VIEWS ON NATIONAL HOUSING AND MORTGAGE LENDING POLICY I. THE GOAL OF NATIONAL POLICY The record of residential construction in this country over the years indicates that the home-building industry is characterized by long cycles of activity, alternating in booms and depressions. Because of the great importance of the home-building industry in our national economy, fluctuations in this area play an important role in the problem of instability in the economy as a whole. In view of these circumstances, it is appropriate for the Federal Government, through general credit policy, through policy with respect to the Governmentinsured and guaranteed mortgage program, and in other similar ways, to aid in lending stability to the private home-building industry. The objective of Government policy in this regard should be to help level off the peaks and fill in the valleys in home building. This does not mean that the Government has a responsibility at any time to build houses itself; rather, its efforts should beconfined to providing a general economic climate conducive to stability in private home building. It would be a mistake to define the appropriateness for Government to exert a stabilizing influence in the housing field in terms of a rigidly fixed number of housing starts per annum, for example, the 1 million units so often cited. A rigid objective of this sort is not in keeping with the flexible, free, market economy on which we place reliance. Moreover, whatever the stabilization objective, the number of housing starts each year must bear a direct relationship to such basic forces as the rate of family formation, the need for replacement of clearly substandard housing, and the ability of people to pay for housing. Whatever the general objective of stability, there must be leeway for the inevitable price and production adjustments and readjustments which are so healthy in our freemarket economy. II. THE GOVERNMENT INSURED AND GUARANTEED MORTGAGE PROGRAM (a) The function of FHA mortgage insurance.-The FHA system of homemortgage insurance is, if administered soundly and with flexibility, a desirable vehicle for lending stability to home building and mortgage lending. The idea of mortgage insurance as set forth in the preamble of the original Federal Housing Act is basically sound, but there is evidence that the FHA program has departed from the original plan. The FHA should return to the function originally intended, namely, purely as an insuring agency to be operated on business principles and with adequate reserves in order to make its maximum contribution to a stable mortgage market. (b) Interest rate policy with respect to Government insured and guaranteed mortgages.-The fundamental cause for the present shortage of Government insured and guaranteed mortgage financing is, along with the excess of overall demand for capital funds relative to the supply of savings, that the existing rate on these loans is not sufficiently flexible; and, although it was recently increased to 42 percent, the insured or guaranteed mortgage is still not entirely competitive at par with rates on alternative investments. It should no be overlooked that at this rate the net yield to investors after meeting servicing and other costs is considerably below 41⁄2 percent, and is nearer 3.75 percent. Other interest rates set by competitive market forces have risen in the past several months as a result of the heavy demand for capital funds, whereas the rate on insured and guaranteed mortgages has not been permitted to adjust fully to meet changing capital market conditions. The basic solution to the problems which we have experienced in recent years in the mortgage market is to make the insured and guaranteed rate flexible so that it can reflect and adjust fully to free-market forces. This can be accomplished in the following way. The FHA Commissioner should set a maximum permissible rate which can be charged on insured and guaranteed mortgage loans, but this rate should be substantially above the current going market rate.1 Under the ceiling of the maximum, the actual contract rates on individual insured and guaranteed mortgages would be set as a result of competitive market forces. The rates would move up or down depending on market competition and would also be allowed to reflect geographical differences in the 1 It is later recommended that the VA home mortgage program be merged with FHA, 30 that the FHA Commissioner would administer both the insured and guaranteed program. market, as well as the additional expense involved in handling a small volume of loans in smaller towns and rural areas. Despite flexibility in the contract rate on insured and guaranteed mortgages, there will always be a tendency for discounts or premiums to arise on these mortgages-as on any mortgages-as market conditions change, so that official approbation of trading of insured and guaranteed mortgages at a discount or premium is needed. The general principle of flexible rates should also apply to rates payable on FHA debentures. Historically the FHA debenture rate has been reduced during a period in which the downpayments have been cut and the maturity of FHA loans has been extended, the latter not only making the loans less attractive but also having the additional disadvantage of leading to an extension of the maturity of FHA debentures. In order to keep the FHA mortgages competitively attractive in the general capital market where rate flexibility prevails, it is necessary to follow a flexible policy with respect to the FHA debenture rate and to permit this rate to rise in a rising interest-rate market. The debenture rate at the time of making the loan should be kept in line with the general level of interest rates. (c) Federal Reserve influence on insured mortgage terms.-As indicated in the preceding section, interest rates on Government-insured and guaranteed mortgages, as well as conventional mortgages, should be entirely free to move in response to basic conditions of supply and demand for mortgage funds in the market, and to reflect such factors as regional differences in risks, in servicing costs, and in costs of foreclosure. Within this framework, interest rates will automatically exert a stabilizing influence in that they will tend to rise in a period of boom in housing and mortgage lending and to decline in a period of downturn. Any Government influence on mortgage interest rates, if needed at all, should be exerted solely through the exercise of the indirect general credit control powers of the Federal Reserve. Aside from the rate of interest, other terms on Government-insured and guaranteed mortgages, notably the amount of downpayment required and the length of the amortization period, have a direct effect upon the volume of mortgage credit. In the past these terms have been set rigidly by the Congress without much opportunity for administrative flexibility. There have been occasions in recent years, for example, when Congress has moved to ease downpayments and to lengthen amortization periods at the same time that the Federal Reserve has been exercising its general credit control powers to tighten credit in an effort to combat inflation. It would be desirable in the future for Congress to provide discretionary authority, within limits, for the FHA Commissioner to fix the various terms of the insured and guaranteed loans such as downpayment and period of amortization. In exercising such discretionary authority, the Commissioner should, of course, have an eye to stability in home building and in the economy as a whole. To insure appropriate use of his discretionary authority, the Administrator should be required to consult regularly with the Federal Reserve authorities in order to maintain consistency between general credit-control policy and the noninterest-rate terms on insured and guaranteed loans. (d) Organization and Administration of the Government-Insured and Guaranteed Mortgage Program.-Certain changes are needed in the organization and administration of the Government-insured and guaranteed mortgage program as follows: 1. Both the Federal Housing Administration and the Home Loan Bank Board should be restored to independent status and should no longer be affiliated with the Housing and Home Finance Agency. With both of these agencies operating independently, the remaining need for HHFA is greatly reduced. It may be true, however, that HHFA should continue to function, at least on an interim basis, as a coordinating agency on housing and mortgage matters. For example, HHFA might serve on an interim basis to handle such matters as the disposition of Lanham Act housing, the liquidation of FNMA-as later recommendedAlaska housing, college housing, and the community facilities program. Also, there is a real need for an improved research and statistical program by Government in the housing and mortgage lending field which might be assigned to HHFA. 2. Rivalry between the VA and FHA with respect to the making of loans and the liquidating of holdings involves serious disadvantages. Therefore, the VA home-mortgage program should be merged with FHA in a separate title. At the same time, the VA should retain the function of guaranteeing veterans' business loans. Aside from eliminating the dangers inherent in rivalry between FHA and VA, the merger of the VA home-mortgage operation into FHA would lead to greater efficiency and economy for the entire operation. 3. Regardless of whether recommendation No. 2 above is adopted, the VA should accept FHA appraisals and inspections, as well as field service and supervision, thereby relieving the taxpayer of the cost of duplicated service and eliminating for the home-building industry all the details, difficulties, and costs entailed in dual processing. The independent appraisal operations of the VA Loan Guaranty Division should be abolished. Now that a competitive market for housing has been reestablished, VA should abandon the "reasonable value test," insisting only that the veteran buyer should know the FHA valuation placed on a piece of property and should sign a declaration for VA that he has seen it. (e) Matters of Detail.-Apart from the recommendations already made with respect to the Government-insured and guaranteed mortgage program, there are several additional recommendations dealing with the detailed operation of the program which deserve mention, as follows: 1. There does not seem to be any real economic justification for the present FHA policy of insuring a much higher percentage of mortgages for the purchase of new housing than for the purchase of older housing. Therefore, the FHA should at the present time take steps to narrow the margin. Discretion as to the terms should reside with the FHA Commissioner, who should maintain a policy of flexibility with respect to the insurance terms on new and older houses depending on economic circumstances at any given time. In the exercise of this discretionary authority the Commissioner should be required to consult with the Federal Reserve Board. Under the proposal being made here, it should be recognized that the margin of safety on the loans on older houses would be preserved in that the appraisal of the older houses would naturally reflect the difference in value of the older house as compared with the newer one. 2. The FHA should give encouragement to higher standards of space, design, construction, and land planning. 3. The various FHA titles should be completely overhauled to develop one simplified insurance pattern for all owner-occupied 1-4 family units and one simplified pattern for all civilian rental housing. 4. The FHA program of insuring cooperative housing should be critically reviewed. There is serious doubt whether this program is basically needed. Moreover, it should be remembered that cooperative housing projects have the serious pitfall, as shown by history, that if a small minority of the families in such a project experience financial difficulty the entire project then experiences trouble. 5. FHA procedures should be simplified to make it easier to employ FHA debentures for the payment of insurance premiums. 6. FHA should simplify its various rules and regulations in order to reduce originating and servicing costs. 7. FHA, by establishing certain standards, should lend its influence for uniformity of State law with respect to mortgage foreclosures. Costly foreclosure laws in many States add greatly to the expense of mortgage lending. It is essential that the foreclosure procedure be improved, according to satisfactory standards, and made uniform in the various States in the interest of lower mortgage lending costs. 8. FHA should also lend its influence to achieve uniformity of building codes in municipalities throughout the country. Much can also be done through private groups, such as the United States Chamber of Commerce, to educate municipal officials on the value of a uniform system of building costs. III. DIRECT GOVERNMENT LOANS IN THE HOUSING FIELD The program of direct Government loans to veterans for the purchase of homes and farmhouses is unnecessary and should be terminated. The argument which has been made for this program is that there are certain rural and remote localities in the country where private mortgage credit is unavailable so that direct Government lending to veterans is rendered necessary. Actually, the mortgage market in the United States is exceedingly fluid and mortgage money from private lending institutions will flow, within the limits of the total supply of savings, to all communities provided that interest rates are flexible enough to reflect fully the risks and servicing costs involved. The apparent need for direct Government lending has been caused by the rigidity of the VA mortgage rate and its failure to reflect regional differences in risks, servicing costs, costs of foreclosure, and the like. The adoption of a flexible interest-rate policy on Government-insured and guaranteed loans, such as was outlined earlier, and the recognition of regional differences in risks, servicing costs, costs of foreclosure, and the like should completely eliminate, except possibly in extreme cases, any need for the direct lending program. IV. FANNIE MAY-PUBLIC OR PRIVATE Operations of the Federal National Mortgage Association should be terminated and the mortgages held by FNMA should be liquidated just as promptly as is consistent with orderly market conditions. Throughout the postwar period FNMA has served to provide a primary market for Government-insured and guaranteed mortgages bearing interest rates not competitive in the market. Its operations have constituted a drain on the Federal budget and have often throughout the postwar period contributed to inflationary forces in the booming housing market. If the interest-rate policy on Government-insured and guaranteed loans which was outlined earlier is followed, the private lending institutions of this country-the life insurance companies, the mutual savings banks, the commercial banks, and others will provide an adequate secondary market for home mortgage loans. Just as there is no real need for FNMA, assuming the adoption of flexible interest rates on Government-insured and guaranteed loans and the recognition of regional differences in risks, servicing costs, costs of foreclosure, and the like, there is likewise no need for a private national or central mortgage bank, as is currently being urged in several quarters. This private bank would at best be merely a substitute for FNMA and would still have as its basic function the purchase of Goverment-insured and guaranteed mortgages which, because of their failure to meet market competition, are not salable to the private lending institutions. The time has come to stop resorting to palliatives and to introduce a basic remedy-namely, real market flexibility of rates on Government-insured and guaranteed mortgages. The idea of a private national mortgage bank has serious disadvantages. In order to obtain the funds to purchase mortgages, the bank will be required to sell debentures, and it seems obvious that the only possible market for these debentures will be with the lending institutions which in the first instance have found the mortgages unattractive because of rate rigidity. In a period of heavy demand for capital funds, which would be the time of greatest need for the national mortgage bank, there will not be a market for the bank's debentures unless some way can be found to sell them to the banking system. However, resort to the banking system under such conditions would have serious inflationary consequences and should not be permitted in the general public interest. V. SLUM CLEARANCE AND LOW-RENT HOUSING It cannot be denied that in certain cities throughout the country there is a serious problem of slum clearance and low-rent housing. It is doubtful, however, that public housing is the answer to this problem. Certainly the public housing program to date has had serious shortcomings, with housing being built in places where it was not needed, and with high-income groups living in public-housing projects. The present period of high prosperity and much improved housing standards affords a good opportunity for a thorough study of why the public-housing program has failed and what basically can be done to meet the slum clearance and urban redevelopment question. This study should consider the question of whether a sound and workable basis can be devised for making it possible for private enterprise, with Federal, State, and municipal participation, to do the job. The CHAIRMAN. Of course, we will have to study this bill. It is strictly 100 percent a voluntary program. Mr. SHANKS. That is right. But it ties in the HHFA Administrator as Chairman, and the Federal Reserve so that there will be full cooperation between the Government and private companies. The CHAIRMAN. What it does is set up an organization, and if there is a shortage of funds in any given section, this organization will make an effort to find the funds, but they do not guarantee to do so. Mr. SHANKS. They do not, but they will get the information, and they will have an organized effort to try to find the answers. The CHAIRMAN. I think it has a lot of merit to it. I think the most virtue it has is the fact that you gentlemen who are recommending it handle the big percentage of home mortgages. So if you recommend it and get behind it, I think you have to see that it works. Mr. SHANKS. We will try to make it work. The CHAIRMAN. I would say that would be its best recommendation. Because you could make it work if you were in a position to do so. Of course, I know you want to, but if you were in a position to do so, you could make it work. Mr. SHANKS. I think you could make it work. The CHAIRMAN. It requires no money and no appropriations? Mr. SHANKS. Of course, all the other institutions are in it, and I think they also will be behind it. The CHAIRMAN. That is right. It requires no money from the Government? Mr. SHANKS. That is right. The CHAIRMAN. It will be strictly an organization, supported, or rather guided and directed by the Government, in finding money, mortgage money, in those instances where it was scarce; isn't that what it does? Mr. SHANKS. That is right. Senator BUSH. Who would finance this committee's operation? Senator BUSH. The operating expenses of the committee. Mr. SHANKS. First, the expenses of the people on the committee we anticipate would be borne by the various institutions with which they are connected. There would be rotations from time to time. Just as in connection with the voluntary credit-restraint committee. We have provided they will meet in the Federal Reserve banks in various sections, and they will provide the office space and some clerical help. Senator BгSH. Wouldn't it be necessary for such a committee to have a rather large staff? Who is going to collect all this information the committee will use? How are you going to operate without a staff? Mr. SHANKS. We felt there wouldn't be too large a staff, but if there has to be a staff or much of a staff, then there will have to be some way of financing that. Senator BUSH. It seems to me there ought to be some anchor to windward, so to speak, for any committee. Somebody has to be a managing secretary or managing director, or somebody to keep it together, and it seems to me there would be some expense involved. I wonder who you think should pay that. Mr. SHANKS. First, the members themselves, the time they put in, and whatever cost they incur will be borne by the institutions with which they are related. But where it comes to holding their meetings, we provide in the bill that they will be held in the Federal Reserve Banks, Washington, or in the regions, and that they will provide the secretarial assistance, and so on. Beyond that I don't think there should be too much of a staff. If they can just give clerical assistance to the chairman, it could be done that way. If it goes beyond that on staff, and there is no provision in the bill, the institutions would have to provide it, one way or another. 44750-54-pt. 1—40 |