where rates were flexible attracted funds away from the VA and FHA mortgage market where rates were fixed. In the middle of 1953 it was recognized by Congress that some means is needed to permit flexibility in yields of FHA and VA mortgages. With the contract rate on FHA and VA mortgages fixed, the discounts thus become the means through which these mortgages have yield flexibility in response to changes in market conditions. Since this yield flexibility through the discounts has been in effect, the VA mortgage has been able to hold its own in competition with other demands for capital funds, and we have avoided a further big expansion of Government financing. The yields available on direct loans to business and industry are highly competitive with Government-insured and guaranteed mortgages in the current tight-money market, but the flow of life-insurance funds into these mortgages continues at a very high rate.

The great importance of yield flexibility in maintaining the attractiveness of an investment was perhaps never demonstrated better than in the case of VA mortgage loans in the summer of 1953 when the rate on these loans was raised from 4 to 42 percent and it was made clear by the Congress than discounts were not illegal so long as they were not paid by the veteran. From the second quarter to the fourth quarter of 1953, according to reports made to the Life Insurance Association of America, the volume of new commitments made by life insurance companies to purchase VA mortgage loans increased by 375 percent.

The importance of flexible yields on FHA and VA mortgages may be indicated in still another way. If some of the legislation currently being considered by your committee is adopted and FNMA purchases of mortgages are used to support the prices of VA and FHA mortgages at artificial levels, the effect under present conditions will be to drive some institutional funds away from the VA and FHA mortgage market into other investment outlets where yields are flexible and more attractive. Thus the use of FNMA funds to increase the availability of mortgage money will be self-defeating. Instead, by upsetting the forces which create a natural balance in the money market and by discouraging private financing it will merely serve to require a larger and larger flow of public funds into the VA field.

Some of the legislative proposals before your committee are directed to using FNMA mortgages purchases to stabilize the prices of VA and FHA mortgages and to wipe out the large discounts. The methods proposed to accomplish this purpose would place FNMA in virtually the same position as the Federal Reserve System prior to the spring of 1951 when it was purchasing Government securities at pegged prices. This support operation had to be ended because it was causing a sharp increase in the money supply and was contributing to rising prices. In the same way, FNMA funds to support the prices of VA and FHA mortgages, to the extent they are obtained from commercial banks, would also have inflationary consequences. This country learned the hard way through inflation in 1950 and early 1951 that it is healthy for yields on Government securities to be flexible in response to market forces. This lesson should guide us against the Government committing the mistake of trying to hold VÄ and FHA mortgage yields unresponsible to market forces by pouring funds in to this market.

In considering the importance of investment yield and yield differentials as forces in the distribution of capital funds we would like to emphasize that it is important to think in terms of net yield after costs. The importance of this is indicated in chart No. 9 which shows the average gross yield earned by life-insurance companies on nonfarm mortgage loans in 1954 (the latest figure available as well as the cost which are involved in administering a mortgage loan portfolio). As you will see, the average gross yield in 1954 amounted to 4.43 percent. The net, however, after total costs of 0.57 percent, was 3.86 percent. It should be emphasized that these figures are the averages for all types of nonfarm mortgage loans combined, including Government-insured and guaranteed loans, uninsured residential, and business and industrial mortgages. Average costs on VA and FHA mortgages alone are somewhat higher as I shall indicate presently.

In the discussion of mortgage interest rates it is unfortunately too often overlooked that mortgage loan portfolios are relatively costly to administer with the net yield being considerably below the gross. At the present time, in the case of VA mortgage loans on a 20-year amortization basis purchased at a discount of 2 points, the gross yield is about 4.75 percent and the net after costs average a little better than 4 percent. It is sometimes argued that a net yield of 4 percent on VA mortgages is much too high in comparison with a little better than 3 percent yield on long-term Government securities or a yield of, let us say, 3.30 percent on Moody's Aaa publicly quoted corporate securities. Such a comparison is meaningless so far as most institutional investors are concerned. The yield on long-term Federal securities and highgrade corporate bonds selling in the public market is not competitive with the investment return which long-term investors can obtain in the investment areas into which their funds are currently being

directed.

The competition which the net rate of about 4 percent on discounted VA mortgages must face today is the net yield which can be realized on such investments as uninsured residential mortgages, commercial and industrial mortgages, income-producing property, and direct loans to industrial and business concerns. These net yields provide exceedingly strong competition for the net yield on VA mortgages. In a period such as the present in which all types of capital funds are in heavy demand, market forces require discounts on VA and FHA mortgages if the latter are to maintain their attractiveness as an investment outlet.

Much publicity has been given to large discounts of several points on certain VA mortgage loans. These are, of course, in contrast to the generally prevailing national averages of 2 or 3 points. There are a number of reasons for differences in the amount of discounts on VA mortgages. One of the most important factors explaining sizable discounts on VA mortgage loans is the quality of the loan. Despite the Government guaranty, which is less than 100 percent, there is an element of risk in VA mortgage loans and naturally those of poorer quality from the viewpoint of the property involved or the credit risk of the borrower will carry somewhat larger discounts. It should also be borne in mind that a free market works both ways. At one time, premiums were paid on FHA loans by life-insurance companies.

Because discounts on Government-insured and guaranteed mortgages are difficult for the public to understand, particularly the ab

normally high ones, we have always felt it would be preferable to utilize another means of making the Government-insured and guaranteed rate flexible so that it can reflect and adjust fully to free market forces. This could be accomplished in the following way. A maximum contract rate should be set on insured and guaranteed mortgage loans, but this rate should be substantially above the current going market rate. Under the ceiling of the maximum, the actual contract rates on individual insured and guaranteed mortgages would be set as the result of competitive market forces. The rates would move up or down depending upon market competition and would also be allowed to reflect geographical differences in the markets and differences in the quality of mortgages, as well as the additional expense involved handling loans in smaller towns and rural areas. Competition is keen in the capital markets and it can be depended upon fully to provide the lowest rates consistent with demand and supply conditions.

Mr. Camp will continue with our testimony at this point. Mr. RAINS. I would like to say that Mr. Camp's testimony before the subcommittee in Birmingham, and his frequent appearances before the Senate and House Committees, and the roundtable discussions we have had with him on mortgage credit, attest to the fact that he is a very keen student of the matter, although I don't always agree with his viewpoints.

Mr. CAMP. Thank you, I appreciate your kind remarks.

Views on H. R. 9537 and H. R. 10157: With this general background, I would now like to present our views on H. R. 9537 and H. R. 10157, the principal bills before your committee.

First, taking up H. R. 9537, we favor this bill in the main, with the following principal exceptions. First, we are opposed to the provisions of title II which would make it possible for FNMA (1) to reduce the present stock purchase requirement from 3 to 1 percent, and (2) to purchase mortgages within the range of market prices rather than at the market price as at present. We believe that the provisions under which FNMA is now operating are sound in that they assure that FNMA will be restricted to providing a measure of liquidity to the market as was intended. If the proposed changes are adopted, as indicated earlier there is grave danger that FNMA will burgeon out as a big factor in the market and all create further inflationary pressures in the residential construction field.

We also seriously question the wisdom of increasing the amortization period of 40 years in section 221 loans. This longer amortization period will make these mortgages much less acceptable to private financing institutions and will be of doubtful help to the mortgagor. To illustrate, if we assume a $7,000 mortgage at a 41/2-percent rate amortizable in 40 years, at the end of 5 years only No. 353 would have been paid in amortization; at the end of 10 years only $794; and at the end of 20 years only $2,038, with $4,962 of the initial loan still outstanding. As is obvious, the rate of amortization is exceedingly slow, in fact so slow that the physical deterioration and obsolescence of the property would undoubtedly be greater than the amortization. This exposes the investor to serious risk which no lender operating on sound fending principles would be able to assume. The 30-year amortization period currently in effect, although still long in the eyes of many institutional investors, makes the loan much more acceptable. Moreover, from the viewpoint of the homeowner, the monthly

carrying charge (interest and amortization) on a $7,000 411⁄2 percent, 40-year mortgage is $31.50. The monthly carrying charge on the same mortgage, but with a 30-year amortization period is $35.49. Thus the shorter term, making the loan sounder, involves only $4 more per month in the mortgagor's payment. More important, if the loan is on a 40-year basis the mortgagor must pay total interest of $8,120 over the life of the loan, as compared with total interest of $5,776 if the loan runs for 30 years. Accordingly, the 40-year loan will cost the homeowner $2,344 more in the form of interest, which is a heavy price to pay for the extended maturity. For these reasons we believe that the 40-year loan is socially undesirable and we urge that the section 221 loans be continued on a 30-year basis.

After those very kind remarks by the chairman, I think I should state to the committee that it is somewhat disturbing to me to be placed in the position of having to oppose any provision in a bill which carries the name of my distinguished Congressman from Alabama. I might say to the members of the committee that in my State Congressman Rains is considered one of our outstanding statesmen, and we appreciate the extreme interest he has taken in this whole question of housing and mortgage lending, and while, as he said a moment ago, we do not always agree, I have always found him willing to listen and to debate the question with an open mind, for which I have always been very grateful.

I would like to preface my comments on H. R. 10157 with the general observation that we believe the provisions of H. R. 9537 are much more appropriate, with the principal exceptions noted above, in the present housing and mortgage lending situation.

Title II, the secondary mortgage market: Section 201 (b) would make the nonrefundable capital contributions to FNMA "equal to not more than 2 percentum of the unpaid principal amount of mortgages" instead of the present provisions of not less than 3 percent of the unpaid principal amount or such greater percentage as may from time to time be determined by FNMA. The original language clearly intends that resort to FNMA should not be easy. We believe that the proposed amendment, which would permit FNMA to purchase mortgages without requiring any capital contribution, would be a sharp departure from the original intent and would pose the threat of a sharply expanding FNMA operation, which as we indicated earlier is bound to have inflationary repercussions in the residential construction field. We recommend strongly against it.

Section 201 (c) would permit FNMA to issue advance commitments to purchase mortgages and these commitments would be issuedat prices which are sufficient to facilitate advanced planning of home construction, but which are sufficiently below the price then offered by the association for immediate purchase to prevent excessive sales to the association pursuant to such commitments.

We are strongly opposed to this provision for the following reasons: (1) The history of advance commitments in the FNMA operation prior to the Housing Act of 1954 shows clearly that FNMA advance commitments encourage overbuilding and inflationary excesses in residential construction. (2) This provision would tend to draw FNMA nearer to the primary mortgage market and away from its basic purpose of providing supplementary assistance to the general

secondary mortgage market; and (3) it would tend to place FNMA in direct competition with private mortgage investors.

Section 201 (d) would require that under the special assistance function FNMA must purchase mortgages at not less than 100 percent of the unpaid principal amount. We recommend against this provision because (1) it would operate mainly to displace private investors in the mortgage market and would not supplement them as was the original intent; and (2) because of the "par" purchases, it would be clearly a "support operation." If this provision is adopted it seems. inevitable that every mortgage eligible for FNMA purchase under the special-assistance program would be sold to FNMA and the funds. would be quickly exhausted.

Section 201 (g) authorizes a $50 million revolving fund for FNMA to purchase and to make commitments to purchase mortgages insured by FHA under section 203 (i) of the National Housing Act, namely, low-cost housing in outlying and rural areas and in small communities. Moreover, under this provision FNMA would be required to purchase mortgages at par. We are opposed to this provision on the grounds that: (1) it is clearly a "support operation" which would provide no opportunity for the play of market forces and would remove private investors from the field; and (2) it is not needed in that this area is already being aided by the secondary market operation of FNMA and by the voluntary home mortgage credit program. Investment of national service life-insurance fund: Section 202 provides:

The Secretary of the Treasury is hereby authorized to invest and reinvest not in excess of 10 percent of such fund by purchasing loans which are guaranteed pursuant to section 501 of the Servicemen's Readjustment Act of 1944, as amended, and which are secured by property located in geographic areas where private capital is found by the Secretary to be generally available for guaranteed loans only at an excessive discount, in order to stabilize the price at which such loans generally will be salable to investors. The price to be paid for such loans shall not exceed the unpaid principal balance thereof, plus accrued interest. No such loan shall be purchased hereunder except from the original mortgagee prior to any other sale thereof. No such loan shall be purchased hereunder after July 25, 1957, except pursuant to an agreement to purchase made on or before such date. Loans will be eligible for purchase hereunder only if guaranteed on or after the date of the enactment of this subsection, and loans so purchased may be sold for an amount not less than the unpaid principal balance plus accrued interest. If any loan acquired under this subsection by the Secretary of the Treasury shall default, and the Secretary determines the default to be insoluble, such loan and the security therefor shall be assigned to the Administrator of Veterans' Afiairs, who shall pay to the fund (in the manner provided by the first proviso in section 506 of the Servicemen's Readjustment Act of 1944) the entire unpaid principal balance of the loan plus accrued interest. We recommend strongly against this section of H. R. 10157 for the following reasons:

(1) It would constitute an unnecessary and undesirable direct intervention in the residential mortgage field by the Federal Government. A keystone of our private enterprise system is the accumulation of capital funds through private institutions and the flow of these funds into investment under conditions governed by free market forces. The need for Government to intervene indirectly in the residential mortgage field through such means as FHA is generally accepted, but the direct intervention as provided in this section would strike at the heart of the free mortgage market.

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