MORTGAGE FINANCING

THURSDAY, FEBRUARY 7, 1952

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to recess, at 10:30 a. m., in room 301, Senate Office Building, Senator Burnet R. Maybank (chairman) presiding.

Present: Senators Maybank, Robertson, Sparkman, Frear, Moody, and Bricker.

The following participated in the round table discussion: Edward Bartelt, Treasury Department; George L. Bliss, United States Savings and Loan League; Roy Blough, Council of Economic Advisers; Alan Brockbank, National Association of Home Builders; E. A. Camp, Jr., Liberty National Life Insurance Co.; Norman Carpenter, Metropolitan Life Insurance Co.; W. A. Clarke, W. A. Clarke Mortgage Co.; Thomas P. Coogan, Defense Department; Aubrey M. Costa, Mortgage Bankers Association; William K. Divers, Home Loan Bank Board; Raymond M. Foley, Housing and Home Finance Agency; Harry Held, The Bowery Savings Bank; J. G. Jewett, Prudential Insurance Co.; T. B. King, Veterans' Administration; Oscar Kreutz, National Savings and Loan League; Guy E. Noyes, Federal Reserve Board; Robert Morgan, Boston Five Cents Savings Bank; Robert E. Pratt, Institutional Securities Corp.; Franklin D. Richards, Federal Housing Administration; John J. Scully, The Chase National Bank; Ward Smith, National Association of Real Estate Boards; Jesse W. Tapp, Bank of America; and Charles R. Van Anden, New York Life Insurance Co.

The CHAIRMAN. The meeting will come to order.

I want to again express my appreciation for the cooperation of you gentlemen, and before I call on the first witness this morning, Senator Robertson said he would like very much to ask Mr. Scully a question, if it would be agreeable to Mr. Scully.

Senator ROBERTSON. I was very much encouraged by Mr. Scully's testimony yesterday, but after reflecting upon the general trend of discussion, I recall that Mr. Scully said that that great Chase National Bank, with which he is associated, was interested primarily in construction loans.

Mr. SCULLY. Temporary financing.

Senator ROBERTSON. Temporary financing. When I was recently in Norfolk discussing this critical housing shortage in what is probably the second most critical area of the entire United States-San Diego is probably more critical-both important points in great States, they told me the main difficulty was getting the insurance companies

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and those who handle long-term loans to take the mortgages after the construction financing had been done. Can you throw any light on that?

Mr. SCULLY. Well, I think the situation is a little bit in reverse, Senator. The temporary financing is usually not arranged until the permanent financing has been arranged.

In other words, the interim financing is based upon a satisfactory take-out by some financial institution of the long-term mortgage.

Senator ROBERTSON. Well, let me see if this is the procedure. They first get some local mortgage company, let us say, to agree to handle the matter and service the short-term loan when it is made?

Mr. SCULLY. Right.

Senator ROBERTSON. Then they get a commitment from an insurance company, or some lender of long-term loans, to agree to take the ultimate mortgage?

Mr. SCULLY. Right.

Senator ROBERTSON. Then they come to you to get some quick cash? Mr. SCULLY. That is the idea.

Senator ROBERTSON. And you do not go in until the insurance company has agreed to bail you out?

Mr. SCULLY. In a great many cases, that is true.

Senator ROBERTSON. Now, how can we put the pressure on the insurance companies?

Mr. SCULLY. Well, one solution, I believe, would be to raise the interest rates.

Senator ROBERTSON. That has been one suggestion, but I have been told that the insurance companies state that they do not have so much ready money because the Federal Reserve Board is not cashing their bonds any more. Of course if the Federal Reserve Board does cash their bonds, that is highly inflationary, but the insurance companies, most of whom have gravitated to your wonderful city, draw revenue every day—I have five policies, and I send most of my money up there, small money, but it adds up when everybody all over the United States sends it up there they get money every day. They do not have to depend on what has been contributed 10 or 15 years ago and they have accumulated.

Do you know of any reason why they could not put some of that current cash into this program, or is it because they are really a bit fearful about the defense agencies, and do not want to take the chance? Mr. SCULLY. Senator, I think I should defer that question to be answered by representatives of the insurance companies. I can only tell you what our position is.

The CHAIRMAN. Thank you, Mr. Scully.

From what I could gather yesterday, and it seems to follow from what Senator Robertson said-and I hope we can give more thought to it--and perhaps subject you gentlemen to some questions-there seemed to be lack of confidence in the defense housing program; not in the officials of the program, but in the program itself-not knowing how long it is going to keep up, or how long the people will live in the houses; and so on.

Senator ROBERTSON. I just want to make this comment, that in all of the period, at least since the commencement of World War II, in which we have been concerned with housing problems, I have never known as much talent assembled in one conference as we have here.

The CHAIRMAN. And we are grateful to you gentlemen. Senator ROBERTSON. I want to commend our chairman, and our housing expert, Mr. McMurray, for bringing these men together. If this is not a most helpful round-table conference, it will be because these men who know so intimately all these details do not tell us what their real problems are.

Senator BRICKER. I would like to concur in what Senator Robertson said, that this is the way to consider the problem, the committee getting the assistance in this kind of meeting of the very best that there are in the country, in really formulating a constructive program to meet a rather critical situation, and your cooperation is most thoroughly appreciated.

The CHAIRMAN. Mr. Pratt, will you, representing the Institutional Securities Corp., address yourself, sir, to what your corporation is and what it is doing? Would you also refer to the matter of lack confidence in the defense housing program?

Mr. PRATT. In brief, our corporation is a kind of satellite of the savings-bank system of the State of New York. The 130 savings banks contributed five millions of capital, and Institutional then tends to the real estate needs of the savings banks under circumstances where the savings banks cannot conveniently tend to those needs themselves. Now, one thing that developed back in 1944, because of the great pressure of deposits in the State, and the lack of investment opportunity, was the need to lend moneys Nation-wide. The savings banks were confined to the geographical limitations of the State of New York. They had our institution go out in the field, to make loans Nation-wide in the guaranteed mortgage field, the FHA mortgage. The CHAIRMAN. In any section of the country?

Mr. PRATT. In any section of the country. There is a board of 20, presidents of the savings banks, large and small, a cross section. They used the corporation in a pioneer effort, and when we succeeded in overcoming the various legal barriers in connection with State laws, we succeeded in getting out the 50 millions, the legislature of the State of New York was convinced that lending in the FHA mortgage field could be done safely by the savings banks of the State of New York.

A statute then was passed which enabled savings banks in 1949 to go out in a partnership device, again through the medium of Institutional, wherein, for example, if they lacked loans in any part of the country, they in groups of two or more would say to Institutional, "We would like that loan, here is the money, go get it, give us participation certificates."

Now, that succeeded, and went up to about 275 millions. Then the legislature was convinced that the savings banks should go out on their own, so that we ourselves handle about 300 millions, as the agent for the savings bank system. The savings banks in our State went out into the national field for approximately a billion. In this FHA mortgage field, the cooperation of the administration, Housing and Home Finance Agency and the FHA have meant a great deal to the savings banks of the State. We now have an avenue of investment Nation-wide, including Alaska, and Puerto Rico.

Now, with respect to the condition of the market, I should like, if I may, to confine my remarks to the practical aspects of mortgage marketing.

As you well know, when one considers a market offer-and this is as of now, as well as the last 10 years-it is either on existing construction, which is immediate delivery, depending upon the title, or there is the future type of investment which relates to mortgage financing needed in connection with construction.

Up until March of 1951, when the Treasury bonds were under support, it was a perfectly simple operation to agree to make X dollars; agree to buy a great volume of futures. You were sure of

your 212 percent money, you had ear-marked-you fill up your commitments, and you earmark your moneys that would be used to take up mortgage deliveries. While you were waiting for your deliveries, you had the Treasury bonds earning interest.

That

But with the break in March of 1951, the savings banks in our State found themselves with 1 billion 600 millions in commitments. is the future type of transaction.

The insurance companies found themselves with a far greater amount, so that since March, when brokers came in with offerings on futures, regardless of what the interest rate was, the mortgage lenders generally were not in position to take up great volumes. They were busy whittling down that backlog of mortgage commitments. There were new deposits coming in, receipts coming to insurance companies, and those were used to pay for mortgages as delivered pursuant to these contracts.

Of course you understand that even in the small-loan development, you are dealing with future delivery that might be 4, 6, to 10 months off. In connection with the larger ones, the section 608's, heavy purchasing, you would be dealing with 18 months to 2 years. If one were offered to you today, at X yield, you would have to think in terms of whether X yield would be attractive to you when the mortgage was delivered 12 or 18 months in the future.

We have had kind of an unnatural market since March. The arithmetic was not there. You just could not deal in large volumes of futures. You had this big backlog to get out of the way in the mortgage lending business. Now, that has been whittled down, so that as of about now the banks in our State have not 1 billion 600 million as they had a year ago, but are down to around 500 million.

The gentlemen from the insurance companies would know their situation better than I. The insurance companies have been represented by the Journal of Commerce as having two billion odd as of the end of November in this backlog. We expect in the mortgage-lending industry generally that that backlog, left over from March of 1951, will be whittled down almost completely by July of this year.

From July, and thereafter, banks and mortgage lenders generally will again view the future type of contract with a whole lot more enthusiasm than they do now.

The CHAIRMAN. When you say a future contract, what do you mean?

Mr. PRATT. Well, in this respect, Senator Maybank. A broker comes in and he says we have $1,000,000,000, section 903, or section 908, in such and such a location. The first question you ask is when will that mortgage be delivered. Construction will be completed, and insurance attached in 18 months.

You sit down and you agree to take that loan for delivery 18 months from now, and the question in your mind is, What shall I use for money to pay for that loan when delivered? During these last 9 or 10 months, in addition to that type of offering, there were others for immediate delivery, and on these guaranteed mortgages, you could get yields from 3.75 to 4 percent, on loans for immediate delivery, which is the same thing as the brokers were offering in connection with loans for future delivery, delivery 12 or 18 months in the future. Naturally, whatever limited funds there have been in the last 10 months were used to buy mortgages on existing property.

There has been a bit of artificiality or abnormality about this mortgage market, in my opinion, since last March, but it is going to clear up.

The CHAIRMAN. Do you think it will be cleared up by July?

Mr. PRATT. It will start. You see there are a lot of lending agencies who had as their target figure to lend 50 percent of their assets in mortgages. Some of them are pretty close. Others may be down to 30, so they have more room, and will need more mortgages.

The CHAIRMAN. Do you think that would affect defense areas? Mr. PRATT. It would help defense areas, but in the meantime there is a big job to be done, how to market their futures now, and here is my recommendation, made respectfully.

You notice that some little activity started to develop when FNMA made advance commitments. If FNMA facilities could be used to make advance commitments during this period of the next 6 months, to deal with the critical problem of financing these futures, FNMA would be in a position ultimately of acquiring finished loans which would be attractive to mortgage lenders generally.

The CHAIRMAN. Now, as I understand it, you have $400 million set aside, Mr. Foley?

Mr. FOLEY. Roughly that, set aside for defense areas.
The CHAIRMAN. Could you do that?

Mr. PRATT. You do not have much room.

Mr. FOLEY. It would not take care of the problem. The set-aside funds, assuming that all mortgages on houses programed for critical areas were presented to the FNMA, the set-aside funds would cover the housing program up to district No. 96, as against about 150 districts that have been designated up to this time.

The CHAIRMAN. In other words, with what money you have, you could only cover 96 districts, though there have been 150 set up. Mr. FOLEY. As I said yesterday, the remainder of the funds is relaatively small.

Senator BRICKER. How much would it take, do you think, to satisfy all of the needs in the critical areas if you were to make the advance commitments, were authorized to make the advance commitments, provided the Government keeps its present policy?

Mr. PRATT. I do not know what that figure might be, but I did hear expressed yesterday by Governor Martin, in relation to Mr. Foley's estimate of 800,000 units needed, a $412 billion figure. Mr. NOYES. That was for the country as a whole.

Mr. PRATT. We know that whole 800,000 is not related to defense. I do not know what the figure is, frankly, but I was about to develop a principle. Up to now, FNMA has got its money from the Treasury, out of the budget. That is what it used.