On the other hand, if you are triple “A," you are in the big league and get your money lower than anyone else can get it. I can see no reason why if a half of 1 percent insurance premium rate is an adequate insurance rate for the existing FHA loan plan, and if these extensions are granted, which admittedly increase the possibility of risk of loss we should hold the same insurance premium rate. If we were to increase the risk 50 percent, we should correspondingly increase the insurance rate 50 percent, which would have the effect of raising the premium rate on that type of loan from a half of 1 percent to three-quarters of 1 percent. In other words, I think there is certainly no magic in a half of 1 percent insurance premium, and that our objective should be to develop flexibility in the operation of the FHA, not with the objective of eliminating the FHA, because I don't think anyone in the United States would disagree that the FHA has made a substantial contribution to the condition of housing and to the construction of mortgage credit, but we certainly should not keep ourselves in the rut of thinking a half of 1 percent is totally inadequate. The second major problem that the FHA itself raises is that it insures the lender practically against any kind of loss. The result of that insurance is that the FHA of necessity has to take over the underwriting job because it is taking all the risk. It has to evaluate the desirability of each individual loan. It certainly cannot permit the individual lenders, against loss of which it is going to provide insurance. It can't allow that individual lender to perform that function. It has to perform that function itself. Now, the result of that, of course, is that you get a highly centralized type of mortgage credit structure, and the more liberal you make that FHA loan plan the greater will be the use of that facility and the more centralized will be the direction of your mortgage lending. One of the great virtues of a private mortgage system is that individual lenders have their prejudices and their opinions, because this is a business of prejudice and opinion. We might as well not kid ourselves on that. There are differences of opinion as to what is a good loan, what is a good borrower, what is the right kind of property; if the FHA is going to do all the underwriting, then the FHA's opinions and prejudices-and I say that without any criticism of the FHA-their opinions and prejudices as to what is a good borrower, what is a good property, what is a good loan amount are going to dominate the mortgage structure credit of the United States. It is almost inevitable. I am sure that many Congressmen as well as many individual lenders have heard lots of complaints about low FHA valuations, unrealistic minimum property requirements, and cumbersome processing procedures. Some of them are justified, some of them are not justified, but basically a good part of those complaints come out of trying to have a national mortgage system that applies throughout all the 48 States and the Territories, covering all these various types of mortgage and risk situations, out of 1 central office. Here, again, we are confronted with the same kind of a problem, what do we do about it? Again, I feel that we are too prone to think in terms of what we did in 1934. We put 100 percent insurance plan in 1934 because the economy was flat on its back and it was the only way you could get mortgage credit into the home-building and home financing business, but this is 1954. Do we actually need in all classes and in all types of residential mortgages 100 percent insurance? Is there no way we can develop a system where individual lenders assume a part of the risk? If the individual lenders would assume part of the risk, the trend and tendency toward centralization of the mortgage structure would be dissipated. I think the FHA itself has part of the answer in title I plan on property improvement loans. Here the FHA insures a percentage of a portfolio. It does not insure each individual loan. Hence, it does not have to determine the desirability of each individual loan. By insuring a percentage of the portfolio, it throws the burden upon the individual lender to perform his classic function of determining among competing potential borrowers who is a good borrower, what is a good property, and what is a proper loan. Here again I think the FHA should examine and explore the possibilities of having different types of insurance plans, certainly under section 220 and 221 of the bill you are going to have 100 percent insurance, but in the run-of-the-mill garden variety single-family residences well located with a person purchaser, I certainly don't think we need 100 percent insurance and if we could get away from that concept we could interject flexibility, mobility into our lending structure. So far as title III of the proposed bill is concerned, dealing with the Federal National Mortgage Association, there are three basic functions as you gentlemen are probably more aware of than am I, the special assistance function, the liquidating and management function of the existing "Fannie May" portfolio, and, of course, the third function, the so-called secondary market operation. Basically, in my opinion, there is no reason for the elaborate procedure for converting "Fannie May" into this private corporation, if the only objectives were special assistance and the management in the liquidation of the existing "Fannie May" portfolio. The validity of this change, this conversion of stock, surplus undivided earnings, etc., into capital stock, is justifiable only insofar as section 304 of the bill is going to work. If section 304 does not work, then there certainly is no reason for going through this elaborate conversion process. As a matter of fact, it might be better not to, for the surplus and undistributed earnings of "Fannie May" instead of then being in stock could be kept as reserves and undistributed earnings to absorb any losses that might be suffered by "Fannie May" in the subsequent liquidation of its existing portfolio, so the changes of title III in my opinion stand or fall on this secondary market operation. The secondary market operation is something there has been a lot of conversation about, every time the mortgage market gets tight the conversation gets more aggressive and when the market gets easier the conversation on the mortgage gets to die down. The two critical problems of the secondary market are: One, problem for membership in the vicinity, and second, it will operate on the purchase principle. Raising these two points I am, of course, assuming although I understand the home builders are not in complete agreement with me on this, that this is to be a genuine secondary market operation, not to be an investment holding company for the purpose of buying mortgages and holding them for any period of time. It is a genuine secondary market operation. The problem of incentive of membership is a very complex one. We can't have compulsory membership like we have with the Federal Reserve System or as we have with the Federal Home Loan Bank System. We can't gear the stock requirement purchases to size, or assets. So because of those problems we have had to resort to this 3-percent discount, or stock purchase certificate plan. In other words, the problem is, who is going to be a member of this corporation; who is going to want to be a member? What is the incentive for membership? Personally, I don't feel there will be an incentive for membership, because subsection (b) of section 304 provides that these mortgages are going to have to be purchased at or below current market price, which, of course, is going to be a little difficult to decide sometimes, but if the mortgages are purchased in accordance with the statutory standard, and then you tack on to that a 3-percent, or even a 2-percent additional discount in the form of a stock purchase plan, I think you practically eliminate the possibility of any incentive for anyone to be a member of it, but beyond that, you have, I think, an even more basic problem and that is the problem that unlike any other secondary operation, where a corporation is compelled to borrow the funds that it is going to use, you have a facility that is going to purchase assets. Now, when the Federal home-loan bank borrows money to lend to its members, it lends those funds. It thus distributes the risk between itself as the facility, and the individual borrowing member, but when you have a "Fannie May" it is not going to do that. "Fannie May" is going to go buy the mortgages, the individual seller of those mortgages is through with the transaction. He has no further connection with it, and the risk of price rises or falls have no concern of his. The result, in my opinion, is that we have a very unique kind of an animal here-no secondary mortgage corporation in Europe to my knowledge has ever engaged in the purchase of principal. All of these corporations have operated on the lending principle and I personally would rather see the "Fannie May" used as a lending operation. It could operate on a warehousing basis, where it was warehousing mortgages, not for the 5-, 6-month period that is normally permitted to your commercial banks, but it could warehouse mortgages for an 18month or 2-year period, lending funds on the collateral of those mortgages, which would obviate this problem of having the facility take all of the risk of market changes. If it worked on that principle and if it charged a legitimate fee for its operations, as any warehousing lender does, it could then in effect build its own capital. It could then operate as does the Home Loan Bank System, in the short end of the market, for borrowing its funds, and in fact, it could legitimately require that the servicing fee normally permitted a lender on a long-term permanent sale of onehalf of 1 percent be reduced to, say, a quarter of a percent because the facility is being operated for the benefit of the seller, who in this case would be merely a borrower. I make these suggestions only to open up other possibilities, to this matter of how to handle the secondary market, because I think it is of great importance that any secondary market operation be conducted in a sound manner, and that failure to conduct it on that kind of a basis would do no good to the private lenders or to the Government. My final comments are on title VI of the act, which respects the problem of conservatorship of the Home Loan Bank System. For many years the Home Loan Bank Board has been in the difficult position of having only a law of high treason. It has not had a law of misdemeanor or even a law of minor felonies. Either the Federal home-loan bank has been compelled to appoint a conservator if the individual association was not performing its functions properly, or it has had to ignore the problem. Through the very kind offices of Congressman McDonough and several of the Government staff and representatives of the industry we have worked on this problem here for many, many years and both of the National Savings and Loan Leagues have worked on this problem, and I personally want to congratulate the committee and Government for putting this section of the bill in, dealing with this matter where it gives to the Government adequate power to enforce its supervisory responsibilities, and yet at the same time puts, by writing limitations into the statute, limitation on the capricious use of that power. This title VI is in my opinion a splendid example of how problems of this type can be resolved in terms of constructive and affirmative attitudes on the part of all parties concerned. I think it represents a real step forward for the savings-and-loan business and also for the Government. Thank you very much. The CHAIRMAN. Thank you, Mr. Wellman. Are there questions of Mr. Wellman? (No response.) The CHAIRMAN. We are very glad to have had you. Mr. WELLMAN. Thank you. The CHAIRMAN. Monsignor O'Grady, I don't think we are justified in asking you to wait any longer, and so far as the committee is concerned you are at liberty to go at your will, but we want you to stay around as long as you would like. We have with us Mr. Wallace J. Campbell, director of the Washington office of the Cooperative League of the United States of America. Mr. Campbell, we are very glad to have you with us. STATEMENT OF WALLACE J. CAMPBELL, DIRECTOR, WASHINGTON Mr. CAMPBELL. My name is Wallace J. Campbell. I am director of the Washington office of the Cooperative League of the United States of America, which, as you know, is a federation of consumer and purchasing and service cooperatives. Our organization has a membership of 2 million direct dues-paying members, 2 million families, and, in addition, we have 9 million families associated with the League through the National Rural Electric Cooperative Association, both of which are full members of the cooperative league. We have worked very closely with the Federal Housing Administration, the Housing and Home Finance Agency, and the Public Housing Administration on housing problems as they affect the hous ing needs of our general membership. We have also had specific interests in the cooperative housing sections of FHA, which was created under the Housing Act of 1950. We are here today supporting the general terms of the Housing Act of 1954, H. R. 7839, even though we feel the severe housing shortage which still faces America should call for a more aggressive housing program. Your committee, however, has had so much testimony presented to it in the last few weeks on general aspects of the legislation before you that I would like to direct your attention for a few minutes to the cooperative section, generally known as section 213, which is treated in the bill before you in section 119. The cooperative housing program of FHA might well be referred to as the stepchild of the Federal Government's housing program. Perhaps the simile of the ugly duckling would be even more appropriate. The legislation was adopted as a compromise following the campaign to secure adoption of a middle-income housing program in 1950. It was expected that the cooperative housing program, as adopted, would eventually provide for something in the neighborhood of $50 million worth of cooperative housing. The response to the program surprised both the Federal Government's housing officials and the original sponsors of the program. As of February 28, 1954, the FHA had insured mortgages on 164 projects with a total number of family units providing housing for 26,930 families. The dollar volume of these mortgages insured totaled $255,015,883. The commitments, statements of eligibility, and applications in process, all classified as "active case workload," brings the number of projects to 493, the units to 56,000, and the dollar volume to $520 million. A table containing these statistics is attached to this statement. For purposes of comparison with other parts of the Government's overall housing program, it should be of interest to this committee to know that in the years 1951, 1952, and 1953 the number of units proeessed by the Rental Housing Division of FHA under section 207 totaled 18,108 housing units for a mortgage amount of $128,883,000. In contrast, the cooperative housing section, 213, processed 25,633 units for insured mortgage value of $242,192,000. As you will see, the amount of housing being built under cooperative housing is substantially greater already than under the 207 rental housing section, which has been on the books for many, many years. It is difficult to compare these with the public housing program of the same period; but during those 3 years PHA built 126,718 lowrent public housing units. A year-by-year tabulation of these figures is also attached. I presume this only to show you in perspective the relative size of the programs under consideration. During the last year the mortgage market for cooperative housing has been particularly tight, and even as the market has eased somewhat the available capital for cooperative projects has been hampered sharply by some unfortunate experiences on the financing of some builder-sponsored projects in New York City which have prejudiced some lending institutions against any of the 213 projects, whether builder-sponsored or those initiated by consumer or public interest groups. Your committee last week heard Harry Held, vice president |