What we are trying to do is to get people to invest in homes and furnish them a method of saving, and at the same time give them a better habitation than they have had at less monthly cost. Mr. FORD. May I make an observation there, Mr. Chairman? Mr. FORD. Mr. Goldsborough is concerned about the 90-percent debt, but if some home owner or potential home owner in paying rent is not only paying the 5 percent that it would cost him to buy a home today, but it would also cost him, the interest plus taxes and all other carrying charges, the owner of the property, from whom he is renting, and he will be paying as much or more for the home he is renting than he will if he were buying under this plan. Mr. McDONALD. Yes, sindeed. Mr. CRAWFORD. Will Mr. Ford yield? Mr. FORD. Yes, sir. Mr. CRAWFORD. Suppose he is renting a $10,000 home for $25 a month, $300 a year. Mr. FORD. That is a temporary situation Mr. CRAWFORD (interposing). I know they have been renting that way for several years. Mr. FORD. I have the same situation, but I know also that a thrifty man who wants a home can get it under this plan with a small down payment, and monthly payments fixed not to exceed what he formerly paid in rent, will at the end of 10 or 15 years have a home, whereas if he pays his landlord's interest and landlord's taxes in the form of rent he will not have anything left but a bunch of rent receipts. It is this principle that has encouraged and developed the building and loan association and has made it for a number of years the principal thrift vehicle in this country, and while I do not know how sound a 90-percent loan is, and no one else does, I am inclined to think if you got the right man in a place the 90 percent loan would be as sound as any loan. Mr. GOLDSBOROUGH. I have no objection to the 90-percent loan provided the borrower can stand it, but I want him to be made secure. Mr. GIFFORD. May I observe something about the average. The traveler asked the porter what the average tip was and he gave him a dollar, and the porter said, "That is the first time I ever had an average tip." Mr. FORD. I did not use the word "average." Mr. FISH. May I ask Mr. McDonald a question? The CHAIRMAN. Yes. Mr. FISH. Mr. McDonald, you are supporting the President's program as announced yesterday? Mr. McDONALD. That is right. Mr. FISH. And if I understood that message correctly he suggested a reduction from 51⁄2 percent to 5 percent to the home owners in the amount of interest and service charges? Mr. McDONALD. That is right. Mr. FISH. That is correct, is it not? Mr. FISH. Now, I am entirely sympathetic with a proper and adequate building program but I cannot understand why we cannot make that interest charge very much less to the prospective home owners. I think one of the main difficulties is to get these proposed home owners to pay 5 percent interest or even 4%1⁄2 percent interest. Why cannot the interest rates by reduced to 31⁄2 percent when these banks and the Government can get money at 3 percent and less? Why does it have to be more than 3%1⁄2 percent, and up to now it has been 5 percent and under this proposed bill it is 4% percent or 5. Would that not encourage it more than anything else if the rate of interest was reduced to 3% percent? Mr. McDONALD. There is no question but what the interest question has a very vital bearing on the matter. We ourselves would be happy to see it at the lowest point. You know the Administration does not loan any money. It simply insures the mortgage. If we make a mandatory rate so will the various bankers. Mr. FISH. Is this not fixing it so the banks can exploit the home owners? If we guarantee the bankers they can get money from the Government at 3 percent and less, why should they charge as they have been charging, and what gets under my skin is why should they charge 5 percent to home owners, and if they continue to charge that I predict we will not have many home owners. Mr. GOLDSBOROUGH. Wait a moment. Mr. FISH. Bankers are not taking any risk. I am trying to make that very simple. If I wanted to make it complicated I would add on a half of 1 percent for interest charges, a half of 1 percent for insurance guaranty and another half percent for payments in advance of interest charges; but it means you pay about 6% or 7 percent without amortization charges, and I want to make this simple, and the interest charges which have been 5 percent, why cannot we do something by legislation to bring it down to 3%1⁄2 percent in promoting a building program? Mr. McDONALD. Mr. Congressman, I wish we could. Mr. FISH. I am putting it to you. Mr. McDONALD. There is only one way I can think you can do it and that is by constant pressure. If we can get the National Mortgage Association working on a big enough scale or in a large enough way so they would be willing to discount these mortgages for the Mr. FISH (interposing). I am predicting right now this whole program is not worth anything if you do not bring it down to 3%1⁄2 percent. It is a waste of time, your time and my time. Mr. McDONALD. If we pass a law Mr. FISH (interposing). The President talks about building and brings in these big officials and bankers to get their cooperation. I say the first essential in getting their cooperation would be to loan money at 3%1⁄2 percent. Mr. McDONALD. I think it would be a wonderful thing. Mr. GOLDSBOROUGH. These mortgages are guaranteed 100 percent? Mr. McDONALD. Insured 100 percent. Mr. GOLDSBOROUGH. Insured 100 percent. all these banks actually render is a service. risk. They could afford to service those mortgages for 3 or 31⁄2 percent and make a very nice profit. Now, that being true, They do not take any Mr. McDONALD. Well, Mr. Congressman, I do not like to be in a position of saying what a bank can do or cannot do without being more familiar with a particular bank referred to and the condition it is in and the locality it is in. I think if banks can loan very large sums of money with very little handling they can do it at a cheaper rate than monthly mortgages which require a great deal more bookkeeping than a large loan. Mr. GOLDSBOROUGH. The banks charge only a rate of 6 percent? Mr. McDONALD. Yes, sir. Mr. GOLDSBOROUGH. In that charge is not only involved carrying charges but the risk they take with the loan, and the loans have to be provided for by the interest rate? Mr. McDONALD. Yes. Mr. GOLDSBOROUGH. My question is when you eliminate all that risk and leave nothing for the bank to do except service the mortgage, do you not think the average bank could afford to loan this money at 3 or 31⁄2 percent? Mr. McDONALD. Frankly, I do not think they can. As to the cost in making these small loans and I will answer another question at the same time- we find the monthly payments of our borrowers run from $30 a month down rather than $30 a month up; $25 would be the average monthly payment. That bank has to take the $25 a month and make a record, segregate the amount of amortization, make the interest, fire insurance and other charges, and the bookkeeping expense in connection with that little loan is a great deal more than a loan of 10 times as much. Mr. GOLDSBOROUGH. Suppose the loan was for $5,000. Mr. McDONALD. It would be paid $50 a month. You spoke also of people buying houses on 10 percent down. We find a majority today are buying houses worth $4,900 or less and paying for them around $25 or less per month, which we believe is less than those same people could secure anywhere near as satisfactory housing by paying rent. That is why if they make a small payment and have and can hold their jobs, they will undoubtedly hold onto their houses. These people, as you can see by the other chart, are getting $2,500 a year average. The CHAIRMAN. What is the general charge in connection with the interest rate under existing conditions? Mr. McDONALD. Mr. Congressman, I have here a report of the Federal Home Loan Bank Board Review, as of November 1937, page 50. The analysis shows of the 1,129 federals reporting, 804, or 71 percent were charging rates from 6.3 to 8.7 percent. More than half of the reporting federals, 627 out of the 1,129, or 55 percent, were charging from 6.3 to 7.2 percent, with 171 federals charging from 7.3 to 8.7 percent. With the exception of one or two States, more federals in each of the States west of the Mississippi River are charging 6.8 to 8.7 percent than are charging below 6.3 percent, and the rates of the majority of these federals are from 6.8 to 8.7 percent. Mr. FISH. What do you mean by "federals"? Mr. McDONALD. Savings and loan associations. The United States has an investment in their capital. Mr. FISH. Is that the rate the home owners are paying? Mr. McDONALD. That is the rate the home owners are paying. These are Federal building and loan associations. As for the State building and loan associations I have no figures. The CHAIRMAN. Do you care to amplify your statements further with reference to interest rates? Mr. McDONALD. I would say there has been nothing comparable ever before in the history of the United States to the rate placed as the maximum by the President of 5 percent on these small homes. Mr. FISH. Have you ever studied the history of other countries' building programs? Mr. McDONALD. I have. Mr. FISH. They are much lower? Mr. McDONALD. That is true. What do they charge in England? Mr. FISH. About 31⁄2 percent. Mr. McDONALD. Four and one-half percent on individual homes, but let me assure you there is a catch in it because those loans are callable at any time although written for 21 years and they are subject to a change in interest rate, depending upon the money rates of the Bank of England, whereas ours, if a man in Houston, Tex., or Salt Lake, or Boston makes a 20-year loan and money goes up he is still safe. Mr. FISH. Yes; but a great many of our figures, I have seen in England it is only 32. Mr. McDONALD. That is public housing. We have that in the public housing under the Wagner-Steagall bill. The bonds are exempt from taxation and those bonds will be sold at a rate around 3 to 34 percent, even down as low as 2%. They are Government securities and are tax exempt. Mr. FISH. May I ask you what happens to the money that is paid for the insurance of the mortgage, mortgage insurance? Is that used for the current expenses of the Government? Mr. McDONALD. Yes; some of it, the expenses of the F. H. A. Mr. McDONALD. Yes; would you like to bear from our General Counsel? Mr. FISH. No; I do not want to interrupt you. I want your advice. Mr. LUCE. You and I have watched the development of the installment-buying system through the years and we have seen the things change gradually until now we see in the newspapers advertisements of certain wares which say "no payment down"? Mr. McDONALD. That is right. Mr. LUCE. I have seen the same thing in regard to savings banks and cooperative savings. Do you think it is socially desirable that men shall be induced to incur debt when they have no funds? Mr. McDONALD. Mr. Congressman, I think I agree with your philosophy. I think thrift is a thing that is very rapidly getting away from the American people, and I would like to see a greater encouragement of it. But I think discrimination should be made as to what the purchase is. I think a man should be encouraged if possible to purchase a home. The home is the center of family life and, if a man and his family have interest in it, they develop a home love which is an asset to the country. The money they would have otherwise dissipated in paying rent is being saved by this forward movement in buying a house which they take a great deal of happiness and joy and pride in. I think that cannot be compared to purchasing an automobile or radio. Mr. MCKEOUGH. Or a fur coat. Mr. McDONALD. Or a fur coat; yes. Mr. LUCE. But you do not catch my point. Should a man that has not been thrifty enough to save be permitted and encouraged to get money for practically nothing? Mr. McDONALD. No; I do not think he should. The F. H. A. is careful in selection of men. Mr. LUCE. The H. O. L. C. would have foreclosed by this time something like 180,000 mortgages, mostly from men who had no intention of paying and who believed they would never be compelled to pay. Under those circumstances is a mere 10 percent down payment sufficient to insure good faith on the part of the buyer? Mr. McDONALD. I think, as I have said before, that you can select your risk, and if you can assume the man is going to be continued to be employed, then you can go on that assumption and on his past reputation in the community and the place where he is employed, which is all a guarantee of his good faith, and it is a wise thing for the Government to see that he is in his own home if he is in position to make the purchase. Now, the F. H. A. is very very careful on that one point. We, for instance, will not accept a mortgage for insurance if the purchaser's income is inadequate to safely support the monthly payments he must make on his home. As a matter of fact, I think our average is about 15 percent of the annual income of the families purchasing their own homes. We in no case will encourage or allow him to exceed 20 percent. Mr. LUCE. You have a model administration and I commend you for it, but another department of the Government Mr. GIFFORD (interposing). Do you have a copy of the application blank you furnish the borrowers? Mr. McDONALD. We can get it very quickly. Mr. LUCE. I want to pursue another line of inquiry. The CHAIRMAN. Before you do that will you let me interrupt? Mr. LUCE. Yes. The CHAIRMAN. I think it might be well to call attention to the fact that the H. O. L. C. was established for altruistic purposes and to take care of emergencies and it should be separated from the ordinary business loans in consideration of this question. I just think it well to call attention to that. Mr. LUCE. I understand that and I also read in the President's message that altruistic purposes are the real object of this legislation. The circumstances appear to be closely identified. Now most of the questions, in fact ali of them, have been addressed to the witness with the interest of the borrower in sight. I would like to ask a question or two about the interest of the lender for I happen to be connected with a savings bank, a building and loan association, or what we call a cooperative bank, and a mutual life-insurance company, and in the mutual life-insurance company instance, every meeting we have held now for years has had for its prime subject the discussion of its real estate. It now owns a considerable number of houses which we do not want and which we could not help. We are now trying to get rid of them. Now, the men I am speaking for are the little people of the country who have life insurance for which they pay 15 or 25 cents a week, the savings bank depositors, who are little people and the men who put their money into cooperative banks. Now your legislation contem |