Mr. ECCLES. They have got to be brought down in cost because people cannot afford to pay rental on properties that cost so much. Mr. WOLCOTT. Mr. Eccles, in reply to the question asked by Mr. Luce, you stated our economy might have been thrown out of balance by certain tariff protection given to industry, inferring that the same protection had not been given to agriculture. Do you think, that caused the recession? Mr. ECCLES. I would prefer not to get into any more discussions about the cause of the present recession, or the cure. I do not object to making a statement. However, I would like to take the time to make a statement after thorough study so I would not be misunderstood. Mr. WOLCOTT. The reason I asked that question is because I am firmly of the belief if we can find the answer why commodity prices have gone down and stock prices have gone down, and we are enjoying a business recession, we possibly will find the answer here. We have a shortage of houses. I think there is something very much more fundamental in this bill than whether we will build a few houses. Mr. ECCLES. So do I. Mr. WOLCOTT. But does not the success of this bill depend largely on whether the banks are attracted to this form of investment? Mr. ECCLES. Whether the lending institutions are attracted. Mr. WOLCOTT. When I say banks I mean all institutions which invest in F. H. A. mortgages. Mr. ECCLES. Yes; you have the national banks and the State commercial banks, the mutual savings banks, life-insurance companies and the building and loan companies, and those are the line of institutions that are engaged in the business or can make realestate mortgages on homes. Mr. WOLCOTT. How much of a spread must there be between the interest paid on Government obligations and interest paid on realestate loans in making these loans attractive for investment by bankers? Mr. ECCLES. Well, of course they are not in competition only with Government obligations. You have many other forms of investments. Mr. WOLCOTT. Industrial and municipal? Mr. ECCLES. Yes. Mr. WOLCOTT. I had in mind this. Allowing for carrying charges, administrative costs, depreciation and foreclosure costs, what would the spread have to be to make this kind of investment equally as attractive as a Government obligation or obligation insured by the Government? Mr. ECCLES. I think that the 5 percent is pressing it right down to the limit at the present time. The question of spread, to take care of the increased cost and risk of foreclosure would have to be one-half to 2 percent at first. Mr. WOLCOTT. Perhaps I should not put it this way, but it seems to me that in the operation of this plan we are completely at the mercy of the banks. You cannot force a bank to buy this paper, can you? Mr. ECCLES. No; you cannot. Mr. WOLCOTT. Has the open market committee authority to force a bank to buy this paper? Mr. ECCLES. No lending institution, of course, can be forced to invest its funds in anything. Mr. WOLCOTT. I have been told if we made two or three changes in this bill we would have a real estate building boom which would create a business boom the like of which we have never seen, I think the builders are somewhat optimistic in that respect. Mr. ECCLES. So do I. Mr. WOLCOTT. Nevertheless it is an element that must be taken into consideration. What I want to guard against and what I think this committee wants to guard against is putting the bankers in position where they think it is more desirable to invest in industrials and Governments than in this class of paper, and therefore the attempt to help the home builder would be nullified. Mr. ECCLES. The national mortgage association which is expected to be set up with $50,000,000 from the R. F. C. will tend to make our insured mortgages more attractive than otherwise would be the case, because a mortgage association would provide an immediate market for these insured mortgages at less than a 5 percent basis, leaving the lending institution a margin that would pay them for the cost of servicing this loan. It is not only the list of lending institutions I read that makes these loans. I want to amend that by saying that mortgage companies, may take part. If they qualify for making these loans, that is, if they have sufficient assets and meet other qualifications, they could make the loans, selling the loans to the mortgage association, the mortgage association in turn selling its debentures in the investment market. Mr. WOLCOTT. That sets up another agency through which the banks may rediscount their paper? Mr. ECCLES. It is not rediscounting. It is selling outright to these associations, just as agencies of insurance companies make loans, turning the loans over to the insurance company and servicing the loans for the insurance company, and getting from a half to threequarters of 1 percent for looking after and servicing the loans. Mr. WOLCOTT. Do you think with the aggregate capitalization of $50,000,000 which the R. F. C. are ready to put into a national mortgage association that that will be a broad enough credit base? Mr. ECCLES. I am favorable to permitting them to sell debentures 20 times that amount which would give an opportunity of selling a billion dollars of debentures. That, it seems to me, will be ample to take care of the situation, certainly for the present time, and if there is need for more, I do not think there would be any difficulty in providing additional capital for making possible further sales of deben tures. Mr. WOLCOTT. I am merely bringing these things out as they come to my mind because of my interest in making this bill successful. Mr. ECCLES. Yes. Mr. WOLCOTT. Another thing that comes to my mind, if we insure a mortgage on a house with an assessed valuation of less than $6,000 at 10 percent and amortize the other 90 percent, we increase the amortization cost and we increase the amount of the monthly payment which the home purchaser has to pay. Do you not think that possibly that increased monthly payment might be a deterrent to home building? Mr. ECCLES. Because of paying a 90-percent loan? Mr. WOLCOTT. Worked out as I have it here, any home owner under the bill would have to raise $600 for the initial payment on a $6,000 home. The balance would be amortized at 90 percent. If a 20-percent down payment or $1,200 is made there is only $4,800 and the difference is $3 or $4 a month, I presume. Mr. ECCLES. Of course, we could carry that down and require them to make only payments on 60 percent, but based upon experience in other countries the 90 percent, the high value of loans, with the lower financing cost works out in the interest of the home owner. There is also this factor, that if the 60-percent loan or the 70-percent loan or maybe even the 80-percent loan was the only obligation and there was the 20-percent equity or the 30- or 40-percent equity, that would be one thing, but it has been proven that few people were able to make a large payment. They buy a home under a contract by paying as low as 5 percent to the real-estate operator and they do not enter into a mortgage obligation. They buy under a contract and the papers are put in escrow and when the buyer finishes bis payment under his contract the property is turned over to him. He does not, under those circumstances, often know what interest he is paying on the actual cost of the home or what other costs are involved in the transaction. This has a provision so that he can buy from the contractor or real-estate operator a home, paying his 10-percent down payment and borrowing the 90 percent, based not upon the appraisal of the real-estate operator; but where he borrows the 90 percent, he has the protection of the appraisals of the lending institution making the loan, and of the F. H. A. Mr. WQLCOTT. I had in mind particularly this. We have been told by some of the witnesses that the depreciation on a new home is likely to be about 10 percent in the first year. The bank I understand, must foreclose. The bank has to take the depreciation. It is compelled to pay the cost of the foreclosure. It has to pay whatever back taxes there might be accrued during the period of foreclosure before it can get any relief from its insurance. If I were a banker I might hesitate about making a loan under those conditions unless I had some positive assurance that the home purchaser is going to have a constant income. Do you not think because of the additional risk which the banks aer taking by increasing the amount of obligation at the same time we are reducing the rate of interest, it is going to make this class of paper less attractive to the bankers and thus defeat the purpose of the bill? Mr. ECCLES. They can still make the 80-percent loan. Mr. WOLCOTT. The purpose of this bill is to produce home construction by reducing the down payment. Mr. ECCLES. Yes. Mr. WOLCOTT. And the success of that depends on whether it is attractive to the banks. Mr. ECCLES. Attractive to lending institutions, and as I said a moment ago, a great many will not be interested. They have not been up to date. The mortgage association, however, will tend to cause agencies to be set up, mortgage companies of various kinds, that will loan money and sell the debentures of the mortgage association. I think that in turn will tend to bring the lending institutions in the community to the point where in order to get business they will buy it against competition that will induce them to make these loans where otherwise they would not. There is also this factor, too, with reference to what you say in regard to the 10 percent depreciation. There may be some depreciation. There is also this factor, however, the taxes that may be paid, the interest that accrues during the period of foreclosure of course is added to the obligation so that there is no loss of principal or interest or taxes at all. They ultimately get the 3-percent guaranteed debenture. Now, the one element of cost that they do not get is the foreclosure cost and that is a serious factor as has been pointed out I think, in several States, in the State of New York and State of Illinois, and I think in the State of Nevada and in New Jersey, there are prohibitive foreclosure costs which would be a deterrent to the 90-percent loan. In the State of Massachusetts, on the other hand, they have a foreclosure cost that runs to $30 and the foreclosure can be carried out in a period of about 2 months. In these other States the foreclosure cost is much higher than the foreclosure cost of $30 in Massachusetts, $300 in New York and Illinois, and it takes all the way from a year to a year and a half to foreclose. It seems to me there is some kind of racket somewhere and something out to be done by State legislation to follow the example of Massachusetts, and if that is the case, the small 10-percent down payment would not be the same deterrent it otherwise would be in those particular States. Mr. WOLCOTT. We have three elements essentially to consider before we can hope for any success under this plan. In reverse order the first is, the foreclosure cost under State law; the second is the willingness of the individual to purchase a home and this element is dependent upon the assurance of a steady income covering the period of amortization; and the next is inducement of home construction because of low labor and material cost. Is not that about the sum and substance of it? Mr. ECCLES. That is right. Mr. WOLCOTT. And if you cannot get labor and material cost down he will not build. If he is not sure about a constant income for a few years at least he will be hesitant to obligate himself, and if the banks are not sure they will not have to take a loss, they are not going to take the paper. Those are the things you have got to consider. Mr. ECCLES. Those things have been considered very fully. Mr. WOLCOTT. Let us analyze them. What inducement is there at the present time for a man by reason of low labor cost to build? Mr. ECCLES. You cannot get everything all at once. You have got to get the first things first. Now, the setting up of this mechanism for getting construction started, in and of itself, it seems to me, will tend to reduce the cost of home construction either for sale or for rent. It makes possible a large-scale operation which in itself makes possible wholesale buying, or at least buying, upon a much more favorable basis than is possible with the construction of one or two homes. Mr. WOLCOTT. In that particular we cannot repeal here the law of supply and demand. Mr. ECCLES. We cannot do what? Mr. WOLCOTT. We cannot repeal the law of supply and demand. It is also inevitable that increased demand for any commodity increases the cost of that commodity. Mr. ECCLES. That is not true in England where building has been going on for 6 years. If we built in the same proportion, we would be building over a million homes a year. During all that period of time, the financing cost has gone down without any action on the part of government, and the labor cost and the material cost have remained about uniform. There has been no appreciable change in the cost of home construction in England during this particular time. Mr. WOLCOTT. You and I have discussed heretofore on this committee the relative national debts of European countries and the United States, and I have come to the conclusion that we should not take for granted that the same economy which prevails most satisfactorily in Europe would prevail as satisfactorily in the United States. What has the administration done or what does it propose to do to induce materialmen to reduce the cost of material to get it within the reach of the home builder? Mr. ECCLES. Let me answer. You said that the law of supply and demand would tend to bring up prices, if the demand for homes increased it would bring up prices. We will take the automobile business as a case in point. As the volume of production has increased the demand has increased and the cost has come down over the last 20 years. As the quality of the product has greatly improved the cost has decreased. That is not only true in the case of automobiles, but in many other things. We have anarchaic financing in the building-construction field and we want to make possible a different type of financing than the home-construction industry had to depend upon during the twenties. That in itself does not necessarily mean you have built up over night a home-construction industry that is comparable or can be comparable to the automobile industry, but you do start here a mechanism that makes possible the organization of construction companies to meet those requirements of homes for the mass market. If we can get a wholesale production of material, and if labor can be hired upon an annual basis Mr. WOLCOTT (interposing). Do you really feel that this bill will result in such mass production of homes that it will have the same effect as has been the case in the automobile industry? Mr. ECCLES. I do not expect that will be accomplished in a hurry. I merely think that we are moving a step in that direction, and I am not thinking for one moment that this is a panacea and that this in itself is going to improve some of these underlying problems we are confronted with. Mr. WOLCOTT. Carrying out that original thought further whether the automobile is cheaper or more expensive is determined by the demand for the automobile, is it not? Mr. ECCLES. It has not been true. The demand was very low in 1932 and the automobile was as cheap then as it is now. Mr. WOLCOTT. That was an inducement for automobile purchase? Mr. ECCLES. That is right. Mr. WOLCOTT. Now, we are trying to induce people to build homes? Mr. ECCLES. That is right. |