consistent with the thinking of those who oppose higher interest rates to individual veteran and civilian home owners.

Even with titles VIII and IX loans made relatively attractive to private lenders, there will naturally be some such loans which private lenders will be unwilling to make. Consequently, Federal National Mortgage Association will still need authority to issue advance commitments. The amount needed, however, will be just a fraction of what would otherwise be required and, of course, the inflationary effect of additional purchases by Federal National Mortgage Association will be greatly minimized.

I hope that something preferably along the lines suggested here will be done to make title VIII and IX loans more attractive to private lenders. However, if nothing is done to make the loans themselves more attractive, Federal National Mortgage Association should, in my opinion, be granted authority by Congress to commit in advance for all such loans.

Hon. BURNET R. MAYBANK,

CONGRESS OF INDUSTRIAL ORGANIZATIONS,

NATIONAL HOUSING COMMITTEE, Washington, D. C., February 19, 1952.

Chairman, Senate Banking and Currency Committee,

United States Senate, Washington, D. C.

DEAR SENATOR MAYBANK: I am advised that at a round table on mortgage financing conducted by your committee on February 6, opposition to issuance of credit for the financing of public housing was expressed by William McChesney Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System. From the discussion which then took place it appears that Mr. Martin opposes as inflationary the issuance of bonds by local public-housing authorities for construction under the low-rent public housing program of any part of the 800,000 starts contemplated for 1952. Under questioning, Mr. Martin made clear that the Board of Governors does not characterize the private financing of 800,000 starts as inflationary.

There are four points which I wish to call to the attention of the committee in connection with this latest statement of Federal Reserve Board policy with respect to public housing.

1. The Reserve Board's disapproval of issuance of credit for public housing, while approving credit expansion for private builders, is an outright discrimination against low-income families who stand most in need of additional housing. In this respect the Board's position, it should be noted, is consistent with its position on consumer credit. It has stood for tight restriction of consumer credit, which is the only means by which millions of low- and medium-income families can even hope to acquire automobiles and other consumer durable goods. Well-to-do and wealthy families are in no degree restricted in their spending by the Board's consumer-credit regulations.

2. The Board's position on severe restriction of credit for public housing and of consumer credit stands in marked contrast to its policy and performance with respect to bank loans to private business.

The Board has not asked for authority to impose direct controls on bank credit generally, such as it has asked and received with respect to consumer credit. It has not renewed its request of 1947 for authority to establish special reserves which might provide some effective restraint on the expansion of bank credit. Its only move in this field has been to establish in March 1951 a Voluntary Credit Restraint Committee, composed of bankers, investment houses, and savings and loan associations which has not effectively restrained the expansion of bank credit.

Despite the existence of the Voluntary Credit Restraint Committee, business loans of weekly reporting banks increased by $2 billion, or 14 percent, in the last 5 months of 1951. More than half of this credit expansion was for nondefense purposes, and $1 billion of it was for increased financing of business inventories in nondefense industries. Total loans of all banks increased by more than $4 billion during this period.

3. While the Voluntary Credit Restraint Committee has proven an ineffective instrument for restraining loans to private business, it has from the start exerted particular pressure against State and local government borrowing. I call your attention to its bulletin No. 3, issued May 4, 1951, and to the address of Governor

Powell May 26, 1951. These documents indicate strong opposition by this Voluntary Committee to loans for meeting community needs for schools, sewers, and hospitals except in expanding communities.

This opposition of the Voluntary Committee to public financing is most strikingly expressed in its veto of borrowings by public-utility districts in the State of Washington for the purpose of acquiring the properties of the Puget Sound Power & Light Co., as reported January 8, 1952. That this action is motivated by opposition to public ownership is sharply emphasized by the fact that bank credit to private utility companies has expanded by several hundred millions of dollars during the past year without interference from the Voluntary Committee. 4. Chairman Martin's outspoken opposition to public-housing loans before your committee represents a reversal of the Board's position with respect to housing financed under the Federal housing program. The Program for Voluntary Credit Restraint promulgated by the Board on March 12, 1951, specifically stated that "this program would not seek to restrict loans guaranteed or insured, or authorized as to purpose by a Government agency, on the theory that they should be restricted, in accordance with national policy, at the source of guaranty or authorization."

Governor Powell, Chairman of the Voluntary Credit Restraint Committee, advised Housing Administrator Foley on May 23 that "the program for voluntary credit restraint does not apply to loans to public-housing agencies carrying out low-rent public-housing projects assisted under the United States Housing Act of 1937, as amended, or slum clearance and urban redevelopment projects, assisted under title of the Housing Act of 1949."

At a press conference November 22, 1951, Governor Powell stated that lending institutions are constantly complaining about the inflationary impact of the public-housing programs. "The most insistent complaints," he is quoted as saying, "come from the savings and loan associations."

Chairman Martin now advises your committee that the issuance of public housing bonds is of special concern to the Federal Reserve Board because the Voluntary Committee has been exerting strenuous efforts to keep down the volume of tax-exempt securities.

I submit that the Board's position as stated last March 12-that it should not assume authority to restrict loans guaranteed or insured or authorized as to purpose by a Government agency-was correct.

The decision is one for Congress to make and I urge your committee to take the necessary steps to make sure that the Federal Reserve Board and its Voluntary Credit Restraint Committee confine their exercise of authority to loans not guaranteed or insured or authorized as to purpose by a Government agency.

The need for low-rent public housing, especially to provide for workers' families in critical areas, is desperate. To permit private lending institutions or the Federal Reserve Board or its Voluntary Credit Restraint Committee to destroy that program would create incalculable hardship for middle-income and lowincome families. The program which Congress has authorized in this field is certainly a minimum one, and it is unthinkable that the Chairman of the Federal Reserve Board would propose to confine the housing starts of 1952 to highcost, high-rent units which only well-to-do families can afford.

Sincerely,

WALTER P. REUTHER

Chairman, National Housing Committee, CIO.

SUPPLEMENTAL STATEMENT TO THE SENATE BANKING AND CURRENCY COMMITTEE BY FRANKLIN D. RICHARDS, COMMISSIONER, FEDERAL HOUSING ADMINISTRATION At the conclusion of the round-table discussions it was suggested by the chairman that it might be desirable for participants to file supplemental statements. I am, therefore, taking this apportunity to express further my views with reference to the housing job in 1952, its size, financing, and characteristics.

Because so many pessimistic things have recently been said on the subject of housing and the mortgage market, I would like to say at the outset that I do not share this gloom. Even with the reduced housing production-even with the necessary stress of defense and military activities and anti-inflationary controls, I believe that with proper planning there is still plenty of opportunity for a good housing year ahead.

KEY TO MAINTAINING HEALTHY VOLUME

The FHA is desirous of maintaining as high a level of residential construction as is possible within the confines of our national defense and anti-inflationary program. However, the program to build our national strength and our economic security must come first. Official announcement has been made that 800,000 new units is an obtainable ceiling for 1952 under the now existing circumstances. I should like to review the areas in which I think the present housing need lies. We are in the midst of a national defense program. First, housing is vitally needed at many military installations. Second, it is of the utmost importance to produce adequate housing for in-migrant workers in critical defense areas. The housing needs of the military and those in critical areas are the most pressing demands on the industry today.

Next in importance, in my opinion, comes increased production of housing that the average American family can afford. This latter field is by far the largest but does not have the dramatic appeal of a current emergency. Now is the time, however, in my opinion, that the industry should recognize that the key to maintaining a healthy real estate and mortgage market may well be lower cost housing. If private industry is going to show that it can do the Nation's housing job-if we expect a continuing absorption of a high level of housing production-then the housing produced for the average American family must be increased. Housing in 1952 should be priced for the average income.

GROWING IMPORTANCE OF MORTGAGE FINANCE

Since very few families who build or buy homes pay cash for them, the fact that the number of home-owning families in the country increased in the last decade from less than 111⁄2 million to over 191⁄2 million means that home financing is an increasingly important feature of our national economy.

I definitely believe that the residential mortgage industry will be in better condition in 1952 than it was in 1951. That is my considered opinion and I should like to review briefly some of the facts upon which I base that opinion.

During the round table discussions before your committee it was stated that adequate financing would be available for needed military and defense housing if the FHA debenture rate were raised; if we would liberalize waste provisions in the regulations for titles VIII and IX; and if FHA would raise the maximum interest rate.

I should like to review these proposals which have been made to assure an adequate flow of mortgage money in more detail than I did at the round table -discussions.

DEBENTURE RATE

The debenture rate under titles VIII and IX of the National Housing Act is 22 percent and the term of the debentures issued under these titles is 10 years. Debentures are issued only if and when a property goes into default and the mortgage that is secured by the property is assigned to the FHA, or there is a foreclosure, or deed in lieu of foreclosure, and the property is conveyed to the Federal Housing Administration.

In considering the effect of raising the debenture rate of titles VIII and IX on an investor's yield we have the experience of section 603 of title VI as a guide. In connection with section 603 cases, less than 12 percent went into default and were subsequently acquired by FHA. That means that the investor secured the full interest rate on 981⁄2 percent of all the 603 cases and that the debenture rate was only applicable in about 11⁄2 percent of all the mortgages insured.

When it is probable that the debenture rate will only be applicable to a very small percentage of the mortgages insured, it would not appear to be a matter of major significance in the total mortgage market.

The fact seems to be that while an increase in debenture rate might theoretically make the program look more attractive, it could not in actual operation be effective in producing an increased flow of mortgage money into these programs.

While the FHA will consider whether or not a proposal to increase debenture rates should be made to the Secretary of the Treasury, we should not consider that a change which would affect only a small percentage of the mortgages would be vital.

WASTE PROVISIONS

Before reviewing the proposal to liberalize the waste provisions of the regulations, I should like to quote the definition of waste as it appears in our regulations: "permanent or substantial injury caused by unreasonable use, or abuse, and is not intended to include damage caused by ordinary wear and tear."

First it is interesting to note that there is no waste provision in connection with project mortgages insured under title VIII or section 908 of title IX.

The "waste" provision of section 903 provides that if the unpaid principal at foreclosure exceeds 75 percent of the value at the time the commitment was issued, no "waste" provision applies. This means, as an example, that in the case of a 90 percent, 25-year, 903 mortgage, no "waste" provision would be applicable for the first 9 years of the life of the loan because it would take that long, in the ordinary course, to pay the mortgage down to 75 percent which is thepoint when the "waste" provision applies. Keeping in mind that the average actual life of an FHA-insured mortgage is only about 8 years, it would seem to me there would be no real value in liberalization of the waste provision..

INTEREST RATE

The proposal that FHA increase the maximum allowable interest rate is under continual study. I do not believe there has been a meeting of bankers or builders in the last year that this has not been discussed. Even though the industry was able to finance the start of 1,100,000 units last year, I was being told at every conference that the interest rate was too low to attract mortgage money.

I have repeatedly made the statement that I thought FHA should have an effective and equitable rate. By this I mean a rate that will draw money into the insured mortgage system which, by the way, is a completely voluntary system.

When the regulations for title IX were issued, we fixed a 44 percent interest rate for section 903 and a 4 percent rate for section 908. Title VIII, Military Housing, has a 4 percent interest rate. Any consideration of interest rate. naturally involves yield and I would like to give a very quick picture of what the yield is on 4 percent and 44 percent insured mortgages.

In view of the fact that payment of interest on bonds is made on a semiannual basis, whereas on FHA-insured loans interest is paid monthly, the 44 percent is equivalent to 4.29 percent on a semiannual payment basis.

Estimated servicing costs on home mortgages have been generally agreed upon at one-half of 1 percent and home office costs at 0.30 of 1 percent. By deducting the servicing and home office costs totaling 0.80 of 1 percent from the 4.29 percent, the resulting yield is 3.49 percent.

On the 4 percent project mortgages, the picture is even brighter because the servicing cost is less. I do not know what percentage of the total number of project loans are serviced directly by the long-term holder, but a substantial part are. Regardless of that, I am estimating servicing cost, and home office cost at 0.35 of 1 percent. I am quite confident that is somewhere near an average cost.

Under title VIII and section 908 of title IX, the interest rate is 4 percent payable monthly. This is equivalent to 4.03 percent on a semiannual payment basis. Deducting 0.35 of 1 percent for servicing and home office costs leaves a net yield of 3.68 percent.

The average yield of high grade corporate bonds, AAA, AA, and A, is currently about 3.06 percent.

By comparing net yields on title VIII and title IX loans with the present yield on AAA, AA, and A bonds, it will be readily seen that FHA-insured loans have a higher yield.

This comparison is even more favorable than I gave at your committee's hearings last week for it is based on daily figures for February 4 through Febru ary 7, as shown in Moody's Investor's Service.

It is frequently said that FHA should have a flexible rate; that operating costs have gone up and the interest rate has remained the same. Although the rate has remained the same for nearly 2 years, premiums have come down and net yield has gone up. When premiums of 21⁄2 points were paid on a 44-percent loan the investor received a net yield of 3.08 percent; now with the same interest rate and with a par market the investor receives a net yield of 3.49 percent. Even today at a 1-point premium the investor gets a net yield of 3.32 percent-0.24 percent more than he received a year or so ago when he paid 21⁄2 points premium.

I think it is apparent that net yield on FHA loans is higher today than almost any time during the last 2 years.

Another factor in studying the effectiveness of an interest rate is volume. Let us look at this record to see if the FHA interest rates have been effective. During 1950 we insured $4,300,000,000 of loans involving 507,000 living units. In 1951 FHA insured $3,200,000,000 of loans on 335,000 living units. Those are the latest insured figures I have, but we have received reports from field offices on applications filed in January and they are 33 percent higher than during the same month a year ago.

Also the military housing volume under title VIII is a significant indicator of the attractiveness of 4-percent project mortgages. By the end of last month FHA had insured over $342,000,000 in loans on military housing and had about another $68,000,000 in commitments outstanding.

As I interpret these facts they show the effectiveness of the FHA interest rate on both home and project mortgages. As I have said before, the entire insured mortgage system is completely voluntary and depends upon soundness and yield to attract private capital.

Competition or the law of supply and demand also has a great deal to do with whether or not an interest rate is effective. In my opinion, there is going to be a lower production of mortgages this year than there was last year. Furthermore there is going to be more money available as the volume of outstanding commitments is digested, and amortization and increased deposits accumulate. Present indications are that we will not have the same situation in 1952 that we did last year when lack of money tightened the market.

I have been with the Federal Housing Administration since 1934, the year it started to operate, and never at any time have we been able to get what we considered adequate funds in every section of America at the exact time it was needed. We could not during the war, and I do not think we are going to be able to in titles VIII and IX in every area this year. I think that is too much to expect, but generally speaking, I believe that there will be ample funds to do the job in most areas.

From experience I know that any new title such as title VIII or title IX has to go through a period of study and careful examination by lenders and builders before it is accepted. That is only natural and logical. Soon after the section 203D program was passed by Congress I attended the annual convention of the National Mortgage Bankers Association in New York and asked how many present would make 203D loans. Not one hand in the audience of several hundred was raised. A year later, when I again met with the association in Chicago, I was able to report that the 203D program was comprising about one-third of all the FHA commitments being issued and around one-fourth of a billion dollars in insurance had been written that first year.

That is the usual pattern for new programs. It is not unusual that the opportunities of titles VIII and IX are not fully understood. At the hearings it was apparent that there is still considerable misunderstanding, for I heard various references to title VIII and title IX being too risky because the housing would be in isolated areas.

As a matter of fact, title IX could be described as being between title II and title VI. In title IX, mortgages are based on a percentage of value instead of cost as in title VI. It is necessary to see continued marketability which in itself would prohibit insuring loans in isolated areas which might reasonably be expected to become ghost towns.

Another point which does not seem to be well understood is that the FHA director and chief underwriter join with the HHFA in setting up a well-considered program for defense housing in critical areas. This is desirable and necessary to make title IX effective inasmuch as title IX cannot be used for other than programed housing.

I think that as the real facts of the defense housing program are learned by lenders, it will be utilized and will grow in importance just like the 203D program and many others which have expanded and fulfilled the objectives of the legislation.

CONCLUSION

Looking back for more than a year there has been much talk about the availability or lack of availability of permanent mortgage financing. During the early part of last year the mortgage money market tightened. However, with the absorption of past commitments and, in addition, amortization, pay-offs, and increased savings, many investors came back into the mortgage market during the latter part of 1951. Also, incidentally, many trustees of pension funds are .95067-52-9