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the only way to hold the price on the veterans' loans was to have the Government, through FNMA, purchase the loans.

This situation was aggravated by the more favorable market position given by the Government to its other mortgage finance plan, the FHA-insured mortgage system. FHA-insured loans on single-family houses were permitted to carry an interest rate of 4.5 percent, a rate that remained attractive after the 4 percent rate had ceased to be so. With so clear a choice offered by the Government itself, funds inevitably flowed toward FHA rather than to VA, thus increasing the dependence on FNMA as a support for the VA plan.

Moreover, the long experience with and well-established confidence in FHA procedures and practices added to the favored position of FHA loans. Finally, the ability of FHA to make firm loan commitments to builders, irrespective of the ultimate purchaser a feature absent in the VA loan system-gave the FHA special advantage. This advantage is of special importance since it provides to builders a means of obtaining financing for construction purposes not otherwise available.

Another condition-characteristic of the mortgage market as a whole-had a particular bearing on the VA loan program. Aside from the savings and loan associations, there are no lending institutions specifically designed for and limited to home mortgage lending. With other classes of lenders, which represent the bulk of available funds, mortgage loans are in direct competition with many other types of investments. When, as may sometimes happen, the returns available on these other investments increase more rapidly than the returns on mortgages, the tendency is to decrease allotments of funds for mortgages and to increase them for the other investments, which have the additional advantage of simplicity and low overhead cost for the institutions.

Consequently, the mortgage market cannot at all times count upon a flow of funds sufficient to meet its demands. This situation especially affects VA loans, since their rigidly limited interest rate causes them to be the first to suffer from a shift in market conditions. Again the resort to FNMA, or some similar device, is inevitable unless the causes of these circumstances are remedied.

For all these reasons the opposition to FNMA has swelled to the point where many advocate its outright abolition upon the return of Congress. On the other hand, those acquainted with the character of the present building boom are well aware of the reliance of a considerable segment of that boom upon the financing support which FNMA is supplying. They realize that outright repeal of the FNMA purchase program can only be accomplished by providing some alternative support, if a radical disruption of the present high level of building activity is to be avoided. The most helpful solution to the problem then would appear to be a proposal of a different type of market which would afford substantially the same kind of support. to the home-finance industry, but which would avoid the excessive outlays of Federal funds characteristic of FNMA operation. The way toward solution of the problem might be afforded were Congress to vote a different kind of market or were a private secondary market utilizing privately subscribed capital to be created.

INTEREST RATES

The long-term success or failure of a Government-insured mortgage program and tied to it a privately owned national mortgage association, is dependent upon a gross interest rate at which FHA or VA 501 mortgages are written. Government-insured mortgages must be acceptable to long-term mortgage investors at all times. To obtain such acceptability the interest rate applicable to Government-insured mortgages at the time they are written must conform to the going interest rates on other types of securities which are free to move with the then supply and demand for long-term money.

The matter of interest rates on Government-insured mortgages should be taken out of politics or the decisions of a few individuals who might find it politically embarrassing either to increase or decrease these rates.

It seems obvious that the FHA and the VA interest rate on singlefamily houses should be the same, and, as expressed above, these rates should change from time to time according to the supply and demand for long-term money. To keep interest rates on these mortgages constantly acceptable to investors it would be practical to have legislation passed by Congress, which legislation would give a fixed formula for the determination of the interest rate applicable to both FHA and VA insured mortgages. This formula would be used at stated intervals for example, January and July 1 of each year. At that time a Government agency, using the formula as set by Congress, would establish the rate of interest that would apply to all FHA and VA 501 mortgages written during the ensuing 6 months. The use of either of two formulas has been suggested.

One suggested formula would tie the interest rate on Governmentinsured mortgages to the yield of long-term-nonbank-eligible Government bonds. The difficulty with using long-term Government bonds as a base for a formula for determining the rate that should apply to a Government-insured mortgage is that the Government bond market is not free but is supported by the Federal Reserve bank and thus is prevented from showing the true yield when money is scarce and rates go up. A better indicator probably would be the corporate bond yield averages, but the use of such a formula also has practical difficulties which probably outweigh its advantages.

THE SEPARATE AGENCIES-FHA AND VA

All lenders concerned with the processing of FHA and VA 501 mortgage loans, particularly those secured by new residence property, are finding that the insuring activities of these two Government agencies are so separated that the work of processing the simplest case is excessive and the duplicate fees of the two Government agencies are an unnecessary expense to the builder and mortgagee, which costs by necessity are eventually paid by the home owner. A few illustrations of those difficulties will be informative.

1. An operative builder, before he starts construction, must file applications with both FHA and VA. There are two compelling reasons why dual applications must be filed.

(a) It is the rate operative builder who knows before construction starts whether his house will be sold to civilians or veterans. To be

prepared for the possible financing requirements of either type of borrower he must have his operation, plans, and specifications, and so forth, approved by both Government agencies.

(b) Construction loan financing in many parts of the country is only available when the operative builder holds firm FHA commitments to insure mortgages on completion, whether sold or unsold. The above requirement of construction lenders necessitates FHA processing even though the houses to be built may all be sold to veterans and the financing of the permanent mortgages will all be VA insured loans.

The only way to adequately describe the work and the cost of these two separate Government insuring agencies is to list the steps involved. The papers required for a building operation of 15 houses containing two types of houses are:

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The 15 items listed above that are submitted to the VA are for the same purpose as the 45 items sent to FHA. The purpose is to determine the soundness of the proposed operation and to set valuation on the houses. There is no reason why one Government agency cannot do this work.

After the builder's applications are approved by both Government agencies he is then plagued during construction by the three normal architectural inspections of FHA plus spot-check inspections by VA appraisers who are not, in most instances, qualified construction men. Again, these inspectors, because they work for different Government agencies which have no coordinated direction, will frequently differ completely in their requirements, much to the disgust and added burdens of the builder, although it is understood that the FHA minimum property requirements are considered standard by VA.

The difficulties, delay, and added costs due to unnecessary duplicate Government agencies' fees and unnecessary clerical work required of the builder and mortgagee processor, can be added to by many others at every stage of the processing and then later servicing of the permanent mortgages.

In retrospect, then, it would seem to have been better to allow one of the established huosing credit agencies of the Federal Government to activate the GI home loan program. But it was decided otherwise.

In the meantime the GI foundling has grown to a lusty $10,000,000,000 size. It has developed special characteristics, traits, and a welter of policy of its own, and this is what would make an out-and-out transfer of the VA program to the FHA so difficult.

Various efforts to bring closer collaborattion between the two programs have met with but indifferent success, attributable in part to the divergent objectives and statutory provisions of the laws administered by the respective agencies.

Further, it should be recognized that FHA is regarded as a permanent fixture in the housing credit picture. VA is not and should not be. It is administering a program and a benefit for a class, that is, World War II veterans. FHA is applying production and consumer credit supports for the building industry, the lending industry and the citizen purchaser.

These objectives inevitably clash with the interest of the "class." The class is apt to find their interest subordinated in the event of a merger or transfer of functions. Transfer or merger therefore might implicitly feature a willingness to subordinate or detract from the effectuation of the present benefit-in fact, it would in all likelihood result positively in that consequence immediately as a direct result of legislation advocated and adopted in conjunction with the transfer or shortly thereafter.

The sponsor of the veterans, reckoning in advance with these aspects of the situation, opposes transfer and this opposition must be taken into consideration.

Let us then consider what can be done-short of transfer or merger-that would be remedial.

As to the siphoning off of FHA commitments into VA section 501 loans, the solution lies in a change of attitude on the part of FHA-or through legislation which will lend the same end result.

The home-building and home-financing industry is well aware of the problem. It hinges upon the reluctance of FHA to issue commitments for projects when a portion of the completed units will ultimately be permanently financed with a VA-guaranteed first mortgage under section 501 of the GI bill. FHA's position is that it is an insuring agency and not a processing agency, and that the actuarial soundness of its mutual mortgage insurance fund basically rests on estimated receipts from mortgage insurance premiums, with commitment and inspection fees only a minor factor.

Because of pressure by FHA on builders and lenders, the benefits of a GI loan are being denied to many veterans.

One avenue of solution has led to proposed legislation which would authorize the Veterans' Administration to set up a firm commitment procedure parallel to that of the Federal Housing Administration. This proposal suffers from a number of serious draw-backs.

First. It would involve further considerable duplication of already existing Government facilities.

Second. It would thrust the Veterans' Administration directly into the field of producer credit, where presently most of its activity is concerned with supplying credit support at the consumer state. But perhaps even more important is the fact that the Veterans' Administration loan-guaranty program is concerned exclusively with only a special group of the population. Because of this limitation the Veterans' Administration, if it were to give firm commitments to guar

antee mortgages for the operative builder upon completion, would be forced to take over properties in the event that no eligible and willing veteran borrower could be found. This would present a serious complication since veteran home purchasers constitute only a partial, although substantial segment, of the total housing demand.

Actually, there is no need to attack the problem through such a complicated method when the solution is so readily at hand through a simple amendment to FHA commitment policy and to the VA appraisal directive. The obvious solution is to enable builders and lenders to utilize FHA commitment protection, but at the same time to permit veterans wishing to utilize their loan guaranty entitlement to obtain the benefits of low-cost GI loans if they so choose. This objective can be achieved very simply by the Federal Housing Administration through the medium of charging a slightly higher commitment and inspection fee for units which do not ultimately result in permanent insurance written under the National Housing Act. The amount of the fee differential necessary to protect the mutual mortgage insurance fund can be determined. The higher fee could be recognized by Veterans' Administration as a legitimate closing cost which could be paid out of the proceeds of a VA-guaranteed first mortgage loan, and would represent a negligible cost factor which the veteran would undoubtedly be willing to bear if it enabled him to obtain the more advantageous financing terms of a GI loan.

If this were to be coupled with a change in the VA directive on appraisals so as to require that agency to appraise for a "maximum loan value" instead of for a “fixed sales price" the two changes taken together would accomplish much.

Such an arrangement would retain the benefits of the technical proficiency of FHA in the housing picture and would leave it in a position, with respect to staffing and operations, to resume its erstwhile functions in the housing field as the GI loan program subsides and expires.

THE DIRECT LOAN

Possibly there would have been merit in putting the veterans' housing benefit on a direct loan basis at the outset. That is a question of ideology. But it was not done. Two million veterans have been served otherwise. These 2,000,000 will have a point if direct loans are authorized at this late stage of the program. They will demand parity. Equal treatment would have powerful appeal as a slogan and a political football would be thrown into the picture. It would seem far more desirable to let the remainder of the life of the home loan begin to work its way toward extinction on the basis on which it was begun. But this will be a political possibility only if the various segments of the lending industry accept the responsibility that the present frame of the law poses before them, and accord reasonable support to its effectuation.

One alternative to direct Government lending is for the mortgage bankers of the country to provide a plan whereby mortgage money is constantly available to the public under either the FHA or VĂ 501 insurance programs. Many of us are convinced that if private lenders do not provide funds for these mortgages the Government will. On the basis of past experience there is little doubt that if the Gov

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