carried on by the Reconstruction Finance Corporation, what discount is paid?

Mr. DUNTON. No discount.

Senator JENNER. No discount? I thought it was 1 percent? Mr. DUNTON. No; that 1 percent that is referred to in the act is a servicing fee that is given to the lending institution, the primary lending institution. May I explain the mechanics of that?

The lending institution, we will say, makes a $1,000,000 loan. They cannot hold the paper. They have got to turn their capital over to get more money for more loans, to build more houses. So they sell this million dollars of paper to the RFC, to the Federal National Mortgage Association. The Federal National Mortgage Association, or the Veterans' Administration, as the case may be, will pay to the lending institution that sold the paper to them, a servicing fee of 1 percent per annum on the unpaid principal balance of the note, thereby placing the decentralizing of the collections on that paper through the local lending institutions, and reimbursing them for their cost by the payment of the 1 percent per annum fee. That was not a discount. It was a servicing fee being paid for servicing, making collections, paying taxes, and things of that character. Senator JENNER. And that applies under this proposed bill? This proposed bill fixes the fee not in excess of 1 percent?

Mr. DUNTON. Yes, sir. I would like to emphasize again at this point the value of this plan from the standpoint of home ownership and what it will do for this country. I firmly believe that if this plan were to continue to operate, 90 percent of our housing problem would be solved, and the bitter controversy that rages over the question of public housing and slum clearance might, to a large extent, be solved by the continuance of this plan within a very short period of time2 or 3 years, perhaps, if it continues at the rate it is now going. It is a splendid plan, gentlemen. It should be put back.

I cannot think of anything else to say. I will be very glad to answer any questions that the committee may have.

Senator MORSE. Mr. Dunton, I think the record ought to show a more complete statement of your business background. When people come to read this record they will want to know the wide experience that you have had in the field of business.

Mr. DUNTON. I am president and general manager of the First Federal Savings and Loan Association of Altadena, Calif., an organization which I organized in 1934 and have continually managed since, starting with a capital of $5,000, and today our assets are nearly $15,000,000. Since the spring of 1946 we have engaged exclusively in financing the construction of veterans' housing, single-family housing. We have financed and directed the construction of over 1,500 units of veterans' houses since that date. We have committed our association as an obligation to the young men of this country to the production of decent, livable, sound, single-family homes, and we have a distinguished record in California in that respect. We there fore know that unless a bill of this character is passed, our operations along this line will have to stop.

Senator MORSE. I have before me, Mr. Dunton, a report of the House committee on a bill in the House which I understand is identical with Senator Jenner's bill. Are you familiar with the report of the House committee?

Mr. DUNTON. No, I have not seen the report, Senator.

Senator MORSE. I will mark it for purposes of identification as exhibit 1 and place it in the record at this point. This is a report of the Committee on Veterans' Affairs of the House on H. R. 6635, which is a companion bill to Senator Jenner's bill, S. 2790. And, Mr. Dunton, at a later point in the hearing, when you have had an opportunity to scan this report, the Chair wishes to put some questions to you in regard to the House committee report, particularly whether you agree with the findings of the House committee as stated in the report, and if not, to what extent you wish to suggest modifications. (Report No. 2157 in the House of Representatives, 80th Cong., 2d sess., to accompany H. R. 6635, is as follows:)

EXHIBIT 1

[H. Rept. No. 2157, 80th Cong., 2d sess.]

The Committee on Veterans' Affairs, to whom was referred the bill (H. R. 6635) providing a secondary market for loans made under the Servicemen's Readjustment Act of 1944, having considered the same, report favorably thereon, with an amendment and recommend that the bill do pass.

The amendment is as follows:

On page 5, line 16, strike out "issuance" and insert "insurance."

EXPLANATION OF THE BILL

Section 511 establishes a long-range Government secondary market for home and farm loans which are guaranteed or insured under the Servicemen's Readjustment Act of 1944, as amended. All loans heretofore made may be purchased by the market. However, as to loans made in the future only those involving a principal sum of $10,000 or less would be eligible. The need for a secondary market has become more and more pronounced since the expiration on June 10, 1947, of the Government market administered by the Reconstruction Finance Corporation.

The problem is by no means confined to lenders in rural communities where there is a dearth of mortgage money, nor to those lenders which have reached a saturation point in their ability to make additional GI loans in the absence of assured secondary market support for a portion of their commitments, both present and future. The incentive for lending institutions in urban areas as well as to invest in 4-percent GI mortgages has been greatly weakened apace with the recent firming of yields in the money market. The effects of the lack of an adequate secondary market are evident in Veterans' Administration statistics showing the trend of GI home-loan applications received during recent months. The number of home-loan applications has declined sharply since September 1947. By March 1948 receipts were 43 percent below September 1947. The phenomenon of a decline in GI home-loan activity during a period when new home completions have been approaching a near-record peak is largely attributable to the aggravation of the secondary market problem.

The secondary market provided for in section 511 is designed to include safeguards ample to prevent abuse of the market and to encourage lenders to sell GI loans to the Government only in case of acute future need.

The major provisions of the market and the supporting reasons for the inclusion of each provision are these:

(1) A market for farm loans, which were not eligible for sale to the Reconstruction Finance Corporation market, is established. The extension of the market to include farm loans will fill a conspicuous void and, by encouraging private lending institutions to make farm loans at the 4-percent maximum interest rate permitted by the Servicemen's Readjustment Act, will enable veterans to obtain liberal financing from lending institutions in their local communities.

(2) Inasmuch as the purpose for creating the Government secondary market is to provide additional GI home- and farm-loan credit where it is now nonexistent or difficult to obtain, the market is designed to apply retroactively to loans already made to veterans in recognition of the actualities facing those lending institutions that have already reached their saturation point, and must needs sell a portion

of their outstanding portfolio in order to have funds in hand out of which they can extend credit to veterans over the immediate future.

(3) Loans are eligible for sale to the market by the lender to whom evidence of guaranty was originally issued for a term of 5 years from the date of origination of the loan. This provision is designed to avoid the recurrence of a flurry to sell GI loans such as the one which took place just prior to the termination of the Reconstruction Finance Corporation secondary market by Congress on June 30, 1947, and, more important, to introduce a stabilizing influence upon the mortgage portfolios of lending institutions. The firm assurance to the lender that he may sell his loans at any time during the 5-year period after origination should encourage him to hold his GI loans as earning assets and to sell them only in case of rea! need.

(4) The amount of any loan hereafter originated, if it is to be eligible for purchase under the proposed market, may not exceed $10,000. The intention of this limitation is to induce lenders to give preference to the financing of low-cost

homes.

AB

(5) No monetary limitation has been placed upon the aggregate dollar amount which may be used by the Administrator for the purchase of eligible loans. This is intended to allay the fears that lenders might have that they might be excluded for lack of funds in the market when they should find a real need to sell some of their loans. A market with a limited amount of funds, on the other hand, would encourage lenders to rush their loans for immediate sale to the Government. example of the experience thus sought to be avoided is afforded by the purchases of the Federal National Mortgage Association. In the face of legislative proposal. to limit or eliminate that market for small home mortgages insured under tite VI (sec. 603) of the National Housing Act. Purchases rose from $752,000 19 December 1947 to $107,000,000 in April 1948, thus paralleling the experience a5 to GI loans in June 1947 noted above.

(6) The bill empowers the Administrator of Veterans' Affairs to prescribe such terms and conditions governing the purchase of loans as will be calculated and effective to impose safeguards against any improper use of the market created by the bill.

Section 512 of the bill adds an incontestability provision to title III of the Servicemen's Readjustment Act to cover the evidence of guaranty or insurance issued by the Administrator of Veterans' Affairs on loans made under that title. The inclusion of this provision will encourage lenders to participate or increase participation in the title III loan program in that more positive assurance wi be given to lender participants as to the extent of their risk in making loans to veterans. Both the need and the solution thus to be supplied follows the prece dent afforded in the insurance of mortgage loans by the Federal Housing Adrainistration. The proposed provision closely parallels in purpose and scope the provision added to the National Housing Act in 1939 to encourage lender participation in the FHA program (53 Stat. 806, 12 U. S. C. 1709 (e)).

ESTIMATE OF COST

No fixed estimate of cost can be furnished in connection with this legislation Only as market operations develop will it be possible to forecast the probabi cost. Assuming continuance of favorable lending activities it is possible that purchases under this proposal will result in a profit to the Government. Even assuming adverse economic conditions, the risk of loss of the Government wil not appreciably increase with respect to those loans it may purchase throug the market provided by the bill, for the reason that the Government, under the guaranty, has already covered the risk of loss up to 50 percent of the amount of the loan.

RAMSEYER RULE

In accordance with the provisions of clause 2a, rule XIII, House of Representatives, the changes made in existing law by the bill are shown as follows (existing law proposed to be omitted is in black brackets; new matter is in italies existing law in which no changes are proposed is shown in roman):

Title III of Public Law 346, Seventy-eighth Congress, as amended (Service men's Readjustment Act of 1944, as amended):

“TITLE III-LOANS FOR THE PURCHASE OR CONSTRUCTION OF HOMES, FARMS, AND BUSINESS PROPERTY

"CHAPTER V-GENERAL PROVISIONS FOR LOANS

"SEC. 500. (a) Any person who shall have served in the active military or naval service of the United States at any time on or after September 16, 1940, and prior to the termination of the present war and who shall have been discharged or released therefrom under conditions other than dishonorable after active service of ninety days or more, or by reason of an injury or disability incurred in service in line of duty, shall be eligible for the benefits of this title. Any loan made by such veteran within ten years after the termination of the war for any of the purposes, and in compliance with the provisions, specified in this title, is automatically guaranteed by the Government by this title in an amount not exceeding fifty per centum of the loan: Provided, That the aggregate amount guaranteed shall not exceed $2,000 in the case of non-real-estate loans, nor $4,000 in the case of real-estate loans; or a prorated portion thereof on loans of both types or combination thereof.

"(b) Loans guaranteed under this title shall be payable under such terms and conditions as may be agreed upon by the parties thereto, subject to the conditions and limitations of this title and the regulations issued pursuant to section 504: Provided, That the liability under the guaranty within the limitations of this title shall decrease or increase prorata with any decrease or increase of the amount of the unpaid portion of the obligation: Provided further, That loans guaranteed under this title shall bear interest at a rate not exceeding four per centum per annum and shall be payable in full in not more than twenty-five years, or in the case of loans on farm realty in not more than forty years: And provided further, That (1) the maturity on a non-real-estate loan shall not exceed ten years; (2) any loan for a term in excess of five years shall be amortized in accordance with established procedure; (3) except as provided in section 505 any real-estate loan, other than for repairs, alterations or improvements, shall be secured by a first lien on the realty, and a non-real-estate loan, except as to working or other capital, merchandise, good will and other intangible assets, shall be secured by personalty to the extent legal and practicable.

"(c) An honorable discharge shall be deemed a certificate of eligibility to apply for a guaranteed loan. Any veteran who does not have a discharge certificate, or who received a discharge other than honorable, may apply to the Administrator for a certificate of eligibility. Upon making a loan as provided herein, the lender shall forthwith transmit to the Administrator a statement setting forth the full name and serial number of the veteran, amount and terms of the loan, and the legal description of the property, together with the appraisal report made by the designated appraiser. Where the loan is automatically guaranteed, the Administrator shall provide the lender with a loan-guaranty certificate or other evidence of the guaranty. He shall also endorse on the veteran's discharge, or eligibility certificate, the amount and type of guaranty used, and the amount, if any, remaining. An amount equivalent to four per centum on the amount originally guaranteed shall be paid to the lender by the Administrator out of available appropriations, to be credited upon the loan. Nothing herein shall be deemed to preclude the assignment of any guaranteed loan or the assignment of the security therefor.

"(d) Loans guaranteed hereunder may be made by any Federal land bank, national bank, State bank, private bank, building and loan association, insurance company, credit union, or mortgage and loan company, that is subject to examination and supervision by an agency of the United States or of any State or Territory, including the District of Columbia. Any loan at least twenty per centum of which is guaranteed under this title may be made by any national bank, or Federal savings and loan association; or by any bank, trust company, building and loan association, or insurance company organized or authorized to do business, in the District of Columbia, without regard to the limitations and restrictions of any other statute with respect to

"(1) ratio of amount of loan to the value of the property;

"(2) maturity of loan;

"(3) requirement for mortgage or other security;

"(4) dignity of lien; or

"(5) per centage of assets which may be invested in real estate loans. "(e) Any loan proposed to be made to an eligible veteran by any lender not of a class specified in subsection (d) may be guaranteed by the Administrator, if he finds that it is in accord, otherwise with the provisions of this title, as amended.

"PURCHASE OR CONSTRUCTION OF HOMES

"SEC. 501. Any loan made to a veteran under this title the proceeds of which are to be used for purchasing residential property or constructing a dwelling to be occupied as his home or for the purpose of making repairs, alterations or improvements in property owned by him and occupied as his home is automatically guaranteed if made pursuant to the provisions of this title including the following: "(1) That the proceeds of such loan will be used for payment of the property purchased or constructed or improved;

"(2) That the contemplated terms of payment required in any mortgage to be given in part payment of the purchase price or the construction cost bear a proper relation to the veteran's present and anticipated income and expenses; and that the nature and condition of the property is such as to be suitable for dwelling purposes; and

(3) That the price paid or to be paid by the veteran for such property or for the cost of construction, repairs, or alterations does not exceed the reasonable value thereof as determined by proper appraisal made by an appraiser designated by the administrator.

"PURCHASE OF FARMS AND FARM EQUIPMENT

"SEC. 502. Any loan made to a veteran under this title, the proceeds of which are to be used for purchasing any lands, buildings, livestock, equipment, machinery, supplies or implements, or for repairing, altering, constructing or improving any land, equipment, or building, including the farmhouse, to be used in farming operations conducted by the veteran involving production in excess of his own needs, or for working capital requirements necessary for such operations, or to purchase stock in a cooperative association where the purchase of such stock > required by Federal statute as an incident to obtaining the loan, is automatica guaranteed if made pursuant to the provisions of this title, including the following: "(1) That the proceeds of such loan will be used for any such purposes in connection with bona fide farming operations conducted by the applicant;

"(2) That such property will be useful in and reasonably necessary for efficiently conducting such operations;

"(3) That the ability and experience of the veteran, and the nature of the proposed farming operations to be conducted by him, are such, that there is a reasonable likelihood that such operations will be successful; and

"(4) That the purchase price paid or to be paid by the veteran for such property does not exceed the reasonable value thereof as determined by proper appraisa made by an appraiser designated by the Administrator.

"PURCHASE OF BUSINESS PROPERTY

"SEC. 503. Any loan made to a veteran under this title, the proceeds of which are to be used for the purpose of engaging in business or pursuing a gainful occapation, or for the cost of acquiring for such purpose land, buildings, supplies, equipment, machinery, tools, inventory, stock in trade, or for the cost of the construction, repair, alteration, or improvement of any realty or personalty used for such purpose, or to provide the funds needed for working capital, is automatically guaranteed if made pursuant to the provisions of this title, including the following: (1) That the proceeds of such loan will be used for any of the specified purposes in connection with bona fide pursuit of gainful occupation by the veteran;

"(2) That such property will be useful in and reasonably necessary for the efficient and successful pursuit of such business or occupation;

"(3) That the ability and experience of the veteran, and the conditions under which he proposes to pursue such business or occupation, are suct that there is a reasonable likelihood that he will be successful in the pursuit of such business or occupation; and

"(4) That the purchase price paid or to be paid by the veteran for such property, or the cost of such construction, alterations, or improvements, does not exceed the reasonable value thereof as determined by proper ap praisal made by an appraiser designated by the Administrator.