1 2 10 REAL ESTATE LOANS BY NATIONAL BANKS SEC. 5. Section 24 of the Federal Reserve Act (12 3 U.S.C. 371) is amended 4 5 6 7 8 9 10 (1) by striking out "80 per centum" and "twentyfive years" in clause (3) of the third sentence of the first paragraph and inserting in lieu thereof "90 per centum" and "thirty years", respectively; and (2) by striking out "thirty-six months", each place it appears in the first sentence of the third paragraph, and inserting in lieu thereof "sixty months". SECTION-BY-SECTION SUMMARY OF S. 3442, THE MORTGAGE CREDIT ACT OF 1970 Section 1 of the bill would establish an experimental dual interest rate system for FHA and VA assisted mortgages and loans. The present temporary authority for the Secretary of Housing and Urban Development to establish maximum interest rates for FHA and VA loans in excess of statutory maximum interest rates when necessary to meet the mortgage market would be extended until January 1, 1972. As an alternative to this administered rate, the Secretary and the Administrator of Veterans' Affairs would be authorized to insure or guarantee loans at any interest rate agreed upon by the borrower and the lender. Direct VA loans, however, could not bear an interest rate in excess of the administered rate. This "free-rate" would be available only if the lender certifies it has charged no discounts to any party except as compensation for expenses in accordance with regulations prescribed by the Secretary and the Administrator. Discounts would continue to be permitted with respect to insured or guaranteed loans bearing an interest rate within the maximum rate established by the Secretary, but it is intended that there be no administrative limitations on the amount of discount borne by the borrower. In order to assure that prospective mortgagors are able to evaluate the cost of borrowing under FHA and VA programs, the Secretary and the Administrator would be directed to take steps to assure that prospective borrowers have adequate information about the operation of the dual interest rate system and current financing costs in the area for FHA or VA loans-including interest rates, discounts, and other fees and allowable settlement costs. In order to assure that maximum interest rates established by the Secretary are maintained at levels to meet the mortgage market, the Secretary and the Administrator would be directed to submit a joint report to the Congress no later than March 1, 1970, and at least once during each three-month period thereafter, on the adequacy of the Secretary-established rates in meeting the mortgage market, including the level of discounts incident to such rates and the relation of such rates and discounts to the "free-market" interest rates. The Secretary and the Administrator would also be directed to submit a joint report to the Congress not later than July 1, 1971 (six months prior to the expiration of the experimental dual interest rate system), evaluating the system and making recommendations as to permanent legislation with respect to interest rates on FHA and VA loans. Section 2 of the bill would direct the Secretary and the Administrator, after consultation with each other, to prescribe standards governing the amounts of settlement costs allowable in any area in connection with the financing of FHA and VA assisted housing. The standards for FHA and VA loans would be consistent with each other and would be based on the Secretary's and the Administrator's estimates of the reasonable charge for necessary services involved in settlements. The Secretary and the Administrator would also be directed to undertake a joint study and to make recommendations to the Congress no later than July 1, 1970, as to legislative and administrative actions to reduce and standardize settlement costs. Section 3 of the bill would create a Special Advisory Commission on Housing which would, no later than November 1 of each year, recommend to the Congress specific housing goals for the next fiscal year and proposals to achieve these goals. The Commission's recommendations would be considered and discussed in the annual housing report required to be submitted by the President pursuant to Title XVI of the Housing and Urban Development Act of 1968 and would thus constitute a part of the Administration's decisional process with respect to housing policy. The Commission would consist of thirteen members appointed by the President after consultation, whenever practicable, with the ranking majority and minority members of the Housing Subcommittees on Banking and Currency of the Senate and House of Representatives. No more than three members of the Commission could be regular full-time employees of the Federal Government and at least four members must represent consumers. Members of the Commission would serve for terms of two years. Section 4(a) would amend Section 5(c) of the Home Owners Loan Act of 1933 to (1) remove the $40,000 mortgage ceiling and to replace it with discretionary authority by the Federal Home Loan Bank Board; (2) authorize Federal savings and loan associations to act as trustees for Keough type retirement funds. Existing tax law permits savings and loan associations to act as trustees for such funds but the Federal savings and loan law contains no such authority. Section 4(b) of the bill would amend Section 2 of the Home Owners Loan Act of 1933 to broaden the primary lending area of Federally chartered savings and loan associations to the entire area of the state in which the home office of such an association is located, provided, however, that this broadened area may not apply in the case of an association having its home office in a state where state chartered savings and loan associations are not permitted to loan in any portion of the proposed broadened area. Existing law limits in general the savings and loan associations primary lending area to 100 miles from the home office of such association. Section 5 would amend Section 24 of the Federal Reserve Act to extend the ratio of loan to value from 80% to 90% for fully amortized conventional mortgage loans by national banks. It would also increase the term of conventional mortgage loans for national banks from 25 to 30 years. In addition it would permit national banks to make construction loans for a period of up to 60 months. Existing law limits such period to 36 months. Hon. JOHN SPARKMAN, CHAIRMAN OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, Washington, D.C., March 16, 1970. Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: I am writing in response to your request for a report on S. 3442, a bill to increase the availability of funds for the financing of urgently needed housing, to authorize the establishment of standards governing the amount of settlement costs allowable in the financing of Federally assisted housing, and for other purposes. The Board of Governors supports the proposed experimental dual-market system of setting contract interest rates on new FHA and VA mortgages, as authorized by Section 1 of the bill. The trial period lasting until January 1, 1972-during which contract interest rates could be established either by regulation, as at present, or by the market-will offer the opportunity for determining how far it is appropriate to move toward more flexible rates. Whatever greater flexibility can be achieved, of course, will allow standardized FHA and VA mortgages to compete more readily with conventional mortgages as well as with other capital market instruments. And it will broaden the potential scope of the secondary market for Government-underwritten mortgages. The Board also favors exploring ways and means of reducing and standardizing settlement costs on FHA and VA mortgages, as contemplated by Section 2 of the bill. Section 3 provides for a Special Advisory Commission on Housing, which would submit annual recommendations, including ". . . the fiscal and monetary policies, both long- and short-range, which are necessary to achieve recommended levels of housing production . . . ." It should be noted, however, that since the Commission's report is to be filed by November 1, its recommendations as to fiscal and monetary policy may not be consistent with, or attainable within, the general framework of public economic policy as it ultimately evolves. Incidentally, the rate that the Commission could pay for consultants appear low. Sections 4 and 5 of S. 3442 would liberalize certain restrictions on the mortgage lending powers of Federal savings and loan associations and national banks, and would permit a Federal savings and loan association to act as trustee for certain trusts. With respect to mortgages, there is a pressing need to standardize, as far as possible, the authority of all types of financial institutions to invest in these assets. Section 5 of S. 3442 would liberalize the authority of national banks to make real estate loans. For conventional mortgage loans, the loan-to-value limit would be raised from 80 to 90 per cent, and the maximum maturity from 25 to 30 years; for loans on construction projects, the maximum maturity would be extended from three years to five years. The Board continues to support this change as a means of stimulating increased mortgage lending by banks. Sincerely yours, ARTHUR F. BURNS. Subject: S. 3442. THE SECRETARY OF HOUSING AND Urban DEVELOPMENT, Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, Washington, D.C. DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Department on S. 3442, a bill "To increase the availability of funds for the financing of urgently needed housing, to authorize the establishment of standards governing the amount of settlement costs allowable in the financing of federally assisted housing, and for other purposes." This bill would implement many of the recommendations of the Commission on Mortgage Interest Rates. Section 1 would establish an experimental dual market system for FHA-VA mortgages under which these mortgages may be originated under either of two options, depending on the preferences of the borrower and lender. The main issue that this dual market proposal raises is whether we are prepared to permit more freedom in FHA-VA interest rates than has been the case before now. We believe such increased freedom would be desirable, both in order to introduce greater flexibility into the market, and as a way to permit the elimination of discounts. The first of the two options provided in S. 3442 is essentially a continuation of the present system. With respect to this option, it would be desirable to have the statute expressly provide that where a discount is collected by the mortgagee, the several parties to the transaction may negotiate to determine what share of the discount each will pay. The requirement in S. 3442 that the mortgagee disclose the full amount of the discounts (or points) collected from each of the parties to the transaction is most desirable because it would help prevent duplictatory charges. The second, or free rate option is intended to provide an alternative to the use of discounts. The discount problem has been especially troublesome in our assisted housing programs. Many nonprofit spnsors of multifamily projects simply have no way of absorbing any discounts, and even under the section 235 homeownership program, builders cannot absorb more than a certain amount before losing money on their operation. To be able to get rid of discounts in these situations we would be most desirable. While we favor enactment of this section, we believe it most important that any legislation that authorizes such a dual market system should leave the timing of implementation to the discretion of the Secretary. We support those provisions in S. 3442 which would direct the Secretary of HUD and the Administrator of Veterans' Affairs to prescribe standards governing the amounts of settlement costs allowable in connection with FHA and VA assisted housing. However, we recommend an extension to July 1, 1971, of the date for reporting the results of the joint study on possible actions to help reduce and standardize settlement costs. S. 3442 also calls for establishment of a special advisory commission "consisting of both government and private participants, including representatives of low- and moderate-income groups" to recommend in the fall of each year a national housing policy for the coming year. These recommendations are to be discussed in the President's Annual Housing Report and, to the extent possible serve as a basis for determining fiscal and monetary policy. Administration policy on housing emerges out of a continuing dialogue among all interested departments and agencies against the background of other national and international conditions and objectives. In addition, we are already continually bringing outside views to bear in a flexible and timely manner on the policy formulation process. A one-shot contribution to this process from an outside commission simply would not be of much help. We do not, therefore, recommend enactment of this provision. Subject to the above recommendations, this Department would have no objection to enactment of S. 3442. Sincerely, RICHARD C. VAN DUSEN Hon. JOHN SPARKMAN, THE GENERAL COUNSEL OF THE TREASURY, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on S. 3442, "To increase the availability of funds for the financing of urgently needed housing, to authorize the establishment of standards governing the amount of settlement costs allowable in the financing of federally assisted housing, and for other purposes." The only provisions of the bill of primary interest to this Department are sections 1 and 5 of the proposed legislation. Comments on these sections are set forth below. Section 1 would authorize the Secretary and the Administrator of Veterans' Affairs, prior to January 1, 1972, to insure or guarantee mortgages and loans "at whatever interest rate may be agreed upon by the borrower and the lender" if the lender certifies it has made no charges in the nature of discounts in connection with a mortgage or loan transaction except as compensation for expenses in accordance with regulations prescribed by the Secretary and the Administrator. The language "agreed upon by the borrower and the lender" does not give adequate recognition to the responsibility of the agency administering a guaranteed or insured loan program to assure that rates paid do not include unnecessary compensation to private lenders for risks borne by the Government, and could lead to pressures to establish maximum rates which would be excessive in view of the virtual complete absorption of risk by the Federal Government. The quoted language also fails to recognize the special responsibilities of the administering agency to attempt to minimize the gross interest rate charged by the lender in guaranteed and insured loan programs, such as the programs under sections 235 and 236 of the National Housing Act, under which the borrower pays a reduced interest rate and the Federal agency pays the difference between the rate payable by the borrower and the rate charged by the lender. These cases involve a direct interest cost in the Federal budget, and there is little or no incentive for the borrower to attempt to minimize the rate charged. In order to remedy these shortcomings, the Department recommends amending section 1 of the bill as follows: In proposed paragraph (2), add at the end thereof a new sentence: "Such regulations may provide for the Secretary's and the Administrator's right to reject transactions with interest rates that are substantially inconsistent with prevailing rates on similar transactions of similar risk." The Department would have no objection to enactment of section 1 of the bill if it were amended as recommended. Section 5 of the bill would increase the amount of a loan that could be made by a national bank when the loan is secured by an amortized mortgage from 80 to 90 percent of the appraised value of the real estate offered as security for the loan and increase the term of the loan from 25 to 30 years. It would also increase the terms of a loan that could be made by a national bank to finance the construction of industrial or commercial buildings from 36 months to 60 months. The Department has no objection to section 5 of the bill. The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Committee. Sincerely yours, PAUL W. EGGERS, General Counsel. Hon. JOHN SPARKMAN, VETERANS ADMINISTRATION, Washington, D.C., March 19, 1970. Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: This responds to your request for a report by the Veterans Administration on S. 3442, 91st Congress, the proposed “Mortgage Credit Act of 1970." The stated purpose of the bill is to increase the availability of funds for the financing of urgently needed housing, to authorize the establishment of standards governing the amount of settlement cost allowable in the financial of federally assisted housing, and for other purposes. The bill consists of five sections, only |