maximum guaranty amount has been raised to $7,500. In November of 1949, VA regulations were amended to permit the lender to charge a 1-percent origination fee to the veteran borrower. While that 1 percent fee did not increase the lender's income by the full amount of the charge, since it was permitted only in lieu of certain other origination expenses of the lender, it nonetheless did serve to "sweeten" the investment attraction of the GI 4-percent loan by providing an offset to origination costs. At that time it was generally agreed that for most lenders the 1-percent charge offered an additional profit incentive, probably averaging about one-half of 1 percent of the loan amount.

In December 1948, VA regulations governing the conveyance of property were liberalized substantially from the lender's standpoint. The present rules governing liquidation provide a number of important advantages, e. g., the Veterans' Administration will take the property upon foreclosure subject to redemption rights and without regard to whether the property is adversely occupied. Also the VA will accept title which is generally acceptable in the locality and does not insist upon a "marketable" title; VA will assume custody of the property and risk of loss due to property damage immediately after foreclosure even though the title has not yet been conveyed to the VA. These are by no means all of the advantageous aspects of VA's rules governing property conveyance when foreclosure occurs, but they serve to illustrate that the lender is afforded strong inducements to invest in GI loans quite apart from the permissible interest rate itself.

In 1948, Congress added an incontestable clause to title III of the Servicemen's Readjustment Act which provided a strong measure of protection previously lacking by enabling the lender to have confidence that the validity of the VA guaranty would not be questioned in the future because of mistake or misunderstanding on the part of either the lender or the VA field office.

Other changes over the past several years have seen the establishment of minimum construction requirements, by the introduction of compliance inspections to guard against defective construction, and by a tightening of the VA appraisal and credit underwriting functions. Now, under credit controls, all GI loans require down payments. The investment attraction of the GI loan has also been bolstered by the wider acceptability now accorded to the GI loan among all types of lending institutions, including secondary market investors who supply mortgage capital on an interstate basis, in contrast to the earlier days of the VA loan guaranty program when the GI loan was regarded by many as a new and untried investment instrument. Last but not least is the outstanding record demonstrated by veterans in repaying their GI loan obligations and the warm respect which that attested record has generated among lenders. In contrast to the fears expressed in the earlier years of the program, many lenders now point with pride to their GI loans and regard their veteran borrowers as their soundest credit risks.

It is admittedly impossible to assign a fixed numerical weight to all of the above-discussed advantages from the investor's standpoint. But it cannot be denied that they all have contributed to a substantial enhancement of the investment appeal of the GI 4-percent loan and show clearly that the GI loan as an investment "package" has not stood still while everything else around it has changed.

THE MORTGAGE MARKET SHOULD IMPROVE

As stated earlier, we are not prepared to concede that the GI 4-percent rate has lost its competitive ability even in the present mortgage market. But we believe that the case against an increase in the maximum interest rate for GI loans is even stronger in view of the prospective improvement now beginning to take shape in the mortgage market. It is our belief that most of the deterring influences to mortgage investment are now beginning to diminish in importance and that the basic trends now evident portend an easing in the mortgage-supply situation, including the supply of funds available for investment in GI 4-percent loans. Briefly, the factors which underlie that belief may well be restated here in summary as follows:

(a) The very large volume of mortgage commitments made by lenders in the latter part of 1950 and the early part of 1951 are now being worked out. This was clearly brought out in the statistics presented at the conference showing the sharp decline over recent months in the outstanding loan commitments of life-insurance companies. With the reduction in outstanding commitments to more normal levels now in sight, the pressure upon lenders to find new mortgage investments to keep their dollars employed will increase.

(b) The extremely high rate of peacetime savings out of current national income is being reflected in the record amounts of new money flowing as deposits into mortgage-financing institutions. That trend, plus very large principal repayments on outstanding loans, is also steadily increasing the pressure to find available investment outlets.

(c) The opportunities to invest in mortgages are gradually contracting as the credit controls and limitations on materials bite deeper, so that the swelling amount of investment money will be forced ot compete for a dwindling supply of new mortgages.

(d) One deterrent to mortgage investment has been the greatly expanded investment opportunity in corporate securities which has arisen in connection with expanding capital outlays by business for defense-plant expansion and other defense-production purposes. Corporate borrowing is still proceeding at extremely high levels, but it is expected that the volume of such financing will soon begin to decline in rate as the initial tooling-up phases of the defenseproduction effort are completed. The probability of such a decline in the rate of corporate borrowing from present peak levels is strengthened in view of present defense-budget policy which contemplates an easing in the impact of defense expenditures upon the civilian economy by spreading the defense-production program over a longer period.

(e) While lenders may be expected to have increasing difficulty in finding .conventional and FHA borrowers who can meet the very substantial down payment terms required for such loans, their potential customers among World War II veterans will be very large because of the preference which GI loans are given under the credit-control laws. For example, on a $12,000 house a nonveteran must put in $2,400 as a down payment with an FHA or conventional loan. With a GI loan the down payment required of the veteran is less than $1,000 ($960) in the same case.

These we believe to be the major influences in the picture which point toward an increasing improvement in the mortgage supply situation, including an in-creased willingness on the part of lenders to invest in VA-guaranteed 4-percent loans. These various influences are reflected currently in VA's most recent statistics. New appraisal requests for proposed construction, the first and most sensitive indicator of GI loan volume, reached a low point of 7,700 units in July 1951. Since that date the monthly total has moved almost steadily upward, reaching a monthly average of 15,000 in the last quarter of 1951, and a peak of 21,600 in January 1952, the highest number of units requested in any month since the October 1950 curbs were imposed.

Some of this accelerated appraisal activity may well be arising from financing arrangements which reflect discounts or the absorption of discounts, which are set up to avoid or skirt the prohibitions of maximum fee schedules established pursuant to section 504 of the Housing Act of 1950. If these recourses are to be proscribed, such a prohibition could be accomplished only by substantially broadening and strengthening the present law. But such a step is not urged since no flagrant abuses such as compelled the Congress to enact the original section 504 have been noted. It is thought also that such arrangements may serve to compensate for and bridge over to some extent the consequences of temporary voids or maladjustments in the regular flow of mortgage money such as underlay the market during 1951.

POSSIBLE INFLATIONARY EFFECTS OF AN INTEREST RATE INCREASE

Another subject discussed was the possible inflationary effects of an increase in the maximum interest rate for Government guaranteed or insured loans. At one point during the discussion Mr. Martin, the Chairman of the Board of Governors of the Federal Reserve System, indicated that an increase in the rate would not be inflationary. As you probably noted, that indication was later capitalized upon by Mr. Clark as a favorable factor in presenting his arguments for a higher rate.

It is deemed probable that the Federal Reserve Board's expression is based upon the assumption that the 800,000 figure for new housing starts in 1952 must be regarded as an absolute maximum and that whatever steps are necessary to achieve that goal will be undertaken by the Government. Viewed in that light, it is conceivable that an increase in the maximum interest rate for GI loans might be regarded as noninflationary, since the result would be to shift a substantial portion of conventional financing into FHA and GI loans with no additional increase in the net amount of the new mortgage indebtedness required to finance that level of starts.

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It is my belief, however, that the stimulation of an increased GI loan interest rate would greatly increase the difficulties which the Government would encounter in keeping maximum housing production within the desired goal, and that further, it might very well incline or force the Government to take other restrictive steps to keep within that goal. Also in the existing housing sector, I do not think there is any doubt that an increase in the GI loan interest rate would tend to inflate the expansion of mortgage credit in connection with the sale of existing homes. In the case of existing homes, there is no numerical goal to be controlled. and a higher interest rate would greatly increase the effective demand of veterans in the housing market. It should not be inferred, of course, that we do not want to see a larger share of the housing supply go to veterans with the advantageous terms of GI financing. We want to see that trend very much but we would prefer to witness its accomplishment at the same low interest costs which have always been in effect for GI loans. We believe also that a gradual improvement in the availability of GI financing-now in prospect even with the 4-percent maximum. rate maintained-will contribute far more to stability in the housing market than would a precipitous improvement caused by an increased interest rate, with the attendant inflationary dangers and the higher financing costs which veteran borrowers would have to bear.

As the committee proceeds further with its consideration and study of the various points and problems related to the foregoing, it may be sure that the Veterans' Administration will be glad to supply it promptly with any further analysis or statistics which may serve to assist the committee.

STATEMENT OF CLARENCE C. KLEIN, PRESIDENT, NATIONAL ASSOCIATION OF HOUSING OFFICIALS, CHICAGO, ILL.

Mr. Chairman, my name is Clarence C. Klein. I am president of the National Association of Housing Officials. I am also administrator of the Pittsburgh Housing Authority.

At the recent hearing held by the Senate Banking and Currency Committee, Mr. William McChesney Martin, Chairman of the Board of Governors of the Federal Reserve System, made a statement to the effect that local housing authority bond issues have an inflationary effect on the general economy of the Nation. The National Association of Housing Officials wishes to present this statement to refute such contention.

Mr. Martin stated in his testimony that in his opinion the 800,000 housing units scheduled for 1952 "can be meshed into the present picture without seriously disrupting the economy." He pointed out that this was the Government's policy and that the Federal Reserve Board had participated in the formation of that policy.

In view of this statement, it is difficult for our organization to understand Mr. Martin's statement to the effect that housing authority bonds are inflationary. Local housing authority bonds are no more inflationary than instruments for private housing financing. In fact it can be argued that they are less inflationary. Inflation is increased as the demand for goods and services increase, without a corresponding increase in the supply of such goods and services. Local housing authority bonds do not funnel funds into the hands of consumers and thereby increase available purchasing power. They do not per se increase the demand for goods since they finance housing which is part of the limited number of units scheduled for any one year.

Mr. Martin stated that the economy can absorb an absolute volume of 800,000 housing units in 1952. The way in which these 800,000 units are financed does not contribute one way or another to the inflationary pressure unless they are financed by means of direct Government obligations. Mr. Martin's concern, therefore, should not be with the less than 10 percent portion of the 800,000 units financed through local housing authority bonds.

Mr. Martin was also concerned over the tax-exempt feature of local housing authority bonds. We assume from this that his objection runs to all bonds of States and their political subdivisions since all such bonds are tax exempt. If Mr. Martin objects to tax exemption for the securities of municipalities, he should not single out but one type of bond. Tax exemption of municipal securities is a separate subject and is divorced from the question of financing housing, public or private. This is a subject in which not just local housing authorities are interested; and if it is to be raised, these groups should have an opportunity to be heard.

It is well to point out that if the tax-exemption feature were eliminated from local housing authority bonds, it would be cheaper for local-housing authorities to borrow money directly from the Federal Government to finance their projects. If such an alternative were provided, the Federal Government would have to borrow in order to lend money to local-housing authorities. Federal borrowing would mean the issuance of Federal securities that could be used to extend bank credit. The Federal Reserve Board points out logically that expansion of bank credit is inflationary, and has advocated a fiscal policy to reduce or limit credit. We do not believe that the Federal Reserve Board would advocate a change in policy that would result in the issuance of securities that could be used for the expansion of bank credit.

In summary, therefore, it seems unrealistic to label local housing authority bonds as inflationary. They are no more inflationary than the financing of private housing, the number of public-housing units are within the agreed-upon yearly limit, and shifting to direct Government financing would certainly be inflationary. Our organization feels that Mr. Martin's statement unfortunately did not take these matters into consideration.

STATEMENT OF J. MAXWELL PRINGLE, MANAGER FHA INSURED MORTGAGE DEPARTMENT, STERN, LAUER & Co., NEW YORK, N. Y.

There is a log jam-and a most serious one-in the production of vitally needed housing, mostly for rent, in critical defense areas and on military bases. I think it is safe to say that this log jam would be quickly broken if a way could be found to secure commitments from long-term lenders (insurance companies and banks) to purchase the permanent loans-title VIII, section 803 and title IX, sections 903 and 908-secured by such housing on military bases and in critical defense areas respectively.

The problem is not construction loan money. There are still many short-term lenders willing to finance FHA housing up to the point of completion, but they do require take-out commitments for the long-term permanent mortgages. It is these take-out commitments that are, at the moment, virually unobtainable. Even Federal National Mortgage Association has no authority now to give such advance commitments.

It is easy, but not very fair, to blame this state of affairs on the savings banks, life-insurance companies, and other investors in long-term mortgages. Such institutions invested heavily in FHA and VA mortgages all through 1950 and the early part of 1951. Now that the general level of interest rates is up, making the unchanged 4 and 44-percent interest paid by FHA mortgages comparatively less attractive, they can hardly be blamed for using the smaller amount of money they have available for investment in FHA mortgages to purchase the safest type of such mortgages, namely, title II 44's secured by owneroccupied homes in stable communities. In fact, as the custodian of other people's money, they might be criticized for doing anything else.

If FHA mortgages were rated, in the same way as municipal bonds, owner occupied title II 44's would, I think deserve the highest rating of AAA, title VIII military housing loans would deserve a rating of AA, and title IX, sections 903 and 908 loans, while still a very sound investment, might be rated A. An A-rated bond is a good bond, but if the lending officer of a bank or an insurance company is offered, at the same time and to give the same net yield, two blocks of bonds, one rated AAA and the other A, it is obvious that if he buys either block, it won't be the A-rated bonds.

Doesn't this matter of comparative quality, in FHA mortgages, as well as in bonds, suggest the way to remove the financing obstacle which has caused the log jam in defense and military housing? A slight increase in the interest rate on title VIII, section 803, military-housing loans, and on title IX, sections 903 and 908 loans secured by housing (largely rental) in critical defense areas would, in my opinion, result in commitments from private lenders for a very substantial part of all FHA titles VIII and IX loans. Recourse to Federal National Mortgage Association would seldom be necessary. Just what do I mean by slight increases in the interest rates and how could such increases be brought about?

Title VIII (Wherry bill) loans now carry 4-percent interest. I believe that a nominal increase to 4% percent would make it possible to obtain commitments from private lenders for the great majority of the title VIII mortgages for which

FHA commitments have been issued or which will be issued this year. Monthly rentals in the average military housing project are around $75 per apartment. An increase of one-eighth of 1 percent in the interest rate would represent an additional cost to the sponsor of about $0.75 per month per apartment, and there are few sponsors who wouldn't gladly absorb that nominal amount. To actually increase the interest rate on title VIII loans would require action by Congress, but it seems to me that the same result might be accomplished in another way. The FHA could, I believe, authorize the mortgagor corporation to execute a contract with the mortgagee providing that upon completion of the project, the mortgagor will pay the mortgagee a service or management fee of one-eighth of 1 percent a year, payable monthly on declining balances. I recognize that such a fee would not be secured by the mortgage and that a failure to pay it would not constitute a default under the mortgage. Nevertheless, it would probably be acceptable to lenders and could be put into effect much more promptly than legislation increasing the interest rate could be passed by Congress. Furthermore, the FHA Commissioner could withhold approval of such a fee arrangement in cases where it appeared to him to be unnecessary.

Title IX section 908 loans secured by multifamily rental housing projects in critical defense areas also carry 4 percent interest and are very similar to title VIII military housing loans. Although there are some who will differ with me, I believe that 908 mortgages, except in those cases where the project is located in a large, stable community, will be considered by most private lenders as inferior to title VIII mortages. Consequently, to make certain that a majority of the programed 908's can be financed by private lenders rather than indirectly by the Government through Federal National Mortage Association, I believe that the interest rate should be increased to 44 percent. As in the case of title VIII, this would require action by Congress. A short cut again would be FHA consent to, and supervision of, an agreement on the part of the mortgagor to pay the mortgagee a service or management fee of one-fourth percent a year. Most sponsors would be willing to absorb the nominal additional cost of approximately $1.50 per month per apartment.

Title IX, section 903 loans are secured by one- and two-family houses in critical defense areas and carry 44 percent interest. Most of the programed housing to be financed with title IX, section 903 mortgages will be for rent but even the small portion of 903 loans secured by houses that may be sold will be relatively unattractive because the mortgagors will be largely in-migrant defense workers or military personnel who will be required to make only relatively small down payments. Private lenders can't be blamed for preferring title II, section 203 owner-occupied 44's to 903 44's particularly when, as is true right now, title II's, the most desirable type of FHA mortgages, can be purchased at par for immediate delivery and at slight discounts for future delivery. To make 903's attractive to private lenders, the interest rate, particularly where the security is rental housing, should be raised to 42 percent. Fortunately the FHA Commissioner has the right to increase this interest rate to 4% percent. No action by Congress is necessary. Builders of 903 rental projects should not find it difficult to realize a fair operating profit even with their interest overhead increased by $1.50 per unit per month. I venture to predict that inability to get financing at 44 percent will prevent far more projects from being built than would be prevented by an increase in the interest rate to 41⁄2 percent.

I have made these recommendations with the full realization that the FHA, the VA, and Members of Congress regardless of party, are opposed to increasing the interest rate on FHA and VA loans. This, of course, is a controversial matter and I see no need, for the purpose of this discussion, to take a position either for or against a general advance in FHA and VA interest rates. In fact, I have been careful not to suggest an advance in interest rates except in the case of FHA mortgages (titles VIII and IX) secured by vitally needed rental housing on military bases and in critical defense areas. The very slight increase involved will be paid not by veterans (no suggestion has been made that the rate be increased on 4 percent VA 501's), not by individual civilian home owners (I do not suggest any change in the 44 percent rate on title II, section 203's), not even by the tenants in the military and title IX rental projects, but by the builders of those projects who will gladly accept slightly reduced future operating profits in order to avoid the serious extra costs resulting from the pres ent inability to get their projects under way due to lack of mortgage financing. At least from the standpoint of breaking the log jam in military and defense housing, my recommendations would appear to be economically sound and not in