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Federal Home Loan Bank statistics for 1967 and 1968 (supra) show the following breakdown of costs among these categories for all members of the Federal Home Loan Bank System :

(Dollar amounts in thousands)

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The ratio of expense to income has a tendency to decrease as associations increase in size, as shown by a January 1967 Survey prepared by the National League. The following table demonstrates this quantitatively on the basis of various savings capital size groups as of the end of 1965 :

Operating ratios derived from medians-Expense to income

· 22

Savings capital :
Under $5 million

0.27 $5 to $10 million

.22 $10 to $25 million $25 to $50 million

. 21 $50 to $100 million

. 18 $100 million and over

. 21 That the savings and loan industry is a low margin of profit industry is demonstrated by statistics for 1967 and 1968 (supra) as follows:

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Balance for addition to reserves, surplus, and permanent stock dividends.
Balance for addition to reserves, surplus, and permanent stock dividends as a percent-

age of average assets..
Balance for addition to reserves, surplus, and permanent stock dividends as a percent-

age of gross operating income

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But part of the additions to reserve is mandatory and cannot be considered to be true profit of the association.

At present, section 403(b) of the National Housing Act provides that Federal Savings and Loan Insurance Corporation regulations must require a buildup of reserves by institutions that have savings accounts insured by FSLIC, to 5 percent of all insured accounts within a reasonable period not exceeding

20 years.

Section 563.13(a) of the Regulations for Insurance of Accounts issued by the Federal Home Loan Bank Board as governing body of FSLIC requires a buildup by specified stages to 5 percent of all savings accounts (not just insured accounts) by the twentieth anniversary of the institution's admission to FSLIC membership. That section requires in addition a setaside by the institution of an amount equal to 20 percent of its "scheduled items” (meaning assets presumably involving more than normal risk, including slow loans (only 20 percent of Federally insured or guaranteed loans) and real estate owned by the institution as a result of foreclosure or in lieu of foreclosure).


Obviously, the amount to which these requirements will dip into income varies with the particular institution involved, depending upon the length of time its savings accounts have been insured by FSLIC and the amount of its scheduled items. But whatever these requirements are in the case of an individual institution, they freeze the amount of money involved and detract from the true usable profits of an institution.

The Study of the Savings and Loan Industry under the direction of Professor Irwin Friend of the Wharton School of Finance and Commerce in the University of Pennsylvania commented on the declining profitability of savings and loan associations. The study defined “profitability' as net income allocable to reserves, surplus and dividends on permanent stock divided by average net worth, adjusted for an estimate of future mortgage losses not covered by specific reserves. The study notes (at page 6 of the Summary and Recommendations printed by the Federal Home Loan Bank Board, dated September 1969) that association profitability declined sharply from an estimated 12.5 percent of net worth in 1962 to 4.1 percent in 1967. The study attributed this decline mainly to the more rapid rise in cost of money than in the return on assets. The lag in increase in return on assets, according to the study, reflected the insensitivity to increases in interest rates of yields on mortgages already in association portfolios. While reportedly the profitability percentage increase somewhat in 1968 to something in excess of 8 percent, the fact remains that as an industry, savings and loan associations rank comparatively low in the scale of profitability.

Reverting to Illinois statistics for more recent soundings, there was a 1.7 percent increase in association expense and a 3.3 percent increase in income in 1968 as compared with 1967. But in 1969 the expense increased 4.3 percent while income increased only 2.9 per cent over 1968. Thus the increase in the rate of expense was increasing while the increase in the rate of income was de

. Mr. William G. Osborn of Alton, Illinois, the National League witness, expects this trend to continue even beyond the current period of tight money.

These factors should be considered by the Subcommittee in its deliberations as to what spread between cost of money and yield on its investment will induce savings and loan associations to make use of funds that would be made available to the Federal Home Loan Bank System under S. 3503 if it is enacted into law.

Senator PROXMIRE. The committee will recess and reconvene tomorrow morning at 10 to hear five witnesses.

(Whereupon, at 12:30 p.m., the committee was recessed, to reconvene at 10 a.m., Friday, March 6, 1969.)






Washington, D.C. The subcommittee met, pursuant to adjournment, at 10:15 a.m., in room 5302, New Senate Office Building, Senator John Sparkman, (chairman of the committee), presiding. Present: Senator Sparkman, Proxmire, Tower, and Percy.

The CHAIRMAN. I have been waiting, hoping some other Senators would come in. Several have said they would be here. I hope some of them will be here later.

We have a pretty full program, so I think we had better proceed. Our first witness is Prof. John C. Payne, of the law school of the University of Alabama.

Professor Payne, we are very glad to have you here with us today. We have a copy of your prepared statement that will be printed in full in the record. You may handle it as you see fit; read it, summarize it, discuss it-however you wish. We will be glad to hear from you now.



Mr. PAYNE. I think I should begin by saying I am somewhat uncertain as to why I was called here before the committee today. Presumably I am being called as a qualified expert on what we will call closing costs—I believe they are called settlement costs in the bill—and I would like to disclaim and say there isn't any such thing as a qualified expert on closing costs, that nobody knows very much about them. Presumably the reason Í have been called is that I have recently completed a very cursory pilot study of closing costs based on information from slightly less than 500 lawyers in all of the States and the District of Columbia. The information which I have obtained is highly tentative and simply lays the predicate for further investigation. But up to the present time it is the only thing that has been attempted along those lines, and that is my sole qualification as an expert.

The matter before the subcommittee this morning is Senate bill 3142, and I expect to direct my attention to section 2. I filed a short statement with the subcommittee. It was rather hurriedly gotten up,



and I will simply try to stress some of the points brought out in that memorandum.

As I read it, section 2 provides for two types of action. The first is the fixing of settlement or closing costs by the Secretary for Housing and Urban Development, and the Administrators of the Veterans Administration. The second is a joint study, and I quote, “* ** with respect to legislative and administrative actions which should be taken to reduce mortgage settlement costs and to standardize these costs for all geographical areas, with a report to Congress by July 1, 1970."

I am not entirely clear as to what this language means, but at a minimum it seems to authorize a study of existing costs. I don't think you can order a reduction of costs until you know what the present ones are. As I have already said, we know very little about costs. What we do know is that there is almost complete chaos in the field, but we have little or no hard data.

The first question explicit in the bill as it is now drafted is who should carry out the study. The study, I presume, will be done primarily by the Federal Housing Administration, operating under the Department. Now, experience in the past with some small studies that the FHA has attempted are not encouraging. They have shown an almost complete lack of sophistication and understanding of real estate transactions. In the first place, they have shown that the FHA authorities do not understand that we face a very, very complex problem in determining true closing costs. Initially there is no standard transaction which they predicate. Most real estate transactions are closed on the basis of a percentage of the sales cost, or the amount of the mortgage. We must, therefore, start with a standard transaction if comparable data is to be obtained. When we compare costs in transactions on houses priced at anywhere from $10,000 to $20,000, we are comparing unlike things. Furthermore, there is no indication in the existing studies that there are different types of costs having no relationship to each other, or that there are costs reflected in closing statements which are not truly costs of transfer.

For example, the allocation of taxes or insurance premiums are not costs of transfer, but are costs of ownership. On the other hand, other costs which have been prepaid may be omitted.

Within the realm of actual costs there are several distinct categories. For example, the cost of establishing title is entirely different from the cost of obtaining money. Also, the cost for effectuating the sale, and the various governmental charges and fees for recording, and the like, are separate and distinct and involve different problems of policy and different people.

Costs within the country show an enormous variation. These variations occur within particular localities, and from locality to locality. For example, if you compare a transaction in New Jersey with one in South Dakota, you get a completely different result.

I might cite by way of illustration figures extracted from my study. The cost of establishing title in the purchase of a $20,000 house financed by a $16,000 mortgage may range from as little as $18 to as much as $820. Statutory costs range from $1 to $426. I am giving those simply as evidence of the enormous differences in costs we find throughout the country.

you know what

Another grave defect in the FHA studies in the past has been that they have been based upon the closing statements in FHA transactions. FHA transactions today are only a very tiny percentage of all transactions, and I think any adequate study is going to have to embrace charges made in a great many kinds of situations. The Administrator and the Secretary are given authority to set fair charges. It is quite difficult to find out what fair charges are until pricing is used in all kinds of transfers in the community, not just those in which an FHA mortgage is used.

The bill itself gives no idea as to the scope of the study, or as to how it is being carried out. And I don't know whether it is possible, in such a bill, to delineate the actual methodology that will be used. But it seems to me what is needed is a comprehensive study on a national scale, and such a study should be carried out by an independent agency. That agency should be authorized to obtain information from other agencies which have control over mortgage lenders. The overwhelming bulk of homes today are sold on the basis of mortgages, and the mortgagees have the information, whereas the FHA does not.

The Federal Home Loan Bank and the Federal Reserve could probably give us better information than the FHA. In saying that, I don't mean to exclude the FHA and VA. They have vaulable information. But it is highly partial information, and should be read in the light of data obtained from other sources also.

Now, with regard to the right to fix closing costs, I might say initially that some closing costs are outrageously high. Others are outrageously low. A very careful study should be made of what they are, before the power—if it is granted-is exercised. If the charges are fixed too low, they can have a disruptive effect in the mortgage market, and can adversely affect the capacity to place FHA loans. It is the policy of this committee to promote FHA Joans, rather than to discourage them.

There is also the danger that if the closing costs are fixed at a particular maximum, that maximum will then become the minimum. At the present time, unquestionably in many transactions involving conventional mortgages, the closing costs are lower than the prevailing costs for FHA loans. The FHA system has caused costs to increase rather than to decrease. I believe it is the policy of the committee to decrease the costs where possible.

There is another factor that has not been discussed as far as I know, up until this time, and I would like to suggest it to the subcommittee. Costs should not be studied without consideration of the services which are being rendered to buyers of homes. The buyer of a home ought to receive personal representation and some formal proof of title. As a matter of fact, he is not getting these today. The whole system is designed to protect mortgagees, rather than home purchasers. I think this is an area in which considerable study is needed.

I would say, by the way, that the evidence I have up until this time indicates little or no relation between costs and the services rendered. Where very high costs prevail somewhat greater services are frequently but not unusually available. Where very low costs prevail services are generally minimal. But there are not universal rules and in intermediate cost areas no correlation between cost and services is discernible.

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