would give realistic recognition to present-day cost factors. In supporting these new maxima, we look to FHA to minimize the excessive use of these mortgage limits by application of their standards of value and of economic soundness. We are opposed to the provision in section 103 of the bill for the increase of loan-to-value ratio to the 90percent figure. In our opinion, 90-percent loans are not compatible with a sound rental-housing program. Experience has indicated that a 90-percent loan is in effect one in which the sponsor usually has a no-cash equity position when the project is completed. Under such circumstances the promotion of such projects is generally speculative in nature, rather than being conservative from an investment standpoint. Some evidence of the dangers inherent in the high-percentage rental loans was indicated in the section 608 investigations. As section 207 represents the permanent rental-housing section of the National Housing Act, we believe it should only be made available on a sound and conservative basis.

We do not support the provision under section 104 of H. R. 10157 amending FHA section 213, which would permit a cooperative sponsor to obtain a commitment for a loan up to 85 percent of replacement cost and to proceed with construction before the cooperative has been formed. We have had some experience in the financing of cooperative enterprises, and we believe that this is a field in which caution should be exercised against excessive speculation. We are impressed with the suggestion FHA Commissioner Mason made before this committee that, if Congress desires a method such as this to be employed in initiating cooperative projects, it be handled under FHA section 207 applying the 207 tests of value and of economic soundness with conversion to the liberal terms of section 213 upon sale to a valid cooperative. We also oppose the provision in the bill to permit a higher per room maximum up to an additional $1,000 in this program. As Commissioner Mason pointed out before this committee, the cooperative program was designed to help middle-income families. This increased per room provision would be conducive to the building of projects with fewer rooms per unit and would tend to produce luxury housing under the section 213 program. We do not believe Congress would look with favor upon such result.

We support the increase of $3 billion in the FHA insurance authorization for the coming fiscal year on the assumption that FHA's activities will continue to require such authority.

The proposal in section 106 of the bill to permit a profit and risk allowance of 10 percent for sponsors of urban renewal projects under section 220 would, in our opinion, tend to induce builder-sponsors to request this maximum in every application. In addition, such a flat provision would, to a great extent, weaken the FHA Commissioner's ability to negotiate this factor downward with relation to type and location of property involved.

Section 107 of H. R. 10157 deals with relocation housing insurance under section 221. Here again the maximum permissible loan would be increased to $8,600 and $9,600 in high-cost areas, as compared to the present ceilings of $7,600 and $8,600, respectively. We believe that the increases in these maximum insurable amounts may more nearly reflect cost elements than do the present limitations, but we are opposed to the provision in this section which would eliminate the downpayment and which would increase the maturity of these

loans from 30 years to 35 or 40 years. The no-downpayment loan and the stretching of the maturity terms, when used to any great extent, can be inflationary factors. While a multifamily project might warrant a loan of 35 to 40 years, we question the soundness of making loans in excess of 25 or 30 years on single-family dwellings. The proposed amendment in section 108 of the bill making the cost certification incontestable after the Commissioner's approval should serve to remove a major deterrent to participation of responsible development sponsors, and we support this provision.

Section 201 of H. R. 10157 would make certain amendments in the operations of the Federal National Mortgage Association. The proposal to permit advance commitments under the secondary market operations is unsound in our opinion. This proposal in effect would give FNMA permission to issue standby commitments at prices sufficiently below the prices offered by the Association for immediate purchase. Extensive use of such standby commitment authority could have serious inflationary effects in the same manner as excessive warehousing of commitments of mortgages in the private market would have. The mere inclusion of an advance commitment provision, even on a restricted basis, becomes an invitation to use the FNMA facility without attempting to secure financing through normal sources. We are also opposed to this proposal for advance commitments due to the fact that extreme difficulty would be encountered in setting the prices for such commitments. If the costs for the commitments were too high; great pressure would be brought to bear on FNMA to bring the prices down. If costs were too low, there would be no incentive for seekers of mortgage credit to go anywhere but to FNMA for their commitments.

We completely endorse the statement of Mr. Baughman, President of FNMA, in his recent testimony before this committee, when he said: The principal objections have been that such a procedure tends to draw FNMA nearer to the originating or primary market and away from its basic purpose of providing supplementary assistance to the general secondary mortgage market, and that it tends to place FNMA more nearly in direct competition with mortgage investors.

We are also opposed to the provision in section 201 of the bill to reduce the stock purchase requirement to no more than 2 percent. In our opinion, the 3-percent stock ownership provision is a fair and equitable one, but we would have no objection to some degree of elasticity being introduced into this requirement such as discretion of the Association to adjust the stock purchase requirement with a maximum of 3 percent and a minimum of 2 percent.

We are strongly opposed to the provision in section 201 which would require FNMA to pay par for special assistance mortgages until June 30, 1957. This is a direct threat to the private lenders of mortgage funds. As Mr. Baughman said in his recent testimony before this committee, if FNMA is to pay a par price

virtually all of the mortgages eligible would be offered to FNMA and would be purchased by it, so long as its funds lasted.

The private mortgage market would be seriously damaged by any such policy and, as Mr. Baughman pointed out, such a support program would be very costly to the United States Government and would aggravate FNMA's management and liquidating functions by the addition of new large blocks of mortgages.

It follows that the proposal to increase advance commitment funds for special assistance operations by an additional $200 million is not necessary if we do not increase the advance commitment authority.

The proposal for a $50 million revolving fund to support FHA section 203 (i) loans is not needed. Here again we agree with Mr. Baughman that the interest rate (42 percent) on these loans with the added one-half percent service fee obviates any necessity for a support

program.

Section 202 of H. R. 10157 proposes a new secondary market program for GI loans by permitting the Secretary of the Treasury to invest up to 10 percent of the reserves of the national life-insurance fund by purchasing VA-guaranteed loans where discounts on GI loans are heaviest. This program reputedly could supply nearly $550 million for this purpose. Under this proposal, FNMA would act as the trustee's agent to purchase and service the loans. Here again, we see another large effort to increase the Government's participation in and the Government's investment in direct home mortgages.

As private investors in this field, we are opposed to this program. We agree with the President of FNMA that the GI loan purchases under these provisions would be at prices higher than the applicable market prices and hence would seriously curtail the growth of the private secondary market in mortgages which is increasingly helpful in spreading mortgage funds throughout the country. This compulsory action would increase the national debt and would put the Secretary of the Treasury as trustee of the insurance fund in the equivocal position of investing these trust funds in assets for no other purpose except as an attempt to stabilize a VA mortgage discount market on a purely regional basis. Such action would not only be unwarranted, but might well be considered in violation of the trustee's duty to the policyholders.

Sections 301-304, inclusive, of the bill propose a new loan program for housing the elderly, financed by direct Government loans to nonprofit corporations. We are opposed to the enactment of this legislation because it would probably result in driving private enterprise completely from this field. Instead, we favor the enactment of the privately financed FHA mortgage program for elderly persons as provided in H. R. 9537. The latter provisions would amend existing FHA section 203 to permit a third party to provide the downpayment where the mortgagor is to be an elderly person, and the third party could also be a cosigner of the mortgage note. The H. R. 9537 provisions would also amend section 207, the rental housing insurance, in those cases where at least 25 percent of the units are designed for the elderly. Here the maximum amount of the mortgage would be 90 percent of value. In cases of FHA section 207 where the project is designed and held entirely for elderly persons by a nonprofit organization, the mortgage could be 90 percent of replacement cost instead of 90 percent of value. We believe that these provisions are much more desirable than the direct lending proposed by H. R. 10157.

Generally speaking, we are in favor of the proposals in section 801 of H. R. 10157. These provisions would extend the life of and liberalize the provisions of title VIII, the military housing program. We would like to comment that FHA should be given more control over the quantity and quality of housing to be insured at military installations. We believe it is rather shortsighted not to take full advantage

of FHA's underwriting skill and experience in programing military base projects. We further submit that the soundness of increasing the mortgage limit is questionable as experience indicates that where mortgage limits are increased, the housing is planned on the basis of utilizing the maximum amount provided. A sounder approach might be to retain the present maximum with a scaling up to the maximum as specified in the bill.

These are the only provisions of H. R. 10157 upon which we wish

to comment.

Generally, we are in support of the administration bill, H. R. 9537, and have so testified before the Senate Banking and Currency Committee. The basis of our support of the administration bill is that it provides a broad basis for the continued participation of mortgage lenders in the solution of our housing problems, and does not threaten the continuance of our participation in housing financing by the enlargement and extension of direct Government loans and direct Government support.

Mr. BROWN. Thank you for your statement, Mr. Held.

Are there any questions, gentlemen?

If not, you may be excused.

Mr. HELD. Thank you, sir.

Mr. BROWN. The committee will now adjourn, to reconvene tomorrow morning at 10 o'clock.

(Whereupon, at 12 noon, the committee adjourned, to reconvene at 10 a. m., Friday, May 18, 1956.)

HOUSING ACT OF 1956

FRIDAY, MAY 18, 1956

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met at 10 a. m., Hon. Brent Spence (chairman). presiding.

Present: Messrs. Spence, Brown, Rains, O'Hara, Mrs. Sullivan, Messrs. Wolcott, Talle, Kilburn, Widnall, Betts, Mumma, and Nichol

son.

The CHAIRMAN. The committee will be in order.

We will resume the hearings.

The clerk will call the first witness.

The CLERK. Mr. Fred J. Russell, appearing for the Wherry Housing Association.

The CHAIRMAN. Mr. Russell, you may identify yourself and proceed as you desire to present your testimony.

Mr. RUSSELL. Thank you, Mr. Chairman.

STATEMENT OF FRED J. RUSSELL, PRESIDENT OF THE WHERRY HOUSING ASSOCIATION

Mr. RUSSELL. My name is Fred J. Russell. I am president of the Wherry Housing Association, a nonprofit organization comprising the majority of the owners of the 82,000 Wherry housing units in the United States and its possessions. This association is made up of owners only and concerns itself primarily with operations matters. Its officers and directors serve without compensation or reimbursement of expense. Its objectives are to develop and maintain the highest quality and efficiency in Wherry operation. We are qualified in matters relating to military housing because we have substantial. experience not only in military housing but also in other housing, in building, in property management, and in business. Accordingly, we are able to contribute comment which we hope will be of some value to you.

Wherry owners entered into agreements with the Government under which they were to build housing exactly in the quantity ordered by the military, exactly in accordance with the design provided and/or modified by the military, exactly at the locations stipulated by the military, and Wherry owners are to operate these projects for 52 to. 75 years for the occupancy benefit of military and military-civilian families.

Wherry owners are living up to their end of these contracts; and they are ready, willing, and able to continue to do so. It is for Con