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Mr. KING. Well, the text, here, is really a brief in itself. I would prefer to I could read it very fast.

Senator BENNETT. You go ahead, then, and read it, at your convenience, and then we can talk about it.

Mr. KING. Affected directly would be much of the control over the administration of the Servicemen's Readjustment Act now vested in the Administrator of Veterans' Affairs. Section 201 of the bill would transfer from the latter to the President the fixing of rates of interest, fees and charges, ratios of loan to value, and maximum maturities on home loans guaranteed or insured under the Servicemen's Readjustment Act of 1944, as amended.

Affected indirectly, is the unique position in which existing laws have placed the World War II or Korean veteran who is desirous of buying a home, by making it possible to raise all prospective home buyers to a virtually competitive level.

For example, sections 104 to 125 of the bill would amend title II of the National Housing Act to increase the maximum insurable mortgage and the maximum permissible term of the mortgages insurable under section 203 of the National Housing Act.

The permissible 30-year maturity which heretofore was applicable only in the case of low-cost housing, featuring mortgage amounts up to $6,650, would be applicable to any mortgage eligible for FHA insurance. Other liberalization would be effected by section 104 of the proposed bill by increasing substantially the maximum loan to value ratios heretofore authorized.

The increases in loan to value ratios are set forth in the printed table on page 4 of the Senate committee's summary of the provisions of the Housing Act of 1954.

The higher ratios thus proposed affect both existing and proposed housing, the increase over present limits being greater in the case of existing housing. Formerly, the maximum loan on an existing unit was 80 percent of the FHA valuation, but under the bill, the maximum loan could be as much as 95 percent of the valuation in the lower price ranges.

These proposed increases in loan to value ratios and the corollary reduction in the cash downpayments, together with the increase in the permissible term of the loan will make considerably more liberal financing terms possible for prospective home purchasers under the FHA program.

This, of course, would tend to dilute the preference which has been available to veterans obtaining GI financing, since the amendments would place nonveterans in virtually an equal position in respect to housing credit terms. The extent to which such dilution would take place depends, of course, upon whatever action may be taken by the President in exercising his authority under section 201 of the proposed bill, as under the bill, the President must authorize the more liberal terms provided for before they become applicable to the FHA program.

On the other hand, it is noted that the only action which the President could take in respect to VA-guaranteed home loans would be to make GI loan terms more restrictive. If the FHA program is liberalized as contemplated in the bill, all eligible veterans, including recent veterans of the Korean conflict, would no longer enjoy the

preferred position that heretofore has been theirs in respect to housing credit.

Inasmuch as it is not known to what extent the President might find it expedient to liberalize the FHA program, the exact effect of the proposed legislation upon the preferred position of veterans in the housing market cannot be measured at this time.

Senator BENNETT. May I stop you at that point? I notice you carefully refrained from making any recommendations for amendments to the program which may offset some of this dilution to which you refer. Do you have a comment on that?

Mr. KING. Later on, I make a comment, but I don't propose a specific provision to be substituted in the law."

Senator BENNETT. If there is discussion later on, I will withhold the next two questions, and we will go on.

Mr. KING. Section 125 of the proposed bill would add two new sections-223 and 224-to the National Housing Act. Section 224 would authorize insurance by FHA of advances to a mortgagor made pursuant to the provisions of a so-called open end FHA insured home mortgage. The type of open-end mortgage this contemplates would provide that loans or advances in addition to the original loan secured by the mortgage may be made to a mortgagor for improvement, alteration, or repair of the home covered by the mortgage without the necessity of executing a new mortgage.

The FHA insurance formerly-up to the present-was not available to cover such advances made under the terms of an open-end mortgage. Such liberalization of the FHA insurance would have the effect of authorizing the insurance of advances which, generally speaking, are to protect or improve the security for the mortgage.

Under present VA supplemental loan procedure, open-end mortgage provisions may be utilized for such purposes, but additional guaranty coverage of the advances made under open-end mortgages is available only to the extent that the veteran has unused guaranty entitlement available.

Senator BENNETT. May I stop you right there? You are saying to us, then, that if the veteran was originally granted a mortgage of a given amount-say $9,000-and he wishes to open it up again, after he has made certain payments to reduce the principal, he may only get additional loans up to the original $9,000 and use up the amount that he has repaid?

Mr. KING. No, sir. The key factor which I endeavor to bring out there is that, irrespective of the amount of the additional lending, or additional loan, there is no inducement for the lender to incur the additional risk of making him that loan, because we can't increase the guaranty amount on the higher loan amount.

Senator BENNETT. Then I have been confused by the phrase, “unused guaranty entitlement." I had assumed that "unused".

Mr. KING. Well, we have a very complicated set of statutory limits, as you know, in this $2,000, $4,000, $7,500 guaranty. But prior to April 20, 1950, the maximum guaranty available to a veteran was $4,000. That would allow a 50-percent guaranty on an $8,000 loan. It would allow a 333-percent guaranty on a $12,000 loan.

Now, those veterans that got those loans-many of which have been well paid down-cannot get an increased guaranty entitlement to put

on that loan to induce a lender to make a supplemental loan, if that loan is now desired for the purposes of modernization and repair. Senator BENNETT. I see that. I was confusing the word "guaranty entitlement" with your top limit on it.

Mr. KING. Well, when Congress put that $7,500 guaranty benefit in, in 1950, they still did not put a limit on the loan itself. But it made that guaranty very restrictive. The $7,500 factor could be used only once by a home purchaser. He couldn't use $5,000 of it, and come in again on a succeeding transaction and get $2,500. That was buttoned down very closely in the law, Mr. Chairman, at that time. What we are stating here, in effect, is with a lot of the influences that dictated that action some years ago removed, and with recognition now being given to the desirability in the case of the FHA mortgage of liberalizing in this regard, "We are now prepared to let a couple of the straps off the bag," and suggest to the committee that it might want to give its attention to liberalizing the application of this $7,500 guaranty at this time, so that it will encourage these loans which are needful and meritorious in their nature, to be made to qualified veterans.

Senator BENNETT. That is, in effect, the meat of the suggestion contained in the next page.

Mr. KING. Yes, sir, precisely.

Senator BENNETT. Would you like to get together with the staff of the committee, at your earliest convenience, and suggest language for an amendment?

Mr. KING. I would be very happy to do that.

Senator BENNETT. A change which would carry that out.
Mr. KING. I would be very happy to do that.

(The amendment referred to follows:)

Amend section 501 (b) of the Servicemen's Readjustment Act is amended to read as follows:

(b) Any loan made to a veteran for the purposes specified in subsection (a) of this section 501, may, notwithstanding the provisions of subsection (a) of section 500 of this title relating to the percentage or aggregate amount of loan to be guaranteed, be guaranteed, if otherwise made pursuant to the provisions of this title, in an amount not exceeding sixty percentum of the loan: Provided, That the aggregate amount of any guaranties under this title shall not exceed $7,500, nor shall any gratuities payable under subsection (c) of section 500 of this title exceed the amount which is payable on loans guaranteed in accordance with the maxima provided for in subsection 500 of this title.

Senator BENNETT. Then, I suppose you are through with your reference.

Mr. KING. That would bring us over to the top of page 7, Senator. Senator BENNETT. Or the middle of page 6.

Mr. KING. I am sorry; I was reading from notes. Mr. Brownstein tells me they changed the page when they typed it. It is page 6.

Section 201 of the bill authorizes the President, on the basis of reviews of conditions affecting the mortgage investment market, and after taking into consideration conditions in the building industry and the national economy, to establish from time to time the maximum rates of interest for various classifications of residential mortgage loans insured or guaranteed or made under the National Housing Act, as amended, or the Servicemen's Readjustment Act of 1944, as amended.

It is provided that no such maximum rate of interest shall, at the time established by the President, exceed 212 percent plus the annual rate of interest determined by the Secretary of the Treasury, at the request of the President, by estimating the average yield to maturity, on the basis of daily closing market bid quotations or prices during the calendar month next preceding the establishment of such maximum rate of interest, on all outstanding marketable obligations of the United States having a maturity date of 15 years or more from that first day of such next preceding month, and by adjusting such estimated average annual yield to the nearest one-eighth of I percent.

It should be emphasized that, under this provision, the figure arrived at by the formula approach is a maximum-a ceiling above which the President may not go. There is, of course, no compulsion implied in the bill for maintaining the effecting FHA and VA rates at or close to the ceilings. During the past several years, a 22-point spread generally was in excess of that deemed to be necessary to attract mortgage investment capital.

However, in view of the apparent purpose of assuring the maintenance of adequate flexibility, it would be most difficult to build a conclusive case for substituting a different spread-either higher or lower in the formula. But in view of the anticipated contentions of some that the maximum should be the minimum as well, it would appear worthy of consideration that the proposed authority, if vested in the President, should be so vested without prescribing any limit. or formula.

It is also desired to point out that in view of the considerable range of geographic disparity which has been demonstrated in the market in respect to the flow of mortgage money into the various areas of the country, it is apparent that incident to fixing of rates under the proposed new authority, there will be for consideration the matter of whether differing rates should be established.

It would be clarifying if the Congress were to indicate expressly whether or not it contemplates that the establishment of such varying rates would be within the authority prescribed in the bill.

Senator BENNETT. Let's stop at that point for a minute. Has it been the experience of the VA that service to the veteran would have been improved if there had been provision for a difference of rates on an area or location basis?

Mr. KING. No, sir; we do not think so. It is practically an untried field, or recourse incident to a national program. It will be a little brittle. It will, perhaps, encourage the flow of mortgage money across boundary lines in unpredictable patterns. In any event, it is an administrative problem which is posed when you are enabled to fix rates, which no one wanted to tackle or has tackled in the past. But there has been considerable talk, incident to FHA and VÂ rates over the past couple of years, that maybe some such geographic pattern of variance should be established. We thought that in deliberating upon this proposed authority that the question should be posed.

Senator BENNETT. There isn't any question in your mind but what there is in existence a variation of actual rates in various parts of the country?

Mr. KING. Mr. Chairman, there is a considerable variance in the supply or flow of money into given areas, and, of course, basically, supply against demand determines rates.

Senator BENNETT. That is right.

Mr. KING. Now, I would think there should be discussion by the committee as to whether they are talking about something here or conferring authority here which they understand will contemplate or assure a single national rate, and let discounts and premiums adjust these variances, or whether they intend that this thing be handled on a regional basis.

Senator BENNETT. Well, there are two problems here in the material which you have just discussed. There is the problem of the device by which the flexible ceiling is set. The device of saying 22 percent above the actual going rate that the Federal Government pays for money on its long-term paper. And I note that you express the feeling that over the past several years the 21/2-point spread would seem to you to be a little more liberal than was necessary, or required by the history. The record contains the charts submitted yesterday by the FHA, which indicated that prior to 1950 there were many occasions where a 2-percent rate would not have, or 2-percent variation above the Federal Government's normal rate, would not have provided enough leeway or ceiling to permit the rates to rise where they were actually placed at that time.

Now, I am confused a little. The 2-percent rate through the 1940's would have been inadequate, the 2-percent variation. The 212-percent variation at the present time seems more than adquate. I think you would agree that it is better to have an adequate variation than to have one that has been proven within the last 10 years to be inadequate. But that is a problem that is not of vital moment. Maybe we should be more concerned with the device set forth, to make it possible for the rates to be changed as the market condition changed.

You have had a fixed rate, haven't you? Haven't we had to legislate in order to change your rate?

Mr. KING. Yes, sir. We had a rate that we didn't change from 4 percent until fairly recent date, about a year ago.

Senator BENNETT. That is right.

Mr. KING. And many were of the opinion that we should have exercised our statutory power to raise the rate to 44 or to 41⁄2 percent before we did so. However, we presented, from place to place, a pretty good argument, designed to prove the contrary.

Senator BENNETT. Well, in your attempt or your design to prove to the contrary, you worked on the basis, as I remember it, of your national gross totals. Some of us who come from States where there is an inadequate supply of money, at least of the rates that are holding the eastern money centers, were concerned with the fact that your existing rates couldn't call out, at least on the basis of bank participation, enough VA loans. We were dependent entirely on your direct loaning program out there, which we felt was inadequate.

Mr. KING. Yes, sir.

Senator BENNETT. Now, you suggest to us, though, as I understand it, you do not specifically recommend to the committee, but you suggest the advisability of studying the question of regional variations? Mr. KING. Yes, sir.

Senator BENNETT. Thank you. May I ask one more question? Do you have any figures that would assist the committee in such a study? Mr. KING. We would be glad to supply supplementary statistics or comment as to our experience with these rates.

44750-54-pt. 1-13

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