legal proceedings which make the issuance of dormitory bonds backed by the full faith and credit of the State most difficult if not impossible. I wish to thank you and the members of your committee for the privilege of making this supplementary statement. Very sincerely yours, LEWIS WEBSTER JONES, President, Rutgers University; Member, Committee on Relationships of Higher Education to the Federal Government. (The following was received with reference to the foregoing:) Mr. MILTON P. SEMER, HOUSING AND HOME FINANCE AGENCY, Chief Cousel, Senate Subcommittee on Housing, Senate Office Building, Washington, D. C. DEAR MR. SEMER: In Commissioner Hazeltine's absence, I am replying to your telephone call to the Community Facilities Administration regarding the effect of the proposed increase in the interest rate for college housing loans in terms of both the individual college and the student. The present interest rate is 2% percent, and that proposed by the administration based on November yields would be 3% percent. Assuming a cost per bed of $3,500, annual maintenance and operation expense of $100, a vacancy ratio of 10 percent, and no principal payments for the first 2 years of the loan, the annual rental required per student for a self-liquidating residence hall on a 40-year basis at 2% percent would be $336, or $26.33 per month on a 12-month basis, and $37.33 on a 9-month basis. Using the same factors, but substituting 32 percent, the annual rental per student would be $363, or $30.25 on a 12-month basis and $40.33 on a 9-month basis. The difference between the 2 rates of interest would amount to $1.91 per student per month on a 12-month basis and $2.55 per month per student on a 9-month basis. The effect in terms of the individual college would depend on the size of the loan. The increase in annual interest cost would amount to $23 per annum for each $3,500 borrowed. Enclosed is a table giving these annual rentals at 2%, 2%, and 31⁄2 percent. If I can be of further assistance please call on me. Yours very truly, (Signed) PERE F. SEWARD, Acting Commissioner. Annual rental required per student for self-liquidating residence hall at various 32 percent__ Assumptions: (a) Cost per bed, $3,500. (b) Annual maintenance and operation expense, $100. (c) Vacancy ratio, 10 percent. (d) Debt service coverage, 1.35 times. (e) No principal payments for first 2 years of loan. (The following was received for the record:) Dr. KERRY SMITH, GAINESVILLE, FLA., March 22, 1957. Association for Higher Education, Washington, D. C.: Strongly support interest-rate formula and adequate funds for college-housing program. Imperative for meeting college needs. J. BROWARD CULPEPPER, Executive Director, Board of Control for State Institutions of Senator SPARKMAN. Now we will hear from the American Bankers Association, Mr. John A. Reilly, president of the Second National Bank of Washington, D. C. We are glad to have you with us, Mr. Reilly. You have a prepared statement, and we have copies. You just proceed in your own way. STATEMENT OF JOHN A. REILLY, PRESIDENT, SECOND NATIONAL BANK OF WASHINGTON, D. C., APPEARING ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION Mr. REILLY. Mr. Chairman and Senators, my name is John A. Reilly. I am president of the Second National Bank of Washington, D. C. I appear today on behalf of the American Bankers Association as chairman of the subcommittee on mortgage financing and urban housing of the association's committee on Federal legislation. We are pleased that you have afforded us this opportunity to express our views on housing legislation now before Congress, and upon the housing and home financing situation generally. It is recognized that a housing shortage existed at the end of World War II and that since that time various steps have been taken to stimulate home construction to overcome this shortage. The stimulation in home construction during this period has now brought about a condition where the demand and supply of homes is approaching equilibrium in an increasing number of areas throughout the country. However, the liberalization of the Government-supported mortgage insurance programs during this period, by increasing the demand for homes, has contributed to inflationary pressures on the housing market. Therefore, we believe as a general principle that legislation should not now provide further stimulants to housing and its financing, which would only serve to continue inflationary housing costs, but rather should seek to adjust present laws to existing conditions in order to attract greater investment interest to this field. The demand for long-term mortgage financing has drawn heavily on savings investment funds during this period. For example, mortgage loans held by banks, savings and loan associations, and lifeinsurance companies have increased $91 billion during the past 10year period and now stand at $112 billion. In banks alone, mortgage investments now total 45 percent of the time and savings deposits of commercial banks, up from 16 percent at the end of 1945. Mortgage investments total 65 percent of the deposits in mutual savings banks, up from 27 percent in 1945. We believe, nevertheless, that the present rate of savings growth, amortization, and retirement that normally take place, and other sources of credit that may be attracted to mortgage investments will be ample to meet normal housing requirements without additional Government supports. INTEREST RATE FOR INSURED AND GUARANTEED LOANS We believe the adoption of a free interest rate for federally insured and guaranteed home loans would go a long way toward elimination of mortgage discounts. Heavy discounts inflate the cost of housing and impose an undue hardship on the small builder as against the large builder, thus affecting competition in the building field. In this connection, if Congress deems some maximum limit is necessary, consideration might be given to a 534-percent maximum limit. However, within such limit the rate should be determined by market conditions and not by administrative action. We would regard it more advisable, however, to permit normal. money market conditions to prevail, with the interest rate on mortgages free to compete with other types of investments which are not regulated. THE VA DIRECT-LOAN PROGRAM Under the present law, authorized funds under the direct-loan program are available until June 30, 1957, except that such undisbursed funds then remaining will continue to be available until June 30, 1958, for advances on applications for loans received by the VA prior to June 30, 1957. We recommend that no additional funds should be provided for VA direct loans to veterans and that this program should be allowed to terminate as provided under present law. We believe that the voluntary home mortgage credit program, which we are recommending be continued, if enabled to function without competitive disadvantage from Government-lending programs, should make unnecessary any additional funds for, or the continuation of, the VA direct-loan program after the termination date provided in existing law. CONSOLIDATION OF VA HOME LOAN PROGRAM WITH THE FHA PROGRAM We believe that consideration might be given to a consolidation of the VA home-loan program with that of the FHA, by amending the National Housing Act to give certain advantages to veterans not available to nonveterans in financing homes with FHA-insured mortgages. This might be accomplished by providing that the downpayment on such a loan to a veteran be one-half of the downpayment required of a nonveteran and that the insurance premium on a veteran's loan be paid by the VA. This would permit continuance under the FHA program of benefits comparable to those now available to veterans under the VA program. Such advantages under the FHA program would continue for the same period as now provided under the VA program; namely, June 30, 1958, as to World War II veterans and January 31, 1965, as to Korean veterans. MORTGAGE LOAN TERMS Present statutory provisions for loan maturities and loan-value ratios are adequate. Further liberalization as a stimulant for home construction is not needed. To do so could defeat the very purpose for which it is intended, in that the need is to attract investment funds for mortgage loan purposes, rather than to increase the demand for those funds. It is also true that while more liberal terms sound attractive to a borrower, they are actually more costly to him. For example, an FHA mortgage of $10,000 bearing interest at the rate of 5 percent and amortized over a period of 20 years, requires monthly payments of $66 for the 240 successive months in order to provide full payment 90300-37-34 at maturity, with interest. If the same loan is written for a 30-year period, the arrangements appear more attractive to the borrower because the monthly payments to amortize principal and pay interest during the 360 successive months is $53.70. However, in the case of the 20-year mortgage the borrower only pays $5,840 in interest for his loan, while the 30-year mortgage requires 10 more years of interest payments and costs the borrower $9,332 in interest. There is a further important reason for not lowering downpayments and extending maturities. It is the fact that such long maturities and high loan-value ratios tie up funds which might be placed in the mortgage market and keep those funds from the market for longer periods of time. A proposal has been made to provide FHA financing with Government support at 4 percent for a term of 40 years. If such loans were to be made, they would cost the borrower on a $10,000 mortgage $5,520 more in interest cost over a 40-year period than it would for a 20-year period. NATIONAL SERVICE LIFE INSURANCE FUND We consider it unwise to use any part of the national service life insurance fund for the purchase of VA-guaranteed mortgages. Such use of this fund would require the sale to, or redemption by, the Treasury of Government obligations now held in the fund. This, in turn, would necessitate borrowings by the Treasury in the open market, which would tap sources of private mortgage credit and only tend to reduce the supply of such credit from these sources. It appears to be contemplated that any sales of mortgages from the fund would have to be at par. Thus, so long as sales of VA mortgages in the private mortgage market are generally at a discount, the mortgages held in the fund would be frozen. Such a nonliquid investment would not seem desirable for life-insurance reserves. MILITARY HOUSING The housing needs of the military personnel are determined by the requirements for national defense. This being so, the cost of such housing should be provided for in the defense budget and not as a part of the Government-supported, home-financing program. Also, the inclusion of such housing in the annual budgets for the military services would give Congress a closer check over expenditures and might in the long run prove less costly to the taxpayers of the country than the contingent liability incurred by the Government under the present military housing insurance program. VOLUNTARY HOME MORTGAGE CREDIT PROGRAM The Voluntary Home Mortgage Credit Program is a cooperative effort of all segments of private industry concerned with housing and mortgage credit to provide home mortgage financing in small communities and remote areas. It has been responsible for placing $236 million in home loans, and this has been accomplished in the face of very difficult market conditions. It has proven advantageous beyond the obvious result of loans made. Under the influence and example set by this program, many loans outside the program have been made by mortgage lenders to provide financing needs in small communities. We recommend that this organization be continued. However, we are in agreement with the view of the National Voluntary Home Mortgage Credit Program Committee as expressed in its resolution, adopted January 25, 1957, that to permit the program to operate successfully the following two fundamental conditions must be present: (1) The Government lending programs, both direct and indirect, must be on terms and conditions which do not put the private investor at a competitive disadvantage. Private enterprise cannot compete with a Government-subsidized program. (2) If private savings are to flow into remote areas and small communities, as well as to the mortgage market as a whole, the return from mortgage investment must be competitive with similar forms of investment. In order to make this possible, the return must be responsive to changing market conditions. CONCLUSION We believe efforts should be directed at this time to the maintenance of an equilibrium in the housing supply and demand. Given normally competitive terms and the absence of further credit stimulants, lending institutions will be able to provide the needed credit for normal home-financing purposes. Senator SPARKMAN. Thank you, Mr. Reilly. Senator Capehart? Senator CAPEHART. No questions. Senator SPARKMAN. Senator Bush, any questions? Senator BUSH. No questions. Senator SPARK MAN. Mr. Reilly, there is one thing that I fail to find in your statement, and I would like to ask you about, and that is the urban-renewal program. What are your thoughts on that? Mr. REILLY. I think the position taken by the American Bankers Association, Mr. Chairman, has been that this is largely a social program and it has no place in the insurance program. I do not think we have taken a position as to the current legislation. Senator SPARKMAN. Of course, the insurance pertains only to the redevelopment part, where houses are built? Mr. REILLY. That is right. Senator SPARKMAN. The cost to the Government comes in the clearance of slums and loss of land values, and so forth, but I do not ask you to comment on it if you have not taken a position. Thank you very much. We are very glad to have your statement and appreciate your appearance. Mr. REILLY. Thank you. Senator SPARK MAN. By the way, I wonder, before you go, if you read in the Washington Post this morning a short news item that Senator Clark particularly wanted to ask you about, if you care to comment on it. This article is entitled, "Trend Noted to Costly Residences." It is a story written based on an article appearing in the new issue of Fortune magazine. Did you, by any chance, read that article? Mr. REILLY. I am sorry; I did not, Senator. Senator SPARKMAN. It points out that the cost of housing is constantly going up, and as it goes up a great part of the market is being |