If this is so, why then again make the same mistake which has been. made so frequently in the past? Why set up an entirely new insurance program when the desired aim is to simplify FHA's operations? Therefore, it is our belief and recommendation that section 220 not be enacted, but that FHA be directed to accomplish the desired results under section 203 as it will be amended.

In other words, everything which FHA or this legislation proposes up to date as far as FHA is concerned, is a simplification and the elimination of various different sections which have been unworkable. We see no reason for adding to the complexities. Section 203, with very slight modifications, can take care of it, and not add to it.

Further, the proposed section 221 for the National Housing Act, calling for a loan with no downpayment-except for closing costsand a 50-year maturity, seems to us to represent even further this kind of retrogression. We do not believe this proposed section is necessary, in the light of the generous maximum terms to be provided for the basic FHA operation.

We doubt that it will prove attractive to private lenders even with the proposed increased assumption of risk by the Government. We know that it will add to the complexity and cost of the administration of FHA.

We are confident that pressure soon would be created to extend its provisions to the basic FHA operation. Finally we question the reality of the advantage to its supposed beneficiaries, assuming that the plan will work at all.

The building industry has all too frequently been criticized for opposing public housing while at the same time requesting more and more Government assistance for our own operations in terms of higher interest rates, lower downpayments and longer maturities. Even though I do not believe such criticism has been justified in the past, it would certainly be justified now, if the Mortgage Bankers Association of America as an organization of lenders were either to sponsor the proposed section 221 program or were to fail to point out its inconsistencies as a so-called private-enterprise program.

If this section of the bill is passed we, as lenders, will endeavor to utilize its provisions in accordance with the purposes of the legislation, but we believe its enactment would be against our better judg

ment.

From the borrowers' point of view, the expansion of the loan-tovalue ratio and the extension of the amortization period may be a very deceptive expedient. In the guise of reducing the cost of his housing, it actually increases his housing cost in terms of the interest that he must pay over the life of the loan. For example, on a $5,000 mortgage the difference in principal and interest monthly payments between a 30-year and a 40-year amortized loan-assuming 421⁄2 percent interest-is only $2.85; $25.35 as versus $22.50. But this supposed saving actually results in the difference of paying $5,800 instead of $4,126 in interest over the life of the loan. A decrease of 11 percent in the monthly payment between a 30- and 40-year loan thus results in a 41 percent increase in the total interest payment. This is a high long-term price for a small short-term advantage.

We should also like to point out the very small difference in downpayment requirements between the proposed section 220-or at new

limits under section 203-and this section 221. Under section 220-or under section 203-the downpayment on a $7,000 house would be $350. Under section 221, the cash payment required would be $200. The difference seems almost so little as to question the necessity of setting up an entire new insurance structure.

The basic trouble with section 221 is that it is trying to do what is essentially a welfare job with a device that is not suited to the purpose. Rather than run the risk of destroying the place of FHA in a private credit system, we believe it would be better, if such a necessity exists, to make an outright grant of a downpayment or part of the interest payment, or some similar subsidy; but in any case to recognize such subsidies for what they are, rather than to conceal their true nature by offering them as a normal credit transaction.

In title II of the bill we find a significant departure from both the specific recommendations and the spirit of the advisory committee report. The report urged the creation of a statutory committee charged with the responsibility of seeing to it that at all times the interest rates on insured and guaranteed loans would be kept in line with the general structure of interest rates. The committee was to have no other powers, but action on the authority given to it was to be mandatory.

The idea was that by reposing mandatory action in a committee instead of permissive action in a single individual, the control of interest rates would be removed as well as it could be from political and other special pressures. It was the idea, further, that by keeping the interest in line with the market, FHA and VA loans would at all times receive a more or less constant share of the total supply of mortgage money, and that the general control of credit through Treasury and Federal Reserve action could be counted on, without other means, to exercise sufficient influences on downpayment and maturity to prevent an inflationary use of credit. It may be noted that, in the past, it was the failure to exercise such general control that brought about excesses in FHA and VA financing.

The bill substantially differs from the report. First, it places the control in the President, upon whom the full weight of political pressure can be brought, rather than in a group of designated officials. Second, it makes the action permissive rather than mandatory, thus inducing delay when political expediency counsels against action.

Third, it substitutes a form of selective credit control applied solely to one part-and a minority part-of the mortgage market for reliance on the general controls which affect all parts of the market equally. We believe that this approach is contrary to the basic principle upon which this legislation is based. We believe it substitutes political considerations for market considerations. We believe, moreover, that it creates an undue hazard to the users of the Governmentsponsored systems, whose activities could be completely controlled while those using conventional financing would be totally unaffected. We can see no excuse for this sort of discrimination. We fail to recognize any justification, for example, for applying selective credit controls to institutions making mortgages directly insured by the Federal Government and not applying it to institutions making mortgages indirectly insured by the Federal Government through the insurance of their deposits or share accounts. We do not, of course,

advocate the extension of direct controls to these other institutions; we merely point out the inconsistency.

We oppose all forms of direct, selective, and optional controls, as being contrary to the very essence of "a strong, free, competitive economy." We consider that the control of the price of money and the rationing of the supply of money by official action is just as deleterious to the effective operation of a free economy as official price control or rationing commodities.

The CHAIRMAN. Will you yield just a moment? What do you mean when you say:

We oppose all forms of direct, selective, and optional controls, as being contrary to the very essence of "a strong, free, competitive economy."

What are you talking about?

Mr. CLARKE. The legislation gives maximum terms which can be used continuously. Those controls are the maximum that can be given. It leaves, then, completely to the President the spot underneath that at which he can operate.

That from our point of view, is a selective credit control. In other words, there is no control set up in this bill. Going back now to the days of regulation X, there was control over every type of mortgageconventional mortgages, FHA, and GI loans. This proposes now to give to the President the authority, the modified terms, interest rate terms, length of terms, cash down payment and so forth, to just one segment, namely, the Government insured guaranty programs. It does not touch anything else. In other words, the people who are making conventional loans, are completely free to do as they please within the maximum limits of the law. This permits selective credit controls, in our opinion, all the way through.

At the same time

The CHAIRMAN. You want us to specifically state the terms in the legislation?

Mr. CLARKE. They ought to be in the bill. As to what can be done. The CHAIRMAN. You don't want any flexibility to it at all?

Mr. CLARKE. That is right.

I have another portion on that that I would like to cover here in just a minute. But while I am at it-

The CHAIRMAN. I say, you don't want any flexibility at all.
Mr. CLARKE. That is right.

The CHAIRMAN. You want us to specify the interest rate in the bill? Mr. CLARKE. No. Not the interest rate. We are talking now about the down payments, the percentage of loan to value, to term-whether it is 25- or 30-year and so forth.

In other words, the bill, as written now, gives maximum limits as to terms, and so forth and so on, and also proposes to give the authority of interest rates to the President, which again we think should go back to the procedure as suggested in the President's Advisory Committee, of a specific committee.

The CHAIRMAN. Who will appoint that committee?

Mr. CLARKE. That committee was specified in the President's Housing Committee report as being the Secretary of the Treasury, the Chairman of the Board of the Federal Reserve, the Housing and Home Finance Administrator, the FHA Commissioner, and the loan

guaranty officer of the Veterans' Administration. I think that was

the group.

In other words, we believe

The CHAIRMAN. Would you prefer a committee like that to pass upon this instead of the President?

Mr. CLARKE. That is right.

The CHAIRMAN. These men having been appointed by the President under his direct supervision, you don't think they will do what he tells

them to do?

Mr. CLARK. No. They are specifically charged, on the basis of the President's Advisory Committee report, with keeping interest rates at the market. The proposal as it stands now is, in our opinion, just as bad, and has been in the past, in that there is no one actually specifically responsible for it.

Then, there is one further question in our minds, and this would be equally applicable, regardless of whether there was a Democratic regime or a Republican regime: I question any President wanting to see the headlines in the newspaper, "The President increases' whether President Eisenhower or President Truman or any other President-"the interest rate on veterans." Or, "The President gouged the veterans of the country by increasing the interest rates." The CHAIRMAN. You don't think the newspapers would carry the same story if you had the Secretary of the Treasury and other members of the President's family handy?

Mr. CLARKE, I doubt if that would be the case. Of course, my own personal opinion is that we shouldn't have any top limits in connection with rates, but that seems to be a political impossibility at the

moment.

The CHAIRMAN. I gather what you are objecting to here is giving the President the right to change it. To making it flexible?

Mr. CLARKE. No. I am objecting to having, as far as the terms are concerned, as to the percentage of loan and so forth and so on, anything, except what is spelled out in the legislation.

As to interest rates, we feel that interest rates should be set by a specific group of people who are required to keep interest rates at the market, whether it may be up or whether it may be down. So that you can know specifically, if you will, who is responsible for it.

The CHAIRMAN. You think it would be better to designate this committee in the legislation rather than to give it to the President? Mr. CLARKE. That is right.

The CHAIRMAN. Shouldn't it be people other than those designated by the President, in their official capacity?

Mr. CLARKE. No. Of course, what we are proposing is that these people should be specified in the legislation. Now that means these people would be charged with the responsibility of maintaining the market rate.

The CHAIRMAN. Would you give them the right to vary it each month if they wanted to?

Mr. CLARKE. As they saw fit.

The CHAIRMAN. Up and down?

Mr. CLARKE. That is right.

The CHAIRMAN. Nobody would know for any specified period of time whether it would be 4 percent or 5 percent or 3 percent?

Mr. CLARKE. That is right.

The CHAIRMAN. Give them the right to change it overnight? Mr. CLARKE. That is right. And it is just as bad to have it too high as it is too low.

Mr. NEAL. May I make a comment. I am Samuel Neal and I am general counsel of the Mortgage Bankers Association.

I think the point in this, Senator, is that the President's Advisory Committee, after considerable study, agreed that interest rates ought to meet market requirements, whether they are interest rates on conventional loans or FHA or VA loans. They figured that the best way to assure that taking place, outside of political considerations, was to create a statutory committee, that would be named in the law and which would be required, from time to time-the exact interval being undetermined-to make these rates meet market conditions, whether that meant raising them or lowering them.

The bill departs from that principle. What it does is to give the President the authority and the responsibility for varying rates, but it doesn't set up any standards. It doesn't require action at any given time, and it doesn't pinpoint a committee whose considered judgment as a group, as to what market conditions were, would be used. That is one way it departs.

The second way it departs is that it puts in this realm of flexibility things which up to date have been fixed by statute. Up to date, for example, when you wanted to increase the amount of a maximum FHA loan, you specified the maximum, and then you let FHA say whether they would insure loans up to that figure.

This bill provides that no new maxima shall be fixed unless the President affirmatively fixes them.

It also provides that he may at any time vary the ratio of loan to value, vary the maturity of the loan.

Those are exactly the same kind of controls and the same kind of authority that the President had under regulation X. This Congress, including most of this committee, voted to terminate that authority when the necessity for it passed.

One thing that is even worse about this proposal, to us, than the authority in regulation X, was that in regulation X, if the President exercised his authority, he had to exercise it for all types of credit transactions FHA loans, VA loans, or conventional loans.

Under this authority, if he wanted to exercise his credit control authority to cut down materials and maturities, the only thing he could exercise it on would be on FHA and VA loans. That would be a regulation of a part of the market instead of all of the market.

Therefore, we suggest that this legislation go back to the principles of the President's Advisory Committee, and specify maxima, so far as terms of the loan are concerned, and let a committee not only have the authority but have the responsibility on the interest rate problem. The CHAIRMAN. I think we might put into the record at this point, from the President's Advisory Committee on Government Housing Policies and Programs, their recommendations to this subject, under the title "Adjustment of Interest Rates to Market Conditions." That will be found on pages 346 and 347.

We will place that in the record at this point so that we can get to it very easily.