AFTERNOON SESSION

The committee reconvened at 2 p. m., Hon. Albert Rains presiding. Present: Messrs. Rains, Brown, Fountain; Mrs. Griffiths; Messrs. Wolcott, Talle, McDonough, and Betts.

Mr. RAINS. The committee will be in order.

We have three witnesses listed here together: Mr. Vieser, Mr. Norman Carpenter, and Mr. Camp.

Mr. VIESER. We are ready, sir.

Mr. RAINS. We are delighted to have you gentlemen.

You may proceed in any manner that you see fit.

Do you have a statement you wish to read, first?

Mr. VIESER. Yes; I do, Mr. Chairman. The statement may seem bulky but part of it is charts, which I will not read, and we will try to summarize some portion toward the end to aid in the time schedule. Mr. RAINS. Very well; proceed.

STATEMENT OF MILFORD A. VIESER, FINANCIAL VICE PRESIDENT, THE MUTUAL BENEFIT LIFE INSURANCE CO., ACCOMPANIED BY NORMAN CARPENTER, SECOND VICE PRESIDENT, METROPOLITAN LIFE INSURANCE CO.; AND EHNEY A. CAMP, JR., VICE PRESIDENT AND TREASURER, LIBERTY NATIONAL LIFE INSURANCE CO.

Mr. VIESER. I am Milford A. Vieser, financial vice president of the Mutual Benefit Life Insurance Co. My associates joining me in presenting this statement are Norman Carpenter, second vice president of the Metropolitan Life Insurance Co., and Ehney A. Camp, Jr., vice president and treasurer of the Liberty National Life Insurance Co. We are here today as representatives of the American Life Convention and the Life Insurance Association of America, two associations of life-insurance companies with a combined membership of 253 companies, holding 98 percent of the assets of all United States legal reserve companies.

The life-insurance companies have a keen interest in the subject matter of your hearing because they provide an important source of real-estate mortgage credit in this country. Last year the life-insurance companies made $6 billion of nonfarm mortgage loans, the larg est amount they have ever made in a single year. Of this total, $2.8 billion were Government insured or guaranteed residential mortgage loans and about $2 billion were uninsured residential loans. The remaining $1.2 billion were business and industial mortgage loans. During the decade 1946-55, inclusive, the life-insurance companies made $38.1 billion of nonfarm mortgage loans. At little over $9 billion of this total were FHA loans, $7.7 billion were VA loans and $21.4 billion were conventional. In the conventional category about 60 percent were residential loans. Throughout the 10-year period, therefore, the life-insurance companies made approximately $29 billion of residential mortgage loans. Of the total of $56.8 billion of FHA and VA mortgage loans made by all lenders in the period 1946-55, the life-insurance companies made about 29 percent.

Before presenting our views on the specific bills before your committee, we would like to discuss two basic questions as follows: (1)

Has the residential mortgage market been obtaining a fair share of the capital funds accumulated in our national economy and (2) is there economic justification for discounts on Government insured and guaranteed mortgages? Our recommendations on the legislative proposals before you will be more easily understood against the background of this general discussion.

BASIC QUESTIONS OF HOUSING AND MORTGAGE LENDING POLICY

The first question-has the residential mortgage market been obtaining a fair share of the capital funds accumulated in our national economy-is pertinent because much of the legislation under consideration, such as that concerning the functioning of FNMA, is aimed at expanding through Government action the flow of funds into residential mortgage financing.

The discussion of housing goals and the adequacy of residential mortgage financing has usually suffered because it has not been placed in the broad framework of real capital formation and financing in our national economy as a whole. Despite the unprecedented strides already made in housing construction in this country in the past decade, we would all like to see a further rapid improvement in the housing of our people. The advocates of a sharp expansion in the volume of residential construction and a much greater supply of residential mortgage credit seem to overlook the fact, however, that housing is but a part-a highly important part to be sure-of the total real capital formation needed in this country. The balanced expansion of our country also depends, of course, upon the growth of our industrial plant and equipment, our business and commercial facilities, our public utilities, our roads and other public works, and many other necessary forms of real capital formation. The growth of these forms of real capital is important because they create more jobs, support rising payrolls, and thus enable more people to buy homes and to pay for them. We do not have limitless productive resources in this country, so that from the viewpoint of physical capacity to produce there are restrictions placed on housing construction at any particular time, although through investment of savings the country's capacity to produce has expanded enormously in the past decade.

Much of the discussion about housing goals and residential mortgage financing has also suffered because of a failure to appreciate that the real capital formation of the country, including housing, must be financed out of saving or noncommercial bank sources if the country is to avoid further price inflation. In a period such as the past decade, in which our national resources of labor and equipment have been and now are so fully employed, the injection of commercial blank-created money into the economy is bound to have inflationary consequences.

What has been the picture in recent years regarding the sources and uses of capital funds in this country? We have prepared two charts to show this picture. The supporting data are taken from Government publications and show the net increase in both the sources and uses of funds. As you will see in chart No. 1, the total uses to which capital funds were put in the United States in 1955 amounted to $44.6 billion. Of this total, the net increase in residential mortgage debt amounted to $13.6 billion. This one use alone exceeded the increase in corporate security issues, State and local government secu

rity issues, and Federal debt combined. Turning to the sources which provided the funds for these uses, I call your attention to the fact that the funds derived from savings and other noncommercial bank sources amounted to $41.7 billion, and accordingly fell short of meeting the total demand by nearly $3 billion. The balance of $2.9 billion was supplied by the commercial banking system through the creation of bank deposits.

Chart No. 2 provides similar data for the period 1950-55. It also shows the substantial part of capital funds which has gone each year into the expansion of residential mortgage debt. It should be noted also how in each of these years the supply of savings and funds from noncommercial bank sources has fallen short of the total demand for capital funds, and commercial bank credit has had to be expanded to meet the demand. It is, of course, necessary to have some increase over the years in the volume of commercial bank credit in order to accommodate the growth in our economy. But one has only to look at what has happened to prices in the postwar period to realize that we have been relying too heavily on commercial bank creation of money and not enough on saving. We have, in other words, been trying to extract more in real product from the economy than it has been able to produce.

The resulting rise in prices has been particularly severe in the residential construction field. Chart No. 3 shows the steady upward movement in the Bureau of Labor Statistics index of wholesale prices of building materials which has risen 81 percent in the period 1946-55. In the past 18 months alone it has risen steadily by more than 8 percent. Chart No. 4 shows the rise of 61 percent which has occurred in the Boeckh index of residential construction costs since 1946.

Chart No. 5, based on data compiled by the United States Department of Labor, shows the rise of nearly 96 percent which has taken place since 1946 in the average estimated per unit construction cost of privately owned houses. This chart, as well as the one which follows, cannot be used as an exact measure of the increase in residential construction costs because it does not take account of improvement in the quality of housing, but in the light of chart No. 3 it is safe to say that it is indicative of cost trends. Chart No. 6 shows the increase of 97 percent since 1946 in the average principal amount of VA-guaranteed home loans closed, and also the rise of 97 percent since 1946 in the average amount for each dwelling unit of FHA home mortgage insurance written. To some degree this rise reflects the liberalization of loan-to-value ratios in FHA loans.

These charts indicate clearly that there are limits to the volume of real output which we can extract from our economy at any one time. During the past several years we have been engaged in a tremendous home-building program. It has also been vital that our industrial plant and equipment be enlarged and modernized. And of course we have steadily enlarged the output of consumer goods. The accomplishments of the postwar period have been remarkable; but there are at any one time physical limits to our real output. In an effort to push the economy beyond those limits, credit has been made available in too great a volume and on too easy terms, and inflation has inevitably followed. General inflation has been serious enough, but the rise in housing prices has been particularly severe. Since 1946 the Consumers Price Index has risen 37 percent, and the

Wholesale Commodity Price Index has risen 41 percent. During this same period the average estimated construction cost per unit of privately owned homes has risen nearly 96 percent. There is a serious question whether the veteran or the small-home owner is being done any real service by easy and excessive credit if the primary effect is to increase sharply the price of the house he buys.

It is sometimes thought that the cost of rising prices to the veteran or the small-home owner is measured simply by the higher price he must pay for his home. This increased initial cost is bad enough, but it does not measure the full toll exacted by inflation. Chart No. 6A illustrates the real cost of rising prices to the average home buyer in the period 1946-55.

Although there is no exact official measure of the change in the price of a standard home in the United States, such Government figures as are available indicate that the price rise from 1946 to 1955 was, at the very minimum, 75 percent. The rise in the average home loan, due solely to this inflation, was from approximately $6,000 in 1946 to approximately $10,500 in 1955.

The chart shows that, in addition to having to pay back an extra $4,500 of principal on his loan, the home buyer, on a 30-year 42-percent loan would have to pay $3,715.20 in extra interest cost because of the larger loan. The rise in the total cost to the average home buyer, due solely to rising home prices in the period 1946-55, therefore, amounts to $8,215.20. Inflation in the post war period has thus exacted a heavy toll from the veteran and small-home owner.

At a later point we shall have specific comments to make about the various proposals for expanding the secondary market and specialassistance functions of FNMA. Within the context of this general discussion, our objection to such proposals is that a large part of the funds needed to carry them out will be derived from the expansion of commercial bank credit and will add further upward pressures on prices in the housing field. At the end of January 1956, $377 million, or 66 percent, of the FNMA debentures outstanding were held by commercial banks.

Inflation which has been generated in the residential construction field is not confined to this area, but has its ramifications in many other parts of the economy. The life-insurance business must be vitally concerned about Government policies which contribute to inflation. At the end of 1955 approximately 103 million policyholders owned $373 billion of life insurance. These contracts are payable in fixed dollars. Rising prices make a heavy inroad upon the purchasing power of the outstanding life insurance. Many times today we hear complacent reference to "moderate inflation"-the 2 percent per annum inflation which is sometimes talked about by economists. Chart No. 7 shows how in 10 years such an inflation of 2 percent per annum would shrink the purchasing power of the life-insurance protection outstanding at the end of 1955.

As to the adequacy of private capital funds to maintain healthy activity in the residential financing field, the accomplishments in 1955 speak for themselves. Last year was a banner year in the residential field, and private capital funds supplied virtually all the legitimate demands. As to the future, it is noteworthy that repayments of principal sums on the existing national mortgage debt add substantially to the availability of long-term capital funds. If the experi

ence in the immediate past hold in this regard in the future, we may expect about 10 percent of the outstanding residential mortgage debt to be repaid to the lender yearly for reinvestment. In addition, savings and loan associations and mutual savings banks, which by law or by custom devote a very large proportion of their funds to the residential mortgage market, will continue to pour their rapidly increasing savings into this area. And it is probably that additional funds will come in the future from pension funds. Despite the current tightness in the capital market generally, my own opinion is that of all the investment markets the residential mortgage market will be the one least likely to experience a scarcity of funds over the next 5 years. I would like to have my associate, Norman Carpenter, take over from here.

Mr. RAINS. Mr. Carpenter.

Mr. CARPENTER. I turn now to the second basic question-is there economic justification for the discounts presently in effect on Government-insured and guaranteed mortgages? This is a difficult question which again can be answered only in terms of the functioning of the capital market as a whole. Our thoughts on this question may be made clear in the following way. Chart No. 8 shows the distribution of the principal assets held by life-insurance companies at the end of 1955. As you will see, the savings of life-insurance policyholders are invested in a wide variety of ways-industrial and business securities, public-utility securities, railroad securities, Federal, State and local government securities, Government-insured and guaranteed mortgages, uninsured residential, commercial, and industrial mortgages, and income-producing real estate.

Generally speaking, the contract interest rates of these various investments are flexible and are free to move in response to changes in the demand for and supply of capital funds. The life-insurance companies and other institutional investors such as mutual savings banks, savings and loan associations, and commercial banks, as well as individuals, direct their funds with an eye toward obtaining the most favorable yields. In other words, investors generally are responsive to changing interest rates under changing market conditions. In their lending capacity the officers of life-insurance companies act in a fiduciary character. The funds at their disposal constitute the savings of more than 100,000 Americans-the great majority of whom are persons with moderate incomes. It is our duty to invest this money on behalf of our policyholders to the best possible advantage to them. The cost of their insurance protection, the amount which their families will derive from their policies, or alternatively, their own modest income in old age after a lifetime of savings, will depend on securing for them the highest possible investment rate consistent with safety. We seek yield because the trust imposed upon us demands that we do so.

Within the general capital market, VA and FHA mortgages are unique in that the contract rate of interest is relatively fixed by Government order. It does change from time to time but the changes are infrequent and usually lag far behind capital market changes generally. This was the reason why, prior to mid-1953, droughts sometimes occurred in the availability of private mortgage funds for Government-insured and guaranteed mortgage financing. As interest rates rose in the face of heavy demand, uses of capital funds