Mr. NEEL. That is the way the schedule was originally set up, Senator.

Mr. ADAIR. Thank you, Senator, and let me tell you it is a pleasure to appear before this distinguished group, and I appreciate the time you are allotting us.

Senator HUMPHREY. You may proceed with your statement.

STATEMENT OF JACK ADAIR, CHAIRMAN, LEGISLATIVE COMMITTEE, MORTGAGE BANKERS ASSOCIATION OF AMERICA, ACCOMPANIED BY SAMUEL E. NEEL, GENERAL COUNSEL

Mr. ADAIR. Mr. Chairman and members of the committee, my name is Jack Adair and I am president of Adair Realty & Loan Co., Atlanta, Ga. I appear before you today to discuss the provisions of S. 1633 and related bills, in my capacity as chairman of the legislative committee of the Mortgage Bankers Association of America."

The Mortgage Bankers Association of America has long held the view that the Federal Housing Administration's system of mortgage insurance is an essential means for encouraging the flow of funds across State lines, for attracting funds from areas of capital surplus to areas of capital shortage, and for diminishing regional differences in interest rates-thus creating a national market for home mortgages. This, the administration considers to be the primary and, so far, the irreplaceable function of FHA; and the policies of the association have been directed to the maintenance and improvement of the FHA system to this end.

Since the recognition of sound credit principles is vital to the successful operation of a system of mutual mortgage insurance, the association has considered it wise to keep as distinct as possible a separation of the self-supporting mortgage insurance operation from governmental functions that involve other than strictly market activities, such as direct lending and subsidy. In pursuit of this objective the association has frequently urged that the Federal Housing Administration be restored to its original independent status in the structure of the Federal Government.

Notwithstanding this position, when the present administration indicated its desire to create a new executive department encompassing the mortgage insurance operation and various other operations related to urban life, the board of governors of the association approved the following resolution:

Mortgage Bankers Association believes housing deserves greater emphasis than it has had heretofore, especially in the field of slum clearance and rehabilitation in our cities. Greater cooperation among all agencies in the accomplishment of this worthy objective is required. Care must be taken to recognize the differences between the essentials of a healthy private credit system assisted by Federal programs and the criteria necessarily involved in direct Government loan and grant programs commonly known as welfare programs. Thus, the administration of programs designed to assist private credit should be kept separate from those designed to accomplish welfare purposes.

If the above principles are recognized, and if it can be shown by a new administration that they, plus other desired programs, could better be accomplished by giving Cabinet status to a Housing Agency, we would recommend that MBA not oppose such status.

After careful consideration of the pending bill, S. 1633, the association is forced to conclude that the bill's provisions do not conform

to the stipulation in the resolution. Housing-that is, private housing-is definitely given a secondary role both in the statement of policy and in the organization of the proposed department. In the policy statement, for example, there is not even an allusion to private enterprise--which is quite in contrast to the original statement of housing policy as set forth in the Housing Act of 1949.

The proposed legislation does not simply transfer the Federal Housing Administration with all its functions intact to the new department. It abolishes FHA and transfers its powers and functions to the new secretary, subject to any future redistribution he may care to make.

In this we see support of what the policy preamble implies: a sharp shift in emphasis from the free operation of the private market to a centrally directed development program to which private building and private investment are incidental except as they may serve the general plan.

While we accept the statements of the present housing officials that they do not intend to diminish the emphasis on the private sector, we recognize also that they will not always be in office. The primary interest of a future secretary may be in other directions. In fact, with the legislative authority in his hands and with the mandate of the policy statement before him, it seems inevitable that a future secretary will feel called upon to divert FHA from its original and basic purpose of broadening and strengthening the whole private home mortgage market to that of serving a more restricted and specialized purpose.

Mortgage credit itself is a specialized form of activity and requires for its effective administration experience and attitudes that are quite different from those needed for the conduct of direct loan and grant operations. The present arrangement, under which the FHA Commissioner has a considerable degree of independent legal authority, makes it possible to meet this requirement. With all authority blended in one official, as this bill calls for, there would be much less assurance of the understanding of, and adherence to, sound credit principles that have created the longstanding confidence in FHA as an institution.

From the title of the bill, this legislation puts the cart before the horse. Private housing and private mortgage credit are not secondary to the kinds of "urban affairs" mentioned in the legislation. They are more than an instrument of urban renewal and the other functions to be included in the new department. Private housing and mortgage credit are at the basis of community development. Other activities should be designed to serve them, rather than the reverse.

The problem in the development of a strong home mortgage credit structure does not arise out of any need for the amalgamation of selfsupporting private credit functions with a mass of direct governmental operations, but rather from a need for better coordination among the private credit activities with which the Government has concerned itself-FHA, FNMA, the loan-guaranty program of the Veterans' Administration, the Federal Home Loan Bank System and, perhaps, in prospect, a Federal system of mutual savings banks. The questions of policy and operation that arise among these agencies are far more serious than those that arise between FHA and an oc

casional urban renewal operation, and they directly affect far more of our people and our institutions than do the other activities included in the proposed new department.

Any plan that does not encompass all these market-oriented agencies and their functions cannot claim to accomplish what this legislation is supposed to do. Moreover, any plan which further separates FHA and FNMA from those other mortgage credit agencies and from the private credit structure generally, cannot help but diminish the future role of these two important institutions as features of the private mortgage system.

Serious attention should be given to this possibility, because, over the years, FHA mortgage insurance has become an integral part of the Nation's private residential mortgage system. It has greatly increased the volume and diversity of the private funds that flow into the mortgage market; it has facilitated the expansion of home ownership; it has encouraged private investment in rental accommodations; it has fostered the growth of an efficient, responsible homebuilding industry.

Because of the wisdom of the original statute, the able leadership exhibited by its successive Administrators, the sound business principles under which its operations have been carried on, and the obvious improvements that it has accomplished in housing conditions and in building and lending practices, a unique relationship of confidence and interdependence has been established between the FHA and the homebuilding and home financing community.

The mortgage companies and the investing institutions comprising this association have been the principal participants in the national mortgage market that FHA has made possible. Consequently the association has a genuine concern with any proposal that may in any way disrupt the relationship that has made such a beneficial contribution to the social and economic well-being of the country. The proposal to "abolish" the FHA thus has an ominous ring. Not only does it threaten the well established and compatible relationship between Government and private activity, but it also raises questions about the continuity of policy and the status of the numerous and vital contractual arrangements in which the FHA operation is involved. The proposed legislation raises these questions. It answers none of them. As the world's largest business insurance operation, the FHA deserves more thoughtful consideration than this.

In order for the pending proposal to remove the doubts it has caused, to assure the continuance of a successful working relationship between Government and the private mortgage lending institutions of the country, and to advance rather than retard the development of an effective home mortgage credit system, several changes are essential.

(1) The policy preamble should be rewritten so as to state unequivocally the predominant dependence to be placed upon private building and private lending activities, the encouragement to be given to the improved functioning of the private home mortgage credit system, and the faith to be maintained in the effectiveness of a private market economy.

(2) The powers of the Federal Housing Commissioner and the administrative organization of the Federal Housing Administration should be kept intact.

(3) The new Department should encompass for coordinating purposes, in addition to the agencies and functions designated in the legislation, the other agencies dealing with nonfarm residential mortgage credit, namely, the loan guarantee system of the Veterans' Administration and the Federal Home Loan Bank Board.

If these changes are made, many of the apprehensions created by the present bill would be reduced and the confidence of the private organizations and institutions on which any Government program must ultimately depend would be enhanced. If these changes are not feasible at this time, it would be preferable to continue the existing arrangement in order to allow the opportunity for fuller consideration of all the questions that are involved and the undesirable consequences that appear certain to follow the creation of a new department as provided for in the present bill.

Senator HUMPHREY. Thank you, very much, for your statement. Senator Muskie, would you like to ask some questions of the witness? Senator MUSKIE. Mr. Adair, in your statement you say that in the bill there is no allusion to private enterprise.

I wonder how you would describe this language in the bill at the end of the second paragraph on the policy section, section 2, where in describing national policy the bill includes this language:

And the fostering of the provision for the expansion of facilities for educational and cultural pursuits, thus contributing to the improvement of conditions under which people live and work and under which business enterprise may expand and prosper to an economy of maximum production, employment, and purchasing power, growth and security of the Nation.

This seems to me to be a pretty good allusion to private enterprise. That appears at the bottom of page 2 and the top of page 3. Mr. ADAIR. Senator, Mr. Neel, our general counsel, with your permission would like to comment on your question.

Mr. NEEL. I think what we were trying to state, Senator Muskie, was to try to contrast the policy statements in the preamble to this bill with the kind of statements that were on the preamble to the National Housing Act when it was first enacted.

Senator MUSKIE. But this is not a housing bill.

Mr. NEEL. That is what worries us because it attempts to destroy the agency that has dealt with private housing.

Senator MUSKIE. I don't find any such intent in the language of the bill or the statement of the administration witness, the Director of the Budget, David Bell. I think this has been made eminently clear in all the testimony that this is an organization bill as to how we can best organize and coordinate functions that are now performed. And nobody has suggested, even the remotest kind of hint, that it is an intention to reduce those functions or to quibble or to limit them to change the policies, as written into the law, with reference to those functions. This is not a functional bill at all. It is an organizational bill. Let me say that I can appreciate this so we won't develop an unwitting difference of opinion as to what each of us would support; we would support what each of us believes.

As you may be aware, I am a supporter of the housing program for this country and I support this bill. But I do think that housing, important as it is, has an importance outside of itself as an important

71743-61- -11

function in the development of communities and in the revitalization of urban America.

I think that to leave housing out of this Department would be to greatly limit the potential of this Department for concerning itself in the field of urban affairs.

Now we have talked about urban affairs for 2 days, and what it means, but urban affairs means virtually all of America. So that is what we are talking about, and there is no conspiracy to hurt housing, or to hurt FHA, or to hurt any of these functions.

Now the conspiracy, if any, is designed to bring all of these functions together in a way that will make them more effective, not only to serve the housing needs of America but to serve other needs as well. Really, I see this Department as a means of strengthening our housing programs, as a means of strengthening the role which private enterprise can play in developing our communities along the lines which will be constructive.

I have said this simply to indicate the basis from which I am approaching my questioning of you. It seems to me that you see things in this bill that are not there.

Mr. NEEL. Well, it might be true, Senator, and we are not obviously questioning the proponents' intent. All we seek to do is to try to look at the language of the bill and see what we think it will do and what it will not do.

Senator MUSKIE. I apologize for interrupting but this I want to make clear with one more point.

Now this bill will bring within the proposed Department of Urban Affairs several existing services. I suppose that we could have restated in this bill the policies which govern all of these other agencies as they now exist in law, but that would have made the bill cumbersome. It seems to me that when we bring them into the Department by this law, as long as we do not repeal any provision of the law itself, it is implicit in our actions that we are bringing into this Department not only the functions, not only the services but the basic organic law which now governs it and that if we don't, in this legislation, change that organic law, I think it is fair to assume that that organic law remains unchanged.

Now there has been reference made to the fact that this bill would abolish FHA. It wouldn't abolish it in substance. In order to bring it into the Department you have to go through a certain procedure here of eliminating the separate existence in order to bring it into a different kind of existence. But this isn't to abolish it; you have to use this language to get rid of the present framework and bring it into the new Department.

Mr. NEEL. Senator, I would suggest that you don't have to do that and this is one of the things that concerns us. For example, you didn't do that with the Federal National Mortgage Association. As a matter of fact, what you did in this bill, what the bill does is to transfer the FNMA into the new Department.

Now if we are going to have housing in any agency, and I suspect that Mr. Adair and I would agree with you that if you are going to do this job at all, if you are going to treat with urban affairs and housing, you have to have the housing in the new Department.

We say to you that if you are going to do this effectively you have to have more than the ones you have in the bill because a substantial