COOPERATION OF FEDERAL HOME LOAN BANK BOARD

Now, if the efforts of our local offices are not productive in placement of the loan, the loan will be reported to us and we have the assurances from the Federal Home Loan Bank Board system that they will cooperate fully with us through their own resources in attempting to place these loans, already processed, with savings and loan association member institutions.

Now, this is not to say that there will not be the necessity for some loans, because some lenders have very stringent policies as to the type of properties, locations, and so forth, in which they will invest. But again we have assurances from the Federal Home Loan Bank system that they are going to do their utmost to persuade these people to relax somewhat to accommodate these direct loan applications. Mr. BOLAND. You expect that relaxation?

Mr. DERVAN, the thrust of your presentation is that there has been such a dramatic change in the mortgage availability for 1972 that you think that all of the requests under the loan guaranty program can be met, or substantially met. Now, the Federal Home Loan Bank Board will be coming to this committee in another week or so. They are requesting $85 million to channel more funds into the housing market.

As you know, the FHLBB works with the savings and loans institutions and this is where most of the money comes from for veterans' housing, does it not?

Mr. DERVAN. A goodly portion comes from savings and loan institutions. They are about the second largest holder of our guaranteed loan paper.

Mr. BOLAND. Based on the rosy picture painted here in the loan guaranty fund, it really is not necessary for the Congress to make that $85 million available to the Federal Home Loan Bank Board, would you say?

Mr. DERVAN. Well, I would say that the resource institutions have the funds available. I would presume that these additional funds are to intensify and accelerate Board activities in persuading and arranging for these resource institutions to invest in GI loans.

AVERAGE COST OF NEW HOMES

Mr. BOLAND. What is the average cost to a veteran in the purchase of a new home?

Mr. DERVAN. Well, it is surprising these days, Mr. Chairman. The average cost for fiscal year 1970 to purchase a new home, that is purchase with a guaranteed loan, was $23,500. Just the other dayMr. BOLAND. How large a home is this?

Mr. DERVAN. I do not have precise dimensions, but I would say is a three-bedroom, one and a half baths.

it

Three years ago, fiscal 1967, the average cost was $18,900. So there has roughly been a 24-percent increase in those 3 years, or about 8 percent a year. It was this escalation in housing prices, coupled with the increased cost of mortgage financing which was entailed in an 8%-percent rate, which was pricing out of homeownership these younger Vietnam veterans. We are very much concerned about them.

AVERAGE MORTGAGE ASSUMED

Mr. BOLAND. How large a mortgage would the veteran carry on that $23,500 home?

Mr. DERVAN. On the $23,500 home, the average was $22,760.

Mr. BOLAND. Over how long a period of time?

Mr. DERVAN. This would be a 30-year proposition.

Mr. BOLAND. Were a lot of the veterans paying 81⁄2-percent last year?

Mr. DERVAN. Yes, sir.

Mr. BOLAND. The interest rate is down to 7 percent, isn't it?

Mr. DERVAN. Yes. I can illustrate that for you in terms of $1,000 units of a $20,000 loan, for example.

At the 81⁄2-percent rate, $1,000 amortized over 30 years required a monthly principal and interest amortization payment of $7.69 per $1,000. At a 7-percent rate, the same $1,000 amortized over a 30year basis would require a monthly principal and interest amortization payment of $6.66. So the difference is about $1.03 per thousand. On a $20,000 loan that is roughly $20 per month.

FACTORS AFFECTING THE HOUSING MARKET

Mr. TALCOTT. Mr. Chairman, I am not quite satisfied yet. You talked about mortgage availability as being one factor, reduction of interest as another factor, and availability of housing as the other factor. But all of these factors are still not as good as when this program was initiated in the early 1950's. Every single one of these factors has been better sometime during those years. Taking the last 6 months is not a very good period of time to be taking. If it was good in 1953 or 1963 or 1965, we have a great deal more need now than we had in those previous years, it seems to me. The reduction of interest-interest is still higher than it was back in some of those other times. The availability of the credit is still a good deal less than it was in some of those prior years. The availability of housing is quite a bit less than it was in some of the past times.

So these three factors that you mentioned, over the long haul are not as important as you suggest.

NEED FOR MAKING DIRECT LOANS

I would like to try to convey an idea here. You know this 24 percent increase in cost of housing in the last 3 years, well some of these veterans have been in the service and have had no way of increasing their earning capacity during this 3 years. In fact, it may be reduced. So they are in very dire need, in more need than people who have not

been in the service.

I think we need a direct loan for veterans, more than we need a direct loan for people who have not been in the service.

Mr. DERVAN. I would agree with you, I think, except for one fact, Congressman. I think perhaps in your comment there is an assumption that the direct loan money is available at somewhat lesser cost than is a guaranteed loan. This is not the situation.

The interest rate on a direct loan is the same as on a guaranteed

loan.

MORTGAGE MONEY IN RURAL AREAS

Mr. TALCOTT. I agree, but it is just not available, particularly in rural areas. I am sensitive to rural areas, where veterans simply cannot get loans because there are no banks around or no banks willing to go 20 or 30 miles to talk with this veteran who wants to build a home outside of the big cities or outside of the ghettos.

I think we ought to be concerned with them. I think the Veterans' Administration ought to be in coordination with the administration's program of trying to prevent this out-migration from the rural areas. People from the rural areas, my district, will move to the ghettos, to the slums, because it is more economical to live in the ghettos and slums because of things like this. They need somebody to care about them and to provide facilities for building homes, if we are going to keep them in the rural areas, rather than fill up and overflow the slums and the ghettos.

This is one program that did that.

CONCEPT OF DIRECT LOAN PROGRAM

Mr. DERVAN. In your comment, Congressman, there is implicit, I think, the fact that the direct loan program was established by the Congress back in 1950 to fill the vacuums where private lender guaranteed loan financing was not generally available. That concept was sound and it has proven to be sound over the years.

In essence, the position we are taking today is that direct loan expenditures should be minimized this year because of the tremendous increase in the availability of mortgage funds for guaranteed loan financing, and that we certainly, this year, should intensify and expand our private placement efforts.

It is a matter of judgment, but we believe that through the expansion, with the cooperation of the Federal Home Loan Bank Board, we can minimize direct loan expenditures to a very small number of

cases.

Mr. TALCOTT. This sounds very, very good. It will be news to veterans who live in rural areas. I just hope that you are right.

I think there is a large percentage-I have not figured out the statistics of people that go into the service from the rural areas as compared with those from the city areas. But I know people from the city areas get all kinds of services in the Veterans Administration and other agencies of the Federal Government that rural people do not get.

I think we should not forget them, especially when they are veterans. Poor people in large cities get privileges that poor people in rural areas do not, but with veterans I do not think we should make that discrimination.

NO DENIALS TO QUALIFIED VETERANS

Mr. OWEN. Let me reassure you again that no qualified veteran will be denied a home loan.

Mr. TALCOTT. That is good news.

May I ask two more questions that are factual?

How much in this fund is now available for direct loans?

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Mr. OWEN. Around $600 million is now available.

Mr. TALCOTT. How many applications do you have on record right now for direct loans?

Mr. DERVAN. The first half of this fiscal year we have received in the aggregate about 6,000 applications. We have closed about 3,700 direct loans.

TREND IN DIRECT LOAN APPLICATIONS

Mr. TALCOTT. Is there any downward trend in the number of applications in the last 2 years?

Mr. DERVAN. Yes, I would say so, Congressman.

I think it is probably attributable to the Farmers' Home Administration program which has been revised and broadened in recent years. It takes in communities up to 10,000 in population, whereas heretofore it was limited to about 5,400.

Also, the Farmers' Home Administration shares in some of the funds made available to HUD for mortgage interest subsidy payments.

It is conjecture, frankly, but I think there is probably some truth in it, that a number of veterans who heretofore would have come to the Veterans' Administration for direct loan financing are finding it advantageous, because of income limitations, to apply to the Farmers' Home Administration for financing.

Mr. TALCOTT. I think it may be a matter of conjecture, too, that so many people who would apply for direct loan in rural areas have migrated to the cities, and that is a shame.

Mr. DERVAN. Yes.

Mr. OWEN. To show you the decline in the actual direct loans closed in 1969, it was 11,162; 1970, 8,530.

Although last year we estimated it would be above 9,000, it is dropping to the point that it will probably reach around 6,000.

Mr. TALCOTT. Of course, if you are discouraging this kind of a program, there will be a drop.

Mr. OWEN. At this point we are not discouraging.

Mr. TALCOTT. It sounds pretty discouraging to me.

Mr. OWEN. Even through the first 7 months we closed around 4,100 of the loans, which is under our estimate and shows a continual decline in the program.

Mr. TALCOTT. Thank you, Mr. Chairman.

AVAILABILITY OF DIRECT LOAN MONEY

Mr. BOLAND. In response to Mr. Talcott's question with respect to the availability of money for the direct loan program, you indicated that there was $600 million available.

Mr. OWEN. Approximately.

Mr. BOLAND. Is any congressional action required to assure the availability of funds for making direct loans in 1972, if and when needed?

PROPOSED LEGISLATION RELATED TO SALE OF DIRECT LOANS

Mr. OWEN. Mr. Congressman, the chairman of the House Veterans' Affairs Committee, at our request, has introduced H.R. 3344 which would, in effect, remove the 98 percent floor for the sale of direct loans. We cannot sell them at less than 98 percent of par.

The legislation, if enacted as introduced, would permit us to sell them at a reasonable cost or rate.

This is related to the money market and the interest rate that our loans are carrying. Some of our loans carry 72, 8 percent, some much lower down in the 6 percent area.

Mr. BOLAND. That particular congressional action would not assure the availability of funds, would it, for the direct loan program for 1972, if and when money is needed for the direct loan program? Mr. OWEN. It would contribute to the availability.

Mr. SHYTLE. There is about $600 million available in the fund from which direct loans could be made. No specific congressional action is needed, Mr. Chairman.

REDUCTION IN OUTLAYS

Mr. BOLAND. Is this projection of no direct loans in 1972 in effect an effort by the Office of Management and Budget to show a minus $231 million in outlays for 1972?

Mr. OWEN. It certainly contributes to the showing of that reduction. Mr. BOLAND. No question about it, is there?

Mr. OwEN. Let the Controller respond, if he will.

Mr. SHYTLE. You are correct, sir.

The $231 million is substantially attributable to the fact that there are no outlays estimated for direct loans. Mr. BOLAND. Mr. Shipley?

COMMUNICATIONS FROM PRIVATE SECTOR

Mr. SHIPLEY. I would like to pursue, just a moment longer if I could, with regard to Mr. Talcott's questioning. The committee has received correspondence from other members throughout the country. I come from a rural area and would like to say that it fits my district also.

Congressman White sent us a letter that he received from some realtors in his district. I would like to quote this in the record if I could and ask someone to comment on it.

It says:

In the past 2 years it has been almost impossible in this area for a veteran to purchase a home at a reasonable price under any program except through the direct loan program. During most of this time, if a house was purchased through FHA, the seller had to pay 5 percent discount to a loan company to make the loan.

Of course, this is a penalty, no question about it, to the veterans, if this is true.

Savings and loan in this area charged 9 percent and required a 20 percent downpayment.

That again is a handicap in the veterans' program, is it not?

Mr. OWEN. In the guaranteed-loan program, whereby we intend to place these in the private sector, there would be no 20 percent downpayment because we are guaranteeing the loan and there would not be this requirement of the downpayment.

As to the discount, it is true we cannot permit the veteran to pay the discount, but the builder or the seller, if he so wishes, can pay a discount.