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Mr. REILLY. I surely do, sir.

I disagreed with it last year. I agree now that he should have it because there is an abundance of money.

Mr. MULTER. Well, is it only when there is an abundance of money that you need them?

Mr. REILLY. No; but I think I have revised my opinion about it. I think he should have it.

Mr. MULTER. In other words, somebody should have the authority to act when money gets tight and when money gets loose?

Mr. REILLY. That is correct.

Mr. DEANE. Will you yield?

Mr. MULTER. I yield.

Mr. DEANE. One other point: You said that the banks are prepared to move in and do this financing, generally speaking. Is that true? Mr. REILLY. I think it is true, Mr. Deane. I think that you will see, from some figures that I saw the other day, that the time deposits in the various banks, and in the mutual savings banks, in the reserves and insurance, have built up $12 billion in the last 12 months. Mr. DEANE. Where are those banks?

Mr. REILLY. Largely in the eastern section of the United States, the larger sections.

What we have got to do in the banking business

Mr. DEANE. I want to follow the point for a moment. You said in the eastern sections, and in the larger sections?

Mr. REILLY. Yes.

Mr. DEANE. Well, now, the Congress and this committee have to think in terms of the entire country, and I doubt seriously that your statement will measure up so far as the smaller community banks are concerned. Isn't that true!

Mr. REILLY. That is what I was trying to explore for you. I think that what we have got to do is to find some vehicle to bring together the permanent lender and the originator of the mortgage and the homeowner.

I think it is the small areas that have been deprived of what they should have, sir, and I think that that is a challenge to the banking profession, and I hope that if the Government gets out of this business that we will be able to meet that challenge. There is plenty of money available to do it, in my opinion.

Mr. DEANE. Thank you, Mr. Multer.

Mr. MULTER. Mr. Reilly, you say on the last page of your statement: FHA should be free to establish policies consistent with sound insurance practices.

Are you referring there to sound insurance practices such as are followed by the private insurance companies in insuring credit?

Mr. REILLY. No; I don't think the FHA's insurance funds should be diluted with welfare programs. I think it should be an independent insuring agency. These premiums are paid by those people, and I don't think those funds should be diverted for welfare purposes.

Mr. MULTER. Is the FHA program a welfare or subsidy program? Mr. REILLY. No, sir; I don't so regard it. I think it is a sound insurance program.

Mr. MULTER. Is that because it guarantees the bankers and lending institutions against loss?

Mr. REILLY. No; I think it is a sound insuring program.

Mr. MULTER. Yet you won't compare it with credit-risk insurance? Mr. REILLY. With credit-risk insurance?

Mr. MULTER. Yes; that is carried on by the private insurance companies.

Mr. REILLY. I don't think that I understand your question.

Mr. MULTER. Well, are you familiar with the credit insurance issued by private insurance companies throughout the country?

Mr. REILLY. Oh, yes; I am familiar with credit insurance.
Mr. MULTER. Why shouldn't we insure those programs?

Mr. REILLY. I don't think you should.

Mr. MULTER. Why not?

Mr. REILLY. I think that the housing program was something that the people had to have

Mr. MULTER. What good is housing if we don't have an economy in which they can earn the money to pay off their mortgages?

Mr. REILLY. I think if the FHA is let alone, that it will stand on its own feet and will be able to pay them off.

Mr. MULTER. As long as the Government is guaranteeing them? Mr. REILLY. Well, the payoff will come out of the reserves built up out of the insurance premiums paid by the borrowers. I think it is a sound program. But I don't think it has received a sufficient test yet, to say turn it over lock, stock, and barrel to private enterprise and to expect the market to maintain its hold on it.

Mr. MULTER. It would be a sound program provided the Government is not called upon to make any payment, and that any payments that are required to be made under the guaranties come out of the reserves; is that right?

Mr. REILLY. I would say that would be ideal; yes, sir.

Mr. MULTER. And those reserves necessarily would be built up out of the profits of the program?

Mr. REILLY. That is correct.

Mr. MULTER. Isn't that private enterprise?

Mr. REILLY. That is what we think.

Mr. MULTER. Why shouldn't it be private enterprise?

Mr. REILLY. You have got to have the marketability of the loans guaranteed by the Government or you won't be able to sell the loans because a 95-percent loan is not bankable without a guaranty on it.

That is the reason for it.

Mr. MULTER. That is the reason the Government got into the program in the first place?

Mr. REILLY. That is correct. You would not have had any housing if it didn't.

Mr. MULTER. The insurance companies and other lenders wouldn't lend moneys for that?

Mr. REILLY. We don't feel we should lend depositors money at 95 percent and take 25 years to get it back.

Mr. MULTER. That is what this program is. If the premiums don't build up enough reserves the taxpayers' money is going to guarantee you against loss.

Mr. REILLY. I think that is true.

Mr. MULTER. That is not a welfare program, then?

Mr. REILLY. It hasn't operated as welfare. My difference, there would be the clearing up of these slums and doing this work, where the people need actual protection by the Government. In this program the borrower puts his money down, puts his downpayment down, and makes his monthly payments, his credit is analyzed, it is supposed to be a sound basis

Mr. MULTER. Will you admit that we should have slum clearance, and that we must clean out the blights in the various communities? Mr. REILLY. I certainly do; and I don't think we need to go any further than right here in Washington, but I don't think that we should expose this reserve fund to that kind of work. I think it is a problem of the Government.

Mr. MULTER. Then what you are saying is that both programs are needed and they are necessary, the one should be carried on by an agency which will use the taxpayers' money as an outright subsidy, that is the slum-clearance and rehabilitation program, and the other should be kept separate as a strictly business enterprise with the Government in the business.

Mr. REILLY. That is right.

Mr. MULTER. Just one thing more, sir: I noticed that in the beginning of your statement you said that these alteration and repair and improvement loans, in larger amounts, may be justified, but they should be secured by mortgage. And then, in the latter part of your statement, you say that you do not approve of the open-end mortgage. Mr. REILLY. That is right.

Mr. MULTER. Now, if these repairs are to be secured by mortgage, and we are not to have the open-end mortgage, then we have got to get back to the old second or third mortgage market.

Mr. REILLY. No; I think you could pay off your existing mortgage and get a larger mortgage, probably, by the same lender, or by a different one, and wrap it up in one package. The reason we object to the extension of title I to the 5-year period is because we think that it encourages people to be extravagant.

Mr. MULTER. We are now not talking about term. We are talking about the security. At least that is what I intended to direct your attention to. I am not going to get into an argument with you as to whether it should be 3 or 5 years on these loans. We are now talking about the security, and I am directing your attention to the fact that you think that those repair and alteration and improvements loans should be secured by mortgage, in the larger amounts.

Mr. REILLY. We would be glad to amend that statement by first mortgage. That is what we mean.

Mr. MULTER. What is the difference between refinancing the existing mortgage, with a new mortgage, and adding on to that the cost of the repair, and adding the cost of the repair to an open-end first mortgage. It is still a first mortgage.

Mr. REILLY. Yes, but the people will use the money for things other than the house, which they should not do, and they are going to have to get their titles, anyhow, and the laws of the various States are in hopeless conflict on the subject, it stimulates speculation, and a good many people who maybe do not have the same high degree of ethics as others would use that open-end mortgage to abuse the homeowner. Mr. MULTER. What I see in your objection, sir, is that you would

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rather do it your way, of refinancing the mortgage, and adding on the cost of repair to the new mortgage, because that means a financing of a $10,000 mortgage, and paying for a $10,000 mortgage, instead of taking a first mortgage of $7,000 and letting it stay, and adding $3,000 at the end of it.

Mr. REILLY. We feel it is better for the borrower.

Mr. MULTER. Instead of paying a finance charge on $3,000, he is going to pay it on $10,000. That may be good business for the lender but I don't think it is good for the owner.

I think on an open-end mortgage you would be paying a higher premium than you would on a repair loan. Because the people who make those loans would see they got their charges. They wouldn't come through the banks.

Mr. MULTER. I don't think that has been the experience.

Mr. REILLY. In some locations it may have worked, but we think the open-end mortgage leads to things that are not good for the borrower. We think that you should not make the loan unless you get a title, brought down to date, and it costs you almost as much, if not as much, and you would be foolish to make it if you did not do it because of possible intervening judgments and liens against that property, so we don't see that it serves any useful purpose, and that is why we are against it. Not to get additional commissions.

Mr. MULTER. Tell me, what do you think the reaction will be of the banks and insurance companies that are lending money on real-estate mortgages to the program for $7,000 houses with 40-year terms? Mr. REILLY. What do we think the reaction will be?

Mr. MULTER. Yes.

Mr. REILLY. We are absolutely opposed to that.

Mr. MULTER. Do you think that any of the bankers or insurance companies will support that kind of a program?

Mr. REILLY. I do not, sir.

Mr. MULTER. You think not?

Mr. REILLY. I think not. Forty years is too long, and no downpayment is no good.

Mr. MULTER. And the fact that the program calls for issuance or the taking up of any balance unpaid at the end of 20 years, and the issuance of bonds against it, you don't think that would affect the situation?

Mr. REILLY. I don't think that adds a thing to it, because if you have a mortgage in good shape at the end of 20 years, why would you change a 42 percent mortgage for a 212 percent debenture? I don't think it means anything. It is just a bait.

Mr. MULTER. So, first, we have got to find the builder who is willing to build a $7,000 house, and then a lender who is going to lend, even with a guaranty?

Mr. REILLY. That is right.

Mr. MULTER. You don't think that program will produce any houses?

Mr. REILLY. I don't think it is sound, and I don't think it will work. Mr. DEANE. Will you yield?

Mr. MULTER. Yes.

Mr. DEANE. Why can't we have a $7,000 house?

Mr. REILLY. I didn't say that. I said you shouldn't have a $7,000 house with no downpayment and 40 years to pay it back.

Mr. DEANE. What would you recommend for, say, the people in the Southwest Washington area, where a witness yesterday said the average rental was around $40 to $44 a month? What type of housing do you recommend for those people when they are displaced?

Mr. REILLY. I think they have got to be taken care of but I thinkMr. DEANE. What would your organization recommend?

Mr. REILLY. I don't know, but certainly a person living in a slum area now paying a low rental is no kind of a risk to build a house for and sell it to him for $7,000, and take his note and give him 40 years to pay it back. There has got to be some Government subsidy in that, as I see it.

It is a social-welfare problem that has to be solved by the Government and not by lending money to them.

Mr. DEANE. You understand I am not trying to put you on the spot. Mr. REILLY. I understand.

Mr. DEANE. We must do something for those people.

Mr. REILLY. We surely do. I think it is a Government welfare program and should be considered by the Congress as such. And not toss it off into the loan field.

Mr. DEANE. Is that the viewpoint of the American Bankers Association?

Mr. REILLY. It certainly is.

Mr. MULTER. I would like to clear this up. By my questions with reference to the $7,000 house, and I think by your answers, Mr. Reilly, neither you nor I intend to infer that we cannot build a fairly good house for $7,000 in certain areas?

Mr. REILLY. That is right.

Mr. MULTER. But as long as there is a demand for a $10,000 house the builder is going to build the $10,000 house.

Mr. REILLY. I think it is reasonable to assume that.

Mr. MULTER. That is all.

Mr. PATMAN. I want to ask you about this 3 percent, Mr. Reilly, 'under this substitute for FNMA.

This 3 percent is to be paid by the borrower, under the bill as written, as I understand it. Is that your understanding?

Mr. REILLY. That is my understanding of it. It certainly would not be paid by the Second National Bank. We would not pay it. Mr. PATMAN. Well, you heard the discussion here a while ago with Mr. Mason, and you agree that the banks certainly are not going to pay it. They don't expect to pay.

Mr. REILLY. I said my bank would not pay it.

Mr. PATMAN. You don't know of any banker that would?


Mr. PATMAN. So that 3 percent, under this bill, will be paid by the borrower, and it will go into the fund for the public good, and will be forever a part of the capital of the organization. Is that your understanding?

Mr. REILLY. Of course, it seemed to me that that would be the normal phase of it, but the bankers are opposed to that, anyhow. Mr. PATMAN. I understand that.

In other words, on a $10,000 mortgage this Joe Doaks I was speaking of, or John Q. Public, would pay $300-3 percent-into that fund. So he would actually get about $9,700.

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