HOUSING ACT OF 1961

FRIDAY, APRIL 28, 1961

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON HOUSING,

Washington, D.C.

The subcommittee met at 10 a.m., pursuant to adjournment, in room 1301, New House Office Building, Hon. Albert Rains (chairman) presiding.

Present: Representatives Rains (presiding), Mrs. Sullivan, Mrs. Griffiths, Messrs. McDonough, and Widnall.

Also present: Representatives Miller and Harvey.

Mr. RAINS. The committee will please be in order.

The first witness this morning is Mr. Saul Klaman, director of research for the Association of Mutual Savings Banks.

Come around, Mr. Klaman. You may proceed with your statement.

STATEMENT OF SAUL B. KLAMAN, DIRECTOR OF RESEARCH, NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, ACCOMPANIED BY WILLIAM F. MCKENNA, DIRECTOR-COUNSEL, WASHINGTON OFFICE, NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS

Mr. KLAMAN. Thank you, Mr. Chairman.

Mr. Chairman and members of the subcommittee, my name is Saul B. Klaman. I am director of research of the National Association of Mutual Savings Banks, and staff adviser to the Committee on Mortgage Investments of the National Association of Mutual Savings Banks. I appear today on behalf of the national association, representing an industry having 515 mutual savings banks with nearly 23 million savings accounts and over $41 billion in total assets. Because two-thirds of these assets are invested in home mortgages, our industry has an understandable interest in housing legislation.

We know from Chairman Rains' announcement that this series of hearings is being held on the administration's omnibus Housing bill, H.R. 6028, introduced by the chairman, and on certain additional bills pertinent to the field of housing. Our testimony will be directed only to H.R. 6028.

However, the national association would appreciate permission to file a statement in the record of this hearing touching on any matters discussed in the other bills, if upon further reflection it is thought such a statement would be helpful to the subcommittee and to the national association.

Mr. RAINS. That may be done.

Mr. KLAMAN. Thank you.

We strongly endorse the emphasis in H.R. 6028 on measures to maintain and improve the quality of the Nation's existing housing inventory and to expedite urban renewal programs. Mutual savings banking has long given practical support to such programs. It is in our own interest to do so because so many of our institutions are located in the downtown areas of communities in need of redevelopment.

Some recent examples of savings banks activity to encourage home improvement and renewal include the pooling of $20 million in funds by savings banks in the Boston area for rehabilitation of housing; the spearheading of the financing of urban renewal in Philadelphia by a large mutual savings bank; and the pooling of funds by New York City savings banks to finance the improvement of "brownstones" in urban renewal areas.

We favor authorization in title VI of additional funds for urban renewal. An additional $2 billion authorization for urban renewal grants over the next 4 years hardly seems excessive in light of the known needs to revitalize our urban communities, nor does the additional planning grant authorization of $80 million.

Such a log-term grant, moreover, would permit a continuity of community activity not now possible under the present Federal aid program. Urban renewal programs in many cities have been slowed because of the inability of local officials and technicians to develop long-term programs in light of the uncertainty of the availability of Federal funds.

Title II of the bill would expand the scope of home improvement by inaugurating a program of FHA-insured loans up to a maximum of $10,000 in amount, 25 years in maturity, and 6 percent per annum in interest rate. In our opinion, this program would be strengthened by authority to obtain advance commitments for Federal Housing Administration insurance and to approve FHA insurance of funds as advanced for improvement.

Moreover, the wisdom of permitting a maturity as long as 25 years for such loans is questionable, considering the short remaining life of properties to be improved in many cases. Many lenders will consider such loans uneconomic notwithstanding FHA insurance. On the other hand, we recognize the need to extend the maturities for such loans if large-scale repair and modernization is to be made feasible. A maximum maturity of 15-20 years is likely to accomplish the purpose of this program and yet keep it economically sound. Section 220 (h) (2) (v) would permit such improvement loans to be secured in such manner as the Federal Housing Commissioner may require. Presumably this would afford latitude for accepting, as security, liens other than first liens. It may well be broad enough to allow accepting security other than a mortgage lien. Mutual savings banks operate under State statutes in 17 different States, and this is an important consideration.

While in some of these States, savings banks are permitted to invest in any type of federally underwritten mortgage loan, in other States they may invest only in first liens on real estate. Most savingsbanks States permit the acceptance of a second lien only if the lender ready holds a first lien on the real property to be mortgaged. Some

States, morcover, do not permit savings banks to make personal loans other than those secured by pledge of the borrower's passbook evidencing his savings account with the lender.

It may prove necessary, therefore, for savings banks in some States to seek appropriate amendment of State laws before they could fully take part in the expanded home-improvement program proposed in title II of this bill, and in my personal contact with many of these savings banks in many of these States, I believe that they would heartily support such a program. This is a program they would cooperate in fully.

Meanwhile, many savings banks may find it possible to recast outstanding mortgage loans in order to include within the first lien the additional funds to be advanced for home improvement. In this regard methods to reinvigorate the FHA open end mortgage program should be investigated.

Proposed section 220(h) (2) (ii) laudably includes a provision to protect an individual from overextending himself in borrowing funds for home improvement. Our understanding is that no loan would be approved unless the Commissioner determines that the sum of the estimated cost of home improvement and the Commissioner's estimate of the value of the property before home improvement will not exceed the limits contained in section 220 (d) (3) for other than new construction.

We approve this important safeguard. In most cases the lender will also feel obliged to check carefully into the ability of the particular prospective borrower to meet the repayment schedule.

Because the risk in the loan may well vary depending upon the quality of security for the loan, the Congress may wish to consider requiring the Federal Housing Commissioner to take this factor into consideration in fixing the premium charge for insurance of homeimprovement loans. Possibly a sliding scale of premiums should be considered to match the extent of risk.

The proposed section 220 (h) (6) would permit the Commissioner to acquire a defaulted home improvement loan and security in urbanrenewal areas upon paying the lender the unpaid principal balance of the loan plus accrued interest plus any FHA-approved advances, either in cash or indebentures maturing 10 years after date of issue. If the loan is secured by mortgage, apparently the Commissioner may acquire the loan without requiring the lender to resort to foreclosure proceedings.

This prospect should make the loan more attractive to lenders. But since the option to acquire rests with the Commissioner rather than with the lender, the latter, at the time the loan is made, cannot rely upon this method of recoupment.

It is recommended that the Congress consider placing this option with the lender instead of with the Commissioner. It is recognized that provision for cash payment is a departure from FHA past practice, although the payment of cash has been a long-time practice in the case of VA loans. While we recognize the risks involved in this change in FHA procedure, we feel it is essential to make this homeimprovement-loan program work and it will not jeopardize the broad overall FHA insurance program.

It is noted that proposed new section 305 (h) of the National Housing Act expands Federal National Mortgage Association's special

assistance functions to include home-improvement loans in urban-renewal areas under section 220 (h). The National Association has advocated holding within present limits the special assistance functions, lest the secondary market aspect of FNMA operations be outweighed by an indirect primary-market function.

We recognize, however, that the proposed home-improvement-loan program is a radical departure from past experience which may not be readily embraced by private lenders. Accordingly, limited special assistance from FNMA may be required in the early stages, but we strongly urge withdrawal of FNMA support as soon as the program has been proven economically sound.

As to home-improvement loans outside urban-renewal areas, it is recommended that the parenthetical expression "(including advances during construction or improvement)" be inserted after the word "loan" on page 19, line 22, in order to parallel a like provision appearing in the new section 220 (h) (1) on page 12, lines 17 and 18. It is feared that lenders may hesitate to advance so-called construction money for work on one- to four-family houses under this proposed program unless such advances are protected by FHA insurance. It is noted that insurance proceeds under this program would be payable only in debentures maturing in 10 years, not in cash.

In summary, with the qualifications noted, the National Association applauds the effort to devise new methods of encouraging private lenders to finance improvements to homes in order to maintain them in good condition and thus prevent the spread of blighted housing. We feel that it is long past due that more consideration be given to the quality of the existing housing inventory than has been the case heretofore.

It is further acceptable to the National Association to extend for a short period the existing program of title I home-improvement loans protected by FHA portfolio insurance. Section 401 (a) of the bill proposes an extension until October 1, 1963. Experience with this program has been so successful that there is reason to believe that the time has come for weaning it from Government support.

Mr. Robert Morgan, president of the Boston Five Cents Savings Bank and chairman of our Mortgage Investments Committee, in testifying before the Senate made statements about how these loans are more and more being done on a private basis and suggested that this is getting further to the point where it can stand on its own feet. But until the proposed new FHA programs of home improvement under sections 220 and 203 are proven successful, however, continuing the title I program should serve as a backstop to assure the availability of some measure of home improvement funds.

The proposal to extend to "low- and moderate-income families" throughout the Nation the opportunity to participate in the nodownpayment, 40-year loan program now limited to urban-renewal areas requires serious appraisal. Basically the program rests on the premise that there is a large potential market demand for moderate priced housing-as defined in the bill-if such housing could be provided on credit terms so liberal as to bring monthly payments within the means of moderate-income families. Granted the premisethough some observers doubt its validity-the method of implementaion proposed in H.R. 6028 is basically unsound. Under 40-year

mortgage-repayment terms, and with no initial downpayment, families acquiring properties have little opportunity to build up any real equity.

It takes about 29 years to repay one-half of a 40-year loan, and the cost of interest payments alone is well in excess of the total cost of the house.

If the mortgagor under a 40-year loan views his amortization payments as rent-as he is more than likely to do-he will probably default on his loan if payments become burdensome rather than make sacrifices to retain his property. Furthermore, normal depreciation on a house is greater in the first 5 years of its life than the amount of amortization provided for in a 40-year loan. Such loans therefore are inherently unsound, both from the standpoint of borrower and lender, and are hardly likely to be supported by the private financial community.

It is important to remember also that the longer the term of amortization provided for in mortgage loans, the slower the return flow of funds to the lender. In the case of a 40-year loan, payments in the first 5 years are only half as large as in the case of a 30-year loan. To this extent the reduced flow of funds makes it more difficult to sustain a high level of new home financing from the private sector of the market.

As the supply of new mortgage funds declines, the cost of such funds rises, making it more burdensome for potential borrowers to acquire homes. Therefore well-intentioned efforts to increase home ownership should be carefully evaluated lest they reduce the flow of home mortgage funds in the future and unduly burden low and moderate income families in attempting to acquire home ownership. For all of these reasons we cannot endorse the proposed broadening of the 40-year, no-downpayment program, notwithstanding its wellmeant purpose to bring adequate housing within the reach of more American families.

I would add here, Mr. Chairman, if such a program is finally approved we would certainly hope that it was limited to the request in the original bill to an experimental program as part of the extension of 221 for 2 years or so to see how it works and basically to channel credit into this moderate low-income area.

These are the fundamental purposes of the proposal, to provide a differential in credit terms to make it more attractive to the borrower, and to make it more attractive to the builder to produce housing in this area. If the 40-year program is expanded to the permanent 203 section of FHA, the entire purpose of the 40-year extension is nullified because then you provide no differential, no incentive to provide housing in this particular income bracket and this particular price bracket, assuming a market exists there, and the purpose of the program is defeated. So in glancing at the amendments proposed by the chairman, I would certainly urge a reappraisal of the wisdom of trying to extend 40-year loans at this time to a permanent part of the FHA program.

Rather it seems that the desired end to make more housing available to the low- and moderate-income families of the country could be better achieved if we could develop a program to reduce the cost of land and the cost of building construction. For this reason we