The interest of mortgage bankers, consequently, is not a narrow one. Since the legislation before this committee, if enacted, will have a profound influence on the future course and character of the housing market and, through that, on the whole economy of this country, our concern with it is justifiably great, as I believe our view toward it and its implications is genuinely broad.

We have been much impressed by and are in full accord with the statement of basic policy which introduced the recent report of the President's Advisory Committee on Government Housing Policies and Programs. Because of its significance as well as its bearing on what I shall later say, I ask your indulgence to let me read it in full:

It is the conviction of this committee that the constant improvement of the living conditions of all the people is best accomplished under a strong, free, competitive economy, that every action taken by Government in respect to housing should be for the purpose of facilitating the operation of that economy to provide adequate housing for all the people, to meet demands for new building, to assure the maintenance, restoration, and utilization of the existing stock of housing, and the elimination of conditions that create hazards to public safety and welfare and to the economic health of our communities, and that only those measures that prove to be successful in meeting these objectives should be continued.

Since this statement has been quoted or paraphrased both in messages of the President and speeches and statements of the Housing Administrator, we assume that it offers the underlying principle on which this legislation is based. Our examination of the bill has been made with the view of considering the extent to which this principle has been embodied in its specific provisions.

Title I, for the most part, we believe faithfully follows this underlying principle. It looks upon FHA, as did its originators back in 1934, as a means for improving private lending methods, of making possible a wider distribution of the savings of the country for mortgage-lending purposes, and, through that, a great expansion of the housing market and the improvement of housing conditions; but not as a means for supplanting private savings with Government credit, or supplanting private decisions, based upon demand as expressed in a free market, with official decisions as to what ought to be built and where and how much.

The original FHA statute was relatively a simple affair, dealing broadly with the whole housing market, high, low, new, and old, without discrimination or special favor. In the intervening years, the tendency has been to move away from this position, to substitute special purposes for one broad purpose, Government direction of activity for private decisions, and complexity for simplicity.

The results have not been satisfactory. The law has had to be frequently changed to prevent excesses resulting from misconceptions of the market by Government officials.

The creation of special provisions for one type of activity or another has produced pressures of all kinds to increase or modify these favors. In the end the statute has been so cluttered up with procedural variations and provisions of little or no utility that it has got beyond the comprehension of the experts in the field, let alone the ordinary citizen for whose benefit it was intended.

The pending bill probably goes as far as is presently possible to simplify the statute, to remove discrimination as between one type of house and one type of borrower as against another, to reassert con

fidence in the private market to make its own decisions, and to make FHA again truly an instrument for facilitating the operation of "a strong, free, competitive economy."

Specifically, we endorse the elimination of sections of the National Housing Act that have no proven utility; the simplification of procedures for handling group accounts in the mutual mortgage insurance fund; the allowances made against the cost of foreclosure; the provisions on debentures issued on foreclosure; the removal of distortions in the schedule of loan-to-value ratios so as to avoid undue concentration on one area of the market; the increase in the top dollar limits so as partially to restore FHA's original broad market coverage; the equalization of terms for new and existing construction; the increase in the limits for financing unsecured loans for repair and modernization; the application of the "open-end" procedure to FHAinsured loans; and the utilization of FHA-insured loans for the renewing of blighted neighborhoods.

We have only a few suggestions to make about these sections of the act. One of these would be to give FHA authority to refund its own debentures, if necessary, at their 10-year maturity, instead of having to resort to Treasury financing as might be necessary if the foreclosed properties should not have been previously liquidated. Another is a proposal to facilitate the operation of section 213 of the National Housing Act dealing with cooperatives.

On that subject I am not proposing to testify. Mr. Maurice R. Massey, Jr., who is a member of our board of governors, is here today and will discuss our proposals in connection with section 213.

We also wish to urge the adoption of a provision in the advisory committee's report, but not included in the bill, which would give FHA greater leeway in using its income to meet the inevitable variability in its operating expenses. We refer you specifically to recommendation No. 27 of that committee as it appears on page 56 of the printed report.

We believe that, if the things are done that I have been discussing, all that may be done to make FHA a beneficial aid to the operation of the private market will have been done. To go beyond this would only be to revert to the practice of setting up a special provision to meet each real or assumed emergency, to renew pressure to make the new provision applicable to a greater range of cases, and to turn builders and lenders away from their own responsibility for meeting public demand to dependence on Government support and direction.

For example, the bill proposes enactment of a new insurance program to be called section 220. We support the objectives of this proposed program but we do not support the method it is proposed to use to accomplish these objectives. So far as we can determine the maximum loan limits and other terms proposed for these new section 220 loans are almost identical with those which would be imposed if the proposed amendments to section 203 are enacted.

It is our belief, therefore, that the purposes of section 220 could be effected by FHA under the new section 203 program if proper underwriting instructions are issued by FHA with reference to the kind of neighborhood improvement operation contemplated for section 220.

If this is so, why then again make the same mistake which has been made so frequently in the past? Why set up an entirely new insurance program when the desired aim is to simplify FHA's operations? Therefore, it is our belief and recommendation that section 220 not be enacted, but that FHA be directed to accomplish the desired results under section 203 as it will be amended.

In other words, everything which FHA or this legislation proposes up to date as far as FHA is concerned, is a simplification and the elimination of various different sections which have been unworkable. We see no reason for adding to the complexities. Section 203, with very slight modifications, can take care of it, and not add to it.

Further, the proposed section 221 for the National Housing Act, calling for a loan with no downpayment-except for closing costsand a 50-year maturity, seems to us to represent even further this kind of retrogression. We do not believe this proposed section is necessary, in the light of the generous maximum terms to be provided for the basic FHA operation.

We doubt that it will prove attractive to private lenders even with the proposed increased assumption of risk by the Government. We know that it will add to the complexity and cost of the administration of FHA.

We are confident that pressure soon would be created to extend its provisions to the basic FHA operation. Finally we question the reality of the advantage to its supposed beneficiaries, assuming that the plan will work at all.

The building industry has all too frequently been criticized for opposing public housing while at the same time requesting more and more Government assistance for our own operations in terms of higher interest rates, lower downpayments and longer maturities. Even though I do not believe such criticism has been justified in the past, it would certainly be justified now, if the Mortgage Bankers Association of America as an organization of lenders were either to sponsor the proposed section 221 program or were to fail to point out its inconsistencies as a so-called private-enterprise program.

If this section of the bill is passed we, as lenders, will endeavor to utilize its provisions in accordance with the purposes of the legislation, but we believe its enactment would be against our better judg

ment.

From the borrowers' point of view, the expansion of the loan-tovalue ratio and the extension of the amortization period may be a very deceptive expedient. In the guise of reducing the cost of his housing, it actually increases his housing cost in terms of the interest that he must pay over the life of the loan. For example, on a $5,000 mortgage the difference in principal and interest monthly payments between a 30-year and a 40-year amortized loan-assuming 42 percent interest is only $2.85; $25.35 as versus $22.50. But this supposed saving actually results in the difference of paying $5,800 instead of $4,126 in interest over the life of the loan. A decrease of 11 percent in the monthly payment between a 30- and 40-year loan thus results in a 41 percent increase in the total interest payment. This is a high long-term price for a small short-term advantage.

We should also like to point out the very small difference in downpayment requirements between the proposed section 220-or at new

limits under section 203—and this section 221. Under section 220-or under section 203-the downpayment on a $7,000 house would be $350. Under section 221, the cash payment required would be $200. The difference seems almost so little as to question the necessity of setting up an entire new insurance structure.

The basic trouble with section 221 is that it is trying to do what is essentially a welfare job with a device that is not suited to the purpose. Rather than run the risk of destroying the place of FHA in a private credit system, we believe it would be better, if such a necessity exists, to make an outright grant of a downpayment or part of the interest payment, or some similar subsidy; but in any case to recognize such subsidies for what they are, rather than to conceal their true nature by offering them as a normal credit transaction.

In title II of the bill we find a significant departure from both the specific recommendations and the spirit of the advisory committee report. The report urged the creation of a statutory committee charged with the responsibility of seeing to it that at all times the interest rates on insured and guaranteed loans would be kept in line with the general structure of interest rates. The committee was to have no other powers, but action on the authority given to it was to be mandatory.

The idea was that by reposing mandatory action in a committee instead of permissive action in a single individual, the control of interest rates would be removed as well as it could be from political and other special pressures. It was the idea, further, that by keeping the interest in line with the market, FHA and VA loans would at all times receive a more or less constant share of the total supply of mortgage money, and that the general control of credit through Treasury and Federal Reserve action could be counted on, without other means, to exercise sufficient influences on downpayment and maturity to prevent an inflationary use of credit. It may be noted that, in the past, it was the failure to exercise such general control that brought about excesses in FHA and VA financing.

The bill substantially differs from the report. First, it places the control in the President, upon whom the full weight of political pressure can be brought, rather than in a group of designated officials. Second, it makes the action permissive rather than mandatory, thus inducing delay when political expediency counsels against action.

Third, it substitutes a form of selective credit control applied solely to one part-and a minority part-of the mortgage market for reliance on the general controls which affect all parts of the market equally.

We believe that this approach is contrary to the basic principle upon which this legislation is based. We believe it substitutes political considerations for market considerations. We believe, moreover, that it creates an undue hazard to the users of the Governmentsponsored systems, whose activities could be completely controlled while those using conventional financing would be totally unaffected. We can see no excuse for this sort of discrimination. We fail to recognize any justification, for example, for applying selective credit controls to institutions making mortgages directly insured by the Federal Government and not applying it to institutions making mortgages indirectly insured by the Federal Government through the insurance of their deposits or share accounts. We do not, of course,

advocate the extension of direct controls to these other institutions; we merely point out the inconsistency.

We oppose all forms of direct, selective, and optional controls, as being contrary to the very essence of "a strong, free, competitive economy." We consider that the control of the price of money and the rationing of the supply of money by official action is just as deleterious to the effective operation of a free economy as official price control or rationing commodities.

The CHAIRMAN. Will you yield just a moment? What do you mean when you say:

We oppose all forms of direct, selective, and optional controls, as being contrary to the very essence of "a strong, free, competitive economy."

What are you talking about?

Mr. CLARKE. The legislation gives maximum terms which can be used continuously. Those controls are the maximum that can be given. It leaves, then, completely to the President the spot underneath that at which he can operate.

That from our point of view, is a selective credit control. In other words, there is no control set up in this bill. Going back now to the days of regulation X, there was control over every type of mortgageconventional mortgages, FHA, and GI loans. This proposes now to give to the President the authority, the modified terms, interest rate terms, length of terms, cash down payment and so forth, to just one segment, namely, the Government insured guaranty programs. It does not touch anything else. In other words, the people who are making conventional loans, are completely free to do as they please within the maximum limits of the law. This permits selective credit controls, in our opinion, all the way through.

At the same time

The CHAIRMAN. You want us to specifically state the terms in the legislation?

Mr. CLARKE. They ought to be in the bill. As to what can be done. The CHAIRMAN. You don't want any flexibility to it at all?

Mr. CLARKE. That is right.

I have another portion on that that I would like to cover here in just a minute. But while I am at it

The CHAIRMAN. I say, you don't want any flexibility at all.
Mr. CLARKE. That is right.

The CHAIRMAN. You want us to specify the interest rate in the bill? Mr. CLARKE. No. Not the interest rate. We are talking now about the down payments, the percentage of loan to value, to term-whether it is 25- or 30-year and so forth.

In other words, the bill, as written now, gives maximum limits as to terms, and so forth and so on, and also proposes to give the authority of interest rates to the President, which again we think should go back to the procedure as suggested in the President's Advisory Committee, of a specific committee.

The CHAIRMAN. Who will appoint that committee?

Mr. CLARKE. That committee was specified in the President's Housing Committee report as being the Secretary of the Treasury, the Chairman of the Board of the Federal Reserve, the Housing and Home Finance Administrator, the FHA Commissioner, and the loan