HOUSING ACT OF 1954

FRIDAY, MARCH 19, 1954

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to recess, in room 301, Senate Office Building, at 10:10 a. m., Senator Homer E. Capehart (chairman) presiding.

Present: Senators Capehart, Bricker, Bush, and Payne.

The CHAIRMAN. The committee will please come to order. Our first witness will be Mr. Shanks, president of the Prudential Insurance Co. of America, who is here representing the American Life Convention and the Life Insurance Association of America.

Mr. Shanks, you have a long prepared statement. Do you wish to read it, or do you wish to talk extemporaneously from your statement, and then place the statement in the record? Whatever your pleasure is.

STATEMENT OF CARROL M. SHANKS, PRESIDENT, AND JOHN G. JEWETT, VICE PRESIDENT, PRUDENTIAL INSURANCE CO. OF AMERICA; AND MILFORD A. VIESER, VICE PRESIDENT, THE MUTUAL BENEFIT LIFE INSURANCE CO. OF NEWARK, N. J., AMERICAN LIFE CONVENTION AND LIFE INSURANCE ASSOCIATION OF AMERICA

Mr. SHANKS. I would like to read it, sir, and make a few extemporaneous statements as I go along.

The CHAIRMAN. You proceed in your own way.

Mr. SHANKS. My name is Carrol M. Shanks. I am president of the Prudential Insurance Co. of America, which has its home office in Newark, N. J. I am also chairman of the joint committee on economic policy of the American Life Convention and the Life Insurance Association of America, 2 associations of life insurance companies with a combined membership of 243 companies holding approximately 98 percent of all life insurance company assets in the United States.

It is in the capacity of chairman of this joint committee that I testify here today on behalf of the life insurance business. My associates are Milford A. Vieser and John G. Jewett.

Mr. Vieser is vice president of the Mutual Benefit Life Insurance Co. of Newark, N. J., and is in charge of his company's mortgage loan and real estate investments. He is also chairman of the joint committee on housing and mortgage lending of the two associations mentioned earlier. Mr. Jewett is vice president of the Prudential Insur

ance Co. of America, and is in charge of mortgage loan and real estate investments. He is also a member of the joint commitee on housing and mortgage lending. We appreciate the opportunity afforded by your invitation to appear here today to discuss S. 2938.

The life insurance companies are naturally greatly interested in sound national policy with respect to housing and mortgage lending. They are vitally concerned about improvement in standards of health and well-being of the American people, in which good housing plays such a prominent part.

Beyond this, they are well aware of the important role which a thriving residential construction industry plays in general economic prosperity. At the same time, they have an equal interest in seeing that housing is not over-produced relative to demand, thus causing all the difficulties which must eventually follow. More directly, the life companies are interested in national housing and mortgage lending policy because of their important position as investors in home mortgages.

Before turning to specific discussion of the bill, it will be helpful, I believe, to review briefly the extent of life insurance company investment in residential mortgages.

For many years, home mortgages have been an attractive investment, and the activities of the life companies in this field have been especially noteworthy. During the 7 years 1947-53, inclusive, the life companies of the Nation increased their holdings of mortgages on 1- to 4-family residences from $2.6 billion to $13.1 billion, or a net increase of $10.5 billion. At the end of 1953, they held 20.1 percent of the total outstanding mortgage debt on 1- to 4-family residences.

The life insurance companies are by far the most important investors in Government-insured and guaranteed mortgages. Their holdings at the end of 1953 of $6 billion of FHA mortgages and $3.6 billion in VA mortgages, for a total of $9.6 billion of insured and guaranteed mortgages, greatly exceeded such mortgage holdings by the other principal institutional investors. During the period 194753, inclusive, they expanded their holdings of FHA mortgages by $4.8 billion and their VA mortgages by $3.3 billion, by far the greatest increase of any investor type.

Finally, the life insurance companies held close to $3.9 billion of mortgages on multifamily units at the end of 1953, a substantial part of which were accounted for above in Government-insured and guaranteed holdings. These holdings are above and beyond the $450 million invested directly at the end of 1953 in housing projects.

Adding together holdings of mortgages on 1- to 4-family residences and mortgages on multifamily dwelling units, the life insurance companies had total residential mortgage holdings of $17 billion at the end of 1953.

This brief summary indicates the substantial role of life companies in housing and mortgage lending and demonstrates the readiness of the companies to aid the American people in the long-term financing of their housing requirements.

Despite the sharp increase in residential mortgages in recent years, life insurance companies have by no means invested all of their funds in this field. Instead, they have continued their traditional and sound policy of building a well-diversified investment port

folio, including the bonds and stocks of industrial enterprises, public utilities and railroads, Government securities, State and municipal obligations, commercial and industrial mortgages, farm mortgages, foreign securities, and real estate.

Financing provided by the life insurance companies has played an immensely important role in the postwar expansion of industrial, public utility, and transportation facilities which is of cardinal importance in our military preparedness program. The building of new plants and equipment all over the country has, at the same time, given a great stimulus to housing demand.

I think I ought to mention, there, Mr. Chairman, that in connection with their investment throughout the country, there is an interesting pattern, and that is that the northern section, generally speaking, tends to generate surplus capital; the companies take in their premiums there, and they invest in the South, the Southwest, the West, and in those areas of the country that do not generate as much capital and are calling for capital.

In our company, and in the industry generally, we sometimes invest as much as 3 or 4 times what we take in in premiums in those newer sections, the money, of course, coming from the old sections which are throwing off capital.

Another thing I want to point out is that as an industry, we represent the small people of the United States. The average amount of capital, of reserves, which we have for each one of our policyholders, is something under $400. They are the small people of the country. We have 30 million of them.

The industry has 90 million policyholders, and the average amount of reserve per policyholder is about $700.

So that we are investing as best we can for some 90 million people of the insurance policyholders.

With this background, I would like to comment on the provisions of S. 2938. We are in full accord with most of the ideas put forward in the bill which we believe are sound and should be supported. Many of the bill's provisions follow closely recommendations which the life insurance business put forward last summer in our own statement entitled, "National Policy on Housing and Mortgage Lending-a Statement of Life Insurance Company Views.' With your permission, I would like to submit this statement for the record.

We like the effort which is made in a number of sections in the bill to shift from direct Government action to reliance on private financing under the FHA insurance program. This is particularly true in connection with the urban renewal and slum clearance program in title IV, and in the proposed new section 220, which I shall touch on in more detail later.

We are also in general accord with the provisions of title II, which would give the President the power to establish flexible maximum interest rates on VA and FHA mortgages loans, and likewise, discretion in establishing other mortgage terms on a more flexible basis. We think that flexibility is very important.

We believe, however, that in the use of these discretionary powers the President should be guided by the goal of keeping VA and FHA mortgage terms competitive in the market and that these powers

HOUSING ACT OF 1954

should not be used as a means to employ housing policy as a pump primer for the entire economy.

The CHAIRMAN. If you will yield just a moment, I presume you know that is one of the controversial sections of the bill.

Mr. SHANKS. Oh, yes, yes, indeed.

The CHAIRMAN. We have had witnesses who maintained that the Congress ought to be specific as to what the interest rate and terms will be. Period. That is it. Others feel that we ought to give the President flexibility, as the bill calls for. And then we have had some testimony recommending setting up a board of five to handle the interest rates. But you are approving the bill as written?

Mr. SHANKS. We are approving the bill as written, but I ought to say that if it seems better to have a committee, we would just as soon have a committee. I think it is the flexibility that is important.

The CHAIRMAN. In other words, what you are interested in is the idea of the flexibility or setting the rate in line with the general market conditions in respect to interest.

Mr. SHANKS. That is right. So the money will flow where it should flow.

The CHAIRMAN. You don't care whether it be a committee of five or the President?

Mr. SHANKS. No, I don't. I would like to have it, of course, where they could be as objective as possible, and with as few pressures as possible. Whether that would be a committee or the President-some think the committee would be better.

The importance of that flexibility is shown by the fact that in 1953 the FHA and VA rates were out of line with the market and consequently, the amount of money going into those mortgages went down drastically. It was changed in May of 1953, following which money flowed back into investment in VA and FHA mortgages.

During the time the money was not going into the VA and FHA mortgages-because they were out of line-the money was going into the conventional mortgages. You see, we, as investors, have to get the best rate where we can, because we are investing for all these people and we feel keenly our responsibility. And where you can get a better rate on a conventional mortgage, that is where the money goes. So, when FHA and VA came into line, it flowed back into investment in the mortgages and it showed very graphically in those figure during

1953.

The CHAIRMAN. I have been a life policyholder for many, many years in quite sizable sums. I have considerable cash value on all my life insurance, so I am glad to know you adopt that policy.

Mr. SHANKS. We do the best we can to get good interest rates commensurate with safety.

We also think that most parts of title I deserve our support. For example, the provisions of section 101, dealing with property improvement and repair loans, are sound. Likewise, we agree that it is sensible and desirable to give the same treatment to both new and existing homes under the FHA insurance program.

We think the authorization of FHA insurance of advances in openend mortgages has much to commend it. Moreover, we favor a number of provisions in title I which serve to simplify the FHA insurance system, but we are disappointed that the bill does not provide for

eliminating the duplication of effort by the FHA and the VA in processing mortgages, which is so costly to not only the mortgage borrower but also the lender and the American taxpayer.

The CHAIRMAN. You weren't here a couple of days ago when we instructed the VA and FHA to get together on that very matter. We told them we expected them to get together before we started writing up the bill; otherwise, we might write some specific instructions into this legislation.

I agree with you it doesn't make sense to me that you have FHA and VA out here setting 2 different standards, and having 2 different policies, one in many respects directly opposed to the other.

Mr. SHANKS. That is the way we feel.

The CHAIRMAN. Yet, they have been doing it. We have instructed them to get together and come up here with some recommendations on simplifying and coordinating and cooperating, making their instructions and procedures and policies the same, if it is possible to do so. I think it is-at least I am sure it can be done up to 90 percent. Mr. SHANKS. I think it is very important.

The CHAIRMAN. We have already talked to Mr. Cole about it, and he is working on it at the moment.

Mr. SHANKS. Good.

This is but a partial list of the things we like about the bill. However, we are apprehensive about some of the broad philosophy which runs through the bill. This takes the form of a general liberalization of insured and guaranteed mortgage terms to a point which we think raises a serious question of conflict with the tenets of sound financing. Likewise, we believe that the bill leans too far in the direction of accepting the objective that the volume of housing starts must be kept going at a peak level at all costs, and that the Government should use its proposed control over insured and guaranteed mortgage terms to accomplish this objective.

We would like to see in the bill a recognition that regardless of a desire to stabilize the housing industry at a high level, the number of housing starts each year must bear a relationship to such basic forces as the rate of family formation, the need for replacement of clearly substandard housing, and the willingness to buy.

Whatever the general objective of stability, there must be leeway for the inevitable price and production adjustments and readjustments which are so healthy in our free market economy. In brief, we believe that Government policy should aim to help level off the peaks and fill in the valleys in home building, but at the same time it should permit building to be responsive to market forces.

I would now like to consider the new sections 220 and 221. Section 220, providing for a carefully programed system of rehabilitation and neighborhood conservation housing insurance, deserves the support of all institutional investors in that through the use of FHA insurance, it provides a workable method for private financing to aid in arresting decay and blight in our cities.

If the section is carefully administered and the various safeguards written into the bill are observed, the program has real possibilities for attracting private financing on a sound basis. As a general rule, life-insurance companies question the soundness of an amortization period running as long as 30 years, as provided in this section, but

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