Now, then, from such studies as we have made and I think this will be generally supported by those from financial institutions—it seems probable that there would be available from the usual channelsfrom accumulation of funds, savings, and amortizations of previous mortgages, and so forth-sufficient funds to finance the new construction of 800,000 units this year. Our problem, it seems to me, particularly from the standpoint of the Housing Administrator at this time, is whether those funds are going to be available generally and effectively in the point of time and geographic location and type of housing for the general market, particularly for the defense housing market, and for the general needs of the veteran. It seems to me that is the approach that we need to make at this time to determine, one, whether we are right in assuming that funds, per se, will be available; and, two, whether they will be made effectively available in those particular areas, and again especially in defense areas. If they will not be available, what is the reason why those who are responsible for custodianship and investment of those funds are unwilling or unready to advance them in a particular part of the area as distinguished from some other, whether it is a matter of interest rate, whether it is a matter of special risks involved in locations, and so on. Those are the things that I think, if we could get answers to in these sessions, would be most helpful to us. Senator ROBERTSON. On the question of whether the funds would be available, how much construction does the United States Savings and Loan League finance? The CHAIRMAN. We will have the answers from their people here. The next gentleman I was going to call was Mr. Costa, president of the Mortgage Bankers Association, who represents the men in the front lines in this battle for mortgages. I would like to know his view on the 800,000 houses Mr. Foley spoke of, and the distribution of these houses in various areas of America; and, if he would not mind, the interest rate also. Mr. Costa. Mr. COSTA. Mr. Chairman and members of the committee, the Mortgage Bankers Association of America is, generally speaking, a group which works with builders in the organization of mortgages. They help them in their program of the procurement of interim financing that is, money while the buildings are in progress and then they make these mortgages, handle them with various investors, and service them from their inception to the ultimate payment. We are anxious to carry on with the defense-housing program and the housing of veterans. We have some problems that seem to disturb us in the program somewhat. You asked about interest rates The CHAIRMAN. Yes; we would certainly like to know the problems, to get your ideas. Mr. COSTA. Senator Maybank, I would believe the thing we are most concerned with at this time is the financing of the defensehousing program. We find some problems in that situation in the matter of interest rate as well as in the matter of settlement in the event of default. The CHAIRMAN. Is that a great worry to the mortgage bankers, in the defense areas, in case of default? Mr. COSTA. Well, Senator, there are certain projects that we might describe as being planned in remote areas. Presently The CHAIRMAN. Well, that gives this committee great concern, as you know. If you could enlarge on that, we would appreciate it. Mr. COSTA. Presently we have a number of areas with which we have not become too familiar. They are in remote areas, and when we take investors into these areas to make mortgages we find that they have expanded activities in Army, Navy, and Air installations, but should those become deactivated in the course of, shall we say, 2 or 3 years, or when the emergency has passed, we have a problem in the position of the investors at that time. Senator ROBERTSON. May I ask a question? Mr. COSTA. Yes, sir. Senator ROBERTSON. If the lenders hold back in a critical defense area, because in 2, 3, or 4 years it may be deactivated, are they then in a position to object if the Government goes in and erects the houses? Mr. COSTA. Sir, I think we have a desire to cooperate. If we fail to be able to provide the money on the terms that are presently in the program, I would feel we could not complain too severely if the Government did at that time. We are asking for some changes. Senator ROBERTSON. If there is a desire to cooperate in the interest of the preservation of the American private-enterprise system, have you not a duty to cooperate? Mr. COSTA. Yes, sir, and we want to. Senator ROBERTSON. If there is a limited amount of money, and critical materials, whereby we cannot build 800,000 units this year, where should the priority be given? Mr. COSTA. I think the priority should be given through defense housing. That is the paramount factor. If I might go a little further, Senator Robertson, in the event of the deactivation of one of these areas, an investor would find himself not in possession, shall we say, of a mortgage, but ultimately in possession of debentures, which are given by FHA. There are certain factors in the matter of the value of those debentures that are presently disturbing us. The CHAIRMAN. Let me ask you this, too, Mr. Costa, in connection with that: Is it not a fact in some of these defense areas, and particularly the remote areas, the lack of facilities also materially curtails. whatever mortgage operations you have? Mr. COSTA. Yes, sir. The CHAIRMAN. I am speaking of sewers, drains, and so forth. Mr. COSTA. Definitely; and I think each individual area has to be underwritten and weighed on its own merits. The CHAIRMAN. Particularly the facilities. This committee last year passed a substantial authorization bill for facilities in defense areas. This is comparable to direct appropriations for the Army and Navy. As you know, this authorization was never approved through an actual appropriation. Mr. COSTA. That is correct, sir. Now, in the event of a case, we will say, that goes into difficulty, a ghost city is something that is quite disturbing, because to get your debentures you have to deliver the housing in certain condition, and that housing can be subject to vandalism; there would be considerable waste, and one of our problems is the matter of delivery of the prop erty and the acquisition of the debentures, and then the rate of interest on the debentures, and the term of the debentures. The CHAIRMAN. Would you discuss the matter of the interest rate for us? Mr. COSTA. Yes, sir; the rate of interest on the debentures in the present defense-housing program, I believe, is set at 212 percent. We would believe that a small increase in that rate would provide a better value for that debenture, based on the current value of money. The CHAIRMAN. What would you call "a small increase"? Mr. COSTA. A quarter of a percent increase would make a considerable difference. The CHAIRMAN. Do you think that would make the mortgages more attractive. Mr. COSTA. I think it would improve the market. It would encourage the people who presently are having a problem to be interested in them. Those debentures, I would hazard a guess, might be worth today to those in possession of them possibly 96 on the present market, and of course these investors who make these loans represent basically widows and orphans, whether they be life-insurance companies, savings banks, national banks, savings and loan institutions or others, and the companies are in the position of being criticized if they accept a security that might entail a considerable capital loss. Senator ROBERTSON. When you refer to the bankers, are you referring to a bond that has no lien on any specific property? Mr. COSTA. When a mortgage is liquidated, for a holder of a mortgage, Senator, to get his debentures he delivers title to the Federal Housing Administration, and they issue him a debenture of the United States Government. I believe that gives you basically that picture, sir. We are interested in a further discussion on the problem as regards veterans' housing. We have, we believe, done a fine job up to this time, and want to continue on it, and as the discussion proceeds, we will participate further. The CHAIRMAN. We will hear now from Mr. Martin, Chairman of the Board of Governors of the Federal Reserve System. Mr. MARTIN. Mr. Chairman, we all know that during 1952 the defense effort will generate a heavy demand for financing both on the part of the Federal Government, and private borrowers. If we are to be successful in maintaining our economic stability, it will depend on whether total demands on the credit and capital market can be substantially limited to the supply of real savings. Now, I want to point out that the economy's aggregate savings in 1951 were at a very high level, and this entire amount of savings was absorbed in financing private, State, and local government capital expansion, including inventory accumulations, plant and equipment outlays, and residential and commercial construction. Nevertheless, the total credit and capital demands were so great that the savings supply was supplemented by an expansion of bank credit which was large enough to bring about the resumption of inflationary trends. This situation, I want to point out, resulted, despite the fact that we had a Federal cash surplus of about a billion dollars. 95067 -52- -2 Now, the President's recent budget estimates imply that the Federal Government will have a large cash deficit in the present calendar years, involving new borrowing in the market of as much as $10,000,000,000, or even more, and at the same time private financing demands for defense purposes, and for essential civilian needs are going to continue strong and persistent. If we grant that the Nation's saving this year will again be at a high level, these necessary credit and capital demands must have a first call on the available savings supply, and will take a much larger share than last year. If resumption of inflationary pressures is to be avoided, such demands should not produce an excessive expansion of money created through the growth of bank credit. The primary financial problem in our judgment, confronting public policy at this time, is how to keep the total financing demands of the economy in reasonable relation with the savings funds that will be available. The questions with which this group is particularly concerned are whether mortgage financing can obtain from the available pool of funds a sufficient amount to cover the 800,000 new units which had been suggested as an attainable ceiling for 1952 on the basis of available resources, and also whether the distribution of that financing, at the current pattern of mortgage interest, will be generally consistent with that experienced in the recent past. Now, I want to give you our estimates on this. We conservatively estimate that the turn-over of old houses, and the financing of the number of one to four-family dwelling unit completions which would result from an 800,000-start year in 1952 would require approximately $134 billion. About $8.8 billion of this amount would probably be used for the financing of transfers of existing properties, and for loans on such properties, and $42 billion of it for new construction. At the same time, mortgages outstanding would generate repayments through amortization of $39 billion, amortization payments and other retirements, which would require a net investment of new funds of about $414 billion to support this 800,000-unit start. One of the striking features of the above estimates to us is that twothirds of the mortgage credit extended in 1952 was in connection with existing properties, and only one-third for the purpose of financing new construction. If credit extensions in connection with existing properties could be regulated selectively, as we have suggested, as you gentlemen know, such regulation would help, we think, to assure the availability of funds for financing new construction. Without some restraint on the absorption of funds in the financing of existing properties, it cannot be said with any certainty that funds will be readily available either for 4- or 4-percent financing in defense areas, or for 4-percent GI financing generally. On the other hand, in 1951, we did finance over 61⁄2 billion of net extensions of mortgage credit, and the 414 billion projected for 1952 represents a very substantial reduction in that figure. If confidence in the basic soundness of our monetary structure is maintained, and people continue to save and place their savings with savings banks, insurance companies, and savings and loan associations, these institutions, which are normally large purchasers of mortgages, will have, we think, substantial funds to invest. A large part of these savings, this year, will need to go into Government bonds, however, if we are to attain our anti-inflation objectives. What part of the remainder, which will be keenly sought by a variety of outlets will flow freely into mortgages at 4 percent, I am not prepared to predict at the present time. It is important to note, however, and here I strike at the policy problem, that any efforts to stimulate that flow through additional FNMA or direct loans would increase the Government's prospective cash deficit, and therefore increase considerably the difficult problem of financing the Federal budget. So far I have limited my remarks to the financing of one- to fourfamily unit dwellings. There will be some new multiunit starts, and some financing requirement from this quarter. If such starts are in the neighborhood of 50,000, as informed trade sources believe, about $800,000,000 would be required to finance this type of structure. It does not appear likely that this substantially reduced program will encounter serious difficulties in obtaining financing through the usual channels. One important factor-and here I come to one of my personal convictions which is disturbing to us is the tax-exempt bonds which are being issued to finance public housing. Some $328,000,000 of such issues were floated in the last half of 1951, together with $45,000,000 of 6-month notes, and the market anticipates total issues for 1952 in the neighborhood of $750,000,000. Not only Senator BRICKER. That is on the public housing program? Mr. MARTIN. That is right, sir. Not only do such issues absorb some of the funds which would otherwise supply a market for Government property, or mortgages generated by new private construction, but they afford an opportunity for wealthy individuals and corporations to reduce, legally, their income-tax payments in a period when it is essential that tax revenues be as large as possible. The issuance of these bonds at this time has been of special concern to us in the Federal Reserve, since the Voluntary Credit Restraint Program Committee organized under the Defense Production Act, and with the approval of this committee, has been exerting strenuous efforts to keep down the volume of such tax-exempt securities otherwise originated. The CHAIRMAN. Governor, would you mind giving us your thoughts as to what effect an increase in the interest rate would have? Would that hurt the other financing through the Federal Reserve bank and the Treasury? Will it increase or decrease inflationary forces, in your judgment? Mr. MARTIN. An increase in rates will increase inflation? No, sir, I do not think it will increase inflation. We believe in flexible interest rates. The CHAIRMAN. What about financing of the Treasury obligations? Mr. MARTIN. I think we would have some difficulty with the rest of the problem. We are struggling with that problem now, sir. The CHAIRMAN. I understand that from what you said here the other day. Senator ROBERTSON. Governor, the FNMA money was exhausted before the end of the calendar year 1951, was it not? Mr. MARTIN. That is correct. |