HOUSING AMENDMENTS OF 1949

WEDNESDAY, AUGUST 3, 1949

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met, pursuant to adjournment, at 10 o'clock a. m., Hon. Frank Buchanan, presiding.

Present: Messrs. Buchanan, Brown, Monroney, Multer, McKinnon, Addonizio, Dollinger, Mitchell, Gamble, Kunkel, Talle, and Cole.

Mr. BUCHANAN. The committee will come to order. The first witness this morning is Mr. Robert M. Morgan, representing the National Association of Mutual Savings Banks. Mr. Morgan.

Mr. MORGAN. Thank you.

STATEMENT OF ROBERT M. MORGAN, ON BEHALF OF NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS

Mr. MORGAN. Mr. Chairman and members of the committee, my name is Robert M. Morgan and I am vice president of the Boston Five Cents Savings Bank, Boston, Mass. I am appearing here, however, as chairman of the committee on mortgage investments of the National Association of Mutual Savings Banks. This is an organization representing the savings banks of the country, which are mutual institutions operating solely for the benefit of their depositors and all their assets belong to their depositors to whom dividends are paid. They are 530 in number operating in 17 States, primarily located in the New England States, New York, New Jersey, and Pennsylvania. They have a total deposit liability of about $19,000,000,000, and have assets of approximately $21,000,000,000. They are traditionally known as depositaries for small savers.

I think it may be generally said the savings banks have been liberal in the making of mortgage loans consistent with safety, and their record during and since the conclusion of the war will show that they have been among the leaders in making such loans, particularly to supply the deficiency of homes and particularly veterans' loans. Those in the Administration who have responsibility for veterans' housing will corroborate my statement that we have cooperated fully in all of the Government's undertakings to supply veterans with needed housing. We have, however, been conscious of our obligations to the veteran to persuade him not to purchase or construct a home which may be beyond his means to support, and which may reflect an inflated value. We have been particularly careful to see that the lad who makes $40 a week does not get tied up with a $10,000 house that costs him $75 a month to carry. We do this not only because of our obligation to our depositors but because we feel we

have a great responsibility to these veterans and to the community as a whole. The savings banks have also been consistent supporters of FHA legislation and have widely participated in the FHA program. Our record before this committee will show that we have never objected to sound legislation designed to provide public housing for the underprivileged and have made constructive suggestions for the improvement of public housing legislation. We have consistently favored plans to stimulate slum clearance through equal grants by the Federal and local governments.

Despite this background, we find ourselves unable to lend our support to the most important provisions of H. R. 5631, the bill before you. On balance, we find it necessary to appear here today in opposition to this bill.

We find proposals being made, for the first time, in this bill for direct lending by the Government in the field of housing, not on a single narrow front, but in three broad phases: First, through the setting up of provisions for direct loaning to cooperative housing units; second, for direct loaning by the VĂ to veterans; and third, through provisions by which the Federal National Mortgage Association would be given authority to make direct residential loans.

Mr. Ferguson's testimony here before you yesterday was very significant, I think, on this point. He had a wealth of background and experience from which he talked.

This bill goes far beyond the slum-clearance and public-housing legislation and reaches well up into the income brackets of those who can, under existing arrangements, provide housing for themselves through regular borrowing channels. As far as we know, the Government has never before attempted to enter this field directly. The bill is not a private-enterprise bill; it is essentially a Government lending bill.

With your permission, I would like now to discuss some of the specific provisions of the bill. I will refer first to the direct lending provisions of the bill.

On page 22 of the bill, in section 112, paragraph (5) authorization is given to the Federal National Mortgage Association to make real estate loans insured under FHA sections 207, 213, and 608. This is a major addition to the powers of the Federal National Mortgage Association which, under existing law, is authorized to provide a secondary market and not a direct market for mortgage loans. We have not, at any time, taken a position either for or against the secondary market of the Federal National Mortgage Association. It is not needed in the communities where we operate because, in those communities, there are adequate funds available for mortgage lending without the addition of any Government funds. We have not opposed the secondary market, however, because we recognize that there may be a need for it in other sections of the country. It is our belief that the Federal National Mortgage Association's secondary market is adequate to provide the mortgage funds that are needed in areas where money may be tight. The Federal National Mortgage Association is able, by taking the loans on the books of regular lending institutions, to provide the institutions with the liquidity necessary to provide for sound local needs. Under this plan, the Federal National Mortgage Association receives the benefit of the local lending institution's knowledge of conditions in the community and there is some assurance that there

is a need for additional funds in the community before the Federal National Mortgage Association takes the loan. Direct loans lack these advantages and we believe there is no need for them.

Title III of the bill provides for direct Government loans on a 60 year 3-percent basis to any cooperative agency which may be formed for the purpose. There are no requirements that the cooperative organizations have any housing experience. If the housing corporation is organized on sound business lines and is in a position to offer adequate security it can obtain private financing. It would appear that this title of the bill would encourage unsound projects. It is not necessary, apparently for the sponsors of the project to have even the necessary funds to pay for organization expenses. Section 303 (c) of the bill, at page 59, authorizes the cooperative housing commissioner to make preliminary advances to assist in the formulation of a housing project.

The 60-year maturity and the 3-percent interest rate provided for such direct Government loans to cooperatives would undermine the sound standards that have been set up by the Government for mortgage loans. The original FHA maturity was 20 years, which has subsequently been extended for certain loans to 25 years. In only one case (sec. 207, cooperative housing loans) can the FHA maturity run as high as 40 years. Forty years is also the maximum provided by law for public housing. The maximum maturity of a GI loan is 25 years. Yet this bill proposes to establish a 60-year maturity. Sixty years would, in almost every instance, carry the veteran or other occupant beyond the life of the property and beyond his own life. He would never have the opportunity to enjoy the benefits of full ownership of the property. The FHA interest rate usually runs from 4 to 5 percent. Even for veterans, the interest rate has been set under the GI-lending program at 4 percent. This bill, however, proposes a 3-percent rate that will be available to nonveterans under this direct Government lending program.

If the committee desires direct evidence provided by the Government itself of the record made by housing cooperatives, their difficulties, shortcomings, and failures, it is suggested that reference be made. to Labor Department Bulletin No. S. 896 entitled "Nonprofit Housing Projects in the United States." I would like to quote briefly some significant statements made in this Government bulletin. On page 6 the Department of Labor says:

* *

It will be apparent, from this report, that housing is a complicated process which calls for much patience, good technical advice and assistance, and competent management at all stages. Innumerable factors will call for a succession of decisions by the membership, upon the wisdom of which the success of the entire project may depend. * The probable cost of the completed dwellings should be predetermined with some accuracy, so that the prospective member may consider it in relation to his family income, resources, and prospects. Some stability of prices is essential here. In times like the present, when prices are either rising rapidly or show indications of a sudden fall, the group should proceed cautiously or postpone action.

Also, on page 6 it is said, with respect to the desirability of requiring a down payment from cooperative members and occupants:

One leader believes that 10 percent is the very minimum for safety and for insuring sufficient member interest in making the project a going concern. Some confirmation of his opinion is found in the experience of the United Workers' project (New York City) and in other associations not here described. From

United Workers members, only $250 per room was required—$125 at time of joining and $125 within a year. This underfinanced association was never able to meet its obligations and the project was finally taken over by the creditors.

The committee may also be interested in a comment taken from a report by a labor union which has had experience with nonprofit cooperative housing. I have reference to a report of a textile workers' union on its nonprofit cooperative housing venture at Stonewall Heights, Front Royal, Va. This report was made in August 1946, and on page 73 states:

The fact is that it is very easy to borrow all the money needed from big or little concerns and at banks and insurance companies, for workers' housing, if competent people are hired who will see to it that the plans are properly made and strict business methods adhered to.

I would like, at this point, to emphasize that we are not opposing the cooperative principle. Our opposition is directed to the making of direct Government loans to cooperatives on a 100-percent basis as is provided in this bill. I intend to say more about the cooperative principle later when I come to the subject of 100-percent insurance of 100-percent private loans to cooperatives.

The next provision of the bill for direct Government lending is found at page 78. Title IV of the act amends the Servicemen's Readjustment Act of 1944 to authorize, for the first time, direct Government loans through the Veterans' Administration to veterans. Shortly prior to the conclusion of the war and during the postwar period when the needs of the veterans for housing assistance were acute, the Government adopted the wise policy of stimulating loans to veterans through the loan guaranty provisions of title III of the Servicemen's Readjustment Act. At the time of the veterans' greatest need, Congress thought there was no necessity for direct loans by the VA to veterans. To a degree, the veterans' housing needs have now diminished and there would seem to be no reason to add this direct loan provision to the existing policy of financing veterans' homes through VA guaranty of loans.

That concludes my discussion of the direct lending provisions of the act. There are, however, other provisions in this bill which we believe would be unfortunate if enacted into law.

On page 76, section 401 (b) makes provision for an increase in the guaranty of GI loans from 50 to 60 percent and from $4,000 to $7,500. While such a provision would provide added protection to our mutual savings banks, we believe that it is not in the public interest and that it would provide no loans for veterans that are not today available. It is therefore, recommended to the committee that this provision be not enacted into law. It will be inflationary, sure as shooting. When the guaranty was raised from $2,000 to $4,000 there was a direct inflationary effect took place in the market and if you raise it to $7,500 you will have even greater trouble. In my experience, actually making the loans myself over my own desk, I know the amount of guaranty does not need to be raised and you will make no more loans through doing it.

On page 7 of the bill, section 401 (c) would eliminate the GI loans made under section 505 (a) of the Servicemen's Readjustment Act. This section has been used primarily in connection with FHA-GI combination loans whereby the veteran can obtain 100 percent financing through a primary loan up to 80 percent insured by the FHA, and