Mr. AYRES. But a recommendation that you felt Congress was in accord with, Congress as a whole, would be helpful, is that right? Mr. KING. I am certain it would be, Mr. Chairman.

Mr. AYRES. We will have to recess. We will reconvene at 1 o'clock. I think, Mr. King, in all fairness to you, it will not be necessary to go into any more detail at 1 o'clock unless you have something you want to discuss.

Mr. KING. I would like to suggest that if it is the disposition of the Congress to modify these things in a broader manner than would be proper with section 504 standing as it is, it is my understanding that the Senate Committee on Banking and Currency will be in executive session on Monday morning, and I have heard this only third-hand, to consider its final draft or its final action on S. 2103. That would afford an opportunity to put in the law at an early date any desired amendment of section 504.

Mr. AYRES. Thank you very much, Mr. King.

We will meet again at 1 o'clock this afternoon.

(Whereupon, at 11:15 a. m., the committee was recessed, to reconvene at 1 p. m., the same day.)

AFTERNOON SESSION

Mr. AYRES. The committee will come to order.

Our next witness will be the representative of the Mutual Benefit Life Insurance Co., of Newark, N. J., Mr. Milford A. Vieser.

STATEMENT OF MILFORD A. VIESER, VICE PRESIDENT, THE MUTUAL BENEFIT LIFE INSURANCE CO., NEWARK, N. J.

Mr. VIESER. My name is Milford A. Vieser. I am vice president of the Mutual Benefit Life Insurance Co., of Newark, N. J., and have charge of their mortgage loan and real estate investments. I am also chairman of a joint committee on Housing and Mortgage Lending of the Life Insurance Association of America and the American Life Convention, 2 associations of life insurance companies with a combined membership of 240 companies holding approximately 98 percent of all life-insurance company assets in the United States. I appreciate the opportunity afforded by your invitation to appear here today and discuss VA guaranteed loans.

Since the start of the Veterans' Administration mortgage program life-insurance companies have been very substantial investors in VA guaranteed home loans. At the present time the companies have in their portfolios $3.5 billion of these loans. Historically, mortgage loans have been a large investment outlet for life-insurance companies. Today about 30 percent of our aggregate assets consist of such loans. We have a deep interest in VA guaranteed mortgages because they are one of the major components of the mortgage loan field and represent a large part of our mortgage-loan portfolios.

In recent months there has been a lessening of life-insurance company investment activity in VA home mortgages. Available data indicate that for the first 4 months of this year United States life insurance companies acquired $106 million of these loans as compared with $205 million the first 4 months of the previous year. This decline

in activity is traceable primarily to the exceptionally heavy demand for all types of credit, a demand presently far in excess of the supply. There is not only this heavy demand for credit, but today life-insurance companies have less money to invest in mortgages than in previous years. Since World War II there has been a tremendous shift in their investment portfolios. During the war company funds virtually ceased flowing into the conventional forms of investments and moved instead into the financing of the war through the purchase of Government bonds. Life-company investments in Government bonds increased from $5.8 billion in 1940 (19 percent of assets) to $21.6 billion in 1946 (45 percent of assets). After the war. life-insurance funds were supplied to meet the peacetime needs of the Nation, particularly the acute housing shortage. The mortgage loan portfolios of the companies in this postwar period showed a net increase from $7.1 billion in 1946 (15 percent of assets) to $21.2 billion in 1952 (30 percent of assets).

This transition was accomplished in part by the sale of securities as well as the investment of a part of the asset growth of the companies. Today this transition has been virtually completed and the great majority of companies have regained their historical position in the mortgage-loan field. In the near future this means that the volume of life-insurance company funds going into all types of new mortgages will depend largely on the repayments on existing mortgages and that portion of the asset growth of the companies which management believes should be allocated to mortgage investments to maintain sound investment portfolios.

Another reason for the lessening of activity in VA loans is the failure of these loans to remain competitive with other forms of investments. The recent increase to 41⁄2 percent on VA loans will prove an effective means of securing more life-insurance funds for VA financing only when there is a decline in the exceptional demand for credit and a softening of interest rates generally. Several months ago some felt that an increase of rates on VA loans to 4%1⁄2 percent would produce a more satisfactory market for those loans. Since that time, however, the demand for credit has increased and all other interest rates have risen.

The interest rates in all segments of the economy are uncontrolled and respond to general market conditions, except interest rates on Government insured and guaranteed mortgages. The latter rates continue to be fixed and consequently funds do not flow into VA loans when the fixed rate is below the rates available in the general market. This situation could be improved by making VA mortgage rates flexible so that they will adjust to free market forces. Giving official approbation to selling Government mortgages at a discount or premium would be one way of introducing some flexibility in the VA loan rate.

The life-insurance business recognizes a responsibility to supply funds for housing our people. It also recognizes a responsibility to provide funds for the great industrial expansion of our country. The allocation of funds to these respective areas of investment have been and will continue to be made in the public interest, with due regard to the welfare of our policyholders and consistent with prudent management.

Mr. AYRES. You have made a very clear presentation, Mr. Vieser.

I presume that we can draw from your statement that the effect of the May 18 order more or less takes you out of the market.

Mr. VIESER. There is no question that the May 18 order has had a substantial effect on the VA market, that is, a detrimental effect. There is no easy and immediate solution to the problem, except, of course, if the interest rates soften, or this great demand for credit declines.

It would seem, however, that flexibility of mortgage rates and this approbation of discounts would materially strengthen the market. Mr. AYRES. Are you of the opinion that if discounting is permitted, or if it is not declared illegal, that the veteran can receive protection if you have realistic appraisals?

Mr. VIESER. I am not apprehensive about the effect of legalizing discounts on the veteran on his purchase price. One reason is because there has been something new added, largely the acute shortage of housing has caught up and competition has entered into the picture. I think that is the big point. I am not apprehensive about the effect on the veteran.

Mr. AYRES. Looking at this problem today as compared with a year ago, the market is far more competitive in the building industry. Mr. VIESER. Absolutely.

Mr. AYRES. Then your recommendation is that something be done to make it possible for you to get the yield that you can get from other investments from the VA mortgage field.

Mr. VIESER. To put it another way, certainly a solution must be found to prevent this recurring crisis, and the sudden stoppage of mortgage funds to VA and FHA. It is not good for the lenders, the builders, or the economy.

Mr. AYRES. Being as familiar with this problem as you are, Mr. Vieser, and putting yourself in the position of the loan guaranty officer of the Veterans' Administration, would you have been able to anticipate in advance what the effect would be of issuing an order similar to that which was issued on May 18?

Mr. VIESER. I do not want to put myself in his position, but certainly we have known for some time that unless insured and guaranteed funds could compete successfully in this market, they could not attract lenders. Most definitely I feel the first solution is a fully flexible interest rate. There is no question that the veteran is entitled to, and should receive, some benefits in housing. I think his primary concern, largely because of his age, is a very small, or no downpayment, and a long maturity, because his immediate interest is: How much a month does it cost? I do not think it is fair to translate the extrainterest cost over the full maturity of 30 years because we have ample evidence that American housing transfers frequently, particularly in that age bracket, as their children get older and they need other housing. It is anywhere from a low of 7 years to a high of 12 years' turnover. It will not have a material effect on the monthly payments to the veteran.

Now, if you make a completely flexible interest rate which will unquestionably attract lenders and you still must give further consideration to veterans, then I think further studies must be given to better methods than have prevailed heretofore.

Mr. AYRES. Thank you very much.

We have a representative here from the Chase National Bank, Mr. John J. Scully, vice president.

STATEMENT OF JOHN J. SCULLY, VICE PRESIDENT, CHASE NATIONAL BANK, NEW YORK

Mr. SCULLY. I want to thank you for the opportunity of coming down for today's hearings. I am John J. Scully, vice president of the Chase National Bank, the city of New York. in charge of mortgages and real estate.

I do not have any prepared statement. I will say, however, I have been in the mortgage and real estate business for 27 years, and at no time during that period, to my knowledge, has there ever been an occasion when mortgages were not freely marketable at discounts and premiums, depending entirely upon the circumstances-the economic situation, the value and type of property. The discounting of mortgages is nothing new, and it is nothing peculiar to the veteran loans. It has been going on and will go on for years to come. There is no other way by which people who have investments in mortgages and have a flexible, liquid method of transferring from one type of investment to another.

An attempt, in my opinion, is being made to peg GI mortgages at par. I do not know what other reason there is for these regulations. Mr. AYRES. Were you here this morning? Did you hear Mr. King's testimony?

Mr. SCULLY. Yes.

Mr. AYRES. He pointed out rather specifically that his order did. peg them at par.

Mr. SCULLY. I do not think it has been successful. I think the net effect of the order has been to drive investors who might have been willing to come back into the market completely out. You might be interested in my giving you a brief history of the Chase Bank's operation in this field. We originally started the warehousing of mortgages perhaps 5 or 6 years ago. At this point I want to say that warehousing is a term that has grown up as a trade name in one of the phases of mortgage financing. What warehousing is is making collateral loans against mortgages. That has been done for years and years and years, but it was done on a basis of individual mortgages, individual credit applications, and they were called collateral loans. They were not referred to as warehousing. But when you build up a volume of business such as has been done in this country, you fasten a tag on it and that tag is warehousing. Everybody in the industry refers to collateral loans against mortgages as warehousing.

We have operated two different types of warehousing arrangements. The original warehousing deals were against commitments of another financial institution to purchase identified mortgages at a later date. We made the collateral loan in the meantime so the mortgage originator would have the funds to originate these mortgages for future delivery to insure companies, savings banks, pension funds, and other investors in the permanent mortgage.

It then became advisable, I think-and we gave it serious consideration to establish what we refer to as a noncommitted warehousing loan. We necessarily, in setting up those lines of credit, from time to time tried to outguess-there is no other word for it-what the market for those mortgages would be, and for that reason the discount figure goes up and down.

I might say it has been going down and not up. When we went out of business we were discounting GI loans at 94. That volume, just so that you gentlemen will have some idea of the overall picture, in the Chase National Bank reaches a high of $164 million.

Mr. MAILLIARD. You were discounting them at 94 at the 4 percent rate; is that correct?

Mr. SCULLY. That is right.

Mr. MAILLIARD. You have not been in the market since it has been 41⁄2 percent?

Mr. SCULLY. No.

We were effectively ruled out of the market.

Mr. MAILLIARD. Would you hazard a guess as to what the discount rate would be now?

Mr. SCULLY. Yes, I can tell you what it would be; it would be 94 for the 42's.

Mr. MAILLIARD. The market has declined enough in the intervening time to offset the increase in the interest rate?

Mr. SCULLY. That is right. You see, the market, as near as we can put our finger on it, for the 4 percent loans was ranging 94 and 95, and an investor who purchased those loans at that price got a net return, after paying the local servicing costs, of about 4.21 percent. Now, I feel if we had a free market for GI loans 41⁄2 percent would probably be 97% to 98%. The reason I say that is because on that basis they would get exactly the same return as they have been getting on the 4-percent mortgages, net to them.

As to the availability of money to carry on this sort of an operation, I do not know of any other large commercial bank today that could handle it in the same volume that we have in the past of the competition for other types of investment and the demand upon the banks for credit of all types. With the money market as tight as it has been, the deposits, the assets of the large banks have gone down and the demand for loans has gone up. The deposits go down because with rates as high as they are the large depositors in the banks are using more of their moeny rather than maintaining large balances.

As to the confusion and the unmarketable situation we find ourselves in, I would just like to hold this agreement up before you. This [indicating] is commonly known as a warehousing agreement. That document today is legal in one transaction and illegal in another, depending upon the date of issuance of the certificate of reasonable value.

Mr. AYRES. If the certificate was issued prior to the 18th you are in the clear?

Mr. SCULLY. It is good. It is a legal transaction. If it is issued after May 18 it is illegal.

Mr. AYRES. Will you repeat that?

Mr. SCULLY. If the certificate of reasonable value was issued prior to May 18, this is a legal contract for the Chase National Bank and a borrower to enter into. If the certificate of reasonable value is issued

after May 18, it is illegal.

Mr. AYRES. And you would be subject to prosecution?

Mr. SCULLY. That is right.

Mr. AYRES. If you engaged in it?

Mr. SCULLY. That is right. For that reason we have completely withdrawn from the warehousing GI loans.