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each individual loan. And the overhead and the opinions of the Government do not assume such tremendous significance as they do in the case of a title II loan, where the Government is asked to examine the desirability of each loan because it is insuring each loan practically up to 100 percent.

Here again I would suggest that the Commissioner be asked to make a study of the FHA operations, as to whether or not we could not develop within the FHA program certain classes of mortgages where the risk of loss would be shared between the individual lender and the Government, instead of having the situation today, which is that the Government takes all of the risk.

I think that in the FHA we can, with one step at a time—not change it overnight, but gradually-on some of these very basic aspects, change its character so that it becomes more of a partnership between the individual lender and the Government instead of as it is at the present time, where the Government takes all the risk and has an insurance fund that is admittedly inadequate.

Now, on title III of the bill you have many provisions respecting the so-called FNMA. Actually, on the matter of special assistance and the management and liquidation of the existing FNMA portfolio, certainly if you were limited just to those two functions there would be no reason for converting the present Government stock, the surplus, the reserves and undistributed earnings, into a new stock issue. As a matter of fact, there might be considerable argument against doing that, because if FNMA takes any losses on its liquidation of its existing portfolio, you would have, by converting the reserves and surplus into stock, in effect deprived the corporation of any cushion out of which to absorb these losses.

So this very elaborate mechanism that has been set up in title III actually rests and stands or falls entirely on whether or not it is really going to function as a secondary mortgage operation. The key to all the changes that are made in the FNMA operation is not special assistance or the management and liquidation of the existing portfolio, but it is whether or not it will be an effective secondary market operation.

On the secondary market aspects of it, I have two basic criticisms. My first criticism is that there is practically no incentive for membership in the facility. When the Federal Reserve System was set up, membership was compulsory on the part of the national banks, and they were compelled to contribute up to a maximum of 6 percent of their capital and surplus. Actually, the Federal Reserve only called for 3 percent of that 6 percent, or half of the 6 percent.

In the case of the Federal Home Loan Bank System, when it was set up, the Federal savings and loan associations were compulsory members of that, originally on a stock purchase of 1 percent of their total mortgages, which has subsequently been changed to 2 percent.

Actually, there is no incentive really for anyone to become a member of this, particularly when the only way you can raise your money is by charging a 3 percent or 2 percent-it doesn't make much difference which it is-to whoever uses the facility, particularly when you put the proviso on it that the only basis upon which you can sell mortgages to the facility, under this section of secondary mortgage operations, is if the facility buys at or below the existing market price.

So, an individual or a corporation comes in to sell mortgages, whatever the cost of selling it absorbs, the 2 or 3 percent of the stock membership, and it takes it and sells it at whatever the going market price is. So, if the market price were 97 on mortgages, and it costs, say, a half a percent to sell, at the 3-percent stock requirement you would be down to selling mortgages to the facility at 32 percent. The result of that would be that I doubt very much if many corporations or individuals would actually use the facility.

But even more important than the problem that, in my opinion, there is no real incentive for membership in it-which I believe will almost foredoom it before it gets started-is the problem that this facility is a very unique kind of an animal. It is operating on the purchase principle, and to my knowledge there has never been a secondary market operation where the facility had to borrow its money from the general public then purchased assets, instead of lending on their security.

The Federal Home Loan Bank System, for example, lends money to its member institutions on the collateral of mortgages. The result of that is that the institution that makes the loan is taking the basic risk. If the price of mortgage shifts, it is in the position of taking the risk of the change in price, and it still has to pay back its debt. But, if a secondary market facility goes in and borrows money and then in turn buys mortgages, it takes all the risks. If the price level goes down, it is stuck; it is locked in. If the price level goes up, it is a hero; it has made some money.

Now, of course the Federal Reserve can operate on that principle, but the Federal Reserve can manufacture its own funds, and there is a very sharp distinction between a secondary market facility that can't manufacture its own funds, that has to go out in the market and borrow its money, and then turns around and does not lend on the securities of mortgages, but actually goes out and buys mortgages. And the result of that, in my opinion, is that the operation is being called upon to do something that it simply cannot do.

There have been central mortgage banks in Europe, and those that have existed there have been on the principle of lending on the collateral. There would be nothing the matter, in my opinion, for a corporation to be set up where it lent money to its members, say, on an 18-month basis, and made collateral funds available to individuals that wished to use the facility. You would have an entirely different principle of operation, a loan principle, rather than an outright purchase principle. Then you have distributed the risk between the borrower and the facility.

When you set up a facility that is going to buy mortgages on an without-recourse basis, as is proposed here, you will have a situation where, in my opinion, the facility can easily get locked in. It is going to be the type of operation where it has to operate, it has to buy low and sell high, or it is not going to function effectively. And a secondary market facility that operates on the borrowing principle, in my opinion cannot also operate on the purchase principle. The CHAIRMAN. Did you testify before the House committee? Mr. WELLMAN. No, sir.

The CHAIRMAN. Are you going to?
Mr. WELLMAN. Yes, sir; this afternoon.

Those are my two basic objections to the present arrangement under FNMA.

I feel there would certainly be nothing wrong with the committee setting up a corporation that could lend money on 12-month or 18month basis, on a collateral-loan principle. And in that way it would, I believe, avoid this basic problem of buying, when it is, at the same time, not making its own money but borrowing its money from the long-term capital market. Actually, I would prefer to see two corporations.

The thing that concerns me the most with the present FNMA operation is that there is a subsidy involved in the existing FNMA market, a subsidy that amounts to about $33 million a year, because FNMA is currently borrowing its money from the Government at a rate of interest lower than the commercial banks or the savings and loans, or any of the other financial institutions pay for long-term money. In fact, it is at a lower rate than the Government itself is paying for long-term money, in terms of savings bonds. And that differential between the 24 FNMA is currently paying, and the rate of interest it is getting on its money, in terms of the mortgages it is holding, is in effect a concealed subsidy.

Now, I must confess I am not sure what section 307 of the bill says when it calls for separate accountability. If that means separate accountability as far as assets and liabilities are concerned, that is one thing. If it means separate accountability insofar as income and expenses are concerned, I think that is a very important difference, because if the net income arising to the FNMA operation, through use of Government credit in effect, could be made available to the FNMA in its secondary market operation, you would never get a true test of how effective this secondary market really was.

My final comment is on title VI, and that will be very brief.

I feel that the changes proposed in the supervisory authority of the Home Loan Bank System is an excellent step forward. I think it is a good example of how the Government, the executive branch, the Congress, and industry, can, over a long period of time, gradually work out these problems. Maybe everybody isn't completely satisfied, but it represents a real step forward. It gives the Home Loan Bank Board a greater supervisory authority than it previously had. It can now use a cease and desist type order, and at the same time it writes into statute law restrictions on the use of that power so that it is not arbitrary.

Thank you very much, Mr. Chairman.

The CHAIRMAN. Any questions, Senator Payne?

Senator PAYNE. No questions.

The CHAIRMAN. Senator Frear?

Senator FREAR. I would like to ask one question: When the FNMA disposes of these assets, it also transfers the risks, does it not? Mr. WELLMAN. That is right.

The CHAIRMAN. Thank you very much, Mr. Wellman. You have given us a lot to think about. We appreciate your testimony.

Our next witness is Mr. Henderson of the American Council on Human Rights.

Do you have a prepared statement, Mr. Henderson?
Mr. HENDERSON. Yes, sir.

The CHAIRMAN. Do you want to read it?

Mr. HENDERSON. I would prefer to talk from it, and I will be brief.

STATEMENT OF ELMER E. HENDERSON, DIRECTOR, AMERICAN COUNCIL ON HUMAN RIGHTS

Senator FREAR. Mr. Chairman, may I ask a question before Mr. Henderson begins?

The CHAIRMAN. Yes, Senator Frear.

Senator FREAR. Will you tell us what the American Council on Human Rights is, briefly?

Mr. HENDERSON. Yes. If you don't mind, it is in the first paragraph of my statement, and I will read that.

Senator FREAR. If that will be a part of the record, you need not restate it.

The CHAIRMAN. Proceed, Mr. Henderson, in your own way.
Mr. HENDERSON. Thank you, Senator.

We have been before this committee a number of times, as you know, over a period of years, and we have talked generally on the same theme.

I would like to make it very clear that our organization is heartily in favor of any and all programs that will help to improve the housing conditions of the American people.

Our particular interest is in housing for minority groups, and that is a very crucial problem with us today. I think your own investigations have shown that to be the case.

The CHAIRMAN. Yes.

Mr. HENDERSON. Now, we supported the Housing Act of 1949 very strongly. We supported all of the provisions of that act. We were quite interested in the slum-clearance features, because we believe that our cities should be more beautiful places in which to live. We believe there should be better homes for the people, and we know all of the consequences of slum life.

I would like to call to the attention of the committee a very important, I think, publication, which was recently released by the Chicago Daily News, based upon a collection of articles in that newspaper on slum conditions in Chicago. I don't ask that this be made part of the record, but I would just like to make it available to the committee in the event any of its members or staff may have a chance to peruse it. One thing those articles bring out-and it is not only true in Chicago, but is true also all over the country in our large metropolitan areas is that a very large percentage of the inhabitants of those areas, which are now designated as 'slums, happen to be Negroes or other minority groups. Slum conditions have had a great effect on their morale, on their outlook on life, and on the treatment they have received from the general population.

So, from that standpoint, we are very interested, and have long been, in slum clearance. We are interested in seeking, as best we can, to have the Congress adopt the best legislation that it can to increase the housing available to minority groups. The need for that is so great today that it would hardly seem to be necessary to document it. But I would like to offer for the record a very brief one-sheet tabula

tion of what Housing and Home Finance Agency seems to feel is the need today among the minority groups, the housing need.

The CHAIRMAN. Is that a part of your statement?

Mr. HENDERSON. No, sir; it is not.

The CHAIRMAN. First, without objection, the statement of Mr. Henderson will be made a part of the record, and all of his remarks will be made a part of the record. And then this memorandum will be placed in the record.

(The information referred to follows:)

STATEMENT OF ELMER W. HENDERSON, DIRECTOR, AMERICAN COUNCIL ON HUMAN RIGHTS

Gentlemen, I have the honor to represent the American Council on Human Rights, a cooperative program of 6 national college fraternities and sororities with over 1,000 undergraduate and alumni chapters on college campuses and in cities throughout the country and with a membership of over 70,000 collegetrained persons. Our 6 constituent organizations have been established from over 30 to more than 40 years and the council itself is nearly 6 years old. The council's purpose is to mobilize the influence and resources of its members to secure the extension of fundamental human and civil rights to all citizens within the United States. The council is a nonpartisan organization containing both active Republicans and Democrats among its members, some of whom hold positions of prominence in the present administration.

We are here to comment upon the Housing Act of 1954. Our council has long been interested in housing and we have appeared before your committee many times. Negroes, in particular, have been severely affected by the low quantity and quality of housing available to them due to a great extent by historic discriminatory practices of the real-estate industry.

We have supported comprehensive legislation such as the Housing Act of 1949 in the belief that it offered an effective approach to our problem. We recognized its deficiencies without appropriate safeguards but felt that with fair and just administration advantages would accrue. We have been greatly disappointed. Comparatively few benefits have come to our group in the 5 years under this measure. On the other hand, the slum clearance and redevelopment features of the act have often been used as a weapon to clear Negro residents from areas where they have lived for generations, build new and modern housing thereon and then bar the cleared Negro residents from renting or purchasing the new houses. The public housing provisions, which we have strongly supported, have not had sufficient appropriations to be effective in meeting the serious needs that so clearly exist.

SLUM CLEARANCE

In spite of our experience under the 1949 act we still favor a program to rid cities of slum and blight and to check the spread of hate if at all possible, We, therefore, support the broader urban renewal program contained in the pending bill. We insist, however, that this program be administered fairly and equitably for all and with no discrimination because of race in the selection of areas for demolition, the displacement of families, or the rental or sale of new housing constructed on the cleared sites. I think it only fair to say that the Government and private developers are inviting extensive litigation if these policies are not adopted.

I would like to offer again an amendment we suggested in 1949: that those persons or families displaced by slum clearance be given priority in any new housing built on the cleared land providing, of course, they meet the economic requirements.

RELOCATION

All evidence points to the fact that the relocation provisions of the 1949 act are not being observed by the local communities nor enforced by the Federal Government. This is one of the most serious aspects of slum clearance.

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