loan to value on FHA as well as VA loans, notwithstanding any statutory limits provided in the National Housing Act and the Servicemen's Readjustment Act. There is an attempt here to apply the pattern of flexibility to whatever it might attach-interest rates, downpaymens, maturities-as though flexibility for one must necessarily follow flexibility for another. However, there is an essential difference between flexibility for interest rates, on the one hand, and flexibility for downpayments, on the other. It is a general principle that interest rates on Government-insured loans should not predetermine the market but should follow it. For example, interest rates should be at the lowest possible level which would still result in the flow of sufficient money. However, downpayments and maturities, on the other hand, should predetermine the market. In the interest of longrange stability for the housing market, we strongly urge the committee to eliminate this standby authority as contained in paragraph (5) of section 201.

In opposing this part of title II of the bill we want to emphasize again the importance of permitting increases in FHA mortgage limits and ratios of loan to value, provided for in this bill, to take effect upon enactment. In the interests of stabilizing the homebuilding and lending segments of our economy it is essential that definite positive action be taken rather than more standby authority created. Standby authority may very likely bring about harmful uncertainty in the market as builders and lenders sit back and wait for a more favorable atmosphere, and, similarly, would-be home purchasers would very likely follow the same approach.

Mr. Summer will carry on from here, Mr. Chairman.

Mr. PATMAN. Could we ask questions of this gentleman, Mr. Chairman? I just wanted to ask him about 1 or 2 points that he brought up. The CHAIRMAN. I wish to meet the committee's wishes in the matter. These gentlemen are all representing the National Association of Real Estate Boards, and they are dividing up the subjects for their own convenience. I had hoped that we could conclude the statement before we started to ask questions. The three of them will be present to answer questions.

Is that agreeable with you, Mr. Patman? If it is agreeable with you Mr. Summer will proceed.

Mr. PATMAN. I would rather ask questions as they get through on each subject, Mr. Chairman. However, if the chairman wants to do it that way, it is all right with me.

The CHAIRMAN. You can put a check mark opposite the subject matter and come back to the question later.

Mr. PATMAN. I don't want to disrupt the chairman. I know he has a difficult job in getting the hearings completed, and I want to cooperate with him.

The CHAIRMAN. I thought it might make for more orderly and expeditious procedure to proceed in that way, Mr. Patman.

Mr. SUMMER. Mr. Chairman, my name is Alexander Summer. I am past president of the National Association of Real Estate Boards, and a member of the President's Committee on Housing. I am a head of the Alexander Summer Mortgage Co., and the head of a real-estate brokerage business in New Jersey.

Before I get into the specific statement I wish to point out that which we all know, and that is to emphasize that the main purpose of this entire bill is to provide adequate housing for all Americans, and an essential of that is an adequate flow of mortgage funds.

Of equal importance is a desire to maintain a healthy economy; a healthy building economy is essential to the economy of the entire Nation. In order to maintain that building economy it is necessary to have an adequate supply of mortgage funds.

Now, the ascending spiral of municipal insolvency partially can be checked, at least, by the removal of slums, and this cannot be accomplished, and it has been proven in the past that it has never been accomplished, without adequate mortgage financing and risk capital. The heart of the entire slum-clearance program is adequate risk capital and adequate mortgage financing.

What is adequate mortgage financing? It isn't enough to implement FHA with more realistic sections and amendments. When we get through with a fine bill it is still theoretical and still on paper unless money flows, and the answer, and the only answer, to make this program a success is to give risk capital confidence, and to make available a realistic and a steady and reliable source of mortgage financing. In the past this has been a series of up-and-down movements, partially brought about by market conditions and often brought about by legislation.

Now, what will make mortgage money flow on a sound basis? Gentlemen, I think it might artifically create a depression in this country immediately, if the bill embodies standby authorities.

We have found, from a bitter experience, that where legislation creates standby authorities, which offer a more realistic treatment, both capital and mortgage lending will hold back, and wait and see what will be adopted. We have seen evidence of it already, and I think the standby provisions of this bill are the surest way to start a downward spiral in our economy. I think this committee, in its recommendations to the Congress, should decide what it wants to recommend and make that the law. Otherwise, I think we are contributing, artifically, to a situation that need not be, and should not be, in face of the established need for housing, of such a big segment of the American people, who are not now adequately housed.

I agree that you cannot establish interest rates in advance, there must be statutory provision-but I think that an established Board, created by Congress, should be ready to function, and the reason the Secretary of the Treasury and the Federal Reserve Board should be on there is because we had situations, 5 years ago, where lenders were paying builders 5 points premium for borrowing money. If you borrow a hundred thousand dollars from me, I would give you $5,000. That should have been reflected in a lower interest rate to benefit the owners and the tenants of property.

Similarly, last year, when you couldn't get mortgage money in many cases, interest rates should have found an upward level to make mortgage money flow.

Now, there is just so much money in our economy. We need some for financing our United States Government, we need some for industry and commerce, and we need some for mortgage loans. By having a board represented by the Treasury of the United States and the

Federal Reserve and these other groups, FHA, HHFA, then you have a group of men who can sit around a table and not permit mortgage money to run away with an unfair portion of our money in our economy nor permit it to be the stepchild, as it was last year.

We also know, if such a board were created and met at fixed intervals such as June 1 and December 1, every lender in the country would stop lending in April to see what that board would do about interest rates in June. Instead of that we, on the President's Committee, have recommended that this board meet at the call of the chairman and, without advance notice, adjust interest rates according to the needs of that time not only for mortgage lending but as to its place in the entire financial needs of the Nation.

Therefore, I think that is the only practical vehicle to continue to provide a steady flow of mortgage money and to give the benefits of lower interest rates to the owner and to the tenant and not to the builder.

That is No. 1. That is one thing necessary to make mortgage money flow, removal of standby authorities.

No. 2 is realistic interest rates not only on mortgages but on debentures and the term of debentures. And this six-man committee should have that function, again to see that it plays a proper role in the money economy of this Nation.

And it is just as important that a really_workable and practical secondary mortgage facility be created, and I will touch on that in a moment.

But other things that are necessary to make mortgage money flowsome are included in the bill and some are not. Another is to provide for loans in small and isolated communities. We have small communities in States throughout this Nation that, because of their isolation or because of their small size, the big lenders cannot afford to make loans to them because they cannot afford to service those loans. So we have recommended three things to make mortgage money flow in those small communities. One is to give the FHA Commissioner authority to provide for an extra service charge annually, if necessary, but not to exceed a fixed amount to make mortgage money flow there.

No. 2, to permit, in the initial commitments of FHA, participation so that these small institutions who have only so much money can get participations from the big banking institutions of the major cities. And, thirdly, the need for technical assistance. I admit this is administrative, but I think this committee should recognize the need for technical assistance by FHA and VA to the lenders in these small communities.

It is so complicated and so involved that for the few loans involved there hasn't been justification for having experts on hand to study all the many requirements.

I think your recommendation of two-thirds of the closing costs is a commendable one. I think also the simplification and streamlining of FHA processes is necessary, and the establishment of sound actuarial methods in establishing FHA reserves; and the recommended study has that in mind.

Now, insofar as the secondary mortgage facility is concerned, I have already touched on the fact that mortgage lending in this country has seen cycles, scarcity of money, artificial Government regula

tions, the economy not permitting sufficient mortgage money to flow. We feel that any consideration of the long-range needs of the housing industry must recognize fluctuations in the mortgage market and the maldistribution of mortgage money because many eligible purchasers could not finance during the last few years.

We are all familiar with the peaks and valleys; and, therefore, we think the answer is, one, a practical adjustment of interest rates and, secondly, a true secondary mortgage facility to be operated without unnecessary restrictions and in such a manner that the initial Government capital will be progressively replaced by private capital.

The first recent legislation introduced on this subject was H. R. 6614, by Mr. Stringfellow, a member of this committee. Our association endorsed the principles of that bill and still believes that the secondary market as set forth in that bill presents the framework for an ideal secondary market because of its planned decentralization operations and because it contemplates activity with respect to all types of real-estate mortgages.

However, we recognize that the creation of a secondary mortgage market facility which will truly function as such must be almost an evolutionary process. Confidence in the capital structure, obligations, appraisal standards, and so forth of, and the machinery for, such a facility cannot be created overnight.

We are most anxious that a workable facility be created and begin functioning as soon as possible in order to avoid any further disruption to the mortgage economy. That is why we have adjusted our sights to the framework presented in title III of this bill, trusting that experience with the FHA and VA mortgage markets will in time, under the study and observation of both Government and private interests, reach out to encompass also conventional mortgage loans. But that is something for future consideration.

In our study of the proposed title III we have noted several features which we consider to be inherent weaknesses. Some of them would tend to restrict FNMA's operations unduly. Although the bill underscores private ownership as an ultimate objective, the formula to bring this about is nebulous and speculative. We are, therefore, suggesting several amendments for the consideration of this committee. I will discuss them in the order in which they appear in the bill.

A. Limitation on mortgage amount: Section 302 (b) provides that there shall be a $12,500 limit per living unit on the principal obligation of any mortgage offered for sale to the Association. We would offer no objection to the imposition of such a restriction in section 305 of the bill, relating to the special-assistance functions of the Association, which has as its primary objective assistance to lower-cost housing. However, we believe that the provision is entirely too restrictive.

There has been some talk that the recommendation to increase maximum loans to $20,000 is approaching the field of luxury housing. When FHA was established in 1934, the maximum was $16,000. Twenty thousand dollars today, on a 50-cent dollar, is equivalent to $10,000 in 1934, and we submit that a $20,000 mortgage today is more conservative, is 63 percent of what a $16,000 mortgage was in 1934. And it would certainly make a better portfolio to have not only the

low cost and low rent mortgages go into this secondary facility but also the other type of loans.

The secondary market operations should not be conducted solely to benefit the financing of lower-cost housing, particularly when the limit is below that contemplated as the maximum for FHA under other provisions of this bill. The funds used for the purchase of mortgages will have been borrowed from private sources, and the operations will be conducted according to business standards. We recommend that the maximum permitted limits be the same as those ordinarily applicable to FHA.

B. Capitalization: Section 303 of the bill provides that the Secretary of the Treasury would initially hold all the stock of the rechartered Association-approximately $70 million-representing the present capital and surplus. The users of the facility would be required to pay 3 percent of the unpaid principal amount of the mortgages offered for sale to the facility as nonrefundable capital contributions. Subsequently, according to the bill, these capital contributions, represented by convertible certificates, would be converted into capital stock of the Association, but not until all of the capital stock held by the Treasury had been retired. In view of the fact that the Association will not necessarily operate a par market, as it has in the past, we believe that the 3-percent nonrefundable capital contributions coupled with the market discount on mortgages-particularly those covering properties located in the outlying areas which may be as much as 2 or 3 or more points below par, plus a FNMA service charge-would almost certainly deter mortgage lending where it is most needed. We think the requirement should be 2 percent.

We strongly urge that the bill be amended to provide for two different types of stock. The Treasury should receive preferred stock on which it would be entitled to cumulative dividends as the bill presently provides. The users of the facility should receive common stock on which they would receive dividends when earnings permitted, and even after the Government-held stock has been fully retired the dividends on such common stock may not exceed in the aggregate 5 percent of the par value of such outstanding common stock. These latter limitations are already in the bill. Both types of stock would be nonvoting for reasons which I will subsequently set forth.

The bill provides for the ultimate substitution of private financing for Government financing, and we sincerely believe that this ultimate objective would be better served by providing for the immediate issuance of stock to the users of the facility instead of convertible certificates.

It has been estimated that it will take 8 to 10 or more years to retire all of the Treasury-owned stock. Inasmuch as the capital of the Association would be made up of funds from both the Treasury and private sources, the Association would be a mixed-ownership Government corporation. It would be appropriate that not only the Government but also private stockholders participate in its ownership. The capital structure itself could not be impaired by the mixed-ownership status, because the bill contains a provision that the stock, other than stock held by the Treasury, may not be retired if, as a consequence, the amount remaining outstanding would be less than $100 million.