HOUSING AMENDMENTS OF 1949

FRIDAY, JULY 29, 1949

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met, pursuant to adjournment, at 10 a. m., the Honorable Brent Spence, Chairman, presiding.

Present: Messrs. Spence, Brown, Patman, Monroney, Hays, Deane, McKinnon, Mitchell, Smith, Kunkel, Talle, Cole, and Nicholson. The CHAIRMAN. The committee will be in order.

Mr. King, I believe, is the first witness. Mr. King, will you proceed?

STATEMENT OF T. B. KING, DIRECTOR, LOAN GUARANTY SERVICE, VETERANS' ADMINISTRATION

Mr. KING. My name is T. B. King, and I am Director of the Loan Guaranty Service of the Veterans' Administration, the activity popularly known as the GI loan program.

Mr. Chairman, I am gratified that the committee allowed me to come back this morning to continue my testimony. One of the questions raised the other morning, on which I could not give a definite figure, was the number of employees in the Loan Guaranty Service.

I have a short statement here which I would like to put into the record. It shows that on June 30, 1949, the Veterans' Administration had 2,003 employees assigned to the loan-guaranty program. Of this number, 131 were located in the Washington central office and 1,872 were stationed in the various regional offices, of which there are 67.

The table I am submitting here includes the salaried classification of each of these 2,003 employees by groupings. If I may, I will submit this statement, Mr. Chairman.

The Chairman. It may be inserted.

(The statement referred to is as follows:)

STATEMENT CONCERNING LOAN GUARANTY PERSONNEL OF THE VETERANS'

ADMINISTRATION

On June 30, 1949, the Veterans' Administration had 2,003 employees assigned to the loan-guaranty program. Of this number 131 were located in the Washington central office and 1,872 were stationed variously in 67 regional offices throughout the country and in Hawaii and Puerto Rico. A table is attached showing the distribution of the 2,003 employees according to civil-service grade classification.

This program in each regional office is headed by a loan-guaranty officer who, with a technical and clerical staff, examines applications for the guaranty of loans, inspects and appraises property, extends supplemental servicing on de

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linquent accounts, and directs the liquidation of acquired collateral. The central office establishes regulations and procedures under which the program is administered, and provides direct supervision over technical and operational work. Analysis of Loan Guaranty employees as of June 30, 1949, by grade

Mr. KING. Last Tuesday morning I had virtually concluded my comments on pages 20 through 22 of the bill which concerned themselves with the secondary market provided by the Government under the Federal National Mortgage Association, which proposes to give 100 percent eligibility to the GI loan under $10,000. I would point out that this same 100 percent eligibility is proposed to be given under the bill to various other classes of loans, many of which carry an interest rate in excess of 4 percent, which is the maximum in effect under the GI loan program.

I would like to suggest to the committee that it may wish to direct its attention to the commitment fees charged to builders and lenders under that market. If it is the purpose of the committee to encourage the support of that market for the 4 percent loan to the veteran, it may wish to provide that where a commitment is taken up by the sale of the loan to Fannie May, the commitment fee on the 4-percent loan should be restored to the builder or lender.

It will be observed that in the case of an FHA loan, the lender is permitted to charge a brokerage or servicing fee. He can compensate himself for that commitment charge out of that brokerage fee. However, the loan-guaranty program precludes the charging of any such fee to the veteran, so that consequently there is no kitty or fund out of which the lender can absorb the commitment fee or the part that will not be refunded to him.

Lastly, concerning the secondary market on pages 20 through 22, the committee will wish to note that the charges presently being made by those selling those loans to the Government under the present law are somewhat excessive. They run anywhere from 2 to 6 percent, a flat charge in addition to the interest rate.

Now, if it suits your convenience, Mr. Chairman, I will pass over to the part of the bill which proposes direct amendments to title III of the Servicemen's Readjustment Act. Those amendments are found on pages 76 through 83 of the bill under discussion. These provisions do not represent the draftsmanship of the Veterans' Administration. As we analyze their apparent purpose, it is to assure the availability of 4-percent financing to the veteran desirous of purchasing a home.

The effort of the Congress initiated in 1944 to give credit preference to veterans of World War II on favorable terms has been somewhat prejudiced or somewhat affected adversely by various other credit media that have been employed through legislation to accomplish other objectives in the meantime. These, in their practical application, have raised the consumer credit standing of the nonveteran to a plane which approximates, and as it works out in some cases, even exceeds that of the veterans.

Apparently the purpose here is to make such changes in the light of existing law and the amendments to existing law proposed by this bill as will raise the level of the veterans consumer credit standing to an equal or slightly superior plane. These media, which are introduced in this bill for that purpose, are four:

1. The 100-percent secondary market to which I referred earlier; 2. The increase in the amount of the guaranty;

3. The direct loan; and

4. The elimination of the present 505 (a) combination loan. The 505 (a) combination loan is a medium of financing which consists simply of a primary FHA mortgage, supplemented by a second-mortgage 100 percent guaranteed by the Veterans' Administration. It is not a favorable form of financing for the veteran. It costs him about 10 percent more ultimately to own his property debt free under this combination loan than it does to acquire his property under a straight section 501 loan, which bears a maximum interest rate of 4 percent.

The primary loan on the combination plan bears an interest rate at 41⁄2 percent and carries a servicing charge or insurance premium of an additional one-half percent. This is an annual charge based upon the outstanding principal balance from year to year.

Other charges which are necessarily incurred in the making of the combination loan raise the initial costs of the combination loan substantially above the comparable cost of the straight GI section 501, 4-percent loan.

Some have contended that the elimination of the 505 (a) loan will preclude many veterans from obtaining homes. From testimony offered before this committee by the various veterans' organizations, the veterans' organizations do not appear to fear that possibility. The various steps which I enumerated, found in title IV of this bill, would apparently assure against the possibility that the elimination of the 505 (a) loan might preclude veterans from acquiring a home. The committee will undoubtedly wish to analyze each of these four steps and to judge for itself as to whether all are necessary. The committee will make its determination, undoubtedly, with regard to whether or not it still represents the policy of the Congress to accord credit preference, effective credit preference, to the veteran of World War II. Judgments may differ as to whether or not each of these steps taken together are necessary in order to accomplish the desired

purpose.

I should amend that to say "that purpose, if it is the desired purpose of the committee."

The Veterans' Administration has not favored the direct loan. We do admit we are compelled to admit-that perhaps as to some rural areas, where local capital is scarce, it may be the only vehicle through

which those veterans can obtain 4-percent financing for the construction or purchase of their homes.

The GI loan program, in terms of volume, ran downhill very fast during 1948 when the yields obtainable from investments of alternative appeal, necessarily long-term investments, long-term Government bonds, corporates or municipals, were moving up to a point where the 4-percent rate could not hold its own. I believe the committee should advert to these facts in considering these amendments under title IV of the bill.

Firstly, the 4-percent rate regarded truly is now in about the same level with respect to alternative yields as it was during the heyday of this program in 1947. The committee will also wish to advert to the fact that the President, in his recent economic message, stated it would be the policy of the administration to support lower yields.

The action of the Open Market Committee of the Federal Reserve Board over recent months has been aimed in that direction. For example, from a high point of 2.45, the yield on long-term Governments came down to, when I looked at it last week, 2.27. Over the last 60 to 90 days, the appeal to the investor of the 4-percent rate in the light of these comparable investment media has improved somewhat. There is no abundance of 4-percent money flowing into this program or into loans for veterans, but there is a very discernible, even though I cannot say substantial, trend in that direction. Our volume has risen from a low point of just under 19,000 in March of this year to a factor for June of approximately 29,000.

Concerning the increase in the guaranty to $7,500, this proposal is almost contrary to the views expressed by the Veterans' Administration consistently over the last 4 years with respect to bills which propose to raise the amount of the guaranty, and so forth.

However, I would like the committee to attend to the fact that the inflation that we feared in consistently taking that position is, perhaps, not as likely to result from making such a change at this time.

I would like the committee to note further that even if increased to $7,500, it still does not commit the Government to as much, or perhaps some might say or suggest I should say, any more than does the 100-percent FHA-insured loan.

We have never wished to suggest to the Congress that it raise the guaranty factor under the GI loan program to 100 percent because we valued the effect of the fact the lender is sharing the risk under our program and, therefore, must attend more carefully to the underwriting components that go into the making of a loan.

From the standpoint of ultimate risk of loss to the Government, I can see no substantial difference between a $4,000 maximum guaranty and a $7,500 maximum guaranty.

Lastly, regarding the direct loan, we have not asked for it, it is up to the committee to consider whether they wish to put it in here as a stand-by measure, which is the way its language is framed. I merely would like to say that if you put that into the law, we can administer it.

Perhaps it will be controversial. Undoubtedly we would be criticized because we would be compelled to refuse these direct loans. to many veterans who would apply for them because we would find the income factor would not permit him to carry the loan and we would be severely criticized for holding the line in that regard, a

holding which ultimately would be necessary out of a consideration for that veteran, but if it goes into the law, we will know how to administer it.

Mr. Chairman, I think that about covers all I think it useful that I should take the time of this committee to narrate. I will be very pleased if the committee would wish to question me on any of the points involved in the GI program or in the bill.

The CHAIRMAN. Mr. King, in setting up a direct loan program, you would have to effect an organization that would be very different from the organization now in existence; is that not true?

Mr. KING. No, sir; that is not true, Mr. Chairman

The CHAIRMAN. If you were going to lend directly, you would have to probably have surveyors to survey the property and examiners to examine it. How would you accomplish that?

Mr. KING. To epitomize it, Mr. Chairman, let me say that the substantial innovation that would be entailed would be the closing of these loans by an agency of the Government. We would undoubtedly find it most economical and perhaps a practical necessity, administrativewise, in order to meet peaks, to close these loans by a fee attorney in the community in which the property was located. The charge for that fee work would undoubtedly be levied against the

veteran.

The CHAIRMAN. Then the veteran would have to have the land surveyed.

Mr. KING. The land survey would be simply a function which would be related to the closing of the loan. For example, the closing attorney, under our direction, could order a survey from a private surveying company.

The CHAIRMAN. Would you not have to have some inspection as to the construction?

Mr. KING. That is true, Mr. Chairman. Those features are all provided for under our present activity.

The CHAIRMAN. They are paid for by the borrower?

Mr. KING. They are all paid for by the borrower, Mr. Chairman. I do not want to signify that the Veterans' Administration could take this direct loan program over and tell these 2,003 employees, who are already very much overworked, that they could just absorb this on their holidays. It would entail an increase of personnel. I would think outside, an outside number would be 400 employees.

The CHAIRMAN. Could you approximate what it would cost the veteran for an appraisement fee, a survey and examination, and the inspection that would be necessary?

Mr. KING. Would I afford the chairman an answer if I said this. It would not result in charges against the veteran in excess of those he is now paying to close a loan under the present program.

The CHAIRMAN. Would it be necessary for you to set up in the various communities agencies that do not now exist in order to make these loans?

Mr. KING. Mr. Chairman, I doubt that necessity very much. There would be urgings that we could give better service were we to put district offices throughout a State. As you know, in the days of its volume, Home Owners' Loan Corporation had such district offices throughout the more populous States. They were closed up very rapidly after the peak of volume had passed.