As of June 30, 1966, over 6.5 million home loans, aggregating $63.3 billion, had been guaranteed or insured by VA. In addition, 262,000 direct loans on homes and farm houses, for $2.4 billion, had been made.

Our statement further points out, Mr. Chairman, that entitlement for World War II veterans will expire on July 25 of this year, but last March the Congress extended the GI loan benefit to a new class of veterans, namely, the post-Korean veterans, and a new body of veterans totaling approximately 4.3 million was made eligible for the GI loan, and approximately 600,000 additional post-Korean veterans will come into being each year.

An analysis of our experience in 1966 shows that although the total volume of guaranteed home loans was only slightly below that of 1965, this was attributable primarily to two factors.

First, a new class of veterans had been brought into existence of approximately 4.3 million, and second, the authority given by Congress to adjust the interest rate, resulting in three upward adjustments in 1966, are responsible for the fact that overall there was very little decline in volume.

An analysis, however, of the loan volume to World War II and the Korean conflict veterans only shows that the program was very hard hit, and that there was a 40 percent decline in this respect, and we attribute a decline of approximately 30 percent to the tight money situation which existed in 1966.

In short, our recommendations are that consideration seems to be merited for continuance of the authority granted by Congress on the part of such agencies as the Federal Reserve Board and the Federal Home Loan Bank Board to take action in respect to interest rates or dividend payments of member institutions, but we defer to these agencies in this respect.

In respect to assuring a reasonable supply of mortgage money to veterans on the special terms authorized by the Congress, it seems to us that consideration should be given to the desirability of freeing the GI interest rate from the present 6 percent maximum, or, alternatively, to consider either an extension of the direct loan program throughout the country in times when credit is unduly tight or stringent, or possibly to subsidize a portion of the discounts when excessive discounts exist. This is a summary of our statement.

Senator PROXMIRE. Thank you very, very much. I appreciate your precise and helpful summary.

(The prepared statement of Mr. Dervan follows:)

STATEMENT OF THE VETERANS' ADMINISTRATION

Mr. Chairman and members of the subcommittee, we are pleased to appear as representatives of the Veterans Administration to discuss certain aspects of our loan guaranty program and direct loan program and to present a summary of the recommendations previously forwarded to the Subcommittee.

The VA extends credit assistance to veterans through the guaranty of home loans made to them by private lenders. In non-urban areas, where private capital is not generally available for guaranteed loans, we make direct loans to veterans for the purchase or construction of homes and farm houses. In other words, the VA operates a consumer-oriented program, which is not directly concerned with the extension of production credit or with the regulation of commercial banks, savings and loan associations, and other types of financial institutions.

As of June 30, 1966, over 6.5 million home loans, aggregating $63.3 billion, had been guaranteed or insured by VA. In addition, 262,000 direct loans on homes and farm houses, for $2.4 billion, had been made.

Prior to March of last year, the volume of new home loans processed for guaranty in the VA program had been on a declining trend, particularly since 1963. The declining trend had been heavily influenced by the fact that the eligibility of World War II and Korean veterans had started to phase-out. The eligibility of a World War II or Korean veteran for VA loans is determined by a formula, given in section 1803, chapter 37, Title 38, U.S.C., which is based on his length of service. The statute provides that the delimiting date of the eligibility of World War II veterans is July 25, 1967, and for Korean veterans such date is January 31, 1975. The elapsed time from the end of World War II to the earliest date when eligibility for World War II service began to expire was 15 years. And the comparable period for Korean veterans was 10 years. The maximum period of eligibility for both World War II and Korean veterans has been 20 years.

On March 3, 1966, the Veterans' Readjustment Benefits Act of 1966 (PL 89358) was approved. That law extended VA loan benefits to veterans with service after January 31, 1955, and to active duty servicemen. In effect, the approval of Public Law 89-358 added 4.3 million veterans to the rolls of eligible veterans for loan benefits. This class of post-Korean veterans will expand by some 600,000 each year into the foreseeable future. The duration of the eligibility of each such post-Korean veterans is also determined by a statutory formula, which appears in section 1818, chapter 37, Title 38, U.S.C., subject to the limitation that his eligibility shall not continue after 20 years from the date of his release or separation from the last period of active duty.

We estimate that of all the World War II and Korean veterans eligible, 30% have obtained VA home loans. The rate of participation for World War II veterans is 41%. For Korean veterans, the rate is 25.8%. And, as of April 30, in the 14 months following the approval of PL 89-358, over 2% of the post-Korean veterans already had obtained loans through the VA program. The rate of participation by World War II veterans probably has reached its ultimate level, since their entitlement expires on July 25 of this year. In all likelihood, the rate of participation by Korean veterans will eventually reach the 41% attained by World War II veterans, and it is possible that by 1975 the Korean class may outstrip World War II veterans in terms of participation rate. Of course, at this early stage it is well-nigh impossible to predict the participation rate of postKorean veterans.

In connection with the subcommittee's consideration of the establishment of stable and effective home financing activities, we wish to invite your attention, Mr. Chairman, to the fact that in 1966, there were approximately 157,500 loans guaranteed by VA. In the preceding year-1965-we guaranteed 163,700 loans made to veterans by private lenders. Thus, in 1966, our volume of guaranteed loans declined by approximately 4% from 1965. In relation to the volume of all types and kinds of new residential mortgage loans originated generally in the country in 1966, it is our understanding that VA guaranteed loan activity last year held up quite well compared to prior years.

However, an analysis of the number of home loans closed in 1966 by month with those closed in 1965 shows that the program was hit hard during the first five months of 1966. Thereafter, there were substantial increases in the volume of new home loans processed for guaranty. Two basic reasons accounted for the improved activity in the second half of 1966. PL 89–358 not only increased the number of eligible veterans by 4.3 million but the law also gave the program more flexible interest rate authority. For the first time since the inception of the program, the interest rate was adjusted upward on three different occa sions in 1966, to reflect market conditions. These rate adjustments, plus the increased number of eligible veterans, contributed to the maintenance of moderate levels of home loans for veterans.

The effect of the credit shortage in 1966, however, is more apparent from the comparison of the number of loan applications received from World War II and Korean veterans in the three year span from 1964 through 1966. In 1964 and 1965, the number of loan applications received from such veterans declined gradually but consistently. This decline can be attributed to the phasing out of the eligibility of such veterans under the provisions of PL 87-84 and to the declining demand on the part of World War II veterans whose ages now place them past their prime home buying period. In 1966, given an availability of

credit equivalent to 1965, we would have expected applications from World War II and Korean veterans to have declined by about 8%-10%, as compared to calendar year 1965. The decline actually registered for the year was more than 40%, and we conclude that at least a 30% decline was attributable to stringent credit conditions. It would also seem, in the light of 1966 results in terms of guaranteed loans for World War II and Korean veterans, that, although substantial numbers of loans were made to post-Korean veterans and were guaranteed by VA last year, the volume of such loans probably would have been larger had there been less stringent credit conditions.

With respect to direct loans, it is evident that some veterans who could have easily obtained guaranteed loans under conditions that prevailed in 1965 and before found themselves in 1966 with no alternative but to seek VA direct loans for housing credit assistance. In 1966, the number of direct loan applications received increased by 93% over the number filed with us in 1965, and the number of such loans actually closed in 1966 was 30% greater than in 1965.

When it comes to the consideration of measures to reduce cyclical fluctuations in the availability and pricing of mortgage funds, Mr. Chairman, we are obliged to suggest that by and large the problems which come into sharp focus relate principally to spheres and functions in respect to which other Federal departments and agencies have responsibilities. In this connection, we have in mind such problems as the effects of both monetary and fiscal policies upon the availability and pricing of mortgage credit, the obstruction to the free flow of mortgage funds, the broadening of the sources of funds for mortgage credit, the liquidity of thrift institutions and other problems of a structural character. On the other hand, the VA has the responsibility to provide a viable form of credit assistance whereby the housing credit needs of veterans may be satisfied, primarily by private capital on more liberal terms than is generally available to non-veterans without the assumption of undue risks by the Government. In this respect, we have endeavored through continuous updating of our policies and procedures to provide an effective program for veterans in keeping with the evident intent of the statute.

In relation to the interests of the subcommittee in this particular study, as we see them, the exploration of possible actions to assure an adequate flow of residential mortgage credit is timely, particularly from the standpoint of the VA. As we indicated earlier, each qualified veteran has a specific period of eligibility which is governed by the length of his service, subject to a maximum of 20 years from the date of his discharge or release from service. Such a period of eligibility in the instances of many veterans is ample time to permit them to avail themselves of loan benefits. There are, however, many other veterans-and this will be the case increasingly in the future in respect to the new class of post-Korean veterans who are too young or not well established as income producers to become home owners, and who will not be in a position to avail themselves of their loan benefits soon after discharge or release from service. For such veterans, the duration of their eligibility in practical effect is reduced from the outset. Where there are, in addition, periods of credit stringency during which the availability of mortgage credit shrinks and its cost increases, further inroads will be made into the duration of eligibility of veterans by factors beyond their control.

We are not suggesting or recommending, Mr. Chairman, that at this time any changes should be made in the law in respect to the duration of veterans' eligibility. In fact, at this point in time, any such changes are not necessary, inasmuch as the maximum period of eligibility for Korean veterans runs to 1975, and, further, no post-Korean veteran will lose his eligibility until 1976. We have considered it desirable, nonetheless, to bring to the attention of the subcommittee that periods of credit stringency have the effect of limiting the eligibility of veterans for loan benefits. The same precise result does not obtain, it is our understanding, with respect to prospective home buyers utilizing the credit assistance of the Federal Housing Administration, including veterans who are accorded preference by FHA under the provisions of Public Law 89-117. With your indulgence, Mr. Chairman, we will briefly discuss the several suggestions advanced in the study paper we previously submitted to the subcommittee.

First, we suggested that consideration should be given to extending PL 89-597, which expires on September 21, 1967. That law granted to the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board authority to control the rates of interest paid on deposits, and it broadened the authority of the Federal Reserve System to purchase obligations 81-082-67- 2

of Government agencies, such as the Federal National Mortgage Association and the Federal Home Loan Bank Board. It seems to us that authorizing the Federal Open Market Committee to purchase Federal agency securities makes it possible for the Federal Reserve System to afford some degree of relief from extreme tightness in the mortgage_market should such a condition recur. Furthermore, authorizing the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board to control interest rates on deposits in supervised banks, savings and loan associations and other institutions provides tools essential to achieving a coordinated effort among the responsible Federal agencies in eliminating undue competition among financial institutions. We should indicate, however, that VA feels obliged to defer to the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board to provide the subcommittee with definitive assessments of the desirability of renewing the provisions of PL 89–597.

Second, we suggested that, to increase the availability of mortgage funds for veterans, VA should be authorized, during a period of credit stringency to provide direct subsidies by paying mortgage discounts of more than two points to lenders to finance new or existing homes for veterans or, as an alternative, the Administrator of Veterans Affairs be provided with more flexible authority to establish interest rates for guaranteed home loans by removing the limitations that the VA rate cannot exceed the rate for FHA 203 (B) loans. We recognize that a subsidy of more than two points is complex and fraught with many possible administrative problems, and that any such subsidy would also be costly. In respect to the cost factor, assuming a situation where discounts have deepened to an average of six points, the subsidizing of four points of such an average discount on 200,000 guaranteed home loans averaging $18,000 each, would entail a cost of $144 million. In considering the cost element, though, it should be recognized that manifold benefits and economic gains would accrue from such a subsidy which would permit veterans to buy or build their homes as and when they could qualify for the necessary loans from a credit standpoint.

The obvious alternative, of course, is to authorize VA to establish the interest rate on guaranteed loans as the loan market demands. The removal of the interest rate ceiling has been urged in the past on several occasions. Specifically, this was done in the 1961 "Report of the Commission on Money and Credit" and again in 1963 by the President's Committee on Federal Credit Programs. Certainly, if the Government is to act in keeping with the commitment implicit in the underlying statute to provide an effective credit assistance plan for veterans, including those who have served in Viet Nam, then some action such as the suggested subsidy or the removal of the interest rate ceiling merits some consideration in order to encourage private lenders to invest in guaranteed loans.

Our third suggestion, that is, to provide a backup direct loan program to be used in all parts of the country during periods of tight money, is actually an alternative to the suggestion involving the subsidizing of discounts or the removal of the interest rate ceiling. Presently, we are authorized to make direct loans only in rural areas, small cities and towns where private capital generally is not available for guaranteed loans. The idea of a general backup program of direct loans contemplates the making of such loans in all parts of the country during periods of credit stringency. This suggestion would, of course, entail substantial increases in direct Government expenditures.

In this connection, it should be noted that through the sale of participation certificates, a much enlarged direct loan program could be operated by VA with the working capital presently available or in prospect.

This concludes our statement, Mr. Chairman. We appreciate having had the opportunity to review these matters with the Subcommittee.

Senator PROXMIRE. Our last member of the panel is Mr. Howard Bertsch, Administrator of the Farmers Home Administration.

STATEMENT OF HOWARD BERTSCH, ADMINISTRATOR OF THE FARMERS HOME ADMINISTRATION

Mr. BERTSCH. Mr. Chairman, the staff of the subcommittee has asked me to describe briefly the method by which the Farmers Home Administration is able to operate its insured rural housing program during a tight money market.

Traditionally there has been a shortage of adequate housing credit in rural areas. To fill this gap, the Congress authorized the rural housing program in 1949 which has been expanded until this fiscal year we expect to insure rural housing loans totaling approximately $475 million.

There are several distinctive features about the Farmers Home Administration housing loan program.

1. Rural housing loans are made only to families who cannot obtain credit from other sources at terms they can reasonably be expected to repay.

2. The Farmers Home Administration through some 1,600 offices works directly with borrower families. These families frequently need more than just credit. They may need advice in house planning and design, obtaining cost estimates, contract negotiations, inspection of construction, and in budgeting their income. The counsel provided these families by our field officials is a major factor in enabling them to acquire a home of their own.

3. The Farmers Home Administration program is limited to families living on farms, in the open countryside and in rural communities of not more than 5,500 population.

Amendments to our enabling legislation in 1965 placed the rural housing program on an insured basis. Today essentially all of our loans are made from funds provided by private investors and insured by the Farmers Home Administration.

The insured program works in the following manner:

Loans are originated, processed, closed, and serviced by the Farmers Home Administration. They are made originally from a $100 million revolving fund established for this purpose. Then the notes securing the loans accompanied by an insurance endorsement are sold to private investors. These investors range all the way from small country banks to large-scale pension and retirement funds.

The interest rate charged the borrower does not vary from time to time. Most of our loans currently being made bear a 5 percent rate repayable over periods extending up to 33 years.

The rigidity of rates and terms that exists so far as the borrowers are concerned, however, does not affect the conditions under which investors purchase the notes. These terms and rates are outlined in the insurance endorsement.

There are two conditions agreed upon by the investor and the Government at the time each note is sold.

One is the length of time the note must be held before the Government will repurchase it.

The second is the rate of return to the investor.

The Farmers Home Administration with the approval of the Treasury Department varies these conditions to keep the return on rural housing insured notes in line with similar investments in the market.

This ability to adjust to changing market conditions applies not only to new loans but to loans that have been repurchased. When the time that an investor has agreed to hold a note expires he has the option of entering into another agreement with the Government at whatever rates and terms prevail at that time. If the investor decides to sell the note back to the Government, the Government then sells the note to another investor at prevailing rates and terms.