4. In order to simplify the computations involved, it has been assumed that, if the maximum permissible rate of interest were to be fixed as the actual rate, such a determination would be made as of the first of the year. Accordingly, an interest rate of 54 percent has been used as the presumptive interest rate on veteran loans under the provisions of the proposed section 201 (1), even though a higher maximum obtained during part of the calendar year. As a further simplification of the necessary calculations, we have assumed that all GI loans closed in the first half of the year bore the 4-percent rate and that all those closed during the last half of the year were written at 4% percent. Inasmuch as many 4-percent loans were actually disbursed after the maximum was increased to 41⁄2 percent in May 1953, the use of this assumption is not believed to affect the accuracy of our estimates materially.

5. On this basis, if a maximum rate pursuant to section 201 (1) had been in effect for the calendar year 1953 at 44 percent, rather than the 4- and 4-percent rates actually in effect, the additional amount of interest payments to be made on account of loans guaranteed or insured by the Veterans' Administration would aggregate $429 million over the total life of the loans. During the first year of all loans guaranteed or insured by VA in 1953, under the same conditions, the difference in interest payments would have been almost $29 million. The average loan made to a veteran in 1953 amounted to $9,480. For such a loan with a typical maturity of 20 years, the increase in the interest rate from 4%1⁄2 to 54 percent would require an additional interest payment of $932.83 over the whole term of the loan. During the first year, the increase in interest would be $70.72. 6. In connection with these estimates, it should be noted that the rates indicated in paragraph 2 and the rates used in estimating the increased costs are maximum permissible rates of interest. The President, under the provisions of section 201 (1) would be given authority to set the maximum rate from time to time at whatever figure was deemed most appropriate in the light of prevailing conditions, provided it did not exceed the maximum permitted.

Veterans deprived of preferred positions now enjoyed in respect to housing credit.

Speaking of preference in obtaining GI mortgage loans, I have read and agree with the statement submitted by Mr. T. B. King, Acting Assistant Deputy Administrator (loan guaranty), Department of Veterans Benefits, Veterans' Administration, when he appeared before your committee recently. On pages 1, 2, and 3 of his statement Mr. King makes reference to sections 104 and 105 (pp. 3 and 4) of the within bill covering amendments of title II of the National Housing Act. His statement, the last paragraph of page 2 and the first paragraph of page 3 thereof, reads as follows:

The proposed increases in loan to value ratios and the corollary reduction in the cash downpayments, together with the increase in the permissible term of the loan which will make lower monthly carrying charges possible, will make considerably more liberal financing terms possible for prospective home purchasers under the FHA program. This, of course, would tend to dilute the preference which has been available to veterans obtaining GI financing, since the amendments would place nonveterans in virtually an equal position in respect to housing-credit terms. The extent to which such dilution would take place depends, of course, upon whatever action may be taken by the President in exercising his authority under section 201 of the proposed bill. Under the bill the President must authorize the more liberal terms provided for before they become applicable to the FHA program. On the other hand, it is noted that the only action which the President could take in respect to VA guaranteed home loans would be to make GI loan terms more restrictive. If the FHA program is liberalized as contemplated in the bill all eligible veterans, including recent veterans of the Korean conflict, will be deprived to a considerable degree of the preferred position they heretofore enjoyed in respect to housing credit. Inasmuch as it is not known to what extent the President would liberalize the FHA program, the exact effect of the proposed legislation upon the preferred position of veterans in the housing market cannot be forecast.

44022-54- -44

For all practical purposes these provisions would wipe out the preferences now granted veterans in obtaining GI financing. When the Members of Congress enacted the loan provisions of the present laws they most certainly intended that veterans should be given preference in obtaining these mortgages, and we do not believe the economic status of veterans of World War II, or Korea, has improved to such an extent as to warrant the termination of such preference, thus forcing them to compete with their more fortunate fellow citizens in their quest for mortgage money.

Mr. Chairman and gentlemen of the committee, I would like to thank you for your favorable consideration of our requests, as well as for your courtesy in permitting me to appear before you.

Mr. PATMAN. Mr. Chairman, I wonder if the witness would like to insert the attached statement from the U. S. News & World Report? The CHAIRMAN. He has already suggested it.

Mr. DANIEL. Yes, we would, sir.

Mr. PATMAN. And the table.

Mr. KENNEDY. That chart, Mr. Chairman, is a chart that I obtained from the Housing Agency, and with your permission, Mr. Chairman, I would like to have it either inserted in the record or marked for identification so that each member of the committee may have a copy. Mr. FATMAN. I would like to see it in the record.

The CHAIRMAN. I understand it is already in the record.

Mr. PATMAN. Thank you.

(The material referred to is as follows:)

[From United States News & World Report, February 26, 1954]

"EASY MONEY" COMES BACK-DOLLARS ABUNDANT, BUT BORROWING SLOW Credit expansion, officially promoted now as one answer to the business downturn, is slow to come.

Bank loans are easily had now-by borrowers with good credit standings-and getting cheaper. Lenders-with official blessings-are loaded up on funds. But a sagging demand is dragging down loans and interest.

The drive by the administration to get people to borrow money and spend it is approaching a critical phase. If credit expansion doesn't get going in buoyant spring and summer months, it's believed, it may not get going at all this year, What has happened is that businessinen and families have been showing more concern over their debts than over their needs for more goods and services. Borrowing to buy has been less popular than it once was. Interest rates have sagged, as money pumped into banks by the Government found too few borrowers. Now, just recently, there are a few signs of a faint revival of willingness to buy "on the cuff." But official figures, even the latest, do not show it yet.

Bank loans, to nearly all classes of borrowers, are a long way from stretching the capacity-and desire-of banks to lend. Records of city banks-those reporting weekly to the Federal Reserve Board-tell the story.

Business loans-to storekeepers, manufacturers, farmers, others-expanded by less than $600 million in the last half of last year. They had grown by nearly 2.5 billion in the last half of both 1951 and 1952. They still lag in 1954, though less noticeably.

Main reason is that businessmen have found themselves with more inventory than confidence. Buying by retailers, wholesalers and producers has been declining. More recently, consumers themselves have begun to acquire doubts and to curtail their buying, too. That has meant even less borrowing from banks. Bank loans made to consumers by weekly reporting banks show the results. Those loans expanded by $99 million in the last half of 1953-against 833 million in the last half of 1952.

Installment-credit reports, too, help to show how families feel about further buying involving debt. Total of such credit rose by about 800 millions in the last half of 1953, against 2.2 billions in the same period of 1952. And the same trends

show up in real-estate loans, though plans now being announced by builders for 1954 give a hint of rising demand for mortgage loans.

Government officials have used just about every monetary device available to push the easy money program adopted last spring. Before that, the Federal Reserve and the Treasury Department-in double harness-had been working overtime to make money for lending scarcer and dearer in a period regarded as inflationary. The turnabout, when it came, involved the use of a flexible money policy in a new situation-a threat of deflation.

BANKS HUNT BORROWERS, BUT RESTUDY WEAK ACCOUNTS

Federal Reserve, first, saw to it that banks were filled with plenty of the reserve funds needed for lending. That was accomplished by the purchase of billions of dollars' worth of Treasury securities. From May to December last year, Reserve bank holdings of United States securities jumped by more than $2 billion-to the highest level in history.

Next, the Federal Reserve reduced the amount of reserves that banks were required to hold for any given volume of bank business. And the Treasury Department made plain that easy money was the order of the day.

Then, early this month, with lending still becalmed, Federal Reserve cut the interest rate that banks must pay when they borrow reserve funds from the central bank. Intent-and effect-was to make sure that all bankers understood they were not expected to be excessively critical of a customer's credit position in making a loan. Officials, it was clear, would be sympathetic to some marginal loans designed to get money into the hands of people who would spend it.

Result, for the man who wants to float a loan, is that banks and other lending institutions are loaded. Many are out scratching for business. That doesn't mean that just anybody can get a loan of any desired size. Most lenders, in fact, have been getting right with their books, too. They've been crowding delinquent customers, cutting off some poor credit risks. Still, people with good prospects of repaying find it easy to borrow.

Demand for lending money, though, continues to lag behind supply.

Interest rates-the price of borrowed money-consequently have been dropping. The chart on page 100 gives the picture, starting in early 1951-the time of the famous accord between the Treasury and Federal Reserve. Before that time, the Reserve System had been an unwilling partner in the Fair Deal administration's plan to hold interest rates down by the simple expedient of supporting Government-security prices in the open market. The accord ended that pricepegging operation.

The chart shows what happened to interest rates of Treasury bonds when the market was unpegged. Those rates rose, along with interest charges generally, and went into a steep climb early in 1953 when tighter money was the goal.

The peak, for those Treasury bonds, came in June. Now all is changed.' Average yield for those bonds has dropped from 3.09 percent to 2.60.

The rate on the Treasury's 91-day bills, nearly 2.42 last June, in January dropped below 1 percent for the first time in nearly 5 years.

Rates on prime commercial paper-the unsecured I O U's of top-credit companies have tumbled from 24 percent at midyear to 2 percent recently. Ordinary short-term loans by banks to businesses, too, showed signs of cheapening in December, though banks still plan to hold their rates where possible. Home buyers, meanwhile, have been given new hope for low-rate mortgage loans guaranteed or insured by Government after months in which lenders avoided those loans. And families hoping for conventional mortgage loans this year have gotten real encouragement.

Corporations are able to borrow on long-term bonds for rates averaging 3.24 percent, compared with more than 3.6 percent last summer.

States and localities have watched their average rate on high-grade bonds drop from just under 3 percent to 2.4 and below.

Cheapness and easy availability of lending money, though, still are not drawing crowds of people to banks.

The question that officials are beginning to ask themselves is: Just how long will people wait?

The CHAIRMAN. Are there questions of Mr. Daniel?

Mr. PATMAN. Mr. Chairman.

The CHAIRMAN. Mr. Patman.

Mr. PATMAN. Are you pleased with the so-called Fannie May provision in this bill?

Mr. KENNEDY. We accept the bill in general, Mr. Patman, with the exceptions as testified to by Mr. Daniel. We leave it to the discretion of the committee as to whether they want to adopt those provisions having to do with FNMA. We have no particular objections to it one way or the other.

Mr. PATMAN. Don't you think that you are very much concerned about this 3-percent contribution that is proposed in the reorganized or rejuvenated Fannie May?

Mr. KENNEDY. Yes; that is the item dealing with 3 percent of the various costs involved. Naturally we would like to see the costs kept down as much as possible.

Mr. PATMAN. Have you considered who will finally pay that 3 percent?

Mr. KENNEDY. Of course, the mortgagor in the final analysis will pay all the carrying charges.

Mr. PATMAN. And that will be an additional cost to the mortgagor? Mr. KENNEDY. Yes, sir.

Mr. PATMAN. In other words, if he borrows $10,000 to buy a home, he will actually get $9,700, but he will continue for the next 25 or 30 years, or 40 years, whatever the time is, to pay interest on the whole

amount.

Mr. KENNEDY. Yes, sir.

Mr. PATMAN. And in the end, very likely the lender will get the 3 percent back.

Mr. KENNEDY. Well, that is correct. As I said before, Mr. Congressman, we would like to see all the carrying charges kept as low as possible consistent with the thinking of the committee, but we are willing to leave that entirely to the better judgment of the committee. Mr. PATMAN. Your forthright stand on the interest-rate increase is evidenced by the fact that you are in favor of keeping the cost down and I am very much in favor of what you had to say about this interestrate increase. I would like to invite your attention to the fact that last year, the interest rate at one time, the going rate, was 311⁄2 percent, instead of 3 percent. I notice the top rate you have here is 3 percent.

Mr. KENNEDY. Yes.

Mr. PATMAN. Last year, about April 1, the Treasury issued some long-term 30-year bonds at 314 percent. Therefore, the interest rate would be 534 percent, and that wouldn't include any insurance fee, would it?

Mr. KENNEDY. That is correct. Of course, as this chart shows, Mr. Congressman, in one place there it does go over 5.50 percent. I presume that is what you have reference to.

Mr. PATMAN. Yes.

The interest rate, I think, is one of the worst features about this bill. I believe Mr. King testified that heretofore, with the Guaranty Department of the Veterans' Administration-do you know Mr. King?

Mr. KENNEDY. Yes, sir. We referred to his statement, Mr. Congressman, in Mr. Daniel's supplemental statement.

Mr. PATMAN. I think one point should be stressed. That is the statement that he made, that heretofore the margin between longterm Government bonds and the going rate on mortgage lending was 112 percent, and this would increase it to 22 percent. That is an increase of 1 percent, and that is the part that you object to.

Mr. KENNEDY. It is one of the things; yes, sir. We object to this interest increase in general, Congressman. We feel that 412 percent, which was established by the law approved July 1, 1953, is fair and reasonable, and we are very reluctant to see new provisions adopted whereby they could charge more by virtue of new legislation.

Mr. PATMAN. If we were to set the pattern here of granting a 1 percent increase, which this would do, and that pattern should be followed and so eventually go clear across the board, the debt of the entire Nation, including the public debt, the national debt, and the debts of all States, counties, cities, and political subdivisions, along with the private debt, aggregating about $604 billion, it would mean $6,400 million a year increase. That would mean that the wage earners and the people who work for a living-and most of us do-would have to divert $6,400 million every year from buying automobiles, appliances and the comforts and necessities of life, over to the payment of interest and service charges in addition to that.

That would mean about $40 per person, would it not?

Mr. KENNEDY. I don't quite follow that, sir, but I accept your figures.

Mr. PATMAN. Well, for a family of 5, it would mean $200 a year which that family would have to forego using to buy the comforts and necessities of life. They would have to take it out of their earnings, and in some cases they would probably be meager earnings. They would have to take that much out and divert it to the payment of higher interest rates, so I think the Legion has made a real point here on that. I commend you for your forthright and good statement in the public interest.

Mr. KENNEDY. Thank you, sir.

Mr. DANIEL. Mr. Chairman, if I might be permitted to do so, I would like to amplify No. 5, on page 3. In addition, the proposal carries with it a distinct possibility of discrimination between veteran home purchasers.

In explanation of that, it could very well be that a veteran might purchase a home in January and pay one interest rate, and by October the market might be such that the veteran who bought a home in October might even pay an entire percentage point more on his loan than the man who bought the house back in January of the same year. That is something else that we would like to have you give serious consideration to, sir.

Mr. PATMAN. You are the economist for the American Legion, are you not, on this particular matter, Mr. Daniel?

Mr. DANIEL. Yes, sir; I am chairman of the economic commission which has jurisdiction over housing matters.

Mr. PATMAN. Well I hope, in studying this interest question-I don't want to discuss it, except just briefly-but I hope you will keep in mind that the fixing of interest rates in this country is not left to the Members of the House and Senate, but is left to 12 people. Congress did that. Congress has delegated that power to 12 people. They are public officials-in name only, some of them.