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Full text of "Post-war economic policy and planning. Hearings before a subcommittee of the Special Committee on Post-war Economic Policy and Planning, United States Senate, Seventy-eight Congress, first session-Seventy-ninth Congress, first session pursuant to S. Res. 102, a reslution creating a Special Committee on Post-war Economic Policy and Planning"

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M (\^'b9..(\\k9 .\)f 




Given By 










S. Res. 33 

(Extending S. Res. 102, 78th Congress) 




PART 13 

JANUARY 19, 1945 

Printed for the use of the Special Committee on Post- War 
Economic Policy and Planning 

91183 WASHINGTON : 1945 



WALTER F. GEORGE, Georgia, Chairman 




SCOTT W. LUCAS, Illinois 

Meyer Jacobstein, Director 

Subcommittee on Housing and Urban Redevelopment 

ROBERT A. TAFT, Ohio, Chairman 
DENNIS CHAVEZ, New Mexico ROBERT M. La FOLLETTE, Jr., Wisconsin 





Statement of— P«8» 
Brigham, Elbert S., president, National Life Insurance Co., Mont- 

pelier, Vt ' 1917 

Kreutz, Oscar, executive manager, National Savings and Loan League. 1931 
Erdmann, Arthur G., president, National Savings and Loan League. 1940 
O'Malley, James J., chairman, legislative committee. National Sav- 
ings and Loan League 1947 

Bestor, Paul, vice president. Prudential Life Insurance Co 1 948 

Howell, Valentine, vice president and actuary. Prudential Life Insur- 
ance Co 1956 

Schwulst, Earl Bryan, executive vice president, Bowery Savings Bank, 

New York City 1958 

NOTE: — There will appear in the final volume an index by subject matter 
covering the entire hearings 




United States Senate, Subcommittee on Housing 

AND Urban Redevelopment of the Special Com- 
mittee on Post- War Economic Policy and Planning, 

Washington, D. C. 
The subcommittee met, pursuant to adjournment, at 10:80 a. m., 
in room 312, Senate Office Building, Senator Robert A. Taft (chairman) 

Present: Senators Taft (chairman), Ellender, and Buck. 

Senator Taft. The committee will come to order. 
The first witness is Elbert S. Brigham, president, National Life 
Insurance Co. 


Mr. Brigham. Gentlemen, my name is Elbert S. Brigham, Mont- 
pelier, Vt. I am appearing at the invitation of your chairman, Senator 
Taft, who has requested me to express my views on certain phases of 
the so-called American housing problem. 

I am president of the National Life Insurance Co., MontpeUer, Vt., 
a company having assets of approximately $291,000,000, of which 
approximately $131,000,000 is invested in loans insured by the Federal 
Housing Administration, under the various sections of the National 
Housing Act. 

Any consideration of the future of housing and mortgage financing 
necessitates that attention be given to interest rates and their relation 
to mortgage activity. Naturally borrowers desire to obtain funds at 
the lowest rate possible, while lenders desire to obtain the highest return 
available in the market at a given time. In any case, both parties 
deserve a fair rate as determined by the market. 

All money rates during recent years have been the lowest in history 
for several reasons. In the first place, the reserve position of our 
banking system has been unusually strong, due in part to gold importa- 
tions prior to our entry into the war. Secondly, the Federal Govern- 
ment has exercised almost absolute control over the money markets and 
has freely loaned its credit to finance private industry, because of the 
desire to keep rates low and thus make it possible to finance the war at 
low interest cost. 

The interest rate on mortgage loans has been influenced by these cir- 
cumstances, as well as by other factors, such as the limited number of 
new security issues and the restrictions on building during the war 



One consequence of low interest rates is a series of suggestions, many 
coming from realtors, that interest rates should be still lower and should 
be established and maintained at fancifully low levels by governmental 

No one questions the good intentions of the persons making these 
suggestions relative to governmental control of interest rates on 
mortgage loans, but consideration should be given to the rights of 
lendc's — ^the savers of the Nation — as well as the borrowers, and to 
the fact that the majority of the savers are dependent upon the 
income from their savings to support them when incapacitated for 

Interest rates, for instance, are an important factor in the 
cost of life insurance. Let me illustrate this by showing in the 
following table the effect that interest earnings have upon the annual 
cost of a $1,000 ordinary life policy issued at age 35: 

T , . Anntial 

Interest assumption: premium 

3 percent... $21. 08 

2 percent 23. 80 

1 percent 27. 07 

percent 30. 97 

It is evident that interest earnings computed at 3 percent on 
reserves account for $9.89 annually in reducing the cost of this policy. 

So, to the extent Government or any other agency interferes with 
interest rates to benefit one group, say, to provide low-cost housing, 
another group is in effect taxed to pay the bill. One group may have 
the benefit of low-cost housing, and another group may be denied 
the standard of housing to which it is entitled. 

The over-all effect on life insurance is significant. For a group of 
49 United States legal reserve life insurance companies, which, at 
the end of 1943, held 91 percent of the assets of all such companies; 
net investment earnings on mean ledger assets dropped from a rate 
of 5.03 percent in 1930 to 3.29 percent in 1943. This decHne in 
earnings has meant that during the 13 years, 1931 to 1943, inclusive, 
the net investment income of all United States legal reserve life 
insurance companies was over $4,000,000,000 less than it would have 
been at the 1930 level. For 1943 alone, net investment income was 
approximately $600,000,000 less than it would have been at the 1930 
rate. This income reduction for 1943 is about $200,000,000 greater 
than the amount of dividends actually paid and credited to policy- 
holders and is a sum over $250,000,000 more than was paid for initial 
premiums on new insurance. 

There are in this country 70,000,000 policyholders, providing their 
own social security through life insurance. These people are paying 
the price for low interest rates. 

While mortgage interest rates currently are low, a substantial and 
satisfactory spread must exist at all times between the rate on mort- 
gage loans and that on Government bonds, or mortgages cease to be 
attractive to investors. Let us take, for example, loans with 4^- 
percent interest rate. From the gross rate the investor must deduct — 

1. His own expenses of buying and handling the loans which may 
approach one-half of 1 percent. 

2. The investor must amortize or write off any premium paid, and 
the period of amortization must be relatively short because of the 
short average life of loans. 


3. If they are monthly payment loans, or even quarterly or annual 
payment loans, the expenses of servicing are likely to equal one-half 
percent or possibly three-fourths percent. 

4. The investor also must make some allowance, one-fourth percent 
or one-half percent, for losses which invariably are bound to result, 
no matter how carefully loans may be selected. 

Thus, the investor ends up with a probable net return of approxi- 
mately 3 percent. If the loans bear an interest rate of 4 percent, his 
net return falls below 3 percent. 

Instead of buying mortgage loans, the investor can purchase long- 
term Government bonds at 2^^ percent with no risk of loss. The bonds 
can be registered, and on each interest date the investor receives a 
check. He has no problem of servicing, personnel, foreclosure, the 
liquidation of acquired real estate, or any of the other problems in- 
herent in mortgage lending. Permit me to remind you again with 
great emphasis that the return on mortgage loans, and I refer now to 
the net return, must be attractive to investors in order to induce them 
to purchase loans. Prospective mortgagors are in constant competi- 
tion with other borrowers, including railroads, industrial organizations, 
and all other seekers of credit. Institutional lenders, quite naturally, 
in fulfillment of the trust imposed upon them to obtain the highest 
possible yield commensurate with safety, will commit their capital to 
the investments affording greatest return. 

One of the great uncertainties in looking ahead to the construction 
and the financing of homes and other buildings is the part which Gov- 
ernment may or may not play in the future through the provision of 
so-called public housing. Tliis uncertainty is aggravated when hous- 
ing becomes a social goal, regardless of the ability or lack of ability of 
a project to sustain itself economically, and must rely upon Govern- 
ment subsidy for its support. Housing then becomes a means either 
of pump-priming or social reform, in the latter's larger sense, and gives 
rise to a number of the questions frequently associated with each of 
these processes. Investors, naturally, wonder whether housing has 
entered an era in which its otherwise promising future is to be obscured 
by threats of govermnental subsidy and competition. 

This becomes especially pertinent if resources of the public treas- 
uries, thought by some to be unlimited, stand ready to finance proj- 
ects and if managers of these projects are not expected to produce 
economically successful results. A large volume of subsidized housing 
also becomes an influential factor in a local housing market and may 
aft'ect values adversely although an equal number of old units is 

The objective of low-cost housing is to provide housing for so-called 
low-income groups at prices they can afford to pay. This objective 
is accomplished not by the production of improved housing at lower 
cost but by subsidies in the form of low interest rates, by unduly long 
amortization, by contributions by a Government agency with money 
raised by taxation, and by local tax concessions. 

The methods used and the results obtained may be summarized 
as follows: 

A low-cost-housing corporation organized under State laws obtains 
its financing by the issuance of two classes of bonds. 

A bonds are issued to the extent of at least 10 percent of the cost. 
These are sold to private investors, are exempt from all taxes, and 


for this reason command a low rate of interest, averaging 2.08 percent 
in 1943. 

B bonds are issued to the Federal Public Housing Authority to 
complete the financing out of money appropriated for this purpose 
by the Federal Government. These bonds average to constitute 
two-thirds or more of the financing. The rate charged the project is 
one-half of 1 percent above the going Federal mterest rate having a 
maturity of 10 years or over. The average rate paid by housing proj- 
ects on B bonds in 1943 was 2.65 percent, or, after allowing for the 
one-half of 1 percent margin, but 0.15 over the interest rate on 10-year 
bonds. The term of the B bonds is 60 years, but as an average propo- 
sition amortization payments do not begin for about 23 years. No 
principal payments are made upon the B bonds until the A bonds are 
paid off. Hence, in effect, the Government takes a second mortgage. 

The average rate on the complete financing was 2.45 percent, or less 
than the Government is paying on its 27-year bonds just issued, while 
the security obtained for its loans to housing projects in the form of 
B bonds is assumed to have a life of 60 years. This assumed life is 
longer than any prudent trustee would consider loaning on an apart- 
ment building which may not last that long. 

Senator Taft. You say there is a period of 23 years before there is 
any amortization on the Housing Authority bonds? 

Mr. Brigham. Yes, about 23 years. That would vary with differ- 
ent projects, but the average would be 23 years, I understand. 

Senator Taft. Before that you mean they pay off the 10 percent? 

Mr. Brigham. Yes. 

Senator Taft. That is the amortization for the first 23 years? 

Mr. Brigham. Yes, on the A bonds. 

Senator Taft. Would you say that the 4)^-percent investment 
enables the insurance company, we will say, to pay 3 percent on its 
reserves? Does it cost IK percent, the difference of lli percent, or a 
little less, maybe? 

Mr. Brigham. It might. It would depend a little bit on the eco- 
nomic conditions that you run into in the period covered by the mort- 
gage. If you had few foreclosures there would be practically no losses. 

Senator Taft. One thing has happened already, and that is that 
these veterans' loans are 4 percent. Have you any of those? 

Mr. Brigham. We are receptive. We haven't had any offerings 

Senator Taft. Will not that tend to break down all mortgage loans 
to 4 percent? 

Mr. Brigham. I could not answer that question until we have had 
some experience with them. 

Senator Buck. Mr. Brigham, what do you think is the minimum 
rate at which mortgage money is attractive to private investors? 

Mr. Brigham. The general average rate? 

Senator Buck. The minimum below which it would not be 

Mr. Brigham. Well, considering all the cost, I think below 4 per- 
cent would not be attractive. Of course, I am speaking from the 
standpoint of a life-insurance company doing business over a large 
number of States. Perhaps a bank would loan in its own community 
for a lesser rate, where the banks pay a very low interest to depositors 
in savings banks, and of course commercial deposits receive no interest. 


Turning now to the operation of the project we find that it has two 
■sources of income: 

1. Rental income paid by tenants. 

2. Annual grants from the Federal Public Housing Authority out 
of appropriations from the Federal Treasury which are not repayable. 

The grant from the Federal Treasury in 1943 amounted to an 
Average per unit per month on all F. P. H. A. -aided projects of $8.38 
.and if earnings are insufficient this may rise $12.13 per unit per month. 

The subsidy in the form of low interest rates, averaging 2.45 percent 
obtained from tax exemption and the use of govermnent credit, 
together with the 60-year amortization period, result in an extra- 
ordinarily low debt service cost of $12.57 per unit per month. This 
figure represents a government subsidy of $12.66 below the cost of 
capital obtained from private sources at a rate of 4}^ percent and with 
an amortization period of 25 years. 

The local taxation concession is not available to me from all proj- 
ects, but on one it is $2.22 per unit per month and we will consider 
an average $2 per unit per month. 

We, therefore, have the following average subsidies for low-cost 
housing per unit per month: 

1. Direct payments from the U. S. Treasury $8. 38 

2. Advantage in low-rate financing 12. 66 

3. Local tax concession 2. 00 

Total 23.04 

The average rental income per unit per month was $20.17. 

Therefore we do not obtain low-cost housing by any miraculous 
method as compared to housing provided by private industry, but 
by eliminating charges which private industry must pay and trans- 
ferring these charges to all taxpayers who must pay them in the end 
through higher levies, local, and national. 

The question is. Can a private housing industry exist alongside a 
low-cost housing industry subsidized to the extent that the above 
analysis shows? 

At a meeting in Chicago last winter I made some inquiries from 
managers of low-cost rental housing projects as to how it was deter- 
mined what families should have the benefit of low-rental housing. 
I was informed in one case that the borderline was a family having 
a yearly income of $1,600. That is, a family having an income of 
more than $1,600 must find its living quarters elsewhere and, as the 
above analysis indicates, pay more than twice the rent for comparable 

Are not the families on the borderline going to demand from Con- 
gress additional appropriations to extend low-rental housing so they 
can be taken in? And there will always be a borderline. 

I appreciate the fact that there exists a problem of supplying hous- 
ing for people with low incomes. If low incomes result from sub- 
standard wages earned by those who are able and willing to work, are 
we not attacking this problem by establishing minimum wage stand- 
ards by government, and by collective bargaining by organized groups 
of workers? 

In times of depression, do not unemployment insurance and per- 
sonal savings assist through a period of adjustment? 

When we come to the problem of housing families whose members 
are unwilling or unable to work, we have a problem of assistance 

91183 — 45— pt. 13 2 



which it seems to me can be solved insofar as housing is concerned by 
the issuance by the Government of rental certificates covering a por- 
tion of the monthly rental. This would be a form of relief not dis- 
guised by hidden subsidies. 

In solving this pi oblom of housing for low-mcome groups, we should 
consider that low-income groups do not exist only in big cities. They 
a^-e to be found in small cities and towns and in farming areas all over 
this country. If the Government is to provide subsidized low-cost 
housing, it should not confine it to New York City, Chicago, Detroit 
Los Angeles, and other large cities, but extend it to all its citizens 
wherever they may be. 

Since shelter is only one factor in the standard of living, should not 
needs for food and clothing be equally entitled to Federal subsidy? 

But before entering upon such a program, should we not count the 
cost unless there is no limit to the Goveinment's borrowing capacity 
and the sums it may raise by taxing its productive people? As 
Browning put it, the problem is not to consider what is fair in life 
providing it could be but finding first what may be, then making it 
fair up to our means, quite another thing. 

The question of devising a peacetime housing organization to 
function when the life of the National Housing Agency presumably 
ceases would seem to depend entirely upon our national point of view. 
If the time has come when the Fedeial Government is going to enter 
into the extensive subsidization of housing in Ameiica, then in all 
likelihood some kind of over-all Federal agency will be necessitated, 
with especial emphasis being placed in its organization upon this 
activity. On the other hand, if the spirit and practice of free enter- 
prise are to prevail, the position of the Federal Government becomes 
one of assisting the private construction, financing and ownership of 
homes. My comments to you are based upon the latter presumption. 

In my opinion, as well as that of many other persons who have 
cooperated with it, the Federal Housing Administration has made to 
housing the outstanding contribution of our generation, a contribution 
which provides fair returns to the investor and the building interests, 
and also make it possible for the borrower to purchase a home on a 
fair basis. 

Senator Taft. Mr. Brigham, you bought a large number of F. H. A. 
mortgages. What is the cost of the house that was insured? 

Mr. Brigham. Well, they vary. I haven't the figures here, but I 
should say it would run from $3,000 up. 

Senator Taft. Have you any idea as to what the average is, about? 

Air. Brigham. No; I cannot give you the average. I can very 
easily send it to you. 

Federal Housing Administration sec. SOS loans made by National Life, 1935 to 1940, 





1935 (6 months) . . 


$2, 518, 182. 06 
11, 093, 938. 70 
9, 885, 572. 83 
7, 828, 797. 23 
13, 662, 492. 45 

$4, 472. 79 

1936 .. 

5, 031. 26 

1937 -- 

5, 510. 35 

1938 . .- -- -- 

5, 254. 23 


4, 874. 24 

1940 - 

4, 645. 30 


11, 681 

58, 116, 589. 75 

4, 975. 31 



National Life Insurance Company — purchases and holdings of Federal Housing 
^ Administration-insured small homes and rental housing 

Small homes (Federal Housing Administration 203 and 603): 

Number _... 


Average per loan 

Rental housing (Federal Housing Administration 207, 210, and 



Average per loan _.. 

Total, Federal Housing Administration's: 



Average per loan 

Total purchased 
to Dec. 31, 1944 

32, 068 

$146, 589, 506. 52 

$4, 571. 21 


$39, 242, 378. 45 

$388, 538. 39 

32, 169 

$5, 776. 73 

Total held, Dec. 
31, 1944 

25 775 

$102, 406, 44* 90 

$3, 973. 09 

$324, 001. 86 

25, 863 

$130, 918, 614. 36 

$5, 062. 00 

Senator Taft. What I am concerned about is how we can reach the 
people, how an34)ody can get a home where the income is, we will say, 
below $1,000. One thousand six hundred dollars is unduly high. It 
was intended to be lower than that. Even in New York City it is 
supposed to be $1,300. But how do we reach people under $1,000? 
Even a $3,000 home will not do that, certainly not without some sub- 

Mr. Brigham. It would depend on where it was located. 

Senator Taft. Well, in a city of any size. 

Mr. Brig HAM. My suggestion was, a rent allowance by way of 
a subsidy, if you have to reach those people. 

Senator Taft. Nobody is going to build a new home for those 
people on a rent-allowance basis. Nobody is going to build a new 
home on the theory that there are going to be a certain number of 
people in the future some day that some board is going to allow rent 
allowances to. 

Mr. Brigham. I assume the Government would have to make a 
contract with the agency building the house. 

Senator Taft. I want to know whether there is any way in which 
private people could invest in low-cost housing and receive the same 
subsidy that metropolitan housing authorities get today. 

Have you any suggestion on that point? 

Mr. Brigham. Well, I have no opinion on that. 

Senator Taft. Another suggestion was made to me that there 
might be some way in which the insurance company or any other 
individual who proposed to put all equity, 100 percent in rental 
projects could be given the assurance of a direct subsidy on condition 
that they rented on the low-rent basis. Have you any suggestion 
as to that? 

Mr. Brigham. I haven't any suggestion on that. 

Some companies have done that. Of course, we are located in a. 
small city where we haven't any opportunity locally, or within easy 
reach, to do that. 

Senator Tafi. There has been some talk about $3,000 houses, but 
whenever you get down to any average income community of any 
size, as nearly as I can see the F. H. A. mortgages run on $5,000 and 
$6,000 houses, as a rule. 

Mr. Brigham. Well, the average has gone up now with the higher 
cost of building and scarcity. We could very easily take the mort- 
gages that we placed in 1935, 1936, and 1937 and give you an average 
of those. 


Senator Taft. In a small town in Vermont, you would be more able 
to build a $3,000 house than you would in a larger city, I suppose. 

Mr. Brigham. You could not do that now, with the costs as they 
are, of course. 

Shall I proceed? 

Senator Taft. Yes, go ahead. 

Mr. Brigham. By mobilizing mortgage credit on the insurance prin- 
ciple, the F. H. A. has taken a long step toward preventing those pe- 
riods of shortage of mortgage funds which, in the past, have contributed 
to the severe contraction of lending with high interest charges and 
which, in turn, has been a factor in generating extreme fluctuations in 
residential building. By establishing minimum standards of construc- 
tion, site requirements, and planning, the F. H. A. has protected the 
borrower against errors to which the uninitiated are very liable. By 
establishing definite and proper requirements for amortization, down 
payments, tax and insurance payments and earning capacity, the 
F. H. A. has given the borrower reasonable assurance that he will be 
able to carry and discharge the debt. The builder and developer like- 
wise benefic from the F. H. A. service — specifically from the selection 
of the borrowers, the experience and objective judgment of the 
F. H. A. upon the venture, and the increased marketability of the 
house that willingness of the F. H. A. to insure the loan provides. 

May 1 give the loan experience of the National Life Insurance Co. 
over the past 10 years to illustrate the success of the Federal Housing 
Administration? During this time the company has made loans on 
32,169 residences and apariment buildings for $185,831,885. Fore- 
closure has been completed on only 52 residences and 4 apartment 
buildings, aggregating $3,518,596. The average monthly payments 
made by residence borrowers, including amonization payments suflB- 
cient to give them complete ownership in from 10 to 25 years, and 
including tax and hazard insurance payments, have averaged just 
about what these families would pay for rent. 

The F. H. A. serves as a distinct aid to the maintenance of private 
enterprise by making it possible for privately owned capital to assume 
risks otherwise hardly justifiable. F. H. A., in other words, has 
aided the marshalling of private capital for a most worthy social 
purpose. Payments to the insurance funds create reserves to meet 
estimated losses, and the Government assumes the unpredictable risk. 
What better formula yet has been devised to aid the continuation of 
capitalistic and democratic freedom of enterprise? 

When the vv^ar is over, the F. H. A. should, in my opinion, be 
restored to its position as an independent loan-insuring agency 
responsible directly to the President and to Congress. It is sometimes 
claimed, mainly by the proponents of public housing, that since both 
the F. H. A. and the Federal Public Housing Authority deal with 
housing, they should be plnced under a single agency, along with the 
Home Loan Bank System, in order to insure a coordinated housing 
program by the Government. Whatever coordination is achieved in 
this way is likely to be more artificial than harmonious. However, 
attractive a simple streamlined organization may appear, I suggest it 
is not the way to achieve operating efficiency where the activities 
involved are complex and variegated. The organization should be 
determined by the activities and not the activities by the organiza- 
tion. If subsidized pubUc housing and mortgage insurance for private 


housing are combined, one of them is very Hkely to become subordi- 
nated to the other. Their methods and their basic objectives are 
essentially different. In view of the vastly greater actual and po- 
tential significance of mortgage insurance for private housing, it 
would seem that this activity should dominate the set-up. However 
fair-minded a common administration might wish to be, it would find 
it difficult to serve two masters. The actual result might depend 
very considerably upon the economic predilection of the administra- 
tion. It would be difficult for any administrator to coordinate and 
harmonize such diversity of interest as is represented by public and 
private bousing, the one having the objective of providing low rental 
units regardless of cost, the other to provide shelter on a basis of 
paying costs through a fair return to private capital and payment of a 
fair share of the cost of Government through taxation. 

According to the last annual report of the National Housing Agency, 
employees of the Federal Public Housing Authority outnumbered 
those of the Federal Housing Administration by more than 3 to 1. 
While this result may arise from the difference in the nature of the 
activity, at the same time it suggests that the administration might 
be influenced toward public housing by sheer weight of numbers. 
Again, the personnel of the top agency might represent a background 
predominantly in public or private housing and this would be a factor 
in the policies of the agencies. Moreover, it is well known that the 
public-housing movement enjoys the support of many wxll-organized 
and extremely vocal organizations which vigorously prosecute their 
case in Washington, as I believe investigation would abundantly 

The United States Public Housing Authority now known as the 
Federal Public Housing Authority is a relativel}'^ new creation in 
Government and, as an agency created to provide public housing, 
its implications to date have been unbounded For these reasons 
alone, if for no other, this agency should function independently and, 
again, should be obligated to report to the President and to Congress, 
in order that the Members of Congress and the people may have full 
knowledge of the activities trends and course of public housing in this 
country, with the exact cost thereof and a plain statement of the 
subsidies granted, either direct or hidden through credit and tax 
advantages. As a former IVfember of the House of Representatives 
for 6 years, I believe I possess some appreciation of the desirability of 
keeping Congress well informed on matters of this kind. 

I also believe that the Federal Home Loan Bank Administration 
should function independently because its activities differ greatly 
from those of the Federal Housing Administration as a loan-insuring 
agency, and from those of the Federal Public Housing Authority as 
an instrumentality to provide subsidized public housing. Omitting 
the H. O. L. C. which, being in liquidation, probably will be of de- 
creasing importance in the future, the principal elements of the Federal 
Home Loan Bank Administration are the Federal Home Loan Bank 
System and the Federal Savings and Loan Insurance Corporation.. 
The latter organization is wholly devoted to serving the safety of 
investors in savings and loan associations, and in practice the home- 
loan banks are largely mortgage banks for the benefit of savings and 
loan associations. While savings banks and insurance companies may 
be members of the Home Loan Bank System, 99 percent of the 


membership in terms of numbers and 87 percent of the membership 
in terms of assets, are savings and loan associations. No criticism of 
this arrangement is intended here, as it is cited merely to show that 
the Federal Home Loan Bank Administration operates in a specialized 
field of mortgage finance. 

Senator Taft. Is your company a member of the Home Loan 
Bank System? 

Mr. Brigham. No; it is not. 

Senator Taft. i think only a few insurance companies are. 

Mr. Brigham. Very few of them. 

Senator Ellender. Mr. Brigham, as you know, there has been a lot 
of talk in recent \^ears about the establishment of so many bureaus 
and so many this and that, that Congress should take some means of 
consolidation. Now, I am just wondering. 1 listened to what you 
had to say about your views there, in saying, in effect, that all of these 
various agencies named and discussed by you should remain separate. 
As I understand, they have been under one head for the past 2 years. 
Have 3'ou found any diflerence in the way they are being handled now 
in contrast to the way they were being handled prior to their consoli- 

Mr. Brigham. No; I cannot say that we found very much difference. 

Senator Ellender. If that be true, don't you think it is advan- 
tageous to the Government to have them under one head and thereby 
save expenses? Quite a few witnesses testified that under the old 
set-up we had a lot of duplication of efibrt. For instance, in appraising 
various properties, one agency worked in the field of the other, but by 
consolidating all of these agencies and placing them under one head it 
is possible to use the same persons to appraise the value of properties 
for all the agencies that you mentioned. Wh}^ would not that be a 
good thing? 

Mr. Brigham. Of course, the Federal Housing Administration is 
selecting loans that they expect will pay out. They select the bor- 
rower as a man who pays his bills, who has good character, and a 
reputation for making payments, and they select the house as having 
a value so they can safely insure it. Their point of view is to insure 
a loan that has every expectation, in normal times, of paying out. 

Senator Ellender. Wliy could not that same policy be followed 
whether it be handled in one agency or a number of independent 

Mr. Brigham. Of course, the low rental housing projects are entirely 
different. They are not expected to pay out. 

Senator Taft. In discovering the true value of a house, why should 
they do it independently? Why could not one consolidated bureau 
do that? 

Mr. Brigham. I suggest a little later here how it might be done. 

Senator Taft. I think Mr. Blandford recommended an over-all 
single unit, but provided for a certain amount of autonomy on the 
part of the units under it. 

Mr. Brigham. There is quite a lot of latitude in the administration. 

Senator Ellender. One of your chief criticisms, as I understand 
it, is you prefer to have an independent agency because this agency 
can report back to the Congress. We get reports from various 
agencies. I caimot see any reason why such reports could not come 
through the one agency rather than have a lot of agencies reporting. 


They could all make their reports to the President through the head of 
that agency. It strikes me that Congress would be just as well 
informed that way as though the agency made it direct to the Con- 
gress. Is that not true? 

Mr. Brigham. Well, my experience has been that the size of a docu- 
ment had some effect on whether Congress paid much attention to it 
of not. 

Senator Ellender. Most of us do not have the time to delve into 
all of them at any rate. 

Mr. Brigham. That is true. 

Senator Ellender. It strikes me, as I understand your testimony, 
that that seems to be the chief and only criticism that you make here. 

Mr. Brigham. We had a good many years' experience with the 
F. H. A. as a separate entity. 

Senator Ellender. I understand. 

Mr. Brigham. Our experience with it was as a separate entity. 
We have had less experience with this combination. How it is going 
to work out in the end I do not know, but we had very good experience 
with it as an independent agency devoted to this specific purpose, 
enabling people of merit to have the means of getting a house, so they 
could own it in the end at a fair price. 

Senator Ellender. Yes. I hoped that some of the critics of 
bureaucracy would come in heie and help us to consolidate some of 
these agencies rather than continue their existence as independent 
agencies. There is entirely too much duplication of effort in our 

Mr. Brigham. The Federal Housing Administration, on the other 
hand, insures mortgages for all types of lending institutions including 
national and State banks, mortgage companies, insurance companies 
and savings banks, as well as the savings and loan associations. 
Since the operation of mortgage insurance has little in common with 
the operation of deposit insurance, of central mortgage bankmg or 
the provision of public housing, an independent organization would 
promote operating efficiency. Also, it would prevent the F. H. A. 
being subordinated to the interests of a specialized group in the mort- 
gage finance field. The responsibility of each agency would rest 
squarely upon the administration of that agency, and not be diffused 
and concealed by the attempt of a single administration to reconcile 
differing and sometimes conflicting interests. 

It is true that there are certain grounds of policy upon which these 
agencies should at times present a united front. For example, at the 
present time, like all institutions in the mortgage-lending field, the 
F. H. A. and the Federal Home Loan Bank Board need to exercise 
restraint upon inflationary lending at higher and higher loan levels. 
But the fact that this is of vital concern to each is all the more reason 
for independence of organization so that each of them is free to work 
out its own proper policy and at the same time to accept sole respon- 
sibility for the consequences. The F. H. A. should be as free to 
refuse mortgage insurance to savings and loan associations as to any 
other lender when it considers that loans are excessive. And it is 
my observation that at present, savings and loan associations are 
more of a factor in increasing loan values than any other type of 
institutional lender. 


Certainly differences of opinion as to methods and manners of 
appraisals and other practices could be no greater if the F. H. A. 
were functioning independently than is the case at present between 
the F. H. A. and certain other branches of the National Housing 
Administration. This may well be demonstrated by a comment 
found on page 35 of the December 1944 issue of Banking, the journal 
of the American Bankers Association, which, in commenting on G, I. 
loans, said: 

Another important factor in this issue is that some savings and loan associations 
have been much more prone to go along with present inflated values with more 
liberal appraisals than has F. H. A. The latter, while recognizing a scarcity 
inflation, has chosen to be more conservative in determining a property's "reason- 
able normal value," which of course benefits the lender. 

The loan-guarantying activities of the Veterans' Administration 
as already set up are not part of the National Housing Agency, and, 
therefore, presumably are outside the scope of this discussion. Yet^ 
while I believe the efforts to assist veterans in the purchase of homes, 
farms, and businesses deserve greatest commendation, in my opinion 
it is exceedingly unfortunate that the G. I. loans were not worked out 
as a part of the F. H. A. instead of creating virtually a new housing 
agency. A separate insurance fund could have been created in addi- 
tion to the several now functioning and the Government could have 
paid all or part of the mortgage insurance premium if it desired. 
Other modifications with ease could have been made to assist veterans 
with their loans and a long step in the direction of unified housing, 
administration would have been taken. 

To sum up, I believe that the Federal Housing Administration, 
the Federal Home Loan Bank Administration, and the Federal 
Public Housing Administration should function separately, because 
each has been created for a vastly different purpose. However, 
this belief in no way ignores the constructive work done by the Na- 
tional Housing Agency during wartime, when it becomes necessary to 
ignore the significance of many matters which are of great importance 
in peacetime and which dare not be overlooked in discussing post-war 

If it seems desirable for the National Housing Agency in some form 
to be continued, very useful functions might be performed along the 
lines of some of the suggestions made by Administrator Blandford 
during his statement at the opening of these hearings last autumn. I 
quote Mr. Blandford from the report on the hearings: 

We must build better houses for less money. The National Housing Agency 
can perform a technical service unavailable elsewhere, relating to housing stand- 
ards, building materials, and construction methods. * * * 

The significance of this suggestion was pointed out very emphat- 
ically in a recent study of "housing costs" made by the National 
Housing Agency, which showed that a 20-percent reduction in the 
cost of a house and lot is more than three times as effective in reducing 
monthly costs than a 20-percent reduction in the rate of interest 
charged for a loan. Specifically, total monthly payments and costs 
of a $5,000 house would be reduced 5.4 percent over a 25-year period 
by a reduction in the intei'est rate from 5 to 4 percent, while a reduc- 
tion in construction costs from $5,000 to $4,000 would reduce monthly 
payments by 16.4 percent. 


Furthermore, the National Housing Agency or whatever it may be 
called, can render very useful services by conducting studies as to 
housing needs, and making these availal)le to builders, to commimities, 
to the F. H. A., to the Home Loan Bank System, to the Federal 
Public Housing Administration, and all other interested agencies. 
This would assist builders, civic leaders, and financing agencies to 
determine the greatest need for housing, and would direct interested 
parties to the opportunities which always repose in such need. 

If the National Housing Agency were to undertake these functions, 
it might well be organized within the Department of Commerce, 
where its findings could be made available to all interested groups in 
m'ch the same manner as the Bureau of Standards. 

In conclusion, it seems appropriate to point out that the American 
peonle are the best clothed, best fed, and best housed people in the 
worl I. This fact in no way reduces the need for strong efforts 
d'rected toward improvement of housing in America and particularly 
for those people who experience only low housing standards. How- 
ever, in our anxiety to accomplish this, let us remember that the 
present high standard of American housing has been achieved through 
private enterprise. Let us give private enterprise opportunity to 
continue performing, in the future, with credit to itself and our coun- 
try, as it has functioned in the past, instead of restricting private 
enterprise and instead of having the Government take over functions 
which probably it cannot perform as well as private enterprise has 

Senator Taft. Mr. Brigham, we are very much obliged to you for 
coming down. The earlier part of your statement, I take it, was a 
very strong play on the point that the interest rate on F. H. A. loans, 
for instance, be not reduced, that is, that the 4}^ percent rate is neces- 
sary if people who buy insurance policies are going to have the same 
incentive as they have today, with social security, and everything 
else; in other words, that the small investor's interests, the small 
saver's interests are at least of equal importance to the interests of 
the man who buys a house. 

Mr. Brigham. Well, there are 70,000,000 policyholders and a large 
number are small borrowers. They are interested on the side of 
having low-cost insurance, and they want to be paid a fair rate. 

Senator Taft. Are your F. H. A. mortgages mostly 80 percent mort- 
gages or 90 percent? 

Mr. Brigham. First, they were 80 percent, then 90 percent. Of 
course, the earlier ones are now paid down, so they are probably 50- 
percent mortgages. 

Senator Taft. I note from your general figure that the average per 
dwelling unit seems to be about $5,700, which would make, I suppose, 
something like $6,500 or $7,000 the average cost of the house or apart- 
ment financed in that way. 

Mr. Brigham. Those were over-all figures. They include apart- 
ments in which we had large investments. If you are interested, I 
can very easily send you the average F. H. A. loan. 

Senator Taft. We have some figures from the F. H. A. itself show- 
ing the average, I think, pretty well, but I would be interested to know 
what your company has. 

Senator Ellender. Do you know approximately what your invest- 
ment in apartment houses is? 

91183— 45— pt. 13 3 


Mr. Brigham. How much money? 

Senator Ellender. Yes. 

Mr. Brigham. I cannot give you the figures offhand. 

Senator Ellender. You can easUy figure that out? 

Mr. Brigham. Yes. 

Senator Taft. How much of that is reutal housing and how much 
is individual housing, do you know, roughly? 

Mr. Brigham. I cannot give you the exact figures because I haven't 
them with me, but the large apartment projects make up the bulk of 
our foreclosures. I think it is a remarkable thing that out of all the 
F. H. A. loans we placed only 52 residence loans have been foreclosed. 

Senator Ellender. That is over a period of how long? 

Mr. Brigham. Ten years. You would expect more casualties in 
families, from death, divorces, and so forth. 

Senator Ellender. I presume those occurred in the early years of 
the loan, 

Mr. Brigham. Yes; in the early years. We have very few now. 

Senator Ellender. What became of those projects? Do you 
know whether or not the guaranties made by the Government were 

Mr. Brigham. I haven't followed them all, but the bulk of them, 
over $3,000,000 involved in the foreclosures, are two large apartment 
projects, and in the end they will probably work out all right, and the 
F. H. A. will not lose anything. They will be refinanced under present 

Senator Taft. Thank you very much, Mr. Brigham. We appre- 
ciate your assistance. 

At this point, I wish to put into the record a letter addressed to me 
by the Metropolitan Housing Council of Chicago in response to our 
request for a statement of their views on the question. 

(The letter referred to is as follows:) 

Metropolitan Housr,NG Council of Chicago, 

Chicago, III., January 15, 1945. 
Senator Robert A. Taft, 

Chairman, Subconnnittee on Hoiising and Urban Redevelopment, 

Senate Post-war Commiitee, Senate Office Building, Washington, D. C. 

Dear Sir: As your subcommittee is not hearing local groups such as ours, we 
are taking the liberty of submitting our conclusions, based on 11 years of work in 
housing, as to the fundamental requisites of our national post-war housing policy. 
We are a citizen group, consisting of realtors, mortgage bankers, women's organ- 
izations, architects, builders, sociologists, educators, labor representatives, law- 
yers, industrialists, and neighborhood groups, functioning in the metropolitan 
area of Chicago. 

We see a sound post-war housing program for the Nation as the key to the 
survival of the cities. The reconcentration of population within the great cities 
must be assured to enable them not only to achieve their maximum potentialities, 
but to actually avoid municipal bankruptcy. Such a program will likewise create 
employment, national prosperity, and social stability. 

We believe the success of this objective to be dependent on — 

1. Creation of a single, permanent housing agency. It would be desirable that 
the head of this agency be given Cabinet status. The problems of research, 
finance, construction standards, insurance of mortgages, and insurance of deposits 
of building and loan associations can be most efficiently and vigorously directed 
under unified leadership. Disintegration of the national housing fram.ework 
among numerous competitive agencies will produce formlessness in the program, 
inefficiency, and waste. An illustration might be cited today in the inconsistency 
of the policies of the Federal Home Loan Bank Agency and the Federal Housing 
Administration. A definite hold-the-line policy in the latter agency is expressed 
in a fine appraisal organization, coast-to-coast, doing a good job in stemming a 


run-away inflation by controlling their appraisals against the inflation in the real- 
estate market. The Federal Home Loan Bank Agency, which insures deposits 
on building and loan associations, has no comparable system of appraising mort- 
gages made by the building and loan associations with their deposits, and is ac- 
cordingly condoning a run-away market. Surely a strong permanent National 
Housing Agency would not permit such an inconsistency. 

2. A sound national public housing program. As soon as the progress of the 
wai permits, materials should be released and the Congress should provide funds 
for resumption of the United States Housing Act program, to be sustained until 
such time as a better formula for the housing of that segment of the population 
which cannot pay an economic rent is produced. 

3. Aid to private enterprise to clear the slums. Private enterprise must be 
enabled to assist in the clearing of the slums bv Federal aid toward the acquisition 
of land. Unless such aid is provided, enabling private redevelopers to buy or 
lease slum land, under proper controls, private building will continue on vacant 
land at the periphery of cities, defeating the objectives of halting the spread of 
blight and restoring the solvency of the cities. 

Only a program of public and private participation under vigorous, unified 
leadership can achieve the goal of ultimately providing minimum standard hous- 
ing for the American people, and making its maximum contribution to the eco-^ 
nomic welfare of the Nation. 
Sincerely yours, 

Feed Kramer, President. 

Senator Taft. I might also say that Senator KadcUffe wishes me to- 
announce he had planned to be here but he is unable to come today 
because he is attending the funeral of Senator Maloney, of Connec- 

The witness is Arthur G. Erdmann, president, National Savings 
and Loan League. 

Mr. Erdmann. Mr. Chairman, I have with me, also, Mr. Kreutz, 
who is the executive manager of National Savings and Loan League 
that I represent today, and also Mr. O'Malley, and I might wish th'em. 
to answer some of the questions. 


Mr. Kreutz. We appreciate very much this opportunity to appear 
before the committee on this very important subject. I think I 
should add — I hope these gentlemen will not object — that Mr. Erd- 
mann, the president of our league, heads the largest thrift and home 
financing institution in the State of Illinois. He is also a member of 
the National Savings and Loan Advisory Council, which is a statutory 
body created by act of Congress about 10 years ago, and Mr. OiM alley, 
who is chairman of our legislative committee and who is from Wilkes- 
Barre, Pa., and is chairman of the Savings and Loan Advisory Council, 
also. /.4 

On July 27, we submitted a factual statement bearing on the sub- 
ject matter of this hearing. I assume that statement will be made a, 
part of this record. 

Senator Taft. Do you wish to have it made a part of the record? 

Mr. Kreutz. If you please. 

Senator Taft. That is the one in response to the questionnaire?.' 

Mr. Kreutz. Yes, sir. 

(The statement referred to is as follows:) 


Post- War Housing and Urban Redevelopment 

(Submitted by National Savings and Loan League to the United States Senate 
subcommittee on Housi'^g and Urban Redevelopment in response to the June 
7, 1944, request of Senator Robert A. Taft, chairman) 

The probable level of post-war house construction has been variously estimated 
as high as 1,500,000 units per year for at least 15 years. Those who use such esti- 
mates appear to think that post-war housi'^g demands will be governed by con- 
dition's quite unrelated to past experiences. It must be admitted that if some 
practicable mea'S of demolishing a sizable proposition of existing structures were 
available a correspondi'ig potential demand for new homes would be created. 
On the other hand, unless meai-^s are found to reduce house construction costs, the 
actual amount of new building may be much less than is anticipated by even 
conservative studer^ts of the question. 

Casual statements to the effect that "one-third of American families are inade- 
quately housed" depend for their validity upoT the acceptance of a definition of 
"inadequate hoasing." One definition is found in Urban Housing, based upon a 
real property inventory taken by the Works Progress Administration during 1934- 
36 and published by the Government Printing Office in 1938. Here we find the 
following quotation: "Since substandard housing may result from a variety of 
objective and subjective conditions, it is not possible to set up a precise and rigid 
definition of the concept. However, absence of sanitary facilities, unsafe condition 
of f^e physical structure of the dwelling, overcrowding and the pressure of extra 
families are all factors which render a dwelling unit substandard." 

The Bureau of the Census found that in 1940 6.5 percent of urban housing units 
lacked running water within the structure; that 9.7 percent needed major repairs; 
that 5.2 percent averaged more than 1.5 perso^^s per room and were therefore 
classed as overcrowded; and that 12.2 percent of urban families consisted of other 
than husband, wife, and children. Of the 12.2 percent, the extra member of the 
household consisted of a grandchild in 1.9 percent of the cases; a parent in 1.7 
percent; other relatives in 4.3 percent; lodgers in 3.5 percent; and servants in 
0.8 percent. 

A brief historical summary of house construction in the past may help to project 
our expectations for the future. From 1910 to 1916, inclusive, the number of 
nonfarm housing units constructed varied from 445,000 to 490,000 per year. After 
a sharp drop during World War I — to as low as 120,000 units in 1918 — the number 
produced in 1921 roSe to 449,000. This was followed by increasing production 
until 1925 when 937,000— the all-time peak — was reached. Annual production 
thereafter dropped off sharply and continuously to reach a low of only 93,000 
units in 1933. From this low point a steady rise was experienced, with a secondary 
peak of 715,000 units produced in 1941. The average for the 10 years from 1934 
to 1943 inclusive was 409,000. 

The housing census of 1940 recorded 34,855,552 occupied dwelling units, of 
which 20,598,506 were classified as urban. If the estimate of 1,500,000 new units 
per year for 15 years were realized, we would witness a production of 22,500,000 
units for the period, or 10 percent more than the entire number of occupied urban 
dwelling units disclosed by the housing census of 1940. 

Meantime, we shall experience some increase in population growth. The rate 
of increase between 1930 and 1940 was 7.2 percent. The bureau of the census 
agrees with other authorities on the subject in forecasting that the rate of popu- 
lation growth will decline steadily until by 1970 the rate of increase will be 
negligible. It is interesting to compare a probable increase in our .population of 
12,500,000 in the 15 years following the close of the war with a projected con- 
struction of 22,500,000 new housing units during the same period — at the annual 
rate of 1,500,000 guessed at by some proponents of a huge construction program. 

The evidence on demolition experience to date is quite illuminating. In 
March 1937 Lowell J. Chawner, senior economic analyst of the United States 
Bureau of Foreign and Domestic Commerce, presented a paper before the .'Ameri- 
can Academy of Political and Social Science in which he said: "The demolition 
of residential structures in the United States in the past has been at a very low 
rate and over the period from 1920 to 1930 probably did not average more than 
40,000 family units per year in all nonfarm areas. In the majority of cases during 
this period demolition occurred in connection with changes in land use from 
residential to commercial or other purposes. Only infrequently have sub- 
marginal structures been taken down during the last few years solely because 
they were no longer in demand. Withdrawal from use as a result of fire, flood, 
tornado, or other catastrophe inay be estimated at approximately 30,000 family 


units annually in nonfarm areas over the period from 1920 to 1929. Tjp to the 
present time in the United States average net changes by conversion, demolition, 
or other withdrawal from use have thus been small m comparison to the immber 
of new units built annually. 0^'er the period from 1920 to 1929 inclusive, the 
number of new units built was approximately 7,000,000. During this same 
period the number of units withdrawn from use by all causes probably did not 
exceed 10 percent of that number." 

Even if we grant that as our housing structures become older they should be 
demolished at a more rapid rate, the above quotation does not afford much en- 
couragement to those who expect a large replacement demand for new housing 
units— unless someone discovers a formula that will make demolition of existing 
structures economically desirable to their owners. 

While the past is useful in helping us to forecast the future, we should not be 
bound by historical facts alone. Unquestionably the recent action by Congress 
in encouraging home ownership for returning veterans will give a tremendous 
impetus to home building. Likewise, if the techniques developed to meet war 
housing needs are fully utilized in the post-war period, and particularly if much 
of the new housing is kept within the reach of low-income groups, we mav witness 
a sustained period of house construction such as we have never known before. 

Because of changing construction techniques, it is difficult to forecast the 
probable amount of employment to be provided direcilv in the building trades in 
the post-war period. According to the National Industrial Conference Board 
(see their Economic Almanac for 1943-44, pps. 324 ff.) there were employed in 
the construction industry 3,279,000 people in 1925, the peak year, when 937,000 
units were constructed. By 1933 the number of construction employees had 
dropped to a fraction of the 1925 number. During the lean years of the 1930's 
many craftsmen sought employment in other industries. By 1943, however, 
the number of people employed in the building trades was estimated to have 
increased to 1,821,000. 

Post-war house construction should require less on-the-site labor than has been 
true heretofore if prefabrication and other new methods of constiuction now 
known are utilized. There is some question about the amount of skilled building 
labor that will be available. On the one hand, it must be remembered that the 
usual number of apprentices has not been maintained for more than a decade. 
Offsetting this is the large number of people who have been employed in some 
fashion in war-construction projects. What degree of skill they attained and 
how many of them will turn to construction work for employment in the post- 
war period is not subject to even approximate determination at this time. It 
appears likelj^, however, that the number of people who will be employed in the 
house-building industry in the post-war period will not exceed 4,000,000, even 
with an anticipated high level of activity. 

Any discussion of house construction in the post-war period must proceed from 
the premise that there will not be substantial competition between housing 
provided at public expense and that provided by private enterprise. To the 
extent that such competition exists, it is likely that private enterprise will largely 
abandon the field to public construction. While private builders can easily 
compete with public construction costs, they are not able to overcome the advan- 
tages which public construction enjoys in the nature of unpaid taxes and other 
proper service charges which public housing undertakes to avoid, as well as the 
various kinds of subsidies which arc available to public housing. 

Public housing, provided on a scale that drives private housing out of business, 
would result in economic suicide for the American way of life. The effects are 
cumulative. If we attempt to provide new housing at public expense for a large 
number of our families, we encourage the group in the next higher level of income 
to apply for similar accommodations. Continue this process for a sufficient 
period of time and most of our people would be looking for living accommoda- 
tions in structures provided by public agencies. 

Meantime, the financing of public housing is a subject that is commonly mis- 
understood. When we speak of the Government doing this and that, we should 
keep in mind that, in our democracy, the Government owns no capital that it 
can use for the construction of housing facilities What it donates to the Jones 
family — in whatever form and in whatever degree — must be taken from the 
pockets of the Smith family. Should the Smith famihes of the country become 
discouraged and cease to be thrifty, not only w'ould the Jones families not be 
provided with Government housing but the Smiths would be competing with 
the Joneses for governmental assistance. As a consequence, we would presently 


find ourselves in a position where we would all be consumers wliile but few 
Tvould have sufficient incentive to continue as producers. 

We believe that whatever housing relief is provided for families that are 
unable to pay an economic rent should be provided at the community level. 
Each community should be permitted and encouraged to define its own needs 
for housing subsidies and should be given the responsibility for meeting them. 
So far as possible, we believe that families which need assistance in the payment 
of rent should be provided with accommodations in existing structures, rehabili- 
tated, if necessary, to meet reasonable standards of livability. It is proper for 
local public agencies to define these standards and to prevent the use of housing 
which does not measure up to reasonable requirements. If the amount of exist- 
ing housing is not sufficient to meet the needs of indigent families, we think that 
new housing to be provided for their use should be simple in character and not 
such as will encourage families that should provide their own shelter to wish for 
accommodations in subsidized housing projects. 

In any case, we believe strongly that the Federal Government should limit its 
assistance to subsidized housing to loans to community projects and to advice in 
the planning of subsidized housing. We are definitely opposed to either the con- 
struction of further subsidized housing by the Federal Government or the con- 
tinued ownership by the Federal Government of such housing already con- 
structed. We think that existing properties — particularly the more permanent 
types of war housing — should be disposed of to local communitv agencies where, 
they are needed as subsidized housing; or to private ownership where they are not 
so needed. In either case, the method of disposal should result in the least pos- 
sible loss to the Federal Government. 

We believe that one of the essentials for po^t-war housing progress is a change 
in the methods of construction — particularly for small houses — that will result in 
substantial lowering of costs to the home purchaser. On this subject we recom- 
mend a careful review of the recent report on American housing, published by 
the Twentieth Century Fund. This report resulted from the careful deliberations 
of a capable committee of disinterested public-spirited citizens, based upon the 
unbiased researches of an able stafi" of experts. 

As is to be expected, we are especially interested in the further strengthening of 
those Federal agencies which were established by Congress to assist local thrift 
and home-financing institutions of the savings and loan type. We refer par- 
ticularly to the Federal Heme Loan Bank System, the Federal Savings and Loan 
Insurance Corporation, and the provision for charters for Federal savings and loan 
associations. A good start has been made by Congress in giving its support to 
these activities which benefit untold millions of thrifty people and home owners 
throughout the country. 

The Federal Home Loan Bank System, consisting of 12 regional banks with 
total assets as of March 31, 1944. of $292,479,000 and with 3,731 member institu- 
tions with total assets of $6,531 ,000,000, was organized in 1932. It is intended to 
provide a credit reserve system for urban residential mortgage institutions. While 
it is expected that the stock of the 12 regional banks will eventually be owned by 
their members, the Federal Government subscribed the majority of all stock out- 
standing, as a means of expediting the establishment of this bank system. While 
membership in the System is open to all types of financial institutions which make 
home loans, few have joined it to date except savings and loan associations. 

Through advances to its members, the Federal Home Loan Bank System 
increases their capacity to serve both home owners and investors. In addition to 
their capital, the banks obtain funds from the sale of their debentures in the open 
market. At the present time these banks — as a system — may issue consolidated 
debentures not in excess of their outstanding advances to member instittitions and 
not in excess of 5 times the paid-in capital of all 12 banks. In contrast with 
the Federal Eeserve System, the Federal Home Loan Bank System has much 
more limited powers. The former possesses both discount and currency-issuing 
powers; the latter can neither discount its members' paper nor issue currency 
against it. They can merely lend to their members their capital and the pro- 
ceeds of the sale of their debentures. This limitation places definite restrictions 
upon the Federal home loan banks which adversely affect their usefulness to their 

The success of the insurance of accounts in commercial banks by the Federal 
Deposit Insurance Corporation led to a similar insurance program for savings and 
loan associations. In 1934 Congress authorized the organization of the Federal 
Savings and Loan Insurance Corporation, with a capital of $100,000,000 provided 
by the Home Owners' Loan Corporation. All Federal savings and loan associa- 
tions must insure their accounts. Eligible State chartered savings and loan 


associations may elect to have their accounts so insured. The present premium 
rate is one-eighth of 1 percent, as against one-twelfth of 1 percent for the Federal 
Deposit Insurance Corporation, and the protection to each investor extends to the 
first $5,000 of his investment. To date 2,500 associations, with nearly 4,000,000 
investors, located in every State, Hawaii, Alaska, and the District of Columbia, 
have taken advantage of this insurance. The assets of these associations aggre- 
gate $4,500,000,000. The losses to date have been only 10 percent of the total 
net income of the insurance corporation, or 25 percent of its premium income. 
Its capital and reserves are now nearly $150,000,000. 

In order to encourage the establishment of a uniform type of thrift and home 
financing institution under Federal supervision, and to make its use available 
to sections of the country not heretofore served by this type of institution. Con- 
gress included in the Home Owners' Loan Act provision for the chartering of 
Federal savinsg and loan associations. In a very real sense they have become 
the "national banks" of the home financing field. These Federal associations 
have grown in number and size until, as of March 31, 1944 they total 1,466, with 
assets aggregating $2,710,000,000. They constitute a very active segment of 
thrift and home financing institutions. 

At this time we think it quite essential that Congress take early action in the 
enactment of Senate bills 756, 757, and 1034. None of these is reaUy new in 
character. They merely amend laws that have been on the statute books for 
10 years or more. The provisions of these bills are intended to change these 
laws to the extent that the experience of the past decade or more demonstrates 
is necessary. We are enclosing a copy of the brief we filed recently in support 
of these bills. 

We have every reason to believe that the strengthening of the Federal Home 
Loan. Bank System, the Federal Savings and Loan Insurance Corporation, and 
the Federal savings and loan associations in the manner provided in Senate bil's 
756, 757, and 1034 will go a long way toward enabling private lending institutions 
of the savings and loan type to meet future emergencies. 

The Federal Housing Administration was organized in 1934 at the insistence 
of manufacturing, construction, and real estate interests who sought an early 
revival of construction and building trades employment. At the outset the 
emphasis was placed upon title I modernization loans. Presently, however, the 
emphasis shifted to title II which provided for mutual mortgage insurance. To 
date total loans insured by the Federal Housing Administration aggregate $7,500,- 
000,000. Reserves to- meet losses now amount to $81,000,000. In the adminis- 
tration of the Federal Housing Administration considerable emphasis has been 
placed upon improvement in housing standards. We assume that the Federal 
Housing Administration will continue to insure such loans as Congress sees fit 
to encourage but which private institutions hesitate to make without insurance 
because of too great an element of risk. 

There is a serious conflict between the Federal Home Loan Bank System and 
its affiliated agencies on the one hand and the Federal Housing Administration 
on the other. The differences are ably summarized by the Twentieth Century 
Fund's report on American housing (pps. 269-270) in the following words: "In 
theory, the home loan bank system is a partnership between Government and 
the member institutions. With the final liquidation of the Federal Government's 
investment, the home loan banks will be owned by the members. Regular pro- 
cedures exist for consultation between the banks and the central administration 
on matters of poUc> j but the directive authority of the administration over the 
banks or member institutions is decidedly limited. Thus interest rates on mort- 
gages are beyond the direct control of the administration. The methods of 
appraisal or the standard of housing accepted as security cannot be dictated by 
the administration except through the banks' supervision. The system derives 
its character from the numerous local institutions of which it is made up, and in 
turn provides a means for coordinating the policies and expanding the credit 
facilities of local institutions. 

"The Federal Housing Administration, by contrast, is centralized and inde- 
pendent of local relationships. The Federal Housing Administration insures 
only such loans as are made on the basis of its appraisals and are backed by 
security conforming to its standards and subject to its inspection. Its policies are 
internally determined and no regularized means exist whereby the locality or its 
institutions can influence the adaptation of national policy to local needs. The 
success of the system thus depends upon the administrative wisdom of Federal 
Housing Administration. It asks only that the institution with which it deals 


be 'responsible and able to service the mortgaue properly' — a purely routine task. 
There is, consequently, a tendency for lending institutions to offer little more 
than this and to become dependent upon the judgment of the Federal Housing 

"A divergence in basic policy is thus present. The Federal Home Loan Bank 
Administration is concerned with strengthening the lending institutions and 
increasing their participation and responsibility. The Federal Housing Adminis- 
tration is less concerned with the technical than with the mortgage-getting capac- 
ity of the institution, relj'ing on its own processes to see that proper security is 
given. W'th the Home Loan Bank Administration, the institutions are the 
system. With Federal Housing Administration, they are merely the sales and 
service agents of a sj'stem. 

"Another difference between the Home Loan Bank Administration and Federal 
Housing Administration is their attitude toward the segregation of banking 
functions. The former is attempting to create a specialized, long-term mortgage 
banking system. Federal Housing Administration accepts and promotes the 
fusion of long- and short-term lending functions in the same instituticn. With 
it the characteristics of the mortgage rather than the nature of the lending insti- 
tution are the primary consideration. These differences are displayed in the 
insurance plans of the two agencies. Under the Federal Home Loan Bank 
Administration, the Savings and Loan Insurance Corporation insures the assets 
of an institution collectively. Federal Housing Administration insures each 
mortgage separately. Here again the Home Loan Bank Administration stresses 
the solvency of the lending institution, while Federal Housing Adminstration is 
concerned with the soundness of the mortgage itself." 

The National Savings and Loan League thinks it should be possible to conserve 
the best that these two agencies have to offer to the service of the home-owner- 
borrower without sacrificing any of their important contributions. 

We recommend the prompt disposal of war housing as soon as it has served its 
original purpose. We think delays in its disposal will result in greater losses 
to the Government. That housing which is temporary in character should be sold 
with the i^t pul it on that it should be demolished within a specified period of time. 
Only by following this procedure can we prevent it from becoming slum housing 
at an early date. The legislation under which Congress provided for this housing 
contemplates its early demolition. The more permanent war housing can be dis- 
posed of to private owners or to local community agencies for continued use in 
its respective communities. Since we are convinced that Government-owned 
housing that undertakes to compete with private housing retards the development 
of our best productive national efforts, we hope to see the Government retire 
from the competitive housing market as soon as possible and, of course, at the 
least loss. 

Urban redevelopment for the post-war period presents a challenge which we 
hope Congress will accept courageously. In many of our cities we find obsolete 
residential districts that represent desirable locations, equipped with street im- 
provements, utilities, schools, shopping facilities, and indeed with everything 
needed for future residential uses except modern houses. We recommend that 
private enterprise be encouraged to provide the needed construction of new 
housing facilities. We believe that, under proper public supervision, private 
groups should be given the risht of eminent domain to acquire title to land 
necessary for redevelopment, after the group in question has acquired by negotia- 
tion a reasonable proportion of the area to be developed. Whenever it is neces- 
sary for public agencies to acquire title to su-^h land, we recommend that it be 
leased to private corporations or groups for redevelopment. 

We beheve that if the private agencies concerned with house construction and 
finance can be given the assurance that their facilities will be utilized in the 
post-war period, housing will play a major part in the adjustment of our economy 
from a war-time to a peace-time program. In placing emphasis upon our faith in 
the ability of private enterprise to meet America's post-war housing needs — 
without National or State subsidies — we hope that we are not blinded by our 
faith in our own abilities. We point to the fact that, in the past, the savings and 
loan associations of the country have played a major part in the financing of 
America's homes. At the present time practically every community is served 
by one or more savings and loan associations. Assisted by the agencies which 
Congress has set up to strengthen them, we feel that these associations will aid 
materially in meeting the home financing requirements of American families in 
the post-war period. 


Out of our long and successful experience, we have learned that there is a 
peculiar advantage, or set of advantages, to the homeowner-borrower who deals 
with a local institution in the financing of his home. Both at the time of closing 
the loan and throughout its life problems arise in the average family that can best 
be solved by the sympathetic understanding of those who know the borrower 
personally and who can best contribute toward the solution of his problems. 
The relationship which e.xists among local investors, local borrowers, and local 
management tends to result in the creation of jobs through home construction by 
the aid of local money. The end result is the development of the kind of citizens 
who have helped to make our country great. 

Specific recommendations to be filed at a later date. 

Mr. Kreutz. On January 10, since these hearings opened, we sub- 
mitted 11 specific recommendations to the committee. They are 
very brief, one page, in fact, and I wonder if you would like to have 
me read them to you? 

Senator Taft. Well, you present whatever you want, whatever 
you think is of interest to us. That perhaps is the best way. 

Mr. Kreutz. Of course, we would like to have these made a part 
of the record. 

Senator Taft. Would you state of whom the membership 
National Savings and Loan League is composed? 

Mr. Kreutz. Yes. The National Savings and Loan League is a 
relatively new organization that started about a year ago. It has 
members in 33 States of the Union at this time. It is gaining members 
daily. We have substantially more than 300 members at the present 
time. Their assets are somewhere between three-quarters of a billion 
and a billion dollars at the present time. 

Senator Taft. What is the nature of the business of the members? 

Mr. Kreutz. They are all savings and loan associations, makmg 
loans on homes, primarily, and accumulating the thrift capital in their 
communities. They are locally operated, locally managed and 
owned institutions. 

Senator Ellender. You are supported, I suppose, by dues and 

Mr. Kreutz. Yes, sir. Our recommendations are these: 

1. That Congress reassert its faith in private enterprise b}'' placing 
upon it the major responsibility for post-war housing construction 
and finance. A clear-cut statement by Congress on this subject will 
aid materially in reestablishing in the minds of all concerned with 
the construction industry both the opportunities for future business 
and the challenge to take whatever steps are needed to be ready to 
care for it when the war is ended. 

2. That Congress let it be known that post-war housing needs must 
be determined at the community level ; that private enterprise and 
public agencies within each comniimity must meet the housing needs 
of that community; and that direct Federal activity in the field of new 
construction in the post-war period, if any, will be limited to loans 
to community agencies for the pin-pose of providing such subsidized 
housing as is needed to supply shelter to those families that private 
enterprises clearly cannot serve. 

3. That Congress cause corporate — and income — taxation proced- 
ures to be examined to discover means of encouraging further invest- 
ment of capital in the house building industry. 

4. That Congress strengthen Federal antitrust and antiracketeering 
laws to remove restrictions upon the adoption of new and, improved 

91183 — i5— pt. 13 4 


methods and techniques wliich, if commonly used, would result in 
better homes at lower cost to the consumer. 

5. That the Federal Home Loan Bank Board be reestablished as a 
five-member board with added powers to make it the over-all Federal 
agency dealing with piivate ho?ne financing institutions. 

6. That steps be taken to include in the membership of the Federal 
Home Loan Bank System all types of institutions that make long- 
term loans for the financing of housing. 

7. That, under the supervision of the Federal Home Loan Bank 
Board, Federal home-loan banks be permitted to purchase mortgages 
from their members. 

8. That Congress enact the necessary amendments to the Federal 
Home Loan Bank Act to permit the Federal home-loan banks to 
extend their lending facilities to their members so that the latter may 
take full advantage of the Servicemen's Eeadjustment Act of 1944. 

9. That Congress amend the Home Owners Loan Act to permit 
Federal savings and loan associations to take full advantage of the 
Servicemen's Readjustment Act of 1944. 

10. That Congress pass S. 179, S. 180, and S. 103. I might add 
that S. 179 and S. 180 are very similar bills. We support all those 

We are attaching a brief filed with the Senate Banking and Cur- 
rency Committee in support of these bills as introduced in the Seventy- 
eighth Congress. 

11. That Congress take whatever steps are necessary and proper 
to encourage private enterprise and municipal authorities to make 
the most effective use of urban-redevelopment programs wherever 
the public will be best served thereby. 

Now, Mr. Chairman, Mr. Erdmann is here, and he would like to 
make a statement in support of these specific recommendations, if you 

Senator Taft. I might raise a question or two. As to these bills, 
as I understand them now, why don't they put the Government into 
the lending business directly? That is to say, if the Federal home- 
loan banks can buy mortgages from their members, become the ulti- 
mate owners of the mortgages, and then issue their debentures under 
these bills to the general public. I am not sure whether, under the 
bills proposed, they cannot sell even them with a Federal guaranty. 

Mr. Erdmann. I do not think the bills before the Congress at the 
present time include any of that. This is merely our recommendation 
at the present time, subject to the introduction of additional bills. 

Senator Taft. Do they provide for the purchase of mortgages with- 
out recourse? 

Mr. Erdmann. They do not. 

Senator Taft. You recommend that, however? 

Mr. Kreutz. Yes. 

Senator Taft. That you recommend directly? 

Mr. Kreutz. For future consideration. 

Senator Taft. Of course, if the Federal home-loan banks are going 
to buy any considerable number o^ mortgages, the only place they are 
going to get any capital to buy them with is out of the Federal Treas- 

Mr. Erdmann. Not necessarily. 


Mr. Kreutz. They have been able, Mr. Chairman, in the past to 
raise capital without too much difficulty by the issue of debentures and 
the sale of those debentures on the maiket at very low interest rates. 
Except for the initial capital, a part of which was supplied by the 
Government, they have obtained their funds in that way, and from 
the deposits of their members, and transfers of funds from one bank 
to another within the city. 

Senator Taft. Is there any possibility, rather than doing that, of 
their creating a market, a national market for mortgages? 

Mr. Erdmann. I would not say so, Mr. Chairman, from my point 
of view. 

Senator Taft. If you are going to have a national market for mort- 
gages, I suppose the F. H. A. mortgages are easier to cieate a market 
for than those made by building and loan associations. 

Mr. Erdmann. That has already been provided, but at the moment 
there is not any instrumentality through which an association operat- 
ing in the field, locally making loans, has the opportunity to sell them. 
It is through the means of trying to create the Federal Home Loan 
System that we would like to see it brought about. 

Senator Taft. I understand the Federal Reserve people — at le£st, 
I always understood it so — are very much opposed to setting up any- 
thing like a central mortgage bank. If there is going to be any central 
bank, they want to be the central bank. 

Senator Ellender. What would be the advantage of setting up an 
agency of that kind, that is, to buy mortgages that you, yourself, own? 
Is not the interest that accrues from those mortgages j^our chief 
source of revenue? 

Mr. Kreutz. I was going to suggest that Mr. Erdmann, in his state- 
ment, will cover tliat to some extent, and, of course, after that, you 
may have a further question. He may answer that to your satisfac- 
tion in his statement. 

Senator Taft. The moment you permit the purchase without 
recourse, really, in effect, the Federal home-loan banks are making 
the mortgage themselves and you get no longer any interest from that 
mortgage. Where you discount it, you usually discount at a lower 
rate and make something on that. 

Air. Erdmann. The institution that made the loan originally would 
continue to service it, and to have the bank system purchase these 
mortgages would provide additional capital, so the local institutions 
could make additional mortgage loans. 

Senator Buck. You say they cannot dispose of them to any other 

Mr. Erdmann. Not their own conventional mortgages, they cannot 
sell them anywhere at the present time, to my knowledge. 

Senator Taft. There is no market for them. 

Mr. Erdmann. Even under the State laws the State institutions 
haven't the right to do it. 

Senator Ellender. Reverting to the question of profits that I 
have mentioned, what part of your income do you derive from serv- 
icing loans? 

Mr. Erdmann. About one-half of 1 percent, I would say, would be 
fair figure. That is what we get now in servicing F. H. A. loans that 
we sell to the National Mortgage Association. 


Senator Buck. Wliat is the average rate? 

Mr. Erdmann. Four and one-half to five percent; that is on the 
conventional loans. On the F. H. A. loans, of course it is 4J^. 

Senator Ellender. Do you cover in your statement how that 
would be handled? If it is on a discount basis, how much of the 
amount is due, and so forth? 

Mr. Erdmann. No; I do not cover any specific matter. I felt that 
would be a matter that Congress would want to investigate on any 
recommendation that this committee would like to make. 

Senator Ellender. Your idea would be to proceed, in the orderly 
way of doing business, buy the mortgages and then sell them to the 
Federal Government, that is, this agency, without recourse? 

Mr. Erdmann. It could be done. 

Senator Taft. That is, 4}^ percent either with recourse or with- 
out recourse? 

Mr. Erdmann. That has not been determined in our thinking, 
Mr. Chairman. 

Senator Ellender. I see. Would there be objection that you be 
held in case of default? 

Mr. Erdmann. If they are sold with recourse, then obviously we 

Senator Ellender. Very well. But you would like to sell without 

Mr. Erdmann. Shall I proceed with my statement now, Mr. 

Senator Taft. Yes. 


Mr. Erdmann. It is our understanding that your committee is 
endeavoring to determine the part Avliich the Federal Government 
should play in the post-war period in housing and home financing. 

The interest of our Government in home financing is now well 
established. During past years Congress has taken several important 
steps to strengthen the local institutions which finance America's 
homes. Among the most important ways by which Congress has 
helped these institutions and those served by them are the following: 

First, the development of the Federal Home Loan Bank System 
and the Federal Savings and Loan Insurance Corporation; 

Second, the chartering of Federal savings and loan associations; and 

Third, the establishment of the Federal Housing Administration. 

We strongly urge that these agencies be continued and strengthened 
in ways that will make them even more effective. At the proper time 
we shall make specific suggestions to the appropriate congressional 
committees to the end that amendments to existing legislation may 
be enacted to correct some of the weaknesses that more than a decade 
of experience has uncovered. 

In addition to the establishment of these permanent governmental 
agencies which deal with home financing, Congress has enacted laws 
for specific temporary purposes involving home financing and housing. 
For example, as a means of saving the homes of distressed home 
owners during the depression of the 1930's, the Home Owners' Loan 
Corporation was established to provide home-financing assistance to 


those unable to secure it from ordinary sources. This was a temporary- 
agency, established to meet a specific condition. The H. O. L. C. is 
well on its way toward liquidation and, since there is no longer any 
need for it, no group sponsors its indefinite continuance. 

In like manner, to meet war needs, Congress has provided housing 
to meet specific purposes. Like the H. O. L. C, this Government- 
sponsored housing should be looked upon as a temporary source of 
relief to meet needs that private enterprise, for one reason or another, 
could not or should not serve. 

The National Savings and Loan League believes that the Federal 
Government should make its post-war plans not to get deeper into 
the housing business but rather hold it down to the barest possible 

We recognize that there are, in most communities, families so 
situated that they are unable to pay an economic rent for housing 
accommodations. We recognize also the importance of recon- 
struction of slum areas in many of our cities. But we recommend 
that Congress let it be known that the housing of indigent families 
must be handled at the local level by local authorities. With this 
principle established, Congress should then do whatever it can to 
encourage private enterprise and municipal authorities to make the 
most efl"ective use of redevelopment programs. We urge also that 
Congress limit the participation of the Federal Government in the 
field of housing to loans to local authorities, under conditions which 
seem appropriate to the Members of Congress. 

It has been demonstrated many times that private enterprise 
cannot remain in competition with its Goverim^ent. Whenever the 
Government undertakes some major activity in competition with 
private enterprise, the advantages which the Government enjoys 
overcome the greater efficiency of private enterprise and cause the 
latter to abandon that particular activity. Unless the American 
people are ready to ask their Government to supply housing for a 
large percentage of our population, we respectfully urge that this 
responsibility be left upon the shoulders of private enterprise. We 
do not believe that the American people think a major change in our 
national policy of depending upon private enterprise for home con- 
struction and finances should be made. Nor do we believe that the 
Congress thinks such a change of policy is either necessary or desirable. 
Because of the insistence of some groups that wartime-housing 
policies should be carried over into the post-war period and be greatly 
extended, many private operators who would normally expect to 
engage in home construction and finance are apprehensive about the 
post-war period. We hope that such fears will be dispelled at an 
early date. Congress can do much to accomplish this result. This 
hnportant Senate Subcommittee on Housing and Urban Redevelop- 
ment, we hope, will reassert its faith in private enterprise by placing 
upon it the miajor responsibility for post-war home construction and 
finance. A clear-cut statement by Congress on this subject would 
reestablish in the minds of all concerned with construction both the 
opportunities for future business and the challenge to be ready to 
meet these when the war is ended. 

Anyone who professes to believe that a Government housing pro- 
gram will be needed at the end of the war to provide employment in 
the buildmg industry, ignores the facts of history and the accumu- 


lated evidence to the contrary. Even without the G. I. home-pur- 
chase program, recently enacted by Congress, there is a potential 
demand for homes that it will take years to satisfy. Add to this the 
further demand from returning veterans and it becomes evidc^nt that 
the problem will not be how to generate a demand for new homes, but 
where to find the materials and labor to satisfy it. One thing is clear. 
Any materials and labor used in the construction of Government 
housing after the war must be diverted from what would otherwise be 
private construction. In brief, any Government housing in the near 
postwar period will bo at the expense of private housing. We believe, 
therefore, that Congress should give to the people, and particularly 
to the home-building and home-financing industries, the strongest 
possible affirmation that post-war housing needs must be determined 
and insofar as possible met by the communities concerned and not 
by bureaus of the Federal Government — that private enterprise and 
local public agencies should combine to meet all housing problcmiS 

Senator Ellender. Even for the low-rent housing? 

Mr. Erdman. I would say "Yes", Senator; except, as we have stated, 
people who are unable to pay for their accommodations at all, or have 
such low incomes that it becomes necessary to get Government help. 

Senator Ellender. You m.ean through the same policy we have 
been following in building homes through the U. S. Housing? 

Mr. Erdman. I would think so. 

Senator Ellender. But you want them to originate locally. 

Mr. Erdmann. "P'rom the local level, that is right. 

Senator Buck. What do you mean by that, Mr. Erdmann? 

Mr. Erdmann. Most communities are now studying their housing 
needs either through planning boards, planning commissions, or what 
have 3'ou. 

Senator Buck. Let that command the level? 

Mr. Erdmann. Let that comm,and the level and show the need and 
then let that come up to whatever may be necessary. 

Shall I proceed? 

Senator Taft. Yes. 

Mr. Erdmann. And that Federal activity in the field of new con- 
struction should concern itself strictly and exclusively to the housing 
of families in such low earning brackets that they cannot possibly 
house themselves but must depend upon Federal subsidies for sub- 

We believe that Congress might well cause corporate— -and in- 
come — taxation procedures to be examined to discover means of 
encouraging further investiment of capital in hom.e building and 
related industries. During recent years various law^s have had as 
their effect the lowering of the cost of home financing. Our members 
have made and will continue to make the necessary adjustments in 
their operating policies to the end that home financing shall be made 
as economical as possible. However, we wish to point out that the 
cost of home financing is only a minor part of the total amount paid 
by the home owner. There should be therefore continuous study to 
make the cost of home construction as low as possible, consistent with 
sound construction. 

Senator Taft. The Federal tax laws are pretty favorable to in- 
dividual home construction. The problem has more to do with rental 
housing, I think. The home owner who is able to deduct real-estate 
taxes and interest charges is better off than the renter. 


Mr. Erdmann. Yes; that is true. 

Senator T AFT. It encourages home owning. 

Mr. Erdmann. In this same connection, various practices and 
combinations of employers and labor unions which result in unnec- 
essarily high cost home constrution should be discouraged. Some of 
these deterrents are mere trade practices, others are crystallized in the 
form of building codes. Congress should strengthen Federal anti- 
trust and antiracketeering laws to remove the restrictions upon new 
and improved n.ethods and techniques which, if commonly used, 
would result in better at lower cost. At the same time, the 
adoption of standards of construction which have as their chief pur- 
pose the protection of the health and safety of the occupants of homes, 
rather than the protection of vested interests in building materials 
and labor, would also result in economies. The Bureau of Standards 
has already done a great deal of work in this direction and should be 
equipped by Congress to undertake a great deal more. 

For the betterment of home finance in many ways, we strongly 
recommend the reestablishment of the Federal Home Loan Bank 
Board as a five-member, bipartisan board, and the addition of powers 
which will make this bank board the over-all Federal agency dealing 
with private home financing. Vs'e believe such a five-member board 
should also supervise the Federal Home Loan Bank System, the 
Federal Savings and Loan Insurance Corporation, the Federal Na- 
tional Mortgage Association, and Federal savings and loan associa- 
tions. We further believe that the Federal Home Loan Bank System 
should include all types of institutions that make long-term loans for 
the financing of homes. 

"We should like to ^ee both tlie Federal Home Loan Bank and the 
Federal Savings and Loan Insurance Corporation strengthened in 
ways that we will recommend to the proper congressional committees 
at an appropriate time. 

We believe that the Federal home-loan banks, acting under the 
supervision of the Federal Home Loan Bank Board, should be em- 
powered to purchase home mortgages, subject to reasonable safe- 
guards. Through the establishment of the Federal National Mort- 
gage Association and by other means the Congress has in the past 
encouraged the organization of better marketing of home mortgages. 
One of the reasons why the system already tried has never quite 
accomplished the purposes of its sponsors is that there has not been 
the proper coordination with the agencies of the Government most 
concerned with urban residential financing. By giving the Federal 
Home Loan Bank Board the authority to supervise all of the activities 
of the Government dealing with such financing, and then by giving 
the Federal home-loan banks the right to buy mortgages under the 
supervision of the Board, much better results could be obtained. 

We recommend that Congress give early attention to legislation 
that will enable the Federal home-loan banks and their members to 
render the best possible service to returning veterans who purchase 
homes under the provisions of the Servicemen's Readjustment Act of 
1944. We also recommend that Congress amend the Home Owners' 
Loan Act to permit Federal savings and loan associations to avail 
themselves fully of the same act of Congress. Savings and loan 
associations will undoubtedly be called upon to make a large propor- 
tion of such loans. We stand ready to do our part but will need some 
changes in Federal laws to make our institutions most eftective. 


These amendments while of great benefit to the savings and loan 
industry would be much more far reaching in their results, for they 
would make home financing more readily and completely available to 
the returning veteran. And this, we believe, is an objective very 
close to the hearts of the American people. 

We consider it a privilege to have had this opportunity to submit 
the views of the National Savings and Loan League to you gentlemen 
of the Senate Subcommittee on Housing and Urban Redevelopment, 
and we wish to express to you our appreciation and thanks. Our 
appeal to you may be summed up briefly by expressing our deeply felt 
conviction that all your committee's recommendations should be 
based upon the principle that private industry can be depended upon 
to accomplish the great home building and heme financing job in the 
post-war period. We believe that private industry should be em- 
powered to act in these fields without Government competition. The 
sole exception to this principle should be the construction of housing 
for indigent families so underprivileged that they cannot provide 
decent accommodations for themselves. We believe that the greatest 
progress in home building and home financing will result from the 
fostering by Government of private initiative. This is the principle 
on which our country has grown great — the principle which has made 
our people as a whole the best housed, the best fed, the best clothed, 
the best served, the highest paid, and the most enterprising and ener- 
getic in the world. You can further this principle by wise new laws 
and by the revision of the old laws. We earnestly hope therefore 
that the suggestions we have given may assist you in the splendid 
and important work you have undertaken. 

Senator Taft. Mr. Erdmann, just exactly )vhat is necessary to 
make the ex-servicemen's G. L bill provisions effective as to your 

Mr. Erdmann. There are several things — one of which makes 
possible the secondary financing where they do not already the first. 

Senator Taft. That would be in the case of savings and loan 

Mr. Erdmann. Yes. 

Senator Taft. We could not do that. The States would have to 
do that. 

Mr. Erdmann. I mean specifically Federal building and loan 

Mr. O'MallI'-.y. Under section 501, there is the matter of the repair 
loan unsecured for about $500 which they cannot make. 

Senator Taft. Federal savings and loan? 

Mr. O'Malley. Yes. 

Senator Buck. I still do not see why you want the loan banks to 
buy these mortgages. It seems to me that is inconsistent with your 
wish for private enterprise, that the Government does not go into 
the building business, but you want to put them into the mortgage 

Mr. Erdmann. This is merely an additional means of supporting 
the market. If it is all right for an institution to make an F. H. \. 
mortgage, and it finds it necessary, in order to get a turn-over of its 
money, to provide additional capital in that particular community, 
it has the right to sell that type of paper to the Federal and national 
mortgage associations, then, for the same reason we believe ought to 
have that right with our own conventional type of loan. 


Senator Ellender. Cannot you borrow it? 

Mr. Erdmann. Yes; there is such a thing as borrowing, that is true. 

Senator Ellender. Why not, that is a source of more creating 

Mr. Erdmann. I would like to add to that statement, too, Senator, 
if I may, and that is this: If what has been predicted is apt to happen 
in the post-war with reference to housing, there will be such an enorm- 
ous amount of capital required that, if for no other reason, we believe 
definitely it would serve a very useful purpose at that time. 

Senator Buck. What you are saying is that your associations need 
more capital. When they have all their money invested, they are 
still not satisfied. Why come to the Government to get more? 

Mr. Erdmann. We would not come to the Government to get it. 

Senator Buck. You shift your mortgages back to them, you ask 
them to buy them from you so you will have more money to reinvest. 

Mr. Erdmann. The Government would not have anything to do 
with this. The source of money there is to have the Federal home- 
loan banks go into the open market and sell the debentures. 

Senator Taft. They sell them successfully largely because most of 
the stock is held by the Federal Government. The people know the 
Federal Government is not going to throw that money away. 

Also, you say they can do that because you sell them to the Federal 
National Mortgage Association. That was just set up as a kind of an 
experiment. There is the same objection to passing on all the mort- 
gages to the Government through them as anybody else. As 1 under- 
stand it, that was set up as a kind of experiment, to show how this 
thing would work, hoping it would lead to the formation of private 
mortgage associations that would buy these mortgages. In other 
words, the whole effort has been, not successfully, to get these mort- 
gages passed on to the public, to find the capital from private individ- 
uals. It seems to me our job ought to be to develop that more and 
see why it has been unsuccessful, to standardize the mortgages so they 
can be sold to the public directly and not sold indirectly or through 
debentures that are looked upon more or less as a semi-Government 

Senator Ellender. That would certainly be in line with their views 
that the Government ought to keep out of private busmess. It 
strikes me every effort ought to be made to interest private capital 
in it. 

Mr. Erdmann. That is exactly what I am saying, Senator Ellender, 
because private capital would actually bring this about. 

Senator Ellender. But still you want to get out and lend the home 
owner on his note so much money and then take the same paper and 
sell it to the Government, I suppose at a little discount, and in addi- 
tion to that get one-half of 1 percent, or more, to collect that for the 
Government. I can see where you could certainly increase your in- 
come considerably by using the Federal Government in that "way. 

Mr. Erdm.^nn. Senator, I would like to have the record clear on 
one point and that is it is contemplated in this recommendation that 
there is to be any discount at all, or any profit from discounting, if 
this provision is finally worked out through proper proceduie. The 
only thing that the institution originating this mortgage business 
would expect to get out of it would be a reasonable servicing fee, 
which at best probably would not exceed one-half of 1 percent. 


Senator Taft. Of course, one of the greatest threats to private 
enterp -ise is the gradual absorption by the Federal Government of all 
the financing of the country, because the Federal Government can 
raise money cheaper. One of the greatest threats that we face is 
that g'^adually we will try to finance every effort through the Federal 
Government. The Federal Government can get the money cheaper; 
that is their argument. It seems to me inevitably that leads ulti- 
mately to Federal ownership of everything. The provision of all 
capital by the Federal Government perhaps is the most likely way in 
which private enterprise may be destroyed. I do not like the steps 
in that direction any more than in the other direction of Government 
intrusion in private affairs. 

Mr. O'Malley. Mr. Chairman, I would like to explain before 
preparing these recommendations we send a questionnaire to all of 
our members, outlining the p'oblems and polling them on their views, 
I would like to emphasize on this pai ticular point there was no thought, 
I am sure, anywhere, that the sale of mortgages by any member 
institutions to the home-loan banks would constitute, in normal 
times, any operation at all of any part of their activity and that only 
in abnormal times might that privilege be used, and then to a limited 
extent. By and large, these institutions have been in the business of 
collecting the capital locally from the public in the form of savings 
and to keep the capital for local needs. In fact, at the present time 
all the associations in the country, of which there are 6,000, with 
total assets of 7}^ billion dollars and have out of the total assets some 
$2,000,000,000 cash. In addition. Senator EUender, on the question 
you raised, they have a borrowing capacity, that is, the individual 
members of the Federal Home Loan Bank System, of which there 
are about 3,700, has a borrowing capacity of $3,000,000,000, under 
the terms of the Federal Home Loan Bank Act as it was passed in 
1932, and this system of Federal home-loan banks over the country 
has a tremendous capacity to finance housing or home construction 
in the post-war period. 

Senator Taft. The only idea is that there must be some emer- 
gency. Isn't that emergency taken care of by the ability to borrow 
from the Federal home loan bank? That is the reason for the crea- 
tion of the banks originally. The Federal home loan bank was not 
intended as a permanent proposition. It was to be used in hard 
times to borrow from and in other times to pay back. Isn't that 
enough recourse for an emergency? Why do you need these banks 
just to buv from you outright? 

Mr. O'Malley, There is apparent in these recommendations, as 
you may have noticed, a provision for the placing of the Federal 
National Mortgage Association mortgages — F, N, M, A., as it is 
commonly called — with the Federal Home Loan Bank System, which 
for years was restricted by the statute to the purchase of F. H. A, 
insured loans. The thing Mr. Erdmann pointed out is the privilege 
of purchasing the uninsured loans by these banks, in a manner 
similar to that which is followed by the F, N, M, A., would seem to 
be desirable to take care of emergency situations and to support the 
market. But it is not a thing that I would like to labor particularly 
here at all, it is not a thing that goes, I would think, to the heart of 
the problem. 


Senator Ellender. Reverting to your statement a while ago that 
it was not contemplated to make a profit on the sale of these mortgages 
from you to the Federal Government, cannot you conceive this situ- 
ation: With the Government paying, say, 2 percent for its money and 
you taking the mortgage at 4}^ percent and selling it to the Govern- 
ment for 4K percent, that a cry might be sent up, "Well, now, the 
Government is making 2% percent on this investment, therefore it 
should share its profit with us."? 

Mr. Erdmann. I reiterate, it is not the Government, it is an 
instrumentality of the Government. 

Senator Ellender. Oh, well, it is an arm of the Government. 
The Government is responsible. I am certain the Government would 
stand 1 ack of its guarantee. 

Mr. Erdmann. I do not want to stress the point, but the Federal 
National Mortgage Association has been in existence some 8 or 9 
years, I believe, and that same thing has existed there all that time, 
and to my knowledge that cry has never been raised. 

Senator Ellender. I do believe a way by which we might be able 
to help would be to amend the present law, if necessary, so as to 
facilitate your ability to better discount your papers, if that can be 

Mr. Erdmann. All we want is to meet the needs of the community 
in connection with this better housing program that is underway. 
May Mr. O'Malley add somethmg to that? 

Senator Taft. Yes. 


Mr. O'Malley. My name is James J. O'Malley, Wilkes-Barre, 
Pa. I am the chairman of the legislative committee of the National 
Savings and Loan League. Our legislative committee wanted to 
have a statement before your committee today, but because of the 
particular time of your meetings we have been unable to do it. Most 
of our associations have had their annual meetings in January. The 
Federal associations, under their bylaws, had their meetings just 
Wednesday of this week. So, I would like to ask to be extended the 
favor by this committee, if possible, of filing a statement, we 
having a meeting of the legislative committee on the 29th and 30th 
of this month. We would like to have the privilege of either filing a 
statement with your committee, after our meeting, or if you have any 
hearings in February to make an appearance then, after the legislative 
committee has held its meeting. 

Senator Taft. You certainly may file a statement. I do not know 
whether we will have any hearings in February. We want to have 
the statements in here as promptly as possible. 

Senator Ellender. Your statement will be relatively new matter? 

Mr. O'Malley. That is right. The committee comes in from all 
over the country, don't you see, and we want to get their general 

Senator Taft. Very well. 

Mr. Bestor. 



Mr. Bestor. My name is Paul Bestor. Mr. Valentine Howell and 
I represent the Prudential Life Insurance Co. of America. Mr. Howell 
is the vice president and actuary, and I am vice president in charge 
of mortgage loan investments. 

Senator Taft. Mr. Bestor, you were connected with the land bank 
for many years? 

Mr. Bestor. The Farm Loan Board as it existed many years ago, 
in charge of tiie land banks. 

On behalf of my associate, vice president and actuary. Mr. Valentine 
Howell, and myself, 1 wish to express appreciation of this opportunity 
to make a brief statement to this committee. 

First, I wish to make it clear that we are not authorized to speak 
for any life-insurance company other than the Prudential, although 
I believe that most others are similarly situated. Naturally, we are 
all in favor of increased home ownership and are doing everything 
possible to enable worthy individuals to own their own homes. The 
accomplishment of the F. H. A. in cooperation with private capital in 
financing hundreds of thousands of small home owners has been out- 
standing. It has been our pleasure to purchase large numbers of both 
title II and title VI F. H. A. loans; in fact, such loans at the present 
time constitute more than 40 percent of our residential loan portfolio 
and in new loans closed during the last few years the percentage is 
much higher. 

I might say our average F. H. A. loan is $4,900, not counting some 
50 of the large-scale housing loans that aggregate about $20,000,000. 

Senator Ellender. What does that volume mean in dollars and 

Mr. Bestor. I was going to come to that a little later, but I will 
give you that now. The total amount is $268,000,000. I think we 
have the largest F. H. A. account of any institution. I am not abso- 
lutely sure of that. 

The phase of the post-war housing problem which we wish to dis- 
cuss is that of the interest rate paid by the individual who is financing 
his home and the resulting net return received by a hfe-insurance 
company such as ours, which has available for investment the cash 
savings of 22,000,000 of policyholders. We are anxious to continue 
if possible the policy which we have followed consistently for more 
than 67 years of financing home owners and farmers, and we expect 
to continue this policy providing, of course, our net rate of return 
from this type of investment is high enough to permit us to do so. 

We believe that the further lowering of interest rates should be 
approached with considerable caution. In that connection we would 
like to explain why if a rate very much lower than the one now 
prevalent is adopted it would be difficult if not impossible for insti- 
tutions such as ours to continue this long established policy of home 
financing. If the Prudential alone were forced to withdraw from this 
field of financing it would be of importance to our policyholders but 
perhaps not of any great importance so far as the general housing 
problem is concerned. However, if many other institutions with 


large reservoirs of available credit were forced to do the same thing 
it would lead to a scarcity of private funds and possibly to a diminution 
of new construction. 

It is also a fact that the funds of a life-insurance company — and 
this is especially true of a mutual company such as ours — are not 
the funds of a few large investors. They represent the accumulated 
savings of many, many individuals. It should also be remem.bered 
that existing premium rates have, for the most part, been computed 
on the assumption of not less than 3 percent interest, and these lates 
cannot be increased no matter what happens to interest rates. Any 
loss in net return on investments must result to a loss to the policy- 
holders of our company. If the number of borrowers were approxi- 
mately as great as the number of policyholders, it might be argued 
that since they were to all intents and purposes bori owing money 
from themselves, the rates of interest on loans should make no great 
difference, but that is not the case. The number of policyholders is 
many times the number of home owners. Manifestly, it is not fair 
to reduce the savings of the majority in order to benefit the minority 
of home owners, and I might add that it is not at all improbable, as 
has already been intimated, that to grant a reduction in interest rate 
would prove a boomerang against home owners themselves, in that 
they might not be able to obtain the necessary funds for home 
financing if the rate were excessively low. 

It may be asked whether the policyholders of life-insurance com- 
panies will suffer unduly if there is a further reduction in interest rate. 
The only way to arrive at the answer to that question is to determine 
the net return which an insurance company gets from residential 
mortgages on the present interest rate basis. As the Prudential has 
specialized in the financing of small homes, a record of the experience 
of our company in this respect should be useful to your committee. 

As of December 31, 1944, our total volume of mortgage loans was 
$1,081,000,000 and the total number of loans 177,500. This means 
that our average loan, including urban loans of all types and farm 
loans, was $6,100. Of this total of 177,500 loans more than 135,000 
were residence loans, not counting multiple housing loans, of which 
we had some 5,500. The doUar amount was $635,000,000 and the 
average residence loan was $4,750. The great majority of these 
residential loans were on the monthly installment repayment basis 
and of that volume $268,000,000 were insured F. H. A. loans. 

We were pioneers in the making of monthly installment loans. 
They are by no means a recent discovery. We made our fii st monthly 
installment loan 29 years ago and have been making them ever since. 
The idea was evolved from our experience with monthly premium pay- 
ments on life-insurance policies. We reasoned that if monthly pay- 
ments were a good thing for policyholders they should also be a good 
thing for home owners. This proved to be the case. The plan has 
been advantageous from the home owners' viewpoint but it added ap- 
preciably to the servicing and administrative costs as will be seen 

Something over a year ago we made an analysis of our mortgage 
investment for the 15-year period 1928-42, inclusive. We did not 
make it sooner because, while we had made many estimates before 
that, we did not feel that accurate risk figures, without which no 


complete analysis was possible, could be determined until we had 
disposed of most of our foreclosed properties acquired as the result 
of the depression. By the end of 1942 we had sold more than 85 
percent of all properties acquired and we felt that we had sufficient 
data from which to make our analysis. 

One of the first things we found out in making our analysis was that 
our loss on disposal of foreclosed residential loans was much more 
than it was on our average mortgage investment. This failure to 
secure satisfactory ultimate recovery on residential loans was due 
chiefly to two particular factors. The first one of these factors is 
basic and cannot be avoided. Tliis is the obsolescence and deprecia- 
tion factor. We found that both houses and neighborhoods, particu- 
larly neighborhoods, depreciated to an extent not found in most other 
types of security. The second factor was the result of our policy of 
extreme leniency toward delinquent home owners during the depres- 
sion years. 

As early as 1931 we advised our branch offices that the prevention 
of home and farm foreclosures was to be their major program.. This 
action was taken voluntarily by us nearly 2 years before the national 
movement against foreclosure. Our policy of preventing foreclosures 
continued to be a first objective throughout the depression as is evi- 
denced by various methods initiated by us to prevent foreclosure was 
that of refunding the loan by wi-apping up the outstanding principal, 
delinquent interest, insurance, and taxes and extending the loan over 
a period of years under a new schedule of payments. This method 
saved many loans from foreclosure. The H. O. L. C. saved many 
others from foreclosure but still a very considerable number of cases 
proved to be hopeless and we ultimately acquired these properties. 

Senator Buck. What was your mortality rate? 

Mr. Bestor. I do not have it for that particular period, but our 
entire mortality rate over the period of maldng the loans is a little 
less than 10 percent of all types of loans. I cannot give it to you on 
residential loans. I know it is a little less than that on residential 
loans. I cannot remember what the exact figure is, but I think it is 
about 8 percent, 

I have given this other long explanation because this delay in 
acquiring properties which we nevertheless ultimately acquired re- 
sulted in the necessity of extensive repairs by us at heavy expense, 
and in many cases with poor recovery of investment. 

In making this analysis we also ran into the factor of higher expense 
in servicing monthly installment loans. It is easy to see that the 
clerical work of making collections on one loan 12 times a year instead 
of once a year increases the cost. Our analysis showed that although 
the number of our monthly installment loans was only 87 percent of 
our city mortgage loans, the work involved on the monthly install- 
ment loans was 94 percent of the total work required on the entire 
city loan account. 

A further reduction in net return to the company in recent years 
has been brought about by changed customs concerning the payment 
of brokerage and expense in acquiring loans. For many years it was 
customary for the borrower to pay a commission in obtaining his 
loan but rece!vtly under competitive conditions tliis has been changed 
and at present it is customary for the company to pay the brokerage 
cost rather than for the borrower to pay it. In spite of that, however, 


our cost of acquiring these loans was not excessive as the analysis will 
show. Much has been said about the high premiums paid for F. H. A. 
loans. We did not pay these high premiums and yet were able to 
acquire a large amount of business. 

The average interest rate which is paid by borrowers to us on new 
residential loans is 4K percent. In order to arrive at the net return 
it is necessary to deduct the following— this is in making the 15-year 

(1) Cost of placing the loan on our books, properly amortized over 
the average life of the loan. This figure proved to be 0.28 percent. 
Just over one-quarter of 1 percent. 

(2) Cost of servicing installment loans and other administrative 
expense, 0.54 percent or about one-half of 1 percent. 

(3) Risk factor as determined by recover}^ of investment on loans 
foreclosed, 0.65 percent or about five-eighths of 1 percent. Total cost 
1.47 or about lYi percent. 

It should be mentioned that while the loss factor is considerably 
reduced for F. H. A. mortgage, their smaller average amount plus 
additional work necessary pushes the average expense costs on this 
types of mortgage up to about an equivalent figure. 

The total cost percentagewise, including the losses on property 
acquired on all our residence loans is shown to be 1.47 percent. De- 
ducting this 1.47 percent from the 4.5 percent rate, we find a net 
return to us of 3.03 percent. This is about one-half of 1 percent 
better return than the 2.5 percent Government bonds available to a 
life-insurance company. Government bonds have the advantage of 
liquidity, and while I would not know how much to allow percentage- 
wise for this liquidity factor, it is an important advantage. However, 
it is clear that if the rate paid by the borrower were 4 percent instead 
of 4K percent, and if the liquidity factor were assigned even a normal 
value, an investment in Government bonds yielding 2)^ percent would 
be a more advantageous investment. We believe a rate below 4 
percent would probably dry up this source of investment for many 
companies such as Prudential. 

Senator Buck. You do not recommend 4 percent? 

Mr. Bestor. No, sir. From our analysis it would be a question 
whether an investment in 4 percent residential mortgages were better 
than in 2% percent Governments. 

Senator Taft. You would not want all Governments anyway. 

Mr. Bestor. No, sir; we would not. At present we have 52 percent 
of our total assets in Governments. 

Some question may be in your mind as to our cost of operations. 
For the last 11 years we have used the branch office system of oper- 
ations, which has cut down costs from our earlier method of operation. 
We have made every effort and continue to make every effort to cut 
this expense further. Compared with the costs in other companies, 
insofar as they are available, our costs are somewhat below the 
average. We believe our conclusion is correct that under present 
conditions our cost of placing a loan on the books and of servicing 
and administering the loan could well be regarded as close to a 
minimum cost. 

The next point has been mentioned by Mr. Brigham, I believe, 
but I thinl<^ it bears repeating. 


Senator Ellender. Before you go to the next point 

Mr. Bestor. Surely, Senator. 

Senator Ellender. Your chief argument for not desiring to reduce 
that rate is that your company, as well as many others, might be 
prone to buy Government bonds rather than finance homes and 
thereby the home owners would suffer. With such an enormous debt 
as we now have and with so much money in circulation, cannot you 
see the possibility of the Government rate of interest being cut? 
Don't you think it will be necessary to reduce the Government rate 
considerably within the next few years? 

Mr. Bestor. Senator, I do not think I would know enough about 
that to say. I can see, from what you say, the possibility of that, 
but I would not be in the position to express an opinion on it. 

Senator Ellender. You have given thought, I am sure, to the 
enormous amount of money we will have to appropriate each year 
simply as a carrying charge, some estimate from Q% to as much as 
7J^ billion dollars a year, just simply to carry out debt. That is 
more than we spent in the early thirties to run our whole Government, 
and that is something I am sure a lot of thought will have to be given 

Senator Taft. Mr. Bestor, going at the other end of it, this 3 
percent that you want to earn, how far is that a reduction of the 
interest rate going to result in a lowering of the return to the policy- 
holders, and how strongly can the insurance company itself stand it? 
In other words, have you guaranteed policies at 3 percent to any 

Mr. Bestor. I think Mr. Howell has a brief statement on that. 
He is the actuary of our company. 

Mr. Howell. Would you care to wait? 

Senator Taft. Yes. 

Mr. Bestor. It is a very brief statement. We did think you 
might raise that point, so we have prepared a statement on that. 

Senator Taft. Yes. 

Mr. Bestor. I would like to mention one other point. 

It would seem that the interest item in the cost of a house to the 
individual home owner may easily be overemphasized when it is 
compared with the cost of other items. I wish to call attention to 
the fact that wliile other costs to the borrower, such as material and 
labor, have been going up during the last few years the cost of money 
to the borrower has been steadily going down. As to the matter of 
the relative importance of further interest reduction as compared to 
reduction in the cost of other items that go to make up the cost of 
home ownership, the National Housing Agency in a recent pamphlet 
on housing costs entitled '"Where the Housing Dollar Goes" has made 
an interesting analysis. They have taken as an example a case where 
a home, including both house and land, cost $5,000. They have 
amortized this cost on a basis of a 25-year, 90 percent F. H. A. loan. 
Their break-down of costs has included amortization payments, cost 
of labor, material, taxes, insurance, maintenance, interest paid to the 
F. H. A. and the loss of interest to the individual on his 10 percent 
cash payment. Based on this break-down of cost the National 
Housing Agency pamphlet points out that a reduction in interest 
would not cut costs to the borrower materially. Based on their 
break-down, if the capital cost of the house were to be halved without 


any change in interest rate, taxes, maintenance or any other items, 
the total cost to tlie borrower would be reduced close to 50 percent, 
whereas if the interest rate were reduced 50 percent and all other 
factors were left the same it would reduce the cost to the borrower 
only 13 percent. 

It would seem to me that to penalize the majority, by which I mean 
life insurance policyholders, at the expense of a decided minority 
financing their homes, would scarcely be worth while from the stand- 
point of the percentage saved the borrower. 

It is also a question as to whether it is a wise policy to discourage 
private investors of the Nation by reducing further the net return 
they can hope to get on the investment of their savings. 

I would like to summarize the points which I have tried to make 
as follows: 

1. The cost of making and servicing residential loans, particularly 
those written on the monthly repayment basis, taken over what 
might be called a full real estate cycle, is heavier than it is in the case 
of making and servicing loans of other types. 

2. Interest rates to homeowners have been going down steadily for 
several years, while other costs have been going up. Further reduc- 
tion in interest rates are not fair to policyholders whose savings are 
being used for home financing, and excessively low interest rates may 
react against the borrowers themselves by limiting the supply of funds. 

3. As the National Housing Agency has pointed out, a further 
reduction in the interest rate paid by the borrower at the present time 
is of relatively small importance to the borrower as compared with 
reduction in other costs; and 

4. If interest rates are further reduced life-insurance companies, 
such as the one with which I am connected, will be faced with the 
problem of whether or not it will be possible to continue their long 
service in financing homeowners, or whether they must seek invest- 
ments in other types of security where the investments will bring the 
same or better net return and will be more attractive because of the 
presence of elements such as liquidity and perhaps greater stability. 

Thank you. Senator. 

Senator Taft. Mr. Bestor, what about the problem of rental 
housing? That seems to be, in the financing field, a greater problem 
than the problem of the individual home. What has been your 
experience in financing rental housing? 

Mr. Bestor. May I say, first. Senator, I did not come down fully 
prepared to discuss that, and if you will give due allowance for what 
I might not know about it, or be prepared to give, rather, I would be 
glad to answer. 

Senator Taft. Surely, you know more than we do. 

Mr. Bestor. You mean as to the ownership of them? 

Senator Taft. I mean whether you have done a great deal on it, 
whether you have acted under the Federal Reserve section 207. 

Mr. Bestor. We have about $20,000,000 of those section 207 loans 
on our books. 

Senator Taft. The section does not seem to have been a very great 
success, as far as volume is concerned. I wondered if you knew why. 

Mr. Bestor. No. Our loans have been very satisfactory, though. 
Senator. Of the entire number that we made, I think there are only 


three that ultimately came to foreclosure, and I understand that those 
are now on a sound basis. 

Senator Taft. Are they high-grade apartment houses, mostly? 

Mr. Bestor. They were fairly high grade, practically all of them. 
We were rather selective in the ones we took under that section. 
There was section 210 that we took a few under. That is now 
obsolete; there are no longer any being made under that section. 
Most of the multiple housing loans have been made under section 
207 and 608. 

Senator Taft, Has your company any equity investment in housing 
such as the Metropolitan? 

Mr. Bestor, About 12 years ago, in a small way, we put up three 
apartments in Newark, under a special section of the law of New 
Jersey which permitted us to do so, under certain limitations, par- 
ticularly the limitation on rent per month. It is confined to New 
Jersey under those limitations. 

Senator Taft. Was that an attempt to get low-rent housing? 

Mr. Bestor. It really was an attempt to get low-rent housing; that 
is correct. As a matter of fact, these three projects that we put up, 
my recollection is we invested about $5,000,000 in them. In one 
building the rent is from $10 to $14.50 per room per month, including 
public utilities, and in another one it is from $8 to $10 per room per 
month. There were two others. 

Our experience over the 12-year period has been, with the limita- 
tions that were placed on it under that particular New Jersey act, 
that limitation as to rent, we were unable to secure an adequate return, 
plus an adequate depreciation over a reasonable period of years, 33 
years as we figured it. 

Senator Taft. There was, of course, no subsidy involved from the 
Federal or State Governments, was there? 

Mr. Bestor. That is correct. 

Senator Taft. Do you think any money would be available if the 
Federal Government did something in the way of a subsidy, as they do 
with the metropolitan housing authorities? I mean, is there any 
chance to replace anj^ public investments in low-ront housing by 
private investments in them if they got the same inducement? 

Mr. Bestor. You mean if there were a certain Government guaran- 
tee of return on investment. 

Senator Taft. Certain payments on condition that the rent did not 
go over a certain amount? 

Mr. Bestor. Senator, if I understand your question, if you mean 
whether private industry could handle low-cost housing 

Senator Ellender. Upon the payment of a subsidy. 

Mr. Bestor. I think that an insurance company would undoubtedly 
wish to be guaranteed a reasonable return on its investment plus ade- 
quate allowance for depreciation, which w^ould insure ultimate recap- 
ture of invested capital. In other words, I do not believe that low- 
cost housing projects would attract private capital without satisfac- 
tory guaranty. 

Senator Taft. That would make possible an average return with 
the rents paid plus the subsidy at some figure that you regarded as 

Mr. Bestor. That is exactly it. Senator. 


Senator Ellender. If you do not care to answer this question, don't 
put it in the record. Can you give us an idea of what your net 
returns were on these three projects that you spolve of? 

Mr. Bestor. 1 cannot give it for the whole period. 

Senator Ellender. I mean the percentage, based on your invest- 

Mr. Bestor. You mean on the housing projects? 

Senator Ellender. The projects you built yourself. 

Mr. Bestor. I have the figures here, Senator, for 1943, but I do not 
have them for previous years. 

Senator Ellender. That was a mighty good year as contrasted 
to the past. 

Mr. Bestor. Yes. On one project it was 4.67, on another 3.16, 
and on another 4.38. 

Mr. Howell. That was not allowing for depreciation. If you 
allow a 33-year life, you take 3 percent from those figures. That is 
less than 2 percent. 

Senator Ellender. What did the rent aggregate per family unit? 

Mr. Bestor. It varied, of course. On two buildings it ran from 
$8 to $10 per room per month, averaging four rooms to the apartment. 
The first one was built in 1932 and the other in 1933. It ran from 
$40 a month to $60 a month. 

Mr. Howell. There were quite a few three-room units. 

Mr. Bestor. I think Mr. Howell is correct; I said four. They 
varied all the way from two rooms to five roons, I think. I think 
the average was probably three rooms. 

Senator Taft. Did you have any trouble keeping them full? 

Mr. Bestor. No; not recently. 

Senator Taft. What was the restriction? Was that under your 
charter, you mean, that the law of New Jersey would prevent doing? 

Mr. Bestor. We cannot go in under the law of New Jersey except 
under the special statute. 

Mr. Howell. That is right. We cannot invest in real estate 
except under this particular statute. 

Senator Taft. Under what kind of authority did the Metropolitan 
build the development there? 

Mr. Bestor. It is my understanding that is a special act of the 
State of New York permitting domestic companies to do that. The 
Metropolitan has done it in other States, as well as in New York. 

Senator Taft. What do you think of the possibility of investing 
insurance funds in equities in residential developments? 

A4r. Bestor. I would think, Senator, that an insurance company 
would be interested provided that after an anlaysis of the proposed 
development the company were convinced of its economic soundness 
and that under normal conditions return of invested capital with 
reasonable interest would ultimately result. 

Senator Taft. You would probably want in that case more than 
you do on these other mortgages. You would want 5 percent or 
6 percent, would you not? 

Mr. Bestor. I do not think so, not so much as that. 

Senator Taft. On all these mortgages you get 90 percent of the 
property, under the present conditions anyway. If you got a little 
better returns you might as well take 100 percent. 


Mr. Bestor. I think there is one factor there that is overlooked 
in those projects. There are a good many factors, but one is that 
you may get a good return in the first few years, but then those 
buildings must still give a good return up to the end. You must 
have the property produce a return over the life of it, so that at the 
end of the period you will have it fully amortized and paid. 

Senator Taft. It requires you to put in a development which is 
sufficiently good in order to be pretty certain that it will be of per- 
manent advantage, from the point of attractiveness. 

Do you wish to make your statement about the 3 percent now, Mr. 

Mr. Howell. Yes, I would like to take your time for a few minutes, 
to discuss the interest rate in its relation to mutual life-insurance 
company premiums and reserves. 


Mr. Howell. Most premium rates on policies issued up to 2 or 
3 years ago have been figured on the assumption that we will earn 3 
percent or 3]^ percent on our investments up until the policies mature. 
When those rates were calculated, those were conservative assump- 
tions. Back in 1930 when the assets of the Prudential were $2,500,- 
000,000, about equally divided between bonds and mortgages, the 
interest rate earned was 4.99 percent, and the amount available in 
excess of the 3 and 3'2 percent for premium refunds or dividends to 
policyholders was $34,000,000. Today, on assets of $5,850,000,000, 
slightly more than 50 percent of which are Government bonds on not 
better than a 2J^ basis, the amount that can be returned to policy- 
holders from this source is practically nothing. If, in the near future, 
a large part of our mortgage loan account has to be refunded at lower 
rates since a distinction between new and existing borrowers can be 
made only for a short period, there will be a difficult adjustment 
ahead for the life-insurance companies. 

Now, I don't want to overdraw this picture. Mortality rates have 
been better than those assumed throughout this period, and the civilian 
mortality rate is lower at the present time than it has ever been. 
Policyholder profits from this source have been sufficient to offset 
to a very considerable extent losses from interest and from war mor- 
tality. It may interest you to know that war claims last year were 
just 'short of $20,000,000 in the Prudential, Prudential refunds or 
dividends to its twenty- two million-odd policyholders have decreased, 
on the average, to less than 40 percent of what they were in 1930. 
The decrease so far is not alarming, but the dangerous angle, so far as 
far as the policies of earlier issue are concerned, is that the great 
bulk of the mortality improvement has been at the young ages. As 
policies and policyholders grow older, mortality margins get less, and 
reserves, and hence the interest deficits which are based on such 
reserves grow greater. Finally, in the case of almost all ordinary 
policies, in place of claim payments in one sum, proceeds may be left: 
with the company at 3 percent or 3^^ precent interest. Interest 
deficits from this source are going to be heavy as thepolicies mature in 
greater numbers. 


I don't know how much responsibility is felt by this committee 
toward the institution of life insurance. In the past life insurance has 
been an accepted medium through which the funds of the smaller 
investor have found their way into housing operations. In 1944 the 
Prudential's premium collections were $750,000,000 from about 
$22,000,000 people, and about $475,000,000 of additional funds were 
available for investment. 

In my belief, and you may not agree with me, about 75 percent of 
that was extra investment funds, in the sense that if these people 
hadn't been sold life insurance, and if the premiums hadn't been ag- 
gressively collected, the money would have been spent rather than 
saved. From the viewpoint of those primarily interested in the hous- 
ing problem, this potential investment arising from life insurance 
sources is important. From the viewpoint of the 70 million holders 
of life insurance policies in this country, it is equally important that 
this avenue of investment be kept open to them, and that a reasonable 
rate of interest be maintained. 

Senator Taft. Are any contracts in your company guaranteed a 
3-percent return? 

Mr. Howell. The rate basis is 3 percent, and in that sense we 
have guaranteed the rate. However, there are other factors, as I 
have mentioned. The mortality rates, for example, have been better 
than those assumed in computing these premiums, and they have been 
increasingly better throughout the period. 

Senator Taft. Does that mean people have died sooner? 

Mr. Howell. No; I mean they have not died as soon. 

Senator Taft. You referred to war losses. Was that war losses in 

Mr. HowFLL. Yes. 

Senator Taft. You mean they were $20,000,000 larger than the 
prior year? 

Mr. Howell. There were $20,000,000 losses in total amount. As 
I say, the civilian mortality was the most favorable that we had ever 
experienced, in 1944, and, to quite a large extent, offset that increase 
of $20,000,000. It did not completely offset it, but it offset a large 
part of it. 

Senator Ellender. You spoke of your war casualties. 

Mr. Howell. Yes. 

Senator Ellender. Do not most insurance companies have a 
clause, with some restrictions, as to those who enter war service? 

Mr. Howell. Only on policies issued since Pearl Harbor. The 
vast bulk of policies have no restrictions. 

Senator Ellender. Does that apply to all companies? 

Mr. Howell. Yes. 

Senator Ellender. I am glad to know that. 

Mr. Howell. There is another factor that has to be taken into 
account also in these older policies, and that is, to a large extent, on 
maturity there are settlement options contained in them under which 
the beneficiary has the right to leave the proceeds of the policy with 
the company, and in that case — in answer to your question about 
guaranties— there are guaranties in practically all old policies of 3 
percent or Sji percent on the proceeds of claims. When the policy 
matures as a death, claim, instead of taking cash, in a great majority of 
pohcies the option exists to let the policy stay with the company and 


have it either paid out by instalhnents which are based on 3 or 3)^ 
percent, or let it stay at interest with the company, with the guaran- 
teed rate of 3 percent. Those are the potential losses. 

Senator Ellender. In those cases where it is optional for the 
beneficiary to spread that over, say, 20 years, is there anything written 
in the policy, or are you obligated to make this payment on the basis 
of 3/^ percent? 

Mr. Howell. In some cases Sli percent, and in some cases 3 per- 
cent; yes. 

Senator Ellender. Is that in the policy? 

Mr. Howell. That is in the policy; yes. 

Senator Ellender. I see. There is more written in the policy 
than I thought there was. I might get more insurance. 

Mr. Howell. While we are satisfied that we can continue to exist 
on the 2}^ percent basis, nevertheless, and don't let me overdraw this 
picture of our troubles, but nevertheless we camiot come much below. 

Senator Taft. You have to pay enough to people so there is some 
incentive to save money. 

Mr. Howell. That is right. 

Senator Taft. If you get it too low, there is no reason why they 
should not buy Government bonds. 

Mr. Howell. Exactly. 

Senator Taft. That is all. 

The committee will recess until 2:15. We just have one witness 

(Whereupon, at 12:45 p. m., a recess was taken until 2:15 p. m. 
of the same day.) 

afternoon session 

(The committee reconvened at 2:15 p. m., pursuant to recess.) 
Senator Taft. The committee will be in order. 

We will first hear from Mr. Schwulst, executive vice president of the 
Bowery Savings Bank. Mr. Schwulst. 


Mr. Schwulst. Mr. Chairman and gentlemen, I am the executive 
vice president of the Bowery Savings Bank of New York City. 

This bank was organized in 1834. It is a mutual institution, that 
is to say, it has no stockholders. Its earnings and its assets belong 
to its depositors. It is managed under the direction of a board of 
trustees who serve without compensation. 

It has deposits of about $535,000,000, belonging to 383,000 de- 
positors. It is supervised by the Banking Department of the State 
of New York, and by the F. D. I. C, of which it is a member. It does 
no commercial banking business. Its deposits are pure savings 
deposits wliich come in over the counter. Its investments are strictly 
governed by law and they comprise principally United States Govern- 
ment bonds and certain other types of bonds legal for investment, 
together with first mortgages on real estate. 

There are some three or four hundred of these mutual savings banks 
in the country, mostly in the northeastern section of the country, 
and they have deposits aggregating in the neighborhood of eleven or 
twelve billions of dollars. 


As a preface to my comments upon the specific questions included 
in Senator Taft's letter to me of November 27, 1944, I should like to 
say that those comments will be based upon two assumptions: j 

1 . It is the policy of the Federal Government that our existing eco- 
nomic system, wdiich is based upon free enterprise and private profit, 
is to be preserved and encouraged. 

2. It is accepted public policy, as evidenced by National and State 
legislation already on the books, that government — National, State, 
and local — has a proper place in providing or facilitating the provision 
of housing for those elements of the urban population which private 
enterprise unaided cannot provide for. Tliis housing need not be 
new housing. The only requirement is that whether it be new or 
whether it be rehabihtated old houisng, it should meet certain gen- 
erally accepted minimum, standards of decency. 

It will hardly be necessary for me to make the point that it is^ 
entirely consistent with the private-enterprise system, particularly 
as that system becomes prog' essively more and more industrialized, 
for government to participate directly and indirectly with ent:e- 
preneuis, financiers, farmers, and workers in policies and undertakings 
affecting their economic lives. It is generally accepted that govern- 
ment should be responsible for the monetary systern, for the post 
office, for public education, for the regulation of foreign commerce 
through a system of tariffs, for the provision and maintenance of an 
adequate system of public highw^ays, and for a great maze of policies 
and operations involving the public safety and the public health. The 
participation of government in activities that fall within one or more 
of the fields just mentioned may take the form of direct expenditure, 
direct ownership, direct and indirect subsidization of private ventures, 
or direct and indirect underwriting of the loss that might be incurred 
in private ventures. 

The protective tariff, for example, is a form of indirect subsidy 
instituted for the benefit of certain industries, businesses, and farmers. 
While there is a great deal of controversy from time to time about the 
desirability of a protective tariff, yet no one contends that it is in- 
consistent with the private-enterprise system. Direct subsidies by 
the Government to encourage the establishment and development of a 
comprehensive air transport system and an adequate merchant marine 
are not regarded as being in conflict with the private- enterprise 

In short, as the development of the arts and sciences has led to the 
progressive industrialization of our own country and other countiies, 
and as this industrialization has also led to the intensification of the 
division of labor in the productive processes, and as this in turn has led 
more and more to the employment of labor en masse, it has become 
apparent that there is an increasingly important place for government 
in keeping the intricate machine running smoothly and in protecting 
the health and welfare of the multitudes at work within that machine. 
The^re is a supervening public interest in the operation of this machine 
and in the effect of that operation upon individual citizens. The 
responsibility for the protection of that public interest must rest with 

Tfie arts and sciences have abolished laissez faire just as they have 
abolished the feudal system of the Middle Ages and the household 
economy in our own age. 


The problem for those of us who beUeve in the preservation of the 
private-enterprise system is to find the way for government to play its 
necessary part in our complicated economic life without usurping the 
role of lord and master in everything we do. That is the basic 
challenge facing democracy and private capitalism today. 

Statistics have already been presented to this committee showing 
that there are many of our people whose incomes are insufficient to 
permit them to own or pay rent for housing that meets generally 
accepted minimum standards of decency. If such housing is to be 
provided by private enterprise, it must be with the assistance of gov- 
ernment, because private enterprise cannot venture into investment 
fields where the revenue to be obtained will not cover operating costs, 
amortization of capital invested, reasonable reserves for contingencies, 
and a rate of interest or dividends on capital comparable to what 
capital can earn in fields of like risk. 

Therefore, if for reasons of public health, crime prevention, and the 
public welfare generally, it is in the public interest to provide such 
housing, it would seem to me to be perfectly proper for government, 
preferably through subsidies or guaranties issued to private enterprise, 
to take up the slack between what private enterprise can do unaided 
and what the public interest requires to be done. There is nothing 
new or revolutionary in this statement, and there is nothing in it 
which is incompatible with the private-enterprise system. The only 
problem is that of determining to what extent the public welfare 
requires that government participate in the provision of housing. 

Before I comment upon certain specific matters relating to the sub- 
ject which this committee ^s investigating, I wish to make one other 
general observation. Whenever the Federal Government in the 
public interest decides that it must participate directly or indirectly 
in the housing field, it should do so only after giving careful considera- 
tion to the following: 

1. Is it true in the given case that private enterprise cannot do 
unaided by government what government in the public interest 
decides should be done in the housing field? This calls for a sincere 
and painstaking examination of the facts. 

2. Government will not do directly what it can do indirectly, 
through such devices as the subsidy and the guaranty against undue 
loss, to encourage private enterprise to do. 

3. Government will, tlu"ough such means as the encouragement of 
research, the study and revision of tax and zoning legislation and build- 
ing codes which may be hampering private enterprise, and the pro- 
motion of a better understanding between capital and labor, try con- 
stantly to lower construction costs and broaden the housing field in 
wliich private enterprise may function unaided. This will involve 
withdrawal by government from direct or indirect participation in 
that field as private enterprise is able to take over. Sincerity 
and good will on the part of all concerned are required in dealing 
with this complicated problem. Cliches and slogans will not provide 

4. Government is nothing more than an instrumentality of the 
people created for the purpose of making effective the people's will 
through collective action, within the borders of our several constitu- 
tions — Federal and State. 


Just as government derives its authority and powers from the 
people, it must also derive from the people the means of making its 
authority and powers effective. The means is represented by the 
wealth or income taken by government from the people in the form of 
taxes and loans. Government has many claims upon the wealth and 
income which it takes from the people, and before it adds to those 
claims through ventures into the housing field, it should make sure 
that it can afford the risks and losses which it is underwriting and 
that the incurring of those risks and losses is definitely in the public 

With the permission of the committee, I should now like to take 
up the specific questions which I have been invited to comment upon.. 



By virtue of Executive Order No. 9070 signed by the President on 
February 24, 1942, a number of housing agencies and housing func- 
tions were placed under the direction and supervision of a National 
Housing Administrator. Perhaps the three most important of those 
agencies are the Federal Housing Administration, the Federal home- 
loan bank— together with the Home Owners' Loan Corporation and 
the Federal Savings and Loan Insurance Corporation — and the 1" ed- 
eral Public Housing Authority. 

1 think all of these agencies have a useful and proper part to play 
in the housing field. But it is important to private enterprise that 
the Federal Pubhc Housing Authority not be permitted to engage in 
housing undertakings that may properly be left to private enterprise. 
The Federal home-loan banks and the Federal Housing Administra- 
tion are essential aids to private enterprise and they would probably 
share this view. There would seem definitely to be a place for a 
coordinator to see that these respective Federal agencies do not en- 
croach upon each other's territories. 

All of the housmg agencies now under the supervision and direction 
of the National Housing Administrator have a common interest in 
the securing and maintenance of lower construction costs, proper 
staijdards of construction, proper neighborhood planning and zonmg, 
and, above all, sound appraisal practice. They also have a common 
interest in avoiding another housing boom, in seeing to it that new 
housing is provided in an orderly manner as materials and labor may 
be made available after the war and in harmony with the needs and 
meahs of the people who will be in the market for housmg. 

As I understand it, the general idea behind the creation of the 
National Housing Agency was to accomplish such purposes as I have 
outlined. So far as I know, the National Housing Agency and its 
present Administrator have handled well the assignment which the 
President gave them. Wliile I hold no brief for the Agency or the 
Administrator, I am satisfied that the function they are supposed to 
perform is an essential function. In the interests of efficiency, I 
believe that the administrative responsibility for directing the Agency 
should be lodged in one man and not in a board. 

In view of tiie fact that in some respects the various housing agencies 
mentioned compete with each other or may have conflicting interests, 
the administrative head of the supervising agency should be carefully 


chosen and should be a man as free of prejudices and predilections as 
possible. To help him in maintaining a judicial temperament, it 
should be required that on all matters of policy and on all operations 
that may affect the interests of more than one of the constituent 
agencies, he must consult with an advisory board made up of the 
heads of those constituent agencies. That board should be no more 
than advisory, however. Such an administrator could accomplish 
a great deal in the general fields of research, construction costs, con- 
struction standards, and trade and labor practices which would be of 
great benefit to the constituent agencies and to all interested in housing 


As I understand it, most of the war housing built directly by agencies 
of the Federal Government is temporary, and the law provides for 
the removal of this housing after the war. The National Housing 
Administrator has stated that he proposes to remove such housing 
upon advice from the local communities that its removal will work no 
hardship. It would seem to me that this question is probably ade- 
quately taken care of. I would conclude my remarks about it by 
saying that temporary war housing should be removed as soon as 
possible so as not to compete with existing permanent housing or 
with new housing that would otherwise be provided by private enter- 
prise. Perhaps some of this housing can be dismounted or cut up 
and made available to the devastated areas abroad. That possible 
source of disposal should be carefully explored. 


I should like to deal with the relaxing of wartime controls as an aid 
to the revival of the home building industry before taking up the other 
relevant problems. It would be a grave mistake for the Government 
to yield to pressure groups or yield to the restlessness of the public in 
general, which is chafing under wartime restrictions, and remove too 
soon the controls now exercised by the O. P. A., the W. P. B., and other 
arms of the Government. As a savings banker and as a life insurance 
policyholder, and also as a prospective pensioner, I have a professional 
and personal interest in the prevention of inflation. As a citizen with 
an interest in the welfare of all of our people, I know how disastrous 
inflation can be and how imperfectly most of our people understand 
this fact. 

The groundwork has unavoidably been laid in this country for a 
first-rate inflationary spree after the war unless the Government turns 
a deaf ear to the removal of controls on costs, prices, and consumption 
until the plant of this country can begin to turn out production in 
sufficient volume to meet the great pent-up demand. The monetary 
purchasing power of the country represented by currency in circulation 
has increased from 7.3 billion dollars to 25.3 billion since the out- 
break of World War II, and the monetary purchasing power of the 
country as represented by the demand deposits in commercial banks 
has increased during this same period from 27.4 billion dollars to 65.4 
billion dollars. The over-all increase in monetary purchasing power 
has been 161.4 percent. 


Of course that isn't the whole story because we have got bilhons of 
dollars of demand Government obhgations, such as War Savings bonds 
that have been sold to the public. A good many of those bonds have 
been placed by virtue of the patriotic urge with which most of our 
people quite properly are seized at this time. I don't know how many 
of those bonds are going to be redeemed after the war, but when you 
sell bonds under pressure it is quite likely that a good many of them 
are going to be presented for redemption when the war crisis is over. 
"When those bonds are presented for redemption, unless the Govern- 
ment has got enough income from taxation to take care of those bonds, 
when they are presented — and that may not be the case — ■ — 

Senator Taft (interposing). It certainly will not be. 

Mr. ScHWULST. Or unless the Government can sell refunding bonds 
to savers with which to take care of tlwse bonds that are presented 
for redemption, we know what is going to happen — the Government 
is going right into the commercial banks for the money with which to 
redeem those bonds. That means an addition to the monetary pur- 
chasing power of the country. 

If this vast increase in purchasing power is permitted to circulate 
freely and if the owners of it are permitted to bid against each other 
for a limited supply of goods and services, we shall be in for terrible 
times in this country. 

With the necessity of maintaining this general policy ever before 
us — that is to say, the policy of control over these inflationary factors — 
I believe that the restrictions upon the building of new housing and 
the repair of existing housing should be relaxed as soon as workers and 
materials can be made available for use in the house-building industry. 

Mr. Blandford has already pointed out what the post-war need for 
housing is likely to be. As a means of providing employment and 
needed shelter for our people, the Government should encourage the 
resumption of the home-building industry on a peacetime basis as soon 
as that may be done with a proper regard for the general welfare of 
the country and with a proper regard for the eminent danger of 

Now, if I may, I should like to comment briefly upon certain other 
problems affecting the revival of the home-building industry. Some 
of these problems are endemic, and their solution, if possible at all, 
can be brought about probably only over a long period of time. In 
the first place, I should like to refer to the way in which the home- 
building industry is organized. It is still, generally speaking, in the 
handicraft stage. Mr. Miles Colean has dwelt fully upon this problem 
in his recent book entitled "American Housing." There are few. 
large-scale producers of housing. The nature of the product itself 
makes large-scale production difficult, but it would seem that there is 
room for great improvement in this direction. 

The production of housing, particularly housing in small units, is 
likely to remain relatively costly until we learn how to apply to it 
mass-production methods and large-scale management, for which 
America has a special genius as is demonstrated in a most noteworthy 
fashion by the motorcar industry. The fact that costs are high is 
responsible for the fact, as Mr. Blandford has pointed out, that very 
little new housing is built for people of low incomes. They must be 
satisfied with hand-me-down housing, much of which is very old and 
inadequate when it reaches them. 


\Mthout at all attempting to be critical of builders, material men, 
contractors, and labor unions, many of whom have resorted to certain 
restrictive practices in order, in their judgment, to protect their 
legitimate interests, these elements in the organization of the home- 
building industry should try seriously to find ways and means of 
reducing the cost of producing homes. I should put high on the 
priority list among the problems to which the National Housing 
Agency, or some agency of the Government like it, should give its 
concentrated attention, this problem of lowering the cost of producing 
housing. Such an agency can be objective in its approach and should 
enjoy the confidence of all the elements in the industry in its study 
of this problem. 

As a savings banker associated with an institution that has long 
had a deep and sympathetic interest in financing the provision of 
shelter, I am probably expected to say something about the problem 
of financing costs in the provision of homes. If there is any field in 
which there is free competition, it is that of lending money on mort- 
gage. There is the freest possible competition among the large seg- 
ments of lenders on mortgage, such as the insurance companies, the 
savings banks, the commercial banks, and the building and loan 

By and large, the borrower against mortgage — certainly in my 
territory — gets the benefit of the lowest interest rate which a free 
and open market can afford him when the risk factors surrounding 
his own particular situation are taken into consideration. The over- 
all governing factor is the interest rate on Government securities. 
Since a mortgage is less marketable, more expensive to make, more 
expensive to service, and surrounded with more risks as to the credit 
position of the borrower and the value of the security, than are Gov- 
ernment bonds, it is inevitable that the interest rate on mortgages will 
exceed the interest rate on Government securities. But the rise and 
fall in the Government-bond rate is sooner or later followed by a 
rouglily corresponding rise and fall in the mortgage-interest rate. 
In my territory, that spread will usually run from 1J4 to 2 percent 
between the long-term Government rate and the long-term mortgage 
rate on the typical conventional mortgage loan. That spread com- 
pensates for the various disadvantages mentioned above pertaining to 
the mortgage loan as against the Government bond. It is noteworthy 
that conventional mortgage loans are now being placed at 4 and 4K 
percent interest in the New York region, whereas about 10 years ago 
the common rate was 6 percent. This represents a drop of from 25 
to 33 % percent. 

While on the sub] ect of interest rates, I should like to say that thrift 
institutions, in order to encourage the masses of the people to practice 
thrift, must have some regard for the necessity of offering those people 
in the way of interest a sufficient reward to induce them to save. 

Senator Buck. What do you pay, 2^ percent? 

Mr. ScHWULST. We pay Di percent up to $5,000 and 1 percent 
above $5,000. I should say the characteristic rate in that territory, 
among thrift institutions in general, would be around 2 percent. ^ In 
New York City the common rate is IK percent, such as we are paying. 
There are a few banks paying 2 percent. The building and loan asso- 
ciations, I think, on the whole are paying around 2 to 2]^ percent. 


Thrift institutions have many more depositors or members than 
they have borrowers. The Bowery Savings Bank, for example, has 
nearly 384,000 depositors as against only about 13,000 borrowers on 
mortgage. Sometimes the relative numerical importance of these two 
groups is lost sight of, particularly when we talk about interest rates 
on mortgages. 

I might just interpolate there and say that while our average deposit 
runs something over $1,000, our typical deposit is well under that, it 
is probably in the neighborhood of four or five hundred dollars. So 
you can see that it takes the savings of some 10 or 11 or 12 savers to 
provide the funds for one $5,000 loan. 

The return paid to depositors and members in my territory is now 
lower than we would like to see it. This is in part a reflection of the 
general lowering of interest rates obtainable from investments. Thrift 
institutions have been increasingly heavy investors m Government 
bonds at relatively low rates. It is in part a reflection of the inade- 
quate supply of good real-estate mortgages, due to the virtual stoppage 
of construction. Then, of course, it costs thrift institutions something 
to operate, and they must also for the protection of their depositors 
and members set aside each year some reasonable proportion of their 
earnings to meet losses and other contingencies. In New York State 
the law imposes upon savings banks certain surplus requirements which 
can only be met out of earnings. Because they have no stock they can 
sell no stock. They can only build up their net worth, or their cushion 
of protection for their depositors, out of the earnings that they make. 

Given the desire and even the necessity on the part of thrift insti- 
tutions to raise somewhat as soon as possible the payments they make 
to their depositors and members as a reward for the practice of thrift, 
and given the necessity also on the part of those institutions of niain- 
tainmg a reasonable proportion of their assets in Government secu- 
rities and other liquid investments, it would appear from various cal- 
culations that have been made from time to time not only that the 
mortgage interest rate should not fall below its present level, but also 
that there should be an increase in the supply of good mortgages at 
these rates available for investment. 

Senator Taft. Are your mortgages made direct or are they F. H. A. 

Mr. ScHWULST. We make both kinds. Senator. We have about 
6,000 F. H. A. insured loans, and we have about 7,000 uninsured 
mortgage loans. 

Senator Taft. Is there any trend to take more F. H. A. mortgages? 

Mr. ScHwuLST, It so happens that at the present time, due to the 
dearth of construction, except war housing, that about the only avail- 
able supply of loans in the current market is F. H. A. loans under 
title VI of the National Housing Act. Consequently, most of our 
investments in mortgages in the last year and a half or 2 years, have 
been in the title VI loans. Now there are a few loans, the refinancing 
of existing mortgages, conventional loans — those would be uninsured 
loans — but there isn't a great deal of that, and there is such keen 
competition for them that we have more or less been out of the 
market for that type of loan. 

Senator Taft. As you look forward to the F. H. A. going back to the 
90-percent loan under title II, what do you think will be the division 


between the two? Will the F. H. A. gradually absorb all mortgages^ 
or is there a permanent substantial place for the conventional mort- 

Mr. ScHWULST. I think there is a very definite permanent place 
for the conventional loan. I think there are a great many people who 
can buy homes and make a substantial down payment, who won't 
need the F. H. A. to insure the mortgage. 

Senator Taft. They save a half a percent on that, don't they? 

Air. ScHWULST. They will save a half of 1 percent, of course, on the 
insurance. The F. H. A. is set up primarily for the middle and the 
lower income home owner. You take the fellow who can afford to 
pay a substantial price for a home and he has no business going into 
the F. H. A. The banks, the insurance companies, and the other 
lenders ought to be able to take care of him without benefit of insur- 
ance, and there will be a considerable amount of construction for those 

Now the fourth topic that you asked me to comment on is the Role 
of the Federal Government in Future Public Housing. 

I think I can save a little time if I just comment about that without 
attempting to read what I had prepared. I have just one or two 
points to make in that connection. I am afraid these are lil^ely to be 
more or less trite, but for the record I ought to make them. 

I don't believe that the Federal Government ought to get into any 
housing field where private enterprise, unaided by the Federal Gov- 
ernment, can do the job. As I have already pointed out, there are 
certain housing fields where there is a definite public interest involved 
in the way of crime prevention, public health, public safety, and so on 
where, because of the low incomes of the tenants, the occupants of 
the housing, private enterprise simply cannot enter because of high 
land costs, high construction costs, and various other reasons. 

I think that there is a place for government, and when I say 
"government" I am using that in a generic sense, I am not talking 
altogether about the National Government, I am talking about 
State and local governments too. I think they ought to bear a 
large part of the burden of providing this housing or facilitating the 
financing of it, or providing the subsidies that may be required, and 
so on, but I do think there is a field for that. I don't think that 
government can supply that type of housing for everybody who 
needs it. The Government has only what it takes from the citizens 
in the form of taxes, and what it borrows from them, and it isn't an 
inexhaustible gold mine. And the Government has got a lot of 
claims on it, or I should say the Government has a good many claims 
on the wealth and income that it takes from the citizens in the form 
of taxes and borrowings, and it must canvass carefully its over-ail 
situation before it jumps too glibly into this business of doing a 
welfare job in housing. 

The claims of veterans are likely to be very substantial when this 
war is over, and in the post-war years to come. 

I mean there has got to be a lot of common sense used in just what 
the Government can do. The Government can't go out and do all 
this job, that is impossible. 

One other point I would like to make in that connection is that to 
the extent that it is possible — and I don't know to what extent it is 
possible but it is something that ought to be studied — I should prefer 


to see the Government do whatever it may feel called upon to do in 
the interest of public welfare in the housing field, through subsidy 
and through guaranty to private enterprise. I should prefer to see 
it use that device of the subsidy and the guaranty rather than the 
device of direct lending or direct borrowing in the market, or direct 
ownership or building of this housing. I would like to see the Gov- 
ernment bring private enterprise into it, but through subsidy or 
guaranty sec that private enterprise is protected against loss which, 
if the job is to be done at all, has got to be socialized. 

Now one other point in that connection before I pass on to another 
subject. I have just made the point that the Government is not an 
inexhaustible gold mine. The Government can do something — and 
it should do all it can with due regard to the other claims on gov- 
ernment, present and prospective. I know that is very vague and 
it isn't very helpful, but I don't know how I can make it any clearer 
or any plainer. But it seem^s to me that the greatest aid that gov- 
ernment can really render in this housing field is through research, 
through a better coordination of the elements in the housing industry, 
all designed to lower the cost of production, so that we can broaden 
the field in which private enterprise can operate without calling upon 
Government for subsidy or help of any kind. 

The Government can do a great deal in the way of a study of 
existing legislation, zoning legislation, tax legislation both real estate 
tax legislation and income-tax legislation, to see if there may not be 
some ways there of making it possible for private enterprise to func- 
tion more efi'ectively without Government aid than it seems to be 
able to in this low-income field at the present time. 

I have one thing in mind which I am going to mention presently 
in connection with urban redevelopment. We have made some very 
intensive studies of that question in New York City and I hope the 
committee will grant me the time to bring before it a few of the results 
that we have found. But it would seem to me if, in the income-tax 
laws, more liberal allowance could be made for depreciation deduc- 
tions before determining net taxable income, that there might be a 
great incentive there toward private enterprise doing a job unaided 
by Government, so that private enterprise would have a better 
opportunity or a better assurance of getting back its capital invest- 
ment, even though with a modest rate of return on it. 

But I will come to that again in a moment. 

Next I deal with the subject of Types and Methods of Private 
Credit Aids. I can summarize that briefly, without reading it, by 
merely saying that in the middle income field where the F. H. A. 
operates, and the home-loan banks operate, I don't think the Govern- 
ment need do very much more than it is already doing, and in the 
rental field there it would seem to me that the Government, through 
section 207 of the Federal Housing Act, is doing about all that need 
be done. 

Builders can go into that field now with a moderate capital invest- 
ment, or a moderate equity investment, and build housing. There 
may be some little refinements that ought to be put into that pro- 
vision of the law, but by and large it seems to me that Government is 
doing about all it ought to do w ith respect to these owners and tenants 
in the middle income group. 


I might just say in that connection that in New York State the 
State legislature has authorized the insurance companies and savings 
banks, through certain housing legislation, to get into the moderate 
income rental field of housing, and I shall have a little more to say 
about that when I come to the subject of urban rehabilitation. But 
I think I can pass over this topic with that comment. 

Part VI has to do with the insurance of construction loans. Just 
briefly, I don't know that the Government need do any more than it 
is already doing in that connection. Under section 207 of the National 
Housing Act the Government can insure construction loans. That 
takes care, it seems to me, of the middle income group of tenants, 
and I don't know that that ought to be expanded any further. When 
we get into the low-income groups that I have been talking about, 
we have other problems, some of which I have touched upon, and I 
will touch upon those a little further on in my paper. 

The seventh question had to do with the relation of housing agencies 
to the general credit policy of the Government. 

All I have to say about that is that the home-loan banks and the 
Federal Housing Administration certainly can and do influence the 
extension of credit in the housing field, and it would seem to me to 
be logical and sensible that those agencies, through this coordinator, 
the need for which I have already indicated — it would seem to me that 
that influence ought to be tied into the general credit policies of the 
Government. I don't think it ought to be left out at loose ends to 
one side. I think that is particularly important when you are 
threatened with inflation as we are now, and I think it is important if, 
later on, we should have a deflation staring us in the face. 

So I do think that there should be a tie-in between the credit 
policies of these housing agencies and the general credit policy of the 

Now we come to the eighth subject, the effect of veterans' loans 
on the housing picture. 

When the war is over, we may find 11 or 12 million veterans in our 
midst. Many of these veterans will require housing, and many of 
them who are not home owners will desire to become home owners. 
If they act as a group, they will have a most important influence upon 
all phases of the economic and political life of this country. Their 
views with respect to housing matters will carry tremendous weight. 
It is important that those views be enlightened and not merely selfish. 
It is important that they understand that to the extent that Govern- 
ment is called upon to underwrite special treatment for them in the 
housing field, the cost of that special treatment will in large measure, 
in the last analj^sis, be borne by them. 

The debt which the citizens owe the veterans is one that can never 
be repaid in an economic sense, and I doubt that the veterans expect 
any considerable repayment in that sense. They are a good cross 
section of our people, and they know that if the American system of 
private enterprise is to continue, there is a limit to the burden that 
may be imposed upon the general economy in defraying the cost of 
subsidies and other special privileges that may be granted by Govern- 
ment to special groups of citizens. 

Senator Taft. Furthermore, of course, they will have to pay that 
burden themselves, practically. I 

Mr. ScHwuLST. That is exactly the point I am making. 


Senator Taft. They will make up such a large part of the population, 
representing practically every family in the United States. 

Mr. ScHWULST. That is right, when you figure that their families 
and dependents are going to constitute a very large part of the pro- 
ductive and tax-paying population of this country within a few years 
after the war is over. 

The G. I. bill of rights and the regulations of the Veterans' Adminis- 
tration have fixed at 4 percent the interest rate that may be charged 
on loans to veterans guaranteed by the Veterans' Administration. 
The effect of fixing the rate at this figure upon mortgage interest rates 
generally remains to be seen. 

If I may just put in a remark here, I think that effect is going to be 
one of influencing the general mortgage rate downward ; it is going to 
be another influence added to the general plentitude of money through 
definite financing that has been exerting a pressure on interest rates 
steadily for the past several years. But I don't laiow what the effect 
is going to be. That would seem to me to be just another influence 
in that direction. 

I have no doubt that lending institutions are gohig to try whole- 
heartedly to make every mortgage loan that it is in the interest of the 
veteran himself to incur. With money as plentiful as it is today and 
with the general level of interest rates where it is today, I am confi- 
dent that the lending institutions, certainly in my section of the 
country, will make funds available on sound loans guaranteed by the 
Veterans' Administration at the rate fixed in the law and in the 
regulations, but, from what I have said before, this rate will leave 
little, if any, margin after the lending institutions pay their expenses 
and pay the prevailing modest rates of return on the money left them 
by their depositors and members. 

Now I come to the last subject, gentlemen, and I regret that this 
subject is perhaps not one of such general interest throughout the 
country as it is to us in the urban centers, but I hope you will bear 
with me while I go over this subject, because it is of vital interest to us 
in the urban centers, and we do pay a lot of taxes and we hope that 
you and your colleagues, when the time comes to enact legislation, will 
give such consideration as may be due to what is said on this topic. 

The topic, as a matter of fact, has to do with rural housing as well 
as urban rehabilitation, but I am not competent to talk about rural 
housing and therefore I shall confine my remarks to urban rehabilita- 
tion, on tliis topic, that is, to the clearance of blighted areas and the 
construction therein of housing developments. 

The Bowery Savings Bank, along with other financial institutions in 
New York City, has been giving a good deal of thought to this matter. 
Enough has already been brought to the attention of this committee to 
establish the importance of revitalizing slum areas. References 
already have been made to the fact that the laws of New York State 
permit insurance companies and savings banks, either directly or 
through the medium of housing companies, to own housing develop- 
ments outright. A few of the life insurance companies have acted and 
are proposing to act under these powers. The savings banks have 
made loans to some of these housing developments but they do not 
have quite the same latitude as the life insurance companies. How- 
ever, they are attempting to obtain from the New York Legislature 
approximately the same powers through having the Institutional 
Securities Corporation, a mortgage company which they own, author- 


ized to engage in housing undertakings in blighted areas through the 
sale of its securities to the savings banks. Some of the savings banks 
would like to have, under proper limitations and safeguards, the same 
powers conferred upon them as are now enjoyed by the life insurance 
companies so that they may operate directly in this field in the same 
manner as those companies, and it is possible that the Legislature may 
in time grant that authority. In fact, a bill has just been introduced 
in the New York State Legislature, with the approval of the New 
York State Banking Department, which would give the savings banks 
that power. Whether it will be passed or not, of course, I don't know. 

Wholly aside from what the savings banks may now legally do or 
may in the future be permitted directly or indirectly to do in this field, 
there are certain economic considerations involved with respect to 
slum-clearance housing in New York City which may be of interest 
to this committee. 

Of course I can only talk about New York City, but I should imagine 
that perhaps the same economic factors that I am now going to call 
to your attention in New York City, would pertain generally in the 
larger urban communities of the country. 

Land cost in the blighted areas of New York City are high. If 
those areas are to be used for the construction of housing to be rented 
to tenants in the middle and particularly in the low income classifica- 
tions, such housing developments should be on a sufficiently large 
scale to assure their not being swallowed up by the surrounding slums. 
This would involve the accumulation of land in substantial tracts. 
This can only be done through condemnation, and condemnation 
usually involves paying approximately the assessed value for the land 
and old improvements thereon. While the assessed values have been 
coming down, they have by no means reached the point of the land's 
actual economic value for housing development purposes. The 
State law recognizes this fact by providing that redevelopment or 
housing companies may enjoy the benefit for a determined number of 
years of tax exemption on the new improvements placed on the land. 
This is, of course, a form of subsidy. 

The question naturally arises as to whether the city could not lower 
the assessed values in these areas to bring them more in line with 
economic values, but we are advised by counsel that there are serious 
legal obstacles in the way of the city's singling out a specific area and 
reducing the assessed values there as against other areas. 

Senator Buck. What are the factors that keep the value of property 
like that up? 

Mr. ScHWULST. Well, the principal factor. Senator, is that in the 
years prior to the stoppage of immigration — let's say prior to 1921 or 
1922 or 1923, somewhere around there — there was a constantly 
expanding population in New York City and an increasing popula- 
tion, and an intensive pressure, you might say, on the land. The city 
had greatly to expand its plant, that is to say, it had to extend its sub- 
way system, it had to build more schools and more hospitals, and hire 
more policemen and more firemen and all that kind of thing, and that 
plant cost a great deal of money, and that plant is still there. But the 
city, to pay for that plant, had of course to depend upon real-estate 
taxes, which is the principal source of income of the city 

Senator Buck (interposing). Well, it is really a fictitious figure, 
then. If you had to go out and sell it would not sell for the assessed 


Mr. ScHWULST. You couldn't sell it now for the assessed value. 
Now that the pressure has come off the land, and the population is 
decentralizing, getting away from the center of the city, rents have 
come down drastically in those areas, but the city can't drop the 
assessed value — it has been dropping it some but it can't come down 
too rapidly, because they would go broke, and they have got to keep 
the assessed value up in order to collect sufficient taxes to keep going. 
That is the long and short of it in so many words. However, they 
are bringing that assessment down gradually, but it is a long, long 
way from reaching the economic value of that property, if you. are 
going to build new housing on it. 

Even with the indirect subsidy now authorized by State law, hous- 
ing companies find it impossible to build acceptable housing in these 
areas to rent for much less on the average than $15 per room per 
month, which means from $50 to $60 per month for an average size 
apartment. A family should have an annual income of at least $200 
a month, or $2,400 a year, to be able to rent one of these apartments. 

This assumes that the density of population in the area would still 
remain fairly high, even if you built this new housing there. In one 
of the areas which the Bowery Savings Bank has been studying 
closely, the density would have to be in the neighborhood of 400 
persons per acre, which is slightly in excess of the density already there. 

Under the foregoing conditions, the housing company — and let me 
say just a word about these housing companies. You build these 
things through housing companies and under existing State law the 
life insurance companies and the savings banks can own those com- 
panies. They can own the securities, the bonds, the mortgages, and 
even the stock. So that is the way the institutions would get into the 
field, but they would do it through the device of the housing company. 

Continuing — under the foregoing conditions, the housing company 
could expect to earn on the cost of the development only between 6 
and 7 percent; that is, on total cost after paying euch operating 
expenses and such real-estate taxes as would have to bo paid which, 
after allowing a return of 4 percent in the form of interest on the 
investment, would leave only between 2 and 3 percent available for 
income taxes — these housing companies would have to pay income 
taxes — and the amortization of the investment. There would be 
slight, if any, cushion for reserves against contingencies. 

It would seem to be clear from the foregoing statements that the 
housing companies would be confined in their endeavors to the pro- 
vision of housing for the middle-income groups. This would involve 
a considerable displacement of existing population in the blighted 
areas because most of the families now living in those areas earn less 
than $2,400 a year, and it is these families which constitute the 
major portion of the rent-paying population of the city. 

You might be interested in a few figures on that. The island of 
Manhattan contains about 2,700 acres. According to the city 
planning commission 14 percent of the area of Manhattan Island is 
blighted area. Now that 14 percent of the total area of Manhattan is 
equal to about 30 percent of that part of Manhattan Island which is 
devoted to residential uses. So you can see that a very considerable 
portion of Manhattan Island is already officially designated as 


Now, according to the 1940 census, there were about 545,000 rent- 
paying families on the island, living on the island of Manhattan. 
About 60 percent of those families were paying less than $40 per 
month for their living accommodations: about 40 percent of those 
families were paying less than $30 per month for their living accomo- 
dations. Now I have just shown you here where, even with real 
estate tax exemption on the new improvements, if new housing is built 
in those areas, still maintaining high densities, and counting on an 
over-all throw-off of only between 6 and 7 percent on the investment, 
that we would still have to get in the neighborhood of $50 or $60 per 
month per family in order to get into this field. 

Senator Taft. Suppose a similar development in a section that is 
undeveloped, or where the land is equally cheap? 

Mr. ScHWULST. You can go on the outskirts, of course. 

Senator Taft. How much would that bring down the $50 or $60 
in such an area? 

Mr. ScHWULST. There have been some 10 or 11 limited dividend 
housing projects built in the city of New York in the last 15 or 20 
years, I believe, and they are renting under the limited dividend 
housing law at from $11 to $12.50 per month per room. That is much 
cheaper than what I have said. However, with one exception those 
projects have been built on cheap land; they have been built on the 
outskirts of the city. They haven't been built in the slum areas. 
But one of them was built in a slum area, and that was Knickerbocker 
Village, originally financed by the R. F. C. 

Senator Taft. I don't want that; what I am trying to get is a 
comparison between the ones built on cheap land. They rented at 
between $11 to $12.50 per month, per room? 

Mr. ScHwuLST. Yes, 

Senator Taft. That makes how much per apartment? 

Mr. Schwulst. I would say, for a 3 ^/^ or 4 room apartment that it 
would be around $35 to $40, somewhere around there. 

Senator Taft. That is about $20 a month cheaper than those built 
on expensive land. Can you attribute to the cost of the land the 
difference of $20 per apartment per month? 

Mr. Schwulst. Well, the land has a good deal to do with it, but 
of course construction costs have gone up too, construction costs are 
an important factor in this thing, and in the studies we have made we 
have allowed for some increase in construction costs over what they 
were back in the earlier days. 

Senator Taft. If we subsidized up to the difference in the cost of 
the land, how far down would that get these costs? 

Mr. Schwulst. When you get into the question of subsidy I don't 
think that you can base it on trying to make up the difference between 
the uneconomic cost of that land, if you take it in at assessed values, 
as you would have to do now, and the true economic value of that 

Senator Taft. That is what all these urban redevelopment bills 
propose to do, just exactly that. 

Mr. Schwulst. I am not so sure that that is going far enough. I 
think, with building costs what they are, with the building industry 
organized the way it is, that you are going to have to base your sub- 
sidy on some form of a minimum return guaranty from the housing 
project, which would pay a minimum assured rate of interest and 


amortization on the investment cost of the project. I think you have 
got to look at it from that angle. 

Senator Taft. Well, I think you have to look at it that way also, 
but I was wondering about the possibility of separating out the sub- 
sidy required to eliminate the slums, so to speak, that is in buying 
land for more than it is worth and thereby eliminate the slums, from 
the subsidy required just for low-income housing? 

Mr. ScHwuLST. I think maybe this will be helpful to you in con- 
nection with that question. The Metropolitan Life Insurance Co. 
several years ago built a large development, without benefit of subsidy 
of any kind, in the Bronx. They bought a large tract of land from the 
Catholic Church, and they paid, as I remember, around a dollar a 
square foot for the land. 

Now, this project that I have been talking about, and that we have 
been studying carefully, on Manhattan Island, has a land cost averag- 
ing around $5.50 per square foot. 

This project up in the Bronx had a land cost to the Aletropolitan, 
as I remember, of about a dollar a square foot. That was raw land 
and they had to equip it before putting the buildings on it, and I 
think that cost them another dollar or thereabouts a square foot. So 
the wound up with about $2 per square foot land, ready to build on. 

Now, their density runs, if I remember correctly, somewhere around 
what our density would run in this project that I have been talking 
about, and that is a pretty heavy density. 

They found that in order to get aroimd 7 percent free and clear on 
their over-all cost — now this land, you understand, cost them less 
than half of what this land would cost us that I am talking about — 
that they woidd have to get around $14 per room per month, which is 
still higher than these low-income groups can pay. So that your land 
is not altogether the governing thing, although it is important. 
Parkchester has a density of a little more than I was talking about. 
The density I was talking about is about 400 persons per acre, and 
it runs around 500 persons per acre m the Parkchester project. 

They have no subsidy, but by vu'tue of getting their land cost 
down to aroimd $2 per square foot over-all, ready to build on, they 
were able to rent at about the same figure per room per month as we 
estimate we could rent for in Manhattan if we did get a subsidy repre- 
sented by the exemption from taxation for a limited period, of the 
cost of the new improvements. 

We estimate roughly, in this particular project, that that limited 
tax exemption would be worth somewhere around $2.50 to $3 per 
room per month in rent, which would make up that difference in land 
cost, roughly. 

If I might come back to that. Senator, I would say that if you are 
going to get down to the $6, $7, or $8 per room per month rental 
category, for people in the income class that can pay only those rents, 
that whatever you feel this Government is called upon to do in the 
interest of public welfare, in helping do a job there — I don't think 
they can do the whole job by any means — I think you have got to 
base that subsidy on a return basis, a minimum return basis. If the 
project fails to earn that minimum return, that subsidy has got to 
make up the difference. I think that is the way you have got to look 
at it. 


The modest return available on the investment of housing com- 
panies under the conditions stated, effectively precludes the ordinary 
private builder and owner from this field. It is a field, however, in 
which institutional investors may find a limited opportunity as they 
become educated up to it and as the remaining legal impediments are 
cleared away. 

Because of the small margin on which housing companies venturing 
into this middle rental field would have to operate, the Federal and 
State Governments, as an encouragement to them, might consider 
making somewhat more liberal provisions regarding the exemption 
from income taxation of deductions on account of depreciation, so 
that the companies would have better protection against contingencies 
and a better assurance of the return of their capital investment during 
the reasonable economic life of the projects. 

Our studies would seem to indicate that so long as land costs in 
blighted areas in New York City, and construction costs, are as high 
as they are, even institutional investors who w^ould be content with 
a modest return on their investment cannot do a great deal in the way 
of clearing those areas and building properly planned neighborhood 
developments in them. The principal reason is that they can reach 
only a limited market. The mass market, the market which con- 
stitutes the bulk of the present inhabitants of those areas, cannot pay 
rents high enough to earn even the modest economic return indicated 
on the institutional investment. 

But to the extent that there is a market for such housing as institu- 
tions can economically build, those institutions should be encouraged 
to build it. The tenants in the middle income classes are an important 
element in the community. They are now progressively leaving the 
present residential sections of the city and are moving to suburban 
areas. It would mean a great economy for the city if these people 
could be kept within the city and in those areas already provided with 
utilities, streets, schools, police and fire protection, and so forth, which 
must be duplicated in the new areas to which those people are moving. 

But we still would not be providing decent housing in the slum 
areas for the people already living there and earning incomes below 
the level which will permit them to pay rent for such new housing as 
private enterprise would seem able to build. To provide these people 
with decent housing will entail the extensive modernization of such 
existing improvements in the blighted areas as may properly be sal- 
vaged, and the construction of much new housing. Private enterprise 
should be encouraged to engage in this field, but up to the present 
t me it can do so apparently only with extensive assistance from gov- 
ernment — Federal, State, and local. This may well be a field in which 
the device of yield insurance can be used. 

I have got a little dift'erent idea about yield insurance from what is 
commonly talked about. What I am thinking about — I have already 
mentioned this just a moment ago — is this field, the so-called uneco- 
nomic field, the public welfare field, if you please, and I think that 
private enterprise ought to do that job to the extent that it can be 
done gradually over a long period of time, and it will have to be aided 
by subsidy. Now, I think that subsidy should take the form of a 
guaranty of a return on the investment which the net income from 
the operations of the housing project itself will not provide. That 
is what I mean by yield — guaranteed income, plus the reasonable 


amortization of the cost of that project over a long period of time, 
say 50 years or longer, depending upon what kind of construction 
you have. 

Now, I want to make one other statement. It seems to me that 
the Federal Government ought not- to be looked to to do this whol& 
job, or even the lion's share of it. I think the States and the local 
governmental bodies, the municipalities, should be tied into this 
thing, and should be made to put up a substantial part of any subsidy 
that is required, because after all the baby is on their doorstep and 
they ought to be the ones to look after it, or at least decide whether 
it is a baby they want to adopt or not. 

Now, there is just one other remark I would like to interpolate at 
this point so far as New York City is concerned, and that is this, that 
it is possible that if the city administration were called upon to help 
out in subsidizing this type of housing, along with the Federal Gov- 
ernment and the State of New York, that they might be able to appeal 
to the riders of the subways there to pay a more economic fare, and 
the saving resulting from that might be very helpful in defraying a 
part of this subsidy for the provision of decent housing in the slum 
areas. I just throw that out as a suggestion. 

It is to be hoped that if the Federal Government determines that 
it is in the public interest for it to assist private enterprise in this field,^ 
such assistance will be rendered as largely as possible through the 
F. H. A. or through some agency like it. The F. H. A. has been ex- 
ceptionally well administered, and it has earned the confidence of pri- 
vate investors throughout the country. It has proven itself capable 
also of protecting the interests of the taxpayer. It has been notably 
free of pursuing will-o'-the-wisps. I think it could be counted upon 
to withstand the pressures that would be brought to bear upon it by 
people who do not realize that there are limitations to what even the 
Federal Government may sensibly do in underwriting the activities of 
its citizens and who have little or no understanding of, or regard for, 
the economic or even the social soundness of many of the proposals 
which they bring forth. 

I am sorry I have taken so much of your time and I want to thank 
you for your patience. 

Senator Taft. We appreciate very much your suggestions; they 
have been very helpful. 

Mr. ScHWULST. Thank you. 

Senator Taft. I am afraid that we will have to adjourn at this time. 
I know that there are some others who wanted to be heard, but I am 
afraid we will have to recess now. We hope to have one or two hear- 
ings in February, perhaps around the second week in February. Also, 
Mr. Klutznick, of the Federal Public Housing Authority, has requested 
permission to file as part of the record a further statement from the 
Federal Public Housing Authority, showing the result of a new survey 
of incomes of persons living in Public Housing projects. His figures 
before related to those admitted to Pubhc Housing projects, and these 
figures are more complete on the question as to the incomes of all of 
those living in the projects. That permission will be granted. 

The committee will now recess, subject to the call of the chairman. 

(Whereupon, at 3:35 p. m., the committee recessed, subject to the 
call of the chairman.) 


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