participate unless their investments in the program were geared to a realistic interest rate.

On the subject of direct lending, the American Legion has always felt that the direct home loan program was an important function of the GI home loan program. It has been our policy, however, to insist that such funds only be used in areas where conventional financing was not readily available.

On the subject of direct lending, The American Legion has always felt that the direct Home Loan program was an important function of the GI Home Loan program. It has been our policy, however, to insist that such funds only be used in areas where conventional financing was not readily available.

In this connection it is interesting to note that the maximum amount which has been recommended in the numerous bills submitted in both the House and Senate have called for an amount not in excess of $1 billion, and the general opinion among many has been that this would completely handle the GI loan program. The truth is, however, that this is only one-fifth of the amount required for GI home loans in 1956 and one-seventh of the amount which was required in 1955. Therefore, it becomes obvious that this is not the answer to our present problem.

The subject of discounts has always been a rather controversial subject and a distasteful one to moneylenders, such as leading life insurance companies who will not participate in making loans where excessive discounts are charged. Discounts are charged in a direct proportion to a fixed interest rate and the current yield of money in an open market. For instance, on a 25-year loan a 4-point discount is equal to one-half of 1 percent interest. At the present time 5 percent FHA loans are demanding a 4-point discount which means that actually the current interest rate is 51⁄2 percent. GI loans at 41⁄2 percent interest are demanding an 8-point discount. This brings them to par with the yield on FHA loans. It is our position that to limit these discounts by law would require a subsidy by the Government to insure a realistic yield. If this were not done the loans would have no takers on the current mortgage market. We feel that without a realistic interest rate the practice of excessive discounts would definitely have a tendency to destroy the GI appraisal system which we believe is the finest appraisal and inspection system ever devised.

We now should like to give consideration to a subject of primary importance before your subcommittee today; namely, the general proposal to liberalize the FHA program. The American Legion is anxious to see any legislation passed which will enable more Americans to own their own homes. Furthermore, after there has been an orderly termination of the loan guaranty program for World War II and the Korean veterans, it would be desirable to have a more liberal program in the FHA to effect a transition without undue disruption in the general economy. We recognize, of course, the support which has been given the residential construction and related activities by the GI loan program and the possible harmful consequences which may result from an abrupt termination. It is our further view that planning at this time would be desirable, and your subcommittee is to be commended for its foresighted attitude.

There is, however, an overtone in certain of the proposals being advanced which is disturbing the American Legion. It is our firm conviction that no program should be set up within the FHA to replace the GI loan program. The establishment within FHA of a loan program for veterans would be contrary to the philosophy which motivated Congress in 1944 to include in title III of the Servicemen's Readjustment Act a loan program for veterans. Over the years since the creation of the loan guaranty program the suggestion has been advanced for consolidation of all home-loan insurance and guaranty activities under the FHA. The American Legion has always been strongly opposed to any such proposals. There appears to be less valid reason today for the merger than at any time since the inception of the loan guaranty program. We would favor an orderly termination of the eligibility period for World War II veterans, and we believe that the time is now approaching when some phasing out of this program could be accomplished. There will, of course, ultimately be about 6 million Korean veterans who will be eligible for loan guaranty benefits and undoubtedly a large percentage of them will decide to obtain GI loans. The proposal of transferring only the home-loan guaranty function could not conceivably result in the saving of any administrative expenses. If the VA retains the direct-loan program, the farm- and business-loan programs and the servicing and claims functions on existing loans, it would have to retain a large staff of personnel. The FHA by assuming the veterans loan guaranty activity undoubtedly would augment its staff considerably in order to process its increased workload. In all likelihood the

total number of Government employees would be increased rather than reduced through a transfer of some of the functions out of the VA.

If the entire program should be transferred to FHA, that Agency would be dealing with a number of matters on which they have no experience. For example, the FHA has not made any direct loans, and, perhaps more important, the FHA's activity in the area where VA makes direct loans has been extremely limited. The FHA has nothing comparable to the VA farm loan or business loan programs. Therefore, there would necessarily be a considerable period of testing and trial and error before the program could get underway, and undoubtedly many World War II veterans would find that their eligibility period had expired before FHA was able to put the program in full operation.

Perhaps, the overwhelming objection which the American Legion would have to the transfer of all or any part of the function to FHA, would be the difference in the basic philosophies between the two agencies. The VA is concerned with administering a benefit to the veteran and gears all of its processing with this thought foremost in mind. It is carried through into the reasonable value requirement, the compliance, inspection, and construction complaint procedure, and in dealing with veterans who default on their loans due to temporary reverses. The FHA was created for the purpose of stimulating mortgage credit and to improve housing standards. While these are important objectives, they are not aimed specifically at the problem of what is best for the purchaser to the extent that the VA home loan guaranty program has been devised.

Since it does not appear that there will be any saving, the obvious question to which we gave consideration is why any consideration is being given to any such proposal at this time. We feel there can be only one plausible answer. The setting up of a veterans' program in FHA would seem to be in lieu of authorizing the Administrator of Veterans' Affairs to increase the interest rate on GI loans to 5 percent. It was our recommendation when we appeared before the House Veterans' Affairs Committee on February 1, 1957 that the Congress provide the Administrator of Veterans' Affairs with the same authority to regulate interest rates on VA loans, which the FHA Administrator now exercises over FHA loans under the National Housing Act. But if the veterans loan program is authorized within FHA, the Congress will be increasing the interest rate on veterans' loans to 5 percent, since that is the rate currently permissible on the FHA mortgages. As a matter of fact, the veteran would be paying 51⁄2 percent interest, since the FHA also charges an insurance premium of one-half percent. One of the suggestions advanced was, that the veteran be given a subsidy to the extent of the FHA insurance premium. If this is done, the amount which the Government would have to add to FHA's insurance fund would exceed many times over the losses, which the VA has sustained in its loan guaranty operation. The American Legion believes that the direct approach is best in solving problems of this nature and repeats its recommendation that the Administrator of Veterans' Affairs be given the authority to adjust the interest rate on GI loans to that permissible on FHA insured mortgages.

Before leaving this subject there are a few further comments I should like to make. Periodically through the press and other media reference has been made to the duplication and the processing of requests for appraisals and inspections on houses to be built and sold under the FHA insurance and VA guaranty programs. I am sure, if a thorough study would be made of all the facts, the authors of such charges would be surprised at the small degree of duplication, especially when you consider the conditions and circumstances under which a builder is required to resort to much duplicate filing. Time has not permitted me to obtain the exact statistical comparison, but I doubt that more than 10 percent of last year's housing starts were processed under the purported duplicated procedure. As you are aware, many builders do not have sufficient financial resources to start and continue the building operation. Normally, they must obtain interim construction financing, under which periodic advances are made by the lender as the job progresses during the various stages of construction. Many lenders to assure themselves before committing or making a construction loan require the builder to obtain an FHA dual commitment (under which if the builder is unsuccessful in selling his property, he can obtain in his or his company's name, a loan insured in an amount in excess of the construction loan) or a firm take out commitment for permanent financing under the VA program.

The FHA does appraise for mortgage insurance and inspects the property. FHA inspection reports are accepted by VA, but due to the legislative requirements of the GI loan law, VA is required to appraise in order to determine the

reasonable value, or in other words, the maximum price the veteran should pay for the property. FHA appraisals do not meet this legislative requirement.

It is our feeling that so long as we have builders who have limited financial sources and are willing to produce housing for the veterans' market, the production facility arrangement under FHA, although it may cost the builder a few extra dollars, is a sound and useful benefit to such builders.

This completes our statement, Mr. Chairman, and we again would like to extend our appreciation for the subcommittee's invitation to express our views on this most important subject.

Senator DOUGLAS. We will recess until 10 o'clock on Thursday. (Whereupon, at 12:05 p. m., the hearing was recessed, to reconvene at 10 a. m., Thursday, March 21, 1957.)

HOUSING AMENDMENTS OF 1957

THURSDAY, MARCH 21, 1957

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON HOUSING, Washington, D. C. The subcommittee met, pursuant to recess, in room 301, Senate Office Building, at 10:10 a. m., Senator John Sparkman (chairman of the subcommittee) presiding.

Present: Senators Sparkman, Douglas, Clark, Capehart, and Ives. Senator SPARKMAN. Let the subcommittee come to order, please. Let me say at the beginning that this morning we are very happy to have with us a member of the Austrian Parliament, Dr. Prinke, accompanied by Dr. Baier of the Austrian Embassy. Dr. Prinke is very much interested in the subject of housing. That is one of his particular jobs back in the Austrian Parliament. So I invited him to come up and sit in on the hearings this morning.

Wir freuen uns Sie heute morgen hier zu haben, Doktor Prinke. Our first witness this morning is Mr. Robert E. Scott of the National Association of Real Estate Boards, and Mr. John C. Williamson will appear with you at the same time, I understand.

STATEMENT OF ROBERT E. SCOTT, DIRECTOR AND VICE PRESIDENT, ACCOMPANIED BY JOHN C. WILLIAMSON, DIRECTOR, DIVISION OF GOVERNMENTAL AFFAIRS, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS

Mr. SCOTT. Yes, sir.

Senator SPARKMAN. Fine. If you gentlemen will take your seats at the table. You have a prepared statement, I believe.

Mr. SCOTT. Yes. Good morning, Mr. Chairman and members of the committee.

Senator SPARKMAN. We have your statement before us and you proceed as you wish.

Mr. SCOTT. We have a prepared statement which we have filed, but I would like to read a summary of it, if I may.

Senator SPARKMAN. Very good. The longer statement is the one to which you refer, that you have filed?

Mr. SCOTT. Yes.

Senator SPARKMAN. This is the full statement, and you want that full statement printed in the record?

Mr. ScoTT. If we may.

Senator SPARKMAN. That will be done, at the end of your remarks. You may summarize.

Mr. SCOTT. For the record, I am Robert E. Scott, Elizabeth, N. J. I am a realtor, builder, and mortgage banker, with more than 25 years' experience in the field of housing.

I appear today on behalf of the National Association of Real Estate Boards, of which I am a director and vice president. With me is our Washington counsel, John C. Williamson, and we have prepared this summary in the interest of saving the time of this committee.

Mr. SCOTT. The scarcity of residential mortgage money in the FHA and VA sectors of the market is attributable to the lack of flexibility in their rates. The Congress should approve a formula which would provide for administrative determination of these rates from time to time so that the rates will properly reflect the market. A suggested ceiling for such rates is 22 points plus the average yield (for the previous 6 months) of Government obligations having a remaining maturity of 15 years or more.

The Congress should avoid any attempt to impose statutory restrictions on discounts, as any such restrictions would dry up mortgage money in many parts of the country.

We oppose using any part of these trust funds of the NSLI to buy VA-guaranteed mortgages. This money is not in being, and the Treasury would have to go into an already tight market to borrow it. Also, Government trust funds should be invested in Government obligations, and should not be used to purchase mortgages above their market value.

The National Association of Real Estate Boards recommends that FNMA be authorized to issue an additional $100 million in preferred stock to the Treasury to increase FNMA's borrowing authority by an additional $1 billion. (This is in addition to the $50 million recently provided by the Congress.) Such an increase will permit FNMA to continue its operations at current high levels until the end of 1957 when we hope market conditions will have improved. Current husbanding of FNMA's limited resources has adversely affected the existing house market through application of rigid selective criteria. Our association also recommends the removal of the arbitrary $15,000 maximum mortgage limit with respect to FNMA's purchases in its secondary-market operations, and that FNMA be authorized to issue stand-by advance commitments for FHA and VA mortgages on used homes, similar to the arrangement now provided for new construction. FNMA's operations should be modified to include a mortgagediscount facility whereby participants might borrow on the security of FHA and VA mortgages. Participants who would be FHAapproved lenders, would subscribe to an initial amount of stock and purchase additional stock with each loan tendered. Such loan would not exceed 95 percent of the principal amount due on the mortgage, and would carry full recourse against the lender. Such an operation is essential to insure a continuous and adequate supply of FHA and VA mortgage financing.

Congress should direct that FNMA purchase special-assistance mortgages at not less than 99, in order to make meaningful the assistance which these FHA programs such as sections 220 and 221 require. We doubt that these vital aids to rehabilitation and relocation will be effective without such special assistance as recommended herein. Also