The savings and loan associations do not have fixed rates. They vary from 4 percent up. But if you passed a law tomorrow saying the maximum rate of savings and loan associations was 51⁄2 percent, my bet is you would find an increase in loans at 51⁄2 percent. It tends to become a fixed rate. I think it is well worth considering whether or not it is a good thing for the veteran to put this artificial limit and block him because his loan cannot compete. If that cannot be done, and you look at what is the next best thing, then you have to say, "All right. We have got to be able to achieve the same thing by having that veteran able to reflect an increase in rate through a discount." I may be a minority of one in this, but I do not think there is any point in kidding ourselves that a discount system will be absorbed by a builder of a new house, or a seller of an older house. That will be passed to the veteran eventually. You get a discount system operating over a period of 6 months and a new cost setup becomes established, and houses will sell for more money, because nobody will absorb this artificial amount that we are trying to get somebody to absorb other than the veteran. But if you freed it so that a discount system could work, the veteran could buy from a builder or buy an older house. Mr. TEAGUE. Would you place a limit on this discount business? We have bumped into 12-percent discounts in some places. Mr. ROUSE. I think it is your conscientious and sincere effort to protect the veteran by setting a limit that creates these problems, for you immediately introduce a hurdle in the free market. Construction loans in Baltimore have conventionally been made with a 1-percent commission for years. Mr. TEAGUE. We should not have to protect the veteran. He should make enough investigation to know what he is doing. But unfortunately that is not true. Mr. EDMONDSON. The regional situation has been pointed out where a veteran in the East might be paying 4% percent and in the Southwest or Far West might be paying 6 or 7 or 71⁄2 percent. Mr. ROUSE. And that will happen. It is happening anyway. Mr. AYRES. We will have to recess for a few minutes so that we can go to the floor and vote to prove to our constituents that we were in town today. (Short recess.) AFTER RECESS Mr. AYRES. Gentlemen, we will proceed. Mr. ROUSE. I will go back to the summary that I was making, and I will make it brief. I think that there are three basic alternatives available in this situation. The first one is, as I mentioned, making the interest rate a free interest rate so it can move and mortgages can move with it. Mr. AYRES. Would you also recommend then that the guaranty part be eliminated; that there would no longer be a guaranteed loan? Mr. ROUSE. Not unless you want to reduce the amount of it. The purpose of the guaranty, and the achievement of the guaranty is to bridge the gap between what lenders can legally lend Mr. AYRES. We have always been told that the reason for pegging the interest rate at perhaps a lower level than the going market was because you had no risk involved in buying the mortgage. Mr. ROUSE. I do not think that is the major reason for the guaranty. I think the major reason for the guaranty is to permit lenders to make loans on rates and terms that would otherwise be legally impossible. The laws of almost all States would limit life-insurance companies to a two-thirds loan, a limit of building and loan associations to 75 or 80 percent, limit national banks to a 60-percent loan, and yet obviously the veteran borrower needs to borrow more than that. Mr. AYRES. I just wanted to get that on the record. Mr. ROUSE. I do not think at the time the rate was established at 4 percent it was under the going rate. When the rate was initially established at 4 percent and the GI program got underway and over the initial hurdles, any new program has to get over to be accepted in the market, VA loans actually for a period of time sold at a slight premium of 101. That was the typical price on GI loans all during 1946. So the rate, I believe I am justified in saying, was not established at a point to be under the going rate, but at it. I I am really not here to argue with you. Í recognize it is not within the province of the committee, but it seems to me that is the solution of the problem. If that is not going to happen, then the same result has to be achieved by eliminating the limitations on discounts, by completely eliminating section 504 and permitting the market place to determine the fees, charges, and discounts which are necessary, and they will vary in different sections of the country. Mr. TEAGUE. Would you put any protection in there for this veteran who would not try to protect himself? Mr. ROUSE. Well, my third alternative is that. If the second alternative is not practicable or feasible, I think your third choice is one of limiting fees and charges, as you have done, but making it clear in some way to the Veterans' Administration, prevailing upon the Vetarans' Administration, that a discount is not a fee or a charge and that fees and charges-which is what the law says are to be regulated, but where a lender is making a charge to a builder to compensate himself for a discount which he is taking in order to find a place for that mortgage in the market, then that discount is not a fee or a charge and should not be regulated. That would be a third possibility. It is perhaps the quickest that could be accomplished. I do not think that clears up the whole situation, and it would still keep out of the market a good many lenders who would otherwise be in it. There are a great many lenders who are not going to buy mortgages at substantial discounts, even if you clarify the great haze that surrounded it in the past. If you clarify that, these exception procedures by which discounts got into it, you will bring some lenders into the market. Mr. TEAGUE. There should not be a great haze. A man should be able to come to the table and do what is right or wrong. Mr. ROUSE. That is right. To do that, the Veterans' Administration would have to carify their rulings that fees and charges are such and so, but that discounts are permitted. I am not going into all the problems that that raises. That raises other problems. Mr. AYRES. As has been brought out before by Colonel Teague, really the problem is getting a realistic appraisal. Do we not have to face the reality of the situation that the house cannot be appraised on what it necessarily costs to build, or can it be appraised on how much profit there is in the house? Is it not feasible to assume that a project builder building 100 houses is going to be able to build the same house to the same plans and specifications cheaper than the man who builds only 3 of that house, and therefore you cannot say, well, this man has built a hundred houses and he has built them for less money and therefore he has more profit in them. You cannot let that enter into the appraisal, can you? Mr. ROUSE. No, you cannot properly. He is trying to arrive at a market value, and the builder who has achieved a low cost, and making a greater profit, is still selling at the market price and is entitled to make that extra profit. Many of them, however, will take advantage of that opportunity by having a somewhat lower price in order to increase volume. That is a characteristic of a free economy. Mr. ÅYRES. Surely. If he found that his market still held up at the going price, then it might be feasible for him in order to sell his paper, to get in the discount field. Mr. ROUSE. He might. Mr. AYRES. Is that not where the bulk of it occurs? The reason that the bulk occurs with the large builder is because he is the only one who could do it. You put your house on the market for saleMr. AYRES. You brought that point out clearly. Mr. ROUSE. It is not available to him. This thing is in sharp focus with the larger builder, because he is the one who accounts for the big volume of construction in the country, No. 1; and No. 2, he is the one who can handle the discount situation in the market. I think it is possible that many of the larger builders in the country would be able to absorb a discount and still sell the house at a price no greater than a smaller builder was selling it for who was not absorbing a discount. I think that is a possibility. Mr. NEEL. I think it would be well to point out that third alternative, while perhaps not being the most desirable from our point of view, I see no reason legally why it could not be achieved within the language of the present legislation under section 504, because all it says is that they are directed to set up a schedule of fees and charges that might not be exceeded. There is no reason, it seems to me, why within that authority they could not say, "These are the fees and charges which cannot be exceeded, but that does ont preclude you, builder or seller, from paying what discount it takes to sell the mortgages in the secondary market." Mr. BONIN. Supplementing the statement you just made, I notice here that you are listed in this statement of principles and recommendations as general counsel for the Mortgage Bankers Association of America. Mr. NEEL. That is correct. Mr. BONIN. I assume also that you are an attorney at law. Mr. BONIN. Would you mind commenting on this section on page 12 of this booklet which says: The Veterans' Administration has not adequately recognized the size and importance of the loan-guaranty program with relation to its other staff functions. We believe the status of the Loan Guaranty Service should be improved. The Director of the Service should have a position and title commensurate with his responsibility, and he should have the benefit of his own counsel experienced in real-estate law. Mr. NEEL. I certainly believe that, as do most members of our association. I think it can best be explained in this way: When as a lender or an attorney you go to see Mr. Holliday, who is the Commissioner of the Federal Housing Administration, to talk to him concerning the problem of FHA loans, you are talking to the Commissioner of the Administration, the gentleman at the top of the heap, who has the authority to make decisions, and the responsibility. When you take the same approach, as far as the Veterans' Administration is concerned, you go to see Mr. King, who is very ably doing the job of Chief of the Loan Guaranty Service, but the Chief of the Loan Guaranty Service is a minor division—and I am not sure I correctly identify these administrative titles-but Mr. King reports to an Assistant Administrator of the Veterans' Administration for Finance, who reports to the Deputy Administrator of the Veterans' Administration, who reports to the Administrator of the Veterans' Administration; so, when you talk to Mr. King about the administrative mechanism in the Veterans' Administration, you are talking to an individual who, while very capable in his field, is greatly restricted in his responsibilities and his authority. Mr. TEAGUE. Will you yield there? Mr. NEEL. May I make a comment? In addition, we have found over the years that many of the problems that we have to do with the Loan Guaranty Service require legal interpretation. Those, to be official from the Veterans' Administration, have to be made by the Solicitor of the Veterans' Administration, and I am not talking about individuals at all. The Solicitor of the Veterans' Administration has many legal problems that do not relate to real-estate matters, and we would prefer to see the Loan Guaranty Service, as big a program as it is, given a status of an Assistant Administrator of the Veterans' Administration with the benefit of his own counsel experienced in law who will report directly to him and who will have the authority to make legal decisions for the Loan Guaranty Service. Mr. TEAGUE. That certainly sounds reasonable. has a real-estate man in section Unless Mr. Odum Mr. NEEL. I do not want to get into personalities. Our experience has been that it has been in many instances very unsatisfactory. Mr. TEAGUE. You mentioned Mr. King. I have not personally discussed this with him, never heard him testify in that regard. Are you just assuming he is encumbered by higher authority, or do you know that to be a fact? Mr. NEEL. I think that it would be very embarrassing for you to ask Mr. King how he was able to operate his own organization. I will tell you from my personal observation as the attorney for the mortgage bankers that in many instances I think our relations with the Veterans' Administration, and the success of their program, could have been greatly enhanced had Mr. King had more of a position administratively of responsibility and authority. Mr. AYERS. We thank you very much for your excellent presentation. I would like to insert a letter in the record at this point from Benjamin Levinson of Detroit, who is president of the Michigan Mortgage Corp. (The letter referred to is as follows:) Hon. WILLIAM H. AYERS, M. C., Chairman, Veterans' Affairs Committee, MICHIGAN MORTGAGE CORP., House of Representatives, Washington, D. C. DEAR CONGRESSMAN AYERS: I just returned from a visit to New York City and other parts of New York State. I was seeking banks and insurance companies to purchase Government-insured mortgages, both GI and FHA. Were I Diogenes and his lamp, or were I offering these loans at absolutely ridiculous maximum discounts, it would be to no avail. I am president of the Michigan Mortgage Corp., Congressman, and also president of the Michigan Association of Approved Mortgagees, but I am most proud of my designation as mortgage counsel to the AMVETS, and also mortgage counsel to the national and local branches of the Real Estate Brokers Association. In my capacity with the various organizations that I represent and my own company, I would like to go on record to recommend, Congressman Ayers, the immediate rescinding of the order regulating fees and charges of GI mortgages after they have been closed and properly guaranteed by the local guaranty office of the Veterans' Administration. Although for many years I protested and argued against the increase in interest rates, I now recognize that not only interest rates but our entire economic life is going through a transition period and we must keep abreast of these major changes in our economic life, or else not only will the returning veterans be denied homeownership but the entire residential building industry, suppliers, builders, and artisans, will suffer greatly because of a few individuals in the Government housing agencies who are not alert to what is happening to our changing economics. The elementary facts are plainly this. The Government-insured mortgage is no longer attractive to national investors. The United States Government itself has been one of the main factors in discouraging investments in mortgages, because of their attitude in permitting Government bonds to sell at high interest rates in competition to mortgages, which are much more involved, require more manpower to handle, and in the final analysis the net yield has no interest to national investors with the insignificant difference in the final result. Banks and insurance companies have contributed a great deal to make America the Nation of homes. They made a great contribution to the residential building industry and have proven themselves to our veterans and to the average workingman. Then cannot be expected to continue purely because this may be a patriotic gesture when other investments of national concern are more attractive. You cannot restrict the eventual disposition of a Government-insured mortgage under present money conditions. Because of the human equation involved you will make cheaters and connivers out of honorable people with the desire for homeownership. The builder can afford to pay a premium for the financing of his venture. In many cases his acquisition costs of land are below the allowance by the Land Division of the Government Housing Agency. He is permitted a legitimate profit and also permitted to pay a 5-percent selling commission to his agents. He should be permitted to seek his financing in the open market without any restrictions which may eventually subject him to Federal penalties and embarrassments. I would be delighted to meet with you personally to discuss this further and I am asking all members of the Senate and the House of Representatives from our State to join with me and the entire building industry to ask that you please rescind the order restricting fees and charges on veterans loans. Thank you for considering the above comments. Looking forward to an early reply. Respectfully yours, MICHIGAN MORTGAGE CORP., |