The banks are limited in security dealings only to Government securities and the direct obligations of the States and their subdivisions. They may not deal in bonds supported out of nontax revenues, and it is into this category that housing securities fall. It may be, though we question it, that the conditions that dictated the segregation have become impossible of recurrence. If that is the fact we submit that the Banking Act should be examined on its merits and that any backward step be taken only in the light of that examination. Otherwise the act should stand unweakened. As a matter of fact, it appears that confusion prevails between what the banks may do under the present banking law and what they might not do. They might, if the Comptroller of the Currency feels it wise and desirable to rule liberally, invest 10 percent of their capital surplus in the obligations of each and every individual housing authority. Thus the commercial banks of New York City, together, could at one time hold for investment up to more than $160,000,000 of the bonds of each of the housing authorities of the country; those of Chicago, up to $33,000,000; those of San Francisco, up to $30,000,000. The commercial banks of the country as a whole could hold in portfolio a total of some $800,000,000. These figures pertain, not to aggregate holdings of housing bonds, but merely to the holdings in each individual housing authority. It is highly questionable whether any one authority, even that of New York City, will under the proposed authorization have outstanding as many bonds as could be bought by the commercial banks under existing law. We have, of course, placed sizable amounts of housing bonds with commercial banks. Such purchasers have been with little exception confined to relatively short bonds, in conformity with the long-standing fundamental bank policy and practice of seeking the liquidity and stability afforded by nearby maturities. While we have welcomed that business, it has not solved our problem, as more than half the aggregate amount of recent issues has matured in 25 years or longer. That is well beyond the customary range of bank investment. We have been in the past, and assume that we will be in the future, forced to look otherwise than to commercial banks for permanent absorption of the major and more difficult part of housing financing. The proposed amendment affords no means of altering that necessity. Moreover, the commercial banks are permitted to underwrite, that is to buy at public sale, housing obligations for their own investment. If it transpires that wider investment powers are deemed desirable, that can be conferred by a simple amendment that will ameliorate, but not begin the emasculation of, the salutary provisions of the Banking Act. Practically, the admission of banks to dealings in housing obligations will narrow, not broaden, the market. Security dealers possess the buying, trading, and selling organizations calculated to obtain widest distribution. The banks do not have comprehensive sales organizations. We have ample capital. According to the July 1945 issue of Finance, investment banking, using the term to include corporations and partnerships engaged in securities underwriting, but excluding banks, had capital of $400,000,000, and borrowing power of more than $3,500,000,000 wholly mobile, constantly being turned over. It has been our task to place governmental and quasi-governmental securities with savings banks, insurance companies, trustees, and individuals. Among our principal customers for housing bonds have been the trust departments and trust affiliates of the commercial banks. It is significant that banks acting as dealers do not place with their trust accounts the securities in which they are financially interested. Consequently, an important and desirable segment of the investment field would be narrowed to housing bonds by bank dealings in them. The CHAIRMAN. You have these very high maturities, haven't you? Mr. VEIT. Yes. The CHAIRMAN. And a very low rate of interest. Mr. VEIT. We have an extremely low rate of interest, for which the interest cost of the last loan was only slightly over 12 percent. Running from 1 to 45 years. Most of the bonds were 30 years or longer. The CHAIRMAN. Did you have any difficulty in selling them? Mr. VEIT. We did at first, but we have established rather a broad market. That is one reason why we are so anxious to have that flow of funds of the local contribution continued, because the greatest objection, the one thing I think has cut our market, probably is the fact that many people are afraid that some breach-I think you perhaps are familiar with those various contracts--some breach between the local housing authority and FPHA might stop the flow of funds. I can go into all the details of that, but it is rather technical. The CHAIRMAN. Well, no. I was just interested in that one question. There have been things said here that the only difficulty in the selling of the bonds is that the interest is too low. Apparently your experience is otherwise. Mr. VEIT. Of course, a great deal of that depends our job, Senator, is to sell securities in bulk, and that is a very different thingI don't mean to express any opinion whatsoever on the taking of individual mortgage notes. I know nothing about that. I do know we can sell securities in bulk, which are good securities, and we can sell them in quantity. Senator MURDOCK. Who issues the bonds you deal in? Mr. VEIT. The local housing authority. It used to be called the Alley Dwellings here in Washington. Senator MURDOCK. Are they general obligation bonds or are they absolutely dependent on revenues from the housing projects? Mr. VEIT. They are dependent on two things. They are dependent mainly on the assistance given by the Federal Government, which has to be enough to cover the bond and interest on the bond. They are also payable from any surplus earnings that the housing authorities may have. Senator MURDOCK. You consider participation of the Federal Government one of the big factors? Mr. VEIT. Oh, that is the ultimate security in these particular bonds. Senator MURDOCK. Now, if your bonds which carry an interest rate of 1.61, as I understand you, over a period of 45 years Mr. Veit. They average that. Senator MURDOCK. Are considered good security, would you consider a mortgage bearing 312 percent, guaranteed by the Government— by the FHA-as an adequate interest rate? Mr. VEIT. I am not qualified to reply to that in quite the way you put it. I would say if it were a large bond issue with a good market, an established market, it would be very easy for us to sell it. I know nothing about securities that are sold in terms of $500 or $750 or $1,250, but I do know securities that are sold in 10 million and 50 million. In suggesting commitments to their small bank correspondents, the large banks will be free of any suspicion, however unjustified, of acting in self-interest if they function purely as advisers, rather than as purveyors of housing bonds. Their recommendation in solely an advisory capacity would, in our opinion, be far more weighty in broadening the market, and would alone produce effective results. During the current year, the security dealers of the United States, in spite of many weeks devoted largely to flotations of the Federal Government, will have underwritten, it is estimated, more than $6,000,000,000 of corporate securities of all kinds and qualities. This has been accomplished amid intense competition, which has been to the interest of the borrower and investor alike. In the light of this record, we feel ourselves competent to distribute the necessary amount of housing bonds, an obligation of the highest type, that are contemplated in section 704. We see no reason to reopen a door that for good reason was presumably closed forever. A radical amendment to the Banking Act is, in our opinion, not called for to attain the aims of the Housing Act. The CHAIRMAN. Thank you very much. Senator ELLENDER. Did you say in your statement who your firm is? Mr. VEIT. We have no stockholders. We own our own business. We do our own job. It is our own money we risk in these commitments. Senator ELLENDER. Well, you talked about $50,000,000. Mr. VEIT. Of course, that is not all ours. We form groups of anywhere from 1 to 50 houses, but they compete with each other. We have had very keen competition for the housing bonds, which has helped the project. Senator MURDOCK. Keen competition with an interest rate of 1.61? Mr. VEIT. Keen competition and a lot of hard selling and spade work has brought that interest rate down to 1.61. Senator ELLENDER. We are of course grateful for the criticism you have laid against some portions of the bill. I am wondering how you feel about the bill as a whole. Mr. VEIT. We believe in private enterprise, quite clearly. On the other hand, I might say we also believe in creating as many stock and bond buyers as we can get. We think that anything, if it is not carried to extremes, if it tends to raise the average well-being of the American people, is in the interest of all the people. In other words, you take a certain number of people and put them in better housing and they are going to be better people. That doesn't apply to everybody, of course. There are exceptions. We have got our clients' money in this thing. We are particularly impressed with the way it has helped the colored people in particular. Senator ELLENDER. From your statement I would, of course, assume you are for public housing. Mr. VEIT. Yes. Senator ELLENDER. If it is not carried too far. Mr. VEIT. Well, you don't want to emasculate people's desires. Senator ELLENDER. Does your concern belong to the Mortgage Bankers Association? Mr. VEIT. We would not be eligible. We don't deal in mortgage bonds. Senator ELLENDER. Do you know whether you belong to any association that is opposed to the bill? Mr. VEIT. No, sir; I don't think we do. The CHAIRMAN. Thank you, Mr. Veit. STATEMENT OF NEWTON C. FARR, CHICAGO, ILL., REPRESENTING THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS— Resumed Mr. FARR. I will just go through this very quickly. As to the provisions improving the operations of the Home Loan Bank Board and the Federal Housing Administration, I might say in general that if these changes will stimulate home construction, and will make possible better and cheaper financing, then they are quite acceptable. I believe they are intended to do that, with one glaring exception, and I will not attempt to discuss them in detail. The glar ing exception is the so-called builders' warranty. We are unalterably opposed to this proposal. It would force the Federal Government to umpire the smallest type of disputes between builders, owners, architects, real estate offices and others. I do not think you want to get into that. From a practical viewpoint, it would be a serious obstacle to production of houses as it would discriminate against the good builder who wouldn't build under these circumstances because he is conscientious, and it would encourage bad builders to go ahead because they are the type who would sign anything and chisel their way out. I believe Mr. Blandford and Mr. Foley have already discussed this in some detail, so I will not expand further than to earnestly recommend that it be dropped. Senator ELLENDER. Have you ever thought of the situation to such an extent that you can give us a way by which home builders can be protected, because, after all, that is what we are trying to do. Mr. FARR. Here is our situation in Chicago. If I build any housing, that housing is supervised by the Chicago Building Department. They have building inspectors. Senator ELLENDER. As to lumber, as to the quality of lumber? Mr. FARR. That is not necessary. We have an architect and the architect supervises it in my interest. Senator ELLENDER. Irrespective of the size of the home? Mr. FARR. That is right. You should pay an architect to do that job. When you cut him down to a nominal fee, then you cannot expect service from him. When you make a loan, the lending agencies inspect the job. So we are covered by at least three inspections in nearly every case. Certainly, where you have FHA insurance, their inspection is pretty detailed, and I just don't see that you are accomplishing anything by that provision. I am very frank in saying that I think it is a discouraging thing to inject another restriction against the builder. I want to get these builders to build more houses. I don't care whether I build another one myself or not, but I do want to see a large mass of building, not only by big builders, but by little builders. Chicago has been built by little builders. We don't have but very few men who build 100 houses in a year. Most of them build less than 10. But we have got to get onto the bandwagon every builder who can produce decent, adequate housing right now. I don't mean 2 years from now. I mean, let's get some going this month. Let's get a lot of them going in the spring, because we just cannot wait. Under this bill you are not going to stimulate housing very much for at least a year. It is going to be more nearly 2 years than 1. What we want is housing right now. As to the 95-percent mortgage on $5,000 houses, we think that perhaps this cuts equity too low. There is considerable merit in higher equities from the standpoint of responsibility of ownership. We want to say, however, that we would gladly back any sound proposal along this line which would make it possible for more families of low income to own houses of their own. The wide distribution of ownership of property has been a positive, cardinal policy of our association since its founding. As to cooperative housing, it has been the practical experience of real-estate people over many years that it does not work successfully. In the twenties there were many cooperative projects built. Almost uniformly, they turned out badly. All you have to do is to look at the record and you will see what I mean. The yield insurance provision seems rather impractical to us. We see little in it that would attract much investment. A few large corporations might be willing to put some money into such projects, but it is questionable whether this type of housing ownership is desirable in the final analysis. The National Association of Real Estate Boards strongly favors a program for urban redevelopment. In fact, we would like to see this problem thoughtfully worked out in a separate bill. If that were done, however, we would want to see legislation that would assure local control of the projects from start to finish, and Federal financial assistance made in lump sum grants on a 50-50 matching basis for land assembly purposes. We don't like annual appropriations. We think when you are making a commitment it might well be made in an amount so that you know how much it is going to cost, and you know it is going to be done. We favor putting the Federal contribution into an outright grant, because in that way you know exactly what it will cost the United States Treasury. The annual contribution method in a sense is the blank-check type of operation, obligating the Government over a long period of time. The annual contribution is vicious, also, in that it insures Federal domination of the municipality. We feel it would be better in the long run to make outright grants on a matching basis |