tions. Its membership consists of some 4,100 local savings and loan associations, cooperative banks, homestead associations, and building and loan associations. In addition, we have affiliated with us 49 State, district, or Territorial leagues of savings and loan institutions, and 13 regional groupings of this type of financial institutions. All in all, the league's membership comprises 85 percent of the assets of the savings and loan system in the United States and its Territories, and I should like to emphasize that I am including in this total both the State chartered and the federally chartered associations.

Last year Congress did a comprehensive rewriting of the basic laws relating to the Government's participation in housing, and the league testified in detail at that time. To save the committee's time, we plan to present our comments as briefly as possible at this time.

Extension of title I of the National Housing Act: The league favors the extension of the title under which the FHA insures home repair and modernization.

Provisions relating to FHA mortgage insurance: At the request of Housing Administrator Cole and FHA Commissioner Mason, the league presented on March 25 its views on the proposals regarding FHA made by the Hoover Commission on Organization of the Executive Branch of the Government as reported to the Congress. The statement which we presented to Mr. Cole and Mr. Mason is attached and, with your permission, Mr. Chairman, I submit it with this testimony to become part of the record.

The CHAIRMAN. Without objection, it may be inserted in the record. (The material referred to is as follows:)

RECOMMENDATIONS ON FHA

I. Requirements for mutualization

1. Terminate the participating dividends to borrowers.

2. Set maximum terms at 80 percent, 20 years for existing homes and 90 percent, 25 years for new homes.

3. Increase the insurance premiums to 1 percent.

4. Limit claim payments to 90 percent of unpaid balance (90-10 coinsurance). 5. Eliminate the Federal guarantee of debentures.

II. Steps which can be taken immediately

1. Terminate participating dividends to borrowers.

2. Reduce loan terms to 80 percent, 20 years for existing houses and 95 percent of first $7,000 and 70 percent of excess for new houses for 25-year maturities. 3. Make a one-time charge to the borrower of 3 percent of the excess of loan over 60 percent of value, such charge to be added to the loan and amortized over the first 24 months.

4. Pay 100 percent of claims only to those lenders whose loss claims after effective date are less than 50 percent of premiums paid after effective date. Lenders exceeding this ratio would receive 95 percent of unpaid balance. (This is a modified 95-5 percent coinsurance.)

SUPPORTING MATERIAL ON FHA RECOMMENDATIONS

GENERAL

The United States Savings and Loan League believes that a sound FHA program can definitely make a contribution to housing. The benefits and advantages of the FHA plan were intended to result from the insurance principle of spreading the risk over a tremendous number of widely divergent loans and borrowers. Benefits were not intended by Congress to stem from Federal subsidy. In actual practice the insurance principle has been so badly diluted that the program is not self-sufficient and requires a heavy backstopping from the Treasury. The reserves of about 2 percent are grossly inadequate compared to private

lenders with reserves of around 10 percent. If the risks assumed by the FHA are brought in line with the reserves, or vice versa, the program will become selfsufficient, will conform to congressional intent, and will be immune from legitimate criticism by private lenders. To do this requires that the risk be reduced and/or income and reserves increased.

Group number one of the recommendations reflects those changes required to put FHA on a proper basis. Group number two of the recommendations provides for a more gradual transition and represents changes which are more feasible politically and would avoid the risk of any sudden effect on the economy.

BRIEF EXPLANATION OF RECOMMENDATIONS

I. Requirements for mutualization

1. Terminate the participating dividends to borrowers.

This is the quickest, easiest, and least painful way to increase FHA income and reserves. Up to 1953, $47 million had been returned to borrowers and another $60 million was earmarked for distribution to be repaid under the present program. This "windfall to mortgagors" (words used by Administrator Cole before Senate committee), plays an insignificant part in encouraging home ownership or popularizing the FHA. It can be likened to the $160 interest gratuity for VA loans which was dropped by Congress practically unnoticed and unprotested. Actually, the insurance premium is collected to meet losses over a total cycle. Until there has been a total cycle there is no true basis for a refund. Under present procedures all of the losses will have to be met out of one group of loans and the risk has not been truly pro-rated. The point is well summarized by Commissioner Hollyday before the Senate Banking Committee (Housing amendments of 1953): "I think the following is quite important gentlemen: The anomaly of substantial dividends to mortgagors while the Treasury is exposed to appreciable expense on account of the system is a consequence of inadequate provision for spreading the burden of contingent cyclical losses throughout the entire system of group accounts."

The President's Housing Advisory Committee, in recommending major modification of the mortgage insurance system, had this to say: "The final major factor which has limited the accumulation of surpluses to meet future losses has been the extent of participating shares distributed to terminating mortgagors. This factor continues in effect although partially abated by the legislative action in the Housing amendments of 1953, and constitutes the main objective of the specific proposals listed below for carrying out recommendation number 12."

2. Set maximum terms at 80 percent, 20 years for existing homes and 90 percent, 25 years for new homes.

Until reserves are built up to a higher level some reduction must be made in the new risk assumed. These terms represent liberal lending and exceed the terms typically offered without insurance. It seems irrefutable that present reserves for FHA are grossly inadequate. This inadequacy has been pointed out by the Hoover Commission, the Hoover task force, the President's Advisory Committee on Housing, and the FHA itself.

According to exhibit seven of the President's Advisory Committee on Housing based on figures supplied by the FHA, section 203 mutual mortgage insurance fund has estimated available surpluses of $151,900,000 against unpaid balances outstanding of $9,196,100,000 as of June 30, 1953. This is a reserve ratio of approximately 1.6 percent. The FHA itself estimated the reserve requirements at that time to be $245,500,000, indicating approximately a $100 million "shortage." Savings and loan associations have reserves against conventional loans of approximately 10 percent. The following exchange before the Senate Banking Committee in 1953 bears out the point:

"Senator DOUGLAS. *** would you regard this as a very adequate reserve, 11⁄2 percent, against maintaining 83 percent of value at the time of construction? "Mr. HOLLYDAY. No, sir, but I do think you have to bear in mind that we get back properties, and we are not under enforced liquidation.

"Senator DOUGLAS. I understand, but after all, you only have a sector of the real-estate market.

"Mr. HOLLYDAY. Yes.

"Senator DOUGLAS. Suppose there is a general decline in the real-estate market? "Mr. COLE. That is one of the reasons why we suggest in this bill that we strengthen the reserves."

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At another point Commissioner Hollyday describing an FHA study of possible losses said: "The difference of $77,399,716 constitutes the prospective liability of the United States Treasury for payment of MMI fund debentures which the MMI system would have issued but been unable to redeem if a depression had started at the beginning of this year."

In the report of the President's Housing Advisory Committee you will find this comment: "The subcommittee has been informed that in the event of an immediate depression the FHA surplus accounts in the mutual mortgage insurance system might be as much as $70 million to $100 million or more below the amounts required by the most serious assumed standards of losses. This amount may be considered an approximate measure of the inadequacy of the accumulation of assets resulting from a more than normal period of prosperity."

The Hoover task force on lending agencies had this to say: "While FHA is sometimes represented as being one of the business-type Government corporations, the fact is generally conceded that there would be no market for the loans which it insures were it not for the Government guaranty behind the debentures a lender will receive in the event that he forecloses an FHA-insured loan. So there is a contingent liability of the Government with respect to the total amount of FHA-insured loans outstanding at any time, less the amount of loss reserves that have been accumulated by FHA to meet the contingencies. The long-range adequacy of the reserves for that purpose has been questioned by thoughtful students of the subject." The Hoover Commission report on lending agencies contains this comment: "As noted earlier, the $17,921,863,000 of mortgages insured by the Federal Housing Administration as of June 30, 1954, is supported by reserves and surplus of $338,826,000 or a reserve of about 2 percent which compares with a reserve generally carried by private savings banks on outstanding home loans of 6 percent. It seems to us that the adequacy of Federal Housing Administration reserves should be thoroughly explored, particularly in view of the low minimum equities which have been required in many of these loans and guaranties."

Thus FHA reserves are actuarially inadequate. The two available remedies are to increase reserves and decrease risk. The inadequacy is so great and so obvious that both steps should be taken. The recommended cutback in maximum terms would sharply reduce the FHA's risk since it will require 50 to 100 percent greater equity by home owners and speed amortization of loans. For instance, on a $10,000 house, a 95-percent loan at the end of 5 years will have an unpaid balance of $8,721. A 90-percent 25-year loan will have been paid down to $7,974. In the latter case the loan would be safe against a 20-percent drop in property values; in the former case against a 13-percent drop. To put it another way, a 25-percent drop in values would result in respective losses on the loans of $474 or $1,221, the slight change in terms making a 3 to 1 difference in ultimate loss.

3. Increase the premium to 1 percent.

With FHA reserves totaling less than 2 percent of the unpaid balance of loans, income must be increased to permit greater allocations to reserves. Much

of the present one-half of 1 percent premium goes for administrative expenses and even an increase to 1 percent would leave for reserves considerably less than 1 percent. Savings and loan associations which build their own reserves have in recent years been allocating in excess of 1 percent solely for losses.

4. Limit claim payments to 90 percent of unpaid balance (90-10 coinsurance). Lenders should participate in some of the risk of title II loans just as on title I loans. This makes for better appraisals, supervision, and tighter processing. A lender who is not willing to assume up to a maximum of 10 percent loss on a loan should stay out of the lending business.

5. Eliminate the Federal guaranty of debentures.

As the reserves and the risk are brought into line the debentures will "lean" on the Federal guaranty to a lesser and lesser degree. The Federal guaranty of the debentures should be dropped just as soon as such action can be taken without drastic consequences to the FHA program.

II. Steps Which Can Be Taken Immediately

1. Terminate participating dividends to borrowers.

See above.

2. Reduce loan terms to 80 percent and 20 years for existing houses and 95 percent of first $7,000 and 70 percent of excess for new houses for 25-year maturities (30 years for houses costing less than $10,000).

See above. These suggested terms represent approximately the terms offered prior to 1954.

3. Make a one-time charge to the borrower of 3 percent of the excess of the loan over 60 percent of value, such charge to be added to the loan and amortized over the first 24 months.

If it is not feasible to immediately adjust the premium, then a quick way to produce necessary income to add to reserves is to make a flat charge based on the "risk portion" of the loan. On a $10,000 home this would amount to a charge of about $90 to be pro rated over 2 years which is less than $4 a month, but it would quickly add millions of dollars to FHA reserves.

4. Pay 100 percent of claims only to those lenders whose loss claims after effective date are less than 50 percent of premiums paid after effective date. Lenders exceeding this ratio would receive 95 percent of unpaid balance. (This is modified 95-5 percent coinsurance.)

This provides a very minimum of lender participation and has some salutory effect on improving lenders' supervision and processing of loans.

Mr. BUBB. Low-rent public housing:

As the senior members are well aware, the league has repeatedly and consistently presented its view of unalterable opposition to public housing. When restrictions on public housing were placed in the legislation last year, the league was heartily in favor of them and we do not want to see them repealed.

Savings and loan sections of H. R. 5827:

Besides the provisions of H. R. 5827 which relate to Government activity in housing, the bill contains certain proposals relating to the statutes governing the Home Loan Bank Board and its activities in relation to the savings and loan associations, both federally and State chartered. These proposals are of immediate concern to the savings and loan institutions which I represent and the league generally favors them. Over the years, Mr. Chairman, our legislative committee and other standing committees made up of the men who actually operate savings and loan associations, study possible improvements in the Federal statutes which have a bearing on our operations.

The provisions in this legislation have had the substantial study made possible by this continuing program of the United States league. I understand that the chairman of the Home Loan Bank Board has presented a general summary of the provisions and what they would accomplish. What I shall add is, of course, from the industry itself and should therefore give the committee a well-rounded picture of the effect of the proposals.

In referring to these portions of the bill, my testimony will identify the various provisions by their section numbers in H. R. 5827.

Section 14 (1). Reduction of the stock in the Federal home-loan banks:

It has been evident for several years that the Federal home-loan banks, all 11 of them which make up the system, are increasing their capital at an excessive rate under the formula now provided by the law. The growth of the savings and loan business has been very rapid, as you gentlemen are doubtless aware, and their substantial additions to their mortgage loan portfolios in recent years, as they have continued to do one-third of all the home financing in the country, has brought about an unanticipated rapid increase in their stock in the Federal home-loan banks. This is due, of course, to the fact that the associations are required to have 2 percent of their mortgage loans outstanding in Federal home-loan bank stock. We feel that the provision in H. R. 5827 would afford a reasonable formula for slowing up the accretion of home-loan bank stock by the members to a degree far beyond any need or prospective need.

Section 14 (2). Termination of bank membership:

This provision is in line with the substance of the provisions for conservatorship and receivership which the Congress wrote into the Federal savings and loan statute last year. Its provisions were generally favored by the league, and we favor this new proposal for Statechartered members of the bank system.

Section 14 (4). Increase in number of elected directors in Federal home-loan banks:

This proposal would enable the home-loan bank board to correct what seems to be an inequity in the present provision for elected directors in the Federal home-loan banks where the bank's district comprises an unusually large number of States.

Section 15. Removal of $2,500 limitation on property improvement loans by Federal associations:

This proposed amendment would merely clarify the situation regarding the power of federally chartered associations to make property improvement loans insured by FHA or VA in amounts of $2,500 where the property is a multifamily one.

Section 16. Admission fee to the Federal Savings and Loan Insurance Corporation:

The Federal Savings and Loan Insurance Corporation has now been in operation for 20 years and the original provisions for admission fees for associations newly availing themselves of the corporation for protection can appropriately be determined by factors other than those governing the formula when the Insurance Corporation was younger and in the building-up stage.

These items, as can be seen, are primarily technical or internal matters which have relatively little effect on the basic savings and loan operation or our ability to serve the savings or home-owning public. I would like to propose to the committee certain amendments to the bill which I feel sure will have a much more far-reaching effect, both from the point of view of savings and loan associations and of the national housing program.

The distinguished chairman of the committee has introduced H. R. 5945 which restores the independence of the home-loan-bank board and immediately retires and repays to the Treasury the $66 million now invested in the Federal Savings and Loan Insurance Corporation. We urge the committee to include the substance of H. R. 5945 in the pending bill and I attach to my statement an amendment which would accomplish this.

The CHAIRMAN. Without objection, that may be made part of the record at this point.

(The material referred to is as follows:)

(Attachment 1)

ATTACHMENT TO STATEMENT BY HENRY A. BUBB ON BEHALF OF UNITED STATES SAVINGS AND LOAN LEAGUE ON PROPOSED AMENDMENTS SUBMITTED FOR H. R. 5827

I. Add at the end of section 14 of H. R. 5827 the following new subsection : "(5) Renumber section 17 to read section 17 (a).

"(6) Add at the end of section 17 a new subsection (b) as follows:

6

"(b) The Home Loan Bank Board which was, pursuant to Reorganization Plan Numbered 3 of 1947, established and made a constituent agency of the Housing and Home Finance Agency shall, from the effective date of the Housing Amendments Act of 1955, cease to be such a constituent agency and shall be an independent agency (including the Federal Savings and Loan Insurance