FEES AND CHARGES SCHEDULE GOVERNING GUARANTEED HOUSING LOANS THURSDAY, JUNE 18, 1953 HOUSE OF REPRESENTATIVES, * Washington, D. C. The committee met at 10 a. m., Hon. William H. Ayres (subcommittee chairman) presiding. Mr. AYRES. We have called this hearing to discuss the GI building program. This is not an investigation. It is a hearing which we are going to conduct to attempt to find out why the GI is not able to get a home today. This committee does not have the authority to establish monetary policies, nor does it have the authority to set interest rates, to pass on discount practices. Our prime purpose is to see that the veteran gets a good house and that existing laws affecting the veterans' housing are abided by. We conducted hearings in Ohio last March, and at those hearings we had representatives of the lending institutions, the builders, realtors, veterans' organizations, and individual veterans. Testimony at that time was given by some of the leading lending institutions in the State of Ohio-from Cleveland and Cincinnati. In Cleveland we had Mr. James T. Johnson of the Society for Savings; we had Mr. Arthur E. Kluner of the Central Trust Co.; we had Mr. Juergens of the Central National Bank; we had representatives from Buffalo, Mr. George M. Marvin of the Buffalo Savings Bank; and in Cincinnati we had Mr. Walter Schultz, who was the executive secretary of over 600 savings and loans, and who was connected with the Federal Home Loan Bank Board. In all these instances every gentleman testified that if the interest rate should be increased to 41⁄2 percent there would be plenty of money available for veterans and they would be more than anxious to enter into the GI program; in fact, several of them testified that if the interest rate should be increased to 41⁄2 percent they felt they would be just as active in the field as they were in 1948, 1949, and 1950. We came back after our hearing and have had representatives of the Veterans' Administration appear before us, and on April 29 Mr. T. B. King appeared before the whole Veterans' Affairs Committee; at which time we discussed the testimony we had heard in Ohio. Mr. King made certain recommendations regarding his proposal, or the proposal of the Veterans' Administration, to legalize the discount. During the course of those hearings many of us, including myself, were quite emphatic as to what we thought would happen if the emphasis was placed on discount. 1381 After that hearing the Veterans' Administrator raised the interest rate to 41⁄2 percent. For the first several weeks those of us on the committee were hearing from the lending institutions, the realtors, the homebuilders, stating that the program was beginning to work. Then, on May 18, the Veterans' Administration issued a directive which does not have any number, nor can it be identified except by date, the subject being Fees and Charges: Schedule Effective May 18, 1953. After this directive was issued we began receiving communications from lenders, builders, and also veterans' organizations saying that the GI money had not only slowed up but it had practically dried up. Since it is the purpose of this committee to see that the veteran gets a home, we felt it might be advisable for us to call in the lending institutions and discuss with them just what their problem is today. It is not our purpose to point a finger of accusation at any particular group, organization, or individual, but it is our purpose to attempt to gather facts so that we in turn can make the proper recommendations to correct what is now a very bad situation. The first organization to testify this morning will be the United States Savings and Loan League, and I believe Mr. Russell is here. Will you state your full name and affiliation? STATEMENT OF HORACE RUSSELL, LAWYER, REPRESENTING THE UNITED STATES SAVINGS & LOAN LEAGUE Mr. RUSSELL. Mr. Chairman and gentlemen of the committee, I am Horace Russell, a lawyer, Chicago, Ill., representing the United States Savings and Loan League. Mr. AYRES. Do you have a prepared statement, Mr. Russell? Mr. RUSSELL. If I may read a short statement of a page and a half, then I will try to answer any questions that the committee has, if I can. Mr. AYRES. That will be fine. Mr. RUSSELL. It is my understanding that this subcommittee is inquiring into the effect of the 4%1⁄2-percent limitation on interest on veterans' guaranteed and insured loans and into the present schedule of authorized initial charges and discounts. I represent the United States Savings and Loan League-a trade organization. Our savings and loan associations, nearly all of which are mutual funds, have about $20 billion of private savings. The average saver has about $1,500. Nearly all of this money is used in the financing of homes. The Government has guaranteed or insured about 3 million loans for veterans for a total amount of about $20 billion. The losses to date are less than 0 of 1 percent. It is the greatest home ownership program in the history of the world. We are advised that the five principal aids to veterans, (1) demobilization pay, (2) unemployment assistance, (3) education, and (4) hospitalization, have each cost the Government several billions of dollars. The home loan program has a net loss of only about $15 million to date. It appears that the ultimate loss will certainly be less than the cost of any one of the other aids mentioned. Nevertheless, we believe that the home ownership program is the most beneficial of all of them directly to the veterans and indirectly to them by sustaining the economy and promoting home ownership. Therefore, we are very much interested in the program and this inquiry. Savings and loan associations, in the early days of this program, made a very high percentage of these loans. To date they have made about 27 percent of such loans. This is a total of more than $5.4 billion. First, as to the rate: In recent months the yield on Government bonds, other high grade securities and conventional mortgages, has moved up more than 2 of 1 percent. Therefore, in our opinion, the 41⁄2 percent rate is now fully justified. Stated another way, the present prevailing rate on "no risk” home mortgages is 41⁄2 percent to 5 percent, and the veterans' guaranteed loan is largely a "no risk" loan and therefore the 41⁄2 percent rate is justified. Second, as to initial charges and discounts: Savings and loan people almost altogether make and hold home mortgages. They do not to any substantial extent make and sell such mortgages. They are, therefore, interested in (1) an economic interest rate and (2) initial charges sufficient to cover the actual cost of putting the loans on the books. It is our opinion that the present provision for initial charges and discounts approximates and does not exceed the actual cost of putting the loans on the books. We have not requested a regulation of initial charges and discounts. We believe that competition would take care of this problem without regulation of it. However, if there is to be regulation, the present requirements, in our opinion, are appropriate. Three things have happened, each of which has slowed up the veterans' loan program. The first was the amendment of the law by Congress requiring regulation of initial charges and discounts. This has caused a great deal of confusion, delay, and has caused some institutions to discontinue such lending. The second was the action of Congress in requiring minimum construction standards, which necessarily was followed by a system of local inspection, all of which is confusing and which is expensive to the veteran and to the builder and to the lenders and causes much delay. It is very doubtful whether such amendment is justified. It would have probably been better to have relied upon Veterans' Administration appraisal of reasonable value. The third is the present confused issues of technical bulletins, which ought to be amended, simplified, and brought up to date. Each of these propositions has been largely mastered by the largest lenders with adequate staffs and facilities. However, unfortunately, each of these has tended to run the small builder and the small lender out of the veterans' loan market. These three Government red tapes, confuse the smaller builders, lenders and veterans. They tend to drive them out of the business because they are afraid of this much Government regulation. Unfortunately, this affects availability of such loans in rural areas where they are most needed. Finally, we point out that any kind of a mortgage discount system which may be authorized is likely to encourage speculators and promotors and discourage legislative lenders. The United States Savings and Loan League is encouraging its 4,000 members engaged in this program and assisting them in every way it can to do so. On the whole, the program has been better conducted by the Government than any other governmental operation, in our opinion. If we can be of assistance to this subcommittee, or your committee or the Congress or the Administrator of Veterans' Affairs, we will be at your service. Mr. TEAGUE. Would you read again the next to the last paragraph on page 2 of your statement? Mr. RUSSELL. The United States Savings and Loan League is encouraging its 4,000 members to engage in this program and assisting them in every way it can to do so. On the whole, the program has been better conducted by the Government than any other governmental operation, in our opinion. Mr. TEAGUE. Thank you. Mr. AYRES. Mr. Bonin. Mr. BONIN. I have no questions. Mr. AYRES. After the Government's Administrator issued the directive raising the interest rate to 4%1⁄2 percent, did you see any appreciable increase in loans throughout your organizations? Mr. RUSSELL. There was a distinct increase in interest in the making of veterans' loans, but it takes a few weeks to process loans, and that interest did not show up the first day after the rate was increased in additional loans. It is now rapidly showing up in new and additional loans being made from day to day now. Mr. AYRES. Did the directive issued by the Veterans' Administration, effective May 18, have any bearing on your operations? Mr. RUSSELL. There were situations where there were speculative builders and promoters who were in the process of negotations under the old rule as to charges and discounts, whose operations were affected by the new order. Mr. Chairman, I think it should be kept in mind that the Congress in the Housing Act of 1950 directed the Administrator of Veterans' Affairs to regulate charges made against the builder, the seller, the veteran, or other purchasers-four people. In the process of endeavoring to do what the Congress said, and the Congress intended, the Administrator of Veterans' Affairs, as in the case of the Commissioner of the Federal Housing Administration, who was likewise directed, put out directives to regulate interest and charges. It was believed at that time that the intent of the Congress was to regulate those charges at approximately the cost of putting loans on the books. The regulations prior to the present one, and the present regulation, appear to be an effort to regulate those charges at the approximate cost of putting the loans on the books. The difference between the present one and the former one is that the present one more clearly states that as to the builder, the limit is the amount stated, namely, 2% percent on construction lending to be paid by the builder, or absorbed by him in any manner whatsoever. The storm that has arisen over the fact that the present order closes the door to what was going on by way of taking out of the builders more than 2%1⁄2 percent by way of a discount instead of a charge. Mr. AYRES. Do you think, Mr. Russell, that the builder should have the right after the loan has been closed to discount his mortgage, if he wants to? Mr. RUSSELL. Mr. Chairman, we do not request that the Congress undertake to regulate this market. We think that probably it would be better if this question had been left to the market. We submit to the committee that if you are going to regulate the market, it ought to be regulated uniformly as to all concerned. Now, if you are going to regulate the charge against the lender, it follows that you must necessarily regulate the discount which a builder may absorb. The present regulations do not regulate the market for GI loans. My clients can sell veteran guaranteed or insured loans at any price they want to. I do not represent builders. The lenders, any lender, may sell any GI loan at any price the lender wants to in the present market. The regulation goes no further than to say that you cannot take out of the hide of the builder any more than 2% percent by any device whatsoever, including a discount. That is what the Congress said to do. If the Congress would repeal this amendment of section 504 of the act and leave this question to a free market, I do not think that anyone would complain, but if the Congress wants a regulation it is difficult to see how you could possibly regulate initial charges unless you regulate discounts by the builder, and that is all this does. Mr. TEAGUE. Mr. Russell, we find that the veterans, as a rule, do not pay too much attention to the interest rate. If they can get a low down payment and pay over a long period of time, they are not going to worry about the amount of interest. We have found as much as a 12 percent discount. The Veterans' Administration has testified here that they feel with their appraisal system they can get within 5 percent of the cost of a house, but no closer. If they cannot get any closer than 5 percent, is there any way they can keep this discount from being passed on to the veteran who is buying the home? Mr. RUSSELL. It is a very difficult problem. Mr. TEAGUE. So up to about 5 percent, then, you would say there is practically no way they can keep that from being passed on to the veteran? Mr. RUSSELL. I would agree that there is no way to appraise the exact value of a house. It is an estimate value, but I think that the original provision of the law which protected the veteran by a Government determination of reasonable value is as nearly as you can get to that question. It is not exact. Mr. TEAGUE. It is my personal opinion that the Congress should in some way protect the veteran from a 12-percent discount. It seems to me that is getting a little rough. But 2 percent or 21⁄2 percent, if the builder wants to absorb some of that, perhaps we should not be too much worried about it. Mr. RUSSELL. I would point out that the present schedule of fees and charges is no more than the actual cost of doing it, that is, if you go out and build houses and provide your own financing it will cost you about 21⁄2 percent any way you do it. If you come to the Society for Savings and want them to do the work and provide the capital that is required for construction lending, it will cost them, and they will charge you, doubtless, about 21⁄2 percent and that is the allowance in the present schedule. Mr. TEAGUE. What should Congress do? Should we say that it takes a certain amount of interest to get this money and raise the |