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Given By
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POST-WAR ECONOMIC POLICY AND PLANNING
HEARINGS
BEFORE THE
SUBCOMMITTEE ON HOUSING AND UEBAN
EEDEYELOPMENT OF THE
SPECIAL COMMITTEE ON POST-WAE ECONOMIC
POLICY AND PLANNING
UNITED STATES SENATE
SEVENTY-NINTH CONGRESS
FIRST SESSION
PURSUANT TO
S. Res. 33
(Extending S. Res. 102, 78th Congress)
A RESOLUTION CREATING A SPECIAL COMMITTEE
ON POST-WAR ECONOMIC POLICY
AND PLANNING
PART 13
HOUSING AND URBAN REDEVELOPMENT
JANUARY 19, 1945
Printed for the use of the Special Committee on Post- War
Economic Policy and Planning
UNITED STATES
GOVERNMENT PRINTING OFFICE
91183 WASHINGTON : 1945
SPECIAL COMMITTEE ON POST-WAR ECONOMIC POLICY AND
PLANNING
WALTER F. GEORGE, Georgia, Chairman
ALBEN W. BARKLEY, Kentucky ARTHUR H. VANDENBERG, Michigan
CARL HAYDEN, Arizona WARREN R. AUSTIN, Vermont
JOSEPH C. O'MAHONEY, Wyoming ROBERT A. TAFT, Ohio
CLAUDE PEPPER, Florida ALBERT W. HAWKES, New Jersey
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
ALLEN J. ELLENDER, Louisiana GEORGE L. RADCLIFFE, Maryland
C. DOUGLASS BUCK, Delaware ROBERT F. WAGNER, New York
II
CONTENTS
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
in
POST-WAE ECONOMIC POLICY AND PLANNINCx
FRIDAY, JANUARY 19, 1945
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)
presiding.
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.
STATEMENT OF ELBERT S. BRIGHAM, PRESIDENT, NATIONAL
LIFE INSURANCE CO., MONTPELIER, VT.
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
period.
1917
1918 POST-WAR ECONOMIC POLICY AND PLANNING
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
action.
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
work.
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
0 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.
POST-WAR ECONOMIC POLICY AND PLANNING 1919
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
demolished.
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
1920 POST-WAR ECONOMIC POLICY AND PLANNING
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
yet.
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
attractive.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1921
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
accommodations.
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
1922
POST-WAR ECONOMIC POLICY AND PLANNING
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,
inclusive
Number
Principal
amount
Average
1935 (6 months) . .
563
2,205
1,794
1,490
2.803
2,826
$2, 518, 182. 06
11, 093, 938. 70
9, 885, 572. 83
7, 828, 797. 23
13, 662, 492. 45
13,127,606.48
$4, 472. 79
1936 ..
5, 031. 26
1937 --
5, 510. 35
1938 . .- -- --
5, 254. 23
1939
4, 874. 24
1940 -
4, 645. 30
Total
11, 681
58, 116, 589. 75
4, 975. 31
POST-WAR ECONOMIC POLICY AND PLANNING
1923
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 _...
Amount
Average per loan
Rental housing (Federal Housing Administration 207, 210, and
Number
Amount---
Average per loan _..
Total, Federal Housing Administration's:
Number
Amount
Average per loan
Total purchased
to Dec. 31, 1944
32, 068
$146, 589, 506. 52
$4, 571. 21
101
$39, 242, 378. 45
$388, 538. 39
32, 169
$185,831,884.97
$5, 776. 73
Total held, Dec.
31, 1944
25 775
$102, 406, 44* 90
$3, 973. 09
$28,512,164.46
$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-
sidy.
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.
1924 POST-WAR ECONOMIC POLICY AND PLANNING
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
POST-WAR ECONOMIC POLICY AND PLANNING 1925
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
demonstrate.
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
1926 POST-WAR ECONOMIC POLICY AND PLANNING
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-
dation?
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
agencies?
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1927
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
Government.
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.
1928 POST-WAR ECONOMIC POLICY AND PLANNING
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
housing.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1929
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
done.
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
1930 POST-WAR ECONOMIC POLICY AND PLANNING
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
recovered?
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
conditions.
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
POST-WAR ECONOMIC POLICY AND PLANNING 1931
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-
ticut.
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.
STATEMENT OF OSCAR KREUTZ, EXECUTIVE MANAGER,
NATIONAL SAVINGS AND LOAN LEAGUE
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:)
1932 POST-WAR ECONOMIC POLICY AND PLANNING
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
POST-WAR ECONOMIC POLICY AND PLANNING 1933
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
1934 POST-WAR ECONOMIC POLICY AND PLANNING
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
members.
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
POST-WAR ECONOMIC POLICY AND PLANNING 1935
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
1936 POST-WAR ECONOMIC POLICY AND PLANNING
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
Administration.
"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.
POST-WAR ECONOMIC POLICY AND PLANNING 1937
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
assessments?
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
1938 POST-WAR ECONOMIC POLICY AND PLANNING
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
bihs.
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
please.
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-
ury.
Mr. Erdmann. Not necessarily.
POST-WAR ECONOMIC POLICY AND PLANNING 1939
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
bank?
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.
1940 POST-WAR ECONOMIC POLICY AND PLANNING
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
would.
Senator Ellender. Very well. But you would like to sell without
recourse.
Mr. Erdmann. Shall I proceed with my statement now, Mr.
Chairman?
Senator Taft. Yes.
STATEMENT OF ARTHUR G. ERDMANN, PRESIDENT, NATIONAL
SAVINGS AND LOAN LEAGUEj
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
POST-WAR ECONOMIC POLICY AND PLANNING 1941
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
minimum.
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-
1942 POST-WAR ECONOMIC POLICY AND PLANNING
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-
sistence.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1943
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 hom.es 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.
1944 POST-WAR ECONOMIC POLICY AND PLANNING
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
institutions?
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
companies?
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
associations.
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
business.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1945
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
capital?
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
guarantee.
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.
1946 POST-WAR ECONOMIC POLICY AND PLANNING
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1947
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
done.
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.
STATEMENT OF JAMES J. O'MALLEY, CHAIRMAN, LEGISLATIVE
COMMITTEE, NATIONAL SAVINGS AND LOAN LEAGUE
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
viewpoint.
Senator Taft. Very well.
Mr. Bestor.
1948 POST-WAR ECONOMIC POLICY AND PLANNING
STATEMENT OF PAUL BESTOR, VICE PRESIDENT, PRUDENTIAL
LIFE INSURANCE CO., IN CHARGE OF MORTGAGE LOAN IN-
VESTMENTS
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
cents?
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
POST-WAR ECONOMIC POLICY AND PLANNING 1949
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
shortly.
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
1950 POST-WAR ECONOMIC POLICY AND PLANNING
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,
POST-WAR ECONOMIC POLICY AND PLANNING 1951
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
analysis:
(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.
1952 POST-WAR ECONOMIC POLICY AND PLANNING
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
to.
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
extent?
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
POST-WAR ECONOMIC POLICY AND PLANNING 1953
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
1954 POST-WAR ECONOMIC POLICY AND PLANNING
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
sufficient?
Mr. Bestor. That is exactly it. Senator.
POST-WAR ECONOMIC POLICY AND PLANNING 1955
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-
ment.
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.
1956 POST-WAR ECONOMIC POLICY AND PLANNING
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.
Howell?
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.
STATEMENT OF VALENTINE HOWELL, VICE PRESIDENT AND
ACTUARY, PRUDENTIAL LIFE INSURANCE CO.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1957
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
1944?
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
1958 POST-WAR ECONOMIC POLICY AND PLANNING
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
more.
(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.
STATEMENT OF EARL BRYAN SCHWULST, EXECUTIVE VICE PRES-
IDENT, BOWERY SAVINGS BANK, NEW YORK CITY
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1959
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
system.
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
government.
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.
1960 POST-WAR ECONOMIC POLICY AND PLANNING
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
housing.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1961
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
interest.
With the permission of the committee, I should now like to take
up the specific questions which I have been invited to comment upon..
I. A PERMANENT FEDERAL ADMINISTRATIVE ORGANIZATION OF THE
HOUSING AGENCIES
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
1962 POST-WAR ECONOMIC POLICY AND PLANNING
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
matters.
II. DISPOSAL OF WAR 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.
III. PROBLEMS OF THE REVIVAL OF THE HOME BUILDING INDUSTRY,
INCLUDING THE RELAXATION OF WARTIME CONTROLS
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1963
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
inflation.
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.
1964 POST-WAR ECONOMIC POLICY AND PLANNING
\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
associations.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1965
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.
mortgages?
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
1966 POST-WAR ECONOMIC POLICY AND PLANNING
between the two? Will the F. H. A. gradually absorb all mortgages^
or is there a permanent substantial place for the conventional mort-
gage?
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
people.
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
POST-WAR ECONOMIC POLICY AND PLANNING 1967
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.
1968 POST-WAR ECONOMIC POLICY AND PLANNING
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
Government.
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.
POST-WAR ECONOMIC POLICY AND PLANNING 1969
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-
1970 POST-WAR ECONOMIC POLICY AND PLANNING
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
value?
POST-WAR ECONOMIC POLICY AND PLANNING 1971
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
blighted.
1972 POST-WAR ECONOMIC POLICY AND PLANNING
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
land.
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
POST-WAR ECONOMIC POLICY AND PLANNING 1973
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.
1974 POST-WAR ECONOMIC POLICY AND PLANNING
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
POST-WAR ECONOMIC POLICY AND PLANNING 1975
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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