it is our view that the life-insurance companies generally will find the proposed section 220 acceptable in its present form and will, therefore, purchase these mortgages.

The life insurance business also believes that section 221, providing for a system of mortgage insurance for relocation housing, also has real possibilities if certain amendments are made. The most glaring defect of the proposal is the provision for a 40-year amortization period. We believe that section 221 mortgages could be made acceptable to private financing institutions, without appreciably raising the monthly carrying cost on such mortgages, by reducing the amortization period to 30 years, and by tightening the insurance provisions to guarantee the investor against loss at foreclosure. To illustrate our point, if we assume a $7,000 mortgage at a 42 percent_rate amortizable in 40 years, at the end of 5 years only $350 would have been paid in amortization; at the end of 10 years only $791; and at the end of 20 years only $2,037, with $4,963 of the initial loan still outstanding.

As is obvious, the rate of amortization is exceedingly slow, in fact, so slow that the physical depreciation and obsolescence of the property would undoubtedly be greater than the amortization. This exposes the investor to serious risk which no lender operating on sound lending principles would be able to assume. If we assume a $7,000 mortgage, also at a 42 percent rate, but with a 30-year amortization period the amount amortized at the end of 5 years is $623; at the end of 10 years $1,400; and at the end of 20 years, $3,598. This rate of amortization, although still quite slow in the eyes of many institutional investors, makes the loan much more acceptable.

To follow through with the illustration, the monthly carrying charge-interest and amortization-on a $7,000, 41⁄2 precent, 40-year mortgage is $31.50. The monthly carrying charge on the same mortgage, but with a 30-year amortization period, is $35.49. Thus, the shorter term, making the loan sound, involves only $4 more per month in the mortgagor's payment.

More important, if the loan is written on a 40-year basis, the mortgagor must pay total interest of $8,120 over the life of the loan, as compared with total interest of $5,776 if the loan runs for 30 years. Accordingly, the 40-year loan will cost the homeowner $2,344 more in the form of interest, which is a heavy price to pay for the extended maturity. For these reasons, we believe that the 40-year loan is socially undesirable, and we urge strongly that section 221 loans be placed on a 30-year basis.

By the very nature of the loan, the default experience on section 221 loans will be much less favorable than under most other FHA loans, so that the investor must be prepared for more difficult collection problems and larger percentage of foreclosures.

We believe, therefore, that to make the section 221 loans acceptable to private investors, provisions should be included to limit the lender's out-of-pocket losses at the time of foreclosure. This is a special loan program where the risk must inevitably be great, and it is, therefore, necessary to limit the losses of the lender.

It would be most helpful, as a practical matter, to include in section 221 the same provision in effect with regard to section 608 loans, namely, that upon default the investor would have the option to as

sign the mortgage to FHA and to receive debentures equal to 99 percent of the unpaid balance.

We do not believe that the amendments we have suggested will. interfere with the basic objectives of section 221. They will, however, make the program generally acceptable to life insurance companies and, we feel confident, other institutional investors. If these amendments are made, we are confident that life companies and other institutional investors will purchase section 221 mortgages.

I would now like to turn to title III, calling for the rechartering of FNMA. We are firmly and vigorously opposed to the provisions of title III with the exception of those providing for the liquidation of the existing FNMA portfolio.

We believe there is only one valid reason for a Government program as provided for in title III; namely, to assure the general availability of insured and guaranteed mortgage credit in small communities and remote areas and for minority groups. We are confident this can be done by private financing institutions, themselves, through voluntary but well organized effort, without the Government intervention provided for in title III. I shall presently explain how such a voluntary plan would operate, but before doing so, I would like to outline our reasons for opposing title III.

We are opposed in general to title III because, first, it provides for little more than a rechartering of FNMA to revive its power currently to supply Government funds in the mortgage market. Actually, it goes further in the direction of direct Government participation in the mortgage-lending field than does the existing FNMA program.

Secondly, it reflects a philosophy that housing must be kept going at a boom level, regardless of basic market forces with respect to the demand for housing. The United States has been through a boom in housing production and a steady rise in prices of housing, and basic market forces now suggest the need for a moderate downward adjustment in output and prices. We believe that it would be preferable to have a moderate adjustment now, rather than a major break in the future, which seems inevitable if we continue to apply artificial stimuli at this time.

I think I ought to say for the first 2 months of this year, in our own company and industry generally the mortgage commitments for loans have been running well ahead of the first 2 months of last year, so I don't think there will be too much of a downward adjustment.

Thirdly, provisions of the title, through continued and strengthened Government propping of the housing industry, will retard technological improvements in housing and thus will delay movement toward a lower housing cost basis. Finally, if, as under this title, the Government tries to perpetuate boom conditions in housing in the face of a needed readjustment, it will have an adverse effect on the occupancy and prices of our existing stock of housing, estimated at close to $200 billion, on which the Government has a contingent liability of nearly $29 billion in the form of mortgage insurance and guaranty.

The specific reasons which we have for opposing the special-assistance function in title III are as follows:

(1). We do not believe that it is necessary for the Government to embark upon the task of direct assistance to special insured or guaran

teed mortgage programs. As we indicated in connection with the proposed sections 220 and 221, if the amendments we have suggested are accepted, then private investors will purchase the mortgages under these sections.

(2) In addition to the objective of supporting special programs, it is provided that the assistance function should be employed as needed to retard or stop a decline in mortgage lending and home building. We do not believe that this function is soundly conceived and it certainly is not necessary. It puts the cart before the horse in that if homebuilding activity goes into a decline it will certainly not be for lack of available private mortgage credit on a liberal basis. The reasons for any decline will be rooted in the demand for housing and will not derive from any lack of available funds.

(3) The function of the special-assistance provision will, in effect, involve direct Government lending, with funds coming directly from the United States Treasury. The initial amount may not seem large, but we have seen how easy it was to expand FNMA once it came into being.

(4) This program is on the direct road to public control of housing and home financing. It goes beyond the Government insurance and guaranty function and is a long step in the direction of comprehesive public control. We feel that it is incompatible with the free-enterprise objective which has often been mentioned in the bill.

(5) Under this function there is no provision for a 3-percent nonrefundable contribution to be required of sellers of mortgages to FNMA. The absence of this requirement, which is provided for under the secondary market function, certainly makes the dumping of mortgages with FNMA a still greater risk.

For these reasons we think that not only is there no need for the special assistance function but it is a dangerous threat to the private financing system. We are firmly opposed to it.

Before I discuss our proposal for a voluntary effort to make residential mortgage credit generally available in all communities throughout the country, I would like to outline why we are also strongly opposed to the proposed secondary market function of the rechartered FNMA, as follows:

(1) Basically, there is no need for a Government secondary market function. Readily available statistics show the tremendous job the private mortgage financing system has done throughout the postwar period. During the past 5 years, even in 1952 and 1953 when there was supposed to be a mortgage stringency, the number of new nonfarm dwelling units started has exceeded 1 million per year.

Incidentally, when that stringency was supposed to be in effect. I know our own company put out more money in 1953 than we did in 1952.

The average number of starts per year in the 6-year period 1948-53 inclusive is 1.112.000. Nonfarm mortgage debt on 1-4 family houses increased from $18.5 billion at the end of 1945 to $65 billion at the end of 1953, or an increase of 31⁄2 times. Within this total increase of $46.5 billion, financial institutions such as life insurance companies, mutual savings banks, savings and loan societies, and so forth, increased their holdings by nearly $41 billion. During the period 1948-53 inclusive, the total of nonfarm mortgage recordings in

amounts of $20,000 or less has averaged over $15.5 billion per year, and the average in the past 3 years has been over $18 billion. All but a small fraction of these mortgages have been absorbed by the private market. In reviewing these figures we can see little evidence that private mortgage financing has been less than fully adequate throughout the postwar period. We believe the figures prove that the savings institutions, the commercial banks, particularly through their warehousing loans, and individual investors have provided an admirable private secondary market and that FNMA is not needed for this pur

pose.

(2) Under the provisions of title III, the proposed FNMA secondary market function is a direct Government operation in every respect, with the provision that $70 million of its stock is to be subscribed by the United States Treasury and with up to $1 billion of its obligations purchasable by the Treasury.

(3) The most extensive use of FNMA in the past, and we fear inevitably in the future if title III passes, has been under boom conditions. At other than periods of inflationary boom, as witnessed by the present time, there is plenty of legitimate residential mortgage credit available. FNMA purchases of mortgages in a boom are bound to be inflationary, as we have learned so well in the past. The FNMA operation is not a normal operation to supplement and liquefy the private mortgage market; rather, it is a means to pour additional money from United States Treasury sources into the mortgage market in a boom, when savings necessarily tend to be scarce relative to demand. Thus, FNMA funds inevitably serve to promote inflationary pressures. (4) The basic condition for a free flow of mortgage funds is flexibility of interest rates, but the FNMA secondary market operation will only tend to rigidify rates. If the President exercises the powers proposed in title II to keep FHA and VA interest rates in line with market conditions, that is, if he flexes them on the upside as well as the downside, the Government-insured and guaranteed mortgage programs will have an ample flow of funds.

I think the example of 1953 that I gave shows that that is true. (5) The "nonrefundable contribution" of 3 percent may seem to be a real deterrent against the dumping of mortgages in the recharted FNMA, but we see little to prevent the shifting of the contribution on to the home purchaser in the form of a higher price for the house. Since the FNMA would be used under boom conditions, it would be especially easy in a seller's market for houses to shift the contribution to the home purchaser at the time FNMA would be used.

We believe for these reasons that the provisions for a FNMA secondary market operation should not be enacted. As I indicated earlier, the only valid reason for a secondary market operation by Government is the fact that there may be certain small communities and remote areas where Government-insured and guaranteed mortgage credit is not generally available, and there may be cases where credit has not been available to minority groups.

We think that this problem has been exaggerated, but there is no doubt that because of great pressure on the supply of mortgage money in the postwar housing boom, because of less than full coverage by the private mortgage system, and because of high servicing costs in small communities and remote areas, it is probably true that there may be

HOUSING ACT OF 1954

cases where persons of good credit standing have been unable to obtain credit.

We believe that much can be done to correct this situation if the President exercises the powers provided in title II for flexibility of interest rates and fees and charges. Nevertheless, there may remain some element of difficulty here.

Senator BUSH. Mr. Chairman, may I ask a question?

The CHAIRMAN. Senator Bush

Senator BUSH. Do you have an approximation of the amount of FNMA mortgages that are now held by the Government? Is it approximately $212 billion?

Mr. SHANKS. Of that order, yes, sir.

Senator BUSH. Do you feel that the very large accumulation that has taken place is due in some measure to this lack of flexibility which you speak of?

Mr. SHANKS. I think there is no doubt but what flexibility would have slowed down that accumulation. When FNMA stands there ready to take the mortgages, then when someone can't get what he wants and the provision he wants, in it goes to FNMA.

In order to provide additional assurance that this problem will be solved, we wish to propose a plan under which all types of private financing institutions, through a voluntary but well organized effort under the direction of HHFA Administrator, would undertake to see that Government-insured and guaranteed mortgage credit will be available to the maximum extent possible to all good credit risks for residential loans in every community of the United States. We have embodied our plan in the draft of a bill, and I would like to give the committee copies for your study.

I think they are before you, sir.

We believe that under the voluntary effort which we are proposing the problem of credit, unavailability in small communities and remote areas, to the extent there is a problem, can be fully solved. Our plan should be tried to see what the magnitude of the problem is. We have made a canvass of the life-insurance business and the plan has the backing of the big majority of life companies.

I might say there that following our testimony of a week ago, before the House Banking and Currency Committee, we discussed our proposal informally with spokesmen of the American Bankers Association and the Mortgage Bankers Association. And I am glad to say that they think well of it, in principle, and will give it their full cooperation and support if it is enacted."

We also have had reason to believe that other mortgage-lending institutions would support the plan if it is enacted.

Perhaps it would help if I were to outline the plan briefly, although I am sure you will want to read the proposed bill. The principal provisions are as follows:

(1) The basic purpose would be to facilitate the flow of funds for housing credit into remote areas and smaller communities where funds are not available in adequate supply, and to make mortgage credit generally available without regard to race, creed, or color.

(2) The plan would be limited to loans insured or guaranteed by the Government.

(3) There would be established a National Voluntary Mortgage Credit Extension Committee under the chairmanship of the HHFA