Happy birthday GI Bill.
Fifty years ago this month, the greatest invasion force in all history was launched on the shores of Normandy. That invasion marked the beginning of the end of World War II, the bloodiest struggle in the history of the world. It was a war that called more than 16 million Americans to uniform and produced more than 1 million casualties, including more than 407,000 who died in the service of their country.
As the war drew slowly to a close a half-century ago, many thoughtful Americans were concerned over what would happen to the millions of GIs returning to civilian life.
Until that time, our country did not have a particularly good record of dealing with its veterans. Civil War veterans were often left destitute. The Bonus March on Washington, D.C. during which World War I veterans demanded that Congress pay their mustering-out bonus in full, had ended in violent riots.
Many feared that postwar America at the end of World War II would be faced with the loss of millions of jobs, creating unprecedented unemployment and possible civil unrest. A federal survey indicated that 50 percent of the nation's soldiers anticipated a widespread economic depression after the war. The Great Depression of the 1920s and 1930s was still fresh in people's minds.
GI bill is created
Spearheaded by the American Legion, a remarkable piece of legislation was drafted to prevent economic and personal chaos for postwar America. It was called the "Servicemen's Readjustment Act of 1944," but ever since President Franklin D. Roosevelt signed it into law on June 22, 1944, it has been known as the "GI Bill of Rights." When President Roosevelt signed it, he said the GI bill "gives emphatic notice to men and women in our armed forces that the American people do not intend to let them down."
The original GI bill provided six benefits, three of which were administered by the Veterans Administration (VA): education and training, loan guaranty for a home, farm or business and unemployment pay of $20 a week for up to 52 weeks. The other benefits were job-finding assistance, top priority for building materials for VA hospitals and military review of dishonorable discharges.
During the past five decades, the GI bill, with its later modifications, has made possible the investment of billions of dollars in education and training. It also made possible the loan of billions of dollars to purchase homes for millions of veterans and helped to transform the majority of Americans from renters to homeowners.
The VA Loan Guaranty Program was created by the GI bill. It has helped to shape the face of America. The nation, in return, has earned back many times its investment in the form of jobs created in housing construction and related trades, increased taxes and a dramatically changed society.
Loan guaranty in the GI bill
The loan guaranty program was originally conceived as part of a national effort to move from a war-time economy to a peace-time economy, and to avoid the economic recession historically associated with postwar periods. A government guaranty of part of the loan (in lieu of a down payment in most cases) was offered as an alternative to a cash bonus, a benefit that had been given to veterans after previous wars. Advocates said the loan guaranty program would be less expensive to the nation than bonuses and would better serve the needs of returning veterans.
Underlying the program was the philosophy that veterans, because of their service in the armed forces, had missed an opportunity to establish a favorable credit rating. The loan guaranty program was an attempt to place veterans on a par with civilians who had developed favorable credit ratings and amassed savings during the war. More recently, it has also been seen as part of the incentive package for this country's all-volunteer military forces.
The loan guaranty program also provided an investment outlet for large amounts of savings that had accumulated during World War II, when normal investment outlets were restricted. Government imposition of price and production controls had reduced the normal flow of consumer goods. As a result, individual savings had reached record proportions, and large amounts of money were available for investment.
The first guaranties
When the loan guaranty program began in 1944, the guaranty was limited to no more than 50 percent of the loan, up to a maximum of $2,000. Loans were limited to 20 years, with a top interest rate of 4 percent allowed. The law specified that the purchase price, including the value of the land, could not exceed its "reasonable normal value." Loans could be used to buy, build, improve or repair residential property that veterans intended to occupy as their homes.
A veteran had to apply for a loan within two years after leaving the service or two years after the official end of the war. No applications would be received five years after the end of the war.
During the first year of operation, the housing market changed dramatically. Real estate prices rose so much that the $2,000 maximum guaranty was not large enough to replace the normal down payment. Difficulties also arose from the law's requirement that the price of the real estate must be "normal," which was interpreted to mean comparable to prewar prices.
The two-year limit on obtaining a loan was considered inflationary because of the large number of potential borrowers and the fact that the 20-year maximum maturity on loans made monthly payments too high for many veterans to qualify for loans.
The first changes
After congressional hearings, changes in the program were enacted in 1945. The maximum amount of guaranty was increased to $4,000. (It is $46,000 today.) The term "normal" was removed from the requirement of "reasonable normal value," and the maximum maturity was extended to 25 years (40 years for farm loans).
While the original law was considered an immediate readjustment aid for veterans, the 1945 legislation extended eligibility to any time within 10 years after the war was declared officially over.
In 1950, Congress increased the guaranty again, and lengthened the maximum maturity from 25 years to 30 years, where it stands today. More significantly, the program was opened to unremarried widows of veterans who had died in service or as a result of service-connected injury or disease.
Another significant change was a provision for direct loans. In areas where private mortgage money was not readily available, the VA lent money directly to the veteran. As a direct result of the growth of the mortgage banking industry into a nationwide presence, Congress was able to suspend the direct loan program in 1980.
The 1950 legislation helped veterans whose homes were lost through fire or natural hazards or taken by public condemnation, by making those veterans eligible for new guaranties. The law also for the first time authorized the VA to establish minimum construction standards and to set the amounts of fees and charges that lenders might impose on loans to veterans.
Active duty eligibility
In 1952, the law was modified to extend home loan guaranties to Korean War veterans. In 1966, post-Korean veterans were made eligible for home loan guaranties and direct loans. The law also expanded the program to include active-duty personnel who had served at least two years. A VA charge, or "funding fee," was initiated at this time to form a reserve fund that would cover losses incurred by the program. The law at that time directed the VA to adjust the VA home loan interest rate ceiling according to the demands of the market.
In 1970, eligibility for the home loan program was made open-ended, and limiting dates on using the benefit were removed. By this act, home loan benefits were restored to 9 million World War II and Korean conflict veterans.
Four years later, legislation made it possible for a veteran who had used the loan benefit to regain eligibility, provided the property had been disposed of, the loan paid in full or assumed by another veteran who had agreed to use his or her own entitlement. The second-use feature added more than 4 million veterans to those potentially eligible for new loans.
FIGURE 1 VA Loan Milestones Milestone Date Issued Interest Rate 1 millionth loan January 1948 4% 2 millionth loan October 1950 4% 3 millionth loan May 1953 4 1/2% 4 millionth loan August 1955 4 1/2% 5 millionth loan September 1957 4 1/2% 6 millionth loan July 1963 5 1/4% 7 millionth loan November 1968 6 3/4% 8 millionth loan November 1972 7% 9 millionth loan February 1976 8 3/4% 10 millionth loan November 1978 9 1/2% 11 millionth loan March 1983 12% 12 millionth loan March 1987 8 1/2% 13 millionth loan August 1990 10% 14 millionth loan December 1993 7 1/2%
In 1981, the VA was authorized to guarantee graduated-payment mortgages for the first time. The funding fee, rescinded for a time, was reinstituted in 1982, with exemptions for disabled veterans and surviving spouses.
New guaranty formula
The guaranty amount was increased in 1987 to $36,000, and a new formula for the calculation of the guaranty was established: for loans of $45,000 or less, 50 percent of the loan would be guaranteed; for loans greater than $45,000, 40 percent of the loan would be guaranteed up to a maximum guaranty of $36,000. A new revision allowed "streamlined" interest rate reduction loans during this period of substantial refinancing activity.
In 1989, for the first time, this historically no-down payment program was modified to encourage (but not require) veterans to make down payments: the funding fee to be paid by veterans was increased to 1.25 percent with no down payment, but it was only 0.75 percent with a 5 percent down payment; or 0.5 percent with a 10 percent down payment. The government was responsible for paying the fee for service-disabled veterans and surviving spouses. The law also provided an additional guaranty for loans of more than $144,000, equal to 25 percent of the loan amount up to a maximum total guaranty of $46,000.
Persian Gulf veterans
Veterans of the Persian Gulf War were made eligible for home loan guaranties as of August 2, 1990. To qualify, a veteran must have served at least 90 days of service, any part of which was during the Persian Gulf War. The veteran must also have served two years' active duty or the full period for which ordered to active duty.
When Congress passed Public Law 102-547 in 1992, it provided a recent resounding endorsement of the program by making a number of favorable changes. For the first time, eligibility was expanded to reservists who have no active duty service if they have at least six years of honorable service in the Selected Reserves or National Guard. It is estimated that there are approximately 500,000 such veterans. In this limited program, funding fees are higher than for other veterans, and their eligibility expires in 1999.
A three-year test allowed the interest rates on loans to be negotiated between veteran and lender and permitted payment of discount points to be negotiated among veteran, seller and lender. The law also authorized a three-year test of guaranteed adjustable-rate mortgages (ARMs).
A pilot program was established in 1992 to provide direct loans to Native American veterans, because VA guaranteed and other types of mortgage loans have not been generally available on reservations or trust lands. These loans are normally limited to $80,000, though a higher amount may be authorized in areas where the cost of housing is significantly higher than the average cost nationwide.
Loan Guaranty Program today
When the GI bill established the VA Loan Guaranty Program, it launched a revolution in the American housing industry. In the 1940s, less than 44 percent of American families were home-owners. Today, more than 64 percent of U.S. families own their own homes.
The GI home loan program offered 30-year, fixed-rate mortgage financing, with no money down. Together with FHA's limited down payment mortgages, this revolutionized the mortgage financing industry. For the first time, the ordinary working man or woman could afford to buy a home.
Today, more than 14 million veterans have financed their homes through the VA Loan Guaranty Program. Our veteran borrowers come from every corner of the country, every race and a variety of age groups. Almost the only thing they have in common is they all wore the uniform of one of our country's armed services.
These veteran borrowers are not wealthy. In fiscal year 1992, the latest available figures, the median assets (cash on hand) for veteran borrowers were $4,500; gross median income, $39,600. Approximately 55 percent are first-time homebuyers. And 85 percent of all purchases had zero down payments.
Today, the average veteran remains really the only homebuyer who can hope to buy a house with no money down. The vast majority of VA home loans could not have been made in the conventional market. A recent study by the VA determined that more than 38 percent of these veterans would not have been able to make a down payment of even 4 percent, based on their verified cash assets.
Minorities continue to be well represented in the home purchases financed by VA home loans--accounting for 17.5 percent of the total.
Another feature these veteran borrowers share is that they are very good credit risks. In fact, according to VA data, from the beginning of the program to February 1994, 69 percent of all VA loans have been paid in full, while only 5.8 percent have gone into foreclosure. This gives solid evidence of the creditworthiness of veterans as borrowers, as well as the effective management of this unique program.
Outlook for the future
The home loan program is stronger than ever. Last year we guaranteed $34.6 billion worth of loans, the second highest volume in our history. The highest volume year was 1987, when originations hit $34.7 billion. In fiscal year 1993, mortgage bankers made 82 percent of all GI home loans.
It looks as though when fiscal year 1994 ends in September, we will smash all records. Already through February, we have guaranteed loans worth $22.5 billion. If we keep up that pace, we will reach $54 billion, or 55 percent more than any year in VA history.
A recent initiative launched by the VA to reach veterans with high interest loans, to encourage them to refinance, has brought a good response. More than 1.6 million individualized letters have gone out to veterans with rates as high as 17.5 percent, urging them to consider an interest rate reduction loan. We estimate that if even 10 percent of these veterans take advantage of the substantial savings possible from today's low interest rates, this will save the government approximately $90 million in avoided claims. It will also, of course, mean a great deal of added business for the mortgage banking industry.
The economic impact of this program on veterans has been tremendous. And these benefits have contributed to our nation's overall economic strength as well. Housing is one of the major sectors of our economy, accounting for 12 percent of the real gross domestic product (GDP) in 1992. The ripple effect of housing investment multiplies the initial impact on the economy. The direct increase in jobs and income from housing construction triggers additional rounds of consumer spending that stimulate further increases in jobs and income.
This ripple effect is evidenced in new schools being built, new roads, new stores and businesses, and more jobs, with the result being a true stimulus to the economy.
A tribute, not a reward
Representative G.V. "Sonny" Montgomery (D-Mississippi), chairman of the House of Representatives' Committee on Veterans' Affairs, had this to say:
"The impact of the VA home loan guaranty program on the economic and social well-being of the United States is immeasurable. It strengthened tremendously the opportunity for millions of veterans and their families to obtain mortgage credit, move into their own homes, and thus maintain their self-esteem and productivity. But don't fail to notice what the program has done for the homebuilding, realty and banking industries in this country. They too have realized great opportunity as a result of VA-backed home loans.
"With a stroke of his pen in 1944, President Roosevelt gave us a prudent and profitable domestic program--some would say the most important of the 20th century. While the primary-intention was to help veterans readjust to civilian society, the home loan/education assistance initiatives of the Veterans Readjustment Act became a formidable locomotive which will continue to carry our nation through stations of economic good health and commercial stability long after we are gone.
"I have often heard the home loan entitlement characterized as a reward for honorable service in uniform. It isn't a reward so much as a tribute to those who have had their lives disrupted, even threatened, in order that we might all enjoy the security and prosperity of democracy. A roof over their heads is a meager payment for what they have given us."
James A. Michener, the novelist, wrote in January 1993 that the original GI bill is one of the two or three finest laws Congress has ever passed. Noting that it and two other laws, the 1862 Homestead Act and the 1862 Land-Grant Act, were passed in the middle of war, he commented: "Subtract the consequences of these wartime laws and the United States would today be a much poorer nation."
Celebrating the 14 millionth VA home loan, VA Secretary Jesse Brown recently stated, "The VA Loan Guaranty Program is good for veterans and their families. It is good for the home building and banking industries. It is good for our economy, locally and nationally. It is good for America." These same things can truthfully be said about the entire GI bill.
FACTS AND FIGURES
The total dollar value of the 14,026,700 home loans guaranteed by the VA during the 49 years from 1944 through February 1994 is $442.2 billion. Another 113,444 loan guaranties were made for manufactured homes valued at $2.1 billion:
Through February 1994, some 9.2 million home loans guaranteed by the VA have been paid in full, while only 5.5 percent of loans guaranteed (784,000) required VA payment of claims for foreclosure or other causes.
Since fiscal year 1984, the number of loans paid off has exceeded the number of new loans made, so that the, total number of home loans outstanding has been declining. That number has gone from 4.1 million in September 1984 to 33.4 million in February 1994.
Keith Pedigo is director of the VA Loan Guaranty Service at the Department of Veterans Affairs, Washington, D.C.