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Such a result could be obtained in many cases by removing the existing limitation on the use of the currently authorized $7,500 maximum by a simple amendment to section 501 (b) of the Servicemen's Readjustment Act of 1944, as amended, permitting the $7,500 maximum to apply to loans for alterations, improvements, and repairs, as well as the purchase and construction of residential property and by removing the April 20, 1950, date limitation.
Section 201 of the bill authorizes the President, on the basis of reviews of conditions affecting the mortgage investment market, and after taking into consideration conditions in the building industry and the national economy, to establish from time to time
(1) The maximum rates of interest (exclusive of premium charges for insurance and service charges, if any) for various classifications of residential mortgage loans insured or guaranteed or made under the National Housing Act, as amended, or the Servicemen's Readjustment Act of 1944, as amended: Provided, That no such maximum rate of interest shall, at the time established by the President, exceed 21⁄2 per centum plus the annual rate of interest determined by the Secretary of the Treasury, at the request of the President, by estimating the average yield to maturity, on the basis of daily closing market bid quotations or prices during the calendar month next preceding the establishment of such maximum rate of interest, on all outstanding marketable obligations of the United States having a maturity date of 15 years or more from the first day of such next preceding month, and by adjusting such estimated average annual yield to the nearest one-eighth of 1 per centum.
As you know, under present law the Administrator of Veterans' Affairs is authorized, with the approval of the Secretary of the Treasury, to establish such rate of interest, not in excess of 42 percent as he may find the loan market demands. The National Housing Act provides somewhat similar authority for adjustment of maximum interest rates by FHA, up to a maximum of 5 percent for most home mortgages, although section 203 provides authorization for rates up to 6 percent if the Commissioner finds that in certain areas or under special circumstances the mortgage market demands it. Since there is adequate authority in the Federal Housing Commissioner to authorize an upward adjustment of the interest rate on FHA loans, as described, the effect of proposed new section 201 is to make an upward adjustment of the interest rate for GI loans possible if deemed necessary because of changing market conditions, and to vest the authority for adjusting both FHA and VA interest rates in the President.
In this connection, it should be emphasized that, under the provisions of H. R. 7839, the figure arrived at by the formula approach is a maximum-a ceiling above which the President may not go. There does not appear to be any compulsion implied in the bill for maintaining the effective FHA and VA rates at or close to the ceilings. is worthy of note that the 22 percent spread contemplated by the proposed provisions exceeds that which experience has demonstrated is necessary.
In view of the considerable administrative experience to the effect that maxima tend to become the minima as well it would appear worthy of consideration that the proposed authority be vested in the President without prescribing any limit or formula. It is also desired to point out that in view of the considerable range of geographic disparity which has been demonstrated in the market in respect to the flow of mortgage money into the various areas of the country it is apparent that incident to the fixing of rates under the proposed new
authority there will be for consideration the matter of whether differing rates should be established. It would be clarifying if the committee were to indicate expressly whether or not it contemplates that the establishment of such varying rates would be within the authority prescribed in the bill.
There is also a technical question with respect to whether the average yield on all marketable Government bonds with a maturity of 15 years or more is the best base for comparison with FHA and VA interest rates. While the majority of GI loans are written for terms of 20 or 25 years, under the statutory maximum of 30 years, the best available estimates indicate that such mortgages will probably have an average life of not over 10 or 12 years. Accordingly, it may be well to consider the exclusion of extremely long-term issues such as the 314 percent issue maturing in 1983 from any average used for comparison with mortgage interest rates. From a technical viewpoint, it is believed that the average yields on Government bonds with from 8 to 15 years remaining before the first due or call date would be more nearly comparable with the expected life of FHA and VA mortgages. Under section 201 (4) of the bill the President may establish maximum fees and charges which may be imposed or collected in connection with the origination of residential mortgage loans which are to be guaranteed or insured under the Servicemen's Readjustment Act, or the National Housing Act. Such authority extends not only to the charges made in connection with the guaranteed or insured loan to the purchaser of the unit, but also includes fees and charges that may be imposed in connection with non-Government assisted construction financing obtained by the project builder or, for that matter, an individual lot owner desiring interim financing to construct a some on his lot, who contemplates permanent financing in the form of a guaranteed or insured loan.
It is not known whether this authority in the President will be exercised immediately following enactment of the bill, or only if abuses develop in connection with the fees and charges imposed or collected incident to the extension of construction or so-called permanent financing.
In conjunction with the foregoing provision it is noted that section 203 of the bill would repeal section 504 of the Housing Act of 1950, as amended. The Veterans' Administration concurs in the proposal to repeal section 504 and heretofore recommended such repeal to the Administrator of the Housing and Home Finance Agency for the reasons set forth in the attached copy of a letter dated December 22, 1953.
The CHAIRMAN. Without objection, the letter may be inserted in the record.
(The letter referred to is as follows:)
Hon. ALBERT COLE,
Administrator, Housing and Home Finance Agency,
Washington 25, D. C.
DECEMBER 22, 1953.
DEAR MR. COLE: This is in response to your request of December 14, 1953, that I advise you regarding the experience of the Veterans' Administration with section 504 of the Housing Act of 1950, and that I state my views as to whether it has proved to be workable and effective.
It is considered advisable at the outset to advert to the situation which existed when the Congress originally enacted section 504 of the Housing Act of 1950. The following is quoted from Conference Report No. 1893, dated April 5, 1950, which accompanied S. 2246:
"Section 504 of the Senate bill contained a provision directed against the practice of lenders requiring excessive charges in consideration for making FHAor VA-guaranteed loans. In lieu of the provision of H. R. 6070 that no otherwise eligible mortgages could be purchased by the Federal National Mortgage Association unless the mortgagee certifies that no bonus, fees, or other charges in excess of those expressly authorized by the association has been or would be charged or received by such mortgagee to or from the builder or the mortgagor in connection with such mortgage, the Senate language specifically authorizes and directs both the Federal Housing Commissioner and the Administrator of Veterans' Affairs to prescribe the maximum fees which could be charged in connection with financing of construction or sale of housing built or sold with the assistance of any FHA-insured or VA-guaranteed loan, and to require certification from the mortgagee that no excess charges have been imposed by such mortgagee. These regulations would apply not only to charges in connection with the particular mortgage loans insured or guaranteed by the Government, but to charges in connection with other loans made for the construction or sale of housing involved. The conference substitute contains the Senate language."
In the report from the Senate Committee on Banking and Currency on the amendment of S. 2246 (Rept. 1286, dated February 24, 1950) it was stated: "With respect to these GI-guaranteed loans, a committee amendment previously reported would have required the mortgagee, as a condition to the sale to the FNMA, to certify that no bonus, fee, or charge, other than those approved by the FNMA, has been or will be received in connection with the placement of the loan. The amendment was directed against a practice in some areas of payments by builders to lenders in order to get them to make 4-percent GI loans for resale to FNMA. This practice tends to increase the price of housing sold to veterans and to defeat the purpose of the 4-percent interest rate limitation for GI loans. Your committee has now deleted this amendment, which would have applied only in the case of FNMA purchases of VA-guaranteed loans, and in lieu thereof is recommending a provision to be included in title VI of the amendment (sec. 604), which would specifically authorize and direct both the Federal Housing Commissioner and the Administrator of Veterans' Affairs to prescribe maximum fees which could be charged in connection with the financing of construction or sale of housing built or sold with the assistance of any FHA-insured mortgage or VA-guaranteed loan, and to require certifications from the mortgagee that no excess charges have been imposed by it. Regulations so issued could apply to all charges made in connection with financing of housing built or sold with such assistance, even though some portion of the financing was not assisted by the Government. Thus the maximum benefits from such a provision would be extended to all purchasers of homes for which loans are guaranteed or insured by the Government, whether or not the loans are sold to FNMA."
It should be borne in mind that initially what the Congress proposed was a control on fees chargeable by the mortgagee only with respect to those mortgages being tendered to Fannie May. At that time the Federal National Mortgage Association was issuing advance commitments and many such commitments were held by lenders. Furthermore, the mortgagee could sell all of his GI loan originations to FNMA and those lenders who had the Fannie May commitments were, in some areas, charging builders very substantial sums in order to obtain the financing which eventually resulted in a mortgage owned by the Government. The lender was (in effect) exacting a fee from the builder or sponsor for obtaining GI financing that actually represented the use of Government funds. It is considered that this was the practice Congress was mainly concerned about and was desirous of curbing, although there was, in addition, concern that the cost to the purchaser of the house would include this charge to the builder. As you know, Congress has changed the FNMA advance commitment authority. Such change together with other developments concerning the purchase of mortgages by Fannie May have operated as effective curbs on the practice (the charging of fees for what really was the use of Government funds) which the Congress was seeking to control when section 504 was originally enacted on April 20, 1950.
Prior to June 30, 1953, section 504 of the Housing Act of 1950 directed the Administrator of Veterans' Affairs (and the Commissioner of the Federal Housing Administration) to control the charges and fees lenders could impose on the builder or seller of residential construction being sold with the aid of Government guaranteed or insured financing. The statute required controls on the charges and fees that lenders could impose against builders not only in connection with the guaranteed or insured financing to the persons purchasing the completed units but also in connection with conventional construction financing obtained by the builder to construct the units. The Federal Housing Administration and this agency took coordinated action to issue appropriate regulations and approved schedules of permissible fees and charges. The respective agencies construed the statute as prohibiting the payment or absorption by builders of the discounts incurred by originating lenders when disposing of loans guaranteed or insured by such agencies to investors, and the schedules prohibited lenders from passing such discounts on the builders. As you know, VA guaranteed 4-percent loans were selling in the secondary market at substantial discounts. FHA insured 42-percent loans had a somewhat more favorable market. In this economic market lenders and builders sought ways and means of legally circumventing the prohibitions in the VA regulations and schedules against the payment or absorption by builders of the discounts being incurred by lenders when disposing of 4-percent loans in the secondary market and a situation developed which was not satisfactory from an administrative standpoint, or from the standpoint of lenders and builders.
On June 30, 1953, Congress endeavored to cure the situation by an amendment to section 504 which has the effect of authorizing builders to pay or absorb the discounts and other charges lenders originating Government guaranteed or insured loans incur when disposing of these loans to secondary investors. It is true that under this amendment lenders originating GI loans for retention may not make any charges to builders in connection therewith since the status contemplates the absorption or payment of discounts by builders only in the event the loans originated are sold. The industry has overcome this obstacle by having the loans origiated by builders or by their subsidiaries or affiliates who thereafter sell the loans to the "permanent" lenders at a discount. You will recognize that this arrangement is necessary in order to cope with the competitive advantage which the statute currently affords to secondary investors who acquire loans by purchase rather than through direct origination. Such local institutions as savings banks, savings and loan associations and others that ordinarily would originate loans on local properties for retention are naturally adverse to doing so at a par cost when their position yieldwise will be improved by acquiring loans through purchase.
Section 504 as it currently provides precludes effective control over the amount of the charges against builders since the statute clearly contemplates that builders may pay whatever discounts and charges secondary investors actually charge the lenders originating loans guaranteed or insured by the Federal Housing Administration or the Veterans' Administration. There obviously is little point in controlling the charges a lender makes in connection with conventional construction financing extended to the builder so long as the builder can originate the "takeout" loans and thereafter sell them to the construction lender at whatever discount is agreed upon. The enactment of legislation prohibiting builders from originating GI loans directly or through the medium of a subsidiary or affiliate would not be a remedy because it would only serve to continue in effect and to accentuate the competitive advantage which investors acquiring loans by purchase currently have under section 504 over investors acquiring loans by origination. These factors and the fact that the practice which mainly induced the original enactment of section 504 no longer obtains leads this agency to recommend that section 504 be repealed. The effect of such a repeal would be that both this Agency and the Federal Housing Administration would con ine its control to the regulation of the charges lenders may make against the borrowers obtaining guaranteed or insured loans while control of charges against builders both in respect to guaranteed and insured financing to persons purchasing homes and to conventional construction financing obtained by the builders would be determined by competitive forces. The Veterans' Administration is of the opinion that this is desirable and that Government controls should exist only if practicable and clearly necessary. The repeal of section 504 would also allow local investors such as savings banks and savings and loan associations to compete on equal terms with secondary investors without the necessity
for resorting to the indirect origination of loans by builders or their subsidiaries or affiliates.
We are not unmindful that some contend that builders do not absorb discounts or other charges made by lenders but merely pass such charges to the home purchaser by increasing the sales price of the homes. It is the opinion of the Veterans' Administration that this contention is not generally valid in that it overlooks the appraisal controls which this agency can exercise through refusal to recognize increases in reasonable value. Regional offices of this agency have been exhorted to exercise extreme care to avoid yielding to any upward pressures from builders to permit the reflection of discounts through higher reasonable values. While we do not deny the possibility or even the probability that in some instances the builder is able to obtain higher valuations sufficient to recompense him for all-or at least part of whatever discount he may be required to pay for his financing, we are of the opinion that such instances are a minority and that in the great majority of cases it is unlikely that a builder is able to recoup his discount costs through higher reasonable values. In any case, there is no reason to believe that the builder would be more successful in having his discount absorptions reflected in the reasonable value if section 504 were to be repealed, since our instructions requiring the vigilent examination of appraisal requests to avoid the reflection of discounts will remain unchanged. This would be consonant with the intent manifested by the Congress when the provisions of section 504 were liberalized to authorize builders to absorb discounts since the Congress contemplated that the control against builders passing discounts on to veterans would, in fact, be the appraisal control. In that connection the conference report (Report No. 692, dated June 30, 1953) which accompanied S. 2103, states as follows:
"In adopting the language of the House amendment, the committee of conference wishes to make clear that the Veterans' Administration may take reasonable measures to assure that any discounts or warehousing or similar fees which may be absorbed by the builder are not to be passed back to the veteran purchaser. Any such cost cannot be passed back to the veteran if the certificate of reasonable value, issued by the Veterans' Administration in connection with the sale of the property, is in fact a realistic value. In connection with the sale of a property guaranteed or insured by the Veterans' Administration the VA issues a so-called certificate of reasonable value, commonly referred to as a CRV, which sets a maximum limit at which the property may be sold and the veteran still obtain an insured or guaranteed loan upon it. This is the control mechanism to guard against abuses in either financing cost or construction practices. Obviously if the CRV is a realistic figure such abuses cannot exist."
Historically, there has always been a geographic variance in the adequacy of the supply of mortgage money. As a consequence certain mortgages would command a premium in some areas of the country while in other areas the same mortgage would be sold at a discount. Within reasonable limits this is an entirely proper situation. On the other hand, there is always the possibility of the practice exceeding normal bounds and unquestionably it would be highly desirable to endeavor to keep it within reasonable limits. That the effectuation of such control through restrictive legislation is not practicable is indicated by the experience of this agency in its endeavor to administer effectively the provisions of section 504 as they existed prior to June 30, 1953. Since the prime motivating factor which originally prompted the passage of section 504 no longer obtains and since the recent amendment to the statute does not afford any really effective control over charges against builders this agency is of the opinion that the preferable course action is to recommend to the Congress that the statute be repealed. We think the clarifying effect of such repeal would have a healthful and desirable effect of encouraging many responsible investors to resume or augment their participation in GI loans as it would eliminate the concern over the possibility that inadvertently or otherwise the fees attendant loan origination may have been in derogation of the law as it now exists.
H. V. HIGLEY, Administrator.
Mr. KING. With the repeal of section 504 of the Housing Act of 1950, as amended, the VA would, in the absence of the establishment of fees and charges maxima by the President only regulate the fees and charges that lenders may impose directly against the veterans obtaining GI guaranteed or insured loans. It would not attempt