HOUSING LEGISLATION OF 1960 TUESDAY, MAY 10, 1960 U.S. SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON HOUSING, Washington, D.C. The subcommittee met, pursuant to recess, in room 5302, New Senate Office Building, at 10:05 a.m., Senator John Sparkman (chairman of the subcommittee) presiding. Present: Senators Sparkman and Capehart. Senator SPARKMAN. Let the subcommittee come to order, please. I have a letter, received from Thomas S. Gates, Secretary of Defense, regarding a legislative proposal to amend title VIII of the National Housing Act to increase the interest rate under section 303(b) from 42 percent to 52 percent. It will go in the record at this point. (The letter referred to follows:) Hon. RICHARD M. NIXON, f THE SECRETARY OF DEFENSE, DEAR MR. PRESIDENT: There is forwarded herewith a draft of proposed legislation to amend title VIII of the National Housing Act, as amended, and for other purposes. This proposal is a part of the Department of Defense legislative program for 1960. We have been advised by the Bureau of the Budget that enactment of this proposal would be in accord with the program of the President. PURPOSE OF THE LEGISLATION The purpose of the legislation is to permit the interest rate on armed services housing mortgages to be set at levels which will enable builders to obtain financing for urgently needed family housing for military personnel without the payment of the large discounts presently required. The present statutory maximum of 42 percent was established by Public Law 85-364, approved April 1, 1958, and it is universally recognized that the cost of money has increased substantially since that time. At present, it is possible to obtain 42 percent financing for armed services housing only with the payment of 72 to 8 points discount. Early in 1959, at the time the Department of Defense testified with respect to the armed services housing program, the interest rate was currently 41⁄2 percent, and the mortgages sold at a discount of approximately 4 to 42 points. In March 1959, the rate was administratively raised to the statutory maximum of 4%1⁄2 percent, but as a result of the steadily deteriorating market the mortgages soon sold at a discount of 5 or more points, and by July 1959 marketability had further deteriorated, as indicated by the Department of Defense in its comments on legislation before the Congress at that time. The situation has worsened considerably in the intervening months, and any further tightening of the money market may well mean that bids will reflect such high financing charges that they may exceed the statutory mortgage ceiling, thereby bringing the program to a halt. The proposed legislation submitted herewith provides for raising the ceiling on interest rates for title VII housing from 41⁄2 percent to 51⁄2 percent. The President recommended in his budget message to the Congress on January 18, 1960, that the present ceiling be removed, and the legislation proposed herewith is intended to accomplish the purpose of the President's recommendation. It should be noted that Public Law 86-372, approved September 23, 1959, raised the interest rate maximum on other FHA-insured mortgages. Notwithstanding the fact that the effective interest rates for these programs have been set at the recently enacted maximum, it understood that investors in these other programs are at present demanding substantial discounts in light of rapidly changing financial conditions. It is clear that the only method of assuring the continued marketability of title VIII mortgages without excessive discounts is to provide for the increase of the ceiling on interest rates. Investors are currently obtaining a yield of 44 to 41⁄2 percent on long-term Government bonds, and 4% percent on recently issued AAA corporate bonds, and since experience has shown that the market demands a higher yield from title VIII mortgages than from these securities, an interest ceiling of 5% percent is necessary to provide the flexibility that will assure continuation of the title VIII program. It should be pointed out that the Attorney General, in his opinion of October 22, 1959, concluded that guaranties by the Department of Defense of armed services housing mortgages "constitute valid and subsisting obligations of the United States"; nevertheless, on the basis of the limited experience acquired since the rendering of this opinion, it appears that the opinion has had no perceptible effect upon the size of the discounts on these mortgages. In the present state of the money market, therefore, it appears that the continued successful development of the armed services housing program depends upon the enactment of legislation authorizing the increase of the ceiling on the interest rate, so that the rate may be set administratively at a level which will attract investment. Sincerely yours, THOMAS S. GATES. A BILL To amend title VIII of the National Housing Act, as amended, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the last paragraph of section 803 (b) of the National Housing Act, as amended, is amended by striking out the words "42" in the second sentence and inserting the words "51⁄2 per centum" in lieu thereof. Senator SPARKMAN. This morning the subcommittee will hear the views of representatives from the Department of Agriculture upon section 4 of my bill, S. 3379, and the views of representatives from the National Aeronautics and Space Administration on a bill that I introduced, S. 3226. While the subcommittee would welcome comments upon any other legislation being considered in these hearings, we are particularly interested in the views of these agencies on S. 3379 and S. 3226. May I say that we had also scheduled Secretary Flemming for this morning, but because of a conflict we had to rearrange that date. That is why the hearings should be rather brief today. Mr. Kenneth L. Scott, Director of the Agricultural Credit Service, Department of Agriculture. Will you come around, Mr. Scott? For the record, give the names and titles of those who accompany you. STATEMENT OF KENNETH L. SCOTT, DIRECTOR, AGRICULTURAL CREDIT SERVICE; ACCOMPANIED BY STEPHEN C. HUGHES, FARMERS HOME ADMINISTRATION; AND JAMES TURNBULL, AGRICULTURAL RETAIL SERVICE, DEPARTMENT OF AGRICUL TURE Mr. Scort. Thank you, Mr. Chairman. My name is Kenneth L. Scott, Director of Agricultural Credit Service, Department of Agriculture. I have with me Mr. Stephen C. Hughes, from the staff of the Farmers Home Administration, and James Turnbull of the Agricultural Research Service of the Department. Mr. Chairman, members of the committee, I appreciate the opportunity to make a few remarks concerning the Department of Agriculture's position on S. 3379. Long-term loans have been very helpful in financing the repair and improvement of existing farm homes and service buildings and the construction of new farm homes and farm service buildings. We believe there should be continuing authority to furnish long-term financing for farm buildings which supplements and is noncompetitive with privately financed loans. This is the way the Farmers Home Administration operates all of its loan programs. It is furnishing sound financing to many farm families who cannot get needed credit elsewhere. During May 1959, I had the privilege of testifying before this committee concerning the effectiveness of title V of the Housing Act of 1949 to provide farm families an opportunity to acquire better housing. At that time, I stated that loans under this authority "have proved to be an effective means whereby families who are not able to qualify for credit from conventional sources can improve their housing conditions." I can again report that this lending authority has continued to be an effective means of financing needed farm homes and other farm buildings. Of the $450 million made available for farm housing loans for a 5-year period beginning July 1, 1956, approximately $153 million will have been loaned during the 4-year period ending June 30, 1960. During this period farmownership loans made under title I of the Bankhead-Jones Farm Tenant Act included approximately $34 million for farm building purposes. This total of approximately $187 million has been very helpful in financing housing needs of farm families who could not get needed credit elsewhere. In addition to credit, the Farmers Home Administration has provided technical services. Since 1937 the FHA and its predecessor agency have been furnishing comprehensive building plan service to its borrowers who were in need of new or improved farm housing and other farm buildings. In the earlier years the Agency maintained an Engineering Division which developed detailed plans and specifications well adapted to the particular needs of farm families. During more recent years the Farmers Home Administration has discontinued its Engineering Division because of the work in this field being done by the Agricultural Research Service of the Department and the State agricultural colleges. The Agency continues to furnish building plans and otherwise assist borrowers in developing building plans that will fit their particular requirements. Furthermore, the Agricultural Extension Service provides plans and other information regarding farm housing and other buildings as a part of their regular educational work with all rural people. Research on farm housing needs has been underway in the Department of Agriculture on a limited scale since 1913. The first farm housing survey, conducted in 1934, indicated the degree of substandard housing which existed on American farms. At the State experiment stations, under the leadership of Kansas and Illinois, States in the Midwest intensified research on farm housing needs during the 1930's and the Midwest plan service and the plan exchange service were established. However, research on means of improving design, construction, and/or functional requirements proceeded very slowly until passage of the Research and Marketing Act of 1946. With the passage of this act some additional funds were made available to the stations for regional research in farm housing and structures and each of the four regional groups promptly initiated such research. Each regional project has been investigating the problems peculiar to its region and a number of publications have been issued by each of these regional groups. At the present time 13 States are actively conducting research on farm dwellings, 28 are conducting research on structures for farm animals, and 25 States are working on other building and building materials problems which affect farmers. The Department of Agriculture, through its Livestock Engineering and Farm Structures Branch and through the Institute of Home Economics, is actively cooperating with the State agricultural experiment stations in the solution of farm structures and housing research. The Department of Agriculture and the State agricultural experiment stations have been working with the Housing and Home Finance Agency since November of 1957 in the development of plans for the use of research funds made available to the Housing and Home Finance Agency. Representatives from the State experiment stations and the Department of Agriculture have reviewed with the Housing and Home Finance Agency areas where research was needed in farm housing and have participated in the research project development. We intend to cooperate fully in the further development of facts which will help improve the plans and materials available to farm families for better farm housing. With further reference to our lending experience, you will be interested in the fact that many farm families who have applied to the Farmers Home Administration for housing loans needed to increase their income before they could undertake to repay the installments on such a loan. Often this need for income called for an enlargement of the farm business, such as an increase in the number or quality or both of the livestock owned. There were many examples where a more intensive program of crop production was called for. Sometimes the necessary income could be obtained only by acquiring additional acreage. While title V of the Housing Act of 1949 contains provisions for recognizing a need for extra income, it has been the experience of the Farmers Home Administration that the provisions of the Bankhead-Jones Farm Tenant Act have been adequate and more practical in meeting the needs for enlargement or improvement of the farm or the further development of the farm business. The foregoing is one of the reasons why the Department considered it necessary to recommend against enactment of section 4 of S. 3379. A further reason is that there is now pending in the Congress bills which would substantially simplify and improve the present authority of the Farmers Home Administration to meet the credit needs of eligible farm families, including their housing requirements. I refer to S. 2144 and to H.R. 11761, which has been reported out by the House Agriculture Committee under the title "Consolidated Farmers Home Administration Act of 1960." While I realize this bill is not being considered by this committee, since it provides broad authority to finance farm housing as well as other farm requirements, with your permission, Mr. Chairman, I should like to briefly refer to the more important provisions of S. 2144. The principal purpose of S. 2144 is to simplify the lending operations of the Farmers Home Administration through consolidation of existing authorities. The authority for farm housing loans contained in title V of the Housing Act of 1949 would be consolidated with the nearly duplicate authority contained in the Bankhead-Jones Farm Tenant Act. S. 2144 includes the same authority as is contained in title V of the Housing Act of 1949, as amended, except that loans could not be made on larger than family-size farms. Also included in this consolidation would be loans for soil and water conservation purposes now contained in the Water Facilities Act of 1937, as amended. Loans could be made from Government funds or from funds advanced by private lenders which would be insured as now authorized under the Bankhead-Jones Farm Tenant Act and the Water Facilities Act. S. 2144 contains the existing authority for farm enlargement and development as well as the authority contained in title I of the Bankhead-Jones Farm Tenant Act, for refinancing the applicant's existing indebtedness on the farm. This refinancing authority is not contained in title V of the Housing Act of 1949, but it is important and is often needed to assure a sound loan. S. 2144 recognizes that fiscal year 1961 is the last year in which funds are authorized for loans under title V of the Housing Act of 1949. It provides that the unused balance of the authority to borrow from the Treasury for loans will be available for the consolidated real estate loan program in that bill up until June 30, 1961. Thereafter funds would be available in whatever annual amounts the Congress might approve. One of the significant changes which we are recommending be made to S. 2144 pertains to the insured loan program. In order that there may be adequate funds for insured loans, we are proposing that the interest rate on these loans be set by the Secretary of Agriculture taking into consideration the prevailing private and cooperative interest rates for loans for similar terms and purposes. The interest rate on real estate loans which includes housing loans made from appropriated Federal funds under the terms of S. 2144 would not exceed 5 percent, which is the current rate for farm ownership loans under title I of the Bankhead-Jones Farm Tenant Act. Title V of the Housing Act of 1949, you will recall, sets the interest rate on farm housing loans at not to exceed 4 percent. In recent years this rate has often been inadequate to cover the Treasury's cost of ob |