from Evening Star,
January 23, 1960_________________________________________
California Savings & Loan League, Pasadena, Calif., letter of
February 2, 1960_________________________________________
"FHA Charge Held Usurious in Maryland," article from Evening
Star, January 7, 1960_____ ___________ __ ____ ______ _________
"Home Builders Flay High Interest Policy," article from Evening
Star, January 21, 1960____________________________________
National Association of Home Builders, Washington, D.C.,
letter and supplemental statement of February 1, 1960_ ______
National- League of Insured Savings Associations, Washington,
D.C., letter of January 27, 1960___________________________
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___________________________
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____________________________
Yarbrough, Joe C., El Paso, Tex., letter of January 26, 1960____
Share, Leslie, Hamilton Construction Co., Detroit, Mich.:
Dwelling permits issued, Detroit metropolitan area, 1954-59
Schwartz, Dan, Perma-Bilt Homes, East Bay, Calif.:
Qualifications for conventional loans (chart)___________________
Shishkin, Boris, secretary, Housing Committee, AFL--CIO:
Labor's Economic Review, September 1959____________________
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____________________________________
"Review and Outlook-The Government's Prefab Market,"
article from Wall Street Journal of January 28, 1960__________
Zimmerman, Julian H.:
Monthly survey of opinions of FHA, release on adequacy of longterm mortgage funds_____________________________________
Secondary market prices for FHA-insured 5¾ percent new home
Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis


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
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




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



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
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
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



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.


( 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
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



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
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:)

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



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
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
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




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
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



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



requirement in the law would relieve an unreasonable burden on the
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



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
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.
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



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
Federal Reserve Bank of St. Louis



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



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



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
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
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
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



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



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.

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



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
Such a possibility is implicit in the proposed deletion of the present
requirement that purchase prices shall be "within the range of market
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



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



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
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



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



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.

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
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



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
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



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
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



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
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



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

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
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



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
Federal Reserve Bank of St. Louis



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
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.
Federal Reserve Bank of St. Louis



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. 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
Mr. RAINS. I notice in your statement, Mr. Zimmerman, your figures
on mortgage discounts cover only 25-year FHA loans with 10 percent
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



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
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
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



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



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

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
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
Federal Reserve Bank of St. Louis



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



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
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



The following shows these prices by FHA administrative zones:

Jan. 1, 1960 Dec. 1, 1959
$~: ~
$~: ~
___ ---------------------------------------------------------------95.
96. 05
96. 05
95. 4
95. 5
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
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



Mr. MASON. It can cost them more. I wouldn't say a great deal,
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
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
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
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



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
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



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



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
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



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



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
Mr. MASON. Certainly the price governs whether it is available or
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



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
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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
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
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



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,
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
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
Federal Reserve Bank of St. Louis



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

Federal Reserve Bank of St. Louis



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



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



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.)

(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?
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



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%,
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

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



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
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



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
Can you give us some idea about it?
Mr. DRIVER. You mean today, Mr. Chairman?
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
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



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
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



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



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
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
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




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



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
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



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
. 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



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
· 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
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
Federal Reserve Bank of St. Louis



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


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

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.
Federal Reserve Bank of St. Louis




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
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 :)




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
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
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



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





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



segments of building, "tight money" breeds unsound and potentially dangerous
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
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



'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
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
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
. 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



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:)



To Am


(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



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.

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.

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.

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



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.

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.

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.

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.

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.

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;

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



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




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.

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



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



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.

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
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



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

1954 __ --------- ---------- ---- - --- --- ----- ------------------------ -- -- ------- 1955 ____ ------- -- ------- ------- -- ---- ---- ------ -------------- -------- --- --- -1956 __ ----- ----- -- --- -- --- --- --- ---- ----- - --- -- -- -- -- -- --- --- -- -- -- -- - --- ---1957 __ ----- --------------- ---------- --- -- ------ -- -- -- - --- -- -- -- -- --- -- - ---- -1958_. _-- -- __ -- -- ------- -- --- -- -- --- -- -- --- -- --- ------- --- -- -- --- -- -- -- --- --11159 ___ --- -- --- -- ---· --- -- --- -- . - -- -- --- - -- -- --- --- --- --- -- -- -- -- -- -- --- --- --

of Labor










• 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



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.

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
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



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
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
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
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



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.

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
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.

Federal Reserve Bank of St. Louis




1.-U.S. housing starts by type of finanoo and comparative data for FNMA
program 10 mortgage acquisitions
[1,000 units]

1957-January -··'···
February __ .. _.
March .• _._._.
April_._ .. ___ ._
June_ ........ _
July_ ........•.
August- ..... _.
September __ ..
October._--·-November..• -December._. __
1958-January __ .....
March __ -·---April_._ •.. _. __
May ....•.... _
June ...• - .....
August __ ......
September ... _
November. __ ..
December_ .. _.
196~January __ •····
March .......•
te,rlL .....•.•
ay .•...•....
Jnne .. ••·•·•··

October.- ..•..

November __ .. _

Total.. ..••..
12 months total:
May 1957 to April
1958 __ -··-·····-·
May 1958 to April
1969 •••........ __








FNMA program 10 mortgage
acquisitions 1 advanced 4

91. 4
76. 7
90. 7

15. 7
17. 7
16. 4
18. 7
11. 3
22. 7
29. 7
34. 7
34. 7


9. 7
14. 7
9. 7


57. 7
64. 6




7. 7

1. 7

5. 7



52. 2







---------- ---------- ---------- ----------



191. 7







823. l

Increase: 1959
over 1958 __ -· -·········





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



2.-Program 10 assistance by States-Distribution of program 10
commitments to purclw,se mortfJ'O,ges compared to U.S. housing starts



Alabama ••.••••••••.•••••
Alaska ••••.•••••..•....••
AriZona •••••••••.••.•..••

District of Columbia •••••

Estimated Percent of
percent of
U.S.pri• program 10
vate starts commit•
1. 5



5. 7

8. 7






1. 4

Illinois •....••••••.•••...•
Indiana •.••••••••.•••••.•
Iowa .••....••..••.•••...•
Kansas ..•••••••••••••..•.
Kentucky •.•••.••.••••.••
Louisiana ..••.•••••••..••
Maine ......••••••••••••.•
Maryland ..•...•••••••..•
Massachusetts ...•••••••••





Idaho •.•••.•••.••.•••...•








Estimated Percent of
percent of
U.S.pri- program 10
vate starts commit•


New Hampshire..........
New Jersey...............
New Mexico..............
New York................
North Carolina...........
North Dakota............
Puerto Rico..............
Rhode Island.............
South Carolina...........
South Dakota............


W ashlngton. ... ••. ..•.•..
West Virginia............






1. 5

o. 3

0. 6




1. 0
6. 3
1. 5
4. 8
1. 1

4. 0

1. 8
4. 2
2. 8
1. 4

3. 6

1. 6
7. 2
2. 3
1. 6
1. 9

2. 7
15. 4
1. 8
3. 5
1. 5

100. 0

100. 0




3.-SeZected data on FNMA program JO-Distribution of $1,000,000,000
special assistance authorization

Valueof con•

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

number-of Total mort•
mortgages gages covered
per contract




$636, 199, 000

Number of builders covered in :FNMA contracts to buy mortgages ______ 3,847
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..-,..:______ ..;.;. __ .:.:----



---'---------------- 74
Banks_______________________ ---·---------------· L--- •---17

Savings and loan associations_..:.,.,.,.--,,-------'-,.,--,- .
Insurance companies________________

________ .. _ .---· . .

--------- .----.


TotaL __ · ------'· -------' ------- -· ----------------, _____ .______ 100
Federal Reserve Bank of St. Louis



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

Metropolitan areas

FHA new

VA new homes


Starts Appl!- Starts Appraisal
California _______ - __ -- ________ _ Los Angeles _____________ _ Percent
San Francisco ____________ _
San Diego _______________ _
San Jose __________________ _
Texas ________________________ _ Dallas ____________________ _
___ --------------San
_____________ _
New York-New Jersey ______ _ New York _______________ _
Illinois _______________________ _ Chicago __________________ _
Pennsylvania ________________ _ Philadelphia_____________ _
Michigan____________________ _ Detroit ___________________ _
Florida ______________________ _ Miami-Fort Lauderdale __
Ariwna ______________________ _ Phoenix ___________ -- --- __ _
New Mexico _________________ _ Albuquerque _____________ _
Colorado ____________________ _ Denver __________________ _
Missouri-Kansas _____________ _ Kansas City _____________ _
District of Columbia _________ _ Washington ______________ _

Percem Percem Percent Percent


+34. ,_
+a l



+a ,

-34 ,
-00 :

-36 _________________ _



~ -48











1 Not

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
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



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



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



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
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



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. 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



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



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



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
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
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





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:
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•
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



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



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:


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



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
Federal Reserve Bank of St. Louis




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



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
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
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?
Federal Reserve Bank of St. Louis



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]

(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



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.


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."
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
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]



(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
Federal Reserve Bank of St. Louis



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.

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 * * *."

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.

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
Federal Reserve Bank of St. Louis



[From the Washington (D.C.) Evening Star, Jan. 7, 1960]

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
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
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.

Washington, D.O., February 1, 196(].

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



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.
MARTIN L. BARTLING, Jr., President.

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

1946 __ ---------------1947 __ ---------------1948 __ ---------------1949 __ ---------------1950 __ -- -------------1951- _ ·--------------1952 __ ----------------


Total housing
l, 127,000


1953_ ----------------1954 __ ----------------

1955 ___ -------- ------1951\ __ ---------------1957 ___ ---- ----------1958 __ ---------------1959 '-----------------


Total housing

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



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
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
Federal Reserve Bank of St. Louis


Median sales price of new homes


1950 __ -- -- -- --- -- -- -- -- --- -- -- --- ----- -- -- -- -- __ --- -- --- ------

1954 ___ -- ----- -- -- -- -- -- ___ -- --- -- _-- __ -- -- -- -- -- _-- -- ----- -- _
1955- __ -- -- _-- -- ---- -- ___ -- -- -- _-- -- -- _-- -- -- -- -- -- _-- -- --- --1956 __ --- --- -- -- -- -- -- -- -- _-- _-- -- --- -- -- -- -- -- --- -- -- -- _--•- _
1957 _ - -------------------------------------------------------1958 __ -- -- -- -- ---- ---- -- -- ___ --- -- _--- _-- -- -- ----- __ -- _-- ----1959 __ - -- -- -------- -- -- -- -- --- -- _-- ----- -- -- ---- ----- _--- _---1

Bureau of
Labor Statistics surveys





Estimates of
FHA property value



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.

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



opportunity to again comment on legislative proposals before this
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
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
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
Federal Reserve Bank of St. Louis



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



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
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



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



(The matter referred to follows:)


TULSA, OKLA., January 21, 1960.

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.

HOUSTON, TEX., January 22, 1960.

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.

l\'I. L. WESTBROOK, Ewecutive Vice President.

PORT WASHINGTON, WIS., January 22, 1960.

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.

F. W. KEIL, Vice President.
FORT WAYNE, IND., Ja'll,Uary 22, 1960.

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.

General Homes, Inc.
BRIDGETON, Mo., January 22, 1960.

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



~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.


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. 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
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



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
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
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



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
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



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
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
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
Federal Reserve Bank of St. Louis



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



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



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
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



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
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
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



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.)
(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.

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



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
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



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
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
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-
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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



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



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



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.
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.
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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
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
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.
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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
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.
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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
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.
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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
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.
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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.
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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
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
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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
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.
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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,
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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
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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



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
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
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.

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



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
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
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
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
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



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
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



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
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
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



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



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
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
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.

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



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



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



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
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



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
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



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
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
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
Federal Reserve Bank of St. Louis



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
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
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



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
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
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
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



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
Federal Reserve Bank of St. Louis


Washington, D .0.
The subcommittee met;_ at 10 a.m., pursuant to adjournment, in
Boom 429, Old House uffice Building, Hon. Hugh J. Addonizio
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.

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




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
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



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
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



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
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



Average Annual Rates of Change in Grass National Product
(in Uniform Dollars)

Long term

War Eros

Depression "Ero"



Long term
Exel. Depression
ond Wor Eros





(Exci. 1929-'47
ond 1950-'53)



Periods other than Depression and. War

Period -of Peace
and War






World War II

Korean Wor




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




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
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



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
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.
Federal Reserve Bank of St. Louis



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
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



4-5% a Year
3 - 4% a Year


About 1% a Year

Growth in
Eff iciency

Growth in Number
Wont ing Work

Need ed Growth in
Total Notional Production

Billions of 1958 Dollars












True Level of Unemployment
Mill ions of Workers



~~ ~@
4 .1


5.o ·-----True Unemployment

1.2 :«
t-.-;,.-; 0.·x


. Ient
....Fu11-T.,me Equ1va
of Port -Time

4 .7

3 .8
2 .9




• 1959 estimated on bos ,s of actual figures for first ten months .
Federal Reserve Bank of St. Louis

( est i •

·•· ·Full·Time



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


In 1958 Dollors













( Including Net Foreion}







$ 51.8

Federal Reserve Bank of St. Louis





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
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



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

Federal Reserve Bank of St. Louis



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



j:::.:::.:::::::j Total Notional Production in 1957 Dollars, Average Annual Rote of Change.


Industrial Production, Averag e Annual Rate of Change.

k?v -4

Unemployment as Percent of Civilian Labor Force, Annual Average.*

4 .Z¾















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.*


3.6 %





Bil lion







( Average Annual Role of Change l

~ Consumer Prices

t•:•:•:•:•:•J Wholesale Prices











Industrial Prices



IT:;) 0.3%







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



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



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



"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
These two charts illustrate this discussion.
Federal Reserve Bank of St. Louis



HIGH GROWTH RATE, 1960-1964,
Billions of 1958 Dollars




Totot Notional Product (G.N. P.)
at High Growth Rote
(Average Annual Rare of 5%,
After Full Employment Restored) "


(Average Annual Rate of 2.3%,
The Actual 1953J59 Rate)



Millions of Persons

Civilian Employment
at High G. N. P. Growth Rote



Civilian Employment
at Low G. N. P. Growth Rote





NOTE: Year 1959 is used as projection base year for this chart
Federal Reserve Bank of St. Louis



1960-1964 AS A WHOLE
In 1958 Dollars

IMulliplo Penon Familiul EXPEND/TURES I


















~ I




$225 Billion

: , $165 Billion





$ 40 Billion,


: (Including NII Fo~oign)









Jr.:i· ·




Federal Reserve Bank of St. Louis







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



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



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
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
Federal Reserve Bank of St. Louis



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
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
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



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
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



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
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
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
·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



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



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



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



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



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
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
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



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
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
Federal Reserve Bank of St. Louis



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
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

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



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
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
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



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



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



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:)

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.

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.

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



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.

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



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

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
Mr. AoooN1zro. Without objection, that may be done.
(The article is as follows :)
[From the Wa,M Street Journal, Jan. 25, 1960]



(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.

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



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.

"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

"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



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.

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."

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
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



"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
Will you please come forward, Mr. Shishkin ~
We are running a little behind schedule, so we would appreciate
expediting this as much as possible.

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
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



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
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
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



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
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



In the places where the discount was seven points, the effective interest rate was nearly 7¼ percent. These are breathtaking figures, Mr.
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



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



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
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



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



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
5. A greatly expanded slum clearance and urban redevelopment
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




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:

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

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







million new housing units by 1976, a minimum
of 2.3 million units a year.



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
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.

WIWAM f. SCHNllZLER, S.c.-Jrea1.

Department of Research



l'"'-"rial fn9'flfft1 IIIT OO'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)
Becoming substanding 1960-75
Total substandard .. :
Less substandard suitable for
Total substandard to be replaced
Removed by disaster and demolition
(non-s,ubstandard) ...
Total replacement need 1960-75 ..
Increase in number of families
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



Includes one--person houaeholds.







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

Less than $2,000


_Less than 0.05 percent

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.




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




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



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

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


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.




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

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

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




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
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
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..


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



Sec footnote 1.



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



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
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



taken account of that particular factor, but we wish the committee
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
I have no questions.
Mr. SHISHKIN. Thank you, Mrs. Sullivan. I appreciate it very
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
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•
Mr. ADnoN1zro. Mr. Ashley.
Mr. AsnLEY. I have just a comment, Mr. Chairman.
Federal Reserve Bank of St. Louis



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



that he has a representative here, a Mr. Brinkman. Would Mr.
Brinkman please come forwrd?

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



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



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.)
(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
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



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
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
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
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
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



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.

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



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
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
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



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
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



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
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



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
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.

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
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
Mr. AoooN1z10. Without objection, that will be done.
Federal Reserve Bank of St. Louis



(The information referred to is as follows:)


January 15, 1960.


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
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



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



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
(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



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



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.






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
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



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
Respectfully submitted.

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
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



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
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


: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
. 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
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



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



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.



Sales price________________________________________________________
FHA value________________________________________________________ 17,000
Loan amount______________________________________________________ 15,000

Closing costs (estimated)___________________________________________


Total cash___________________________________________________





Less income tax____________________________________________________


After tax__________________________________________________________


Effective income_____________________________________________




l,13 of first $3,000---------------------------------------------------- $1,000
¾ of balance ($2,860)---------------------------------------------572

Allowable housing expense____________________________________

1, 572


$15,000 loan at 5¾ percent, 30-year term :
interest)-----------------------_ $92.80
insurance( principal
Taxes ________________________________________________________ _
Insurance premium ___________________________________________ _ 27.11
Maintenance __________________________________________________ _
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
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



... m e: ,..,.,,'"'.A....__.,....,_
.. .,......... .,."....... .,.

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...... .....

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NUMIOlDT •· •· ._ ,.. - . . ....

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......... ~i:..=-.:..--:-:::.:....,--:=-..:.:--..:::=::.::c-:
..... " :t..c-.;::

Federal Reserve Bank of St. Louis




D•rc _ _ _ _ _ _ _ _ _ _ _ , 19-



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




WINlr •

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.Z•, le"

..... ialoreltlOII • IJelir,N

IIM, . . . . . . . .liry MIICUI
Federal Reserve Bank of St. Louis


1w 11'....Wt' accuu«

to• for ffl'On GI Offltt..,_


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aHIH 1Prf1'•1 HI

okPUllf 1....,


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_____ _

Paul B. & Belen A ?41 Jer

S.1teble Bn11d1&J


--- ---------~

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 ,_


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

Federal Reserve Bank of St. Louis

FHA Fora No. ZOO,& e
(Bev, 3-58)



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 ........,

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.

421 S. W. Sixth, Portland, Oregon




(Name and title of officer)


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 . . .


·······••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.


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


2. Approximate coat of closing the transaction (including deposits for taxes and insurance premium■, S-----·······) .. S......
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__


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 ·------·-··-·--······-···········•····

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


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,

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 ................... ·····················-·-···-·◄-




4. For open-end only: Are additionaJ rooms or enclosed areas proposed? .............. .

or no)

T1~!0 ~~.n~~~ •a:!~!~t'::°1ft~=r~nto:or




.................................................................................. .
~~~.}3;!~~f)rty offered as security for the loan applied f o r ~





:.-: :1.~,~pa~



·::::::::::~~~~-···•··•-··-·······:::::::::::::::::::::::::::::::::::: ............................ ················::::......... ·::::::::::::::
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,
1, Applleant,
2. Co-applleant:
(a) Employer'•name--------------(11) - - - - - - - - - - - - - - - - - (6) Employer'1addn,u_____________
(b) - - - - - - - - - - - - - - ~ -



(cl) Pooltionoccupled _ _ _ _ _ _ _ _ _ _ _ _ _ _

(cl) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __

(e) Nameandtltleof1uperlor____________
•(I) Number of yean in pruent-plo)'Dlellt.._______


~ - 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

Number of years married _ _ _ _ _ wife .........._
Age■ of dependent■
other than apouae

!. . . . . .


• • • •

• $...,_ _ _M


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

:!t -:°A~uc:!~'i:t!::Citie!tC::-J°!:e~a1:i:i::.,;e:~ o?l!~~!i:!:.ferivea

income from own

Statement d a t e - - - - - - Aeoounta payable (except Installment aeeounta)
Inatallment aeeount payable, automobile •
Monthly payment •
Other inatallment accounts payable
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 • • , , • • • ,
• • •
• •••••••• S

Caah aeconnta (Hat) :
When depoalted-

_________ ,






y .....



(If more than one property is owned attach separate schedule.)



,............... ,............... ,

.............. .

(Name and addreu or aortpsee)


A . .11111




············-·· '····-······..· ...............
Federal Reserve Bank of St. Louis

Bue pay of applicant .
,, _ _ _ __
(Baaed upon current rate of earnings, except

=~~ ~,:=:i~:1'.!;i~ ~'r:h::!:

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


(list sources and

$.... .
$ ................. .


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 ~


Payments on other loans .

S-----------···· --




................. .


(a) Mortgage payment or
( b) Taxes and insurance •
(<) Heat
(d) Water, gas, electricity
$----(•) Maintenance










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

true, :Uii: i::~, :.:.~~ii;,i:n:i.c:;~~d h~~:i:i~:d
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
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.


(Signed) - - - - - - - - - - - M ~ • - r l -6- 4-6-..,-.
(llortsuor'• pNNDt addnaa)


(Telephone number)



The atatement in the above Schedule D u to employment and income therefrom hu been verifted by me at the IOUffll,


(Property Manapr



U. S. GOVERNMENT Pll:INTING OFF1CE : 19Sl-0-4589ol7



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
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
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
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



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
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



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



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



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
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
Federal Reserve Bank of St. Louis



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
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
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
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,
Federal Reserve Bank of St. Louis



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,
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
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



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

Discount on the

$16,000 sales price



Monthly InpayDown come needed
ments, payment to qualify
buyer, per
Amount and taxes

--------01. .•••.•••••••••.•••.••.••
FHA ______________________ •
Conventional (no 2d mortgage) •••••••• __ •••.•••••••
(with2dmortgage) _____________________







• 7.2

















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. ____________________________________________________________________________________


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
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



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



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?
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,
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



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
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
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.
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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
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
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
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.
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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
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



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
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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
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



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
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.

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
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



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



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.

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
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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:)

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
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.
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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
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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
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
Mr. PoRTER. I appreciate the gentleman's concern.

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."
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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
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.
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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

(The editorial, in full, reads as follows:)
[From Milwaukie (Oreg.) Review, Jan. 21, 1960]

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."
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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
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

Mr. PORTER. Mr. Chairman, it is my privilege to introduce to you
and your colleagues my friend, Leonard Netzorg.

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
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.
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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
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
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.
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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
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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,
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
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.
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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.
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
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
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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

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.
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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
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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.

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
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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.
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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
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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



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
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



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.

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
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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
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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.

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.
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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



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
The next witness is Mr. Leslie Share, president of the 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
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



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
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
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



(The chart referred to in Mr. Share's statement is as follows:)



15151i - 1959



~ 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.

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



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
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



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
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.

.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



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
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



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
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
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



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
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



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



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



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
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



I say the foreclosure law is part of it, but it is not the whole
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
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
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



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
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



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
Federal Reserve Bank of St. Louis



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
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
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



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



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


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
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



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
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
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



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
Doesn't that occur sometimes because you have overbuilt your
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
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



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
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
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:)


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



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
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



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
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

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
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]

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



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
Mr. RAINS. That letter along with the additional information may
be included.
(The letter and data referred to above are as follows:)

__ 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



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
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
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
Very truly yours,




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


Jan. 1, 1959 ____________________________________ _
May 29, 1959 __________________________________ _
Aug. 2,15,1959.
Sept. 12, 1959 __________________________________ _

Federal Reserve Bank of St. Louis


96½ --------------



95 -------------93½ --------------








92½ --------------

91½ -------------91½


[From the Miami Herald, Dec. 20, 19-59]

FHA's Boss DoEsN'T SEE IT Ou&


( 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
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.

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.

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.

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
Federal Reserve Bank of St. Louis



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



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.

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

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,
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
Mr. ScoTT. Thank you very much, Mr. vVidnall, it is a pleasure to
be here.
Federal Reserve Bank of St. Louis



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.

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
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



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





sole purpose of lowering the monthly shelter costs to the home owner.
The sole determinant should be the actuarial state of the insurance
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
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


Federal Reserve Bank of St. Louis



the Association would conduct its operations on a revolving fund
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



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
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
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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
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
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.
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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
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ment funds has tended to flow back into the Government-supported mortgage

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
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,
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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
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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
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
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
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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
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
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
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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
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.
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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 a