Mr. FISH. Just because we put it 5 percent does not mean it has to be 5 percent? Mr. JONES. No. Mr. FISH. And if the volume is enough you can reduce it? Mr. JONES. If the volume is enough we can reduce it. Mr. FISH. I am hopeful we can get it down to 3 even if the Government pays some of the cost of administration. Mr. WOLCOTT. Do you think the 5 percent should include service charge? At the present time we are given to understand the actual rate of interest to the borrower is 5.62 percent. Mr. JONES. Not under this Federal Housing. Mr. FORD. That was under title I. Mr. WOLCOTT. The service charge made up the difference. There is a service charge-examination fee, appraisal fee, and examination of the abstract. Mr. HANCOCK. That is one-half on title II. Mr. WOLCOTT. Do you not think any maximum or minimum rate of interest which we put on that should be actual and include the service charge? Mr. JONES. It includes the overhead? Mr. WOLCOTT. Yes. Mr. JONES. I could not qualify on that. Mr. WOLCOTT. In other words the service fee could be taken into consideration in determining the amount to be charged as interest? Mr. JONES. I do not know whether I follow you. Mr. WOLCOTT. Well, if an examination fee we will say of $25 is charged and an appraisal fee of $25, we might use the arbitrary amount of $50? Mr. JONES. Yes. Mr. WOLCOTT. Should that $50 be taken into consideration and spread over the length of the term of the mortgage instead of compelling the home owner to make immediate payment? Mr. JONES. I expect that could be covered. Mr. WOLCOTT. Could that be covered in the rate of interest charged? Mr. JONES. I think it could be worked out in the Administration. The CHAIRMAN. Do you not think it is important that we do not hamstring the Administration under this act so as to defeat the purpose we have in mind? Mr. JONES. You want to fix the maximum? The CHAIRMAN. If we fix it too low we are liable to defeat our plan. Mr. FISH. Mr. Jones, have you gone over this act? Mr. JONES. I have not read the act, but I have read the changes in the act. Mr. FISH. Do you approve of this legislation? Mr. JONES. Yes. Mr. FISH. Do you think it will accomplish the result expected that is to create new homes in the country? Mr. JONES. I think it will be helpful. Mr. FISH. Are you willing to say it will be more than helpful? Do you think it will accomplish the results desired? Mr. JONES. I think I have said as much as I want to. Mr. FISH. Do you want to make any suggestions in the way of amendments to this legislation that would be helpful? Mr. JONES. I would not know how to write it any better. Mr. MCKEOUGH. Will the gentleman yield right there? Mr. MCKEOUGH. I asked the question earlier of you if you thought it might not be well to raise the maximum of $6,000 in cities with a population of 500,000 to a higher figure, and as I understood your answer, Mr. Jones, you told me you thought it might be helpful. Mr. JONES. Personally I see no objection, but I would not confine it to the larger cities. Mr. MCKEOUGH. There is a distinction in cost between the heavier populated cities and with that in mind I thought there ought to be a higher ceiling. Mr. JONES. That was our experience. Mr. SPENCE. Can you put lending institutions, insured under title IV-what influence does the Administration here use on lending institutions? Mr. JONES. I do not know the exact mechanics. Mr. SPENCE. I knew that was not in your department but I thought probably you knew. Mr. JONES. I think they are doing a pretty good job and they formerly had a good deal of latitude. Mr. HANCOCK. Considerable moral suasion is used at times, is it not? Mr. SPENCE. You know from your experience in dealing with these financial institutions they can put them on terms where they would be no advantage to them. Mr. JONES. No. Mr. McGRANERY. On the matter of Federal land bank loans we are now charging 321⁄2-percent interest, are we not? Mr. JONES. I do not know. Mr. MCGRANERY. That is the law. It is 31⁄2-percent interest. Inasmuch as that is the interest to one group of people for that type of loan, do you see any reason why the ordinary terms of every day quality do not require the same rate of 321⁄2 percent being made available to borrowers of the H. O. L. C.? Mr. JONES. I do not believe in having any difference, but there may be a difference in the administration of these loans. I think they operate through the Federal land bank. Mr. MCGRANERY. They have no more volume than H. O. L. C. Mr. JONES. The Federal land bank has 32. Mr. McGRANERY. And they do not have any more volume than H. O. L. C. Mr. JONES. You are talking about H. O. L. C.? Mr. McGRANERY. H. O. L. C., that is right. In other words, if Federal land borrowers are entitled to 3% percent why in heaven's name are not H. O. L. C. people entitled to 3% percent? Mr. JONES. That is a matter of administration. I do not know. The CHAIRMAN. Gentlemen, we will adjourn at this time to meet tomorrow at 10:30 a. m. (Whereupon, at 12:30 p. m., the committee adjourned until 10:30 a. m., Thursday, December 2, 1937.) AMENDMENTS TO NATIONAL HOUSING ACT THURSDAY, DECEMBER 2, 1937 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10:30 a. m., pursuant to adjournment, Hon. Henry B. Steagall (chairman) presiding. Present: Messrs. Steagall, Goldsborough, Reilly, Hancock, Williams, Spence, Farley, Ford of California, Brown, Clark, Patman, McKeough, Evans, Transue, McGranery, Barry, Wolcott, Fish, Luce, Crawford, Gamble. The committee had under consideration H. R. 8520, the Admiknistration Housing bill. The CHAIRMAN. Gentlemen, the committee will come to order. We have with ur Mr. Eccles this morning who will discuss the bill. Mr. Eccles, you may proceed. The committee will be glad to hear you. STATEMENT OF MARRINER S. ECCLES, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. ECCLES. I know of no financial mechanism that is available, or that could be created or enlarged, that is as well able to take care of the adequate financing of the construction of homes to rent and homes to own, as that provided under the Federal Housing Administration law and proposed amendments. There has been considerable said about the high cost of this type of financing. The proposals under consideration, both through regulation and legislation, would put a maximum interest rate of 5 percent. It has been said that on account of the Government guaranty this rate was altogether too high. There is a misconception as to the Government guaranty in many quarters. The Government does not guarantee a 5-percent mortgage. If the mortgage defaults the lender must foreclose that mortgage at his expense and deliver title to the F. H. A. The F. H. A. then gives the lender a debenture which is guaranteed by the Government and bears 3 percent interest so the Government does not guaranty a 5-percent obligation; but it finally ends up, after the lender has absorbed the expense of foreclosure, in a 3-percent guaranteed debenture. Mr. HANCOCK. Who pays the expense of foreclosure? Mr. ECCLES. The lender. Mr. REILLY. Is it added to the final bill? Mr. ECCLES. No. Mr. HANCOCK. That expense is filed with the F. H. A. for reimbursement, is it not? Mr. ECCLES. He gets a certificate of claim if the property is sold for more than the amount of the principal and the interest, which, of course, is pretty remote, and I do not think the lender gives that much attention. Mr. HANCOCK. The reason I asked, I did not think you wanted to leave the record in that shape. Mr. ECCLES. I was thinking from the standpoint of practical purposes he is likely to absorb the foreclosure cost and any lender, I am sure, would figure that way. A 5-percent insured loan running for a period of 20 years calling for monthly payments, it must be recognized, is not equivalent to owning a 5-percent bond. There is a good deal of expense attached to the making of the loan in the first instance and secondly to the collection over a period of 20 years in small monthly payments. Mr. GOLDSBOROUGH. Now, Governor Eccles, what is the average interest paid on Government bonds? Mr. ECCLES. Well, of course it depends on the maturity. The average yield, I think, yesterday, on bonds running 8 years or more was 2.57 percent. Mr. GOLDSBOROUGH. Then a 3-percent Government bond is a pretty good proposition, is it not? That is what these debentures are? Mr. ECCLES. The long-term 20-year government bond would be yielding, I suppose, 24 percent or very close to it. I am speaking of the average yield. The rate that has been charged here has been compared with the English rate. As I understand it the building societies make their loans there at a rate of 4% percent. Mr. GOLDSBOROUGH. May I interrupt there just a moment in order to carry out my thought? Mr. ECCLES. Yes, sir. Mr. GOLDSBOROUGH. The bank or lending institution gets a 3 percent Government guaranteed debenture which is equivalent insofar as the bank is concerned to a Government bond. Mr. ECCLES. It is not tax free as a Government bond is. Mr. GOLDSBOROUGH. It is probable those bonds were selling for a hundred, do you not think so? Mr. ECCLES. No; with the tax, they would not. They may on today's market. It would depend entirely. Mr. GOLDSBOROUGH. The Government has been protecting the bankers on Government bonds ever since the depression started, and if the banks did not want these debentures they could sell them and invest in 6 percent securities. In other words, I think we ought to clarify the statement and understand what it means when the banks get a 3 percent debenture guaranteed by the Government that it is a security almost immediately convertible into cash. Mr. ECCLES. Of course, if they did not get that they would not be interested in making a loan at 5 percent in the first instance. The point I am making is they are not guaranteed 5 percent. Mr. GOLDSBOROUGH. Of course if they were getting a 5 percent guarantee by the Government they would be worth probably 125, and that would not be right at all. Mr. ECCLES. No. Speaking of the English rate, a 41⁄2 percent rate; as I understand it at the end of the 10-year period they have the right to adjust the rate based upon what the rate structure is at that time, so in making a long-term loan of 20 years they are not speculating upon what the inflationary or deflationary situation may be for that entire period. The rates have come down from 5% to 41⁄2 over a period of the last several years. For a 90-percent loan or an 80-percent loan, 5-percent interest with a quarter percent insurance on the small properties and a half on the other loans is a low financing cost by comparison with anything that we have every been accustomed to in this country. The virtue of this set-up is that it permits without discrimination every type of lending institution to make loans and get the benefit of the insured mortgage. It is available for all of the citizens of the country. The insured mortgage instrument is one instrument instead of two and three, such as we had during the 20's with the first, second, and third mortgages, which proved to be so disastrous during the depression. Mr. HANCOCK. It took a superman to get out from under the old straight mortgage system, did it not, Governor? It was almost like the frog trying to get out of the well. Mr. ECCLES. They did not get out. The H. O. L. C. was created for the purpose of providing an amortized long-term mortgage and funded over $3,000,000,000 of mortgages they were unable to get out from under. It has been proven that the long-term amortized mortgage is the soundest type of mortgage that can be developed. Where the monthly payment is not low, when difficulties arise, the borrower is likely to discontinue making payments and rent a place because the rent payment is substantially less than the payment that he may be required to pay. I do not think it practicable to get in great volume the home construction by the masses of our people except on a basis where the monthly payment is very close to what the rental payment would be. Mr. GOLDSBOROUGH. You mean what would be normal rental payment? Mr. ECCLES. That is right; the average rental payment over a normal period. Mr. MCKEOUGH. May I interrupt, Mr. Chairman? The CHAIRMAN. Yes, sir. Mr. MCKEOUGH. Your study has included the possibility of improving the present unemployment situation by home construction, I presume, and I also presume as part of your investigation you entered into the study of the average income of the great masses of the people you hope will be able to get in shape to buy a home. I wonder if your study has developed whether there ought to be a minimum wage level, such as the 40-cent-an-hour rate, established in order to better insure to the large number of workers, who would be affected, a better opportunity to own their homes. Mr. ECCLES. No; we have made no studies with reference to that matter. At least I have not. Mr. FORD. Governor, may I ask a question? Mr. ECCLES. Certainly. Mr. FORD. This may be apparently a crazy question, but in these loans is not this what we do we insure the mortgagee and the mortgagor pays a monthly amount to insure that mortgage; does he not? Mr. ECCLES. That is right. Mr. FORD. The builder builds the building and gets out and he is clear out? 33604-37-5 |