Mr. WOLCOTT. I do not want to take the chance that by passing this bill we destroy all the good we have accomplished already. Mr. FLEMING. I thoroughly agree with the principles you state, sir. I had not taken that view of it, and maybe it was due to the misconception with respect to these mortgage associations, and their ability to lend on small homes. I think that there is a retarding influence in the reduction of the rate. I do not think that is a controlling factor. I think your construction costs and those things are more your controlling factor than this drop of maybe three-quarters of 1 percent in the interest. I do not think that retards. I do think that in the low-income groups it is pretty difficult for those low-income groups to be able to pay $1,200 to $1,500 cash down on the purchase of a house, and I do think that helps there. Mr. WOLCOTT. That is a very desirable thing, if the banks will continue to make the loans under that set-up. Mr. FLEMING. Yes; I think there might be in the change of rates some retarding influence, but I think if the volume started they would. take care of it. Mr. WOLCOTT. If the increase or the decrease in the rate of interest, and the increase in the amount of the obligation, are a retarding influence, is not that the antithesis of what you understand to be the purpose, and what I understand our purpose to be in this legislation? Mr. FLEMING. Yes. I have already said I advise caution on that point, and I do not believe that difference in rate-now, it sounds very well to say that we want to loan these people at the lowest rate possible; I mean a very low rate, maybe 3 percent or maybe 3%; all of us would like to do that, but there are certain overhead costs in handling this type of loans that just cannot be met with that sort of rate, it just cannot be done as I have described earlier in my testimony, the difference between the costs of lending. Mr. WOLCOTT. You have got to have a certain spread between what you would receive on this class of mortgage and what you can buy Government bonds for. Mr. FLEMING. Oh, yes; absolutely, sir. Mr. WOLCOTT. In order to make this attractive, because of the additional Mr. FLEMING (interposing). Accounting costs. Mr. WOLCOTT (continuing). Yes; and the additional chance which you take. Mr. FLEMING. Yes. I would rather-and this is not from the standpoint of not wanting to help the little fellow, because I am anxious to help the little fellow, but I do believe that you do remove a good deal of the urge when you cut this down to the cost of five and a quarter gross. The bank on that loan is going to get probably somewhere near 4 percent net, before his other general overhead; he is going to get somewhere around possibly 4 percent, and from that then his other general overhead, other than the direct cost, and his taxes, Federal and State, will have to come off of that, so there is a danger of a retarding influence there, there is no question about it. I wish we would look at the law again. One of the gentlemen, Mr. Chairman, asked me about these. I think you did, Mr. Wolcottabout these mortgage associations loaning directly on small homes. Mr. WILLIAMS. That is not in the law, positively. 33604-37-11 Mr. FLEMING. My understanding was different, but I didn't want to be too positive on that point. Mr. WOLCOTT. Just a minute-it is in the law, provided the home owner puts up 20 percent, even though the amount is less than $6,000. A VOICE. May I correct that misapprehension? Mr. WILLIAMS. I think not. I do not agree with that, either. The CHAIRMAN. That is a technical matter that can be discussed later. Mr. FLEMING. I do not want to pose as an expert The CHAIRMAN (interposing). It can be amended either way. We have been having_only a discussion of the provisions of the bill. Mr. FLFMING. It was not my understanding. Mr. WOLCOTT. If there is any question about it I would like to clear it up. There was some discussion here about it yesterday. Mr. GIFFORD. While Mr. Wolcott is looking that up I want to make this suggestion to Mr. Fleming. His argument is so many times presented, that the construction costs represent the great drawback in this program. Mr. FLEMING. I said that that was greater than the question of interest, probably. Mr. GIFFORD. Yes. I want to remind him that the carpenter and the painter would look at the home buyer and say, "No matter what we charge you, you can get 90 percent just the same." Mr. CRAWFORD. Mr. Fleming, there has been so much thought given here to this idea of making tax-exempt these debentures, I want to make sure that I understood you. Did I hear you say that in your opinion, if the debentures were made tax-exempt, the financial benefit of that tax exemption would flow down to the man who borrows money to build a home? Mr. FLEMING. I do not think it will; no; because in one case there is direct lending to the borrower, and in the other case it is a question of volume spread between what the mortgage pays to the mortgage association and what they can sell the debenture for. Now, of course, if the debenture is tax-free that debenture is going to be more acceptable so far as salability is concerned, more money might be available in the turnover, but I do not think it is going to have any material effect upon the borrower. I may be wrong in that, but that is my opinion. Mr. CRAWFORD. We would be on the wrong track then if we made them tax-exempt, and spread the news that we were doing it to help the man to build a home? Mr. FLEMING. There is only one thing you have got to do there: You have got to be sure that the mortgage association is going to have a sufficient spread between what he can sell his debenture for and what his mortgage pays, to pay his interest and return on capital investment. Mr. WOLCOTT. I have found this on page 32 of the bill as amended, section 301. Now, the bill says [reading]: The administrator is further authorized and empowered to provide for the establishment of national mortgage associations as hereinafter provided which shall be authorized, subject to rules and regulations to be prescribed by the administrator, (1) to purchase, service, and sell first mortgages and such other first liens as are commonly given to secure advances on real estate held in fee simple or under a lease for not less than 99 years, under the laws of the State in which the real estate is located, together with the credit instruments, if any, secured thereby, such mortgages not to exceed 80 per centum of the appraised value of the property as of the date the mortgage is purchased. The only limitation I see in that paragraph upon the national mortgage association's investment as a banker investing in this paper is that it must be subject to the rules and regulations to be prescribed by the administrator. Mr. SPENCE. You did not read all of it. It says "under section 207." Mr. WOLCOTT. I know that, but up to this point the only limitation there is upon the national mortgage association to invest in low-cost housing is the rules and regulations of the administrator, together with the fact that among other things it cannot be over 80 percent of the assessed valuation. Then this bill goes on to say and to make loans and advances upon, and to purchase, service, and sell mortgages or partial interests therein which are insured under section 207 of this act. Now, I contend that language, if we want to confine it to section 207 of the Act, should read, going back to where it says not to exceed 80 per centum of the appraised value of the property as of the date the mortgage is purchased, in accordance with the provisions of section 207. Then we limit it. Otherwise we do not limit it. Mr. FLEMING. My understanding, Mr. Wolcott, was from an analysis I had of the bill. Mr. WOLCOTT. I think that is a very pronounced evidence that there is a "colored gentleman in the woodpile" in this bill. I predicate my assertion upon that-that we are going to establish Federal mortgage associations which are going to come into competition with the banks. Mr. FLEMING. I would think certainly the language ought to be changed so it would be as clear as the analysis I have of the bill, which is as follows: This section is amended to permit such associations to make loans on mortgages secured, under section 207, which is the larger low-cost housing administration, but leaves the act as it is in connection with small loans insured under section 203which are the mortgages we are talking about, on individual homes. Mr. WOLCOTT. Do you not think my legal conclusions are logical? Mr. FLEMING. I think the language definitely, Mr. Wolcott, should be clarified so that they could not loan on the small homes. I think that would be the Government entering into competition, just the same as the Federal savings and loan was entering into competition with other building-and-loan associations. Mr. WOLCOTT. Do you want to see removed from the act any possibility of the national mortgage associations competing with private enterprise? Mr. FLEMING. Absolutely; definitely so. Mr. WOLCOTT. We can change the wording to accomplish that. Mr. McGRANERY. Mr. Fleming, supposing the banks decided that this interest rate, under conditions that may occur in the future, would not make the mortgages on small homes attractive to the banks-do you not think that there should be some national mortgage company that would be in a position to make these loans to small home owners? Mr. FLEMING. Remember that those national mortgage associations would be affected in the sale of their debentures by whatever occurred in the rates for money. Mr. MCGRANERY. That is true. Mr. FLEMING. That would be the answer there. They would be affected too, and they have only to get a small spread, and that is one thing you have got to be careful of in the national mortgage associations. Mr. MCGRANERY. That is true. Mr. FLEMING. If they are going to function at all. Mr. MCGRANERY. But again coming back to the other point, Mr. Fleming, that Mr. Wolcott raised, if the banks feel as though they would like this business at the rate of interest they are going to get, do you not think then that there should be some national mortgage company erected to take care of that situation? Mr. FLEMING. Of course fundamentally I am opposed, sir, to the Government trying to do all the business of the country, and I think that is one of the troubles. Mr. MCGRANERY. I think we are all opposed to that. Mr. FLEMING. I think in times of emergency, where there was a general break-down, and where people had to be serviced, I think during those times of emergency that it is the duty of Government to step in, but as soon as we get out of that, it is the duty to step out; and the only thing I can suggest on that point-and that is not thought through is the possibility that maybe unless Congress wanted to keep entire control of the rate, that the Federal Housing Administrator might have some latitude in the adjustment of the rate. Mr. MCGRANERY. As the act now stands he would have that latitude. Mr. FLEMING. Well, he has downward, but not upward. Mr. McGRANERY. He has downward but not upward, that is true. Mr. FLEMING. That is right. Mr. MCGRANERY. But he would be able to take care of the situation that Mr. Wolcott has raised here. Mr. FLEMING. Well, up to maximum for rates of interest, that he should have. I see nothing in the picture now that could bring you to the conclusion that we are likely to have stiffer interest rates in the next year or so, unless it be some calamity, a war or fright, or something of that sort. There is a great deal of money in the country that is on deposit in the banks, that have been set aside by the increased reserve requirement, which of course could be relinquished to keep money easy if it was desirable and found necessary, but the only way that I can see that you could overcome your question and not run into the direct competition of the Government furnishing the capital to these mortgage associations would be to give the Federal Housing Administrator, if the Congress felt so inclined, a little more latitude in regard to rates upward as well as downward. Mr. McGRANERY. That is right. Now, there has been some discussion here too, Mr. Fleming, with respect to whether or not the banks of this country are going to be interested in making this type of loan. Mr. FLEMING. You can only judge by what has happened, by the experience you have seen in the past. There are something over 4,000 banking institutions making this type of mortgage. I think the amount made is about half of the total insured mortgages. The others have been made by building and loan and by other organizations, and so forth. I think I have already testified that a reduction in the rate of interest might have some retarding influence, because this is an expensive type of loan to handle, as I have explained. I do not know whether you were in the room, sir, when I explained that point, but that is a fact. If you would come into my institution and see it, I would be glad to welcome you and to show any of the gentlemen of the committee just exactly the operation, the costs, and all. I think there is a danger of retarding, and the program ought not to be bogged down by that factor, which I do not believe is material in the monthly payment of the individual. I again go back to say that I believe that the greatest problem is to get houses built for the lowincome group, because the higher income group I think are pretty well taken care of under the present provisions and other types of lending. I think the major factors in getting that, which is getting a house that is adequate and livable, with modern conveniences, that can be built at a cost whereby the monthly payment is not going to be very much greater than rent, are those I have stated. Otherwise, the desire for home ownership is not there. The CHAIRMAN. We thank you very much, Mr. Fleming. STATEMENT OF FRANK C. FERGUSON, PRESIDENT OF THE HUDSON COUNTY NATIONAL BANK, OF JERSEY CITY, N. J., ON BEHALF OF THE NEW JERSEY BANKERS ASSOCIATION The CHAIRMAN. Gentlemen, this is Mr. Frank C. Ferguson, president of the Hudson County National Bank, representing the New Jersey Bankers Association. Mr. Ferguson, before proceeding with the presentation of your full statement, will you summarize for the committee your position with respect to this bill? Mr. FRANK C. FERGUSON. Mr. Chairman, I want to suggest to you, first, that the interest rate be retained as it is. That is the important thing. Mr. WOLCOTT. You mean the present law? Mr. McGRANERY. No. Mr. FERGUSON. No; it cuts it. The net return is going to be 41⁄2 percent. Mr. SPENCE. Are you talking about interest on the loan, just the interest charge? Mr. FRANK C. FERGUSON. Just the interest charge; yes. Mr. SPENCE. Where is there an amendment in this act as to the interest rates? Mr. FRANK C. FERGUSON. The effect of the bill is to cut the return to the banks. So far Mr. SPENCE. There is not any change in this law, not a word, as the interest rate is concerned, is there? If there is I would like to have you point it out. Mr. FRANK C. FERGUSON. No; you cut the service charge, which cuts the return to the bank. Mr. WILLIAMS. There is nothing in the law about a service charge, is there? |