viduals to set prices. The mass market does a better job without the prejudices that individuals can readily acquire. 2. If such a program is to work, the law would have to be specific in its directive that the FHA Commissioner and the VA Administrator were given this responsibility with the thought that the program would be administered by them so that there would always be adequate funds seeking mortgage investments. In other words, if this type of legislation is considered, it should clearly spell out the fact that it was not the duty of these Government agencies to hold down interest rates, but rather it was their duty to see to it that these rates, while not excessive, were, nevertheless, at a point that funds seeking FHA or VA mortgages would be attracted into the market. I have attempted to give you my opinions on this very complicated question. If you have any questions, or if you would like to discuss any of the details of the suggestions in this letter with me, I will be glad to go to Washington any time at your convenience. In closing, may I say I very much appreciate having the opportunity to give you my opinions on the subject of interest rates applicable to FHA-insured and VA-guaranteed mortgages. With best personal regards, I am, Beginning Apr. 1, 1952, the series includes all fully taxable, marketable bonds due on 1st callable after 12 years. Prior to that date, only bonds due on 1st callable after 15 years were included. Beginning May 1, 1953, the series listed is that of the 34 percent bonds 1978-83. Prior to that date, the series includes those bonds noted in footnote 2. First quarter average is on bonds due on 1st callable after 15 years; 2d quarter figure is average for May and Junc, only of new series. Thus April's figure is omitted from any quarterly calculation. May to December, new series only. Source: Federal Reserve Board. Yields on new issues of AA-rated long-term electric power bonds, 1950–56 1 Average of several issues-all others indicate a single issue for that month. Source: Federal Reserve Board. NOTE.-Blanks are shown for months in which there were no such issues. Moody's weighted averages of yields on newly issued domestic bonds, 1950–56 NOTE.-Moody's weighted averages of yields on newly issued domestic bonds is composed of yields on all grades of bonds, and is computed only annually. The breakdown is railroad, industrial, and utility. It would be of limited use in our analysis, since it is only an annual average, and, further, neither the 1955 nor 1956 averages are yet available. (The 1955 railroad figure is not yet available; the 1955 industrial and utility data are estimates; and none of the 1956 averages are yet listed.) We are told by the Federal Reserve, in addition, that they question the usefulness of the series, since in any one year there may be more high-grade issues than in the next, and thus comparison of successive annual figures may not yield significant results. Source: Moody's Industrial Manual, 1956. Hon. JOHN SPARKMAN, COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK, Chairman, Subcommittee on Housing, Committee on Banking and Currency, United States Senate, Washington. MY DEAR SENATOR SPARK MAN: It is a pleasure to reply to the invitation contained in your letter of January 2 to comment upon the current mortgage market situation and on some proposals for action by Congress that would affect it. The principal complaint about the market situation is that mortgage funds are not available in satisfactory volume on terms-particularly at or near interest rates-which have prevailed over a number of years. The most liberal terms and the lowest interest rates have characterized mortage loans insured or guaranteed by the FHA and VA. It is generally assumed that funds for investment in these mortgages would become more plentiful if the maximum permissible interest rate were increased by administrative or congressional action. But it is commonly alleged that the recent action of the FHA which increased the permissive interest rate to 5 percent was "too little and too late" and will not remedy the situation, especially since the VA rate remains at 4% percent. The argument is that in order to compete successfully in the money markets for investments funds, mortgages must bear a yield that compensates for their comparative disadvantages. If the yield therefore becomes sufficiently high, a satisfactory volume of funds for investment will become available. The fact that existing FHA and VA mortages, bearing 4% or even 5 percent interest, are selling at discounts indicates that the yield is an important influence in these markets. Other characteristics are also very important. Chief of these are the marketability or shiftability of the investment, its term, and the cost of administering it. In both shiftability and term, FHA and VA mortgages are different from conventional loans. This characteristic of marketability is not only distinct but it is also new. Prior to the establishment of the FHA, the most common criticism of mortgages as investments was that they were "frozen" assets which could not be realized upon even in a local market. Now both FHA's and VA's are bought and sold in markets that are all but nationwide. So long as there is no open market in which the price at which a mortgage can be brought or sold can be ascertained, there is no acceptable basis upon which its yield or capital value can be computed other than the interest rate stated in the instrument and the amount of debt outstanding. Commercial loans in prior real-estate booms, as well as today, are carried on the books of investors at par. consequently, and the yield is taken as the interest rate stated in the mortgage. Changes in interest rates in money markets generally do not affect these investments already made, but they have been reflected in the past in the interest rate at which which new advances have been made. But between the rates at which new mortgage advances have been made and the yield on other types of investments, some evidence indicates that there has not been any constant differential. And I am told, in fact, that the differentials between yields of other traditional types of investment have characteristically fluctuated rather than remained constant in the past. It seems to me, then, that the question of permissive interest rate on FHA and VA loans can be most fruitfully examined from the point of view of marketable securities, including the traditional types, rather than from the point of view of the conventional mortgage loan. If this be true, the following observations are probably valid: (1) It can be expected that the price at which existing FHA and VA loans can be bought and sold in the wide market which they have captured will continue to fluctuate as general interest rates change. (2) The permission interest rate on new FHA and VA supported advances will have to fluctuate in consonance with fluctuations in the yield obtainable by open-market purchases of existing obligations, if new or additional funds are to flow into these advances in satisfactory volume. (3) The response of the money markets to changes in yields on FHA's and VA's purchased in the open market will be promptly reflected in changes in the interest rate required upon new advances. So long as the permissive interest rate is below the market, discounts and other devices will be employed to compensate for the low interest rate and the volume of funds available will probably be less than if the permissive interest rate were higher; and when the permissive interest rate is above the market premiums, bonuses, and other devices, including interest rates below the maximum permitted, will be offered in order to equate the yield on new advances with that which can be realized from open-market purchases. (4) It cannot be expected, however, that the differential between the yield on Government-supported mortgages and any other type or types of openmarket security will remain constant. (5) Any maximum permissive rate, established at such intervals as 6 months and tied to rates prevailing over a preceding period of time, would inevitably lag the market in periods of rapid change and thus when needed would be to some extent "too little and too late." If the interval for adjusting the maximum permissive interest rate were established and known, in periods of rising interest rates the disparity between the rate permitted on new loans and the yield obtainable from open-market purchases might appear and funds for new loans no longer be available long before the date for revision of the interest rate arrived. (6) The best means of obtaining in the open market the largest volume of funds without placing upon the borrower any obligation except that required to attract the funds is to remove the restriction on interest rate and allow it to be fixed by the market in the light of the rate of premium or discount prevailing on existing obligations. If these observations are valid, it follows that the specific amendment which you quoted in your letter, suggested by Mr. Clarke, might not produce the effect which it is expected to produce. (I take it that some such words as "not to exceed" would be inserted in the proposed amendment so that the rate established by the Commissioner would be a maximum permissive rate and no a specific prescribed rate.) It seems clear that the interest rate on government-supported mortgages must vary from time to time if mortgages are to compete for funds in the investigation market. Under existing legislation flexibility can be had only by action of Congress or by change in the regulations. These means of obtaining flexibility in interest rates have not proven satisfactory in operation. It appears to me that the interest rate should be freed from restriction. I believe, furthermore, that the national open market which has developed for these Government-supported mortgages would assure a prompt response of interest rate on new loans to fluctuations in the yield of existing securities. If a maximum permissive rate is retained and is linked to another aspect of the market for investment funds, it might be worth while to consider linking it to quoted prices on these securities themselves. May I add one other comment: Rising interest rates, I take it, are an indication of expanding demand for money and credit. This expansion arises from expanding markets, production facilities, business and economic activities of many sorts. Expansion of money and credit to meet the expanding demand may involve inflation of costs and price levels. It may not be possible or desirable to provide all the funds or credit demanded in such a period. But if all demands are not met, some complaint of shortage of credit is likely to arise. Competitive interest rates in a given type of investment in such a period is not going to quiet such complaints. They may assure that a given type will obtain a larger or smaller proportion of the pool of funds available at a given time for investment, but they will have but little effect upon the size of the pool except in the long run. Again, I thank you for the opportunity to comment on this question. ERNEST M. FISHER, Hon. JOHN SPARKMAN, NEW YORK LIFE INSURANCE CO., United States Senate, Washington, D. C. DEAR SENATOR SPARKMAN: Thank you for your letter of January 2. We are greatly interested in sound national policy with respect to housing and mortgage lending and have given a good deal of thought to the questions you have raised. As far as the New York Life Insurance Co. is concerned, I would say that our views with respect to the interest-rate structure applicable to FHA-insured or VA-guaranteed mortgages differ from those expressed by the advocates of closer |