At the present time there are public programs underway such as Operation Home Improvement designed to improve America's standard of living through modernization of homes. Under the impetus of these activities, built-in equipment, as replacement or modernization units, is certainly becoming a more important part of the requirements of homeowners.

Therefore, it seems only logical that such built-in equipment should be included in title 1 to be covered by FHA loans.

Electric and gas built-in appliances are in great consumer demand and at this point replacement or modernization installations are handicapped because adequate and equitable FHA terms are not available to the consumer. This handicap becomes more acute during 1956, the year designated and cosponsored by industry and governmental agencies as the year for Operation Home Improvement.

FHA Title 1 should clearly indicate to administrative bodies that the cost of all such appliances may be included in property-improvement loans.

We urge also that consideration be given to making FIIA title 1 permanent legislation and of increasing the limits of single loans from $2,500 to $3,500, and the repayment period from 36 to 60 months.

STATEMENT OF THE NATIONAL RETAIL FURNITURE ASSOCIATION BY JULIAN W.

CAPLAN

We deeply regret that it was not possible for the committee to hear the testimony of the National Retail Furniture Association during its hearings on the housing bill (H. R. 10157). Since the crowded schedule of witnesses did not permit time for personal appearance, we respectfully urge every member of the committee to give careful consideration to the arguments presented herein. The National Retail Furniture Association represents some 9,500 retail home goods stores throughout the 48 States. These stores sell furniture and related items of home furnishings and equipment which transform a house into a home. Retailers generally regard themselves as purchasing agents for the public, and nowhere is this more literally true than in the retail furniture business due to the historical marketing pattern which brings manufacturing sellers and retailing buyers together at the great national and regional marketing centers several times a year.

RAPIDLY WASTING ASSETS IN FHA MORTGAGE PROGRAM

Furniture stores have a large stake in the FHA insurance and VA guaranty mortgage programs on new and existing houses. Over the years as these programs have been liberalized and thus increased their effect on the total housing market, retail home goods merchants have continually expressed their concern at the ever-expanding list of items which have become part of the builder's package of housing for sale under these Federal insurance and guaranty programs. The new home market for major home appliances has been largely diverted away from retail channels by this practice of builders selling the equipment with the house in a package deal.

Many items now included in the mortgage are free-standing units, like refrigerators, washing machines, or stoves. These items depreciate rapidly and wear out long before the mortgage is paid off. They are rapidly wasting assets. The longer mortgage periods available under the Federal programs have eased the way for builders to load as much of this household equipment as possible into the initial package mortgage.

It is strange and somewhat hard to understand Federal policy which encourages the sale of appliances on 30-year terms, though their average useful life lies somewhere between 5 and 10 years, and long-term mortgage interest almost doubles the initial cost of the item.

It is our feeling that the national housing policy should be directed toward the building of basically finer houses. To the extent that purchase money is diverted to the acquisition of fancier items of equipment or furnishings at the expense of the basic structural quality of the house itself, this end is not achieved and the home buyer is not getting his due.

The Senate Committee on Banking and Currency took cognizance of this problem as a result of our testimony during the hearings of the Housing subcommittee in March. In its report No. 2005 reported on May 15, 1956, with its clean bill, S. 3855, the following paragraph at page 7 covers the Senate committee's

action (the suggested amendment to which reference is made was submitted by the National Retail Furniture Association):

"RAPIDLY WASTING ASSETS

"The committee considered a suggested amendment to section 203 (b) of the National Housing Act, relating to sales housing constructed as security for FHA-insured home mortgages, which reads as follows:

""To be eligible for insurance under this section a mortgage shall"Not include as mortgage-security items which are not an integral part of the real estate unless such items substantially protect or improve the basic livability or utility of the property and continue to enhance the security and value of the property for the duration of the mortgage period. The Administrator shall develop a list of items of household equipment and furnishings which shall not be eligible for inclusion as part of the valuation of an insured mortgage under this section for use on a uniform basis by all regional and local offices of the Federal Housing Administration.'

"This amendment was intended to prevent the inclusion, as security for an FHA insured mortgage, of rapidly wasting assets which do not continue to enhance the value of the property for the duration of the mortgage period. The committee is quite concerned that the inclusion of rapidly wasting assets may not be in the best interest of homeowners purchasing houses with FHAinsured mortgage loans. However, the committee was uncertain of the total effects of the proposed amendment, and decided to withhold action until additional information can be obtained.

"The Federal Housing Administration is requested to study this proposed amendment to section 203 of the National Housing Act and report its findings and recommendations to the committee by January 31, 1957. This report, among other things, should include (1) information regarding items, now eligible, which would be ineligible under this amendment, (2) the effects upon the size and utility of houses constructed under the FHA program, (3) the advantages and disadvantages to the homeowner, (4) the effects, if any, upon industries producing items which might be excluded, and (5) the effects upon the home building industry as a whole."

BUILDERS MUST CUT CORNERS TO INCLUDE GLAMOROUS, GADGET-LADEN KITCHENS, LAUNDRIES IN POPULAR PRICE HOUSES

So long as Federal policy permits including kitchen or laundry appliances under FHA and VA mortgage financing, builders are going to pull every competitive stunt they feel is necessary to merchandise their houses. As competition becomes keener we have seen this pattern evolving clearly in many areas of the country. If one builder sells a popular price house with an equipped kitchen and laundry, this creates a competitive pressure on other builders to offer a similar deal. In most cases, in order to keep costs down so that they don't price the house out of the mass market, it stands to reason that the builders must cut corners where it doesn't show. And this is precisely what happens.

If builders weren't in the kitchen and laundry appliance business, they could devote their full budget and efforts to building a house of maximum size and structural quality for a given market price.

The FHA and VA single-family housing programs exert a tremendous influence on the housing market, accounting for better than 50 percent of the total market. Present FHA policy-without any guiding criteria or inhibitions in the National Housing Act to restrain the practice-permits inclusion of appliances and equipment according to prevailing area practices, with policy varying among the seventy-odd local FHA offices, and even within a single given area.

Frankly, we question this approach. Since the Federal programs make available longer mortgage terms than are generally available on conventional financing, and require far less downpayment, it seems that they should be based on a sound determination of uniform policy which is geared to assuring homeowners the best and largest available houses with the most durable and efficient construction features for long-term benefits. For example, in cold climates, perhaps a slight additional amount spent by the builder for insulating more thoroughly would result in a substantial annual saving on the family heating bill. Over the 30-year life of the mortgage this saving will mean far more to the homeowner than a fancier refrigerator for the first 5 years than the one they might have already had, or the one they would have managed with until they could afford the ultimate to satisfy their later family needs.

The point we are making is simply this: If Federal housing policy did not allow the mortgage financing of appliances with new homes under the FHA and VA mortgage programs, the American public would very likely be getting a bigger and better house for their money than they are now getting. And in so many cases home purchasers take the appliances because they believe they come with the house-though they might be far better off to shop more selectively for their own appliances on the open market and buy them on realistic short-term financing, or make do with what they have for a few years after moving into their new home. Most home buyers will probably be able to afford better equipment more easily a couple of years after recovering from the impact of initial expenses incident to buying the house and moving and adjusting to a new budget. They will also have a much better idea as to their needs and how best to satisfy them after living in the house for a while.

CARPETING ON 30-YEAR MORTGAGE TERMS?

Here's an example of the extremes to which a practice might be pushed under a federally fostered or inspired marketing gimmick.

Presently the carpet industry is endeavoring to get FHA approval of carpeting for 30-year mortgage financing in new homes. This is a matter for very serious concern. It could cause further downgrading in structural quality of American housing. It would bring about the elimination of finished hardwood floors, and the substitution of plywood or masonite-type floors over which the carpeting would be laid. Now there is probably nothing wrong with the substitute unfinished floor as a foundation for carpeting, but is this a trend in the public interest from the standpoint of almost irrevocably committing a house to the use of carpet? Looking ahead, this means that when the carpet wears out-which can be expected to happen in 5 years or less-it will have to be replaced with more wall-to-wall carpet, or a hardwood floor will then have to be laid at an unlooked-for additional expense if Mrs. Homeowner decides she wants a room rug or some other floor-furnishing style which might then be in vogue.

Immediately following the testimony of the National Retail Furniture Association before the Senate Housing Subcommittee, there appears in the printed hearings at page 386 a letter from FHA Commissioner Norman P. Mason stating that FHA does not presently, or prospectively, plan to permit the inclusion of carpet in the mortgage security. This assurance was welcome, indeed, to retail carpet dealers, and it is their strong hope that this policy at FHA will stand a long time.

However, the fact that within the Technical Standards Division of FHA serious consideration was being given to the idea of accepting carpet as part of FHA mortgage security demonstrates the need for Congress to consider the entire problem with respect to FHA title II home sales (and VA title III sales).

In the National Housing Act, as amended, there are apparently no general limitations or criteria as to the exclusion of nonrealty items or items which are fast wearing, fast depreciating, and not an integral part of the structure.

BAD CONSUMER ECONOMICS SAP FAMILY PURCHASING POWER

A look at costs reveals that it is most uneconomic to purchase fast-wastingassets on terms which go way beyond their useful life. Take as an example a $500 item, whether it be laundry or kitchen appliances with a 10- to 15-year service life or carpeting with a 5-year life under normal family living conditions. We understand that a 5-year wear period is the basis for the use-wear standards the carpet industry has submitted to FHA; so this is a feasible figure for the purpose of this illustration.

Let us compare the cost of $500 worth of carpeting (or appliances) (1) when purchased on retail installment terms of 2 years at 6 percent carrying charge and (2) when purchased under a 30-year, 42-percent FHA (or VA-guaranteed) mortgage.

On terms of 2 years at 6 percent, the total cost is $560; of this amount, interest is $60, and monthly payments are $23.33. The carpeting would be fully paid for long before it was worn out.

Under a 30-year mortgage the total cost is approximately $914; of this amount interest is $414, and the monthly mortgage payment is $2.54 (for 360 months). The net difference in cost to the consumer is $354.

That's bad consumer economics. Still worse, lonog after the original carpet is dead and buried from wear, Mr. and Mrs. Homemaker must continue to pay

$2.54 every month for the carpet they bought under the mortgage. Thus when the worn-out carpet is replaced, their new carpet, assuming they buy on the 2-year terms discussed above, will cost about $23.33 a month, but they will be laying out about $25.87 a month-because the ghost of the old carpet will haunt them throughout the life of their mortgage.

The same bad husbandry applies to other items now included under FHA or VA mortgage financing. In every instance where a refrigerator, range, dishwasher, or other free-standing item of equipment must be replaced, the homeowner must continue to pay for the worn-out item that came with the house for the remainder of the mortgage term. It seems a painless way to buy at the time the house is purchased, but it becomes an almost-permanent, fixed expense which reduces family purchasing power for many years more than the few initial years of use and value afforded.

The magnitude of the economic effect on consumer purchasing power can be seen when the figures are considered. On $1,000 worth of equipment and appliances in the mortgage, family purchasing power for 30 years is reduced $5.08 per month; on $1,500, purchasing power is reduced $7.62; on $2,000, purchasing power is reduced $10.16 per month for 30 years. This $10.16 in monthly payments might have satisfied a household equipment need for 10 years of the 30-year period. This means, then, that for the remaining 20 years the family unit's ability to buy replacement equipment is reduced by $10.16 per month, or $2,438 in the aggregate.

That is why the National Retail Furniture Association contends that it is bad for consumers to buy rapidly wasting household assets on unfeasibly long mortgage terms. It is their own best interests to buy these items on appropriately shorter terms, realistically chosen to fit the life-use expectancy of the equipment and bearing sound relationship to the rate of depreciation.

WHAT DOES MRS. AMERICA WANT IN HER NEW HOME?

Miss Annabelle Heath, Assistant Administrator of the Housing and Home Finance Agency, in a speech on May 21, 1956, made the following pertinent comments which reflect the consumer attitude pretty clearly on the question of builders equipping the house.

"We have recently heard from typical American homemakers what they think a home for a growing family should be like. The Women's Congress on Housing (3-day conference in April) focused on single-family homes for families with children, since they represent the greater part of the housing market demand

"While 103 representatives from all parts of the country were given an opportunity at the Congress to expand their ideas, we received well over 4,000 letters with many constructive suggestions ***

"They want more space for certain activities and functions, but they want that additional space in the proper places. To get properly planned space in the right places, they would be willing to forego initially the convenience of mechanical laborsaving devices. They want space provided for many of them for later installation. But they want to make their own selections when they feel they can better afford them. [Emphasis supplied.]

"They want simplicity. They do not want a mixture of materials.

"They want individuality. They want to escape the standardized units of city apartments, row houses, uniformity, monotony

"They do not want a turnkey job, with no opportunity for individual choices and expressions in colors, wallpapers, equipment, etc. They do not want standardized planting. They want an opportunity left to shape the environment both interior and exterior in which they live and grow."

PREFERENTIAL AND DISCRIMINATORY PRICING IS WIDESPREAD

Another evil arises in connection with practices which encourage builders to enter the consumer goods market. This is the result of the fierce competitive pressure on manufacturers and distributors to get the builder business. In the appliance industry they seem able to sell at lower prices to builders, even in small quantities, than the best carload quantity prices offered to retailers. This, of itself, gives builders a competitive advantage over retailers in offering similar merchandise with the house; but a damaging byproduct is that some of the goods sold to builders at the discriminatory and preferential prices seem to find their way into the retail market. This creates a chronic earthquake under price structures. It breeds uncertainty and instability in the market, and tends to demoralize merchants and confuse consumers.

Since the FHA and VA housing programs often expert a pacemaking effect on the mass housing market, their policies can create or largely contribute to the sweeping changes in marketing practices we have discussed.

PROPERTY IMPROVEMENT LOANS UNDER TITLE I-COMMODITY FINANCING ALSO?

The National Retail Furniture Association recommends continuation of present FHA restrictions on eligible items under title I home-improvement loans. If the title I program should ever undertake to finance major appliances, carpeting and other nonstructural items of equipment and furnishings, then the Federal Government will be in the consumer finance business with both feet-even though it is operating an insurance program and not making direct loans.

If there were a lack of private financing facilities, there might be some justification advanced for a different approach. But there is certainly no lack of competition for short-term financing of consumer instalment paper as between retailers, commercial discount, and finance companies like General Electric Credit Corp., General Motors Acceptance Corp., C. I. T., local banks and more recently special lending plans widely sponsored by a given industry group such as the A. B. C. plan in the carpet industry. The General Electric Credit Corp. last week announced its own 5-year financing plan for consumers on remodeling jobs to modernize kitchens and laundry rooms in the home. The carrying charges were notably lower than those charged for single-item instalment sales.

So here is yet another example of the strong trend in private industry to provide the means for achievement of better homes and higher living standards without Government assistance. The title I home improvement program, therefor, should be limited, by explicit declaration of the intent of Congress, to the basic purpose of underwriting structural changes, additions, and repairs to houses. It should not be permitted to invade the field of consumer goods or commodity financing.

We respectfully submit that the language of the recently released Senate Report No. 2005 could easily be interpreted by FHA as giving it the new latitude and authority to enter into the field of loan insurance for commodity financing under the home improvement provisions of title I. (See p. 4, Purposes for Which Loans May Be Used.)

It would seem far more constructive if the program were channeled into the areas of the Nation where there is an actual lack of financing facilities available to home and farm owners for preserving and improving their properties. Perhaps in the smaller towns and rural areas, there is a vacuum to be filled due to the limited banking facilities and available capital. But obviously this need has diminished in the metropolitan areas as is forcefully demonstrated by the substantial drop of over 40 percent in title I loans last year.

This is not a condition for concern, but, rather, for rejoicing. It should not call for drastic policy changes to insure that the Federal Government will maintain its multibillion dollar contingent liability by embarking upon a broader consumer credit insurance program. In short, there is no actual need nor reasonable grounds upon which the title I short-term lending insurance should be broadened to cover free-standing kitchen and laundry appliances, or carpeting and other furnishings not an integral part of the structural repair or improvement job.

Consumer credit is a volatile field, as we have seen over the past year or so. It reacts broadly to strong stimuli and psychological factors. Eligibility for big volume hard-goods items, like major appliances and carpeting, under title I, on 3-year terms or longer if this provision is changed by the present Congress, will generate powerful forces in the economy on a very broad scale. The wisdom of such a drastic step should be examined thoroughly by the economic and fiscal policy units of the Congress and the executive branch before such action is permitted a Federal agency.

PRESSURE FOR MORE EXTENDED CREDIT TERMS ON RETAILERS

There is another phase of title I repair and improvement loans which should be considered in connection with proposals to make the maximum maturity 5 years at the discretion of the Administrator and to increase the limit on the amount of such jobs from $2,500 to $3,500.

Obviously there is considerable pressure on all installment merchandisers to liberalize their terms so as to match rates and maturities under title I. With the tightness of money and the difficulty small merchants have in getting addi