I would like to point out that legislation specifically directed the VA and the FHA not only to limit the fees and charges imposed on the veteran or other purchaser, but they were trying to protect the builder from the imposition of any fees and charges except those expressly authorized.

Later on, under section 613 of the Housing and Community Facilities Act of 1951, Congress added to that act the words "or seller." So, as the congressional legislation now stands, both the FHA and the VA were directed by Congress to limit the fees and charges which could be imposed on either the veteran or other purchaser or builder or seller. So it deals with all classes of people interested in this problem. Both the FHA and the VA promptly came out with regulations. The FHA regulation, of which I have a copy here, prohibited the imposition directly or indirectly of any fees and charges other than those expressly permitted; by any method directly or indirectly. And the history of the FHA regulation is very clear and very precise. Any time anybody presented the question to FHA that dealt with a method by which some sort of imposition of a fee or charge on any of this group-builder, seller, purchaser, or anybody else the FHA promptly replied in writing that

under this regulation authorized by Congress you cannot collect anything more than these fees. We do not care how you propose to do it, by what method you go about it, that is very clearly forbidden

and there is comparatively little question about the regulation. And there has been little protest against the FHA regulations for two reasons. No. 1, under the FHA system, only an approved mortgagee can secure an FHA loan; and, an individual builder as such, or individuals, cannot be an approved mortgagee; an individual cannot own an FHA loan. So you cannot have the problem of a builder attempting to dispose of a loan for another.

Secondly, FHA loans, have until recently, almost always commanded a little better market than VA loans; therefore, you did not have the pressure on the FHA loan that you had on the VA loan. As long as they could be marketed within the fees and charges permitted, you did not have the pressure on the part of anyone to try to dispose of them at whatever price he could and pass the charge along.

The VA regulations came out about the same time, and shortly thereafter there began a series of numerous and rather complicated interpretations of these regulations. Therefore, this whole question would have been before you gentlemen a long time sooner if the Veterans' Administration had been as strict, you might say, as the FHA was. But rather than being as strict as the FHA was, the Veterans' Administration was more lenient for one reason or another— perhaps in response to the demands of industry and the demands of builders and others. They whittled away at the clearly written rule that you just could not collect anything except the narrow charges no matter how you tried. All sorts of commitments grew up at that time, and so there were all kinds of opinions as to how, under the regulations, you could pass along to the builder a charge in excess of those permitted.

Mr. EDMONDSON. Was that device or relaxation a local matter or a national policy matter or both as far as the VA was concerned?

Mr. NEEL. No. The deviations eventually got crystallized under opinions of the Solicitor General of the VA and were followed generally all through the country.

Mr. EDMONDSON. Mr. Odom's opinions?

Mr. NEEL. Yes, sir. Eventually you came up with a situation. where you had a number of opinions showing practices that were not prohibited by the regulations in effect by themselves. It has never been a problem of whether the VA permitted loans to be sold at discounts. Until May 18 the VA permitted loans to be sold at discounts, but the question was who was going to pay the discount.

Now, the people who largely make up the MBA are the middlemen in this discussion. They are the people who originate the loan, bring the fellow who wants the loan in contact with the man who has the money in another community, and therefore services the loan for him. Obviously, as a middleman, his profit being connected with servicing the loan, there is no way in the world where he, for a long period of time, is going to be able to absorb a heavy discount and still stay in business. It has to be passed along to somebody, and the most usual person you are going to pass it along to is the person who was willing to absorb it when you made the loan-the builderassuming, of course, you cannot pass it along to the veteran.

I think in very few instances have any of those schemes been devised for the purpose of passing the discount directly to the veteran; they have all been arrangements under which they permitted the builders to absorb the loss at which it was necessary to sell the VA loan because it carried an unmarketable rate. But these bypassing practices never were popular with lenders, particularly institutional lenders in the eastern market, because strictly speaking under the regulations the practices would never be permitted under the statute, but it is true that many of those practices were recognized by Mr. Odom. But, as Mr. King has said, in a number of cases you could lead the lender down and show him the precipice between how much he could make and how much he could not make, but you could never be able to tell how hard the wind was blowing at the edge of the precipice and whether it would blow him over; and a lot of investors just could not take the risk on the size of the gale. So they just said rather than take any risk involved in those things, "if we cannot buy cleanly on a basis where we can command or establish an actual market rate, we are not going to buy at all, because if you get in trouble with the Veterans' Administration on a practice which is questionable and the question is referred to the local district attorney, God knows where it would stop." He could never know what the answer was going to be. So those kinds of practices grew up under this liberalized interpretation of the regulations of the VA.

Mr. EDMONDSON. Could you at that point cite some specific instances of the rulings from the Solicitor's office relaxing that regulation? Mr. NEEL. Mr. Edmondson, I think if you would secure a copy of all of the Solicitor's opinions and the various interpretations, it may be clearly and easily seen. For example, there is an interpretation which says that under the old rules a builder could, if he did not commit himself in advance to sell the loan at a discount, enter into a repurchase agreement with the lender. The builder could agree to re

purchase from the lender at a later date at par if the lender could not find a market. But if he failed to repurchase, the lender could sell the loan and the builder would forfeit a deposit.

Another example of how those devices were used is this: For example, the man who usually sells the house is a real-estate broker. Even today's regulations, as stated by Mr. Odom, for instance, do not prevent a builder from employing a real-estate sales broker to sell the property. If the real-estate sales broker wants to pass onto the lender part of his regular commission for making the sale, Mr. Odom says there is nothing in the regulations to prevent that, providing the original sales commission is not increased to cover that which the sales broker pays to the lender. That was the way in which the lender could collect, that mortgage banker, the middleman, could collect the discount which was necessary for the disposition of the mortgage in the open market.

Mr. EDMONDSON. That is a fine illustration.

Mr. NEEL. There are many others.

Mr. TEAGUE. Do you think it possible that we could write the law to govern all of our Government activities in housing, where the question is of the general nature?

Mr. NEEL. I think it is very difficult, Mr. Teague. The FHA ruling has been much less susceptible to misinterpretations.

Mr. TEAGUE. I have been told the FHA winks at discounts. That is not your information?

Mr. NEEL. I do not believe that to be true, and I think if you ask Mr. Hollyday of the FHA if that is true, he would agree with me. Mr. Rouse may have something to say about this, being active in the field.

After considerable activity the interest rates were raised. All of us hoped it would provide an answer to the number of FHA and VA loans made and traded in without discounts. Conditions in the money market, however, since the 34-percent Government bonds came out, and since this interest rate was raised, have not been stable. Interest rates are still going up. You gentlemen can examine the papers and it is obvious that that is happening. What you are dealing with is a commodity which, in the market today, in relation to the demand for money, does not carry a marketable rate.

There are so many institutions that are in the market for money that when you are faced with a decision by the administrative part of the Government to go on a hard-money basis, something has got to give somewhere; and I suggest perhaps it is not in the field of this committee-but this whole thing is so definitely related to the demand for money, that before you could determine what will happen to VA loans at the new 42-percent rate, you should have some information from the administration as to what they intend to do on the money market. Will they continue with the hard-money market? If they do, 41⁄2 percent will not get any better.

Mr. TEAGUE. You know we had representatives of the Treasury here, and they would go along with the VA on the discount and with the FHA on the increased interest rate. I do not think you will get them to tell us what they will do.

Mr. AYRES. Your position is that this problem is tied so closely with the Government's policy that there is not a good deal that can be done until we find out what their position will be?

Mr. NEEL. I think in the long run the salability of a VA and FHA loan at 41⁄2 percent is closely tied to it. What you have before you is a regulation in which Congress told the VA and the FHA to issue a regulation imposing a limit on what could be charged the veteran and the seller.

Mr. AYRES. Mr. King has decided a lot of those practices are legal. Mr. NEEL. Yes.

Mr. AYRES. Why should they not spell out the practices that are legal?

Mr. NEEL. What happened on May 18 was that heretofore they had permitted a builder to absorb certain charges, and they have now determined where the builder is the seller of the mortgage, the sale of that mortgage by him at anything less than par will be prima facie evidence that he has paid charges in excess of what he is permitted to pay.

I see no reason why FHA and VA could not issue any regulations they wanted to in regard to fees and charges. The legislation does not say no charges should be paid. The legislation says no charges except what they approve should be paid.

Mr. TEAGUE. What do you recommend that we do in the way of legislation?

Mr. NEEL. I will ask Mr. Rouse if he has any other comments he would like to make in connection with this general presentation of mine.

STATEMENT OF JAMES W. ROUSE, BALTIMORE, MD., CHAIRMAN, GI LOAN COMMITTEE

Mr. ROUSE. My name is James W. Rouse, from Baltimore. I operate a mortgage company. Our whole business is doing business with builders who are building and financing houses, and it is our job to finance the sale of those houses, as well as to finance the sale of older houses. We do that representing life insurance companies and other concerns in the Baltimore area.

I do not want to duplicate anything anybody else has said. Mr. Teague's question is a tough one, and I would like to talk to that.

I think what we have a choice of is a series of unsatisfactory alternatives. I think we have an imperfect situation to which there is no perfect answer.

Mr. TEAGUE. I understand you are chairman of the GI Loan Committee.

Mr. ROUSE. Yes.

Mr. TEAGUE. After you leave here, if you arrive at an answer, will you send it to us, or come back to us? I do not see how this testimony will do any good unless we arrive at a definite answer.

Mr. ROUSE. I can give it to you now.

First let me reemphasize that this order of May 18, which is looked upon as the devil here, really just brought to light a situation that existed and should have existed, and it is a useful regulation just to bring this hearing about.

When 504 was passed and the order went into effect, nothing much happened at that time, but as the tight pressures in the money market began to develop, then naturally the pressures of a free market, of

builders trying to build houses and trying to find ways to finance them, began to assert themselves. Mortgage bankers and builders started to come up with plans.

So there was never a complete relaxation of the fees and charges rule by the VA. One after another individual exceptions began to mount up to avoid the fees and charges rule. They were avoidances. One was a banker out West who wanted to know what would happen if the builder made the loan and deposited it with him as collateral, and the loan was called and he sold the collateral for less than the amount of the loan; what was the position? Obviously the position was that the bank had to come out whole. How could you say it was not good collateral? That was an exception.

Then came the builders making the loans themselves, and that became a way of avoiding the regulation. This created a sort of a gray market. If you were sharp enough in the business, what you were doing was within the law, but it scared the daylights out of a lot of mortgage bankers and builders and it put out of business some people who felt they could not know if they were right or wrong.

It had some other effects that have seldom come up in this discussion. One is the effect on veterans trying to buy an older house. There are some 40 million dwelling units in America. The great bulk of veterans' housing opportunity is realized through all the older houses in America. None of these devices as to a discount and trying to have a workable interest rate could apply to older houses. The situation Mr. Russell described perhaps could have occurred, but it did not occur. The veteran could not use the VA loan plan to buy

older houses.

So what really happened, only the larger builders and larger mortgage bankers dealing with banks sufficiently knowing about these things to accept these plans were free to operate.

Before you changed the interest rate to 41⁄2 percent, and before the order of May 18, a bad situation had already occured.

Now, when the pressure for the increase in rate started a year or more ago and I can remember arguing last fall about whether the increase should have been a quarter or a half, and I think if it had been a quarter it could have worked at that time, but by February_or March it would talk a half and the quarter talk had disappeared. By the time the rate was raised to 42, the Government had come out with a 34 percent bond, and you will find a 0.2 increase in bonds from March to now. So that now you have the same kind of pressure at 41⁄2 that you had a year ago at 4, and again this free market and a free society is trying to find a way to make loans. The builders in Texas and Oklahoma say that they are being skinned.

Now, what to do about it?

Well, it depends on how much you want to do about what. If you really want to make money available to veterans, allow the mortgage he wants to get to compete in the market with other forms of investments. I am not recommending it, but I think that is the crux of the problem, and I think that many times it is worth taking a look at whether or not the placing of a limitation does not work two ways.

When the FHA rate was limited to 41⁄2-and that was more than it should have been-all loans were made at 41⁄2 percent, but they sold at premiums of 103 and 104 in some communities. But if there had been no limit on the rate a lot more loans would have been made at 4 or 44.