rate of about 1,500,000 units per year, which in those days was a pretty good rate. (As a matter of fact, that rate, while low by today's housing needs, would look pretty good right now in comparison with the current home building rate.) This was essentially a non-inflationary period. The GNP ranged from $384 billion to $419 billion. Interest rates on Treasury bills averaged 1.8%, AAA corporate bonds were yielding 3.15%, FHA loans were written to yield 4.6 to 4.8%, Regulation Q ceilings were 22% and savings and loan associations were paying generally 3% to 3%. Note that the flow of funds into various types of debt today are almost three times that of the four-year period of the 1950s. The shortage of credit for housing today is not due so much to a shortage of total credit (although there is a shortage of capital in relation to total demand) as it is to the fact that housing is getting a much smaller share of the total. Home mortgages in the last four years have received only 18.8% of the total credit compared to about twice that share in the four-year period of the 1950s. Note how much more is going into multi-family, commercial and farm mortgages than in the 1950s. Except for farm loans, these are mortgages where equity kickers or piece-of-the-action financing are possible. The Federal Government has been a much more significant user of funds than in the 1950s along with the corporate and foreign bond market. This, by the way, is practically all domestic bonds and not foreign, but the data are classified in that manner. One obvious reason for the substantially reduced flow of funds into home mortgages is that savings and loan associations have not been attracting the high share of the savings dollar we once attracted. Chart 3 shows net savings gains in our institutions, and we also show the GNP each year. We are getting less money from a much bigger economy. The two basic reasons for the reduced flows into savings associations are: (1) The American people are not placing their savings in financial institutions as they once did. Savings have been going into mutual funds, pension plans and, in recent years, of course, into securitiesmostly government securities. The Federal Treasury (and the various Federal agencies) are the biggest competitors we have today. (2) Commercial banks have been much more aggressive and very successful competitors for savings. While we once paid a full percentage point more than commercial banks paid for savings, we now may pay only one-half point more on passbook accounts and one-fourth point more on certificates. Because of the growing promotion of certificate accounts by both banks and our institutions, we regard our effective rate advantage as a quarter of one percent. The "advantage" cut from one full percentage point which we had in the 1950s to the one-quarter point spread of recent years is a great difference, and basically accounts for the greatly reduced flows of savings to our associations. The present difference between our rates and those paid by the commercial banks is not enough to offset the full service concept of the commercial banks, the difference between some 30,000 commercial bank offices and 9,500 saving and loan association offices, and the greater advertising power of the banks. One of our problems, of course, is the difficulty in paying higher rates than we now pay even if the rate ceilings permitted. Chart 4 is reproduced from the Economic Report of the President transmitted to the Congress early this month. I have brought the chart up to date reflecting on it the effect of the most recent changes in the rate ceilings on our cost of money. As is clearly evident from this chart, savings and loan gross earnings have been rising very slowly even though mortgage interest rates have increased sharply in the last few years. We have a problem because of the very nature of the assets in which we invest and because we did the kind of a job that Congress wanted us to do in the years past. CHART 4 Mortgage Yields and Dividend Rate of Federal TOTAL INTEREST RECEIVED AS PERCENT OF AVERAGE MORTGAGE LOANS HELD. SOURCES: FEDERAL HOUSING ADMINISTRATION AND FEDERAL HOME LOAN BANK BOARD. Reproduced from Economic Report of the President, February 1970 The nature of our earnings problem-and the reason we cannot afford to pay any higher rates for savings—is illustrated in the following table, which shows generally the years in which our institutions made the $140 billion in home loans now on our books and the average interest rate in each of these earlier years. TABLE 1.-YEAR OF ACQUISITION AND CONTRACT RATE OF THE $140,200,000,000 IN MORTGAGE LOANS HELD BY SAVINGS ASSOCIATIONS AT YEAREND, 1969 The significant thing is that because of the time lag, 54.9% of the mortgages we now hold are for less than 6% interest even though for several years our new loans have been considerably above that rate. If the interest rate structure were such that we could attract savings to our institutions as we attracted savings in earlier years, much of today's housing problem would disappear. The following table shows the net savings gain for our institutions in each of the years since 1960. 1960 1961 1962 1963 1964 TABLE II.-Net Savings Gains at Savings and Loan Associations If our institutions could gain the savings momentum we had in the first half of the decade of the 1960s, we would be gaining in savings approximately $14 to $15 billion annually instead of the $4 billion we gained in 1969. This difference of $10 billion in savings gain would finance 500,000 homes in one year (assuming an average loan of $20,000). Not enough people may realize how significant the savings and loan business is to the mortgage market. Last year, which was a poor year for us, our institutions made $21.8 billion in home loans. (The source of the funds for last year's lending was as follows: $4 billion came from the net savings gain, $12 billion came from loan repayments, $4 billion from increase in advances from the Home Loan Bank System and $1.5 billion from a reduction of liquidity.) Congressional proposals suggest adding $2-, $3- or $4-billion to the mortgage market. In the years 1963, 1964 and 1965, our institutions loaned $2-billion a month. Chart 5 shows the annual amount of loans made by our associations and also private housing starts year by year. The simplest way for Congress to help the home mortgage market and stimulate home building is to pass such laws, or to get the administration to take such steps, as to increase our lending capacity by 20% or 25%. Money that comes to savings and loan associations-in contrast to other institutions—will be invested wholly in mortgages, primarily on single family homes. I know that this committee is very interested in housing for low-income families and inner-city lending. The basic purpose of the Housing Act of 1968 was to stimulate a flow of funds into housing for low-income families. Programs authorized by this act are new, but our institutions have been getting involved with them. In order to help our people learn how to make these loans, the United States Savings and Loan League has scheduled three urban lending clinics in the next few weeks. The first will be held next Monday and Tuesday in Chicago We will have clinics in March in Washington, D.C. and San Francisco. I have here an announcement of these clinics. When we started the program, it became very evident that in our office we really didn't know how many of our members had been participating in various types of low-income and inner-city loans. As a result, we sent questionnaires out to our members and the returns are just be ginning to come in. To date, the figures look something like this: Approximately 65 associations have reported the following activity: FHA 235 loans: Over $17 million in loans made on over 1,150 units. FHA 236 loans: Over $17.7 million in loans made on 1,276 living units. Section 221 (d) (3) construction loans: Approximately $55 million in loans made which increased the living unit supply by about 3,600 units. Sections 221 (h) and 235(j) rehabilitation loans: $1,400,000 in loans on 125 units. Turnkey construction loans: Over $27.5 million in loan funds on 1,433 new living units. Section 23: Almost $19.5 million in loan funds on over 2,000 units. In addition, we know of the following projects: Community Federal of St. Louis is involved in a 148-unit 221 (d) (4) project for $1,600.000. Loyola Federal of Baltimore has invested almost $6,000,000 in FHA Market Rate Rent Supplement Projects. |