within an economic environment which permits interest rates, along with the prices of all commodities, to fluctuate in accordance with the influences of a free market. We, therefore, recommend that the Congress enact legislation to provide flexibility in the interest rates of FHA-insured and VA-guaranteed loans. Such legislation would safeguard against excessive rates and permit such rates to be adjusted up or down in response to parallel trends in the money market." The realtors' Washington committee in implementing this policy statement approved a resolution which proposes the creation of an administrative board, from among the heads of agencies concerned, to review the interest rates on FHA-insured and VA-guaranteed loans and to make periodic adjustments, downward or upward, of such rates in response to parallel trends in the mortgage market. However, the rate would not exceed by 21 points the average yield, during the 6 months preceding determination, on Government obligations having a remaining maturity of 15 years or more. It must be emphasized that this formula would result in a maximum rate and not necessarily a prevailing rate. One of the great weaknesses in the law fixing the VA interest rate is that the statutory maximum rate is always the prevailing rate. On the other hand, the FHA statutory maximum is 6 percent, yet the prevailing rate has for more than 20 years been less than 6 percent. It is essential to a proper evaluation of our proposed formula that it not be viewed as a means for making the maximum rate the prevailing rate. Your subcommittee might be interested in the recent action of the Canadian Government in increasing the rate on Government-insured residential mortgages to 6 percent. Canada has had in effect a formula which operates to adjust the rate so long as the date does not exceed by 24 percent the average yield on long-term Government obligations. While we do not suggest an increase in the FHA or VA rate to 6 percent, we do recommend that your subcommittee review the experience of Canada in fixing the rate on Government-insured mortgages through the operation of a flexible formula. We hope that we have been helpful to your subcommittee in expressing these views of our association. Respectfully yours, Hon. JOHN SPARKMAN, KENNETH S. KEYES, President. INDIANA UNIVERSITY, Bloomington, January 15, 1957. United States Senate, Washington, D. C. DEAR SENATOR SPARKMAN: This is in response to your letter of January 2, 1957, regarding interest rates on FHA-insured and VA-guaranteed mortgages. If one could assume approximately perfect competition among lenders, a good argument could be made for a free rate on such mortgages. So long as funds are supplied by private leaders acting in their own best interests, the mortgage market cannot be insulated from and must compete with other markets for funds. A rate which is maintained by Government order at a level which is significantly out to line with competitive market rates will inevitably create an artificial imbalance between demand for funds and supply of funds available under such mortgage insurance or guaranty. At the other extreme, if mortgage lenders were in a monopolistic position and were thus able to charge rates above a competitive rate, Government regulation of that rate would be highly desirable. The actual market situation, of course, is between these extremes. In my judgment it more nearly approximates perfect competition. However, the superior financial strength, knowledge, and bargaining power of the typical lender over the typical residential mortgage borrowers means that some measure of monopoly power exists in most such transactions. Moreover, in certain localized situations where there is only one lender or where the several lenders act in tacit agreement, a significant degree of monopoly power exists. It is my conclusion, therefore, that Government should continue to fix the allowable maximum rate on such mortgages but should adjust it from time to time as necessary to approximate a perfectly competitive rate. Probably the best test of the relationship between the established maximum rate and a perfectly competitive rate is the open market for FHA and VA mortgages. This is not a highly or well-organized market, to be sure, but it exists and prevailing premiums or discounts are fairly uniform and not difficult to determine. 90300-57- -37 I would suggest, therefore, that the FHA and VA (if VA-guaranteed mortgages are continued-see below) be authorized and directed to adjust their maximum rates from time to time such that first-quality mortgages issued under such insurance or guaranties will sell at no or only a slight discount in the open' mortgage market. By "only a slight discount," I mean a point or two. A discount this small can usually be absorbed by the builder or lender. A discount of several points, however, cannot be absorbed if the appraisal is honest and is bound to lead to a drying up of funds. I doubt the wisdom of tying the FHA and VA rates to the yield on Government securities. The spread between such rates varies considerably from time to time, depending upon the demand for mortgage money and upon the portfolio needs of lending institutions. Mr. Clarke's proposal, for example, would be of little or no help at present. FHA and VA rates should be tied, not to another money market, but to the residential mortgage market itself. May I also suggest that now, when VA-guaranteed mortgages are scarce, would be a propitious time to terminate the VA mortgage guaranty program. It could readily be absorbed into the regular FHA insurance plan. If it were the desire of the Congress to continue a veterans' preference, this could be done by various devices. For example, the veteran could be exempted from the half-percent insurance charge, which the VA could pay direct to FHA from appropriated funds. I hope that these thoughts may be of some assistance to you. ROBERT C. TURNER, Professor of Business Administration. WASHINGTON, D. C., January 4, 1957. Hon. JOHN SPARKMAN, Chairman, Senate Subcommittee on Housing, DEAR SENATOR SPARKMAN: I have received your letter of January 2 with respect to interest rates in connection with housing. As you know, this is a matter to which I have given a great deal of study for many years, not only in connection with housing specifically, but also in connection with the relationship of housing to the whole economy. As soon as I can, I want to send you a comprehensive memorandum on this subject, but in the interests of a prompt response to your inquiry I very briefly summarize my views below. While the Federal Reserve Board tells us that the higher interest rate policy is designed to check inflation by preventing, among other things, an excessively high rate of housing construction, some of the institutions interested in home financing tell us that higher interest rates are needed to enlarge the volume of house construction. Since higher interest rates cannot at one and the same time stimulate and restrain the volume of housing construction, there is manifestly an inconsistency between these two viewpoints. Broadly speaking, I believe that the Federal Reserve Board is correct in its analysis of the effect of higher interest rates, as applied to housing. The basic limiting factor upon the construction of housing is not the availability of supply on the capital side, provided that the factors on the demand side were inviting, but rather the absence of an adequate demand for new housing construction because the cost of housing is beyond the reach of a large part of the mass income market. Consequently, raising the cost of housing by raising interest rates further restricts the market, and further restrains house production. However, as applied to housing, I believe that in the current economic situation the effort of the Federal Reserve Board and others to restrain the production of housing, through means usually referred to as the hard-money policy, is profoundly wrong both economically and socially. It is wrong economically because the economy is not now suffering from overall inflationary pressures, or excess of total demand over total supply. In fact, when adjusted for price change, the real growth of the economy from the fourth quarter of 1955 to the fourth quarter of 1956 was only 2.2 percent, compared with an average of 3 percent over the last 40 years and an average of more than 4 percent during the years since 1947. What has been happening in fact during the past year, and it is really dangerous, is an inflationary or relatively excessive rate of development in some parts of the economy, such as the investment by big enterprise in plant and equip ment, and an inadequate or potentially deflationary rate of development in other parts of the economy, such as the expansion of consumption, the building of houses, etc. Correspondingly, while some industrial prices and some profits have been rising excessively, farm prices and many other incomes in real terms have been falling excessively or not expanding sufficiently. Thus, the real trouble is not a generally inflationary situation, but an uneven, distorted, and unbalanced situation. In the face of this, the hard-money policy, or the higher interest rate policy, has been operating in a thoroughly upside down fashion to inflate the inflated parts of the economy, to stimulate the parts of the economy operating at relatively excessive rates, and to deflate or further retard the parts of the economy which are already in trouble on the low side. A prime example of the latter situation is housing. To put all of this more succinctly, the hard-money policy is redistributing the national income and the national production pie in a regressive direction. It is class legislation of the worst sort, supported by powerful and pervasive propaganda; and for the very same reasons that it is economically wrong, it is socially wrong, depriving the people of what we need and have the resources to afford (for example, more and better housing) in order to divert benefits and opportunities to other sectors of the economy which do not need this distorted operation of the money power in their favor. During the past year, industrial prices have risen twice as fast as the economy has grown in real terms, and consumer prices have risen about 50 percent more than the economy has grown in real terms. This is the worst inflation in socalled peacetime in my recollection. Yet it demonstrates clearly that this inflation is not caused by an excessively active or excessively expanding total economy; and therefore the application to this situation of the overall antiinflationary measures which were proper when the economy was attempting to expand at a rate in excess of its resources, and expanding as fast or faster than the rise in prices, is entirely erroneous. Instead of the inflation being caused by too much economic activity, this particular inflation, which is really a distortion, is reflecting itself in the repression of total economic activity below desirable levels, and in serious hurt to many groups and to many essential State and local services adversely affected by sharply rising financing costs. The hard-money policy is the prime instrument of this distortion. While this may seem like strong language. I assure you that it is not an overstatement of the facts of the case. One of the greatest economic gains of our generation in the United States, if not the greatest, was the reduction in the cost of money so that the basic producer and consumer were brought into better balance with those who control the money supply. The momentum of this gain is still carrying us, along with other earlier gains, at a fairly high level of prosperity. But the hard-money policy is beginning to fritter away some of the strength, and its effects upon the general economy are already being felt. To relate the foregoing comments specifically to the inquiry in your letter of January 2, an interest rate on FHA-insured or VA-guaranteed housing mortgages at 2 percent per annum in excess of the average yield on long-term Government obligations would, with allowance for costs and servicing, result in an effective interest rate on housing pushing close to or threatening to exceed the proposed 5 percent maximum. As you know from innumerable factual studies of the subject, housing financed at this interest rate is utterly incapable of meeting that large part of the mass market for middle-income housing which represents the controlling factor in the difference between an adequate and inadequate level of house construction. Legislation along these lines would, in my opinion, codify a factual situation which even now is contributing toward the persistent and undesirable decline in house construction. I do believe that legislation should concern itself with influencing those interest rates which affect the cost of housing. This subject is too important, both economically and socially, to be left to the operations of what some people call a completely free rate. I hope that every possible effort will be made during this year to bring the true facts of this situation fully before the Congress. With no interest to serve but the public interest, as I see it, I shall be glad to cooperate with your Housing Subcommittee and with other committees to make what contribution I can in this direction. And I would very much like to discuss this matter with you at your convenience. With all good wishes, Very sincerely yours, LEON H. KEYSERLING. VETERANS OF FOREIGN WARS OF THE UNITED STATES, Hon. JOHN SPARKMAN, United States Senate, Washington, D. C. DEAR SENATOR SPARKMAN: This is in reply to your letter of January 2, in which you requested the views of the Veterans of Foreign Wars concerning an appropriate base or formula for interest rates on FHA-insured and VA-guaranteed mortgages; also, an appropriate allowance for costs and servicing the loans and for administrative expenses. At our 57th national encampment held in Dallas, Tex., August 12-17, 1956, several resolutions were adopted pertaining to the GI home-loan program and interest rates. None, however, pertain specifically to the questions you have posed, and accordingly I have directed my staff to make a thorough study of the suggested proposals. Our views will be presented to you in the very near future. Thanking you for the opportunity to participate in this program, I am Respectfully yours, Senator JOHN SPARKMAN, COOPER T. HOLT, HOUSING SECURITIES, INC., United States Senate, Washington, D. C. DEAR SENATOR: Thank you for your letter requesting my opinion of a method by which mortgage interest rates could be coupled with the prevailing rate of long-term governments. I am not in favor of Mr. Clark's plan, and have opposed it since the time it was proposed. I am afraid that any plan that connects interest rates with some publicly known index-whether it is government's or Moody's-would lead to a dislocated market. Any turn in these indexes, which are published daily, would serve cautionary notice on investors that at the next fixed date for a change that the rate would be up or down. As a result, they would rush to commit prior to the change or withdraw from the market awaiting the increased rate. Even in normal times there would be a tendency to play the season changes as investors now do in the bond market. I feel that the rate must be changed, but only after a definite change in the market has occurred and then only with reluctance. The subject of servicing charges that you raise is very interesting, and should be studied by your staff. I am of the opinion that a flat rate per mortgage per month, regardless of size, should be carefully considered. The present method places a premium on large mortgages, although the amount of work is the same for a large one or a small one. As a result, mortgage companies tend to reject or refuse to originate small loans on homes that we so desparately need. Such a move would tend to give the lower cost homes an even chance and would eliminate one of the major inmpediments to low-cost housing. A flat fee per month will, in the long run, work to the mortgage companies' advantage and prevent some of the difficulties now in store for the housing industry. As time goes on and the mortgages are paid down, the percentage fee becomes so low that servicing is neglected or various alternative devices are tried including attempts to get the homeowner to refinance the mortgage. I cannot let this opportunity go to state that I feel that so-called flexible interest rates will be the death knell of housing. The average home buyer is dependent on low interest rates and long-term amortization to place housing within his reach. When the total rate (interest plus one-half percent mortgage insurance) gets above 5 percent, I feel that the carrying charges are becoming too high. It is up to us to devise some method to keep interest rates on mortgages relatively low if we are to continue the development of homeownership. The present competition for yield by investors has gotten completely out of hand, and if continued rates will soon be at the legal limit in each State with illegal fees being paid to boot. It is for this reason that I have been so long working toward a central mortgage bank and have hoped to gradually convert FNMA to that position. Instead it seems to be moving the other way until we get in these periodic jams, and then it's "dear old Fannie May" and the private-enterprise mortgage men seem to forget their antipathy for an agency to support the market. In my opinion the present monetary policy of the Government is seriously damaging the housing industry along with many other small businesses. Not only is the tight-money policy ruining the long-term money market, but it is not stopping inflation. The seriousness of the present situation is not understood by this administration and the Housing Agency is failing to properly inform the administration. Housing starts are not dropping suddenly because builders must complete what they have underway and use up the land for which they are committed. Those who can afford to stop have ceased operations and are trying to sell their land. Many builders are going bankrupt, but most builders are small and simply pass their operations on to their creditors to wind up. Mortgage companies are unable to borrow money in many cases to close loans in order to sell them to FNMA. The combined actions of the Federal Reserve, the home-loan bank, the Comptroller of the Currency, the FDIC, and State bank commissioners have placed a terrific stress on the home-mortgage field. Meantime, consumer credit soars to new high records; proposed plant expansions for the year will be higher than ever. The average American family can borrow money to travel to Europe, to vacation in Florida, or buy a car, but money to buy a home is nonexistent. The home buyer cannot compete with commercial and industrial users of money. The tax writeoffs, the ordinary tax advantages, make the interest rate a minor matter to many users of credit who hope to profit by its use. The homeowner is looking for a place to live and needs 25 years to pay with no tax advantages to speak of. The tight-money policy is unfair because the Government itself is the worst offender. While asking others to curtail, it continues to borrow and, to make matters worse, invades our field. First it was the Capehart housing with a program of $2 billion, guaranteed by the Defense Department, seeking funds for mortgages. Then the Maritime Commission is guaranteeing loans for ships at rates of 5 percent and up, also in the mortgage market and taking many millions of dollars. On top of these are highway programs, GSA and its leasepurchase of Government buildings, and now we hear of insured loans to buy aircraft. If all the users of funds that normally depend on bonds for financing come to the mortgage market, at least we should be able to go back in the bond market to get funds for mortgages. I am sorry to write such a long complaining answer to a few questions, but I believe in getting a word in when the chance occurs. I am writing you in detail regarding my suggestions for a central mortgage bank. I also believe that we need quick action, prior to a general housing bill, if we are to keep housing from serious trouble. First, parity of interest rates; second, additional authority in FNMA to keep them in business; and last but most important, $2 billions in FNMA special assistance to buy loans at not less than 98 for 203 and 501 loans. This special assistance should probably be flexible to encourage housing in lower cost brackets ($12,000 and under) for minority groups and for rural areas. The special assistance is necessary to restore the market for mortgages. Present quotations in New York are 92 for 41⁄2's and 95 for FHA 5's. When the rate on VA's is raised the old 41⁄2 discounts will prevail unless something is done. One of the new moves that will further weaken the market for mortgages is the rise in interest rates that commercial banks can pay savings depositors. With the aid of their consumer credit devices, the commercial banks can attract a large volume of savings from the mutual savings banks and the savings and loan associations who cannot meet the other services. The commercial banks will not invest in mortgages as the other institutions do, as they have many more profitable types of investments available to them. The result will be a reduction in the pool of available mortgage funds. The present policy is a return to the rule of the jungle and after our experience in the twenties, it is tragic to see money flowing only to those who can pay the most for it. Sincerely, THOMAS P. COOGAN, President. |