sign the mortgage to FHA and to receive debentures equal to 99 percent of the unpaid balance.

We do not believe that the amendments we have suggested will interfere with the basic objectives of section 221. They will, however, make the program generally acceptable to life insurance companies and, we feel confident, other institutional investors. If these amendments are made, we are confident that life companies and other institutional investors will purchase section 221 mortgages.

I would now like to turn to title III, calling for the rechartering of FNMA. We are firmly and vigorously opposed to the provisions of title III with the exception of those providing for the liquidation of the existing FNMA portfolio.

We believe there is only one valid reason for a Government program as provided for in title III; namely, to assure the general availability of insured and guaranteed mortgage credit in small communities and remote areas and for minority groups. We are confident this can be done by private financing institutions, themselves, through voluntary but well organized effort, without the Government intervention provided for in title III. I shall presently explain how such a voluntary plan would operate, but before doing so, I would like to outline our reasons for opposing title III.

We are opposed in general to title III because, first, it provides for little more than a rechartering of FNMA to revive its power currently to supply Government funds in the mortgage market. Actually, it goes further in the direction of direct Government participation in the mortgage-lending field than does the existing FNMA program.

Secondly, it reflects a philosophy that housing must be kept going at a boom level, regardless of basic market forces with respect to the demand for housing. The United States has been through a boom in housing production and a steady rise in prices of housing, and basic market forces now suggest the need for a moderate downward adjustment in output and prices. We believe that it would be preferable to have a moderate adjustment now, rather than a major break in the future, which seems inevitable if we continue to apply artificial stimuli at this time.

I think I ought to say for the first 2 months of this year, in our own company and industry generally the mortgage commitments for loans have been running well ahead of the first 2 months of last year, so I don't think there will be too much of a downward adjustment.

Thirdly, provisions of the title, through continued and strengthened Government propping of the housing industry, will retard technological improvements in housing and thus will delay movement toward a lower housing cost basis. Finally, if, as under this title, the Government tries to perpetuate boom conditions in housing in the face of a needed readjustment, it will have an adverse effect on the occupancy and prices of our existing stock of housing, estimated at close to $200 billion, on which the Government has a contingent liability of nearly $29 billion in the form of mortgage insurance and guaranty.

The specific reasons which we have for opposing the special-assistance function in title III are as follows:

(1) We do not believe that it is necessary for the Government to embark upon the task of direct assistance to special insured or guaran

teed mortgage programs. As we indicated in connection with the proposed sections 220 and 221, if the amendments we have suggested are accepted, then private investors will purchase the mortgages under these sections.

(2) In addition to the objective of supporting special programs, it is provided that the assistance function should be employed as needed to retard or stop a decline in mortgage lending and home building. We do not believe that this function is soundly conceived and it certainly is not necessary. It puts the cart before the horse in that if homebuilding activity goes into a decline it will certainly not be for lack of available private mortgage credit on a liberal basis. The reasons for any decline will be rooted in the demand for housing and will not derive from any lack of available funds.

(3) The function of the special-assistance provision will, in effect, involve direct Government lending, with funds coming directly from the United States Treasury. The initial amount may not seem large, but we have seen how easy it was to expand FNMA once it came into being.

(4) This program is on the direct road to public control of housing and home financing. It goes beyond the Government insurance and guaranty function and is a long step in the direction of comprehesive public control. We feel that it is incompatible with the free-enterprise objective which has often been mentioned in the bill.

(5) Under this function there is no provision for a 3-percent nonrefundable contribution to be required of sellers of mortgages to FNMA. The absence of this requirement, which is provided for under the secondary market function, certainly makes the dumping of mortgages with FNMA a still greater risk.

For these reasons we think that not only is there no need for the special assistance function but it is a dangerous threat to the private financing system. We are firmly opposed to it.

Before I discuss our proposal for a voluntary effort to make residential mortgage credit generally available in all communities throughout the country, I would like to outline why we are also strongly opposed to the proposed secondary market function of the rechartered FNMA, as follows:

(1) Basically, there is no need for a Government secondary market function. Readily available statistics show the tremendous job the private mortgage financing system has done throughout the postwar period. During the past 5 years, even in 1952 and 1953 when there was supposed to be a mortgage stringency, the number of new nonfarm dwelling units started has exceeded 1 million per year.

Incidentally, when that stringency was supposed to be in effect. I know our own company put out more money in 1953 than we did in 1952.

The average number of starts per year in the 6-year period 1948-53 inclusive is 1.112,000. Nonfarm mortgage debt on 1-4 family houses increased from $18.5 billion at the end of 1945 to $65 billion at the end of 1953, or an increase of 311⁄2 times. Within this total increase of $46.5 billion, financial institutions such as life insurance companies, mutual savings banks, savings and loan societies, and so forth, increased their holdings by nearly $41 billion. During the period 1948-53 inclusive, the total of nonfarm mortgage recordings in

amounts of $20,000 or less has averaged over $15.5 billion per year, and the average in the past 3 years has been over $18 billion. All but a small fraction of these mortgages have been absorbed by the private market. In reviewing these figures we can see little evidence that private mortgage financing has been less than fully adequate throughout the postwar period. We believe the figures prove that the savings institutions, the commercial banks, particularly through their warehousing loans, and individual investors have provided an admirable private secondary market and that FNMA is not needed for this purpose.

(2) Under the provisions of title III, the proposed FNMA secondary market function is a direct Government operation in every respect, with the provision that $70 million of its stock is to be subscribed by the United States Treasury and with up to $1 billion of its obligations purchasable by the Treasury.

(3) The most extensive use of FNMA in the past, and we fear inevitably in the future if title III passes, has been under boom conditions. At other than periods of inflationary boom, as witnessed by the present time, there is plenty of legitimate residential mortgage credit available. FNMA purchases of mortgages in a boom are bound to be inflationary, as we have learned so well in the past. The FNMA operation is not a normal operation to supplement and liquefy the private mortgage market; rather, it is a means to pour additional money from United States Treasury sources into the mortgage market in a boom, when savings necessarily tend to be scarce relative to demand. Thus, FNMA funds inevitably serve to promote inflationary pressures. (4) The basic condition for a free flow of mortgage funds is flexibility of interest rates, but the FNMA secondary market operation will only tend to rigidify rates. If the President exercises the powers proposed in title II to keep FHA and VA interest rates in line with market conditions, that is, if he flexes them on the upside as well as the downside, the Government-insured and guaranteed mortgage programs will have an ample flow of funds.

I think the example of 1953 that I gave shows that that is true. (5) The "nonrefundable contribution" of 3 percent may seem to be a real deterrent against the dumping of mortgages in the recharted FNMA, but we see little to prevent the shifting of the contribution on to the home purchaser in the form of a higher price for the house. Since the FNMA would be used under boom conditions, it would be especially easy in a seller's market for houses to shift the contribution. to the home purchaser at the time FNMA would be used.

We believe for these reasons that the provisions for a FNMA secondary market operation should not be enacted. As I indicated earlier, the only valid reason for a secondary market operation by Government is the fact that there may be certain small communities and remote areas where Government-insured and guaranteed mortgage credit is not generally available, and there may be cases where credit has not been available to minority groups.

We think that this problem has been exaggerated, but there is no doubt that because of great pressure on the supply of mortgage money in the postwar housing boom, because of less than full coverage by the private mortgage system, and because of high servicing costs in small communities and remote areas, it is probably true that there may be

cases where persons of good credit standing have been unable to obtain credit.

We believe that much can be done to correct this situation if the President exercises the powers provided in title II for flexibility of interest rates and fees and charges. Nevertheless, there may remain some element of difficulty here.

Senator BUSH. Mr. Chairman, may I ask a question?

The CHAIRMAN. Senator Bush

Senator BUSH. Do you have an approximation of the amount of FNMA mortgages that are now held by the Government? Is it approximately $212 billion?

Mr. SHANKS. Of that order, yes, sir.

Senator BUSH. Do you feel that the very large accumulation that has taken place is due in some measure to this lack of flexibility which you speak of?

Mr. SHANKS. I think there is no doubt but what flexibility would have slowed down that accumulation. When FNMA stands there ready to take the mortgages, then when someone can't get what he wants and the provision he wants, in it goes to FNMA.

In order to provide additional assurance that this problem will be solved, we wish to propose a plan under which all types of private financing institutions, through a voluntary but well organized effort under the direction of HHFA Administrator, would undertake to see that Government-insured and guaranteed mortgage credit will be available to the maximum extent possible to all good credit risks for residential loans in every community of the United States. We have embodied our plan in the draft of a bill, and I would like to give the committee copies for your study.

I think they are before you, sir.

We believe that under the voluntary effort which we are proposing the problem of credit, unavailability in small communities and remote areas, to the extent there is a problem, can be fully solved. Our plan should be tried to see what the magnitude of the problem is. We have made a canvass of the life-insurance business and the plan has the backing of the big majority of life companies.

I might say there that following our testimony of a week ago, before the House Banking and Currency Committee, we discussed our proposal informally with spokesmen of the American Bankers Association and the Mortgage Bankers Association. And I am glad to say that they think well of it, in principle, and will give it their full cooperation and support if it is enacted."

We also have had reason to believe that other mortgage-lending institutions would support the plan if it is enacted.

Perhaps it would help if I were to outline the plan briefly, although I am sure you will want to read the proposed bill. The principal provisions are as follows:

(1) The basic purpose would be to facilitate the flow of funds for housing credit into remote areas and smaller communities where funds are not available in adequate supply, and to make mortgage credit generally available without regard to race, creed, or color.

(2) The plan would be limited to loans insured or guaranteed by the Government.

(3) There would be established a National Voluntary Mortgage Credit Extension Committee under the chairmanship of the HHFA

Administrator, consisting of the Chairman of the Federal Reserve Board and 14 persons to be appointed by the HHFA Administrator representing each type of financing institution, the builders, and the real-estate boards. The Administrator would appoint a regional subcommittee of five persons in each Federal Reserve district.

(4) The National Committee would be empowered to solicit and obtain the cooperation of financing institutions in the program. It would study and review the demand for and supply of funds for residential mortgage loans in all parts of the country and would receive reports from and correlate the activities of the regional subcommittees. It would maintain liaison with the Government-housing agencies and with State and local housing officials to fully apprise them of the voluntary program.

(5) Each regional subcommittee would study and review the demand for and supply of funds for residential mortgage loans in its region, would analyze cases of unsatisfied demand for such mortgage credit, and would report to the National Committee the results of its study and analysis. It would also maintain liaison with officers of the FHA and VA within its own region and would request these officials to supply the subcommittee with information regarding cases of unsatisfied demand for mortgage credit involving loans eligible for FHA insurance or VA guaranty.

(6) The regional subcommittee would render assistance to any applicant for a residential mortgage loan, provided that the applicant certifies that he has made a serious effort to obtain a purchaser for an insured or guaranteed mortgage loan and has been unable to do so. Upon receipt of such certification, the regional subcommittee would circularize private financing institutions in the region or elsewhere in an effort to place the loan with a private financing institution. It would undertake to handle in a similar way cases involving applications made to the VA for direct loans.

Moreover, in order to encourage small or local private financing institutions to originate insured or guaranteed mortgage loans, the subcommittee would be empowered to render assistance to such institutions in locating other private financing institutions willing to purchase these loans, thus extending a secondary market to these local originators.

I think here I ought to point out that my associate here, Mr. Vieser, headed up a small informal committee of lenders in New Jersey, and for many years past they have taken care of all loans which otherwise would have been made by the VA direct.

In other words, they found someone to take them. That was a purely informal small committee, which has had the effect there of seeing that the private lenders did absorb and take up all loans that would have gone direct to the VA. And that makes me think that on an organized basis it would have tremendous effect throughout the United States.

(7) In the performance of its responsibilities each regional subcommittee would be empowered (a) to request the National Committee to obtain for it the aid of other regional committees in seeking sources of residential mortgage credit, and (b) to request and obtain voluntary assurances from any one or more private financing institutions to make funds available for insured or guaranteed loans in any