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The CHAIRMAN. We will check into that. But what we are trying to do here is to avoid selling the complete project at a unit price, less than they were offering them to the individuals that lived in them. That has happened in a number of instances, and will probably happen again.

Senator FRER. What you are proposing to do will help greatly those people that have to move out if they can't buy them, and attempt to find houses.

The CHAIRMAN. They go in and appraise these houses. If there are 100 of them, they appraise them at say $5,000 each. Well, the people think the price is too high, and they don't buy them. Then they offer the 100 units to the highest bidder. The highest bidder is $2,000 a unit. Why should they sell 100 of them to me for $2,000 each, and refuse to sell them for $2,000 to the people that are now living in them.

Senator FREAR. Sure.
The CHAIRMAN. We ought to try to avoid that in some way.
Senator Frear. I agree.

The CHAIRMAN. Because what we find is a general tendency to appraise them very highly, the individual houses.

Senator FREAR. I think that is true. It would probably be to decrease the bookkeeping.

The CHAIRMAN. Yes, but there is nothing wrong with it. I want them to get the highest possible price, but I don't want them to sell 100 of them for $2,000 a piece to 1 individual, when the people who are living in them may have to pay $1,000 for them. I think anybody will agree on that.

Senator FREAR. That is a fine statement, sir. I am in 100-percent agreement with that, sir.

The CHAIRMAN. That is what we are trying to avoid in this new legislation, which I think we made be able to get through before this housing bill is completed. We, the Congress, directed them to dispose of these units, these projects, and they are in the process of doing it. They are not violating any law at the moment, except they may well be appraising the individual units so high that the individuals will not buy them. If the individuals won't buy them, then they advertise the whole project as a unit for sale, and then under the law, they must sell to the highest bidder, but the highest bidder is very low. They are trying to do it fast at the moment, too. It all helps balance the budget.

Senator Frear. Of course, I am in favor of balancing the budget, too, sir.

The CHAIRMAN. I am, too, but I don't want to see 100 houses sold to 1 individual for $2,000 each, where the 100 individuals living in the houses have to pay $1,000 a piece.

Senator FREAR. I also want to say I don't think that is the most favorable way of balancing the budget, where the occupant of that house has to pay twice what it would really amount to under private sale.

The CHAIRMAN. Thank you very much, sir. We appreciate your testimony.

Mr. DOWNER. Thank you, Mr. Chairman,

(The following was received with reference to the above:)

MEMORANDUM FROM FEDERAL HOUSING ADMINISTRATION REGARDING PRCPOBED

AMENDMENT CONTAINED IN SECTION 801 (G) (3) OF S. 2938

Section 801 (g) (3) of S. 2938 would provide, if enacted, that housing which "was offered with preferences substantially similar to those provided in the Housing Act of 1950 to veterans and occupants prior to enactment of said act” could be sold without regard to the preferences established in section 607 (b) and (c) of the Lanham Act.

This amendment is to permit the Agency to pursue a normal campaign of sale in those few instances where the sales program had been initiated prior to the passage of the Housing Act of 1950 and adequate opportunity had already been or would be given to veterans and occupants to purchase the housing. It would eliminate another useless readvertising for priority holders and the ensuing delay which would be encountered.

Our Audubon Park, N. J., project (NJ-28041), should the present sales plan fail, would present the situation that this amendment seeks to avoid. This project has been offered to the veteran and other occupants since prior to 1944 and negotiations with regard to the sale of the property to a corporation formed from among the occupants have been going on since that date. These negotiations recently ripened into a contract with the group for the sale of the property at a price agreed upon between it and the Government and under the terms set forth in section 607 (f), the project being one of those initially programed as a mutual housing community and where no downpayment was required. Because of many factors, including the lack of adequate school facilities, it is possible that this sale may never he consummated, even though the agency has spent over 10 years in its efforts to dispose of the housing to those same priority holders mentioned in section 107 of the act. Should this sale presently fail, we would be required under the provisions of section 607 (c) to again advertise this property and wait the length of time prescribed in that section to determine whether another group could be formed from among the same people with whom we had been previously negotiating to urchase the property. It is this, and 3 or 4 similar situations which might develop, that the proposed amendment seeks to prevent.

The CHAIRMAN. Our next witness is Mr. Charles Wellman, of the Glendale Federal Savings & Loan Association.

Mr. Wellman, I see you have a prepared statement here. It is quite long.

STATEMENT OF CHARLES A. WELLMAN, VICE PRESIDENT, GLEN

DALE FEDERAL SAVINGS & LOAN ASSOCIATION

Mr. WELLMAN. Yes, Mr. Chairman. I would prefer, if it is satisfactory to the committee, just to file the statement.

The CHAIRMAN. Without objection, your statement, as written, will be made a part of the record, and you may proceed to tell us anything you care to.

(The statement of Mr. Wellman follows:)

STATEMENT

OF CHARLES A. WELLMAN, VICE PRESIDENT, GLENDALE FEDERAL

SAVINGS & LOAN ASSOCIATION

My name is ('harles A. Wellman. I am executive vice president of the Glendale Federal Savings & Loan Association, a Federal savings and loan association with assets in excess of $90 million. We are engaged in making all types of loans, including FHA, title II, VA 501, title I, FHA property-improvement loans, our own unsecured property improvement loans and conventional mortgages with open-end provisions. My comments today wit}; respect to the proposed housing bill of 1954 are confined to 3 sections, to title I, and more specifically to the changes in title I of the section 203 FHA for 1- to 4-family residences, on the provision of title III respecting the reorganization of the FNMA and the provisions of title VI respecting the Home Loan Bank system.

Title I of the proposed bill makes or authorizes the President to make substantial changes and extensions in the FHA loan programs. The effect of these changes will be a considerable expansion of the use of the old title II section 203 FHA loan. You certainly could not extend the term of a loan plan up to a maximum of 30 years, lower the downpayment requirements, extend the maximum benefits to existing housing as well as new construction, relieve the previous statutory inhibition against the use of FHA for refinancing, and not have a substantial increase in the use of the old 203 loan. Determining the desirability of making these changes is a difficult task. Certainly, however, making it easier for individuals to buy houses, for builders to build houses, for realtors to sell houses, and for lenders to make loans on houses cannot be the sole objectives of any housing legislation.

The costs that are involved must also be considered and there certainly is a price tag attached to the proposed extensions which must be critically examined. With respect to the changes in title I, there are two specific elements of price which need special attention. One element is the potential cost of the Federal Government of the proposed extensions; the second element is the possible effect of the extensions on the distribution of power over and responsibility for the mortgage credit structure of the country as between the Federal Government and the private home financing industry.

The Federal Government has a irect liability for insured losses suffered by private lenders under the FHA plan to the extent that the specific FHA insurance fund is inadequate. Under the mutual mortgage insurance plan, the Federal Government, in effect, occupies the role of backstop. How strenuous and taxing a job the role of backstop is depends on how good a player is the insurance fund Measuring the performance capacity of the insurance fund to cover fully all insured losses that might occur is, of course, a very difficult and complex task. No matter how carefully and comprehensively it is done, you will never come up with a precise mathematical answer. Nevertheless, unless this element of price, namely the possible cost of the Federal Government, is going to be brushed aside as totally irrelevant, such a task of measurement, with all of its limitations, must be undertaken. To measure the performance capacity of the insurance fund requires an analysis of 3 elements or 3 parts. One is the estimated risk inherent in the total portfolio, the second is the amount in the insurance reserve, and the third is the relationship between these two. The risk inherent in the portfolio is a constantly changing thing. It is affected by many factors. Most important of all, however, it is affected by the rate of growth of the portfolio and the risks inherent in the individual new loans being made.

For example, if you had a total portfolio of $100 million of fully amortized loans and you made no new loans, the risk in that portfolio would diminish, for the unpaid loan balances would be consequently reduced. On the other hand, if you had this same portfolio of $100 million and merely replaced the reductions in it by new loans, and the risks in the new loans were no greater than the reducing risks of the existing loans, the risks of the total portfolio would remain the same. These two illustrations, however, are not characteristic of a dynamic mortgage portfolio, nor are they characteristic of the FHA insured operations in the past or as they are contemplated under this bill.

The bill contemplates an expansion of the total outstanding volume of mortgages insured and at the same time it changes the risk characteristics of the new loans to be made. The stubborn fact is that increases in maximum loan amounts and extensions of the maximum term permitted materially influence the risk, even if you assume the same property and hold all other elements of risk identical.

Of course, if the insurance fund were now excessive, this would not be a critical problem. Unfortunately this is not the situation. The FHA prepared a study of the adequacy of its insurance reserves for the President's Advisory Committee on Housing. The study showed the reserves on the basis of the existing portfolio, as of June 30, 1953, to be short between $70 million and $100 million. Nor was the committee satisfied with this study, excellent beginning thought it was. In fact, one of the recommendations of the President's Committee was that an independent, objective, long-range study for prospective foreclosures and losses should be made. It is this evidence of a deficit in the existing reserves against the existing portfolio that makes the possible cost involved in the new proposals assume even greater significance.

How much, then, do the proposed changes in individual loan plans for the FHA title I, section 203, loan increase the possible risk? A simple illustration using the same assumptions as were employed by the FHA in its study will

mathematically indicate the possible extent of the increased risk. Assume a single-family residence valued by the FHA at $12,000. Assume a loss of the magnitude used by the FHA in its study at the end of the first 3 years of the loan. At a 412 percent rate on a 20-year term, a loan in the amount of the maximum permitted under the now current regulations will result in a possible gross loss of approximately $379. If you retain the same interest rate and hold the maturity of the loan still to 20 years but increase the amount of the loan from the present maximum to the maximum possible under the proposed bill, which is $1,000, you raise the possible loss to $560. In other words, with an increase in the loan amount of slightly over 10 percent, you increase the extent of the possible loss 47.75 percent. If simultaneously with the increase in the loan amount you extend the term for only an additional 5 years, you raise the possible gross loss to $609, an increase over the base figure of 60.69 percent.

If the objective of the FHA operation is to make it a self-supporting operation to the fullest extent possible, these costs assume critical importance. How, then, can we deal with this problem?

I would like to respectfully submit for the Congress' consideration two possible amendments which at least might help in clarifying this problem. One would be to instruct the Housing and Home Finance Agency to carry out the recommendations of the President's Advisory Committee on Housing to initiate an independent study of the possible long-term foreclosure and loan experiences and report back to the Congress. This would, of course, give a factual basis for the contingent liability of the Government on the existing portfolio.

The other possible change would be to instruct the Commissioner of the FHA to increase the mutual-mortgage insurance premium rate to compensate for the additional risk when the President authorizes the use by the Commissioner of the maximum increases permitted by this bill. There is certainly no magic in a set annual premium rate of one-half of 1 percent. If one-half of 1 percent is an adequate annual premium rate for loans now being insured under current regulations, it is obviously inadequate to insure loans that would be made under the maximums or even short of the maximums permitted by this bill. We should (reate in the FHA insurance plan a flexible-premium rate dependent upon the estimated risk if the insurance of mortgages is to conform to the most elementary actuary principles.

This whole problem of potential liability, of course, is present in an even more acute form in the VA program. Here, however, the problem is complicated by the fact that the veterans' loan program is so intertwined with the whole issue of veterans' welfare. Here, too, however, a similar study should be made to enable the Congress to more properly affiliate its contingent liability.

The second element of cost is the effect the proposed bill would have upon the distribution of power over and responsibility for the Nation's mortgagecredit structure. The great issue which is raised by the FHA insurance plan again for title I, section 203, loans is that it practically relieves the individual lender of any individual loss. As a result of the assumption of this burden by the FHA, it has been forced to take over the basic lenders function of discriminating among potential buyers. This is proper.

The FHA certainly cannot guarantee individual lenders against loans and simultaneously permit these same private lenders to perform the necessary vnderwriting functions of measuring the desirability of each loan. When you couple this necessary assumption of power with a financing plan considerably more liberal than that permitted private lenders in the conventional-loan field, you have put together the necessary ingredients for a highly centralized politically directed mortgage system. The private lender no longer performs the classic function of a lender. One of the greatest virtues of a privately operated mortgage-credit system is the real and legitimate differences that exist between private lenders as to what constitutes a good borrower, what is good security, and what is a proper loan. When you centralize all decisions on these and similar matters into a single political agency, you are creating a highly brittle and rigid mortgage structure. You are, in effect, depriving that structure of the freedom and mobility it needs and requires. Many of the complaints both Government and private lenders have received about the low FHA valuations, unrealistic minimum property requirements and cumbersome processing procedures are an inevitable consequence of that centralized-mortgage structure. Are we confronted with an either/or kind of choice? Must we have a highly (entralized mortgage structure in order to have Government insurance? Personally, I do not believe we are. I think our major problem has been that we have just gone along the path of the original FHA of 1934 when in the face of the general economic climate 100 percent instirance was necessary. I do not believe that, in the run-of-mill single-family residence loan, you need 100 percent insurance. For other types of loans, for certain of the types considered in this bill, on which I am making no comment, you undoubtedly do need 100 percent.

If we can eliminate 100 percent insurance, if we can more properly distribute risk of loss between the insurance fund and the private lender, we can have an insurance plan and at the same time a flexible mortgage structure. However, this is a difficult task. One possibility that certainly, to my knowledge, has never been adequately explored is the use of the insurance plan employed by the FHA in its property improvement loan where a portion of the portfolio is insured in each individual loan. The result is that the FHA title I property improvement operations are not involved in determining the desirability of each individual loan. Certainly you could not convert the present FHA setup overnight from 100 percent insurance to partial insurance of the total portfolio. This bill, however, seeks to extend to existing housing the benefits previously restricted to new construction. Here is a fruitful area in which the concept of pooled insurance might properly be used.

The second major facet of the proposed housing program is contained in title III of the bill relating to the reogranization of the Federal National Mortgage Association.

Actually, there is no essential economic difference between the current FNMA operations on military, defense, and disaster housing mortgages and the proposed special assistance functions assigned the reorganized facility by section 35.

With respect to the other function of management and liquidation of the existing FNMA portfolio, the only essential change the bill makes in section 306 is the provision of subsection B for private financing as a substitute for Treasury borrowings.

I have two objections to this proposed change. First, replacement of Govern. ment debt by long-term private debt at this time would have a depressing effect on mort age credit. The bill itself expresses efficial concern about an overhasty liquidation of the existing mortgage portfolio. Pushing on to the longterm capital market obligations to finance the holding of mortgage loans already made would, in my opinion, have practically the same economie effects as would the direct sale of the mortgages themselves if the conversion of the obligations into private hands was successful to any extent.

Second, to give the reorganized corporation's capital the double duty of supporting not only private financing of its secondary operation but also of what the President himself has termed “frozen investments” is risking inadequate performance by the corporation of both functions.

With the single exception of conversion of public debt into private obligations, there is certainly no reason for such a reorganization of the existing FNMA as is proposed by the bill to deal with these two major functions. Indeed, if it were not for section 304, there would certainly be no necessity to convert the present stock of the FNMA, its paid-in surplus, surplus reserves and undistributed earnings into a new stock issue to be delivered to the Secretary of the Treasury, since at present all these amounts already belong to the Government. In fact, there might well be a disadvantage in such a conversion for by converting reserves and undistributed earnings into capital stock the Government is depriving itself of a possible cushion for the absorption of future losses which might arise in the further liquidation of the Government's existing mortgage holdings. The basic changes proposed in title III, therefore, stand or fall on the practicality of the proposed secondary market operations outlined in section 304 of the bill.

Section 304 is an attempt by the administration to create a so-called secondary market, about which there has been so much discussion in the past few years. Most of the basic difficulties created by the proposals in this section arise because there is little incentive for membership in the facility and because the facility is being called upon to purchase outright assets offered it instead of lending funds on the security of those assets. These two essential changes separate the proposals from the experience of all secondary market operations previously developed to deal with real-estate mortgages. Because of the lack of incentive for membership in the facility, it is necessary to have Government ownership of the stock at the outset, and to resort to an elaborate device to convert eventually Government ownership into private ownership.

This procedure as outlined in the bill requires the purchase of certificates by users of the facility equal to 3 percent of the dollar amount of mortgages sold the corporation. At this rate of certificate purchases, it will take the sale

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