Time and competition, in my opinion, will take care of most situations. The need for legislation at the State level will in the main disappear. Frankly, I should hate to see title companies, who serve a very necessary economic function in our economy, deprived of legitimate fees.

I suspect we will have to correct some of the hastily conceived faulty and too restrictive statutes. We will have to clarify the law in a few States such as Wyoming, Delaware, and Massachusetts. In Texas, either the homestead law will have to be changed or the practice of financing modernization through the purchase of vendor's, tax or mechanic's liens and a consolidation with the original mortgage will have to be encouraged through a reduction in the title insurance schedule now established by State law in many of the metropolitan areas of Texas. In the smaller communities of Texas, where the rates are not fixed by law, lenders and homeowners are accomplishing the same goal as open-ending does.

PROGRESS OF THE PROGRAMS

To begin with, the practice of making advances was confined to savings and loan institutions in rural and semirural communities. Very frequently the only assets a family possessed were the equity of its home and land. When Johnny went off to college, the homeowner got an advance to take care of his tuition. When mother had a new baby, the obstetrical bill was paid in the same way. When a successful crop came in, and this may have been 3 or 4 years later, the loan was paid down because the homeowner treasured his home. It served as his piggy bank. The practice grew because losses through the practice were almost nonexistent; the benefits to both borrower and lender obvious.

Today, not only savings and loan associations but also life-insurance companies and savings banks are enthusiastic supporters of the program. This is significant because it is considerably less profitable for an out-of-state institution to make advances, especially if the advance asked for is small. The cost of the paperwork alone would eat up the interest on a $500 advance. Prudential, National Life of Vermont, and Northwestern Mutual are writing the open-end provision into all their mortgages. And just a week or so ago, another of the big four-New York Life-joined them.

In announcing its move, here is what Vice President Manning Brown had to say: "It could be a great advantage to the entire economy, especially in periods of decline in new construction. It would help take up the slack in a recession and may be a useful instrument in preventing neighborhood decay."

He goes on to say, “In addition to providing a greater outlet for investment funds (which also means a larger servicing portfolio for the correspondent), it can reduce relative servicing and overhead costs each time an outstanding loan balance is raised."

"It tends to protect the lender's seasoned loan against refinancing with some other lenders. It encourages the borrower to keep his original loan or to apply to the first lender when he seeks any new refinancing."

"When readvances are spent for home improvements or repairs, they improve the security behind the lender's entire outstanding mortgage balance on the property."

"And," adds L. Douglas Meredith, executive vice president of National Life of Vermont, "The borrower has not strapped himself with a high-cost short-term loan to cover the cost of needed repairs or improvements. It also enables the homeowner to buy both material and equipment that he could not afford on shortterm credit. Inferior materials would either run him into excessive maintenance costs or make him let his property deteriorate, either of which is bad for lenders." Incidentally, New York Life will probably allow maximum reborrowing in excess of the original amount of the mortgage except in States where legal technicalities make it inadvisable.

Last year $500 million worth of additional advances were made and the United States Savings & Loan League predicts that savings and loan associations of the United States will do a half billion dollars' worth in 1954.

And the surface has just barely been scratched, judging from a recent Federal Reserve Board Survey. It shows that as of January 1949, one-half of the 9 million families who own mortgaged homes have equities of 50 percent or more in their properties. The equities claimed by the nine million families amount to $48,600 million.

And if we are to take into account all possible methods of long-term financing of homes now free and clear, as well as advancing under old mortgages or recast

ing them, the credit potential is staggering. For according to this same Federal Reserve Board survey, the 20 million nonfarm families who own homes, claim equities totaling $148 billion-and 11 million of the 20 million own their homes free and clear.

Now, while we are not advocating that every homeowner should rush out and mortgage his debt-free home, it is comforting to know that low-income homeowners (and remember they represent 56 percent of United States families) now have the means of financing needed modernization in good times or bad on terms that won't strap them. The homeowner who can afford it would be well advised to pay cash or use short-term credit.

Debt-free homeownership is a fine thing. It is a tribute to the thrift and good sense of our people that more than half of them own their homes free and clear. However, in many cases the home investment represents the owner's entire savings and assets. And if the owner chooses to make liquid part of this investment (to keep up his home) through the use of the long-term mortgage rather than borrowing on high-cost short-term credit, I don't believe this is an unwise practice.

Of course, he could choose not to maintain his home, but the net result would be a depletion of his equity and also the equity of the man next door.

To us the chief importance of the long-term mortgage credit is the opportunity it holds for recognition of the mortgage as a social instrument of prime importance. Every lender knows that one chief reason for foreclosure is the homeowner's tendency to overload himself with installment credit. The use of the mortgage as a basic credit instrument for home modernization would establish the local mortgage lender as a permanent credit counselor to the homeowner of limited means.

An official of one of the west coast's leading financial institutions that specializes in short-term credit told me this story that highlights the need of separating the sales from the lending function: A mutual friend of ours not too long ago put up a thousand very attractive, inexpensive homes for minority steelworkers near San Francisco. For the first time in their lives the Negro occupants of these homes became eligible for credit because they were men of property. Within a few days after these poor folks moved in, a hoard of dynamiters came knocking on their doors.

"How would you like some of this (synthetic) brick siding put on over that ugly redwood siding," or, "How would you like this barbecue pit? Just sign this title I form and we will take care of the rest."

They did. Before the year was out, a good number of these innocents were over their heads in debt. Nor did the short-term credit outfits who made these unnecessary title I loans even bother to check with each other to see if the homeowners were overextended. They were protected against loss up to 10 percent.

As a result, a number of these unfortunate people contracted to pay monthly installments, including the mortgage payments, that exceeded their incomes. And you can guess what happened under the circumstances.

If the homeowner had gone to his mortgage lender, the lender would have talked him out of dealing with disreputable fly-by-night operators, and out of making a lot of useless expenditures. Or, if modernization was needed, the lender would have helped him with an additional advance.

If credit is understood in its fullest importance to our whole economic system, there would seem no safer or more intelligent way to employ it than to relate it to the prime security owned by the majority of United States families-a house and land.

In conclusion, I hope that you will not only see fit to give FHA authority to insure additional advances but will consider liberalizing the provisions of the Servicemen's Readjustment Act relative to such supplemental lending for purposes of repair or improvement of veterans' homes.

Bert King points out: "As the law now provides, the Veterans' Administration cannot extend guaranty coverage comparable to the proposed FHA program without a change in the existing statute, since the $7,500 entitlement currently available to veterans under section 501 (b) of the act is restricted to loans for the purchase or construction of residential property to be occupied by the veteran as his home. Consequently, additional entitlement for supplemental loans for the alteration or improvement of the veteran's home is available only if he used less than $4,000 of his entitlement in connection with the purchase or construction of his home. In recent years most veteran home purchasers have used at least $4,000 of their entitlement in connection with the original purchase of the

home, and accordingly have no entitlement available for alteration or improvement advances. Naturally, lender interest in making such advances would be stimulated if some additional guaranty protection for such advances were obtainable. Furthermore, the housing needs of a large segment of the 3 million families who have obtained homes with the assistance of GI financing have changed materially due to increasing family size, and in many cases there has been an improvement in the economic status of these homeowners. It is to be borne in mind also that in many instances a substantial reduction in the mortgage debt has taken place since the home was purchased. Those veterans are now in a position to undertake the responsibility entailed in financing improvements and alterations in their homes. If a lender is willing to make a GI supplemental loan, the veteran obtains the advance on a low-cost, long-term repayment basis, and the primary loan is not jeopardized by the high carrying cost of short-term improvement loans. 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."

98

REFERENCES

Item 1. List of some lending institutions making additional advances.

Item 2. Can FHA Insure Open-End Mortgages? article reprinted from House and Home, July 1953.

Item 3. Legal Bulletin, published by the United States Savings and Loan League, September 1953 issue, featuring, The Flexible Mortgage Contract, by Horace Russell and William Prather.

Item 4. Dime Savings Bank of Brooklyn Writes Open-End Mortgages Clause Into All Its Family House Mortgages, article reprinted from House and Home, December 1952.

Item 5. Open-End Mortgage: Good Business Bet, Not a Legal Problem, article reprinted from House and Home, September 1953.

The CHAIRMAN. I think perhaps the committee will be interested in Mr. Goldman's statement in connection with the testimony which we have had concerning the use to which open-end mortgages have been put in the various States which authorize them.

The committee will stand in recess until tomorrow morning at 10 o'clock.

(Whereupon, at 5:34 p. m., the committee adjourned.)
(The following statements were submitted to the committee:)

Hon. JESSE WOLCOTT

CONGRESS OF THE UNITED STATES,

HOUSE OF REPRESENTATIVES, Washington, D. C., March 6, 1954.

House of Representatives, Washington, D. C.

DEAR JESS: Enclosed you will find a letter addressed to me by Mr. B. J. Staal, treasurer of the Holland Furnace Co., which company, as you know, is located in my congressional district.

Mr. Staal, on behalf of the Holland Furnace Co., has requested that his letter in reference to H. R. 7839 be included in your committee's hearings on this proposed legislation. I hope and trust that Mr. Staal's letter can be made a part of the hearings. As you will note, the Holland Furnace Co. does endorse the administration's proposals for title I with a specific recommendation concerning the breakoff problem.

With kind personal regards and very best wishes.
Sincerely,

GERALD R. FORD, Jr.,
Member of Congress.

8 From statement of T. B. King, Acting Assistant Deputy Administrator (Loan Guaranty), Department of Veterans' Benefits, Veterans' Administration. Under the VA supplemental loan procedure, open-end mortgage provisions may be utilized for such purposes, but additional guaranty coverage of the advances made under open-end mortgage is available only to the extent that the veteran has unused guaranty entitlement available.

HOLLAND FURNACE CO., Holland, Mich., March 5, 1954.

Re Housing Act of 1954, H. R. 7839.

Hon. GERALD R. FORD,

House of Representatives,

Washington 25, D. C.

DEAR SIR: During the lifetime of the Federal Housing Administration, this company has financed under Title I-Property Improvement and Repair Loans a total in excess of $265 million.

We heartily endorse the administration's program of not only continuing FHA, but also making certain amendments which should stimulate full employment and production. Our company alone employs several thousands of workers who will be benefited by these amendments. Over the industry this number can be multiplied into hundreds of thousands who will be kept gainfully employed.

The proposed amendment under the above-mentioned section whereby the maximum term of such loans would be increased from 3 years and 32 days to 5 years and 32 days, with a maximum of $3,000 instead of $2,500, meets with our hearty endorsement.

Loans under this section are made to homeowners who have equity in their property. Since it is obvious that homeowners are a dependable class of purchasers, we not only endorse a 5-year and 32-day maximum term, but we feel that this should be passed without any restrictive clause. There may be some thought of a breakoff point where, for example, loans under $1,000 would be subject to 3 years and over $1,000 to the 5-year maximum. We believe that such determinations, if any, should be established by banking interests and industry rather than through an arbitrary law or regulations to be enforced by FHA.

We believe it practically impossible to establish an arbitrary breakoff point on a nationwide basis which would work equitably and fairly to cover the individual homeowners' needs at the local level. Furthermore, such an arbitrary figure, if it is to be policed by FHA, would necessitate extra Federal controls instead of less of them. It should be the responsibility of banking interests and industry to devise sales plans within the scope of the amended act which would be patterned to fit the pocketbook of the individual homeowner. Only then can the amendments assure the maximum good for the most people.

Our company sincerely believes that the Federal Housing Administration has done an excellent job. We also believe that the present administration is taking another forward step to improve the benefits under the Housing Act, which should stimulate and increase full employment and production in the housing field.

Respectfully submitted.

B. J. STAAL, Treasurer.

STATEMENT OF LEE C. BEAN, CHAIRMAN, LEGISLATIVE COMMITTEE,

WHERRY HOUSING ASSOCIATION

Gentlemen, my name is L. C. Beane and I am chairman of the legislative committee of the Wherry Housing Association. The Wherry Housing Association is an association of owners of military housing financed under title VIII of the National Housing Act. The owners in the association represent approximately 40,000 of the 71,766 units which were completed and in operation as of December 31, 1953.

There is a very pressing need for housing at military installations which cannot, at this time, be deemed to be a permanent part of the Military Establishment and eligible for title VIII mortgage insurance. The Wherry Housing Association would like to recommend for your consideration amendments to the National Housing Act which, in our opinion, would enable private enterprise to furnish necessary and adequate housing for personnel at installations which cannot qualify for Wherry housing under the present provisions of the National Housing Act by reason of the fact that the installations requiring housing cannot be certified as a permanent military installation. The activity at these installations is for an indeterminate duration, maybe 10 or even 25 years or possibly longer. We think title VIII can also provide housing at many of this type of installations.

In order to provide housing at installations which cannot be certified as permanent, it is recommended that section 803 be amended to add to the present insurance provisions a program for housing at Military Establishments when

there is a need to provide adequate housing for the personnel at such installation and there is no present intention to substantially curtail activities at such installation.

Eligible mortgages under title VIII may not exceed 90 percent of the amount which the Federal Housing Commissioner estimates will be the replacement cost of the property or project when the proposed improvements are completed or $8,100 per family unit for such part of such property or project as may be attributable to dwelling use, except that in exceptional cases where the Secretary of Defense and the Federal Housing Commissioner concur that the needs would be better served by single-family, detached, dwelling units, the mortgage may involve a principal obligation not to exceed $9,000 per family unit for such part of the property as may be attributable to such dwelling units.

It appears that in order to assure the success of this proposed program it will be necessary to increase the existing authorized insured mortgage limitation from its present 90-percent limitation to 95 percent of the amount which the Commissioner estimates will be the replacement cost of the property or project when the proposed improvements are completed. This increase is designed to minimize the increased hazard to the sponsor for his making the said investment in the required housing on a base which cannot be certified as permanent.

The existing dollar limitation of $8,100 per family unit for such part of the property or project as may be attributable to dwelling use, with the additional proviso for a mortgage of $9,000 per family unit where it is determined that a single-family, detached dwelling would better serve the need should be adequate under the proposed program.

It appears that the amendment would require several provisions substantially as follows:

1. After the last word in section 803 (b) (2) delete the period and substitute a semicolon and add the following:

"and provided further, That where the installation is not a permanent part of the Military Establishment and the Secretary of Defense or his designee shall have certified to the Commissioner that such installation is an essential part of. the Military Establishment, the mortgage shall be insured under this title."

2. In section 803 (b) (3) (B) delete the word "and" after the semicolon and insert the following:

"except that where the Secretary of Defense or his designee certifies that the installation is an essential part of the Military Establishment the mortgage may involve a principal obligation not to exceed 95 percent of the amount which the Commissioner estimates will be the replacement cost of the property or project when the proposed improvements are completed; and."

3. Delete section 803 (b) (2) (C) and substitute the following:

"(C) not to exceed an average of $8,100 per family unit for such part of such property or project as may be attributable to dwelling use where such family unit is for an installation that is a permanent part of the Military Establishment; and

"(D) not to exceed an average of $8,550 per family unit for such part of such property or project as may be attributable to dwelling use where such family unit is for an installation which is an essential part of the Military Establishment.

"And provided further, That where the Secretary of Defense or his designee in exceptional cases certifies and the Commissioner concurs in such certification that the needs would be better served by single-family detached dwelling units the mortgage may involve a principal obligation not to exceed $9,000 per family unit for such part of such property as may be attributable to such dwelling units."

The association recommends that the proposed Housing Act of 1954 specifically limit the rate of interest which may be charged on a title VIII loan to 41⁄2 percent per annum. This is extremely important as interest rates in excess of that amount will defeat the purpose of the military housing program by requiring rentals in excess of the ability of the intended tenants to pay. Each one-quarter of 1 percent increase in interest rates on a $8,100 mortgage increases monthly rentals to tenants by approximately $1.80. As an example a 41⁄2 percent interest will require $3.58 per unit per month more rent than a 4 percent interest rate for the identical housing accommodations and a 5 percent interest rate would raise the rentals $7.17 per unit per month. An analysis, showing the effect of increased interest rates is attached.

The only alternative would be to reduce the size and quality of the house to the extent that it would not be desirable permanent type of accommodations and