Mr. AYRES. We have also received a number of telegrams from interested parties in Texas, and since Colonel Teague comes from Texas, I will let him handle his Texas delegation.

I will first call now Mr. Spiegel.

STATEMENT OF EMANUEL M. SPIEGEL, PRESIDENT, NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. SPIEGEL. My name is Emanuel M. Spiegel. I am an active home builder operating in the State of New Jersey. I make this statement to you as the president of the National Association of Home Builders, which, as you may know, is the trade association of the private home building industry. Our membership now exceeds 26,000, grouped in affiliated local associations in 210 communities. It has been estimated that our members build approximately 80 percent of all residential housing in urban areas of the country.

I understand that this hearing is for the purpose of considering the effect on the GI mortgage market of the revision of May 18 to the fees and charges regulation of the Veterans' Administration. I can sum up in one sentence the results of our survey of all of our affiliated local associations throughout the country on this subject. The revision of May 18 has completely driven from the market for GI loans that very sizable group of mortgage lenders which originate loans for sale to secondary investors. It has had an effect also on the market for FHA loans. We have the results of a telegraphic survey of our membership on which I base this statement and, a little later, Mr. R. G. Hughes, first vice president of this association, of Pampa, Tex., will give you a firsthand report on the situation in that part of the country.

As this committee knows, a very considerable amount of total residential mortgage lending originates through local mortgage companies which resell loans to investors. These are the lenders who are affected by the regulation. It does not affect direct lenders such as savings banks and savings and loan associations which do their own servicing locally. Lending institutions of this type, since they retain servicing, enjoy a natural one-half of 1 percent advantage over those lenders which supply money to mortgage companies. Any testimony with respect to lending by savings and loan associations or savings banks or their willingness to lend does not affect the situation as we see it. With all due respect to direct lenders of this type, they cannot possibly carry the entire burden of mortgage lending.

The revision of May 18 has further demoralized the market by completely eliminating warehousing arrangements which have long been an established part of mortgage lending and are necessary in many areas in order to obtain construction loans.

In a hearing last Monday before the Senate Banking and Currency Committee on S. 2103, Mr. T. B. King called the attention of that committee to the revision of the regulation of May 18 and conceded that it was an additional impediment to GI lending at a particularly unfortunate time but felt that the revision was necessitated by section 504 of the Housing Act of 1950, as the Veterans' Administration interprets that section.

We do not believe that the Congress, in enacting section 504, intended that any regulation issued under it would have the paralyzing

effect which has resulted from the revision of May 18. We believe that Congress intended to eliminate excessive or exorbitant charges and not to fix by legislation the price of the loan in the money market. The forces of supply and demand for mortgage money fix its prices in a free market exactly as the same forces fix the prices of lumber or brick or any other component of the cost of a house. If builders are not permitted access to mortgages selling at the going market price, then the only alternatives are: (1) To stop building for veterans; (2) for the Congress to authorize FNMA to resume its purchases of GI loans in order again to support them artificially at par, or (3) to expand the direct lending program tremendously. Enumeration of these alternatives suggests the only possible answer: The price of GI loans should be left to the market place and not fixed by administrative edict.

I would like to call the attention of the committee to a report in this morning's Washington Post, which I would like to read briefly. The title is "Still Rising."

Financial circles were left gaping at the interest cost involved in yesterday's biggest financing venture. Miami, Fla., offered $16 million of general sewer bonds and $11,100,000 of sewer revenue obligations at competitive bidding, but only 1 bid was received. Smith, Barney & Co., Blythe & Co., and Ira Heupt named a net interest charge of 4.32 percent on the tax-exempt bonds, bidding 99 on coupons ranging from 4 to 5 percent. Reoffering yields ranged from 3 to 4.25 percent on 1957-93 maturities.

The reason I brought that out is because here is an indication of the free market operating on the sale of tax-exempt bonds which are netting a yield of 0.432 percent, and which are in competition with the mortgage market, which also has to go to these same sources for

money.

W have suggested to Mr. King that the regulation should be revised to apply only to the fees and charges made by the lender and expressly to recognize that a lender who passes on to the builder the proceeds of a resale of the loan to a secondary investor is in conformity with the regulation, provided that he makes full disclosure to the Veterans' Administration of the price received by him for the loan and the name of the secondary lender to whom he has sold it. We feel that the disclosure provision will act as the protection against abuses, which in our opinion section 504 was intended to curb, and will provide the VA with accurate data on the condition of the mortgage loan market.

Mr. King has stated that he feels that he cannot withdraw or revise the regulation even though he conceded in his testimony it is having a depressing effect on GI lending. We suggest that this committee advise him of its interpretation of the intent of the act and that it was not intended that administrative regulation under section 504 should attempt to fix the market price of the loan but should be restricted to the elimination of excessive fees and charges.

Legislative action, in our opinion, is not required for this.

In previous testimony before this committee, Mr. King seemed to regard interest rates and discounts as two separate and alternate items. This, of course, completely overlooks the workings of the money market. A mortgage loan, just like a bond or any other fixed obligation, sells in the money market for a price fixed by supply and demand for long-term credit. If the interest rate is the figure that the market at that time will accept as sufficient, the loan will sell at

par. The same security a few weeks or a few months later will sell above or below par. Interest rates can vary from day to day and it is the function of the fluctuations in discounts (or in premiums, if the market is favorable) to compensate for the short-term swings. When and if a long-term trend is established, the interest rate on a particular security must be either raised or lowered to conform to the market.

It is not possible to say-as Mr. King did before this committee a couple of months ago that a discount plan is an alternate to an adjustment of the interest rate. Mortgages of all kinds, including of course GI loans, are part of the money market. When Government bonds decline, as they have in the last few months, GI loans cannot possibly be held at par or at any other fixed figure.

If prices of Government bonds and other securities are left to move in a free market, it is impossible to fix the price of GI loans, as this regulation attempts in effect to do. Mortgage loans are subject to exactly comparable market considerations as affect all forms of longterm credit.

I would like at this time for the committee to hear Mr. R. G. Hughes of Pampa, Tex., who will give you a first-hand statement of the effect of this regulation in Texas and Oklahoma. From the information which we have had from many parts of the country, the story which Mr. Hughes will tell you is typical of the situation in many areas, other than New York and New England which are served by large local lending institutions.

Mr. TEAGUE. Now, the bill from which section 504 came was the Housing Act of 1950?

Mr. SPIEGEL. That is right.

Mr. TEAGUE. And that came out of the Banking and Currency Committee. Was there not a report on the bill with an explanation of what they meant by this section? Are you familiar with that?

Mr. SPIEGEL. I have not seen the report. Yesterday at the House Banking and Currency Committee session, Chairman Wolcott did make some remarks with respect to the intent of Congress at the time that it passed section 504. I think that it was clearly pointed out by the chairman it was not the intent to regulate the price at which the loan should be sold in the market.

Mr. TEAGUE. Mr. King has testified that some of these practices, and I suppose he meant discounts, were legal and some were not. Do you know whether any of those that are legal were passed on in this May 18 regulation?

Mr. SPIEGEL. I think there is only one instance of a new interpretation on the regulations of May 18 involving a brokerage commission by a real-estate broker. There have been numerous interpretations under the regulations prior to May 18. I think that everything has been eliminated prior to May 18 under the May 18 regulation.

Mr. TEAGUE. Could not those that were legal have been included in the May 18 order?

Mr. SPIEGEL. Everything has been abolished, including the warehousing arrangement. We have suggested to Mr. King a revision. of the May 18 regulation. I have a copy of that here. If you would like it for the record I would be happy to read it.

Mr. AYRES. We can insert it in the record at this point. (The revision referred to is as follows:)

SUGGESTED REVISION OF VA FEES AND CHARGES SCHEDULE

Change paragraph C to read:

"C. Any charge or fee which results directly or indirectly in the imposition upon or absorption by the builder or other seller, or the veteran, of any cost of obtaining mortgage financing in addition to or in excess of those amounts expressly authorized or allowed by this schedule is hereby expressly prohibited pursuant to the provisions of section 504 of the Housing Act of 1950, as amended, provided that an originating lender shall be in compliance with this schedule, if such lender disburses to the builder, or seller, or veteran the net proceeds of the sale of the mortgage by such lender to a permanent investor, less fees and charges permissible hereunder, nor does this schedule preclude reasonable and customary charges for bona fide real estate sales brokerage. VA Form shall, in addition to

a statement of fees and charges collected by the lender from the builder, seller or veteran, include a statement certified by the originating lender of the mortgage amount disbursed and that such amount is not less than the net proceeds received by the originating lender from the sale of such mortgage to the permanent investor named in such certification.

"For purposes of this schedule, the proceeds of any warehouse, repurchase or other similar agreement for the temporary disposition of the loan shall be considered a sale and shall be reported by the originating lender in its certification, but the lender shall remain obligated to submit an amended certification at such time as the loan is finally disposed of to a permanent investor.

"E. Nothing in this schedule shall be construed in any way to impair or affect the gurantee or insurance."

In addition to this revision of the schedule the builder's certification should be changed by inserting after the word "absorb" in the first sentence the words "directly or indirectly" and eliminate the entire second sentence.

Mr. SPIEGEL. The lenders are not certain today what is legal and illegal.

Mr. TEAGUE. One of the gentlemen before you testified that the FHA put out regulations that were in black and white, that you could read them and you would know what to do and not to do.

Mr. SPIEGEL. That is right.

Mr. TEAGUE. It seems to me the lenders and the builders and the Members of Congress ought to write this out and spell it out so that there would be no gray market and that the builders and the lenders would know what they were doing and being honest according to the law. There is no question about it. Surely this thing is not that complicated. I do not know anything about building and lending. Mr. SPIEGEL. That is our very suggestion, that it be done in that fashion.

Mr. TEAGUE. I hope we can do it.

Mr. SPIEGEL. I hope so, too.

Mr. BONIN. Have you seen this pamphlet, A Statement of Principles and Recommendations Concerning the Organization and Administration of the Federal Government's Housing Agencies and Programs? Mr. SPIEGEL. I have.

Mr. BONIN. Have you seen section 2, page 11? Do you think that would be of any help to this subcommittee and the Committee on Veterans' Affairs?

Mr. SPIEGEL. I think generally, Mr. Congressman, that has to do with the reorganization program that has been considered by other Members of Congress. I am not too familiar with this program. This is not our program. This is a recommendation of the Mortgage Bankers Association. I am not familiar with the details. Mr. BONIN. You have not read it over?

Mr. SPIEGEL. I have read it perfunctorily. I am not entirely familiar with it.

Mr. BONIN. It seems as though it would give the FHA some credit here for having an established policy on this loaning program which apparently is much better than the present regulations in the system as used by the Veterans' Administration.

Mr. SPIEGEL. That is pretty generally true.

Mr. BONIN. You do believe this subcommittee in conjunction with the entire committee could spell out some form of regulations whereby the building and lending institutions could conduct their business affairs.

Mr. SPIEGEL. We do.

Mr. TEAGUE. I would like to ask a question. Do you get a great difference in interpretation by the legal authorities of the Veterans' Administration and the legal authorities of the Federal Housing Administration?

Mr. SPIEGEL. I think that Mr. Neel has put his finger on something that has been very disturbing to us over the years.

The fact is when you do go to the Commissioner of the FHA you get a pretty quick decision. He has his own counsel, and those decisions are made very readily, whereas at the Veterans' Administration it does not operate, as Mr. Neel has pointed out. Mr. King is not on the same level as the other deputies of the Veterans' Administration. To my knowledge, he does not have his own legal staff. All the decisions come out of the Solicitor's Office in that agency. They are concerned with various problems presented to the Veterans' Administration.

Mr. AYRES. The point that you mentioned before, Mr. Spiegel, regarding the cost of constructing homes, is there a big variation in the cost of completing a home to the project builder; as we used the example before, who is building 100, as compared to the man who builds 5?

Mr. SPIEGEL. Sometimes there is, depending upon the efficiency, the buying power, and those things. They are all factors in the ultimate cost of a house.

Mr. AYRES. As was pointed out by the other gentleman, the bulk of this discount has gone on in that group which can do it, which is the big project builder.

Mr. SPIEGEL. I have to disagree with that. I think those discounts are available to the small builder as well as to the large. Those things are not handled by the builders; they are handled through mortgage lenders, and that is the way those things are negotiated. Mr. AYRES. The man who can build the same house to the same plans and specifications, that is, at a cheaper price, has more margin to play with when it comes to discounting the paper.

Mr. SPIEGEL. He may have. I know of many large builders whose overhead is so much greater that they have to absorb that as well. Some small builders operate far more efficiently than large builders.

Mr. AYRES. We are very much aware, as you know, that the present situation is serious, but as Mr. Teague has been constantly asking, and as you have stated in your statement, it might be advisable for you to bring on the witnesses who are experiencing the difficulty firsthand. Maybe they have a plan to offer.

Mr. SPIEGEL. I would like to present Mr. Hughes, our first vice president, who comes from Texas, and who is familiar with the problem in that section of the country.