Mr. REILLY. I think that the open-end mortgage is going to be a very difficult vehicle to service. I don't agree with the statements that were made by others that it eliminates title expenses.

If you have an open-end mortgage, I think a lender would be bound to have that title brought down to date before he would make a subsequent disbursement on a loan already on the books. He would be foolish if he didn't, because there could be intervening judgments, or a lot of things that could have happened that would require a title report to make it sound. It is perfectly true he might not have to sign additional mortgage papers, and so forth, but he would have to get his title, which is the real expense.

Also the various States have laws in hopeless conflict on the subject. Some agree that they are, and some agree that they are not good for a community.

4

I think in view of that situation that anyone that needs a substantial improvement to his home, which should be the only time that an openend mortgage is used, that he should go to the expense of having his mortgage reset, and have a new title it isn't going to cost him very much more, anyhow-and you have got a nice clean mortgage and it will eliminate the abuse that can come from having an open-end mortgage every time somebody wants to borrow a little money.

It should only be used if the money is to be back into the house, but it is a difficult thing to police, and that is why we are opposed to it. Mr. PATMAN. I can see your point.

The CHAIRMAN. I think there would be in the record a list of the States which authorize open-end mortgages.

Under the District of Columbia law, are they authorized?

Mr. REILLY. They are not, Mr. Chairman.

Mr. PATMAN. Mr. Chairman, I want to ask one other question about this 212-percent margin.

The CHAIRMAN. Mr. Patman.

Mr. PATMAN. Mr. T. B. King-I believe you stated you hadn't heard about this-he is Chief of the Loan Guaranty Division, Veterans' Administration, testified before this committee on March 5, 1954, and stated, and I quote:

It is worthy of note that the 2%-percent spread contemplated by the proposed provisions exceeds that which experience has demonstrated is necessary. Then I asked him this question:

Mr. PATMAN. Isn't it a fact that in the past 12 percent was the normal spread?

Mr. KING. That is a point on which the Veterans' Administration insisted. until everybody got a little bit tired of hearing us insist on it, Congressman. Mr. PATMAN. I beg your pardon?

Mr. KING. We maintained that point at considerable length, over the years. Mr. PATMAN. One and a half percent?

Mr. KING. Yes, sir. We were advertising primarily to the situation, the market situation, which was in vogue, or which was experienced, prior to the March 1951 accord between the Treasury and the Federal Reserve Board.

Mr. PATMAN. So this is about a 75-percent increase?

Mr. KING. No, sir; the point is that 12 percent has not been reflected by experience since March 1951.

In other words, before March 1951, when the so-called accord was made, the traditional rate, according to Mr. King, was 11% percent. That is the point I was trying to make a while ago, Mr. Reilly.

Mr. REILLY. Mr. Patman, I think that 12 percent was probably what was in his mind was when the mortgage rate was 4 percent and the long-term Government rate was 22 percent, and you had an abundant supply of money, then, of course, traditionally the spread was 12 percent. But when money got tight a year ago, those same mortgages that were selling at par and sometimes above par sold as low as 91 and 92 in some sections, so that your traditional 111⁄2 did not work. If you had a flexible interest rate at that time within reasonable bounds you would have protected it.

Mr. PATMAN. That is after this so-called accord. Some of the Government bonds went down to 89.

Mr. REILLY. That is correct.

Mr. PATMAN. Mr. Reilly, don't you agree that the Federal Reserve open-market committee determines the money market?

Mr. REILLY. I think it has a very pronounced influence on it. I would not say it determines it.

Mr. PATMAN. Well, last year, in the first half of the year, it was hard, and in the last half it was easy.

Mr. REILLY. I will admit that your evidence is good on that. I don't think they control it completely. There are other factors in the economy, too.

Mr. PATMAN. Well, when they have the power to go in the market and buy unlimited amounts of bonds that is bound to affect the market; isn't it? That is bound to affect the market?

Mr. REILLY. It always has.

Mr. PATMAN. Pardon me?
Mr. REILLY. It always has.

Mr. PATMA,N. It always has; yes.

Mr. REILLY. Probably always will.

Mr. PATMAN. What disturbs me about that, Mr. Reilly, the Federal Reserve having so much power, the banks have too much power with the Federal Reserve.

I want the banks to remain prosperous and profitable. Do you consider a bank a public utility?

Mr. REILLY. Well, it is a question of what you mean by public utility. Mr. PATMAN. There is, serving the public as a public institution. Mr. REILLY. As I have always understood in a public utility you get a guaranteed rate of return on your investment; in that connection a bank is not a public utility.

Mr. PATMAN. That is right, to that extent it is not.

Mr. REILLY. As far as being interested in the public, as we all know, the depositors generally have 10 times as much money in the bank as the investors do, so we have a very strong responsibility to fulfill to our depositors.

Mr. PATMAN. But operating principally on the Government's credit

Mr. REILLY. I don't agree with that at all. I think we operate on money that we lend to private people for industrial, commercial, and housing purposes. We are not subsidized by the Government.

Mr. PATMAN. The thing that disturbs me about the Federal Reserve Open Market Committee-I got their report the other day, March 5. report-and there is something in that report that I have been afraid of all the time. Namely, that the Open Market Committee, which is

the most powerful Committee in the United States, I suppose, as far as monetary matters are concerned, more powerful than Congress, because Congress has delegated the power in the Constitution to those 12 men-now, there is 1 vacancy on that Board, so there are just 6 members of the Board now, and 5 members who represent the private banks, because they were selected by the private banks, and the last report of the Board of Governors shows that on one important question, those 5 private representatives of the banks voted one way and there were only 4 members of the Board who voted the other way and the public members lost entirely. I don't believe that is right, for the financial affairs of the country to be under the control of the Board, if it can be dominated by the private banks.

That is the reason I say that Congress, in looking into housing, should look into that, too, and make sure that too much control is not lodged in the private banks in performing a public obligation. I will not get off on that, Mr. Chairman.

The CHAIRMAN. Are there further questions?

Mr. MULTER. Mr. Chairman.

The CHAIRMAN. Mr. Multer.

Mr. MULTER. I am very pleased, Mr. Reilly, to find somebody finally coming forth representing private industry who is in agreement with what I have been saying on this committee for about 3 years. It is time that the Government got out of this insurance business.

They are trying to do it with this FNMA title. Eventually if that FNMA title is enacted and is administered in accordance with the intent of the law I think it will finally become a privately owned institution.

Why can't the same thing be done with FHA?

Mr. REILLY. Do you mean to make FHA a private agency?

Mr. MULTER. Yes. If the lenders of the country won't lend on mortgages unless they are guaranteed, why don't they set up their own guaranty agency?

Mr. REILLY. Mr. Multer, we did not consider that question, but I will be glad to give you my own views on it.

The FHA has been in business now for approximately 20 years. I don't think that FHA has had a fair test, as to what the liability is going to be on defaulted mortgages. As one of my associates said here a short while ago, you had to be a genius to make a mistake in the last 15 to 20 years.

We have had a very excellent situation, full employment at all times, shortage of houses, people who wanted occupancy, and they have gone in there and have kept their payments up because they had the money to.

Now, whether that is going to continue on indefinitely or not I don't know. I don't think the reserves have built up to a point where it could operate as an independent agency, because, say, whatever you think about it, when somebody in a small town out in the country makes a mortgage and wants to sell it to one of the permanent lenders in the big industrial centers, the guarantee of the Government of the United States behind that mortgage has a great deal to do with it, and whether you would destroy the market or not, I don't know.

As worthy as the thought may be, for the Government to get further out of business, I certainly would not subscribe to the FHA Federal

insurance being removed at this time because I think it would demoralize the market.

Mr. MULTER. Well, then, you don't mean what you say here, about getting the Government out of this business.

Mr. REILLY. Yes, sir; I say that, and don't get them further into business, and liquidate FNMA, but your question

Mr. MULTER. I don't follow that. The bill before us is to take FNMA out of Government and make it a private enterprise. And it also says continue FHA and the Government-guarantee program. You don't want the Government to get further into business but you want FHA continued and the FNMA program discontinued.

Mr. REILLY. We think the FHA program is basically sound, with the 80-percent loans, 90- and 95-percent loans on the smaller amounts, insured by the Government, the monthly payments, the reserve for

taxes

Mr. MULTER. Isn't that the nub of it? You take the guarantees out of this, and the banks, particularly the commercial banks, won't buy these FHA mortgages. The reason why you have got an increase in commercial and time deposits, in savings and time deposits from $30 billion to $43 billion, with increase of your mortgage or real-estate loans from $4 billion to $17 billion, is because they are guaranteed by the Government, and you look upon those guaranteed mortgages just as you do upon a long-term Government bond.

Mr. REILLY. That is perfectly true, but if you restrict the banks to conventional mortgages, and you have to make 60-percent loans, you are going to deprive a great many millions of people in the United States of housing that they apparently need, sir.

Mr. MULTER. Yes, we heard that same cry, though, about amortized mortgages. The banks wouldn't make amortized mortgages. The only way was the traditional way, long-term mortgage, 3 years, 5 years, pay it off at the end of that time or renew for the full amount. HOLC came along and proved the way to do is to amortize. FHA has proved the same thing.

Now, don't you think it is time that the real estate and banking and lending fraternities stood on their own feet on this program?

Mr. REILLY. I certainly think it is a worthy objective, but whether you can expect the banks to lend 90 or 95 percent without a Government guarantee is something that I would very seriously doubt. We will lend 60. We are glad to lend them, on an amortized basis.

Mr. MULTER. I hope the test that some people think is the only test to prove whether this program can stand on its own feet will never come. Because apparently unless you get a full-scale depression you will never get the test to see whether these mortgages will stand up.

Mr. REILLY. I don't think you need a depression to test it out. I think you have go to have a greater supply of the houses than are needed for occupancy, and then the market will seek its own level. I don't think you need a depression to do it.

Mr. MULTER. Well, now, you also comment here, along that same line, that we are no longer in an emergency so far as housing is concerned.

I think unfortunately when an emergency goes on long enough we accommodate ourselves to it and overlook it being an emergency and think it is normal.

The fact is we don't have enough housing in this country today. Isn't that so?

Mr. REILLY. We don't think there is an emergency in housing. We think it can be met through normal sources.

Mr. MULTER. Well, do you think it is possible for us to build more than 112 million family units a year in this country?

Mr. REILLY. I suppose it is possible. I don't know that is is desirable.

Mr. MULTER. Is it likely?

Mr. REILLY. No, it is not likely.

Mr. MULTER. Do you agree with the statement that it will take at least 10 years of building, at a million and a half family units a year, to catch up with the demand?

Mr. REILLY. I don't think it would take that long, sir. I am frank to say that I have no alternative suggestion to make, but I think that the housing problem is one that is going to be with us from here out as long as we want to raise the standard of living of people, and to get the ultimate objective it might take that long, but I am talking about normal supply and demand. I don't think we have an existing shortage, except in certain possible areas, but, generally, there has been a catching up of that, and I believe the market is going to seek its own level. It certainly is true in this area.

Mr. DEANE. Will you yield?

Mr. MULTER. Yes.

Mr. DEANE. One of the witnesses testifying yesterday, Mr. Reilly, quoted from a survey conducted by Fortune magazine, which indicates that estimates by Fortune magazine are that the annual average housing construction needed, in the period 1955 to 1960, was 1,400,000. Did you see that survey, or would you agree with it?

Mr. REILLY. I didn't see it, sir, and I am not prepared to say whether it is accurate or not.

I have understood, generally, in talking to bankers throughout the country, that the housing situation is not as acute as it has been, and we are getting back to a more normal market. That certainly is true, I think, in the metropolitan area of Washington, with which I am personally familiar.

Mr. DEANE. Thank you, Mr. Multer.

Mr. MULTER. I understand that you agree with the standby authority given to the President as to controlling the interest rates, flexible interest rates?

Mr. REILLY. Yes, sir.

Mr. MULTER. And the like as set forth in your statement?

Mr. REILLY. Yes.

Mr. MULTER. Tell me, how is that any different from the standby controls we tried to give the President last year? Never mind standby price controls, but referring only to standby credit controls. How is this any different?

Mr. REILLY. Well, it measures the flexibility of the rate by 22 percent, and I think that that is one of the greatest safeguards in it, that the President can determine what that rate should be and not have discounted paper on the market.

Mr. MULTER. Do you think anything has happened since the beginning of last year, 1953, to change our thinking on whether or not the President should have standby credit controls?