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HOUSING ACT OF 1958

WEDNESDAY, MAY 14, 1958

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON HOUSING,

Washington, D. C. in room

The subcommittee met, pursuant to recess, at 10:20 a. m., 301, Senate Office Building, Senator John Sparkman (chairman of the subcommittee) presiding.

Present: Senators Sparkman, Clark, and Bush.

Senator SPARKMAN. Let the committee come to order, please.

I think we had better start because we have a rather full program for today. I was waiting for some member of the minority to appear. I have been notified that one or two of them will be late. I think, however, we had better start, and when they come in they catch up.

We are going to have to change our order of witnesses a little bit, due to the fact that the witness on the first subject which we were going to take up, namely, urban renewal have not yet arrived. We have word that Mayor Dilworth is on a plane that is late and will not be until about 11:15 or 11:30. So we will move to the second item and hear from the National Association of Home Builders, from Mr. Nels Severin, president.

Mr. Severin, if you will come around with such associates as you may care to have at the table with you, we have your prepared statement and we will be very glad for you to present the case in any manner you see fit.

STATEMENT OF NELS G. SEVERIN, PRESIDENT; ACCOMPANIED BY CARL MITNICK, FIRST VICE PRESIDENT; MARTIN BARTLING, SECOND VICE PRESIDENT; HERBERT S. COLTON, GENERAL COUNSEL; AND JOSEPH B. McGRATH, LEGISLATIVE DIRECTOR, NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. SEVERIN. Thank you, Mr. Chairman and members of the committee.

I have with me today our first vice president, Mr. Carl Mitnick, and our second vice president, Mr. Martin Bartling, together with our general counsel, Mr. Herb Colton.

Mr. Chairman and members of the subcommittee, as always, it is a pleasure to have the opportunity to discuss with you legislative matters affecting our complex industry.

As you know, my name is Nels G. Severin. I am an active home builder from San Diego. I appear before you as president of the

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National Association of Home Builders, which has approximately 40,000 members, affiliated in 302 local and State associations in every State of the Union. We estimate that our members build over 80 percent of the new homes in metropolitan areas.

Before giving you the views of our organization on the bills you are considering, it occurs to me that you may be interested in a brief report on the results thus far of the recently enacted Emergency Housing Act, initiated by this subcommittee.

This bill became law only a few weeks ago so there has not been sufficient time to form a conclusive judgment as to its effect. However, all the early evidence indicates little doubt that it has accomplished and will continue to accomplish-its intended purposes. It has been a primary factor in easing the supply of mortgage credit available to home buyers. It has again enabled purchasers to buy homes suited to their needs. It is having a stimulating effect on plans for new home construction, particularly in the lower price ranges. Enactment of the bill and the supplementary and collateral steps thereafter taken by the housing agencies have completely changed, almost overnight, the pessimistic attitude of our industry and of the lenders on whom we must depend. Of the utmost importance, these measures seemingly also have helped to restore a measure of confidence to prospective home buyers.

Our Builders Economic Council has just completed a survey of builders' intentions for the coming year. Most of the reporting builders are optimistic. Typically, they forecast that housing starts in their communities during 1958 will top last year by 10 percent. One of the most important findings of the survey is that the trend toward higher priced brackets which has prevailed for the past several years appears to have been halted. Sharpest gains in plans for new starts occur in moderate-priced homes. As a result, the indicated median sales price this year of $14,350 is somewhat lower than the 1957 median of $14,950. This reduction is the result of changes in design rather than lower costs to the builder, which changes, I feel, were made possible by the improvement in financing conditions.

With your permission, I would like to submit for inclusion in the record a fuller summary of this survey.

Senator SPARKMAN. That will be included in the record at this point.

Mr. SEVERIN. Thank you.

(The document referred to follows:)

SUMMARY OF THE MAY 1958 SURVEY OF THE NAHB BUIDERS ECONOMIC COUNCIL

Approximately 450 builders, members of the NAHB Builders Economic Council, have just reported on their plans and the outlook for home building in their communities. This survey, the fourth in a series, covered every size and type of home building operation in every part of the country.

Most of the reporting builders are optimistic. Three builders out of every five expect housing starts in their communities this year to exceed last year. Another 25 percent expect no change from 1957 while only 16 percent foresee a decline. Typically, they forecast that housing starts in their communities during 1958 would top last year by 10 percent.

The reporting builders were even more optimistic about their own operations. Better than 7 builders in 10 plan to build more this year than in 1957, while

1 in 10 expects no change and 2 in 10 plant to cut back. Altogether, the reporting builders started 28,000 new homes last year, plan to build 38,000 this year-an increase of a little better than one-third. The sharpest gains will be in the brackets below $15,000.

Three-fourths say that the market for new homes at present is the same or better than it was at this time last year, and two-thirds look for further improvement over the next 6 months. The strongest market. pressure is in the lower priced brackets-58 percent say that the market for low-price homes is better than a year ago, 34 percent say this of the market for middle-priced homes, and 21 percent say this of the market for high-priced homes.

One of the most important findings of the survey is that the trend toward higher price brackets which has prevailed for the past several years appears to have been halted. In their own operations, the builders plan an increase in housing starts in every price bracket, but the sharpest gains are in moderatepriced homes. As a result, the median sales price this year-$14,350-is somewhat lower than the 1957 median of $14,950. This reduction is the result of changes in design rather than lower costs to the builder. In fact, the majority of builders report that materials prices, labor costs and land costs are the same or higher than they were a year ago. Financing costs, however, have come down. While builders are shifting to lower priced brackets, the typical new home this year will be larger than in 1957, since 39 percent plan to increase floor area in their typical 1958 model against 16 percent who are planning to build a smaller home. (The remaining 45 percent plan no change in size.) Reflecting rapid changes in mortgage money and consumer demand, and the new housing legislation, 3 out of every 5 builders have changed their plans since the beginning of this year. Four-fifths of those who have revised their planned number of starts have raised their sights, though about 1 in 5 now expects to build fewer units than he had thought on January 1. Of those who have changed to a different price bracket, nearly three-fifths have shifted to a lower bracket.

Mr. SEVERIN. The extension of the GI loan for World War II veterans coupled with administrative revival of the no-downpayment loan-has been particularly helpful. GI loans are becoming more freely available and, in some areas, at substantially improved prices. As a whole, however, prices on mortgages have improved only slightly and somewhat more slowly than the changes in the money market would seem to warrant. In spite of limited supplies of available mortgages and limited demand for investment capital from other fields of investment, mortgage investors in many cases are still seeking yields close to the peaks of last year.

For the first time since its rechartering in 1954, FNMA has begun to sell loans from its portfolio at an accelerating pace and at constantly higher prices. This not only will provide funds to FNMA for future use in its secondary market operation when needed, but because this agency (to its great credit) is conducting its sales operations with skill and considerable success, the pattern of its sales, gradually but firmly, is helping to pull the mortgage market back toward par. We believe this could be even more quickly accomplished if FNMA would raise purchase prices in its secondary operation in keeping with its increased resale prices, thus reasonably reducing the spread between its purchase and its sales prices.

I should like to direct the attention of the committee members to what I regard as a very interesting article on the subject of FNMA's operations as it appeared in the May issue of House and Home magazine. I am sure that you would agree with me that this is a very fine operation of a Government agency and I should like to submit it for the record.

25834-58-16

(The article referred to follows:)

[From House & Home, May 1958]

BAUGHMAN OF FANNIE MAY: QUIET MAN OF MORTGAGE Lending

It takes more than $1 billion to excite J. Stanley Baughman. The earnest man who heads the Federal National Mortgage Association is so used to a money spigot which alternately gushes and drips he could only shrug when Congress voted $1 billion in mortgage buying authority for Fannie May to virtually subsidize construction of low-cost homes.

"It may stimulate housing and it may help the economy some," he ventures. "It can't help but offer competition to the private money market."

Which is about as controversial a statement as Stan Baughman may ever utter, even in comment on one of the most controversial loan programs in mortgage history.

NONCONTROVERSIAL JOB

For Baughman is something of a Washington anomaly for a man who holds a political appointment to a policy-making job. He is quiet-almost aloof. He avoids publicity. He does what seems impossible in Washington: an almost noncontroversial job of running a very controversial agency. This feat in an industry which dotes on squabbles, has led some observers to call him colorless. Yet government pros will tell you that J. (for James) Stanley Baughman (pronounced Bóckman) runs the tightest shop in Washington, that there could hardly be a more efficient Government agency than Fannie May.

This may be surprising to the thousands of mortgage bankers, builders and realtors who have seen and met Baughman only briefly or listened to him drone through a speech on the convention circuit.

Baughman looks like a railroad conductor: a bespectacled, paunchy and roundshouldered man of 60. He is not a glib conversationalist like his boss, HHFA Administrator, and FNMA Chairman, Al Cole. Nor is he an affable mixer like FHA Commissioner Norman Mason.

But Baughman is a good administrator-so good, in fact, that he probably has no equal in the HHFA family. Perhaps no other executive in Government housing knows his own field more thoroughly.

He is that rare example of a political appointee who came up through the civil service ranks, was finally moved into the top job in his field (by a Democratic administration) because of knowledge and ability—not because of his political affiliation.

He

Except for two years in Colombia as a trouble-shooter for an oil company, Baughman has spent nearly his entire life in Pittsburgh and Washington. attended both Pittsburgh and Duquesne Universities, was in the building and loan business with his father, was an officer of the Thermatonic Carbon Co. for 10 years and sold real estate.

His Government career began in 1933 when he became Pittsburgh office manager for the Home Owners Loan Corp. He moved up to State director in 1935, went to Washington to head the Property Management Division in 1942. He was named HOLC General Manager in 1948, planned the final liquidation of its portfolio. Before he could complete the job, he was tagged to be new President of Fannie May, then being rechartered and moved out of the Reconstruction Finance Corporation into HHFA.

EIGHT YEARS OF CHANGE

Fannie May has undergone much change under Baughman's leadership. From a loosely run, personnel-glutted office, it has been slimmed down despite a steadily increasing workload. Between 1950 and 1956 Baughman slashed his staff from 954 to 569. (It is now back to 671. But only 92 are in Washington; the rest are in 6 field offices.) In those same 6 years, Fannie May's portfolio increased 127 percent in number of loans and 150 percent in dollars.

Another of Baughman's first and most important jobs: He wrote and published guides for originators selling to Fannie May and those servicing for it, detailing precise procedures and forms.

Baughman brought with him to Fannie May a coterie of trained men. At first, he added to fill key jobs but since then has replaced only two chief aids who

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retired. Among his key staff members are his 2 special assistants: Harry Bivens, with Baughman since 1935 in HOLC, and Ed Wendell associated on and off with him since 1936.

Since Baughman took over at Fannie May in 1950, the agency has earned the United States Treasury $240 million after paying all its administrative expenses. It has bought $3.1 billion in FHA and VA mortgages under its management and liquidation program; $1.8 billion under its secondary market operation and $119 million under special assistance. (Total: $5.45 billion, $1.45 billion since sold.)

Baughman's administrative success is not unnoticed. Says one NAHB staffer: "We owe Stan Baughman a medal." The Civil Service Commission and General Accounting Office have lavishly commended Fannie May's efficiency and management.

THE SIMPLE LIFE

As one of the Government's top housing men, Baughman earns $20,000 a year. But he lives as unpretentiously as his plain manner suggests. His home is a six-room brick house in a middle-class section of Montgomery County, Md. He rides the bus to and from work.

His beige-painted and carpeted office on the southwest corner of the ninth floor of the Lafayette Building (also home to HHFA and FHA) overlooks Lafayette Park and the White House. He works behind a sturdy walnut desk-well covered with books and papers, but not cluttered. An American flag in a standard flanks the desk; pictures of the President, the Capitol, and Lincoln's Tomb adorn the wall. He has four leather chairs, a semicircular sofa, and a lounge chair for visitors.

Perhaps the best clue to Baughman's character is the fact that he shuns the executive dining room where he could sit with other HHFA top brass and have his lunch brought to him. Instead he joins four or five aids in the crowded employees' cafeteria, invariably talks business.

Baughman seldom socializes. He spends most evening hours at home reading or watching television. His only major recreation is golf. He is a member of the Kenwood Country Club, often plays both Saturday and Sunday-shooting in the 90's (His regular partner: Paul Hathaway, Fannie May structural standards chief.)

MORTGAGE MARKETABILITY

Baughman's administration of Fanny May has not escaped criticism. Chief complaint of builders: the agency rejects some FHA and VA mortgages on the grounds they are not sufficiently marketable. Builders argue Fannie May should buy any mortgage which is FHA insured or VA guaranteed.

But Baughman disagrees. He wrote a detailed explanation of his reasoning earlier this year to Al Cole who has expressed concern over some of the complaints. Baughman reported that in November and December of last year 4.5 percent of the 9,253 FHA and VA mortgages offered were rejected. He said:

"I think the fallacy of a policy of purchasing any mortgage merely because it has been insured or guaranteed is self-evident. The fact is that Federal insurance and guarantees do not, per se, provide assurance that mortgages will be or should be generally acceptable to all investors.

"The corporate charter requires, wisely I believe, that mortgage purchases under the secondary market operations so far as practicable shall be marketable that is an essential principle because the purchased mortgages must be resalable to enable FNMA to have adequate sources of funds to assure a continuing operation."

As a result of this policy, he insists: "Our portfolio is equivalent in quality to any private investor's portfolio."

The proof lies in Fannie May's success in selling out of portfolio. Recent sales have been 1 to 2 points over the current market.

At 60, Baughman can retire in 2 years. But he isn't sure when he may finally step out.

If time is not certain, location is: he owns a lot in Lake Worth, Fla.-his regular vacation spot-will build a home there when he retires.

Mr. SEVERIN. I believe it is safe to say that, for the first time in at least 2 years, neither unavailability nor price of mortgage money

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