guaranty officer of the Veterans' Administration. I think that was

the group.

In other words, we believe

The CHAIRMAN. Would you prefer a committee like that to pass upon this instead of the President?

Mr. CLARKE. That is right.

The CHAIRMAN. These men having been appointed by the President under his direct supervision, you don't think they will do what he tells them to do?

Mr. CLARK. No. They are specifically charged, on the basis of the President's Advisory Committee report, with keeping interest rates at the market. The proposal as it stands now is, in our opinion, just as bad, and has been in the past, in that there is no one actually specifically responsible for it.

Then, there is one further question in our minds, and this would be equally applicable, regardless of whether there was a Democratic regime or a Republican regime: I question any President wanting to see the headlines in the newspaper, "The President increases" whether President Eisenhower or President Truman or any other President-"the interest rate on veterans." Or, "The President gouged the veterans of the country by increasing the interest rates." The CHAIRMAN. You don't think the newspapers would carry the same story if you had the Secretary of the Treasury and other members of the President's family handy?

Mr. CLARKE. I doubt if that would be the case. Of course, my own personal opinion is that we shouldn't have any top limits in connection with rates, but that seems to be a political impossibility at the moment.

The CHAIRMAN. I gather what you are objecting to here is giving the President the right to change it. To making it flexible?

Mr. CLARKE. No. I am objecting to having, as far as the terms are concerned, as to the percentage of loan and so forth and so on, anything, except what is spelled out in the legislation.

As to interest rates, we feel that interest rates should be set by a specific group of people who are required to keep interest rates at the market, whether it may be up or whether it may be down. So that you can know specifically, if you will, who is responsible for it.

The CHAIRMAN. You think it would be better to designate this committee in the legislation rather than to give it to the President? Mr. CLARKE. That is right.

The CHAIRMAN. Shouldn't it be people other than those designated by the President, in their official capacity?

Mr. CLARKE. No. Of course, what we are proposing is that these people should be specified in the legislation. Now that means these people would be charged with the responsibility of maintaining the market rate.

The CHAIRMAN. Would you give them the right to vary it each month if they wanted to?

Mr. CLARKE. As they saw fit.

The CHAIRMAN. Up and down?

Mr. CLARKE. That is right.

The CHAIRMAN. Nobody would know for any specified period of time whether it would be 4 percent or 5 percent or 3 percent?

Mr. CLARKE. That is right.

The CHAIRMAN. Give them the right to change it overnight? Mr. CLARKE. That is right. And it is just as bad to have it too high as it is too low.

Mr. NEAL. May I make a comment. I am Samuel Neal and I am general counsel of the Mortgage Bankers Association.

I think the point in this, Senator, is that the President's Advisory Committee, after considerable study, agreed that interest rates ought to meet market requirements, whether they are interest rates on conventional loans or FHA or VA loans. They figured that the best way to assure that taking place, outside of political considerations, was to create a statutory committee, that would be named in the law and which would be required, from time to time-the exact interval being undetermined-to make these rates meet market conditions, whether that meant raising them or lowering them.

The bill departs from that principle. What it does is to give the President the authority and the responsibility for varying rates, but it doesn't set up any standards. It doesn't require action at any given time, and it doesn't pinpoint a committee whose considered judgment as a group, as to what market conditions were, would be used. That is one way it departs.

The second way it departs is that it puts in this realm of flexibility things which up to date have been fixed by statute. Up to date, for example, when you wanted to increase the amount of a maximum FHA loan, you specified the maximum, and then you let FHA say whether they would insure loans up to that figure.

This bill provides that no new maxima shall be fixed unless the President affirmatively fixes them.

It also provides that he may at any time vary the ratio of loan to value, vary the maturity of the loan.

Those are exactly the same kind of controls and the same kind of authority that the President had under regulation X. This Congress, including most of this committee, voted to terminate that authority when the necessity for it passed.

One thing that is even worse about this proposal, to us, than the authority in regulation X, was that in regulation X, if the President exercised his authority, he had to exercise it for all types of credit transactions FHA loans, VA loans, or conventional loans.

Under this authority, if he wanted to exercise his credit control authority to cut down materials and maturities, the only thing he could exercise it on would be on FHA and VA loans. That would be a regulation of a part of the market instead of all of the market.

Therefore, we suggest that this legislation go back to the principles of the President's Advisory Committee, and specify maxima, so far as terms of the loan are concerned, and let a committee not only have the authority but have the responsibility on the interest rate problem. The CHAIRMAN. I think we might put into the record at this point, from the President's Advisory Committee on Government Housing Policies and Programs, their recommendations to this subject, under the title "Adjustment of Interest Rates to Market Conditions." That will be found on pages 346 and 347.

We will place that in the record at this point so that we can get to it very easily.

(The information referred to follows:)

ADJUSTMENT OF INTEREST RATES TO MARKET CONDITIONS

While this condition prevails, there are bound to be localities with a shortage of local capital for mortgage loans, and there is inadequate inducement for funds to flow into these localities from other areas. If interest rates on FHA-insured and VA-guaranteed loans were allowed to rise and fall to meet the changes that occur in the investment market, home owners would benefit as follows: (1) Persons seeking loans to buy, build, or maintain their homes would find funds more readily and generally available, and (2) the discounts on newly placed mortgages would be substantially elminated, so that there would be no hidden costs and borrowers would know what they are paying for their loans.

It is the opinion of this subcommittee that the most effective method of accomplishing such an objective is to place in a committee of technically informed public officials the responsibility for a continuing review of the money market and for establishing a flexibility in the allowable rates on FHA-insured and VA-guaranteed loans. This will make it possible for interest rates to be at levels that will encourage home mortgage investments on the part of those financial institutions holding long-term savings. It will also facilitate the flow of such funds from the areas of more plentiful supply to those of greater need.

RECOMMENDATION NO. 1

That the necessary legislation be enacted to create a committee which shall be empowered and directed to review constantly the demand and supply of funds for home mortgages in all parts of the country and, from time to time, to confirm or revise, by majority vote, (a) the maximum rates of interest that may be charged on mortgage loans insured by the Federal Housing Administration or partially guaranteed or insured by the Veterans' Administration (but which rates may not exceed by more than 22 percentage points the current average yield on all outstanding marketable obligations of the United States Government having a remaining maturity of 15 or more years); (b) the charges that may be made for the expense of originating mortgages insured by the Federal Housing Administration or partially guaranteed or insured by the Veterans' Administration; and (c) the rate of interest on debentures issued by the Federal Housing Administration in settlement of foreclosure claims to be set at the time the note is insured, at a rate not higher than the current average wield on all outstanding marketable obligations of the United States Government having a remaining maturity of 15 or more years. The subcommittee further recommends that such committee shall consist of (1) the Administrator of the Housing and Home Finance Agency (who shall be chairman), (2) the Chairman of the Home Loan Bank Board, (3) the Commissioner of the Federal Housing Administration, (4) the Assistant Deputy Administrator for Loan Guaranty of the Veterans' Administration, (5) the Chairman of the Board of Governors of the Federal Reserve System, and (6) the Secretary of the Creasury.

Mr. CLARKE. In the light of that, I will read this paragraph over gain.

We oppose all forms of direct, selective, and optional controls, as being contrary to the very essence of "a strong, free, competitive econmy." We consider that the control of the price of money and the ationing of the supply of money by official action is just as deleterious o the effective operation of a free economy as official price control or ationing commodities. Such controls as are proposed can only serve o drive activity away from the controlled areas. In the relationships etween private business and government it is vital that the rules be nown and that changes be infrequently made. Private enterprise annot effectively operate in an atmosphere of apprehension or uncerainty caused by frequent and unforeseeable changes in the rules of he game. That atmosphere leads to attempts to double-guess the Government and to act on judgments of probable Government action ather than on estimates of the demands of the market.

The CHAIRMAN. Let me ask you this: Would you prefer the provision in the bill giving the President this flexibility, or having the Congress write the interest rates in the bill specifically.

Mr. CLARKE. No; not interest rates. Interest rates, we believe, should be handled by a committee specifically charged with the responsibility of that job.

The CHAIRMAN. Should we write in the bill a maximum interest rate or a minimum?

Mr. CLARKE. I don't think so.

The CHAIRMAN. Leave it entirely up to the proposed committee? Mr. CLARKE. Why not?

The CHAIRMAN. Don't even say it can't be more than 6 percent or 7, or under 3. Just leave it entirely up to

Mr. CLARKE. The Government-insured programs and guaranty programs can only operate if they have interest rates which are at the market.

The CHAIRMAN. Which are what?

Mr. CLARKE. At the market.

If we assume this particular committee is a responsible Government committee, certainly they would not permit the public to be gouged. Certainly they would keep the rate, if they were charged with that responsibility, which would keep the mortgages continuously in the market. It seems there is little sense in setting either maximums or minimums. It may have to comply with the market price, and therefore if it has to comply with the market price you are assuming that if a committee is charged completely with that responsibility, that they would see to it that it stayed there. That the interest rates were moved up and moved down. It is just as bad to have them too high, Senator Capehart, as it is to have them too low.

The CHAIRMAN. Heretofore we have always specified the interest rate, have we not?

Mr. CLARKE. That is right. Then, of course, what we got into were rates that sometimes were too high, and a substantial portion of the time much too low. Then we operate in a different field of handling it with discounts, or premiums, both of which are wrong.

The Mortgage Bankers Association has long advocated that the rate of interest on FHA and VA loans be left free to find its place in the market, in the confidence that the insurance and guaranty features would be sufficient to give these rates a competitive differential. Actually, in the end, no other method of setting rates will work unless public credit is to be substituted for private credit and public distribution substituted for the private market.

We have accepted the proposal in the Advisory Committee report as being a step in the right direction and probably the longest one that could be made at the present time. We cannot, however, endorse a plan that places the FHA and VA part of mortgage activity under as strict and comprehensive controls as ever have been found necessary in an acute national emergency in the midst on an otherwise free market. We cannot help but point out that our entire industry not so long ago fought vigorously, protesting the extension of authority to impose controls under regulation X, to end the very types of controls now proposed in title II. The plan is neither fair nor practicable. It will not work. It promises only trouble for any administration that seeks to operate it.

I have a supplement that I would like to add to the written testimony. Opposition to the authority to vary statutory maximums for loanto-value ratios, maturities, and top mortgage amounts at the discretion of the President must not be interpreted as opposition to all exercise of discretion in patterning a mortgage loan. The question is one of whether the discretion is to be used on a broad and arbitrary scale, or in a manner that reflects the characteristics of the individual case and the condition of the local market, as well as conditions generally.

There is a view, held by some not thoroughly familiar with FHA and VA operations, that the stating of maximums in the statute implies a right by any borrower to those maximum terms. This is not the case. Discretionary application of the statutory limits has always been a feature of insured and guaranteed lending and will continue to be, so long as the present arrangement prevails.

Discretion is exercised in a number of ways. First, the mortgage lender, mindful of the coinsurance aspects the FHA and VA programs, as well as of the income from a mortgage that remains in good standing, exercises selectivity in his choice of loans. The variability in prices being currently offered for FHA and VA loans according to the mortgage characteristics is evidence that this exercise of discretion is real.

Second, discretion is exercised by the FHA and VA offices. The quality of the property, and its location, and the credit of the borrower, as well as the strength or weakness of the local market, all are considered in determining what is an insurable risk, in terms of downpavment and maturity.

Finally, the total volume of funds available for mortgage lending is influenced by the fiscal and monetary policies pursued by the Treasury and the Federal Reserve System. The potency of the actions of these agencies was vividly evidenced last year, first by a general tightening of credit and later by an easing of credit as general business conditions required.

The present arrangement is thus sensitively adapted to the exercise of discretion in relation to individual cases, local conditions, and national contingencies. It is an arrangement that, in each of its aspects, is dictated by market conditions. It is an effective arrangement, which has worked successfully in all instances except during the inflationary period following World War II when the Federal Reserve authorities failed to exercise their responsibilities.

The arrangement proposed in title II of the legislation under consideration would seriously disturb this situation. The variation of mortgage terms by Presidential edict would, indeed, create the impression that the established terms were to be had as a matter of right, rrespective of individual circumstances and local conditions. would discourage the exercise of discretion by lenders, and it would ender difficult, if not impossible, the discretionary handling of indiidual cases by local FHA and VA offices.

It

If Congress believes that the maximum terms provided in this egislation are too liberal to be safely operative in a free market, then t should tighten them. But in any case, it should set the basic rules n a manner than can be known and counted upon, leaving the inluences that naturally bear on the extension of credit to produce the

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