We still believe that having this kind of authority available to FNMA would be beneficial to the construction industry and to the public and would promote our ability to deal with the ups and downs in home construction. We can, therefore, support this amendment and urge its sympathetic consideration by your committee.

There is one further suggestion which has come to our attention and which I believe does not appear in any of the proposals before your committee. I know it is the intention of Mr. Brown Whatley, a former president of MBA, to appear before your committee this morning and to discuss this proposal, which relates to the insurance of loans for elderly housing by FHA under section 231, and which would allow mortgage limits to be figured in proper cases with relation to the number of rooms in a project rather than the number of units.

Mr. Whatley will discuss the necessity of the proposal and we would agree with his analysis and we would, accordingly, urge the sympathetic consideration by the committee of this amendment.

Finally, while I realize it is not within the jurisdiction of this committee, it would be a mistake if I did not point out to the committee that none of the burdens which the Congress places upon the FHA can be successfully met unless at some point the Congress recognizes the needs of the FHA for adequate administrative funds to carry out its responsibilities.

Today the FHA is seriously handicapped because of the unwillingness of the Congress to permit the agency to function, as was contemplated in the original housing legislation, by using a restricted portion of its previous year's income. Backlogs in regional FHA offices continue to grow. The length of time necessary to secure an FHA commitment-particularly on rental housing projects-is presently unworkable and the time lag is getting worse instead of better. No matter what this committee enacts in the way of housing legislation, it will never meet the needs of the public, unless you can and do provide the agency with sufficient administrative funds to process its workload.

Thank you very much, gentlemen, for the opportunity of appearing before you.

(The complete prepared statement of Mr. Adair is as follows:)

STATEMENT OF JACK ADAIR, OF MORTGAGE BANKERS ASSOCIATION

Mr. Chairman and members of the committee, my name is Jack Adair and I am president of Adair Realty & Loan Co., Atlanta, Ga. I appear before you this morning to discuss the provisions of H.R. 6028 and related bills, in my capacity as chairman of the Legislative Committee of the Mortgage Bankers Association of America.

The Mortgage Bankers Association of America is a trade association with approximately 2,200 members located in all 50 States of the Union. These comprise mortgage companies, savings banks, commercial banks, life insurance companies, and others. Our members have a vital interest in housing legislation and in the program of the Federal Government which assist construction activities. For many years mortgage companies have been the instruments through which a large majority of loans insured by the Federal Housing Administration, or guaranteed by the Veterans' Administration, have been originated.

In the short space of time available to me it would try the patience of the committee if I were to attempt to comment on all the sections of H.R. 6028 which are of concern to our association. To avoid doing this, I would like to ask the permission of the chairman to file with the committee a statement of policy on the relationship of Government to real estate financing, which was adopted by the association in April of 1960. This statement covers our own beliefs con

cerning many of the general matters to which this proposed legislation addresses itself.

An examination of the policy statement will disclose that there are some areas where the proposals in the legislation before your committee would be supported by this association and some areas where the proposals would be in conflict with what this association regards as a sound policy on the part of the Federal Government. I am sure, Mr. Chairman, that you and the other members of the committee will recognize that in such latter instances this association would like to be considered as being recorded as not supporting these features of the proposed bill.

However, there are one or two matters which I would like to discuss especially.

1. Title I would authorize 40-year, no-downpayment mortgages for a 2-year experimental period. Mr. Chairman, we believe this proposal, if enacted, would broaden homeownership only at great risk. It would undermine the integrity of homebuyers and the responsibility of mortgage lenders, and in the end it would tend to reduce rather than augment the supply of mortgage funds and hence the possible volume of homebuilding. These conclusions are supported by the illustrative material that follows.

Taking as more or less a typical case, a $12,000 mortgage for full value, at 52 percent interest, in which the land is assumed to cost $1,850 and the house $10,150, we find that, if the house is depreciated over a 50-year period, the outstanding amount of the mortgage exceeds the probable value of the house for 29 years. If the useful life of the house is taken to be 40 years, it will be the 36th year of the mortgage before the owner actually begins to have any equity in the property.

By comparison, in the case of a 30-year, no-downpayment mortgage, an equity accumulation would begin to be possible in the 10th year on a 50-year depreciation basis, and after the 16th year on a 40-year depreciation basis. The depreciated value of the same property with a 25-year mortgage would manage to keep close to an amount slightly above the outstanding mortgage amount even during the first perilous years.

It may be claimed that houses do not depreciate on a straight-line basis and that, consequently, these calculations have no necessary resemblance to the facts. It is true that actual depreciation need not follow any standard curve. It may even turn out that, for some reason or other (aside from added capital investment), there may for a time be an appreciation of value. But this happy situation cannot be assured.

In the absence of inflation, the chances remain that depreciation will take place, and that, in all probability a life period of 40 to 50 years for the average house (upon which, again, no additional value is created by interim investment) is about all that should be counted upon.

Under these circumstances, the owner of our typical house with its 40-year mortgage, confronted with the wish or need to sell at the end of 10 years, might find his remaining mortgage obligation as much as 115 percent of his realizable value and, in the 15th year, as much as 123 percent.

Such a prospect makes little economic sense. It also makes little sense from the point of view of social responsibility. It is an invitation to the borrower to walk out on his obligation. It is worse than an invitation; it may be a necessity. A lending institution that makes such a loan-even though it may be protected by a full guarantee now proposed-can hardly be said to be acting responsibly. The Government itself would almost be guilty of promoting irresponsibility on the part of both borrower and lender—and, to ease its guilt reaction, the next step might well be to protect the borrower from his folly by carrying his defaulted payments.

The 40-year mortgage has other inherent drawbacks. Back of the beguiling low monthly payment is a rugged interest picture. Carried to maturity, the 40-year, no-downpayment mortgagor will have about 150 percent of the original house price in interest. The 30-year borrower will have paid a little over 100 percent, while the 25-year man will have paid less than 90 percent of the house price in interest.

Looking at this another way, the 40-year borrower will, by the end of the 17th year, have paid as much interest as the 25-year borrower will pay to maturity, and as much by the 22d year as the 30-year borrower will pay to maturity.

In spite of this heavy additional load of interest in the 40-year loan at 51⁄2 percent interest, the monthly payment (plus the insurance premium) is only 8 percent less than that of the 30-year loan and 15 percent less than that of the 25-year loan. On a $12,000 mortgage this would mean that the payment on a 40-year loan would be only $5.92 less than that on a 30-year loan, and $11.29 less than that on a 25-year loan. This is a large price for a small advantage, particularly in view of the aggravated risk of loss already discussed.

The 40-year mortgage creates difficulties that go beyond the immediate problems of borrower and lender. It has grave implications for the whole mortgage structure. Currently about 40 percent of the gross supply of mortgage funds (exclusive of refinancing) comes from repayments. Anything that slows down the rate of repayment, therefore slows down the total amount of funds available in the market.

By the time a 25-year loan is paid in full, less than 40 percent of the 40-year mortgage has been repaid, assuming regular amortization. By the time a 30year mortgage has been fully repaid, the 40-year mortgage still has over 55 percent left to pay. It is argued that these calculations are without significance since the average repayment period of home mortgages is much less than the stated maturity.

On the average, this is true, although with the stabilization of prices and the general rise in interest rates (which discourages refinancing), the average period of repayment has been creeping up from an estimated 8 years, a few years ago, to nearer 14 years today.

Taking for the present purpose an assumed average repayment period of 12 years, we find that the 25-year mortgage will, within that period, have been reduced by 1.4 times as much as the 30-year mortgage and 2.7 times as much as the 40-year mortgage. In fact to pay back as much as the 25-year mortgage has been reduced in 12 years would require 23 years with a 40-year mortgage.

Or, put another way, over a 12-year period the same funds would finance 2.7 times as many 25-year mortgages as 40-year mortgages of equal amount, while over 25 years a given fund would finance 1.4 times as many 25-year mortgages of equal amount as 40-year mortgages. In view of this, the promotion of 40-year mortgages would seem to be a strange way to increase the volume of housing. On the contrary, if widely used, it would seem to be a sure way of reducing volume.

The 40-year mortgage has, we believe, almost nothing to commend it. It puts the honest borrower at hazard and encourages default by the irresponsible borrower. It seriously increases the lender's risk unless he is merely to act as the risk-free agent of Government. It deprives the market of a return of funds it needs for the expansion of volume. It is deceptive, unsound, and selfdefeating.

No. 2, title II which authorizes 25-year loans for home improvements is another section about which we have serious concern. However, since these loans are apparently to be unsecured, they would not really be of interest to most of the members of this association. We would thus expect that other organizations in this type of lending field would give the committee better qualified expressions of the practical effect of such a program.

No. 3, there are three other items of general applicability in the bill about which I would like to comment. One provision would authorize the FHA in certain cases to pay insurance proceeds in cash rather than in debentures. A second provision would authorize the FHA to reduce or do away with altogether the payment of any insurance premium. A third provision would authorize the FHA to engage in insurance programs on a "nonmutual" basis.

Any one of these provisions, it seeems to us, significantly alters the whole basis on which the FHA insurance program was founded. This association has, since the FHA started, concurred in the benefits to be derived from the fact that the system was a system of "mutual" mortgage insurance and from the fact that in the case of default mortgagees would receive payment in debentures and not in cash.

We believe that the reasons prompting the Congress to insert these features into the program are as valid today as they were in 1934. We believe that the tendency of this bill to turn the Agency into a different direction is unnecessary and not really in the best interest of borrowers or lenders. We do not believe that lenders need these kinds of "gimmicks" in order to be presuaded to participate in lending programs.

If a lending program will not be used by lenders unless such advantages are made available, we believe that in all honesty it would be far better (if the Congress considers such a program to be essential) if the Government were to do whatever is necessary to finance the program directly. This does not mean that I favor a direct lending program on the part of the Government.

I do not believe such "gimmicks" are necessary. I believe that lenders will and should be expected to take some risks if they are to receive the benefits of an insurance program, among these risks should be those that are a corollary of the present system. It seems to us that programs which the Congress considers necessary can be successfully completed without such a radical departure from what experience has shown to be the essential elements of the FHA insurance program.

No. 4, I would like especially to comment on two items in the list of proposed amendments to H.R. 6028, compiled by the chairman and submitted for use of the committee.

Suggestion No. 6 proposes an amendment which would eliminate the present prepayment penalty now required by FHA on any one- to four-family mortgage. Our association has long indicated to FHA the burdensome nature of its present requirements, and therefore, we would support this amendment in the belief that doing away with the penality will encourage more people to pay off their existing mortgages and thus increase their equity in their homes.

Suggestion No. 9 would give to FNMA a new kind of lending authority. The details of this proposal were contained in H.R. 12603 of the last Congress. This association worked in cooperation with other organizations in doing much of the preliminary work from which the proposals were developed as they appeared in H.R. 12603.

We still believe that having this kind of authority available to FNMA would be beneficial to the construction industry and to the public and would promote our ability to deal with the "ups and downs" in home construction. We can, therefore, support this amendment and urge its sympathetic consideration by your committee.

No. 5. There is one further suggestion which has come to our attention and which I believe does not appear in any of the proposals before your committee. I know it is the intention of Mr. Brown Whatley, a former president of MBA, to appear before your committee this morning and to discuss this proposal, which relates to the insurance of loans for elderly housing by FHA under section 231, and which would allow mortgage limits to be figured in proper cases with relation to the number of rooms in a project rather than the number of units. Mr. Whatley will discuss the necessity of the proposal and we would agree with his analysis and we would, accordingly, urge the sympathetic consideration by the committee of this amendment.

Finally, while I realize it is not within the jurisdiction of this committee, it would be a mistake if I did not point out to the committee that none of the burdens which the Congress places upon the FHA can be successfully met unless at some point the Congress recognizes the needs of the FHA for adequate administrative funds to carry out its responsibilities.

Today the FHA is seriously handicapped because of the unwillingness of the Congress to permit the agency to function, as was contemplated in the original housing legislation, by using a restricted portion of its previous year's income. Backlogs in regional FHA offices continue to grow. The length of time necessary to secure an FHA commitment-particularly on rental housing projects-is presently unworkable and the timelag is getting worse instead of better.

No matter what this committee enacts in the way of housing legislation, it will never meet the needs of the public, unless you can and do provide the agency with sufficient administrative funds to process its workload.

(The charts attached to Mr. Adair's prepared statement are as follows :)