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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(6) 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.

CHAIRMAN OF THE BOARD OF GOVERNORS,

FEDERAL RESERVE SYSTEM,

Washington, D.C., March 16, 1970. Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currenoy, U.S. Senate, Washington, D.C.

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.

THE SECRETARY OF HOUSING AND URBAN DEVELOPMENT,

Washington, D.C., March 17, 1970. Subject: S. 3442. Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.O.

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-VĂ 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

(For George Romney).

THE GENERAL COUNSEL OF THE TREASURY,

Washington, D.C., March 19, 1970. Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

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.

VETERANS ADMINISTRATION,

Washington, D.C., March 19, 1970. Hon. JOHN SPARKMAN, 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 the first three of which pertain directly to the Veterans Administration and consequently our comments will be limited to these three sections.

The first section would amend Public Law 90–301, as amended, to designate what is now section 3(a) of that law as paragraph (1) of section (a). The only change made in that subsection is to delete the terminal date of October 1, 1970, for the exercise of the authority of the Secretary of HUD to fix maximum interest rates and substitute January 1, 1972, therefor. Thus, it is an extension of one year and three months of such authority.

Although the balance of the first section of the bill as well as section 2 contain provisions substantially in conformity with the recommendations of the Commission on Mortgage Interest Rates in respect to dual interest rates, we note the absence of any provision for the sharing of discounts by the buyer and seller as recommended by the Commission. The Administration, as reflected in the testimony of the representative of HUD at the Hearings before the Subcommittee on Housing of the Senate Committee on Banking and Currency on September 25, 1969, indicated its willingness to go along with the Commission proposal to allow points to be paid by either buyer or seller as they may agree. Without further explanation we can only conjecture as to whether this omission by the sponsor of the bill was deliberate or inadvertent. We do not have any objection to the proposed further extension of the present temporary authority of the Secretary of HUD, after consultation with the Administrator of VA, to prescribe an interest rate in excess of six percent.

The first section of the bill would further amend what is now section 3(a) of Public Law 90-301 by adding three new paragraphs, numbered (2), (3), and (4). The proposed paragraph (2) would implement the second aspect of the dual interest rate system recommended by the Commission on Interest Rates to give the Secretary of HUD and the Administrator of VA authority 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 the transaction. This authority would extend to commitments issued by the respective agencies prior to January 1, 1972.

We took the position before the Subcommittee on Housing of the Senate Banking and Currently Committee on September 25, 1969, that we believe the dual market system warrants a trial. However, we pointed out that it is a substantial departure from the approach used heretofore and, for this reason, it would seem there should be only a gradual and selective implementation of it. This is in line with the position taken by the spokesman for HUD in his testimony on that same date in respect to the free interest rate provision. In his testimony he indicated the Secretary may want to limit the experiment to loans covering multi-family projects in which the borrower is a sophisticated businessman able to bargain on reasonably equal terms with the lender.

We might point out that in view of the current permissible interest rate on GI and FHA loans of 812% per annum and the usury statute limitations on interest in the various states, the rate of interest which could be charged by lenders under the "free interest rate” provision would be little above the 842% rate in a number of states.

The proposed paragraph (3) would require the Secretary of HUD and the Administrator of Veterans Affairs to take appropriate steps to assure that prospective borrowers have adequate information as to four named items. These are:

(a) The alternative methods for establishing interest rates pursuant to this paragraph.

(b) Current mortgage interest rates and discounts in the area.

(c) The amount of any discounts to be charged each party to the transaction, expressed in terms of dollars and yield, and

(d) The amount of allowable settlement costs and other fees. This provision also is in line with one of the recommendations of the Commission on Mortgage Interest Rates. We have no objection to this recommendation in principle. As was pointed out at the Hearings on September 25 on this point, we believe it would be necessary for VA to expand its system of collecting and analyzing data in order to provide the information required. Particularly troublesome would be the requirement that the borrower be informed as to "the amount of any discounts to be charged each party to the transaction, expressed in terms of dollars and yield.”

Under existing procedures the VA has no way of knowing the amount of discount proposed to be charged or which actually was charged by a lender on a specific transaction. To accomplish the apparent purpose of this provision it would appear to be necessary for VA to require the lender to report, well in advance of loan closing the exact amount of any discounts to be charged so that VA, in turn, could inform the buyer and seller of said figures. In view of the fact that, as pointed out earlier, the proposed bill does not contain authority for the buyer and seller to share the discount, VA would be compelled to inform the veteran purchaser that no discount could be charged to or paid by him.

In this connection we would recommend that there be added to paragraph (3) specific authority for the Secretary and the Administrator to require disclosure by lenders in such form as they may prescribe of discounts charged or to be charged. In any event the collection, analysis, and dissemination of the information required to be furnished to prospective borrowers would entail considerable additional manpower and other resources. It would be difficult for VA to undertake to absorb such work with the resources now available.

The proposed paragraph (4) would require the Secretary of HUD and the Administrator of VA jointly to report to the Congress immediately, and at least once during each three-month period thereafter, with respect to the ade quacy of the interest rates established pursuant to the fixed rate authority and the relation of such rates and discounts to interest rates charged under the “free interest rate” provision. It would also require the Secretary of HUD and the Administrator of VA to jointly report to the Congress no later than July 1, 1971, an evaluation of the dual interest rate system and make recommendations as to permanent legislation with respect to interest rates on Government assisted mortgages. We have no objection to the recommendations as such except for the frequency of reports. We would suggest that six-month intervals would be more practical and meaningful. This requirement would also necessitate expansion of VA's system of collecting and analyzing data in order to measure the impact of both parts of the dual market system with the resultant need for additional manpower and other resources.

Section 2 of S. 3442 directs the Secretary of HUD and the Administrator of VA to prescribe standards covering the amount of settlement costs allowable in connection with financing Government assisted housing, to undertake a joint study and make recommendations to the Congress no later than July 1, 1970, 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.

Presently, and for many years past, the VA has been regulating maximum amounts which may be charged to a veteran borrower for closing costs and prepaid items. The lender is required to report to the VA in connection with each loan closed the amounts paid by the veteran borrower for all such items and if charges are made which are not authorized or which are determined to be excessive action is taken to remedy the matter. In our view accomplishment of the apparent purpose of this section of the Act would require regulation of fees and charges imposed on both buyer and seller. The study contemplated by the proposed bill would be quite complex and we would suggest that any report required to be made to the Congress on this subject be deferred until July 1, 1971.

Section 3 of S. 3442 would establish a special Advisory Commission on Housing consisting of 13 members appointed by the President. This Commission would submit an annual report to the President and to the Congress in the Fall of each year recommending a national housing policy for the coming year. This proposal was previously commented upon unfavorably before your Committee on September 25 by the representative of HUD. His unfavorable comment also represents the position of the Veterans Administration on this matter.

If the bill were enacted there would be no cost resulting from the extension of the authority to fix interest rates to meet market deinands. There would be some administrative cost associated with the collection, analysis, and dissemination of information required to be furnished to prospective borrowers and to Congress. We are, however, unable to estimate how much this cost would be.

We would have no objection to enactment of this legislation if amended in line with the changes suggested.

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