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by M . S. SZYMCZAK, Member, Board of Governors of the Federal Reserve System, Washington, D, 0. Q 6 ci 1« <b •> before the TEXAS MORTGAGE BANKERS ASSOCIATION CONVENTION Roof Garden, Adolphus Hotel, Dallas, Texas. May 7 , 1953, 11:00 a.m., CST. -22 RELEASE AT TIME OF DELIVERY MONETARY AMD CREDIT POLICY I am delighted to appear on your program this morning to ^change views with you at a time most important in our history. This °Pportunity is an especially welcome one,- because it gives me a chance "think out loud" about some aspects of mortgage finance as well as Monetary and credit policy. As you know so well, since 19U5 we have broken virtually 6Ver y previous record in the field of building and mortgage finance. Mortgage debt on all types of property has increased from 35> billion d °Uars at the end of World War II to almost 91 billion at the W i n n i n g of this year. The debt on apartment and commercial properties doubled in this period, rising from 12 billion dollars to nearly 26 b illion. You know, too, that in the seven years since the end of thp we have built more houses in this country than we did in entire decade of the Fabulous Twenties. l The mortgage debt on nf ° arm homes tripled in this period, rising from less than 20 billion ^ l a r s to more than 60 billion at the present time. This huge debt Picture rests almost altogether on the purchases of new and old 1 *° n&es made in the recent and current period of high real estate values. The 19^0 Census revealed that for the first time since the began collecting such information in 1890, there were more home ^ing families in the United States than there were renters. Today, - oM r 25 million nonfarm families own their own homes, and well over hgl-p of these families own them free and clear of mortgage debt, v - 2 - Many are beginning to wonder whether a decline in home Gilding may now be in prospect, perhaps fairly soon. Moreover, Questions are raised whether real estate values will stay at present ev ^- els, which are perhaps double those at the end of the war. Finally, ^ere are some who doubt the soundness of our large mortgage debt st ructure. What are some of the relevant facts? For about 2 years activity in residential building and real estate has been stabilized a s high level. In contrast to the late Twenties, vacancies are till very low, and rents are continuing to rise, in part reflecting ^ relaxation or suspension of rent controls. Also, financing arrangements on both outstanding debt and n e w loans are very different from those of the Twenties. Both rr ° °wers and lenders have several advantages which were not available ln that earlier period. First, about I4U per cent of the present 0lne ^ mortgage debt is underwritten either by the VA or the FHA. G r th ' e is the almost universal practice now of using regularly Then, Mortized mortgages. The short term, nonreducing mortgages which dipped many a home buyer and mortgage lender in the late Twenties How fortunately few and far between. Finally, monthly payments for home buyers appear to be in reasonable relationship to their current incomes. The high s °t second mortgage that was an additional peril to home buyers in 0 that earlier period has been largely eliminated. Recently, however, ^erstand there has been some revival of the second mortgage. - 3 - There are other factors that should not be overlooked. Home Gilding in the postwar period has been based partly on backlog demands an d a rapidly growing population. Cl> r edit — ates. It has been facilitated by easy including low down payments, long maturities, and low interest It has been aided, too, by large liquid asset holdings, high Inc; oraes, and rising real estate prices. The backlog lias now been drawn down, interest rates have and family formation may be less rapid in the years just ahead. ^ a n d s for houses — ar and particularly for older houses — are not as gent as they were and property values have been stable for some t;irne . On the basis of first quarter results, however, it appears that tj e " total number of new houses built this year may not be far different fV 0ln x either 193'l or 19$2, which despite many restrictions were both e ° llent construction years. If high levels of building activity are to be maintained the soundness of our present mortgage structure preserved, it will sential to maintain orderly conditions in the real estate and es A instruction markets. thQ It is clear that we must at all cost avoid Speculative building and financing operations that characterized th late Twenties. Frospects for stability in the field of residential construction mortgage finance are actually part of a problem with a much larger Sc °pe the problem of maintaining stability in an expanding economy, Promoting high levels of employment and a rising standard of living, 9rici °f avoiding excessive fluctuations of either an inflationary or ^flationary character. - h- In discussing this problem briefly, first I should like to a few comments on the general economic situation and then touch a Pon the relationship of credit and monetary policies of the Federal Reserve System to economic stability. How long can it last? wherever businessmen gather w That's the question one hears discussed today. Despite this genuine concern ^ c h in itself I find a healthy factor — lru — all of the facts seem to Ucate a strong economic situation for the present and immediate future. T-Je are using our plant and equipment as intensively today as at a ls Sc n y time in our history, short of total war. At the same time, there & noticeable absence of either price rises or declines on a broad ale, on the whole, markets seem in reasonable balance, with most Us ^ iness inventories at high levels but in line with current sales v °lume and there is no evidence of speculative inventory accumulation. The economy recently has demonstrated remarkable flexibility ^justing to shifts in the forces of supply and demand and in ^acting to news events. free 0 Markets ge .erally are more competitive and f governmental regulations than they have been for some Hnie. The initial decline in the stock market as hopes for peace ln r ° eased has been followed by little change for nearly a month now. Consumers and business seem to have confidence in their ^ a n c i a l positions. Investors have demonstrated their confidence by ^ o r b i n g a large volume of new security offerings. as Although there been a large increase in indebtedness, most business firms still substantial holdings of liquid assets and a relatively sound capital tr °e ^cbure compared with other periods of high level business activity. Th flow of savings has continued at a high rate. - 5 - Consumer expenditures have increased in recent months, and ^is has been an important sustaining factor in the current economic situation. 0u The rise in gross national product — that is, the total tput of goods and services throughout the country — during the as ^ t half of 19^2 was essentially due to civilian demands as there was n ° ly a slight increase in national security outlays. There is another side to the present economic picture that Is not quite so bright. Past There have been substantial declines over the year in the prices of some primary materials. The drop in farm r £' ices, even with supported prices for many items, has been sufficient lower the net income of many farmers. There are reports of some 30 j-tening in specific consumer markets and also in certain local estate conditions. lri Further, we are faced with sizeable adjustments the Federal Budget, in an effort to bring governmental spending revenues into balance. In spite of these facts, the situation is basically strong. So toeone has recently described our present economy as an "overtime" which to me conveys an appropriate sense of abnormality. In ae light of capacity operations and so great a proportion of overtime Vofb, a * n a pay, some adjustments eventually to a more normal basis of N a t i o n would be a logical development, and not one to be "viewed ^ alarm," especially if world tensions should be eased. In the area of money and credit where the basic responsibilities the Federal Reserve System lie, credit demands have continued to be er y large. In the past three years, the aggregate public and private ^ in this country has risen about 100 billion dollars. This is an - increase of nearly 6 - per cent, bringing the total to roughly Million dollars. This rapid expansion has, of course, been reflected l n increased pressure throughout the money market. Credit and monetary policy in these circumstances has been a pplying steady, though moderate, restrictive pressure to assure that r edit and capital demands are financed selectively and as much as Possible out of the economy's real savings. e Rapid growth in savings ?osits, savings and loan shares, insurance and pension reserves, provided the primary means for meeting the credit demand. Banks generally, then, have needed additional reserves to ^P.-ort the expansion of their deposits that has taken place. After government security holdings could no longer be converted into cash 0 acc Predetermined prices, banks needing additional reserves have iuired them primarily by borrowing from their Federal Reserve Bank. This privilege of borrowing from the Fed is one of the primary Vantages of belonging to the Federal Reserve System. In addition Meeting temporary needs of member banks, the System is always prey e d to meet any extraordinary needs for funds by the commercial inking system. It is clear that this facility is one of the principal bi -warks i of our private banking structure. On the other hand, the bankers in this audience will recognize, * ^ sure, that the privilege of borrowing from their Federal Reserve ^ k was not designed to be used — a even temporarily — for broadening bank's capital base, for taking advantage of technical market N a t i o n s , or for encouraging ventures of a speculative nature. - 7 - With some restraint on the supply of credit and a strong c °ntinuing demand for its use, a general tightening of the money market has taken place. This was reflected in the last half of 19^2 by a of interest rates, which has continued thus far in 1953. Xnc The ^ease in interest rates recently is the result of allowing the f> r ° in 3- e3 of supply and demand to operate with a minimum of interference free money market. In a free market, of course, what goes up can si s ° go down; and should the demands for credit slacken, or the l u ' PPly of credit increase, interest rates would tend to move in the Pposite direction. With this background, I should like now to discuss briefly ' y o u some of the major policy questions that confront your industry this time. I read, with considerable interest, the Statement of ^ n c i p i e s and Recommendations issued a few weeks ago by your national r ° £anization, and with which I am sure you are all familiar. Cll /0u This ment provides an excellent summary of the matters of concern to at this time. In the first two sections of the Statement, as I read it, the Position is taken that mortgages underwritten by the Federal Gr Gce nment ought to bear a rate of interest that would make them ptable in the market at or above par, and that more of the risk ^ Mortgage lending ought to be borne by the lenders and less by the 0Ve ^nment. These seem like very reasonable positions and should bear examined a little further. Your stand on the first point apparently reflected some Satisfaction w ith the maximum rate of interest then permitted on - 8 - ^ - i n s u r e d and VA-guaranteed mortgages. As you know, there were widely divergent views on this question among various interested groups; but we all hope that the action taken at the end of last week will prove to bp generally satisfactory. The thoughts that led you to a stand on the ^vision of risk seem to stem in part from a concern about the contingent Habii.ity which Governrr^nt assumes when the lender is completely or nearly of all risk and in part from the benefits to be derived from the ^-scipling of additional risk exposure on the lender's part. On the matter of the price for VA-FHA mortgages, the statement '"^es a broad reference to the applicability of the law of supply and demand. A "tight add parenthetically that this law seems to have taken a new lease 011 life lately. However, as you know so well, this stubborn and independent fellow doesn' t always behave just the way you might wish that he would, example, the statement is made that the discount on VA-guaranteed loans s v aried "from one point for properties located in the Northeast to five points for properties located elsewhere." It then goes on to say these mortgages ought to command par "whether the loans are on properties h; °°ated in rural areas of the 'Vest or Southwest or on properties that are c ^° ated in the urban areas of the Northeast." One cannot help wondering e ^ t!i e r th G differentials to which yom refer are not simply evidence of the the law of supply and demand actually operates. Premiums in some markets ^ discounts in others provide incentives for the shifting of funds from ^ a s of abundance to areas of scarcity. We can hope that, as time goes on and mortgage lending techniques ncl a facilities continue to improve, we shall not have some geographic continuously discount areas and others continuously premium areas. Ev G n a when that time comes, however, the concepts of a free market and a pegged at par vdll be mutually inconsistent; they are even more ar ~ ly inconsistent now — 9 - somewhat like having your cake and eating it tool In most highly organized financial markets, adjustments are made •^Parently to the satisfaction of the participants — — both through changes interest rates and through discounts and premiums. This is true in e °ondary mortgage markets, but it is not quite so true in the primary especially for Government-underwritten loans. In the Servicemen's ad 3ustment Aot, Congress has limited discounting in an effort to be sure th^f i, e veteran borrowers would benefit from the Act, For this reason, t fort ognize, you do not have complete freedom to use discounts and premiums ln ^ e primary market. I was glad to see some concern with the even broader question of what ^ Government's role in housing should be. In this connection, I wonder if I might lift one of the paragraphs p a 2e i; of the statement of principles and recommendations out of con- * It says, "...the Government's role in subsidized slum clearance and nousing by local communities should be re-examined to determine: (l) Whether the original objectives of the program have been fulfilled." In the interest of objectivity, I wonder whether you may want to Yourselves whether the same question should be explored and studied r °£ard to mortgage insurance and loan guarantees? Perhaps in a subsequent Statement your group will consider more L S i + h ne problem of transferring some of the risk on mortgage loans ne Government to private lenders. You may want to ask yourselves h or the Federal Government is insuring and guaranteeing loans u ° ld make anyway, but which you would just like to have the Anient share in whatever risk there is. Or, do you think these ar 10 - e the loans on houses that may lose their market appeal, or where the borrower may have too little stake in them, or where a small change in the economic situation would put the borrower on thin ice? ^ it is the former, perhaps some reexamination of the role of Government in your business is in order. If it is the latter, would you want to leave the implication that the Government backing is being u?e d to encourage people — borrowers, lenders, and builders — to against their own best interests and the interests of a stable and r P °Sressive economy? re This is not a question which will be easy to solve. In a period such as the mid-Thirties when the insurance program ' pe 7as started, many feel there is good reason for Government to encourage ople to do more building and lending than they might otherwise be pre pared to undertake and to offer to share a large part of the risk, ^ i o might be done simply because of the expectation that as time passes eQ oriomic conditions would improve and what looked like large risks Vr °uld in time become very small. In a period of high level activity Su °h as we have experienced recently no doubt many of you would find ^ difficult to justify governmental encouragement and sponsorship of ^ g i n a l projects, Terms on Government-underwritten loans have been relaxed ^ite a bit in the past 10 years and terms on conventional mortgages av r ® tended to follow this trend. These relaxations have materially ^ u c e d the monthly payment per :^1,000 of loans, and, generally, have rai s e d the ratio of loan-to-price. Yet, I notice that Part II of the ^ t e m e n t issued by your national association seems to advocate further - t a x a t i o n s along these lines. u c 11 - For example, it states that Section 213, nder which maturities of i;0 years and down payments as low as 5 per ent are permitted, should be "continued, expanded, and improved.» It be that the framers of the Statement had in mind a time when business lria y not be as good as it is today; when it might be appropriate to seek Wa .ys of "broadening the market". I have only touched upon a few of the problems considered Xn the Statement of Principles ana Recommendations concerning the role of the Federal Government in the housing field, proposed by the Board of Governors of the Mortgage Bankers Association. You are to be c °^nended for the thoughtful expression of these views which have been •UbJ.ished for the stucfy and information of everyone interested in this •^Portant segment of our economy. The fact that your national o po ^anization is devoting so much effort to the serious consideration O f 4-1 ^nese problems reflects great credit upon it and, in turn, upon " ach Of you. If, in the future, we can avoid the wide swings in construction ct ivity that have characterized this field in the past, it will be a r contribution to the maintenance of economic stability in this 0,J ntry # a strong, healthy, and dynamic American economy is a vital link • in our defenses against the forces which challenge not only 0( =ives but the very existence of free peoples everywhere.
@FedFRASER