Mr. AYRES. Summing up your testimony, your recommendation is correct me if I am wrong in assuming this that the order of May 18 issued by the Veterans' Administration be changed by proper legislation, and changing 504? Mr. RUSSELL. Well, may I state it this way—that if you are going to have a regulation of initial charges, fees and discounts, we think it ought to be a uniform one, and the one of May 18 is about as effective as is possible to make. We do not recommend that you try to control initial fees, charges, and discounts, but if you are going to do it we think that that regulation to date is as good as is possible to develop. Now, we at the same time point out to you that later on other schemes will be evolved to surround that regulation, and if you are going to undertake to regulate it would be appropriate then to get out another one. Mr. EDMONDSON. Would it or would it not be preferable to limit the legislation on these fees and charges to those actually assessed against the veteran or the buyer? Mr. RUSSELL. In our opinion, it would be. Mr. AYRES. We certainly want to thank you. You have been most helpful. Mr. AYRES. Is there a representative here from the National Savings and Loan League? Please state your full name and the association you represent. STATEMENT OF W. FRANKLIN MORRISON, CHAIRMAN, VETERANS LOANS COMMITTEE, NATIONAL SAVINGS AND LOAN LEAGUE Mr. MORRISON. My name is W. Franklin Morrison. I am chairman of the veterans loans committee of the National Savings and Loan League; also, I am executive vice president and manager of the First Federal Savings and Loan Association of Washington, D. C., a $40 million institution. Mr. AYRES. Do you have a prepared statement? Mr. MORRISON. Yes, sir. I would like to read my statement and then answer questions. Mr. AYRES. You may proceed. Mr. MORRISON. I am glad to have this opportunity to discuss with the committee the important problem of assuring an adequate supply of funds to meet all the sound applications for home loans for veterans. As this committee knows, savings and loan associations took the lead in making home loans to veterans. In fact, our association made the first loan in the United States and 20 percent of our portfolio is represented by veterans' loans. Of the $20 billion plus of total GI home loans, savings and loan associations hold over 27 percent. We are currently making 26.5 percent of VA home loans. Savings and loan associations were moved by patriotic as well as reasons of good business, in embarking on so large a GI loan program. We believe GI loans are good loans. They represent a minimum of risk because of the guaranty, and our experience with them generally throughout the country confirms our original analysis. In the last 2 or 3 years, however, it became necessary for many associations to curtail or temporarily stop their GI loan operations. The reason was economics. As the cost of money to the associations increased, it became impossible to make any considerable volume of 4 percent loans. Statutory reserve requirements and increased costs of doing business resulted in a sharp decline in net earnings available for dividends. Obviously, if the dividend rate is not maintained at a sufficiently high level, people will stop putting money into our associations, and, in fact, will withdraw their funds if they can find a more attractive rate with comparable safety elsewhere. In 1946, the weighted average dividend rate was 2.31. This, you will note, is an increase of about one-half percent during the postwar years. The trend is still up. This accounts, in large measure, for the decline in the GI loan volume in recent years. We had for sometime recommended that the interest rate be raised to 41⁄2 percent by the Veterans' Administrator so as to maintain a steady volume of funds flowing into GI loans from our institutions. Unfortunately, when the increase finally came, the benefits were largely lost by the comparable increase in the return on thrift capital. Therefore, our institutions are not in much better position today with a 4% percent interest rate, than they were in a couple of years ago when the rate was 4 percent. Nevertheless, we have urged our member institutions to allocate as much money as possible for GI loans at the new 41⁄2 percent rate. Our annual convention in St. Louis, May 10 to the 14, 1953, unanimously adopted a report of our economic policies committee which included the following paragraph: It is recommended that the member institutions participate to a greater extent in the GI and FHA lending programs than heretofore, especially in view of the increased interest rates. At the same convention, we had a good opportunity to test the sentiment of the managers of a great many large associations, and we were pleased by the assurance that those associations would resume GI home financing on as substantial a scale as possible. There is, however, an unavoidable lag between the adoption of a policy of this kind and definite results in the form of a large loan volume. But when you hit a large volume suddenly, you are going to have a bog down in a period of time, and that is what is happening at the present time. Most of our associations had made conventional loan commitments in anticipation of receipts of available funds for some months ahead. This is a natural and necessary course in the operation of our institutions. However, it means that institutions willing to make the 42-percent loans would not put much money out at that rate for some weeks or even months after the new policy is adopted. We are hopeful that there will be an increasing amount of money available for GI loans at the new 41⁄2 percent rate. We recognize that the practice of builders, in some sections of the country, to provide a higher net return to lending institutions through the device of originating the loans themselves and selling them at a discount, has had a considerable bearing on the supply of money available for GI lending. In our business, we think of mortgages as being 100 cents on the dollar at all times. Frankly, therefore, we don't like a discount system in mortgage financing, and it is quite unlikely that there would be a discount system if interest rates were allowed to seek an economic level. But when the interest rate is pegged, it is not surprising to find a compensatory device, such as a discount plan, come into common use. We recall that when we argued for an increase in the interest rate as one means of eliminating discounts on GI loans, we made the point that discounts are simply another way of increasing the costs to the borrowers. However, at that time the persons who were opposed to an increase in the interest rate argued that a discount did not represent a cost passed on to the veteran because the VA appraisal system and competition combined to protect the veterans against the payment of extra costs in this form. While we are opposed in principle to a discount system, the practical considerations of the problem force us to recognize that in some areas, at least, a discount practice may be the only way of obtaining adequate funds for veterans home financing. Mr. TEAGUE. Mr. Morrison, I have a letter here from a large construction company in California, a builder of approximately 4,000 single-dwelling GI units. He says "Payment of a discount for the placement of a loan cannot be passed on to the veteran in any way." In a later paragraph he says "Therefore, any discount absorbed by the builder in order for him to place the mortgage of the veteran is for the builder's profit and cannot be passed on to the veteran." It seems from your statement you think it would actually be increasing the cost of the borrower, who originally is the veteran. Mr. MORRISON. No; I do not mean to convey that, Mr. Teague. I meant to say if an appraisal system is provided, the builder must take a lesser profit under the discount system than he does if he can get it under the present regulation. Mr. TEAGUE. Then taking your original statement on page 4, are you recommending that the VA Administrator allow discounts in certain areas? Mr. MORRISON. I do not believe I want to recommend, but I would like to discuss that in this way. In a free economy, where money costs more than in California, Texas, and Florida, for instance, than it does in New York and Washington, D. C., and other places, it may be the only way you will find to provide the volume of money in those areas. Mr. TEAGUE. Can you specifically recommend to this committee what we should do or what Congress should do? Mr. MORRISON. I would say the proper way to handle the problem is to let the interest rate be free and let competition and the supply of housing and the good judgment of the veteran be the controlling factors. Mr. TEAGUE. Then your recommendation is that we take off all ceilings on interest rates and let the rate find its own level? Mr. MORRISON. I think that would be the way to solve the problem of discounts. To many of our savings and loan institutions, 4.5 percent is a satisfactory rate. We here in Washington are making GI loans very well. I mean to say the institution is looking for GI loans. Mr. AYRES. You are? Mr. MORRISON. Yes, sir. Mr. AYRES. That is good to know. Mr. MORRISON. We are finding them, too. Mr. AYRES. We will help you. Mr. MORRISON. We said here in the Washington Post a couple of weeks ago we were setting aside $1 million to make them, and now we have $2 million of applications, and we are still going to make them. Mr. AYRES. In other words, you are saying you think the May 18 regulation is not affecting your operation? Mr. MORRISON. Not so far as building and loan operations are concerned. But we are only, at the most, 27 percent of the market. Mr. BONIN. Apparently you are in conflict with the testimony we heard from Mr. King of the Veterans Association that if there was no ceiling on the interest rate, there would be an over amount of building of homes and it would glut the market so far as homes are concerned for GI's. Mr. MORRISON. I do not believe it would have the explosive effect because we are experiencing in this area and I know in a lot of areas a fairly well built-up condition in housing. And you can only sell what demand there is for housing, and you are finding a slower market all over the country. I think that would have a large effect on controlling the market. Mr. BONIN. That was the thing I could not quite understand-one person coming in here and testifying it would glut the market as far as building is concerned of homes for GI's, and then in the second breath we find out certain practices are put into effect, and the result is we do not know where we are. Mr. AYRES. You do not consider the GI guaranteed loans a very great risk; do you? Mr. MORRISON. No, sir; we do not. We like them. Mr. AYRES. Has it not always been true in the investment field that the greater the risk the more return you are entitled to, and the less the risk the less return you are entitled to? Mr. MORRISON. That is true, Mr. Ayres, but you must keep in mind, if we pay more for our money, regardless of the gilt-edge security you have, the less the return, and you must make enough money to pay a comparable dividend to your savers. Mr. AYRES. Have you increased your interest rate to depositors since the rate has been increased? Mr. MORRISON. No, sir. But this morning's paper, the Washington Post, calls attention to the fact that 7 associations in the District of Columbia have, and 7 good-sized ones; so we may be faced with that necessity. But that was not since the interest rate was increased. You asked me "since the interest rate was increased." Mr. AYRES. Yes, after the interest rate was increased to 4.5. Mr. MORRISON. No. We have made increases up to the 3 percent rate and possibly are faced with another half a percent. Mr. BONIN. What is the interest rate at the present time? Mr. MORRISON. Ours is 3, and some of the associations' are 3.5. The rate over the country is 2.78. Mr. EDMONDSON. I wonder if Mr. Morrison has any second or third alternative that he might suggest to the committee to the proposal of abandoning any ceiling on interest rates, for which I think there is going to be some difficulty in getting acceptance. Mr. MORRISON. I think some form of regulation for segments of this problem is important if you are going to have regulations. 35186-53-3 Mr. EDMONDSON. You think it is imperative that the charges and discount practices between the builder and the source of his funds be regulated in addition to the regulation of fees and charges to the veteran or the purchaser? Mr. MORRISON. If there are going to be regulations, they ought to be universal. You see all the time in the papers it is about builders. We are not speaking about the fellow who goes out and buys what you might call a used house or an older house, and to me the regulation of any of these things, as Mr. Russell said, is beyond what you can do by regulation, because there are too many things you can do to get around the regulations. Mr. EDMONDSON. If I understood Mr. Russell correctly, he said he thought it would be preferable to have a limited regulation of fees and charges to those actually assessed to the veteran directly. Mr. MORRISON. I would agree with him. Mr. EDMONDSON. I just wondered if you would. Mr. MORRISON. I would agree with him. Mr. TEAGUE. What is the price range generally of those loans you make? Mr. MORRISON. The prices are running from $12,000 to $25,000, and $30,000. Mr. TEAGUE. And what down payment? Mr. MORRISON. In our own organization-I am only talking of the First Federal of Washington-5 percent up to $12,000 and 10 percent above that. In other words, the amount of the loan we make is the conventional loan of $12,000, and we want a substantial amount of cash above that. Mr. TEAGUE. Over how long a time? Mr. MORRISON. We have tried to hold them to 25 years with the privilege of 5 years extension if they get into trouble. In other words, if they get delinquent on a 30-year loan, you are really licked, but if you have a 25-year loan, you can help somebody over a rough spot in those 25 years. Mr. BONIN. We have been talking about fees and costs. Would you mind telling me what your fees and costs are in the Washington area? Mr. MORRISON. The maximum as established by this order of May 18 is 2.5 percent. We have not, as a general rule, in the District of Columbia gotten the maximum fees in the past. Mr. BONIN. What was it prior to May 18; what did the fees and costs usually run? Mr. MORRISON. On construction loans, an average of 1.5 percent from the builder. Competition regulated that here in the District. There is a lot more money in the District of Columbia in savings and loans than there is in many of the States. Mr. BONIN. That would include title search; is that correct? Mr. MORRISON. No, sir. That is a construction loan fee-the cost to him. Mr. BONIN. What are your actual costs now for title search, for preparation of the deed, for preparation of the mortgage, recording of the deed and mortgage, revenue stamps, if any? What do those costs usually run? Mr. MORRISON. In this area, somewhere around $200. Mr. BONIN. Paid by the purchaser or paid by the seller? |