STATEMENT OF H. R. NORTHUP, EXECUTIVE VICE PRESIDENT, NATIONAL RETAIL LUMBER DEALERS ASSOCIATION, ACCOMPANIED BY J. H. ELSE

Mr. NORTHUP. Mr. Chairman and members of the committee, my name is H. R. Northup. I am the executive vice president of the National Retail Lumber Dealers Association, a Federation of 32 State and regional associations of retail lumber and building materials distributors, covering the 48 States of America.

I have with me Mr. J. H. Else, who is a counselor for our national association.

I wish in behalf of our industry to comment on H. R. 7893, and to say that generally speaking it seems to us to be good legislation, in that it attempts to realistically simplify and place on a more practical basis various Federal aids to private industry and our communities in reaching a solution for our many housing problems.

The economic welfare of the 26,000 retail lumber and building materials distributors in the 48 States of America depends completely upon their ability to serve the new construction and the alteration, maintenance, and repair needs of the home-buying and home-owning public, as well as the farmer.

The retail lumber and building materials distributor, in addition to being the final link in the chain of distribution of building materials between the manufacturer and the consumer, is at the same time, either in his own right or in cooperation with his contractors, the builder of a substantial proportion of the residential structures built outside the metropolitan areas of America.

He is the one principal source of supply and information with respect to the utilization of lumber and building materials for the great volume of maintenance and repair activities that are required to keep the Nation's homes and farms in good condition.

He serves the consumer not only as a supplier, a builder and an architectural adviser, but also as an adviser on sources of credit required to finance the many new construction and maintenance and repair activities which originate with him.

These facts explain the industry's concern with the policies of the Federal Government in respect to housing and the availability of mortgage funds and construction credit.

We believe that the combination of a continuing healthy new house market throughout the country, plus the market for materials and labor created by the desire of people to keep our existing housing inventory in good repair, to modernize, to keep their housing up to date, will result in a continuing high level of construction activity in these fields if the industry can depend upon a reasonably free flow of mortgage and long term consumer credit in all areas of the country.

The Federal Government can, we believe, best lend stability to the construction industry and thereby assist in the general economy, by taking such steps as would enable private industry to become assured of this free flow of credit at all times.

May we say we believe the bill before your committee heads in the direction of meeting the objectives that we seek.

We would like the privilege of commenting briefly on certain phases of the recommendations made under titles I, II, III and IV, and to

call to the attention of the committee certain other facts that we believe would make for smoother operation of the insured mortgage and loan guaranty functions of FHA and VA.

TITLE I-FEDERAL HOUSING ADMINISTRATION

MAINTENANCE, REPAIR AND MODERNIZATION CREDIT

Section 101 of title I of the bill provides for an increase in the maximum amount and terms of property improvement and repair loans. Likewise, it increases the maximum amount and the maximum terms for modernization and repair of apartments and dwellings for two or more families.

This amendment is excellent and has our wholehearted approval. Section 125 of the bill provides for the "open-ending" of FHA insured home mortgages. This type of long-term maintenance and repair credit, while now available through many conventional lenders and insurance companies has not been previously available under the FHA program.

We heartily endorse this provision of the bill and recommend its approval.

For example, Mr. Chairman, take a homeowner whose unpaid mortgage principal has been reduced from $10,000 down to $7,500, and who wants to spend $2,000 modernizing a kitchen or adding a room and bath. With an FHA title I or similar loan, the monthly payments would come to $63.80 per month and the interest rate would be 9.6 percent.

But if the mortgage still has 10 years to run, the $2,000 can be repaid at the rate of only $21.22 per month, assuming the rate of interest on the mortgage to be 5 percent, provided the funds are obtained by adding the cost of the modernization job to the unpaid principal amount of the mortgage.

In other words, the unpaid balance would be increased to $9,500 and the monthly payments over the remaining 10-year period would be increased by only $21.22-about one-third as much as with a title I loan.

We have noted the statements of the Administrator of HHFA and the Commissioner of FHA to your committee, indicating that they approve this amendment, but also expressing their misgivings as to whether or not they could work out such a plan in FHA satisfactorily.

We would like to recommend to the committee and to these gentlemen the study of a legal bulletin of the United States Savings and Loan League, made by Mr. Horace Russell, their general counsel, who I am sure is well known to many members of this committee, dealing with the "open-end mortgage" and containing a tabulation of State positions in respect to this principle of mortgage lending, Mr. Russell's study would indicate that in every State of the Union, with one possible exception, it is possible to "open-end" mortgages to the satisfaction of the lending institutions and their customers.

I might add some further comments, Mr. Chairman, in view of the questions which have arisen during the course of your hearings, I would like to make several comments with respect to the open-ending of mortgages.

The study which I referred to by Mr. Russell describes the legal status of optional future advances as they stand today in the 49 jurisdictions, both under the mortgage laws of the State and by court decisions in these various jurisdictions.

The committee, I feel sure, would be interested in knowing that such institutions as the Prudential Life Insurance Co. of America, as was testified this morning, the National Life Insurance Co. of Vermont, the Northwestern Mutual Life Insurance Co., and the New York Life Insurance Co., open-ended mortgages, and that the third largest savings bank in America, the Dime Savings Bank of Brooklyn, will also apply this principle to its mortgages.

There is ample evidence that lending institutions of one type or another in every State of the Union, including the District of Columbia, but excepting the State of Texas, are applying the open-end principle to mortgages. In Texas, the homestead laws presently appear to prevent the use of this instrument, but in Texas we feel that a way can be found, and will be found, to make this principle of lending applied, because it is needed badly in that State.

Another problem that I think has not been adequately explained to your committee is the question of liens and title search. It would be assumed that a lending institution, before making a future advance on a mortgage, would determine the lien status of the property through a title search.

Title searches normally cost the customer anywhere from $100 up, but today there are title companies, such as City Title Insurance of New York, Los Angeles Title of Los Angeles, Chicago Title and Trust, the Title Insurance Co. of Minneapolis, and Union Title in Indianapolis, which make these title searches for as little as ten dollars per thousand dollars of loan, and some for less than that amount.

This makes this type of loan a little more attractive to the home owner. All of these facts, we believe, prove that where there is the will, this is the most practical means of providing a form of badly needed long-term credit for modernization and repair activities.

We heartily endorse the amendments in sections 104, 105, and 106 of the bill relating to section 203 of the National Housing Act. The CHAIRMAN. May I inquire of the staff whether Mr. Russell's study is available to us.

Mr. FINK. It is available, Mr. Chairman.

The CHAIRMAN. Very well. Please proceed.

Mr. NORTHUP. These proposals providing for equal treatment in FHA programs between existing and new housing;

To consolidate and simplify the financing of 1 to 4-family dwellings under section 203;

To increase the mortgage limits to $20,000 on 1- and 2-family units, and adjust upward the limits for 3- and 4-family units;

And the proposal to level out the downpayment schedule so that there is no longer a downpayment penalty for those homeowners purchasing homes in the eleven to fifteen thousand dollar price brackets;

Plus the proposal to extend the mortgage to 30 years, will serve to maintain our new house volume and assist many families who need and desire new housing to obtain it with the more liberal and equitable downpayment terms.

We observe that the bill authorizes these more liberal terms only by providing discretionary authority to put these terms into effect. We recall Administrator Cole's statement before your committee that if the discretionary authority was used it would probably not be used to the full extent of the authorization.

It seems to us that if these terms are worthy of consideration they should be controlled only by statute; otherwise industry, at least that portion of the industry that relies on FHA and VA financing, would be kept in a constant state of uncertainty.

It seems to us that the discretionary authority in respect to these liberalized terms is in effect the holding over the heads of the home building industry another type of regulation "X" which would enable the administration and not the Congress to exercise a form of direct and selective control over FHA and VA lending which could be at odds with actual demand and need for housing as seen by the homebuilding industry.

We heartily approve section 126 of the bill which terminates certain authorities previously granted the FHA which are in general no longer useful to the housing economy.

TITLE II-HOME MORTGAGE INTEREST RATES

The provisions in this title to assure that the interest rates on insured and guaranteed mortgage loans will be adapted to current market conditions and that they will be competitive wtih other demands for savings is in our opinion one of the most encouraging features of this bill.

We heartily approve the provision of section 201 which would authorize the President, from time to time, to establish within certain limits maximum rates of interest on residential mortgages insured or guaranteed under the FHA and VA programs.

We believe this provision should result in assurance that residential mortgage financing will be permitted to compete for its fair share of the funds available nationally for investment.

If the FHA and VA programs are to serve their real purpose the interest rates involved in these programs must be realistic and must be allowed to rise or fall to meet the changes that occur in the investment market.

This authority, to the extent exercised, would in our opinion, assure prospective home owners seeking loans that funds for such loans would be more readily and generally available.

Assuming that Congress grants to the President authority to establish realistic interest rates in FHA and VA, and assuming this authority is exercised, the fact remains that there has been in the past and will undoubtedly be in the future certain localities in this country with a shortage of local capital for investment in residential mortgages.

This shortage, in our opinion, might well be alleviated if the Administrators of FHA and VA would recognize geographical differences in the market and permit additional originating and serving fees or charges to encourage lending institutions located in areas where there is more than an ample supply of money to make funds available for mortgages in the outlying areas.

A major problem of the industry is the unequal distribution of credit and mortgage funds rather than lack of volume of such funds available on the overall national scale.

Subsection 4 of section 201 of the bill appears to give the President the authority to establish maximum fees and charges covering the cost of the origination of mortgages and the maximum special service charges found to be appropriate by the President. However, it is not clear whether there is authority granted to vary the service charges in different areas of the country. We believe consideration should be given to the granting of this authority if such authority is not provided in the bill.

An an industry we have felt that there are four major actions that might be taken by the Government which would greatly influence the construction of new housing and the repair and modernization of existing homes in all areas of the country.

First, there is a need for assurance of a realistic interest rate in the FHA and VA, which is accomplished by title II of the bill.

Second, there is a need for more adequate and longer terms for modernization and repair credit. This is accomplished in section 101 of title I of the bill and in the open-end provision in section 125. Third, we have felt there must be some recognition of the need for additional servicing costs for mortgages made in outlying areas and towns of the country.

Fourth, we are convinced that there is a need for a secondary market facility which would provide existing and prospective mortgage lenders with a secondary market for residential mortgages. We believe that such a secondary mortgage facility would provide greater assurance of an even flow and equal distribution of mortgage funds throughout the country and would provide an additional stabilizing influence to the mortgage market. Lending institutions in outlying areas who have a limited amount of funds to invest in mortgages could use the facility to provide a turnover in such funds by disposing of mortgages to the facility.

We disagree with those who feel that provision for a flexible interest rate and an additional service charge would eliminate the necessity for a secondary mortgage facility. Time after time, over a period of years, we have been confronted with the situation where insurance companies and mutual savings banks representing large accumulations of funds in the East have for periods of time withdrawn completely from the mortgage markets in certain areas of the country. Certainly, these companies should have this right.

However, we feel that the existence of a sound secondary market facility properly organized would serve to level off some of the peaks and valleys in the mortgage market and provide a more even flow of funds for mortgages into outlying areas.

TITLE III. FEDERAL NATIONAL MORTGAGE ASSOCIATION

We do not feel that the proposal contained in the bill will solve the industry's secondary market problem.

As we understand the purposes of a secondary market facility, they are (1) to aid in evening out variations in the volume of mortgage funds that come from the large pools of savings represented by the