banks and the life insurance companies and (2) to help make these savings more readily available in small communities and regions remote from the sources of funds.

There seems to be industry opinion that a secondary market facility should not be looked upon as a primary source of mortgage money and that it should be so administered as to discourage its use when funds are obtainable from normal sources.

In order to prevent the misuse of the facility, it is apparently felt necessary that there be some penalty involved in dealing with it. On the other hand, this penalty should not be so severe as to prevent its operation when there may be a real necessity for it.

The proposal in title III of H. R. 7839 involves a penalty of such severity as to render the plan wholly impracticable.

If we understand the proposals correctly, an institution selling mortgages to FNMA might be required to absorb a discount of one or more points, as may be determined by FNMA's estimate of the market, and, in addition, might be required to pay charges and fees for doing business with the institution-section 304a. Present charges under the 1-for-1 plan, we understand, come to 12 percent of the outstanding amount of the mortgages sold.

On top of discounts and charges, the seller would also be required to make to FNMA a nonrefundable capital contribution equal to 3 percent of the outstanding amount of the mortgages sold-section 303b. Since this contribution carries with it a certificate convertible to stock at such time as the Government capital in FNMA might be retired-section 303c-it would be considered as the purchase of a right and therefore a capital investment not deductible for tax purposes as a business expense.

This feature becomes all the more onerous in view of the circumstance that the prompt repayment of the Government capital is an extremely unlikely contingency. Before any of the Government investment could be repaid, it would be necessary for FNMA to have accumulated from earnings, and to maintain intact, an amount of $100 million-section 303c.

Before, however, any funds could be set aside for this purpose, it would be necessary to pay to the Treasury (1) an amount equivalent to the normal corporate income tax on its earnings-section 309cand (2) cumulative dividends, as determined by the Treasury, taking into consideration the average yield on outstanding Government obligations--section 303a. Furthermore, funds from earnings may be set aside as reserves-section 303b.

It is difficult to see how even a beginning of the repayment of Federal capital could be made within 10 years, and it would be possible to defer it indefinitely. In any event, no dividends could be paid on the private contributions until all the Federal stock was retired. Even if the Federal stock were fully retired, there is no assurance that the private investment would obtain dividends or would be redeemable. Presumably, additional legislation would be required-section 303g.

In short, the 3-percent payment must be considered a dead loss to the contributor and, in effect, no more than a fixed, but nondeductible, discount to be added to whatever other discounts and fees FNMA might charge. The result would be a situation as difficult as that

which prevailed in the private market during the period of tightest money in 1953. It would mean to us that either the homeowner, the originating lending institution, or the builder would have to absorb these charges. None of these people would or should be forced to absorb all of these charges.

In order for the plan to be workable, it would be necessary to reduce the amount of the contribution. Possibly the answer is to change its form to capital stock, retirable at such time as the mortgages sold to FNMA were liquidated, and earning dividends at such time as the investment remained in FNMA.

This answer, we understand, has precedent in the land-bank system, in which an initial Federal investment has been successfully retired. It would constitute a sufficient drag on the total payment to the seller of mortgages to discourage use except in case of necessity but, as experience with the land-bank system has apparently demonstrated, not so great as to prevent the functioning of the institution.

By giving the seller an interest in the earnings of the facility, as well as in the ultimate disposal of his mortgages, it would encourage the offering of sound mortgages.

In a sense, the suggestion just made would make the secondary market proposal resemble that made by the President's Advisory Committee except for the fact that the initial capital would be provided by Government instead of by private industry.

Mr. Cole, we noted, in his testimony expressed some concern as to this 3-percent nonrefundable capital contribution and expressed the hope that testimony before this committee might throw some light on this subject. To that end we make the above suggestions.

TWELVE THOUSAND FIVE HUNDRED DOLLAR LIMITATION ON MORTGAGES PURCHASED

The recommendation in the bill that the facility be authorized to purchase mortgages not to exceed $12,500 in amount is, in our opinion, not desirable. This provision would seem to channel the assistance to be given the mortgage financing industry to the $15,000 and below price range. We believe the facility should be authorized to purchase mortgages up to the full extent of FHA and VA authorizations.

TITLE IV. SLUM CLEARANCE AND URBAN RENEWAL

The provisions of the bill designed to broaden and redirect the slum-clearance and urban-redevelopment programs in order to assist communities to meet the problems of eliminating and preventing the spread of slums and urban blight seems to be in keeping with the new approach of placing greater responsibility upon the local communities to take effective action in this regard.

We believe the provisions in the bill requiring a locality to present a reasonable program for eliminating and preventing slums and urban blight and the requirement that the Administrator make a determination that the program is satisfactory, and so certify, prior to Federal assistance, is an excellent provision.

This is at best a long, hard, tough job which we feel will, with this new approach, begin to make headway as our cities and towns realize that their's is the first responsibility.

WHY TWO SYSTEMS OF GOVERNMENT GUARANTY AND INSURANCE ·

One other problem of concern to our industry is the problem involved in the two systems of mortgage insurance and guaranty provided by FHA and VA.

This industry is in agreement with the recommendations of a subcommittee on FHA and VA programs of the President's Advisory Committee, which suggested in their recommendation No. 33 (pp. 65-69 of the report) that the President direct the Administrator of the Housing and Home Finance Agency, and the Administrator of the Veterans' Administration, and the Commissioner of the Federal Housing Administration, to work out an interagency agreement under which VA would contract with FHA to perform the technical functions of processing veterans' home-loan applications under the present home-loan guaranty program.

This recommendation was designed, to quote the report

to have one agency of the Federal Government charged with the administration of the function of market analysis: land-planning requirements; valuation and appraisal; minimum property and construction standards; and property inspection.

It is our belief that the veteran and the homeowner who make use of the insurance guaranties of FHA and VA, as well as the builder and the mortgage lender, should no longer be subjected to the varying details, confusions, and costs involved in the present operation of the two parallel but differing systems of underwriting, inspection, and construction standards on loans.

We believe the consequent saving to the taxpayer and the Government is also worthy of consideration. It may be there are good reasons why this proposal was not incorporated in the legislation. Perhaps, it can be accomplished without legislation, but we strongly recommend that the committee in some manner give consideration to these recommendations.

In conclusion, Mr. Chairman, in behalf of our industry, we have the utmost confidence in, and respect for, Housing and FHA Administrator Cole, and the President's housing aims. We also recognize the importance of the FHA and VA programs, and the good they have accomplished in the residential construction field. We also are aware of the enormous task ahead in the elimination of slums, and the redevelopment of our communities.

There is little disagreement as to the ultimate aims and objectives of the President's housing program. There is, of course, some disagreement as to the best method of accomplishing these aims.

The bill before you is designed to make more readily available to more people, in more communities, the aids of the Federal Government to private industry to provide housing.

The recommendations which we have presented are consistent with these aims. We would like to see these aids made available to everyone who can use them. We are concerned with the problems of people who build and wish to build in our small and middle-sized communities throughout the country.

It is here that our people are most active and it is in these types of communities that we are having our major difficulties. The problem of securing adequate mortgage and consumer credit is greatest in

these communities in contrast to the relatively easy flow of credit in our great urban and metropolitan centers.

Our suggestions are aimed principally at broadening the use of these various Federal aids in order that our industry may be better able to make a substantial contribution to a continuing prosperous housing economy.

Mr. MUMMA. That last statement about small communities, isn't it that the bankers and people who have this money are not thoroughly familiar with the project?

Mr. NORTHUP. I am not sure whether they are not familiar with it, sir, but we just don't get enough mortgage money in the small communities.

Mr. MUMMA. Is it probably due to the fact that the local builder isn't interested in it, and you get these crews of outside shingle people coming in there, and stormdoors, and the local bankers are a little afraid of them?

Mr. NORTHUP. No, I don't think that is it at all. Our problem is that in community after community-and it isn't confined to the South and West and the Southwest-I can show you communities in West Virginia where we have a portfolio of mortgages and have contracts on dealers' desks to build 8, 10, or 20 houses, but we cannot pass those mortgages on from that local community to some other source of mortgage supply, and, therefore, we don't build these next 8 houses until we can get more money out of that community.

Mr. MUMMA. I was particularly referring to your direct participation, as I imagine you are a dealer.

Mr. NORTHUP. Yes.

Mr. MUMMA. The dealer is normally afraid of his money, isn't he? You now, when these groups of people come in and put on a campaign?

Mr. NORTHUP. Yes.

Mr. MUMMA. You are afraid of those people until you get to know them, aren't you?

Mr. NORTHUP. We don't care much for them, sir.

Mr. MUMMA. And you wouldn't go to your banker and influence him to take them unless he was sure of it?

Mr. NORTHUP. Well, actually, the man you are talking about is making use of title I credit of FHA and our dealer has the right to make use of the same type of credit, as a matter of fact.

Mr. MUMMA. Yes, but you don't know whether you are going to get your money out out of that fellow because, ordinarily, he can't get his until he gets a receipt signed that the work is completed? Mr. NORTHUP. That is correct.

Mr. MUMMA. And that is in my opinion one of the reasons why some people don't get very active in it.

Mr. NORTHUP. Yes, that may be one reason. Well, I think FHA has done a pretty good job in trying to take care of that type of man that you talk about, that comes in one night, does a job, and leaves town the next day.

Mr. MUMMA. How do they take care of him?

Mr. NORTHUP. Well, they have just revised the title I standards, and he has to wait now 2 or 3 days to get his money. So he can't

walk in one day and walk out the next with his money without paying anybody.

Mr. MUMMA. You mean so they can personally inspect?

Mr. NORTHUP. That is right, inspect the job. And they have done an excellent job in changing those regulations.

Mr. MUMMA. Who does the inspection, the banker or the FHA? Mr. NORTHUP. The banker.

Mr. MUMMA. I have known cases where he hasn't.

Mr. NORTHUP. And we are urging our people that if the banker does not do it the dealer should do it, to make sure that it is done.

Mr. MUMMA. There is a period of time when you are very much. certain.

Mr. NORTHUP. Yes.

Mr. MUMMA. I honestly believe that it is a matter of getting the local customer or contractor interested in it, that you are dealing with a man who has adequate credit. I know it was the same way when the FHA started in business. Our local builders didn't want it, but there was one fellow who was interested, and he went ahead and he is a rich man today because he promoted their program, and he was the fellow who got the commitments.

Mr. NORTHUP. Well, we are particularly interested in the problem of these small-town bankers who, in many instances, will put in a town of 8,000 people, $12,000 of mortgage money available a month, which means if you build over two average-sized houses you are through building. If you have a market for four, the bank is not going any further than that. But if he had some place to put these, we think he would keep this money turning over and we could keep on building. It is that simple in many of these outlying communities.

That doesn't seem like a major problem, but in the aggregate when you get it in thousands of communities all over the United States, it means a lot of housing.

Mr. MUMMA. Did you hear the president of Prudential this morning?

Mr. NORTHUP. Yes, sir.

Mr. MUMMA. They are doing a good job, aren't they?

Mr. NORTHUP. Excellent.

Mr. MUMMA. They get down to towns of 8,000 population.

Mr. NORTHUP. Yes.

Mr. MUMMA. I don't know. The State of Pennsylvania can have open-end mortgages, can't it?

Mr. NORTHUP. Yes, there is some difficulty in the State if there has been a prior lien.

Mr. MUMMA. Prior to the first mortgage?

Mr. NORTHUP. Yes, but this shows that you can do it in Pennsylvania, and I have lists of organiztaions now doing it in Pennsylvania. Mr. MUMMA. Say you were a banker and had a mortgage, and I came in and wanted three or four thousand dollars tacked on, you would certainly look up whether the tax liens were paid, and judgements, and so forth?

Mr. NORTHUP. Yes.

Mr. MUMMA. Well, that adds expense.

Mr. NORTHUP. Well, my point is, sir, that today these title companies are beginning to do that for $10 a thousand dollars, where it used to cost you a hundred dollars on a $2,000 loan to get the bank to search