all kinds to increase or modify these favors. In the end the statute has been so cluttered up with procedural variations and provisions of little or no utility that it has got beyond the comprehension of the experts in the field, let alone the ordinary citizen for whose benefit it was intended.

The pending bill probably goes as far as is presently possible to simplify the statute, to remove discrimination as between one type of house and one type of borrower as against another, to reassert confidence in the private market to make its own decisions, and to make FHA again truly an instrument for facilitating the operation of "a strong, free, competitive economy."

Specifically, we endorse the elimination of sections of the National Housing Act that have no proven utility; the simplification of procedures for handling group accounts in the mutual mortgage insurance fund, the allowances made against the cost of foreclosure, the provisions on debentures issued on foreclosure, the removal of distortions in the schedule of loan-to-value ratios so as to avoid undue concentration on one area of the market; the increase in the top dollar limits so as partially to restore FHA's original board market coverage, the equalization of terms for new and existing construction, the increase in the limits for financing unsecured loans for repair and modernization, the application of the open-end procedure to FHA-insured loans, and the utilization of FHA-insured loans for the renewing of blighted neighborhoods.

We have only a few suggestions to make about these sections of the act. One of these would be to give FHA authority to refund its own debentures, if necessary, at their 10-year maturity, instead of having to resort to Treasury financing as might be necessary if the foreclosed properties should not have been previously liquidated. Another is a proposal to facilitate the operation of section 213 of the National Housing Act dealing with cooperatives. This is being presented for the Mortgage Bankers Association by Mr. Maurice R. Massey, Jr., who has probably had more experience in financing cooperatives under this section than anyone else in our business.

We also wish to urge the adoption of a provision in the Advisory Committee's report, but not included in the bill, which would give FHA greater leeway in using its income to meet the inevitable variability in its operating expenses. We refer you specifically to recommendation No. 27 of that committee as it appears on page 56 of the printed report.

We believe that if the things are done that I have been discussing, all that may be done to make FHA a beneficial aid to the operation of the private market will have been done. To go beyond this would only be to revert to the practice of setting up a special provision to meet each real or assumed emergency, to renew pressure to make the new provision applicable to a greater range of cases, and to turn builders and lenders away from their own responsibility for meeting public demand to dependence on Government support and direction. For example, the bill proposes enactment of a new insurance program to be called section 220. We support the objectives of this proposed program but we do not support the method it is proposed to use to accomplish there objectives. So far as we can determine the maximum loan limits and other terms proposed for these new 220

loans are almost identical with those which would be imposed if the proposed amendments to section 203 are enacted.

It is our belief, therefore, that the purposes of section 220 could be effected by FHA under the new 203 program if proper underwriting instructions are issued by FHA with reference to the kind of neighborhood improvement operation contemplated for section 220.

If this is so, why then again make the same mistake which has been made so frequently in the past? Why set up an entirely new insurance program when the desired aim is to simplify FHA's operations? Therefore, it is our belief and recommendation that section 220 not be enacted, but that FHA be directed to accomplish the desired results under section 203 as it will be amended.

Further, the proposed section 221 for the National Housing Act, calling for a loan with no downpayment-except for closing costsand a 40-year maturity, seems to us to represent even further this kind of retrogression. We do not believe this proposed section is necessary, in the light of the generous maximum terms to be provided for the basic FHA operation. We doubt that it will prove attractive to private lenders even with the proposed increased assumption of risk by the Government. We know that it will add to the complexity and cost of administration of FHA. We are confident that pressure soon would be created to extend its provisions to the basic FHA operation. Finally, we question the reality of the advantage to its supposed beneficiaries, assuming that the plan will work at all.

The building industry has all too frequently been criticized for opposing public housing while at the same time requesting more and more Government assistance for our own operations in terms of higher interest rates, lower downpayments, and longer maturities. Even though I do not believe such criticism has been justified in the past, it would certainly be justified now, if the Mortgage Bankers Association of America as an organization of lenders were either to sponsor the proposed section 221 program, or were to fail to point out its inconsistencies as a so-called private enterprise program.

If this section of the bill is passed we, as lenders, will endeavor to utilize its provisions in accordance with the purposes of the legislation, but we believe its enactment would be against our better judgment.

From the borrower's point of view the expansion of the loan-tovalue ratio and the extension of the amortization period may be a very deceptive expedient. In the guise of reducing the cost of his housing it actually increases his housing cost in terms of the interest that he must pay over the life of the loan. For example, on a $5,000 mortgage the difference in principal and interest monthly payments between a 30-year and a 40-year amortized loan-assuming 412 percent interest-is only $2.85. $25.35 as versus $22.50. But this supposed saving actually results in the difference of paying $5,800 instead of $4,126 in interest over the life of the loan. A decrease of 11 percent in the monthly payment between a 30- and 40-year loan thus results in a 41-percent increase in the total interest payment. This is a high long-term price for a small short-term advantage.

We should also like to point out the very small difference in downpayment requirements between the proposed section 220, or at new limits under section 203, and this section 221. Under section 220, or under section 203, the downpayment on a $7,000 house would be $350.

Under section 221 the cash payment required would be $200. The difference seems almost so little as to question the necessity of setting up an entire new insurance structure.

The basic trouble with section 221 is that it is trying to do what is essentially a welfare job with a device that is not suited to the purpose. Rather than run the risk of destroying the place of FHA in a private credit system we believe it would be better if such a necessity exists to make an outright grant of a downpayment, or part of the interest payment, or some similar subsidy, but in any case to recognize such subsidies for what they are, rather than to conceal their true nature by offering them as a normal credit transaction.

In title II of the bill we find a significant departure from both the specific recommendations and the spirit of the advisory committee report. The report urged the creation of a statutory committee charged with the responsibility of seeing to it that all times the interest rates on insured and guaranteed loans would be kept in line with the general structure of interest rates. The committee was to have no other powers, but action on the authority given to it was to be mandatory.

The idea was that by reposing mandatory action in a committee instead of permissive action in a single individual, the control of interest rates would be removed as well as it would be from political and other special pressures. It was the idea, further, that by keeping the interest in line with the marekt FHA and VA loans would at all times receive a more or less constant share of the total supply of mortgage money, and that the general control of credit through Treasury and Federal Reserve action could be counted on, without other means, to exercise sufficient influence on downpayment and maturity to prevent an inflationary use of credit. It may be noted that in the past it was the failure to exercise such general control that brought about excesses in FHA and VA financing.

The bill substantially differs from the report. First, it places the control in the President, upon whom the full weight of political pressure can be brought, rather than in a group of designated officials. Second, it makes the action permissive rather than mandatory, thus inducing delay when political expediency counsels against action. Third, it substitutes a form of selective-credit control applied solely to one part-and a minority part-of the mortgage market for reliance on the general controls which affect all parts of the market equally.

We believe that this approach is contrary to the basic principle upon which this legislation is based. We believe it substitutes political considerations for market considerations. We believe, moreover, that it creates an undue hazard to the users of the Government-sponsored systems, whose activities could be completely controlled while those using conventional financing would be totally unaffected.

We can see no excuse for this sort of discrimination. We fail to recognize any justification, for example, for applying selective credit controls to institutions making mortgages directly insured by the Federal Government and not applying it to institutions making mortgages indirectly insured by the Federal Government through the insurance of their deposits or share accounts. We do not, of course, advocate the extension of direct controls to these other institutions; we merely point out the inconsistency.

We oppose all forms of direct, selective, and optional controls, as being contrary to the very essence of a strong, free, competitive economy. We consider that the control of the price of money, and the rationing of the supply of money by official action, is just as deleterious to the effective operation of a free economy as official price control or rationing commodities. Such controls as are proposed can only serve to drive activity away from the controlled areas. In the relationship between private business and Government it is vital that the rules be known and that changes be infrequently made. Private enterprise cannot effectively operate in an atmosphere of apprehension or uncertainty caused by frequent and unforeseeable changes in the rules of the game. That atmosphere leads to attempts to double guess the Government and to act on judgments of probable Government action rather than on estimates of the demands of the market. The Mortgage Bankers Association has long advocated that the rate of interest on FHA and VA loans be left free to find its place in the market, in the confidence that the insurance and guaranty features would be sufficient to give these rates a competitive differential. Actually, in the end, no other method of setting rates will work unless public credit is to be substituted for private credit and public distribution substituted for the private market.

We have accepted the proposal in the advisory committee report as being a step in the right direction and probably the longest one that could be made at the present time. We cannot, however, endorse a plan that places the FHA and VA part of mortgage activity under as strict and comprehensive controls as ever have been found necessary in an acute national emergency in the midst of an otherwise free market. We cannot help but point out that our entire history not so long ago fought vigorously in protesting the extension of authority to impose controls under regulation X, to end the very types of controls now proposed in title II. The plan is neither fair nor practicable. It will not work. It promises only trouble for any administration that seeks to operate it.

At that place I would like to make a comment that I don't believe the people who prepared these bills thought the matter through.

The responsibility for increasing interest rates, or decreasing them, the responsibility for changing terms, is left to the President. I don't believe that either a Republican or a Democratic administration would like to put the onus on the President of having headlines in the newspapers at some time when it became a complete necessity to change rates of interest-and, let us assume it was up-"that the President increased the interest rates on veterans in the United States." Ether Republican or Democrat, I don't think would want to take that possible responsibility.

It seems to me that the thinking ought to go back to that plan as recommended by the advisory committee, of having a specific committee charged with the responsibility for setting the rate that would keep these loans at the market.

Mr. PATMAN. Mr. Clarke, you are assuming that they would always be increased.

Mrs. CLARKE. Not necessarily, sir.

Mr. PATMAN. Think about the credit the President would get for decreasing them.

Mr. CLARKE. Exactly. I have seen it both ways, Mr. Patman. But the point is the action should take place fast, both up and down. I will illustrate for you: Going back before the Federal accord FHA interest rates were 412 percent. They were selling at a very substantial premium in the market. The interest rate was too high. That delayed and delayed and delayed much too long, with the premium continuously going up. Finally the rate was cut to 414. By that time the 44 rate was still too high, and they were still selling at a premium.

In other words, a premium market, in my opinion, is just so bad and evil as a discount market, and if the thing is free, or if there is a specific committee that is charged with changing the market as the market conditions change, it would be done fast.

The problem that comes in this connection is that that there are terrific lags, both up and down.

Our opinion is that title III of the bill-dealing with the revival of the Federal National Mortgage Association-also is a significant and unfortunate departure from the recommendation of the President's Advisory Committee. In an unimpeded free market, controlled by freely moving interest rates, supported by increasing savings and active competition all along the line among various types of lenders and various kinds of borrowers, the need for a secondary mortage market facility is not great.

This conclusion is based on a year-long study recently completed by the Association, the final report of which I am submitting herewith, with the request that it be included in the record-appendix A. In substance, we believe it would be desirable to provide the users of FHA and VA financing with an institution of last resort that could help to even out irregularities in the regional and seasonal flow of mortgage funds and could offer a source of liquidity in times of unusual stress. We do not, however, believe that such an institution should promise to maintain a flow of funds at all times or under all conditions, that it should support credit programs that are not inherently sound, or that it should provide a means for avoiding interest rate adjustments that the market demands.

The plan offered by the President's Advisory Committee conformed to the specifications I have just set forth. It would be capitalized with non-Government money. It would follow the pattern of the land-bank system in requiring an investment in stock at a ratio recommended at not more than 4 percent to the amount of mortgages sold to the institution, this stock to be redeemable whenever these mortgages might be repaid or sold to another investor. It would obtain additional operating funds by offering debentures in the market at a maximum ratio of 12 times its capital and surplus. It would receive no support from Government and assure no support for otherwise unmarketable activities. It could, however, well serve to tide over temporary distortions in the flow of funds and to expand the market for loans in areas of capital deficiency. With minor suggested modifications the Association endorsed the recommended plan.

The proposal in the legislation, on the one hand, offers a completely impracticable mechanism so far as concerns what might be called a normal secondary market function, and, on the other, provides

44022-5427