HOUSING ACT OF 1956

MONDAY, MAY 21, 1956

HOUSE OF REPRESENTATIVES,

COMMITTEE ON Banking anD CURRENCY,

Washington, D. C.

The committee met at 10 a. m., Hon. Barratt O'Hara presiding. Present: Messrs. O'Hara (presiding 10 a. m.), Brown (presiding 10:50 a. m.), Multer, Mrs. Sullivan, Messrs. Fountain, Vanik, Wolcott, Talle, Kilburn, McDonough, Widnall, and Betts.

Mr. O'HARA. The committee will come to order.

Mr. Severin, I understand, is our first witness this morning.

Mr. Severin, you may identify yourself and proceed with your testimony.

STATEMENT OF NELS G. SEVERIN, SAN DIEGO, CALIF., SECOND VICE PRESIDENT OF THE NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. SEVERIN. Mr. Chairman and members of the committee, on behalf of the home builders and the home building industry of southern California, I wish to express my gratitude for this opportunity to speak before your committee.

I have been asked to speak before you today regarding the critical condition of the mortgage market at this time in the interests of the southern California home-building industry which represents approximately 10 percent of the total home building industry in the United States.

We are in a parodoxical situation which has served to aggravate what might otherwise have been normal growing pains attendant with our rapidly expanding economy. On the one hand, southern California has for the last decade been the most rapidly expanding area in the country. This expansion has resulted in great wealth and economic advantage to the people of southern California and has allowed our building industry to grow into a volume which far outstrips that of any other area of the United States.

On the other hand, because of this rapid development and the extent of the changes in the area, it has been difficult to attract an adequate flow of mortgage funds to the area which can support our expansion and we have suffered on this account.

From the accomplishments of our industry and the records which show the great volume of building we have done, it is, of course, clearly evident that a large volume of mortgage money has been placed in our area-perhaps more than in any other comparable area in the

country. We cannot say, therefore, that we have ever been without funds. However, the fact remains that the supply has, for the past 10 years, been to varying degrees inadequate to meet the demand, and we have been forced into the position of paying large discounts to continue the home-building operation. This situation has, over the last 6 or 7 years, become continually worse. With the present restrictive policies of the Federal Reserve Board and the tremendous demand for money generally for our growing national economy we are now in an extremely critical position which in the months to come may very well become much more serious.

It has been said that there will be plenty of money because the production volume of builders is greatly decreasing. The volume of building is slacking off because of a shortage of mortgage money. Both of these shortages are caused by the restrictive policies of the Federal Reserve Board. Money is in short supply in the buyer's pocket, in the mortgage market, and everywhere else. Building a few less houses isn't going to help the situation generally. As we cut down the volume of building the volume of money is decreasing further.

We have, in the last several years built in excess of 100,000 homes a year in southern California. Last year we built 144,000. In January of this year there was considerable optimism regarding the prospects for mortgage money and the outlook was for another banner year. However, this upturn in the mortgage market did not materialize and we now find ourselves in what is perhaps the worst mortgage position experienced in southern California in the last 10 years. As a result, the volume of building starts has taken a steady plunge downward and there is nothing on the horizon to indicate a break of this downward trend in our area.

Contrast this then with any economic surveys dealing with southern California and you will find that without exception the prospects are for continued expansion of our area. The general consensus of the best authorities is that by 1970 the Los Angeles metropolitan area will have a population of 8 million people and southern California will have a population of 12 million.

Our economic development and employment totals are currently advancing at a rate which exceeds the present rate of population increase. In spite of the continuous immigration and population increase at such a high rate, our unemployment is continuing to decrease percentagewise and has maintained that trend over the past year. This can only serve to accelerate our present rate and to bring more people here.

In the face of this, the building industry cannot hope to accomplish the task before it, and fulfill its obligation to this expansion, without a larger supply of mortgage money than we have been able to attract in the past. Our builders, who for the most part are smallbusiness men, simply cannot continue for any extended period to build homes in discount climate which results in a loss by reason of their inability to sell their mortgages at a fair market price.

We therefore, ask that your committee and the Congress in general, give careful consideration to this dilemma to the end that corrective steps be taken. If this is not done, the resulting situation could be a housing shortage which would result in an increase in sale price of homes far above that which might result if the present fears of

the Federal Reserve Board regarding the threat of inflation were to materialize and become fact. We recommend for your consideration a four-point program as follows:

1. The passage of section 202 of H. R. 10157.

If a portion of the national service life insurance fund can be made available for the purchase of mortgages on veterans' homes, this factor will provide a considerable stimulus to the mortgage market. These are not Government funds. This is veterans' money paid as mutual life insurance premiums. The funds have been invested in very low interest-bearing Treasury certificates. The earnings from mortgages would be considerably more and would represent a better use of the funds. What better investment could there be for a portion of these funds than in mortgages on the homes of some of the veteran policyholders.

We recommend that the purchasing, servicing, and sale of mortgages so purchased be administered by the Federal National Mortgage Association using the same purchase schedules as apply to the purchase of mortgages for their own account.

2. Downward revision of Federal National Mortgage Association stock participation from 3 to 1 percent.

Such a revision will improve the net market price to builders and should have a favorable effect on the mortgage rate generally.

3. Mortgage warehousing is vitally necessary for areas such as ours. The disproportionate impact of the restrictive policies of the Federal Reserve Board on the mortgage market should be further pointed up to that body. When they place artificial restrictions on the money market, and when money is in short supply, the mortgage market is the first to feel the impact.

In times of short supply, the price of money like any other commodity goes up in the form of higher interest rates, particularly on short-term borrowings. When lumber, or labor, or some other item in a house goes up the builder can increase the price of his house and that increase is reflected in the FHA and VA valuations. Money is just as important as lumber in producing homes for the people. Unfortunately, under the present FHA and VA regulations, this cost of money is not considered in determining the value of the builder's product and consequently the builders are forced to pay the cost of money out of their steadily shrinking profit margin.

The only partial relief the builder has had has been the warehousing of mortgages with commercial banks during times of money shortage. Since the New York Federal Reserve has frowned on this practice, practically speaking, for our area there has been a virtual stoppage of mortgage warehousing.

If it is necessary, in the interests of the economy as a whole, to continue these general restrictive policies, the Federal Reserve Board should encourage rather than discourage the practice of mortgage warehousing during this critcial period.

4. Federal National Mortgage Association 112-percent fee for use of its recently established repurchase option plan should be reduced to one-half of 1 percent.

Recently FNMA attempted to afford some relief for the scarcity of warehousing by establishing a new repurchase option plan. Its effective fee for this is 112 percent which is much too expensive, particularly when added to its other charges. If the fee for this was set at one

half of 1 percent, the industry would be greatly benefited and FNMA, in our opinion, would be able to operate on a self-supporting basis instead of reaping maximum profit.

Mr. Chairman, as it states at the heading, I am also the second vice president of the National Association of Home Builders, and I should like to offer a supplemental report to one made by our president the other day, and preface it by saying that we presently have some 460 of our members of the board of directors in Washington at this time and we have been considering what we regard as one of the most serious problems confronting us and the building industry, and the economy generally.

I am authorized to convey to this committee the action of the National Association of Home Builders with respect to the important subject of extending of the GI loan for World War II veterans.

The loan-guaranty rights of the veterans of World War II expires, as you know, in July of 1957. Some action must be taken this year by the Congress or builders cannot plan their projects for next spring. The NAHB recognizes that the guaranty of loans for World War II veterans should be brought to an end sometime in the near future. However, this very important program should not be allowed to expire without some kind of a conversion device. In most areas GI loans are a very substantial portion of residential construction.

We heard comments and data from our directors which would indicate that it represents 75 percent of the building being done in some areas of the country today.

To terminate the program without a counterbalancing method of financing would produce a decline in housing starts which in our opinion would result in a severe economic letdown.

It was the conclusion of our 464-man board of directors, representing some 259 communities, that the only way to do this is to provide a single mortgage financing system for veterans and nonveterans alike with downpayment requirements that would fall somewhere in between the present FHA requirements and of the VA no downpayment.

In our opinion this would not increase the total amount of construction, but would distribute it better among all citizens and economic groups. It would remove the distinction between veterans and nonveterans while providing to veterans and others alike an opportunity to acquire a home on reasonable terms. It would do this on a selfsupporting basis and without further increasing the Government's cash liability.

We propose that FHA downpayment requirements under section 203 be amended to produce approximately those called for under H. R. 10692, recently introduced by Congressman Teague, but modified in such a way as to an even graduation of required downpayments, instead of the staggered downpayments in the Teague bill.

At the same time, the present GI loan program should be extended for at least 1 year from enactment of such a new schedule in order to provide a smooth transition. Experience has shown that it requires approximately that time for any newly enacted housing program to become effective.

I wish to again thank you for the opportunity of appearing before your committee. I shall be happy to reply to any questions which you may care to direct to me.

Mr. O'HARA, Mr. Wolcott.