Senator BENNETT. I think it would be very helpful if you could point out the impact of this fixed rate on your lending program, and your impressions of the variations that might have created different situations, more balanced situations.

Mr. KING. Yes, sir. On the basis of experience, we probably would find it more compatible with our program to prescribe a rather moderate rate and have factors of geographic variations and of selectivity, which is equally important, adjusted by premiums and discounts. I don't know how it can be done very cogently on any very different basis.

Senator BENNETT. We would welcome your recommendations for practical application of that idea.

(The information supplied follows:)

SUPPLEMENTARY DATA REGARDING HISTORICAL RELATIONSHIP BETWEEN GOVERNMENT BOND YIELDS AND VA INTEREST RATE AND LOAN VOLUME

For the information of the committee, we are furnishing three charts which present data regarding the relationship between Government bond yields and VA's maximum interest rate and loan volume.

Chart 1 is a copy of a chart furnished the committee by the Administrator of the Housing and Home Finance Agency, on which we have superimposed an additional line showing the maximum interest rate on GI loans.

The upper line of chart 2 shows the market yields on long-term Government bonds since 1945. The lower line shows the "spread" between Government bond yields and the maximum rate on GI loans. This "spread" line provides a rough indicator of the relative attractiveness of GI loans during the past few years in comparison with Government bonds, although there are also many other factors affecting investor's decisions.

Chart 3 shows the relationship between GI loan volume in the past few years and the "spread" between bond yields and the maximum GI loan rate. It will be noted that the two series have followed somewhat similar trends during most of the period, with increases in the "spread" usually being followed by increases in GI loan volume and vice versa. During 1952 and early 1953 the loan volume did not fall as sharply as might have been expected from the trend in the "spread" line. This is probably attributable, at least in part, to the increasing practice of discounting GI loans in the secondary market.

wn VAG TCARD REMAINING MATURITY ROUNDED TO NEAREST 1/8 PERCENT, L/ PLUS 2 PERCENTAGE POINTS AND SAME AVERAGE BOND YIELD PLUS 2 PERCENTAGE POINTS, AND MAXIMUM INTEREST RATES ON FHA-INSURED SECTION 203 LOANS MONTHLY 1944 JANUARY 1954

AND ON GI LOANS

JFMAMJ JASON DJFMAH JJASON DJFMAMJ JASOND JFMAMJJAS OND JF MAMJJASON DJFMAMJJASON DJFMAMJJASON DJFMAMJJA SON DJFHAM J JASON DJ FMAMJJASONDJ
1944
1947
1948
1949
1 1950
1951
1
!
1952
1953

1 '54

Average from January 1944 through March 1952 based on the mean of daily closing bid and asked prices of all Treasury bonds neither due nor callable for 15 years:
April 1952 throuch January 1953. bonds neither due nor callable for 12 years (average probably differs from .01 to .04 percent from average yield for bonds with
15 or more years remaining maturity): February 1953 through January 1954, average yield based on bonds with 15 or more years of remaining maturity. Beginning with
April 1953, yields based on closing bid quotations. Yields computed to first call if bonds selling above par: to maturity if bonds selling below par. Latest
figures shown are for January 1954.

Source Annual Reports of Secretary of the Treasury and Treasury Bulletins for January 1944 through January 1953: unpublished averages computed by U. S. Treasury Department for February through January 1954.

CHART 2

MARKET YIELDS ON LONG-TERM U. S. GOVERNMENT BONDS

Fotes:

Data on GI home loans are monthly averages of quarterly data.
The difference between the GI loan rate and government bond yields is figured from
the Federal Reserve "old series", which included all fully-taxable 2-1/2 percent
bonds maturing in 15 years or more prior to April 1952, and thore maturing in 12
years or more since that date. The GI loan rate was 4 percent prior to May. 1953.
and 4-1/2 percent thereafter.

Senator BENNETT. You may go on.

Mr. KING. We point out further on that same problem, at the top of page 8, Mr. Chairman, that there is room for discussion as to the specifications supposed to be laid down by the Congress incident to the fixing of this formula. And we draw attention to the point that perhaps intermediate term Government issues should be taken into consideration, as well as the longer-term issues, which reflect somewhat higher yields, because of the fact that the pattern of mort

gage loans as to which you would be fixing an interest rate, and the pattern of the investment character of the particular bond issues with which you make comparison, is probably a little nearer in the case of the 8-year issues than it is in the case of, for example, 30 years.

Senator BENNETT. This formula is not to fix a going interest rate, but to fix a maximum ceiling. You would expect the ceiling, the allowable ceiling, always to be a little higher than the current going rate. I don't think it would be very practicable to have the rate always crowding up against the ceiling.

Mr. KING. I believe you are right, Mr. Chairman. It isn't contemplated that the rate will always crowd the ceiling, but I think it is contemplated that the rate fixed will be a going rate, and not a maximum.

Senator BENNETT. That is right. But the purpose of the device, here, by which 22 percent is added to the Government's rate, as calculated by this formula, as I understand it, is to fix a flexible ceiling, with the understanding that the actual rates charged will probably run generally below that ceiling. So, from that point of view, I am not so concerned whether it is 2 or 21/2, or whether we figure it on 15-year or 8-year bonds, as long as the practical result is a ceiling that will generally be above the market, the proper market, for these mortgages. I think we are trying to avoid the situation where the mortgage rates are always bumping up against the ceiling, and there is pressure for legislative action, or pressure on the President, to raise the ceiling. I don't think it is contemplated that these rates should be the going rates. If I make myself clear.

So, from that point of view, as I say, I am not too greatly concerned, as long as the ceiling is a practical one.

Your point is that we don't need any kind of a formula, just leave the President free to use his own judgment to fix the rate?

Mr. KING. We suggest that it be considered further. It is our belief that if you put this formula in the way it reads, everybody is always going to be pressuring to get to that maximum. They will all be looking at it. They may be buying short-term issues on the theory they are going to get there next month, and so on. I think it might be disruptive to the orderly flow you hope you will induce.

Senator BENNETT. The only argument I think of, offhand, for putting any kind of a ceiling on, is the fear that might generate in the minds of some borrowers, GI borrowers, that there was now no ceiling, and that his interest rate might rise to astronomical heights. There are a lot of people in the country who would make a great deal of that situation, and say that we had removed the last protection of the veteran, because it was now possible for the President to put thê rate up. We might soon be hearing speeches on 8-, 9-, and 12-percent money that might be possible under the law. I think that is a logical reason for having some kind of a ceiling in the law.

Mr. KING. I don't think those fears need be very immediate, though, Senator, in view of the way the market is going.

Senator BENNETT. Well, some of us in this body run for office occasionally, and have to look at some of those practical problems.

Mr. KING. Under section 201 (4) of the bill, the President may establish maximum fees and charges which may be imposed or collected in connection with the origination of residential mortgage loans which are to be guaranteed or insured under the Servicemen's