"I strongly doubt that the possibility of saving in the insurance expense is a valid reason for Government intruding into the field of private enterprise. "Loss ratios are known to be ever-changing. One of the surest maxims in the insurance business is that a favorable loss ratio will almost certainly be followed by an unfavorable one. Therefore, the expected saving is entirely conjectural.

"Also, this proposal runs contrary to the part of the announced purpose of the National Housing Act which was to 'provide employment, and stimulate industry ***

"It should be borne in mind that private insurers are paying taxes, not only to Federal Government but to the States. The proposed self-insurance fund is specifically exempt from all taxation, levies, or licenses. If the Government becomes a self-insurer as to FHA business then the premium income of the insurance companies will be reduced. Therefore, the revenue the States are presently receiving from insurance companies will be correspondingly reduced. "As regards the second point in favor of this change, it has been suggested that the proposed self-insurance is ‘in accordance with general practice of Government.' This statement must be based on the thought that the insurance of properties acquired by FHA involves substantially the same practice as the insurance of Government-owned buildings such as post offices, courthouses, etc. "I respectfully submit that the two situations are not analogous. Government is a self-insurer as to the properties which it owns and uses for Government purposes. Properties acquired by FHA are not in any sense Government properties owned or acquired for Government purposes. I feel certain you will agree that they are private properties acquired, almost involuntarily, not used for Government purposes and disposed of as quickly as possible to private buyers. In short, FHA is intended as an aid to private business, and particularly home-mortgage financing.

"Consequently, I urge that the addition, as provided under section 102 of the proposed new section 10 to title I of the act be deleted: or, in the alternative, that the following new section 10 be added to title I of the act:

"SEC. 10. The Commissioner is hereby authorized to purchase such insurance protection as he, in his discretion, may determine to be appropriate with respect to real property acquired and held by him under the provisions of this Act.'

"In view of the statements made above, I sincerely hope that you will give positive support to the deletion of this proposed new section 10 to title I of the act in question."

I would very much appreciate your comments on the criticism of the proposal as voiced in the above quoted letter and if possible the inclusion of the letter in the record of the hearings.

With best wishes, I am

Sincerely yours,

MARGUERITE STITT CHURCH.

STATEMENT OF A. R. SIMMONS, JASPER, ALA.

I am Mr. A. R. Simmons, president of the First Federal Savings and Loan Association of Jasper, Ala. This statement is given to inform the House Banking and Currency Committee of my views on the recent national trend toward the chartering of the permanent stock type of savings and loan organizations and my reason for urging this committee to consider the inclusion of the attached bill as an amendment to the Housing Act of 1956.

As this committee well knows, the savings and loan industry is now in its 125th year of service to the citizens of the United States. From its origin in 1831 its strength and popularity has stemmed primarily from the subordination of the interests of a few and the devotion to the welfare of the community being served. This has been evidenced and assured by the corporate form of charter which has vested the ownership in the hands of all those who would save or borrow in the corporate entity, with the further limitation that the activities of each entity were confined to the local area known as the communiy. With good reason have these entities been described as "local, mutual building and loan associations" and with good reason has the Congress of the United States encouraged the development of such an industry.

Naturally, over the century and a quarter of its existence this business has developed and changed to meet the changing needs of our citizens. Being on the local scene, it has been possible for our associations to quickly sense the need 77603-56-41

for necessary changes and to supply them or to petition the State legislatures or the Congress for such modifications as were consistent with the basic objectives of our business. The creation of the Federal Home Loan Bank Sytem, of the Federal savings and loan associations, the Federal Savings and Loan Insurance Corporation, and the many refinements of these three cornerstones in our system, with which this committee is well familiar, are examples of good and proper developments in the history of this business.

There is another type of development, however, which is taking place currently that is inconsistent with the convictions of the overwhelming majority of savings and loan managers throughout the country-a trend which, unless understood by this committee, may change the future course of our business from the enlightened form of capitalism we have been blessed with. This is the accelerated trend toward chartering of permanent stock companies in which the effective control is vested in a small group who own the nonwithdrawable shares.

In outward appearance there is marked similarity to the local mutual building and loan association. In basic objectives, however, it is totally different. While the mutual association is chartered and operated for the benefit of all of its members, the permanent stock company is operated for the benefit of its ownersthose who hold title to the permanent stock. Owners of such stock, just as the owners of stock in any business enterprise, are properly and primarily concerned with making a profit on their investments. Their personal financial interest dictates all business decisions made. If it is financially desirable to sell such ownership to interests far from the community, there is no way nor any good reason to prohibit such a sale. If subsequent and distant owners chart a course which does not favor the interests of the community, who is to object? If the tendency toward permanent stock companies is encouraged in an industry which has always been mutual in character, we introduce for the first time the danger of monopolistic practices and the restraint of free competition, since it is only this type of corporate structure that lends itself to financial manipulation for the benefit of a few. If financial speculators devise ways of creating quick but unsound profits (as in the scandalous days of the "national associations" back in the 1880's and 1890's), how is the basic character of this 125-year-old business to be preserved? The permanent stock type of charter has been in existence in a relatively few States, notably Ohio, California, Texas, and Colorado. Being a distinct minority in the total picture back in the days when the insurance of accounts was devised, understandably little concern was given when insurance of accounts was made available to them as well as all mutual savings and loan associations. With the adoption of permanent stock company laws in Illinois and Washington and the current interest in converting mutual associations to permanent stock companies, the time has come to question the propriety of the Federal Government making available the insurance of accounts to corporate entities whose objectives are not consistent with those conceived by the Congress when insurance of accounts was issued and whose increased numbers bid well to alter materially the character of the risk being assumed by the insurance corporation and its members. As a fixed minority, there was no need to be alarmed; as a growing and potential majority, basic philosophies must be reexamined and convictions crystallized. It is in the light of this background that I recommend the addition of this attached language to H. R. 10157. Under it the Federal Savings and Loan Insurance Corporation is directed henceforth to grant insurance of accounts to local mutual savings and loan associations exclusively and to cancel its insurance contracts within 1 year to any mutual association which may convert or be merged with a permanent stock savings and loan company. Under such an amendment, no hardship would be imposed on any existing inserted savings and loan association, whether it has a mutual or permanent stock form of charter. Under this amendment, each State is free to legislate and grant whatever form of corporate titles it deems wise within its jurisdiction.

The insurance of accounts, however, since it is a privilege and not a right, should properly be issued by the insuror to such assureds and under such conditions as are reasonable and proper in the light of the total risk being assumed. Federal insurance of savings accounts in savings and loan associations was designed within the framework of the risks inherent in a mutual business. If a State or any group of States, or the United States, deems it wise to insure accounts in a business whose basic motivations and operations differ as radically as does the capital stock savings and loan company, a separate insurance plan on a State, regional or national basis should probably be considered. To represent to the public, however, that these two different types of charters are the same by granting identical insurance is not consistent with fact and is a be

trayal of the public confidence which the Federal Congress wished to encourage in establishing this Corporation originally.

A kindred question, though not related to the insurance of accounts, is also included in my proposed amendment to the Housing Act. It would clearly state that which I'm sure has always been a matter of intent in the liquidation or conversion of any Federal savings and loan association. Under this amendment there would be a clear mandate that mutual owners of an association are to receive their pro rata share of the full market value of all the assets and good will which the association possessed if the association were liquidated, converted, or merged with any form of organization except a mutual savings institution. Such a statement by the Congress will clarify the intent of Congress for more expeditious supervision and eliminate any further inquiry into the determination of what are the equities of the savings members of a Federal savings and loan association.

A BILL To amend section 403 of title IV of the National Housing Act affecting insurance of savings and loan accounts and to amend section 5 (i) of Home Owners Loan Act of 1933, as amended, affecting Federal savings and loan associations, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That title IV of the National Housing Act, as amended, be and the same is hereby amended by adding a new subsection to section 403 thereof as follows:

"(e) The Corporation shall reject the application of any applicant if it finds that the applicant is not a local, mutual thrift and home financing institution. The Corporation shall terminate within 1 year the insurance of accounts of any institution which has been converted after July 1, 1956, from a mutual institution to or been merged into or consolidated with a stock company having nonwithdrawable stock, the holders of which have any preference or advantage as to control of the institution or as to the earnings, reserves or surplus over the withdrawable account holders."

SEC. 2. Section 5 of the Home Owners Loan Act of 1933, as amended, is hereby amended by the addition of the following to subsection (i) thereof:

"The Board shall not approve the liquidation of any Federal association or the conversion or merger of one to any form of organization except a mutual savings institution unless provision is made for the mutual owners thereof to receive the full value of their accounts, including participation in any value represented by reserves, surplus and undivided profits."

STATEMENT RE FEDERAL COLLEGE HOUSING PROGRAM SUBMITTED BY THE MUNICIPAL SECURITIES COMMITTEE OF THE INVESTMENT BANKERS ASSOCIATION OF AMERICA

INTRODUCTORY COMMENTS

The Investment Bankers Association of America is a voluntary unincorporated trade association of investment banking firms and security dealers who underwrite and deal in all types of securities. It was organized in 1912 and has operated continuously since that time. As of March 21, 1956, our association had 804 member firms engaged in one phase or another of the securities business in the United States and Canada, including about 100 commercial banks. Our 804 members had, in addition to their main offices, 1,311 registered branch offices. We thus have members with either main or branch offices in practically all parts of the country. These member firms in the aggregate do a large percentage of the underwriting, distribution, and trading of State, municipal, and corporate bonds.

This statement is directed only to the Federal college housing program. The conclusions in this statement are based on two fundamental concepts: (1) The Federal Government should not take over functions of private industry when those functions can be performed adequately and at reasonable rates by private industry. An authorization for Federal loans at an interest rate arbitrarily fixed at an economically unrealistic low level when such loans are not available from other sources upon comparable terms is, in effect, simply an authorization for the Federal Government to take over a function of private industry-regardless of whether that function can be performed adequately and at a reasonable rate by private industry. Interest rates on loans cannot be arbitrarily fixed by private industry but are determined by many factors, including market conditions at the time of the loan, the interest rate on comparable

loans and on obligations of the Federal Government, and consideration of the risk involved in the individual loan in view of the particular borrower, the source of the borrower's funds for payment of the loan, and the security behind the loan.

(2) A need for a Federal loan program, under which the Federal Government loans money at an interest rate lower than the rate which the Federal Government pays to borrow money for a comparable maturity, is not demonstrated by (a) enthusiastic endorsement by the institutions which receive such loans or (b) a large number of Federal loans under such a program. Any attempt to justify such a Federal loan program on the basis that it is endorsed and utilized by the beneficiary institutions is simply an attempt to support the program by its own bootstraps, because it would be very naive to expect anything other than the most enthusiastic endorsement and utilization by the beneficiary organizations.

Under the present Federal college housing program the Housing and Home Finance Agency is authorized to make loans with a maturity up to 50 years for college housing or other educational facilities at an interest rate determined under a formula, which currently fixes the rate at 24 percent, when loans cannot be obtained from other sources "upon terms and conditions equally as favorable." In its only recent long-term financing the Federal Government paid 34 percent for a 30-year loan in 1953 and 3 percent for a 40-year loan in 1955, and these bonds are now selling in the market at prices to yield 3 percent or better.

Thus, the Federal college housing program authorizes the Federal Government to loan money to a college at the arbitrarily fixed interest rate of 24 percent when the Federal Government itself has to pay at least 3 percent to borrow money for a comparable maturity. Obviously, a private investor will not generally loan money to a college at 24 percent for terms up to 40 or 50 years (probably secured only by a pledge of revenues from the college dormitory to be constructed with the proceeds of the loan) when he can loan money to the United States Government at 3 percent for a shorter period (secured by the full faith and credit of the United States).

Private industry has been forced out of financing practically all college housing (even though private industry can supply the funds for most of such financing at a reasonable rate of interest).

1. The interest rate for Federal college housing loans should be raised to permit private industry again to provide some of the funds for college housing at reasonable rates

Under title V of H. R. 9537, a bill referred to this committee, sections 502 and 503 would amend subsections (c) and (e) of section 401 of the Housing Act of 1950 as amended, to provide that loans under the college housing program shall bear interest at a rate equal to the total of one-fourth of 1 percent added to a quarterly rate determined by the Secretary of the Treasury (this rate would be determined by estimating the average yield to maturity, on the basis of daily market bid quotations for prices during the month of February or May or August or November, as the case may be, next preceding each calendar quarter, on all outstanding marketable obligations of the United States having a maturity date of 15 or more years from the first day of such month and by adjusting such estimated average annual yield to the nearest one-eighth of 1 percent. This change would, in effect, mean that loans under the college housing program at present would be made at 3% upercent instead of the 24 percent provided by the formula in the present law.

The proposed change would be a step in the right direction in that it would raise the interest rate at which college housing loans would be made by the Federal Government to a more realistic level and would thereby enable private industry in some cases again to compete with the Federal Government in financing college housing. This change would still not provide a realistic rate of interest when it would authorize the Federal Government to make college housing loans with maturities up to 50 years (probably secured only by a pledge of revenues from the college dormitory to be constructed from the proceeds) at approximately the same interest rate that the United States Government pays to borrow funds secured by its full faith and credit for a comparable maturity. In this connec tion, it should be noted that serial issues of college housing bonds ordinarily have an average maturity of around 25 years.

The bill to provide Federal financial assistance for the construction of publie elementary and secondary school facilities (H. R. 7535), presently before the

House Rules Committee, would provide under title II for Federal purchase of obligations of local educational agencies with maturities up to 30 years at an interest rate determined under a formula which would presently fix the interest rate at 34 percent. Why should colleges, including private institutions, obtain Federal loans at a lower rate of interest than public elementary and secondary schools?

It is estimated that about $4 billion of additional college residential construction will be needed by 1965 and that substantial sums are also needed for other eligible facilities. Unless the Federal Government is prepared to assume the financing of that entire program, it is earnestly suggested that the interest rate under the program be raised further than 3% percent so that private industry can provide some of the funds at a reasonable rate of interest and the Federal Government will not finance the entire college housing program.

It should be emphasized that there is no magic in the 24 percent interest rate or in a 3% percent rate. If a higher interest rate is charged, the cost of financing is increased and the rentals charged for dormitory housing would have to be increased slightly in some cases if principal and interest charges were paid entirely out of such rentals; but, in many cases no increase in rentals would be required because funds from sources other than rental payments are available to meet principal and interest charges.

Representatives of college associations have suggested that no change be made in the interest rate at the present time because there is an absence of adequate information and there has been no comprehensive study of college housing in recent years. Last year representatives of those same associations, in urging Congress to lower the interest rate immediately, did not find the absence of adequate information or a comprehensive study any reason to defer changing the interest rate. It appears that the suggestion to defer raising the interest rate is intended only to afford an extended opportunity to obtain the largest possible amount of funds from the Federal Government at the present low rate. Furthermore, it appears that information is available and that a recent study has been made. In hearings in June 1955, before a subcommittee of the House Committee on Government Operations (House Hearings on Lending Agencies Report of the Commission on Organization of the Executive Branch of the Government, p. 131), a statement provided to supplement the testimony of Mr. Oakley Hunter, General Counsel of the HHFA, included the following:

"However, a study has recently been made by the Central Association of College and University Business Officers covering 339 of the 1,857 institutions of higher learning in the United States.

"The study indicates that 25.5 percent of the dollar volume of student residence halls completed since March 1953, under construction, or on which contracts had been let by October 15, 1954, were financed by HHFA college housing loans.

"The proportion for private colleges alone was 45.1 percent financed by HHFA college housing loans.

"The same study indicates that 29.1 percent of the financing of residence halls which are definitely planned but on which contracts had not been let by October 15, 1954, would be from HHFA college housing loans.

"The proportion for private colleges alone is given as 46.1 percent. "Other sources of financing are listed as insurance loans, revenue bonds, gift or grants, appropriations, reserve funds, and miscellaneous sources." The study reveals that during the period covered by the study, while the interest rate on Federal loans under the college housing program was over 3 percent, the 339 institutions of higher learning included in the study financed from sources other than Federal college housing loans 74.5 percent of the dollar volume of their student residence halls completed since March 1953, under construction, or on which contracts had been let by October 15, 1954.

In view of the substantial volume of college housing financing in the recent past at interest rates above 3 percent, it appears clear that where financing is practical for college housing at an interest rate of 24-percent financing would also be practical in most of those cases at a reasonable interest rate above 3 percent if the demand for college housing is anywhere near as acute as is claimed. Private industry can supply most of the financing for college housing at a reasonable interest rate, but it generally cannot compete with the Federal Government in providing college housing loans with maturities up to 50 years at the present arbitrarily fixed and economically unrealistic interest rate of 24 percent.