with FHA of about $5.96, or, if you will, cutting it in half, it seems to us that that is not a sound proposal.

If you and I and this group here, as cooperatives, can do that, why not extend it to those of us who wish to own our own homes and do not wish to get ourselves mixed up in the form of cooperatives? That is our position on it. We think that it would have a very bad effect on the value of existing real estate because people would be seeking, in many cases, the matter of getting into this lower carrying charge simply because of a Government guaranty.

That, roughly, is our major opposition to this bill.

It is now more than 4 years after the end of hostilities of World War II. The special housing problems created by rapid demobilization, increased marriages, and several years of restricted building have been eased, due to the combined effort of Government and industry. Although the total housing demand has by no means been met, its characteristics are now of a more normal rather than of a special nature, and its satisfaction should depend upon means that may be confidently relied upon over a long period of time.

Consequently, the main purpose of legislation in 1950 should be to advance toward such dependable, long-term methods of finance and to turn away from a debilitating and unobtainable dependence on Gov

ernment.

Accepting this point of view, the Mortgage Bankers Association should urge that, instead of adopting the more generous Government aids and supports, such as the direct loan to cooperatives and to individual veterans that are advocated in pending legislation, attention be turned rigorously to the task of restoring the responsibilities of private investment and of creating the means through which these responsibilities can be exercised.

A rational approach to planning a desirable set-up in the housing finance picture for the span of several years ahead must recognize (a) the realities of the present institutional framework of housing finance, and (3) that the issues involved in housing finance problems are in the last analysis subordinate to the larger problem of continuing national prosperity.

The approach must accept the inheritances which represent mistakes of the past and which have contributed to the dislocation presently evident in the housing sector of our economy. It requires also an assumption that the present high level of economy will not get badly out of gear during the period of projection. And, finally, it requires an agreed set of objectives, for any approach and suggested solution-tailored to suit given objectives-will appear warped and distorted to those who have variant objectives in mind.

In preparing the analysis which follows, we have adopted three main objectives as fundamentally necessary to any acceptable approach. The analysis will, of course, touch upon other corollary and subsidiary objectives, but its scope and direction will always be hinged to these three fundamental assumptions:

1. That the maintenance of a high rate of housing production is imperative to provide for our housing needs and to contribute to the buoyancy of our national economy;

2. That veterans' benefits in housing finance must be preserved short of the point where they can be considered as involving a disproportionate prejudice to the attainment of (1) above.

3. That Government credit support should be used only to the point necessary to supplement and aid private industry to produce and finance a high volume of new residential construction, and to effectuate the national legislative policy implicitly called for by (2) above.

For purposes of clarity, this report is divided into two parts: (I) The problems the committee believes need solution; (II) suggested solutions and the philosophy behind them:

I. THE PROBLEMS

IN GENERAL

Immediately following VJ-day, the crucial shortage of housing accumulated over a decade past was the No. 1 housing problem. Manifold forms of credit support were justified to assist in overcoming the shortages. Having thus set the stage for inflation, the Congress was persuaded to remove all controls-to stimulate increased production of materials in short supply-and all the signals were set for a run-away inflation in housing prices.

Now that era is on the wane. It is already history in some areas, and in some price brackets. Shelter, except perhaps for some of those in the lower-income brackets, is no longer a crucial unfilled need. New houses are now pouring into the market. True, many lowerincome families cannot afford these houses. But that is normal in any free economy, and is commonly bridged at length and in part by producers extending themselves to reach the unsated market which exists in the lower-income brackets.

With the lessening appeal of solving a shortage as an argument, advocates of ever-broadened Federal credit supports have shifted emphasis to a new appeal-that sustained high production is necessary to keep the over-all economy sailing smoothly. There is considerable merit to this argument. In the past several years investment in new residential construction has been proceeding at record or near-record levels. In 1949 it is estimated that private home construction will represent outlays totaling about $7,000,000,000. The multiplying effect of these expenditures is, of course, much greater than this because of the myriad of producing and distributing agents which are involved in the complex process which begins in our forests and quarries and ends in the complete house ready for occupancy.

Unquestionably, the boom in housing investment is one of the major forces generating and sustaining our present high level of economic activity. And, for this reason, it behooves caution on the part of those who propose changes which might interfere with the fullcapacity operating of the housing industry.

Conceding the tremendous role of housing investment in our overall prosperity does not mean, however, that we must forego attempts to channel that investment along lines more rational than those presently employed. What we must avoid is radical or disruptive change, whether it involves the impact of new devices or legislation or whether it involves a contraction of present supports.

The key investment role of housing in the over-all economy should not, however, be accepted on a carte blanche basis. The manner in which that investment finds outlet must be carefully studied. The present trend may be dangerously toward a completely subsidized

home-building and financing industry. It may put housing in the same category as farm commodities on a parity-price-support basis. Because of this patent danger of too great reliance upon Government support, the time is overripe to move, at least cautiously, toward a fuller attainment of the spirit of objective No. 3; namely, to use Government aid and support only where it is really necessary. The pith of the planning should be toward accomplishing objective 1 (high production) more and more by means of private industry and capital. As a corollary, Government support should be redirected and confined to the minimum levels consonant with high-production levels and the preservation of veterans' housing benefits.

VETERANS' BENEFITS

The enactment of the loan guaranty benefits in the Servicemen's Readjustment Act constituted a commitment by the Federal Government, a commitment which was reaffirmed and crystallized in the December 28, 1945, amendment to the law. Its performance from the veterans' standpoint, was diluted and defeated in part by various interfering factors, some of which were perhaps unavoidable. Nevertheless, it accomplished much both in solving the housing plight of veterans and in aiding them in pushing roots into their home communities.

It has put nearly 2,000,000 veterans in possession of homes under loan repayment plans that are relatively advantageous to themsufficiently so as to vest them with what is virtually an equity in their ownership. It has supplied them with low-cost loans and with lowequity loans.

The attractiveness of the GI loan from the borrower's standpoint may prove to be a bulwark in the event of a recession, as it embodies an incentive factor which is lacking, or is lesser, in other loans. That is, the lower monthly payment. The borrower can take advantage of this, and in effect build up his equity only so long as he continues his loan.

Thus the activation of the commitment made by Congress to World War II veterans has not proven a misfit, and there seems to be no justification for its being withdrawn.

It seems probable, however, that the program will commence to slow down measurably in another 2 years or so, and that natural course should not be altered. There would seem to be no justification for a further extension beyond the present fixed expiration date-July 25, 1957. Granting thus the advisability of retaining the veterans' housing benefits as a component of the housing picture, there remains the need to restudy its functioning so that it may better fulfill its purpose over the remaining period.

GOVERNMENT CREDIT SUPPORT AND THE FEDERAL NATIONAL MORTGAGE ASSOCIATION

The heart of the home-finance problem centers around the nature and degree of Government credit support necessary to supplement and aid private industry during the next few years.

Essentially the problem is to continue to assure families of moderate income and veterans the availability of mortgage credit at low cost and on a liberal equity basis, and at the same time to accomplish this

objective with the minimum amount of Government support necessary, and in a manner which will eliminate, or at least moderate, the present excessive Government support and its attendant abuses with which thoughtful observers are concerned.

There is general agreement that the largest single factor causing dissatisfaction and concern on the part of those interested in a sound system of home finance is the excessive rates at which Government funds are being supplied in the market by the FNMA operation.

There is also concern over the fact that a large share of FNMA disbursements are being channeled to veterans' projects on an extremely liberal financing basis which enables builders to offer their products without requiring a single dollar of equity money from the veteran purchaser. This development is a prime example of excessive stimulation of housing credit on the part of the Government.

But perhaps the greatest animus underlying criticism of the support afforded by the present FNMA market stems from the present widespread concern over the unbalanced position of the Federal cash budget. Although it is true that FNMA expenditures are by no means unproductive, down-the-drain investments, since they are matched by repayable loans, they do represent very substantial cash disbursements which are swelling Treasury cash payments to the public at a time when all avenues are being explored to avoid, or at least minimize, deficit spending by the Federal Government.

As constituted by the legislation of 1948 and 1949, FNMA has provided a system in which the position of the private lending institution has been essentially that of an agent acting without either risk or responsibility. The profitability of the operation to the original lender should not be allowed to cloud his recognition of the true aspect of the situation, including the untenability of his own position. Moreover, the success of the operation in expanding the VA loan program should not blind the Government to the severe additional strain which it, or a similar operation, places upon the Treasury in a period of mounting budgetary deficit.

The dangers of the present FNMA activity lie not only in the risk of self-extinction with which it threatens private mortgage institutions or the contribution that it makes to an uncontrollable budget, serious as these are. Also dangerous are the encouragement it offers to unresponsible lending-hence the further unstabilizing of Government finance and the artificial prop that it provides to the building industry, which becomes more essential the longer it is continued. In these several ways FNMA, as now constituted, is a grave obstacle to the creation of a sound, long-range system of mortgage finance.

The introduction into Congress last summer of the SparkmanSpence bill, S. 2246, for the first time brought forcefully to the attention of mortgage bankers the danger of serious Government interference with our business, and at the same time made us aware of the reasons which prompted the legislation proposed in that bill.

The Sparkman-Spence bill was the first legislation ever introduced into Congress, except in a time of depression, that proposed direct Government lending on mortgages secured by urban real estate. The direct loans proposed were of two categories: (1) Loans, not to exceed $10,000, to assist veterans in purchasing homes. These loans were to be made in areas where 100 percent-4-percent mortgages were not

available. For this category the act would provide $300,000,000, and (2) loans to housing cooperatives at a 3 percent rate of interest and for a 60-year term. For this category the act would provide $3,000,000,000.

Mortgage lenders for some years have been using the Federal National Mortgage Association as an easy place to dispose of loan acquisitions that were not easily salable to private lenders and have supported legislation that would provide it with funds without realizing that in so doing they were building up a competition that could conceivably absorb all residential mortgages. Most mortgage investors have not realized that we are in an untenable position when we push for more funds for FNMA and at the same time oppose direct Government lending. Our Washington counsel, Samuel E. Neel, called this situation to our attention in his annual report to the convention on September 19, 1949, when he quoted from the remarks made by Mr. Walter E. Alessandroni, a national vice commander of the American Legion, in testifying before the Senate Banking and Currency Committee, when Mr. Alessandroni said:

It seems inconsistent to me to have a secondary market in which private lenders can commit in advance-can, after the purchase of that individual mortgage or mortgages, take it directly to the Government. This is direct lending in its most fierce aspect, because it provides a middleman who makes a profit.

So that a person who said that he was against secondary markets of any kind could consistently say that he is against supplemental direct loan, but the indi vidual who comes to the Congress and insists not only that we have the present secondary market, but a much more liberal one, one that goes back even beyond April 30 of 1948, and at the same time says he is against direct loans, to me is just being inconsistent, and the only justification to him is that it is very helpful to him individually.

Aside from the threat of direct Government lending as typified by Mr. Alessandroni's testimony, there is another threat overhanging those mortgage bankers who do a substantial volume of business with FNMA.

The Hoover Report on the reorganization of Government bureaus recommends that FNMA be transferred from RFC to the Housing and Home Finance Agency. It is reliably reported to us that the General Accounting Office of the Government is pushing this transfer of FNMA, because the servicing costs of HOLC, which agency is now a part of HHFA, are $9 per loan as against FNMA's servicing cost of about $32. The threat is that if HOLC had control it would service FNMA mortgages direct rather than using servicing organizations, and thus reduce servicing costs. We can, of course, show the fallacies in the cost figures used, but nevertheless we must realize the possibility that Government officials may believe that the Government can do the urban mortgage lending of the country better and at less cost to the veteran.

A number of circumstances have combined to direct the FNMA into the paths it is now following. Foremost among these is the attempt to fix interest rates on loans to veterans-under the Servicemen's Readjustment Act-by legislative decree at 4 percent, irrespective of the movements of interest rates, and more particularly the yields on securities, elsewhere in the financial market. The result of this effort at price fixing has been to drive investment funds away from veterans whenever the available returns on other types of loans made the 4-percent rate on mortgages relatively unattractive. At such times,