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MONDAY, FEBRUARY 6, 1950
HOUSE OF REPRESENTATIVES,
Washington, D.C. The committee met, pursuant to adjournment, at 10 a. m.,
Hon. Brent Spence (chairman) presiding.
Present: Messrs. Spence (chairman), Rains, Buchanan, Multer, Deane, McKinnon, Mitchell, O'Hara, Talle, Hull, and Mrs. Woodhouse.
The CHAIRMAN. The committee will be in order.
Our first witness this morning is Mr. Oscar Kreutz, executive man-
STATEMENT OF OSCAR R. KREUTZ, EXECUTIVE MANAGER,
NATIONAL SAVINGS AND LOAN LEAGUE
Mr. KREUTZ. Mr. Chairman and members of the committee, my name is Oscar R. Kreutz. I am executive manager of the National Savings and Loan League. On behalf of the league I thank you for this opportunity to make a statement in regard to H. R. 6618, to provide for the creation of a National Mortgage Corporation for Housing Cooperatives and for the guarantee of the bonds of the corporation by the United States, and H. R. 6742, to amend the FHA provisions of the National Housing Act.
The National Savings and Loan League represents a substantial and growing segment of the savings and loan business. Our member institutions are located all over the United States.
Savings and loan associations have financed more than one-third of the homes of America. Last year they loaned more than 31/2 billion dollars to assist GI and other families of America to acquire homes. Savings and loan associations have had major part in bringing about the high percentage of home ownership in the United States. Fiftytwo and six-tenths percent of the homes of America were owneroccupied at the close of 1947. Our institutions have also effectively encouraged, through our long-established monthly amortized loan plan, the stabilizing debt-free condition of so many American homes. According to the latest available data, more than 55 percent of America's owner-occupied homes are now free of debt.
Traditionally our institutions have also encouraged lower costs of homes and home financing. They have supported programs for, and taken the initiative in, the reduction of interest and other home
financing costs and the reduction in the over-all carrying charges on home loans.
As a matter of fact, the only element in the cost of homes buying that has declined appreciably for more than a decade is the cost of home financing. Interest rates on home financing are only two-thirds of what they were prior to the war, and yet all other costs have risen substantially during the same period. Many have doubled. Some have gone even higher.
But there is a point below which home-financing costs in the form of interest and necessary initial charges cannot go if we are to maintain in this country a system of private enterprise for the building and financing of homes.
Interest rates on mortgage loans are dependent on the rates of return necessary to attract thrift capital. For example, if the public generally were satisfied to take a 1-percent return on their long-term savings, our institutions could lend their funds at 3 percent or less and would be glad to do it. But they cannot do the impossible by making the money available at or less than cost. Moreover, the Government itself, through the sale of E bonds, has done much to establish the average rate of return necessary to attract and hold thrift savings in private institutions like ours.
Mortgage-interest rates of private lending institutions are determined by three major factors: First, the rate of return which the public demands on its savings; second, necessary operating expenses which, like all other costs, are higher than prewar; and, third, the necessity of building reserves against possible future losses resulting from lending operations. Yet, as I have stated, the net cost of savingsand-loan home financing has declined one-third in the last decade.
Before funds can be loaned out to finance homes, there must be an accumulation of thrift capital. Thus, savings and loan associations are basically thrift as well as home-financing institutions. And they have done a magnificent job, since the first association was established 119 years ago, encouraging people of small means to save something out of their income. The aggregate savings in these institutions today exceed $11,000,000,000, owned by nearly 8,000,000 persons.
Thrift has long been recognized as a cornerstone of happiness for the individual. It is also a keystone of our national economy. Without it our industries would not have the capital needed to carry on. Without it our Government could not long endure nor successfully wage wars when necessary to protect our institutions. Nothing should be done to discourage thrift. Everything possible should be done to encourage
it. We do not question or differ with the broad objectives of H. R. 6618; namely, the production of housing for families of moderate income. But we must seriously question the means which would be employed because of their threat to thrift institutions and to the existing system of private enterprise in the production and financing of homes.
It is our understanding that the purpose of the proposed legislation is to make it possible for more people to acquire homes because of anticipated reductions in monthly carrying charges. It is our understanding that reduced monthly carrying charges would be brought about by extending the term of financing and reducing the interest rate. It is our understanding that the advocates of this legislation
see in it a 25-percent reduction in rental costs through lower interest charges and longer amortization.
If these objectives of substantially lower rents and substantially lower carrying charges are realized, what would be the effect upon a large part of the existing mortgage structure of the country? For example, what would the average veteran do if he finds that another veteran in comparable circumstances can obtain similar housing with 25 percent lower monthly carrying charges? I think the answer is clear. He would become bewildered and then resentful. And he might abandon his original home and default on his payments whenever he could obtain accommodations in a new cooperative housing project at substantially lower monthly carrying charges.
Almost 2,000,000 veterans have purchased, or are in the process of purchasing, homes under the GI bill. The mortgages they have executed aggregate some $10,000,000,000. The required monthly payments will amortize these mortgages over a 15- to 25-year period; and, of course, the veteran is paying 4 percent interest on the unpaid balance of his indebtedness.
I might add that, in addition to that, there are some $6,000,000,000 of FHĂ-insured mortgages outstanding.
What would be the effect on these veterans and on this Governmentguaranteed debt if cooperative housing is made available at 25 percent lower carrying charges?
When artificial elements are introduced into our national economy, the results may be more far reaching and more dangerous than we anticipate. We believe that a program such as is here proposed for the use of Government credit to supply the funds to finance the largescale production of cooperative housing to be rented or sold on monthly charges which are some 25 percent lower than the charges on existing private financing might have disastrous effects upon the private system of home building and financing and upon the Government's stake in housing as represented by its guaranty of GI home loans and the insurance of mortgages by the Federal Housing Administration.
In our considered judgment there is no need for this proposed legislation. Private institutions have always financed homes of lowincome groups, including those which this legislation is designed to assist. Millions of homes have been bought and paid for by families with incomes in the lower levels of the middle-income group. Yes, and by families in the lowest one-third income group. It is very true that such families which have bought and paid for homes have had to deny themselves some of the luxuries of life temporarily. They haven't been able to buy the latest model automobile nor many other gadgets, but they have had the real satisfaction of becoming home owners with all the security which debt-free home ownership brings.
It has long been our belief, based upon an intimate knowledge of the operations of savings and loan associations for more than a quarter of a century, that the income groups which this bill is designed to assist have always had their home-financing needs met by the savings and loan type of institutions as well as others. But, frankly, we have not had conclusive data to support our contentions until now.
Late last year we asked a substantial group of institutions located all around the country to supply us with data regarding their lending to finance homes for the lower-income families. The lending operations of these institutions represent a good cross section of that done
by the entire savings and loan system. We believe, therefore, that they are typical of those of the industry as a whole. Here are the facts:
Of the total home construction and purchase loans made by these reporting institutions in 1949, exclusive of loans to operative builders, 7112 percent were made to families with incomes of less than $4,500. Here is a further impressive fact. Forty-five percent of all such loans were made to families with incomes of less than $3,500. Twentysix and a half percent were made to families with incomes of $3,500 to $4,500. The average purchase price of these homes was $7,996. The average loan made to finance these homes is $5,514. The average monthly payment by these borrowers, including interest, principal, taxes, and insurance, is $52.58. And I compare that with Mr. Foley's estimate of a median shelter rent of $59 as being necessary to take care of the families in the so-called middle-income group.
The CHAIRMAN. What was the average interest rate on those loans?
Mr. KREUTZ. I do not have the exact figure. I would estimate it to be something under 5 percent-a little under 5 percent. A large volume of them were made to GI's at 4 percent, and many uninsured and unguaranteed loans were made at 4 percent as well.
Mr. BUCHANAN. The average purchase price on these homes is under $8,000?
Mr. KREUTZ. Yes, sir.
Mrs. WOODHOUSE. When you say “average,” are you using the arithmetical average? Mr. Foley was using the median. So that your small and large parts, you see, would cancel each other out.
Mr. KREUTZ. Yes; we checked this two or three ways, Mrs. Woodhouse; and, as far as I can tell, we used what is a weighted average here.
Mrs. WOODHOUSE. How can you get a weighted average for the average purchase price of a home?
Mr. KREUTZ. No; I should say not on the purchase price of the home, but on the monthly payment and on the average size of the loan we have what I think nearly approximates a median, and these figures check very closely with some figures which are compiled by the statistical division of the Federal Savings and Loan Insurance Corporation on the lending of all insured associations, of which there are some 2,600, and the average loan made by all of those institutions is very close to the average loan to which I have referred here.
Mrs. WOODHOUSE. I am not questioning your figures. I was just pointing out that you were making a comparison between two things which it would be difficult to compare.
Mr. DEANE. On that point, in what part of the country was this survey made?
Mr. KREUTZ. These institutions were located all over the country, Mr. Deane.
Mr. DEANE. Would you be willing to submit for the record the places covered by your survey?
Mr. KREUTZ. I would be very glad to. In fact, I would be glad to turn over to the committee, for its files, the original reports which we received from these institutions, if you will first permit me to have copies made of them.
The CHAIRMAN. You may continue your statement, Mr. Kreutz.
Mr. KREUTZ. The total number of loans made by savings and loan associations in 1949 to finance home construction and home purchase was 353,000, exclusive of loans made to operative builders to finance the construction of 105,000 dwelling units. On the basis of our recent survey we can assume that 45 percent of all the home-construction and home-purchase loans made by savings and loan associations in 1949, or 160,000 loans, were made to finance homes for families with incomes of less than $3,500. Twenty-six and one-half percent of the total, or 90,000 loans, were made to finance homes for families with incomes of $3,500 to $4,500. That means that 7142 percent of their total, or 250,000 home-purchase or home-construction loans made by savings and loan associations last year, were made to families with incomes of less than $4,500.
You may be interested in some individual examples of what our institutions are doing.
Here is one from an association on the west coast. Last year it made 750 loans totaling $6,000,000 to finance the construction of new homes for veterans. Tlie prices of these completed homes ranged from $7,500 to $8,500. Eighty percent were under $8,000. These homes were acquired by families with an average monthly income of $275, or $3,300 per year. The average monthly payment, including all charges for interest, amortization, insurance, and taxes, is $50. These loans were
. made for 25 years at 4 percent interest without any down payment. These houses range in size from 750 to 825 square feet. Each house has two bedrooms, a living room, a dinette, a kitchen, an electric refrigerator, a gas range, and an electric washing machine. Each house is described as being of No. 1 California construction with wood-shingle roof and oak floors. The price of each home included a single-car garage.
The same institution expects to finance, and in fact has already made commitments on a substantial portion of, 1,000 similar units, totaling $8,000,000, in 1950. In most areas of the country there is an adequate supply of funds at reasonable interest rates to finance low-cost houses of this general type for people of low incomes.
Mr. Rains. Let me interrupt you there.
Of course, those loans could not have been made by that institution if there hadn't been a guaranty by the Government.
Mr. KREUTZ. That is right. Mr. Rains. In other words, these loans you are talking about were all made on the hundred percent fully guaranteed veterans' loans.
Mr. KREUTZ. They would not have been made on a hundred percent basis had there not been a guaranty.
Mr. DEANE. That is true of the homes covered by the survey you mentioned a moment ago?
Mr. KREUTZ. The survey covered all loans made, and they would include some FHA loans and some GI loans. Our institutions have made a substantial number of GI loans.
Mr. DEANE. As you submit that statement you will show, will you not, those that were guaranteed by FHA and Veterans' Administration?