to provide for a significant volume of purchases of home mortgages at par runs counter to the purpose of the FNMA secondary market function which provides for the purchase of mortgages "within the range of market prices." In this regard, the Department favors the provisions of title I of S. 1609, the administration bill, which would provide flexibility with respect to prices at which mortgages could be purchased under the special assistance functions. The Department also feels that the increases in authorizations that would be provided under title I of S. 1609 are adequate at this time and that the increases that would be provided by S. 912 are unnecessary. The Department has been advised by the Bureau of the Budget that there would be no objection to the submission of this report and that the proposed legislation would not be in accord with the program of the President. Very truly yours, (Signed) W. RANDOLPH BURGESS, Acting Secretary of the Treasury. BOARD OF GOVERNORS OF THE Hon. J. W. FULBRIGHT, Chairman, Senate Banking and Currency Committe, DEAR SENATOR FULBRIGHT: This is in response to your request for the views of the Board of Governors on S. 912. This bill would authorize the Federal National Mortgage Association to purchase, or commit to purchase, at par, $3 billion of mortgage loans insured under title II of the National Housing Act or guaranteed under the Servicemen's Readjustment Act. Eligible loans would bear interest at no more than 41⁄2 percent per annum, and would be no larger than $14,000. In effect, this is a plan for the Treasury, acting through the Federal National Mortgage Association, to make direct mortgage loans on terms that are out of touch with market realities. If enacted, it would add $3 billion to Treasury cash expenditures, to Treasury borrowing, and to the public debt. The disadvantages of this approach of Federal assistance to housing are discussed in more detail in Mr. Riefler's statement before the Subcommittee on Housing of the House Banking and Currency Committee, a copy of which is attached, and in my statement to the Housing Subcommittee of your committee (see p. 269). For these reasons, the Board believes the bill should not be enacted. Sincerely yours, (Signed) WM. MCC. MARTIN, Jr. STATEMENT OF WINFIELD W. RIEFLER, ASSISTANT TO THE CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, SUBCOMMITTEE ON HOUSING OF THE HOUSE BANKING AND CURRENCY COMMITTEE, MARCH 4, 1957 Mr. Chairman, the volume of home mortgage debt now totals about $100 billion. It is about equal in size to long-term corporate debt, and over three times as large as consumer installment debt. It is more than one-third the size of our gigantic Federal Government debt. Most of the growth of private debt has occurred since the war. In the past decade, home mortgage debt has grown by $76 billion, long-term corporate debt by $60 billion, and consumer installment debt by $27 billion. During the same period, Federal Government debt increased by only $17 billion. During 1956 alone, home mortgage debt grew $11 billion, long-term corporate debt $9 billion, consumer installment debt $21⁄2 billion, while Federal Government debt declined $4 billion. The growth in home mortgage debt during 1956 was much larger than for any other year except 1955 when it grew by $12 billion, Home mortgage lending is costly as compared with most other types of longterm investment. Considerable prior analysis of each transaction is necessary before a lender can decide whether or not a property has sufficient long-range value to justify a mortgage loan of the amount sought as well as whether or not the prospective borrower qualifies as a credit risk Furthermore, elaborate processing is necessary before a mortgage is legally recorded. Over the life of the loan the regular monthly payments must be serviced by a responsible agent. In view of the sheer magnitude of the volume of home mortgage loans placed and outstanding, it is evident that the personnel engaged in home mortgage lending is large and that effective contacts with the great pools of private savings have been established and maintained. In view of these well-established market relationships and the further fact that the supply of savings continues very large, it follows that any diminution of the volume of funds currently placed in home mortgages must be accounted for by 1 or more of the following 4 factors: 1. A diminution in demand for home-mortgage financing. 2. An increase in risk exposure making lenders more cautious in committing savings to home-mortgage investment. 3. A growth in competing demands to borrow the savings that might otherwise be invested in home moratgages. 4. The interposition of barriers that prevent savings from flowing into certain sectors of the home-mortgage market. Now, consider the situation with respect to these four factors. Diminution of demand for home-mortgage financing, if it were occurring, would reflect either (a) overbuilding in particular areas, (b) consumer resistance to a rise in building bosts, (c) consumer resistance to the down-payment requirements or other mortgage-lending terms, or (d) some combination of these developments. While a combination of these influences is operating currently to some extent in individual localities, available evidence clearly indicates that the overall demand for home-mortgage financing remains high and in excess of actual mortgage transactions. The risk exposure factor is always present and at times operates powerfully to affect the flow of home-mortgage funds. It is doubtful, however, whether risk exposure is a ruling consideration under current market conditions. Recent default and loss experience of lenders engaged in mortgage financing has been most favorable. Furthermore, the recent drop in new mortgage commitments is concentrated almost wholly in the Federally sponsored home-mortgage insurance and guaranty programs which involve a minimum of risk to the lender. The volume of funds flowing into conventional home-mortgage financing, where the lender assumes all the risk, has not diminished. A growth in competing demands to borrow the savings that might otherwise be invested in home mortgages is clearly evident in the present situation. Demands for savings to finance industrial growth, expansion of public utility and commercial facilities, instalment and consumer purchases, roads, schools and other public works have mounted greatly in the past 2 years. In the aggregate, including home mortgage financing, these demands have exceeded the supply of current savings, large as it has been. This has caused a rise in interest rates. In the last 2 years, rates on Government bonds have risen about 1 percentage point, on high-grade State and municipal securities about 1 percentage point, on high-grade corporate bonds 85 basis points, and on conventional home mortgages about 1 percentage point. Barriers that impede the free flow of savings into certain sectors of the mortgage market, notably into the federally sponsored home mortgage program, have tended to appear in recent years. As the demand for funds in other areas has grown, lenders have been able to secure a higher net return on loans they considered of equal quality by lending on conventional residential and commercial mortgages, industrial bonds, and similar investment media. The 42 percent ceiling rates that formerly prevailed on both FHA and VA home mortgages gradually became a barrier to the ability of borrowers using these programs to compete with other borrowers for the savings that were available. For a time, competition was maintained through resort to discounts which had the effect of providing a higher gross yield to the lenders than the 4% percent rate stated on the face of the mortgage. The workability of this mechanism diminished as the 42 percent ceiling got further and further out of line with competitive rates in other lending areas. The total volume of VA-financed home mortgages was over $7 billion in 1955, and nearly $6 billion in 1956. So long as the present relationship between demands for and the suply of new savings prevails, there is no possibility that lenders will invest at anything approaching this rate in VA mortgages subject to a 4% percent ceiling. The problem before this committee, as I understand it, is to explore the bearing of this fact on the future flow of funds available for home mortgage lending. Specifically, your committee wants to find out whether or not there is any practical alternative to lifting the ceiling rate which has become a barrier to the flow of new savings into the VA segment of the mortgage market. 90300-57- -5 No. 1 of the three suggestions thus far advanced-(1) an increase in direct VA loans, (2) an increase in FNMA operations, or (3) absorption of VA mortgages in the Government trust funds-will increase the flow of private savings into VA mortgages. None of these proposals operates to encourage new savings, i. e., to increase the total flow of funds from which all demands for long-term investment must be met. All three, furthermore, require that the Federal Government borrow in the market more than it would otherwise borrow. This additional borrowing by the Treasury would not only be inflationary but would tend to raise market rates of interest further and thus increase the barrier that is already impeding the flow of private investment funds into VA mortgages. These programs would, of course, make funds available up to the limits provided in the legislation, and in some cases would help certain individuals to purchase homes. To the extent that already existing VA mortgages were acquired from institutions, however, it might simply provide those institutions with funds to lend in other markets. Hence, tracing the effects of these proposed programs, we find that under them the Federal Government would have assumed large additional responsibilities, without, in the end, restoring the market for VA mortgages. In view of the tentative decision to maintain the 42-percent ceiling rate on VA mortgages, it is evident that the adequacy of a continued flow of new savings into the home-mortgage market will depend on either or both of the following developments: (a) A further increase in the volume of lending on conventional mortgages. This may come about since these mortgages can compete freely yieldwise for limited savings with other demands for borrowing. (b) A revival of home mortgage financing through FHA. If the FHA establishes rates and charges that permit home mortgages covered by its insurance to compete with other investment for savings, this may well represent the channel through which a large part of the adjustment will be made. Re S. 929, 85th Congress Hon. J. W. FULBRIGHT, HOUSING AND HOME FINANCE AGENCY, OFFICE OF THE ADMINISTRATOR, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Agency with respect to S. 929, 85th Congress. This bill would provide that all residential mortgage loans guaranteed under title V of the Servicemen's Readjustment Act of 1944 or insured under section 203 of the National Housing Act shall involve the minimum downpayment and the maximum maturity per mitted by the Veterans' Administration or the Federal Housing Administration unless the borrower certifies that the downpayment and the maturity are in accordance with his wishes. The Housing Agency recommends against the enactment of this bill. We believe that its enactment would not actually operate to assist persons desiring to purchase or construct a home with FHA- or VA-aided financing. Undoubtedly, a borrower who presently accepts a mortgage loan with a larger downpayment or a shorter maturity than is permitted by VA or FHA regulations, does so either because he desires to avoid unnecessary interest charges or because he is unable to obtain more liberal terms from other lenders. In the latter case, the terms obtained are the most liberal which the lender is willing to make in the current mortgage market. Thus, as a practical matter, the net effect of the legislation would be to add one more paper to the routine processing by lending institutions of VA- and FHA-aided mortgage loans. Sincerely yours, ALBERT M. COLE, Administrator. VETERANS' ADMINISTRATION, March 15, 1957. Hon. J. W. FULBRIGHT, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR FULBRIGHT: Further reference is made to your request for a report by the Veterans' Administration on S. 929, 85th Congress, "A bill to protect borrowers against excessive cash requirements and minimum terms in the case of home loans guaranteed under title V of the Servicemen's Readjustment Act of 1944, or secured by mortgages insured under section 203 of the National Housing Act." The purpose of this measure, apparently, is to induce lenders to make loans for the purchase or construction of homes with the most liberal downpayment and maturity terms permitted by the law and regulations governing the guaranty of loans by the Veterans' Administration or the insurance of loans by the Federal Housing Administration, respectively. The bill would specify that, unless such minimum downpayment and maximum maturity are provided in the loan terms, or unless the veteran borrower certifies that the loan terms are in accord with his wishes, the loan may not be guaranteed by the Veterans' Administration or insured by the Federal Housing Administration, as the case may be. At the present time the maximum maturity period permitted by law and regulations on GI home loans is 30 years and, since July 31, 1955, the minimum cash downpayment required of veteran purchasers, by regulations promulgated pursuant to section 504 (a) of the Servicemen's Readjustment Act, is 2 percent of the purchase price of the property. It should be noted in connection with the purpose of the proposed legislation that a lender is free to make or not make loans for guaranty by the Veterans' Administration and that the lender may require whatever downpayment is considered proper and restrict the term of any loan to less than 30 years. In such circumstances the veteran would be confronted with the choice of accepting the amount and term offered by the lender or seeking elsewhere for a loan. If a more favorable loan is not forthcoming the average veteran will in all probability make the required certification and accept the lender's terms, since the alternative would be no loan at all. It would seem that in view of this practical situation it is very doubtful if any tangible benefits would result from the subject proposal. Parenthetically, it is noted that on page 1, line 5, of the bill, reference is made to title V of the Servicemen's Readjustment Act, whereas the correct statutory reference is title III. In view of the foregoing the Veterans' Administration is unable to recommend favorable consideration of S. 929 by your committee. Advice has been received from the Bureau of the Budget that there would be no objection to the submission of this report to your committee. Sincerely yours, H. V. HIGLEY, Administrator. Hon. J. W. FULBRIGHT, HOUSING AND HOME FINANCE AGENCY, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: This is in further reply to your letter of February 8 requesting the views of this Agency with respect to S. 1090, a bill to extend the time for disposal of a certain war-housing project to the housing authority of the town of Wethersfield, Conn. The property in question was the subject of a special provision of the Housing Act of 1954 (sec. 810), authorizing its sale to the local housing authority at fair market value, to be paid for within 30 years, with interest on the unpaid balance up to 5 percent. On January 1, 1957, the project became subject to a general provision of the Lanham Act requiring that permanent Lanham housing not sold by that time must be advertised and sold as expeditiously as possible to the highest responsible bidder (unless all bids submitted are at less than fair market value, in which case the property may be disposed of by negotiation). The above bill, S. 1090, would suspend the requirement of competitive sale as to the project until July 1, 1957, and would permit its sale to the local housing authority until that time under the special provisions of the 1954 act. On January 31, 1957, representatives of the local housing authority and of the Public Housing Administration (acting for this Agency) agreed upon the terms under which the project would be sold to the housing authority if the necessary enabling legislation is enacted. It was agreed that the sale would be on the basis of a purchase price of $500,000 with interest on any unpaid amount thereof at the rate of 4% percent per annum. No downpayment would be required nor would any payments toward principal and interest be made during the first year following the date of sale. The first year's interest amounting to $22,500 would be added to the purchase price and the total amount of $522,500 would be secured by a purchase-money mortgage. This mortgage would be payable in 347 monthly installments of $2,542 per month, beginning in the 13th month after the date of closing, to be applied first to interest accrued and unpaid and then toward principal, with a balance of about $108,000 payable on or before 30 years from the date of closing. The housing authority will be required to furnish insurance in accordance with the customary policy of the agency and the terms of settlement will provide for proration of income and expenses (including payments in lieu of taxes). The local authority will be required to defray the usual and ordinary costs of recordation. The PHA has been negotiating with the housing authority for the sale of this project for over a year and one-half and believes that if the housing authority cannot meet, within the reasonable time prescribed in the bill, the liberal terms PHA has now approved the project should be otherwise disposed of. We believe that, as this legislation is temporary and pertains to a particular project, it should not be included in the permanent Lanham Act, but should be independent legislation. For this purpose, a substitute draft bill is enclosed. Sincerely yours, ALBERT W. COLE, Administrator. A BILL To extend the time for disposal of a certain war-housing project to the housing authority of the town of Wethersfield, Conn. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That notwithstanding the provisions of section 614 of the act entitled "An act to expedite the provision of housing in connection with national defense, and for other purposes," approved October 14, 1940, as amended, the Housing and Home Finance Administrator is authorized to sell and convey war-housing project CONN-6029 to the housing authority of the town of Wethersfield, Conn., pursuant to the provisions of section 810 of the Housing Act of 1954, as amended, until midnight of July 1, 1957. Re S. 1230, 85th Congress. Hon. J. W. FULBRIGHT, HOUSING AND HOME FINANCE AGENCY, OFFICE OF THE ADMINISTRATOR, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Agency with respect to S. 1230, a bill to authorize the Housing and Home Finance Administrator to provide urban planning fellowships. This bill would authorize annual appropriations of $500,000 for a 3-year period beginning on or after July 1, 1957, to be used by this Agency for fellowships for graduate training in urban planning and related fields. There is a great need for additional technicians in the fields related to urban planning. Scholarship funds for the graduate training of such technicians would therefore be helpful. However, we do not believe that such a program should be federally financed. If the Congress desires to give consideration to the proposal, it should be noted that it raises a number of questions. One is whether it should encompass other technical and scientific fields in which the |