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dealing with Federal Savings and loan associations, which was likewise introduced by your chairman; and certain bills to amend those provisions of title IV of the National Housing Act dealing with the premiums and dividends of the Federal Savings and Loan Insurance Corporation, including S. 103, which was introduced by Senator Taft on January 6, 1945, and H. R. 4428, which was passed by the House on November 5, 1945.
Hearings were held before a subcommittee of your committee on May 23, 1944, on S. 756, S. 757, and S. 1034 of the last Congress, which were predecessor bills to the pending bills which I have just mentioned. As suggested, may I offer the following comments concerning sections 301 to 306, inclusive, incorporated in S. 1592, which cover much the same subjects:
Amendments to section 5 of Home Owners' Loan Act of 1933: Section 301 of the bill would amend section 5 (c) of the Home Owners' Loan Act of 1933, as amended, which deals with the powers and functions of Federal savings and loan associations. The chartering and supervision of these assoc'ations is in the Federal Home Loan Bank Administration.
Under existing law, a Federal savings and loan association may make real estate loans only on the security of first liens on homes, or combinations of homes and business property, within 50 miles of its home office. Not more than $20,000 may be loaned on the security of a first lien on any one such property, except that not exceeding 15 percent of the association's assets may be loaned on the security of first liens on other improved real estate without regard to the $20,000 limitation and the 50-mile limit. An association which is converted from a State-chartered institution may continue to make loans in the territory in which it operated while under State charter.
The present bill would retain these provisions, including the 15percent limitation but would moderately liberalize them in certain respects. In the first place, Federal associations do not now have adequate authority to make loans which have the insurance protection afforded by the National Housing Act. Thus, because of the first-lien requirement, they cannot make use of those provisions of title I of the National Housing Act which permit title I loans, repair and modernization loans, to be made without the expense and delay of taking a mortgage or other lien.
The amendment in section 301 at page 20 of the bill, lines 3 through 7, is obviously intended to broaden the powers of Federal associations to make National Housing Act loans, including these title I loans. While line 3 is a misprint, I am informed that the language in the bill as actually introduced refers to any mortgage or obligation which is insured or as to which a commitment for the insuring thereof has been made, or as to which the association has insurance, under title I or title II of the National Housing Act, as amended.
It is most important that this amendment be adopted without delay. Because of labor as well as material shortages during the war, it has been necessary to defer the modernization, improvement, and upkeep of homes. Prompt attention to these accumulated needs is one of the quickest and most economical ways to help the grave housing shortage we confront. Properly utilized opportunities will provide additional and greatly needed space in many homes. Such work may be done more speedily than building entirely new homes
and will not represent such a drain on the limited material supply as would be the case if everything in sight went into completely new
I would suggest that the language "under title I or title II of the National Housing Act, as amended" be amended to read "under title I or any other title or provision of the National Housing Act, as heretofore, now, or hereafter in force." Later legislation may make further amendments to existing titles of the National Housing Act or may add other titles as was done in the case of war housing insurance, which became title VI.
Further, Federal savings and loan associations do not now have full power to invest their funds in loans which are guaranteed under the Servicemen's Readjustment Act of 1944, commonly known as the GI bill of rights. Here again the first-lien requirement which is imposed on Federal associations prevents them from making GI loans which are permitted under that act to be made without security or on the security of second liens.
The amendment in section 301 of the present bill at page 20, lines 8 through 14, is intended to broaden the power of Federal associations to make these GI loans. It would authorize Federal associations to invest their funds on the security of guaranties by the Administrator of Veterns' Affairs under the GI bill on loans made for the purchase or construction, or repair, alteration, or improvement of homes or combination of homes and business property located within the 50mile limit, or, in the case of an association converted from a Statechartered institution, the territory in which the association made loans while operating under State charter.
It will be noted that the amendment would apply only to loans with respect to homes or combination home-and-business properties. While Federal associations, of course, make the majority of their loans on such properties, it would, in my opinion, be desirable to permit such associations to make any loans covered by the GI bill, without regard to type or location of property. In addition, pending legislation may provide for an alternative method of insurance as well as guaranty of certain types of GI loans. I suggest, therefore, that item (5) at page 20 of the bill, lines 8 through 14, be amended to read as follows:
in any loan or investment which is insured or guaranteed or as to which a commitment for the insurance or guaranty thereof has been made, or as to which the association has any insurance or guaranty, under the Servicemen's Readjustment Act of 1944 as heretofore, now, or hereafter in force.
The remainder of the amendments to section 5 (c) of the Home Owners' Loan Act of 1933, as amended, would confer on Federal associations a limited power to invest in rental housing projects which are insured, or for which a commitment to insure has been made, under title VII of the National Housing Act, as amended, which title would be added to the National Housing Act by section 501 of the present bill. Such investments, which would be limited to projects located within 50 miles of the association's home office, would be confined to an additional 15 percent of the assets of the association and could be made directly or through acquisition of capital stock of corporations organized for the sole purpose of developing and constructing, or acquiring, such rental housing projects and operating them. If said title VII is enacted I see no reason why Federal associations should
not be authorized to invest in these insured rental housing projects in the manner proposed by the present bill.
It is noted that section 301 of the bill provides that a Federal association may invest in "the stock and bonds of a Federal home loan bank." While this is a substantial repetition of an existing provision of section 5 (c) of the Home Owners' Loan Act of 1933, it is to be noted that obligations of Federal home loan banks may take other forms than bonds, and in fact their present customary form is that of consolidated debentures which are the joint and several obligations of all the banks. I suggest therefore that the words "stock and bonds of a Federal home loan bank" at page 19, lines 16 and 17, be amended to read: "stock of a Federal home loan bank or obligations of one or more Federal home loan banks."
Amendments to Federal Home Loan Bank Act: Section 302 of the present bill would amend the Federal Home Loan Bank Act, as amended, which is the statute under which the Federal home-loan banks operate. The first amendment would authorize each Federal home-loan bank, on approval of the Federal Home Loan Bank Commissioner by regulations or otherwise, to make advances to its members on the security of any mortgage or obligation as to which the member institution has insurance, or an insurance commitment, under title I, II, or VI, of the National Housing Act, as amended. The advance could not exceed 90 percent of the unpaid principal of the mortgage or obligation offered as security.
It does not seem reasonable that the Federal home-loan banks should be barred from making advances to their members on mortgages or obligations of any type as to which the member institution has the insurance protection provided by the National Housing Act. All other types of institutions have that latitude and the bank certainly should have it.
However, the existing provisions of section 10 of the Federal Home. Loan Bank Act do not permit the banks to accept as collateral for advances loans with respect to which the member institution has the insurance protection provided by title I of the National Housing Act, but for which the institution has not taken mortgage security, nor do they permit the banks to make advances to their members on the security of National Housing Act mortgages with more than 20 years of unexpired maturity.
As you will remember, title I was designed to encourage modernization and repair of homes. Since the safety of loans of this type is protected by Federal Housing Administration insurance there is no sound reason why the Federal home loan banks should not be able to accept such loans as collateral. Likewise, the Federal Housing Administration now insures certain mortgages with maturity greater than 20 years, and the types of mortgages with maturity greater than 20 years which may be insured by it will be increased if S. 1592 is enacted in its present form. Under the insurance provisions of the National Housing Act, lending institutions are protected against loss on such loans and it is obviously illogical that the Federal home loan banks should not be able to accept as collateral mortgages carrying this insurance by another Government agency.
It is noted, however, that the provisions of the present bill which are now under consideration refer to "title I, II, or VI of the National Housing Act, as amended." Since later legislation may make further
changes in existing titles of that act, or may add new titles, I would suggest that this language, which appears at page 22, lines 2 and 3, be amended to read, "title I or any other title or provision of the National Housing Act as heretofore, now, or hereafter in force."
In addition, section 302 of S. 1592 would authorize the Federal home loan banks to make advances to their members on the security of any obligation, whether or not secured by first mortgage, which is guaranteed by the Administrator of Veterans' Affairs under the provisions of title III of the Servicemen's Readjustment Act of 1944, as amended (the GI bill of rights), where the obligation relates to home purchase or construction or home repair, alteration, or improvement. The same 90-percent limitation would apply.
It will be noted that this provision applies only to GI loans which relate to home purchase or construction or home repair, alteration, or improvement. While Federal home loan bank members make the majority of their loans on such properties, it would here again, in my opinion, be desirable to broaden the provision so as to include any loans covered by the GI bill of rights, without regard to type of property. Also, as has been previously pointed out, pending legislation may provide for an alternative method of insurance as well as guaranty of certain types of GI loans. I therefore suggest that provision (ii) at page 32 of the bill, which appears at line 4 down to the proviso in line 9, be amended to read:
any loan or investment which is insured or guaranteed or as to which a commitment for the insurance or guaranty thereof has been made, or as to which the member institution has any insurance or guaranty, under the Servicemen's Readjustment Act of 1944 as heretofore, now, or hereafter in force.
Senator MURDOCK. Mr. Fahey, right back there did you mean to say page 22 or page 32? Page 22 is what you have on my copy. Mr. FAHEY. That is the right page.
The CHAIRMAN. You said page 32 by mistake.
Mr. FAHEY. I am sorry.
The CHAIRMAN. Proceed.
Mr. FAHEY. Subsection (b) of section 302 of the present bill would increase to 25 years from 20 years the maximum unexpired maturity of mortgages which are eligible for advances under section 10 of the Federal Home Loan Bank Act by the banks to their member institutions. Other provisions of section 302 would lift the 20-year maturity limit with respect to National Housing Act loans, and since such loans have insurance protection there is no need to impose a 25-year limit with respect to those loans. The present provision of subsection (b) of section 302 would include loans other than National Housing Act loans and represents a moderate and conservative increase which would enable the Federal home loan banks to render more complete service to their member institutions.
Senator MURDOCK. Mr. Fahey, might I ask you a question or two on that point?
Mr. FAHEY. Yes, indeed.
Senator MURDOCK. You say here:
and since such loans have insurance protection there is no need to impose a 25year limit with respect to those loans.
Is the fact that loans have insurance protection the only factor that enters into the length of period for which they should run?
Mr. FAHEY. No; not necessarily. The point is that the banks have authority to loan, and the great bulk of their loans are on mortgages which have no insurance at all; I mean, they have not been insured by the Federal Housing Administration. It seems quite illogical that types of loans which are insured for all other kinds of mortgage-lending institutions in the country, where the insurance is intended to give full protection against loss, should not be covered; since there is or should be no risk whatever, advances against such loans should not be debarred.
Senator MURDOCK. The insuring is by whom?
Mr. FAHEY. The Federal Housing Administration.
Mr. FAHEY. Yes; an agency of the Government.
Senator MURDOCK. Simply because the Federal Government has adopted a policy of insurance of loans is no reason, is it, why all other factors should be disregarded?
Mr. FAHEY. Oh, no.
Senator MURDOCK. Because if there is a loss sustained, the loss is the loss of the Federal Government.
Mr. FAHEY. Yes; of the insurance fund.
Senator MURDOCK. That is why I asked the question, that simply because loans are insured is no argument, in my mind at least, why other protective factors should be entirely disregarded. I do not say, however, that your suggestion is not a sound one, but the way it presents itself, it would look as though the fact that you have insurance is all that you need.
Mr. FAHEY. Oh, no.
Senator MURDOCK. I cannot get the thought out of my mind that if there is a loss, even though your mortgage is insured, the loss won't come to you but it comes to the taxpayers of the United States.
Mr. FAHEY. That, of course, may possibly be true. The presumption is, however, that the insurance fund which is set up by the Federal Housing Administration in each of the categories of loans which they insure, is sufficient to take care of any losses to that fund. And we must recognize the fact that thus far there have been no substantial losses. The funds have been quite adequate.
Senator MURDOCK. That should be our primary purpose, should it not, in any extension or modification or amendment of the act, so that down the road through a period of 20 or 30 years we can still have that good record of no losses.
Mr. FAHEY. That is the responsibility of the Federal Housing Administration, and it is the theory of the insurance plan that they make certain of the safety of the loan in the first place, when they insure it.
Senator MURDOCK. But they must have the cooperation of organizations such as yours. In other words, the whole thing must be a cooperative plan.
Mr. FAHEY. Of course that is true. But these Federal home-loan banks have nothing to say about making loans which are insured by the Federal Housing Administration. FHA takes that responsibility. Senator MURDOCK. On the other hand, we do not want some other agency which comes under the Housing Act to be in the position, if it can vary the Federal Housing Administration set-up, to transfer that responsibility to the Federal Housing Administration.