controls both discounts and interest rates, it drive money out of the market into other fields of investment.

"Discounts

"What about discounts? Do they serve any necessary or useful purpose? Definitely, yes. Even if there were no controls over interest rates, discounts would be necessary to an effective home-financing operation. Discounts permit many solutions, in the borrower's best interests, which cannot be accomplished by variation in interest rate. They permit much smaller variations in rate than are practicable through modification of interest rates. For example, interest rates, even if flexible, would change in fractions no smaller than one-fourth of 1 percent, but through discounts, rate variations of one-tenth of 1 percent and less can be reflected. On a 25-year loan it takes about a 5-percent discount to equal a one-half of 1-percent increase in interest rate.

"Discounts are essential to warehousing loans in order to accumulate mortgages to offer for mimeditae delivery to investors. A substantial discount is often essential during the warehousing period to protect the commercial banker. But the warehousing process permits sale of the mortgages later at a higher price and thus, in the long run, reduces the cost to the builder and the borrower. The discount facilitates orderly and effective marketing of mortgages at the best possible price. The discount device permits a sensitive evaluation of the quality of mortgages by the secondary market. Neighborhood characteristics, appeal of the house, strength of the borrower, and the foreclosure laws of the State can all be reflected more precisely and more equitably through variation in discounts equal a one-half of 1-percent increase in interest rate.

"It would not help the borrower to limit discounts. It would simply introduce one more barrier to block the flow of money into home financing and thereby chase some investors from the market. Over the long pull, Congress will help the borrower most by encouraging the greatest possible competition to lend. This is not achieved by controlling either interest rates or discounts."

Since our statement was issued, it has frequently been alleged that our position would result in the FHA having no control whatever over interest rates, and that the Government might be in the position of being required to insure a loan which carried an unconscionable rate. In this connection, we should like to refer the committee to an exchange of correspondence between MBA President Austin and Senator Sparkman in which Mr. Austin pointed out that under our proposal the FHA Commissioner would always have the right to refuse to insure any loan which, in his opinion, had any unreasonable terms, including rate. (See exhibit B.)

EXPANSION OF VA DIRECT LOAN PROGRAM USE OF NSLI FUND

In discussing interest rate matters before the Committee on Veterans' Affairs on January 30 of this year, I made this statement:

"Mortgage companies do not like high interest rates any better than any other business enterprise likes them. This statement may be surprising but I should like to point out to you that the primary function performed by the mortgage company is to bring together those who wish to invest in mortgages and those who wish to buy a home financed by a mortgage. Therefore, the primary interest of the mortgage banker is to be as sure as possible that the commodity which he is selling the mortgage-is at all times 'marketable.' Since ours is a volume business, we are encouraged by low rates and ordinarily find our best business under such conditions. But the mortgage can only be marketable if it can meet the competition of other similar types of investment. Thus, in a period of rising interest rates or tight money-over which neither the veteran or other home buyer or the mortgage banker has control-the mortgage banker can only offer a GI loan with an adequate yield by offering it at a discount or by urging that the rate carried by the loan reflect market conditions.

"The net yield to the investor from the present GI loan does not reflect market conditions, and as a matter of fact, it is so far below the market that the discount system is also unworkable, since to reflect a one-half point increase in yield on a 25-year loan requires a discount of approximately 4 percent, using a fairly realistic life table.

"In the long run we do not believe that the Congress, if it wants the GI program to continue, can meet the situation by any method except by permitting yields on GI loans to remain competitive. We regard proposals to continue the low rate by use of the national service life insurance fund or by expanding the direct-loan program as being not in the best interests either of the public, the

country or veteran borrowers, particularly since there is over $300 million still available for direct loans by the VA without any further congressional authority being required."

Mr. Chairman, we believe that, if the Congress begins to expand the directloan program primarily in order to support a submarket interest rate, the ultimate demands upon the Treasury will stagger even those used to discussing matters in billions of dollars.

With respect to the use of the NSLI fund, we would subscribe to the remarks of Mr. W. Randolph Burgess, Under Secretary of the Treasury, before the House Committee on Veterans' Affairs on February 6, 1957, and which appear at page 330 of the printed hearings. Mr. Burgess pointed out that the existing NSLI funds are not idle but are fully invested in special issues of Government securities which would have to be redeemed in cash by additional Treasury borrowings to make them available. As Mr. Burgess stated, "We would be adding to the funds available for mortgages with one hand and taking away with the other."

EXPANSION OF FNMA

Our attitude toward an expansion of the FNMA was expressed by Mr. William A. Clarke, who appeared for the association before the Senate Banking and Currency Committee on February 6. Mr. Clarke stated in part:

"If FNMA is to be retained as an instrumentality for an emergency use in the mortgage market, it must have adequate funds with which to operate. Since there is an emergency which does now exist, and the existing funds of the Agency are almost exhausted, the association supports Senate Joint Resolution 38, which will provide sufficient funds for the operation of the Agency.

"However, the association urges that Congress permit the Agency to use these funds as its sound business judgment would indicate. By this we mean that the association should purchase mortgages at realistic rates and with a realistic stock purchase requirement."

I should add that our association has also in earlier years supported the secondary market operations of FNMA. However, we have consistently directed the attention of the Congress to what to us are the dangers of using the facility to support a submarket rate. In our 1954 statement we expressed it in this fashion:

"As it (FNMA) is presently administered, its facilities are available only at a substantial penalty. Its availability on penalty terms has prevented its use as a general substitute for private money but at the same time has provided a means for supplying liquidity to mortgage companies and builders hard-pressed by changing money conditions. Any appreciable reduction in the penalty provisions will bring the Government into direct competition with the private market and will enormously increase the demand for Federal funds for home mortgages.

"Enlargement of FNMA's authority to provide a market for loans purchased under its special assistance programs could be harmful to the economy generally and to the expressed purpose of FNMA's eventually becoming an independent organization, since purchases under the special assistance program are made at prices above the market and thus represent an indirect subsidy by the Federal Government.

"Because of FNMA's potential impact on the whole structure of the money market, we strongly urge close consultation between Congress and the Federal Reserve on its operations, and, further we urge Congress to consider reshaping the Board of Directors of FNMA to include representatives from the Federal Reserve and the Treasury."

VOLUNTARY HOME MORTGAGE CREDIT PROGRAM

The successful operation of this program is closely tied to the decision of the Congress on the future of the VA home-loan program, since it is in connection with VA home loans that the VHMCP has to a large degree been useful.

Our association has supported VHMCP since its inception. Many of our members have served on its committees and have been the originating institutions for many of its loans. It has been a remarkably successful program and it has brought the resources of private lending institutions into many areas of the country formerly almost completely without sources of financing. However, we are aware of the current recommendations of the national VHMCP committee. We subscribe to those recommendations. If they are not acceptable to the Con

gress, we see no way in which the VHMCP can continue to operate effectively under today's market conditions.

THE FEDERAL HOUSING ADMINISTRATION

Mr. Chairman, I should like to review some of the comments regarding FHA in our earlier policy statement. We said then:

"The Federal Housing Administration has never been released to fully perform the dynamic role of which it is capable. We propose a series of steps, which taken collectively, could free the FHA from the clutter of 'special' programs which confuse its activities, and from an unnecessary layer of administrative supervision and control. This revitalized FHA could find solutions through its normal operations for many 'special' problems which one by one become the target of 'special' legislative programs. We recommend:

"(1) That the Federal Housing Administration be incorporated as a Government-owned corporation; managed by a Board of Directors and presided over by a President-all appointed by the President.

"(2) That the FHA be made fully accountable for its operating policies, reporting directly to Congress and the President.

"(3) That FHA be required to operate within the income received from fees and premiums, after setting up appropriate reserves to cover future losses, and that net income above reserves and operating expenses be turned over to the Treasury. It would thus be unnecessary for Congress to make annual authorizations for FHA's operations and FHA, in turn, would be able to organize its staff as required to carry out its mortgage-insurance responsibilities. In this connection, it is to be noted that the FHA is not a subsidized operation; that it receives no money from the Treasury, that its losses have been fully covered by its insurance premiums, and that it is, therefore, a fully self-supporting operation.

"(4) That the FHA be permitted and required to adjust the mortgageinsurance premium which it charges to its estimate of the risk assumed in each type of mortgage transaction.

"If the FHA were thus administering a flexible program of mortgage insurance, in which it adjusted the premium to the risk, it would be possible for it to enter fields in which it is not now operating by increasing its mortgageinsurance premium, and it would also be possible for it to reduce the cost of some kinds of borrowing by reducing its insurance premiums. An exhaustive actuarial study of the status of FHA's insurance reserves has recently been completed. This report demonstrates that these reserves are more than adequate to withstand the shock of a severe real-estate depression. It indicates that in many categories of risk the insurance premiums might be substantially reduced. It also indicates that even in those categories regarded as particularly hazardous, the accumulation of insurance reserves may be adequate to cover any reasonable projection of future losses.

"If the FHA acted on the basis of such actuarial studies, it would reshape its insurance charges to meet actual and indicated experience. For example, the FHA might undertake a much bolder and more aggressive policy of mortgage insurance on older houses in older areas of our inner city by setting insurance premiums high enough to cover its estimate of risk.

"(5) That consideration be given to a plan by which private investors would gradually purchase stock in the Federal Housing Administration, building up its capital reserves and gradually transferring its ownership away from the Federal Government. It is not recommended that control over its operations ever be fully removed from the Federal Government, particularly from a policy standpoint. Its board of directors should be appointed by the President, regardless of the ownership. But, the assumption of ownership responsibility by investors could result in an active interest in its operations and management, which could reduce expenses, improve efficiency and broaden its activities."

We believe our policy statements still have much to recommend them and we earnestly solicit their consideration by this committee at this time.

To bring our statement more up to date, I should state that our association supports a proposal which will provide within FHA a means of meeting the needs of veterans for home loans. The provisions of the administration's bill (S. 1609) would be acceptable to us in this regard, and I should point out that this bill contempaltes no special title or program within FHA for veterans-a conclusion with which we agree most wholeheartedly, but rather a general revision of FHA requirements for all borrowers.

We would also support a proposal for additional funds for title I operations.

COLLEGE HOUSING, URBAN RENEWAL, HOUSING FOR THE AGED

We believe our policy statements on these fields are as appropriate today as when they were first made. We then said:

"College housing: Congress and the country must face up to the future demands of such programs as the college-housing program. This program began with an authorization for $250 million in Government loans for college dormitories. It has been enlarged to $500 million and the eligible purposes have been extended to include all non-teaching-college facilities. It is now proposed to increase the authorized total to $600 million. There is as much justification for the extension of the program and for the increase as there was for the initial program. Similarly, there will be equal justification for other Government lending programs to meet other special needs. There is every reason to expect the total to become enormous.

"If easy money is made available at rates below the market rate, we can all be sure that there will be an increasing demand for such money. Such programs, by their very nature, generate the demand for their further increase.

"If the Federal Housing Administration were established as the kind of agency proposed earlier in this statement adjusting its insurance rates in accordance with risk, this is the kind of housing need which might be met through a mortgage insurance program without the requirement for an allocation of Federal funds.

"It is strongly recommended that the future potential of the college-housing program and other such special calls for funds be examined in terms of their future potential, and a congressional policy established which avoids direct Government lending and finds the way to draw private investment funds soundly into these fields.

"Urban renewal: To be effective, must put to work all the tools available to the city for combating slums and blight. Wornout houses must be demolished and the cleared land put to its best new use. Houses worth saving must be rehabilitated to acceptable minimum standards; school and recreation areas provided; adverse uses removed; streets replanned and traffic rerouted to protect residential neighborhoods. The supply of existing housing must be analyzed to determine whether or not there is an adequate supply of relocation housing to meet the needs of the families displaced by the urban renewal program. If the existing supply is insufficient, then new relocation housing must be provided at appropriate rental.

"No one element in this program can alone be effective in renewing an American city. Neither public housing, nor redevelopment, nor rehabilitation can alone rid our cities of their slums. If we have learned anything about this problem in the past 15 years, we have surely learned that piecemeal attacks will not work. A thorough, complete, comprehensive program is required. This is what is meant by urban renewal and that is the major contribution of the Housing Act of 1954.

"There is no justification for Federal assistance in any phase of urban renewal unless a city is ready to face up to its problems and launch a full-scale, thoroughgoing urban renewal program. The Housing Act of 1954 required each city to prove that it has a workable program for urban renewal as a precondition to Federal aid. This is a sound concept, and it says simply that a city shall not receive any form of Federal aid-public housing, grants for redevelopment, FHA section 220 insurance-unless and until it has set in motion a workable program for attacking the slums along its entire front. In other words, the city must do its part before calling on the Federal Government for help. This makes sense. "It holds out an inducement to the city to take the kind of action it ought to take anyway. It protects the Federal Government's investment by making it a part of a comprehensive program designed to lift the city out of its slum condition. It compels the kind of cooperation at both Federal and local levels without which urban renewal can never really move ahead.

"The workable-program concept was badly weakened in the Housing Act of 1955 by freeing public housing from its requirements. This was a mistake. Why should any city which refuses to meet the requirements for a workable program for slum elimination be entitled to Federal housing assistance? This requirement should be restored as a precondition to Federal aid in the slum field and the standards for an acceptable workable program should be progressively raised as experience with urban renewal permits.

"Furthermore, the quantity of public housing for which any city is eligible should be limited to that which is needed to meet the relocation needs created by 90300-57-35

the urban-renewal program. The workable program test would require a city to lay out a plan for the total elimination of its slums. Such a plan must deal with the relocation requirements of displaced families. To meet such needs, the local community will first estimate the available supply of existing housing including the supply which becomes available from the turnover in the existing public-housing supply. Many cities will find that together with the other private housing which is available, there is already a sufficient supply of private and public housing to keep pace with the urban renewal relocation schedule. Other cities may not. This test, worked out originally by the President's Advisory Committee on Housing Programs and Policies, contributed enormously to an elimination of the controversy over public housing. It was agreed to by people representing all segments of the housing field, both public and private. By restoring this test, Congress will put an automatic thermostat on the publichousing program, permitting it to expand or contract in accordance with actual requirements in the renewal of our cities.

"Although the nature of the urban-renewal task involves greater timelags that any of us would like to see, this should not be used as an excuse for unaggressive, unimaginative, or clumsy administration of the program. Thoughtful complaints from around the country on specific projects strongly indicate that the administration of the urban-renewal program can and must be substantially improved if the program is to get under way. Too many projects in too many cities are taking far too long in both the Urban Renewal Administration and the Federal Housing Administration. There must be a fresh, new determination to get these programs going and to cut through the red tape which has bogged them down to date.

"Cost certification requirements, under section 220, must be eliminated, or substantially revised, before there can be any large-scale use of the rental housing provisions of section 220."

"Housing for the aged: Proposals permitting a person other than the mortgagor to make the required downpayment in any case where the mortgagor is more than 60 years of age, are reasonable and should be adopted. Similarly, there is nothing objectionable about giving a preference to older persons in FHA insured rental projects. However, there is no justification for a special program of mortgage insurance for rental housing for the aged. There is not sufficient evidence of a need for a special project of this kind. Without many programs for pensions and social security; with the decrease in family financial burdens of older persons; with an increasing housing supply and with programs for overall improvement of the condition of our housing inventory, there is no reason to make a special mortgage insurance program to care for aged persons.

"The actual result of a program for this purpose will be to provide higher ratio mortgage insurance on a paritcular form of housing. Developers will be attracted to this section of the law and will conform with it, not primarily in order to provide housing for the aged, but in order to get 90 percent loans on new apartment projects. Recent housing legislation has given preference to projects with two bedrooms or more. New proposals, if adopted, would swing the pendulum in the opposite direction and give emphasis to projects emphasizing smaller units. The Government, the housing market, the aged and the young would all be better off if a workable overall rental housing program were permitted to operate so that the housing built under it responded to market demand rather than to special advantages created by congressional action.”

MILITARY HOUSING

In our 1954 policy statement we made these comments about this program as it was then proposed:

"Military housing (FHA title VIII): We are aware of the need for additional housing at Army, Air Force, and naval bases, particularly in the case of new and expanded establishments. While we believe that a system of building such housing through the use of the FHA will result in adequate housing at considerably lower total cost than if it is furnished through direct appropriation. under the present law the Defense Department guarantees the FHA which must then insure the mortgage regardless of its analysis of the housing market at the particular base. This means that the military establishment and its base commanders are freed from the disciplines with which they would be faced if the housing requirements were competing with other requests for appropriations