there might be justification for this facility in buying that mortgage at a figure that, in the opinion of its offices, is a reasonable figure, after a period of seasoning. On the other hand, if the reason for that discount or the low price of that mortgage is because the area is overbuilt, and there is no need for further housing, then the facility would be justified in not accepting that loan. We believe it would be unfortunate to retain any provision in the bill indicating that FNMA might buy below the market price. The indication that FNMA might buy below the market could conceivably have the effect of depressing the market, psychologically. We recommend, therefore, that section 304 (a) be amended so as to permit the Association to purchase mortgages "at or near the market price but not above par.' That would not prohibit going below the market, but it doesn't wave a red flag, that its function is to go below the market price. Section 304 (b) provides that the facility may issue debentures for not more than 10 times the capital, capital surplus, general surplus, reserves and undistributed earnings. And it also, quite properly we believe, has a second specific limitation, that the outstanding obligations may not exceed the aggregate of the unpaid balances on the mortgage portfolio, plus cash and plus Government bonds. We believe, however, if this huge program of rebuilding our American cities is to work successfully, and if it is not to impose a hardship upon the balance of the money economy, as represented by the insurance companies and the banks, and mortgage lenders, that, if possible, a new source of mortgage money be made available, namely, the sale of debentures to the public. And inasmuch as the underlying securities are already guaranteed by the Federal Government, we recommend that that limit be increased to 15 to 1 rather than 10 to 1. Senator DOUGLAS. Mr. Summer, may I ask one question: In your plan, would the Government have any residual liability, or would liability to the Government be eliminated under your plan? Mr. SUMMER. Yes, sir. Senator DOUGLAS. When would that happen? Mr. SUMMER. I will get to that in my testimony. Mr. SUMMER. When the Government funds have been retired-you mean as far as this secondary mortgage facility is concerned? Senator DOUGLAS. So far as ultimate governmental liability for losses. Mr. SUMMER. You are speaking of FHA, is that right? Mr. SUMMER. That is something that many of our members have felt for a long time should pass into the hands of private lenders, and I think that there is much merit in looking forward to that situation. We sincerely believe that if this secondary facility as recommended here, builds up tremendous reserves necessary to do the job, and has these reserves large enough, it may well be that the facility no longer needs guaranteed mortgages in its portfolio. Senator DOUGLAS. But until that is done you will retain governmental liability under FHA and VA. Mr. SUMMER. I think there is no way you can avoid an interruption in the building economy of the Nation, which affects our entire econ omy. You can't overnight cut it off. I think a gradual changeover is very much in order. The CHAIRMAN. As the bill is written now-excuse me; were you going to say something? Mr. SUMMER. I have a note here that the $1 billion Treasury backstop on debentures would end when the Treasury stock is retired. That is not specifically answering your question, because your question was on FHA, I think. But I see no reason at all why, after the Treasury stock is retired here, and after adequate reserves-and I mean really adequate reserves are established for losses, why the facility couldn't then take on conventional mortgages, and not be limited to Government-guaranteed mortgages. And in that way, gradually, without interrupting the building market and the lending market, that can be accomplished, and I think it is a commendable objective, sir. The CHAIRMAN. The bill, as written, you know gives the President the right to call directly upon the Treasury for money. Mr. SUMMER. That is right. The CHAIRMAN. Should that continue after the Government stock has been completely retired? Mr. SUMMER. Are you speaking now of the emergency_assistance? The CHAIRMAN. Call it whatever you want to call it. But it gives the President the right to call upon the Treasury for funds. Mr. SUMMER. There is a special assistance clause in the bill, which pertains particularly to section 220 and 221 loans, and we have a comment to make on that. We think that probably will have the same experience that VA had, and that FHA had, and at first the lenders will be slow, and as the thing gets rolling, the need for it will discontinue. And if the Treasury participation or backstop ends with the retirement of the Federal funds on the rest of the program, there is no reason why it can't end on the special-assistance phase of it, after the hurdle has been overcome. Experience, I think, has proven in the past that that is what does happen. Now, as to the Board of Directors, we propose an amendment which, like several others already referred to, would tend to bring closer to reality the objective of ultimate substitution of private capital for Government capital. True, we propose making the association a mixed-ownership Government corporation, but it must be borne in mind that private financial participation will commence on the day the association begins business. We believe, therefore, that the Board of Directors should consist of 7 persons, appointed by the President, without restriction initially as to their Government or non-Government status. When half of the Government-held stock has been retired-approximately $35 million--at least three of such members would be replaced by appointment from among stockholders from the mortgage lending, residential real estate, or home building industry. When all of the Government-held stock has been retired, then we propose that all of the directors be appointed by the President from among the stockholders and be broadly representative of the mortgage lending, real estate, and homebuilding industries. In this connection, we recommend that not more than one director be appointed from a particular industry. With respect to the mortgage-lending industry, its various segments, such as savings and loan associations, commercial banks, and the like, should each be considered a separate industry for this purpose. And I think it is important that the Board of Directors do not have any more than one member from each segment of the industry, because it should be broadly representative, and not be based upon stock investment. We also recommend-and I will just touch on this-the creation of an Advisory Council of 15-the Secretary of the Treasury or his designees, the Chairman of the Federal Reserve System or his designee, the President of FNMA, and 12 others, appointed by the HHFA Administrator, for 3-year periods, staggered terms, representing various segments of the industry, and various parts of the country geographically, to tie in the experience in the field with the overall lending policies. We recommend that at least until the Treasury funds have been retired and there is a substantial buildup, that there be no double taxation on the earnings of the facility; that anything paid out in dividends be taxable; that anything paid out in interest on debentures be taxable; also salaries-that they all be taxable. But until the reserves are very, very substantial—I am talking about 15 or 20 percent of the mortgage portfolio-and until the Treasury's funds have been retired, that there be no double taxation. We recommend also that any real estate owned by the association be subject to normal local taxation. We recommend that section 302 be amended by providing that the association shall be deemed to be a mixed-ownership Government corporation until all the Federal financial participation has been replaced by private capital. reason for that is so it will not be subject to the expenditure restrictions imposed upon ordinary agencies by corporations. The Now, in closing, I want to emphasize that the entire program on FHA, on slum clearance, on removal of slums, is purely academic, unless mortgage money flows. And I think this committee has mentioned that several times. And what will make mortgage money flow is, first of all, a realistic program of handling interest. Secondly, I think it is most important that all standby authorities be removed, because that will have the effect of artificially creating a depression that need never be, because lenders and investment capital alike will wait back to see whether or not the authority is exercised. The CHAIRMAN. I am not quite clear what you mean. You mean if he has authority to change the interest and terms? Mr. SUMMER. Not the interest. We recommend on that, that it go to a board. We do not like the standby authority on interest either. We like the other proposal. But the standby authority on certain changes in the FHA type of lending, title II, sections 220 The CHAIRMAN. You mean such as downpayment Mr. SUMMER. Downpayment, length of mortgage. The CHAIRMAN. You want that fixed definitely? Mr. SUMMER. Whatever this Congress decides should be enacted, with no standby authority whatever. The CHAIRMAN. But you do want authority to change the interest rate given to a board? Mr. SUMMER. Yes; under a reasonable formula. The CHAIRMAN. Why one and not the other? Mr. SUMMER. For reasons that lenders recognize and thoroughly know the economics of interest on mortgages. They know that under the proposal we have for a flexible interest rate, it would be merely a ratio with a return on all other forms of investment which no one can control in advance artificially. And if you do it artificially, unrealistically, you affect the value of the dollar. On the other matter, the question of the length of mortgages, the type of mortgages, and so on, you cannot expect risk capital to go in and buy land and go to the expense of architectural planning, acquisition of property, or expect lenders to agree to loan money, knowing that there may be other means of financing available that might be more advantageous. And it will result in everyone marking time. And when the building industry and the mortgage-lending industry marks time you're hauling your curtain down. The CHAIRMAN. Won't you get the same thing on interest? The CHAIRMAN. You won't? Mr. SUMMER. No, sir. If you announced, for instance, that interest would be increased at a later date, you certainly would get it, but when you have a facility where you don't know whether interest is going down or up, that is not the result. But the moment you have a fixed interest rate, either high or low, you create an artificial situation that causes stops and starts; whereas, a flexible interest rate, adjusted to the entire money economy, and realistically fitted into it, is understandable by all lenders. That is their business. Therefore, I say in conclusion, that without a proper secondary mortgage facility, without a realistic treatment of interest rate-and interest on debentures in terms of debentures are just as important as interest on mortgages-and without the facilities to help these small communities, these isolated communities, through participations and through extra service charges and through technical help that has been recommended, so that mortgage money will flow evenly throughout the United States and not favor the big centers, I don't think you will solve the housing program adequately, and you will have merely a fine-paper program, which I believe is not what this Congress wants. Thank you for your time. The CHAIRMAN. I just want to call to the attention of the committee that Mr. Foley, the former Adminstrator of the Housing and Home Finance Administration, is here this morning. We are delighted to have you, Mr. Foley. Mr. WALTEMADE. Mr. Chairman, before Mr. Burns concludes, I might say we brought with us the president of the National Association of Real Estate Boards, Mr. Ronald J. Chinnock-one of Senator Douglas' constituents-who flew here. I would like to present our national president, Mr. Chinnock. Now, Mr. Burns would like to conclude. Mr. BURNS. Mr. Chairman and gentleman of the committee, I am fully conscious of the lateness of the hour, and I only want to make a few concluding remarks. I think that whereas most of the discussion-and if you want to say "fireworks"-in connection with this bill might revolve around section 221 and the public housing issues, I think it would be regrettable to overlook the fact that in this overall program, this overall attack on slums that we are trying to launch, the biggest job in relocation will be in the moving of people-rather the people moving into1 want to make a great distinction there-people moving into close-in rehabilitated housing. I think that anytime you try to create new housing for the lowest incomes, whether it be Government-owned housing or any other kind of housing, you get into a topsy-turvy type of economics. The idea of building new houses for the lowest incomes is a difficult thing, and it gets very complicated. I think the big job is always going to be to see to it that the people in the lowest incomes get better housing than they have now. And I think it is going to be more a matter of them moving into other rehabilitated, close-in neighborhoods, rather than transporting them to outlying areas, because there are a lot of reasons. There is a certain thing about neighborhood identity that is very important. People like to be near their churches; maybe they have walking distance jobs; children like to stay in the same school, if possible. Keeping neighborhoods integrated as they are, probably also brings about less racial irritations. So, I think the big job is going to be in this rehabilitation program. In my city, for instance, it is rather surprising to note-Los Angeles is a rapidly growing city, but nearly two-thirds of the city's census tracts showed a loss between April 1950 and a special census which was made in September 1953. The loss totaled nearly 71,000 for the census tracts involved, a shrinkage of 8.6 percent in 32 years. This was not only the downtown area, which lost over 12 percent, but the whole central portion of the city. This loss, of course, was more than offset by a gain of 205,000 in the outlying parts of the city, including the San Fernando Valley. But the point I am making is that many cities are actually losing population in their close-in area. It may not pertain to the really hard-shell, rockbottom cities that have almost passed the point of no return, you might say, but it does apply to the vast majority of our cities throughout the Nation. Just within the last day or two-to give you an indication of the kind of things that are going on-here is a voluminous report from Fort Worth, Tex. I will read the first sentence: "The citizens' committee, appointed by the mayor to study housing rehabilitation, has completed its study." And it goes on to report on that study. The CHAIRMAN. Do you want to place that in the record? The CHAIRMAN. Without objection, it will be placed in the record. Mr. BURNS. And this one, from the city of Atlanta, reports for 1953, 4,248 dwelling units repaired, and 463 dwelling units demolished. The CHAIRMAN. That, too, may go in the record. (The documents referred to follow :) Hon. EDGAR DEEN, FORT WORTH, TEX., March 10, 1954. Mayor and members of the City Council, City of Fort Worth, GENTLEMEN: The citizens' committee appointed by the mayor to study housing rehabilitation has completed its study. This study disclosed the following pertinent facts: 1. There is a serious slum problem in Fort Worth and an immediate need for a program of housing improvement and neighborhood rehabilitation. |