supplying the nonveteran virtually equal credit support through amendments to FHA laws. That this was not modified primarily to stimulate new production is evidenced by the added support those laws gave to nonveterans seeking to purchase existing homes in competition with veterans.

There are many proponents for an increase in the interest rates applicable to this program. The advocates for this increase insist that it will revitalize the GI loan program. We ask, "At what expense?" A dispassionate analysis of the present mortgage market shows no justification for a higher interest rate.

During 1947 and most of 1948 the heavy demands upon investment funds exerted an upward pressure upon the structure of interest rates. As a part of this movement, bond yields and mortgage interest rates rose noticeably. In that upward march the GI 4-percent loan began to lose investor appeal and, in view of the anticipation of lenders that the upward trend in interest rates would continue, veterans found it increasingly difficult to find lenders willing to make low-interest GI loans.

Another development which capped the trend and put the GI loan at a disadvantage was the liberalization by the Federal Housing Administration of title II valuations under the National Housing Act. This liberalization enabled lenders to shift into FHA-insured loans which carried 41⁄2 percent interest rate, although they cost the borrower 5 percent, because of the annual insurance premium of one-half of 1 percent. As a consequence of these various factors, the sanction of a higher rate of interest for the GI loan program-from 4 to 41⁄2 percent-appeared in the spring and summer of 1948 to be a necessary step, in view of the existing economic setting, to assure the availability of title III mortgage credit to veterans.

But that setting has changed and the arguments for a higher rate are no longer applicable in the situation which now exists.

In the past few months there has been a fundamental shift in the mortgage situation. Demand and supply factors have both undergone changes which have reversed the influences affecting mortgage interest rates in general and the investment appeal of GĨ 4 percent loans in particular.

(a) The supply of funds in home-finance institutions has increased markedly. For many lenders the past few months have represented a period of peak inflow of new savings. This trend reflects the over-all upturn in consumer saving which became apparent in the latter part of 1948. The peak rate of new money overflow, plus the high volume of mortgage payments and prepayments, has accentuated the investment problem of lenders. The problem is simple-to find profitable mortgage investment outlets for their funds.

(b) At the same time the yields on investments alternative to mortgages have fallen sharply since the beginning of the year. A slumping demand for capital by private business has tended to raise the amount of funds seeking investments in Government and high-grade corporate securities. The effect has been higher bond prices and lower bond yields. Yields are now back to where they were in the fall of 1947 before the Federal Reserve Board lowered support prices in December of that year. Moreover, a recent statement of revised Federal Reserve policy should continue the downward trend in bond yields. Late in June the open market committee indicated that it would

slacken up its sales program of Government bonds, a program which has been tending to retard the drop in bond yields.

(c) The demand for mortgage funds, while still at high levels, is below last year's levels.

Taken together, these factors all add up in favor of an expanded availability of GI 4 percent loans. Lenders have more money to invest but their opportunities to invest in conventional loans are fewer, and the attractiveness of bonds relative to 4 percent mortgages has declined.

The GI 10an offers lenders a way out of their investment dilemma. By deciding to make loans to veterans under the GI bill, lenders can broaden the effective demand for their mortgage funds. The VA guaranty enables veterans to become borrowers with little or no down payment involved in the purchase. And the very low costs. of GI financing also enable more veterans to afford home purchase.

The force of these arguments are already evident in lenders' investment activities. After a long and protracted decline which began in the latter part of 1947, GI loan volume picked up in April and May, registering substantial increases in both months. As against 20,000 GI loans a month in the first quarter of this year, applications in May reached over 27,000. Of this total, more than 25,000 were home loans. It is true that much of the increase is attributable to the purchase activity of the Federal National Mortgage Association which was authorized to buy GI loans in August 1948. After a slow beginning, "Fannie Mae" purchases have risen rapidly. In April "Fannie Mae" commitments for GI loans including both current purchases and future commitments-totaled over 6,000 and in May the number jumped to more than 9,000-8,000 first mortgages and 1,000 second mortgages.

It is noteworthy, however, that "Fannie Mae" buying is not uniform throughout the country. In the Northeast, for example, FNMA funds are a negligible factor in the GI loan picture. In other areas, however, particularly in the South and in the Los Angeles and Detroit areas, FNMA money is the predominant source of 4 percent financing for veterans.

But there is also evidence that private capital is flowing into GI loans in larger volume, for the reasons discussed in detail above. This trend is demonstrated, for example, by the recent rise in GI loan applications in areas of the country where there is little or no FNMA purchase activity.

In short, the availability of FNMA secondary market funds and. the increased flow of private 4 percent money give assurance that veterans in most sections of the country are now able to obtain GI loans if they want and can afford them. A higher interest rate would merely burden them unnecessarily with higher financing costs. The only benefits of a 41⁄2 percent rate would be to mortgage lenders in the form of higher returns.

Another cause of difficulty has been the lack of an adequate secondary market for GI loans. For more than a 12-month period during 1947 and 1948 no Government market whatsoever existed for GI loans. During the same period, moreover, the secondary market among private investors for GI loans practically dried up. As a result, many lenders who had cooperated wholeheartedly in making GI loans found themselves unable, with their portfolios already full.

of GI loans, to make additional GI loans unless an adequate secondary market was available.

It was undoubtedly in recognition of this situation that the Congress established a new secondary market for GI loans in the Federal National Mortgage Association last summer. Unfortunately, however, the intent of the new market was largely vitiated by the limitations and restrictions with which the market was encumbered. As now constituted, the FNMA market offers little incentive to lenders to make new GI 4 percent loans available to veterans. One obstacle posed by the market is the fact that lenders may sell only a specified percentage of their GI loan originations.

The inadequacy of the present FNMA market is evident in its purchase activity in GI loans so far. In the 4 months or more since the market has become available for GI loans, purchases, and commitments to purchase GI loans totaled only slightly more than $50,000,000. Some measure of the infinitesimal degree of relief afforded by this market can be gained by comparing this figure with the $7,800,000,000 of GI loans already on the books of lenders. The proposed bill is a remedy to these problems:

The preceding paragraphs have outlined the reasons why the GI loan benefits of the Servicemen's Readjustment Act are being denied to an ever-increasing number of World War II veterans. The following paragraphs attempt briefly to show how the proposed bill will correct the situation and make GI 4 percent loans generally available to credit-worthy veterans once again.

Secondary market: Section 112 of this bill would amend Section 301 of the National Housing Act to provide that the 50 percent restriction now applying to mortgages guaranteed under the Servicemen's Readjustment Act be eliminated. While we had originally proposed that this restriction be lifted only in the case of GI loans, we note that certain types of FHA loans are likewise eligible to a 100 percent secondary market. We do not believe that this will in any way impede the GI loan program. The feature of a 100 percent secondary market will permit the further extension of GI loan credit by the many lending institutions who are now unable to do so because of their holdings of GI 4 percent loans which have already become excessive.

To encourage sound housing construction for veterans as well as making the loan more attractive to the private secondary market, loans financing the construction of a dwelling unit are eligible only if the dwelling unit is built in conformity with minimum construction requirements prescribed by the Administrator of Veterans' Affairs. Supplemental direct loans: Section 512 of the bill provides a back-up supplemental direct loan program whereby veterans, because of the unavailability of private capital for financing of the purchase of homes, may make application to the Administrator of Veterans' Affairs for a direct loan for this purpose at a rate not in excess of 4 percent per annum.

Although critics attack direct Government lending in any form as a radical innovation, a limited direct lending plan of this sort has ample precedent in Government finance. In the farm mortgage field, for example, a similar plan has been in operation for many years. The Farmers Home Administration (as did its predecessor, the Farm Security Administration) makes direct farm mortgage loans to quali

fied veterans and others at 4 percent if they have been unable to obtain conventional financing at a moderate interest rate. An analogous program is also found in the Home Owners' Loan Corporation, although the latter program was developed in a different economic setting to provide relief to distressed home owners during the depression.

Precedent or not, the proposed plan of supplemental direct lending is a necessary and desirable adjunct to a successful program designed to preserve and assure the availability of 4 percent mortgage credit on favorable terms to veterans. Under the plan there would be no question of lack of funds for GI loans and all credit-worthy veterans in every community would be assured the opportunity of obtaining a GI loan, either from a private lender or from the Government, if no private lender is willing to make the loan.

Such a program of direct lending would cost the Government very little, if anything. Actually, there is every probability that the income received by the Government in the form of interest payments from veteran borrowers would exceed the cost of the program by a substantial margin. No cost to the Treasury would be involved since the Veterans' Administration would pay the going rate of interest to the Treasury for funds received. Since this going rate will probably range from 2 to 2% percent, this would permit the Veterans' Administration to apply from 12 to 2 percent of its interest income to the building up of reserves and for administrative expenses. Barring the possibility of severe economic recession, there is every likelihood that the direct lending program would show a sizable financial surplus in its operation. And, in the event that a period of economic distress should set in, the exposure of the Government to loss on such a direct lending program would be no more than the present contingent liability which the Government has for the more than 1,500,000 GI loans already guaranteed, and upon the great number of mortgages which are insured by the Federal Housing Administration.

Increase in guaranty: Section 401, subsection (a), of the bill would increase the present guaranty in an amount not to exceed 60 percent as compared with the present 50 percent of the loan and the amount of the guaranty may not exceed $75,000 as compared with the present limitation of $4,000. We believe that this proposed change in the guaranty is modest, but at the same time will make the loan much more attractive not only to the original lender but to the secondary market investor as well.

Because of this provision and the liberalizing of the secondarymarket provisions of the bill, plus the back-up authority of the direct loan, we believe the burdensome combination loan may be jettisoned without disservice to the veteran. The American Legion does not share the fears expressed by the Administrator of Housing and Home Finance Agency that the elimination of section 505 (a) will hurt those veterans desiring homes at a price exceeding $10,000. It is our understanding that the average guaranteed loan is approximately $9,100, and we are not concerned so much with those few veterans who can afford homes costing more than $10,000 as we are concerned with the demands of the largest number of our veterans. It is believed, and understandably so, that so long as section 505 (a) is available, the

veterans of this country will be directed to the higher priced loan, thereby weakening the position that the 4-percent loan should occupy. Other aids: It has come to our attention that builders are experiencing difficulties in obtaining advance commitments on projects through FHA unless they clearly declare and follow through that as these homes are purchased they will be sold with loans insured by FHA. We clearly understand FHA's position in this matter, for a great percentage of their expenses is realized through earning on their insurance fund.

At present, builders desiring to acquire advance commitments on projects they contemplate building may do so upon paying to FHA approximately $25 per unit. The agency indicates that this charge does not reimburse them for the actual expenses involved and that they rely on the earnings of the insurance that is acquired on loans covering the sale of the houses. It is our recommendation that this committee consider an additional fee being charged in order that the Agency might be more realistically compensated. It is suggested that the Agency be directed to establish a $50 fee per unit in each case of an advance commitment, the builder to be reimbursed $25 in the event the houses built and sold are insured by FHA but with no refund being made on houses that may be guaranteed under the Servicemen's Readjustment Act of 1944. This is a serious matter and should be carefully considered.

At this point, Mr. Chairman, I would like to insert in the record two schedules that I have prepared. One, schedule A, reflects the trend in savings in the last 18 months, and the other, schedule B, is a schedule showing the yields on investments.

The CHAIRMAN. That may be done.

(The schedules referred to are as follows:)

SCHEDULE A.-Net change in _savings_through institutional and governmental channels by quarters

Source: "Quarterly Letter on Savings and Home Mortgage Lending," U. S. Savings and Loan League, June 1949 issue. Based upon following sources:

1 Home Loan Bank Board.

2 Federal Reserve Board.

3 Life Insurance Association of America.

4 Post Office Department.

5 U. S. Treasury (includes bonds owned by other than individuals as well as by individuals.) 6 Partially estimated.