In the longer run, it is essential that proper mix of monetary and fiscal policy be used to maintain non-inflationary economic growth. However, even under such circumstances housing may require additional stimulation to achieve the national goals.

Perhaps the best answer is to develop incentives for a broad expansion of residential financing, but not on the basis of the type of institution making the loan, as has been the general approach thus far. Rather, incentives should be based on the purpose of the loan without regard to the type of lender.

Incentives to stimulate construction of medium-income housing in the range covered by H.R. 13694 are more likely to be needed than for building higherincome housing. But, as indicated earlier, private enterprise and financing, properly motivated, should be given a chance to prove the job can be done better and cheaper than with direct subsidies based on public borrowing.

In addition, new methods of construction, accompanied by cooperation from State and local government, could go a long way toward meeting the housing needs of medium-income families at affordable prices.

Finally, our association feels that the President's budgeted plan to increase the construction and rehabilitation of housing through government assistance for low- and moderate-income families should be given a chance to function before new programs such as embodied in H.R. 14639 and H.R. 15402 are considered necessary.

I have purposely refrained from commenting even briefly on H.R. 11. The restructuring of the Federal Reserve Board is important enough to deserve separate and full consideration by the Congress. Moreover, we believe it is less urgently related to our housing problems than the other bills before this committee.

APPENDIX

REAL ESTATE LOANS BY NATIONAL BANKS

Section 24 of the Federal Reserve Act establishes the laws that national banks must follow in making real estate loans. Before enactment of the Federal Reserve Act, national banks could not make real estate loans. The original 1913 Federal Reserve Act permitted national banks to make real estate loans but restricted them to loans secured by improved and unencumbered farm land and was designed so that banks could serve the needs of a largely agrarian society. Today our nation is primarily an urban society with vastly different economic and social demands. Although Section 24 has been amended a number of times-most recently in the 90th Congress-it has not stayed abreast of modern business practices and urban demands. The American Bankers Association, therefore, recommends that Section 24 be further expanded by removing certain legal restraints on real estate lending by national banks which now inhibit banks from playing a more effective role in solving urban problems.

1. Unamortized Loans

Permit national banks to make an unamortized real estate loan up to 66% percent of value for a period of three years.

Under present law, a national bank may make an unamortized loan up to 50 percent of appraised value of the real estate offered as security for a period of five years. We suggest that national banks be given additional authority to make unamortized real estate loans up to 66% percent of appraised value for a period of three years. The size and cost of many multi-family and business projects in urban centers are of such magnitude that sponsors are not able to invest 50 percent or more of the cost of a project in cash. The increase in the permissible ratio still leaves a 33% percent borrower equity yet provides additional latitude. Sometimes the 50 percent limitation results in the making of an unsecured loan even though security is available. However, in longer term unamortized real estate loans we feel the 50 percent limitation should be retained.

2. Term of Loan

Permit national banks to make amortized mortgage loans up to 90 percent of appraised value for a term not exceeding 30 years.

Under present law national banks are limited to a 25-year maturity on conventional loans with a loan to appraised value ratio of 80 percent, whereas a substantial portion of the mortgage lending industry may write 30-year loans with a loan to value ratio of 90 percent. Under present rulings, a national bank may originate 90 percent 30-year loans provided the bank has a prior commitment to sell the loan to a permanent investor. It is felt that in order to provide

loans with lower monthly payments on properties in urban areas the maximum maturity of conventional loans should be increased so as to authorize national banks to make 90 percent 30-year conventional loans.

3. Amortization

Permit national banks to amortize 90 percent real estate loans in accordance with a 30-year amortization table.

Under present law there is a distinction between the amortization provisions for loans up to two-thirds of value and those which are beyond two-thirds of value. The installment payments for any loan of up to two-thirds of value and not over 20-year maturity may be calculated in such a way as to fully amortize the loan within the maximum permissible legal term. For example, it is possible to have a mortgage loan up to two-thirds with a maturity of 10 years and calculate the instalment payments based on a 20-year amortization table. If, however, a loan exceeds two-thirds of value, the instalment payments must be such as to fully amortize the principal within the date of maturity. That is, if it is prudent to set the maturity of a 75 percent loan at 10 years, then the instalment payments must be calculated to liquidate the loan within a 10-year period. Requiring the mortgage loan to be amortized by maturity either necessitates unrealistically large payments or requires that the mortgage be written for a term approaching or equal to the legal limit. The A.B.A. recommends that the instalment payment provision for all real estate loans of up to the 90 percent limitation provide that payments must be adequate to liquidate the loan within the maximum permissible legal term and not by the date of maturity. This procedure will give the bank and borrower an opportunity to review their respective posi tions at the maturity date.

4. Combined construction and Permanent loans

Permit national banks to make a combined construction and permanent mortgage loan for a 35-year term with a five-year nonamortization period.

Under present law and rulings a national bank can make a combined construetion and permanent mortgage loan of 28 years. The A.B.A. believes that the fiveyear period is reasonable in view of the changing needs and characteristics of modern day construction, particularly in urban areas. It is often desirable to allow for additional time due to unfavorable weather, labor disputes and other construction delays. It is also unrealistic to require amortization payments during construction and immediately thereafter as it may be some time before the project is competely operative.

5. Construction loans on commercial or industrial projects

Permit national banks to make construction loans on industrial, commercial or multi-family buildings for a 5-year term without the requirement that they be supported by a take-out agreement.

Under present law, loans made to finance the construction of residential and farm buildings (with maturities not exceeding 36 months) are ordinary commercial loans but loans made to finance construction of industrial or commercial buildings (with maturities not exceeding 36 months) must be supported by a valid and binding take-out agreement or be subject to the Section 24 limitations on real estate loans. This requirement causes delay or postponement of needed upgrading of commercial areas. At present, some banks issue their own take-out agreements in order to remove a construction loan from the statutory restric tions on real estate loans. If this type take-out commitment complies with the law then there appears to be no real reason for continuing the take-out requirement which some lenders find burdensome, but others avoid by issuing their own take-out agreement. If a bank intends to do the permanent financing, then a takeout agreement just involves additional expense. The Mortgage Finance Committee also believes that the term of such loans should be increased to 5 years for the reasons stated in number 4 above.

6. Loans insured under the National Housing Act

Permit national banks to exclude all mortgages insured by the National Housing Act from the aggregate loan limits of section 24.

Under present regulations, loans insured under Section 203 (b) (one-to-four family) of the National Housing Act may be excluded when determining the aggregate amount of real estate loans which a national bank may make in relation to its capital and surplus or its time and savings deposits. It is recommended that this exemption from the aggregate limitation be broadened to include all

mortgages insured by FHA under the National Housing Act in order to permit banks to invest more of their funds in mortgages thereby adding to the housing supply.

7. Non-primary liens

Permit national banks to make real estate loans secured by non-primary liens on real estate provided that (1) the amount advanced (not including amounts to be advanced on prior liens) on non-primary liens plus balance due on prior liens will not exceed 90 percent of appraised value (based upon appraisal made prior to execution of the non-primary mortgage); (2) the term of the loan does not exceed 30 years; and (3) the loan is secured by an amortized mortgage, deed of trust, or other such instrument under the terms of which the instalment payments are sufficient to amortize the entire principal of the loan within a period of not more than 30 years from its date.

Under current interpretations, a national bank may hold a first and second lien on real estate if there is no intervening lien. However, except in certain situations (such as second liens taken in abundance of caution) a bank may not lend on second liens where the first lien is held by another party.

The ability to secure real estate loans by the use of non-primary liens could assist greatly in assembling tract of land particularly in urban areas and would permit the sponsors to avoid disturbing existing financing, thus escaping heavy prepayment penalties. The A.B.A. believes, however, that authority to make such liens should be limited so that the amount advanced on non-primary liens plus balance due on primary liens will not exceed 80 percent of appraisad value. 8. Land loans

(a) Permit national banks to make loans on unimproved land in an amount not to exceed 50 percent of the value for a maximum term of three years without amortization.

(b) Permit national banks to make loans on unimproved land in an amount not to exceed 75 percent of value for a term of up to seven years. Instalment payments sufficient to amortize the loan within a period of seven years would be required. Such payments must begin not later than 12 months from the date of the loan.

(c) Restrict national banks from making unimproved land loans in an aggregate sum in excess of 10 percent of their capital stock paid in and unimpaired plus 10 of their unimpaired surplus fund.

The law at present limits national banks' real estate loans to loans secured by improved real estate. Under present interpretations of the Comptroller, improved real estate loans includes loans for certain off-site improvements, loans where the proceeds are to be used to acquire and convert undeveloped property into improved real estate and loans for trailer parks with facilities for sewage, running water and electricity. It would be helpful if the law specifically permitted loans on unimproved property with proper safeguards. In many areas it is important for developers to carry an inventory of land to meet future requirements just as there is a need for a manufacturer to carry an inventory of raw material. If banks could extend credit on land it would eliminate many difficulties in assembling land and would give builders assurance of future requirements. While metropolitan banks are interested in making land loans because of housing developments rural banks desire to finance land purchases by farmers who possess residential and barn facilities but desire additional land for cultivation.

ANALYSIS OF NET Cost To GOVERNMENT OF H.R. 13694 AND AMOUNT OF PRIVATELY FINANCED HOUSING SUCH COST WOULD SUPPORT

(Assuming 25% of Interest Earned is Deducted from Tax Base) Under H.R. 13694, the Federal Government would appropriate $2.0 billion a year for 5 years (a total of $10 billion), to finance mortgages on housing for medium-income families. The money would be used to finance 61⁄2 percent mortgages of $24.000 or less, on homes bought by families with annual incomes not greater than $12,000. After 5 years, the $10 billion appropriated would become a revolving fund for continued lending out of interest and principal repayments. As an alternative it is suggested that private lenders be allowed a deduction for tax purposes, of 25 percent from interest earnings on similar qualifying housing. The question is how much privately financed housing could be supported by

the cost of the direct subsidy program under H.R. 13694, if instead the same cost is absorbed by the Government in diminished tax collections.

The $10 billion loaned by the Government would be a capital investment representing the acquisition of the mortgages as assets. Although treated as a lending expenditure under the budget concept, its real nature is a purchase of assets. It is true that a lending expenditure of the Government requires tax dollars or borrowing. But to compare that expenditure with an annual tax cost, it is nee essary to translate it into a series of yearly payments.

In that translation the big cost is, of course, the interest rate on Government borrowings. In addition there are loss expenses as a result of defaults and the cost of administering the program. Offsetting these costs is the 61⁄2 percent return on the mortgages under H.R. 13694. The net cost-depending on the Government's borrowing cost-is shown on the following table:

COST TO GOVERNMENT OF MAINTAINING $10,000,000,000 IN HOME MORTGAGES AT 6% PERCENT

Instead of these net costs each year, the same amounts in tax losses could be incurred to support the private financing of eligible mortgages by allowing a 25 percent deduction from the tax base. At a 50 percent marginal rate of tax and a 62 percent rates of return on these mortgages the totals that could be supported are shown below:

AMOUNT OF PRIVATELY FINANCED MORTGAGES SUPPORTED BY TAX INCENTIVES EQUAL TO THE NET COST OF PUBLIC FINANCING 1

1 Assuming 25-percent allowable deduction for tax purposes from 61⁄2 percent interest on mortgages outstanding A further advantage of encouraging private financing through tax incentives is that if prevailing rates on nonqualifying mortgages decline, the rates charged on qualifying mortgages would have flexibility to decline also. This would mean more mortgages that could be supported by the same amount of net cost to the Government. For example, instead of $16.9 billion of mortgages based on $138 million in tax loss at a 61⁄2 percent mortgage rate, the amount of mortgages at 6 percent would be $18.3 billion, equivalent to $20.4 billion of housing at a loan to price ratio of 90 percent.

Mrs. SULLIVAN. And now Mr. Wallace.

STATEMENT OF ROBERT A. WALLACE, VICE CHAIRMAN,
EXCHANGE NATIONAL BANK OF CHICAGO

Mr. WALLACE. Thank you, Madam Chairman, and members of the committee. I too appreciate this opportunity to testify before your emergency housing hearings.

Housing, of course, is deeply affected by the state of the national economy, and in considering its prospects we cannot ignore the economic environment in which we find it. Most of the comments that have been made so far, at least today, have been on the problems of a very tight monetary situation and that is an economic matter. For 1970 it is my judgment that we must assume both a recession and inflation along with a sizable Federal budget deficit. Namely, the fiscal 1970-71 Federal deficit may very well reach $10 billion instead of the small surplus which has been projected. The unemployment rate could easily reach 5 to 512 percent. The inflation rate will likely stay near the 1969 levels.

Now, for housing, these factors indicate, first, a greater availability of mortgage money, as monetary policy must ease in the wake of a recession; greater availability of labor, as unemployment rises in the recession; and continued increases in construction costs because of cost-plus inflationary forces.

Madam Chairman, I would like to say that I am going to summarize this statement so I refer members of the committee to the statement itself for justifying many of the comments I make or I will answer them in questions, but I am not going into details of why I think my projections are soundly based.

Mrs. SULLIVAN. Fine. If you do that, we will put the entire statement in the record.

Mr. WALLACE. Thank you.

In my 20 years study of Federal spending, which includes a book called "Congressional Control of Federal Spending," and intimate participation in preparing eight out of the last nine budgets, one truth stands out very clearly: The Federal budget is a document which represents the President's hopes and recommendations. It is not an accurate projection of what will actually happen.

This is no criticism of the President. A budget should represent his fiscal program. But those who would predict the economic and financial outcome must anticipate both the performance of the economy and the action of Congress on the President's proposals.

I was very pleased to see that a program which I began in 1966 in the Treasury Department for speeding up collections of withheld income and social security taxes, and excise taxes was extended, and made possible the $1.3 billion surplus. I would like permission to put at the end of my remarks a statement that I made the day I left office. Mrs. SULLIVAN. Without objection, it may be done.

(The statement referred to appears after Mr. Wallace's prepared statement.)

Mr. WALLACE. Two factors will operate to reduce the levels of revenue: The recession will lower corporate profits and personal income upon which our sources of income taxes are based, and Congress will not be likely to accept all of the President's recommendations for increasing Federal income.