Atlantic Federal in Baltimore, in addition to being involved in FHA 236 loans, has invested $800,000 in 74 units of a Market Rate Rent Supplement project.

First Federal of Detroit has a $5.8 million project for construction funds on a 288 unit development and another $5.6 million in 221(d) (4)s providing housing for 392 families.

Decatur Federal in Georgia is the fee owner of 111 unit low-rent housing project leased to the Public Housing Authority of Decatur.

The Coffeyville (Kansas) Federal has financed two 221(d) (3) projects with 150 apartments and is now involved in a $665,000 below-market investment rate project of 47 units and a 30-unit section 235 project.

Cleveland's Second Federal is supplying the funds for a 420 unit section 236 project involving a $5,841,000 permanent loan by that association. These are but examples of a considerable activity by our associations in this type of lending. We would be happy to give the committee a more complete summary when all the replies to our survey are received. You should know that the Federal Home Loan Bank Board is heavily promoting this type of association activity. Articles describing association involvement in inner-city lending has appeared in each of the last three issues of the JOURNAL published by the Board. We pushed the idea through our publication, SAVINGS AND LOAN NEWS. The February issue of NEWS has its feature article on serving the black customer. The March 1970 issue will have its feature article on inner-city lending.

A few months ago, the Federal Home Loan Bank Board announced it would make ten-year advances to our members at contract rates of interest to permit our associations to finance federally sponsored inner-city projects. There has been a great deal of interest in this on the part of our business but it has been too soon for any projects to have been started with this kind of money.

We, of course, would make a lot more of these loans if we had more money to work with. I mention this to assure the Congress that our associations are not ignoring the lower-income families in their efforts to serve the housing needs of the American people.

The Federal Home Loan Bank Board has been very diligent in keeping money flowing to our institutions from the Bank System. However, this money costs the Bank System currently about 8%, which, at the moment, it lends to our institutions at a rate of 72% to 74%. Savings dollars are now costing our institutions from 5% to 6% as a result of the changes last month in Regulation Q ceil ings and the necessary increases in savings and loan rate ceinligs. Obviously, our institutions cannot afford to take much more than 7% money from the Federal Home Loan Banks. And even paying savers from 5% to 6% is not producing any new funds for lending. The new higher rates have not done a thing for us. Since the first of the year, savings balances in our institutions have shrunk about $1.8 billion. This drop in savings means there are 80,000 homes we are not going to finance. What we ought to have is a $1.6 billion gain which we very easily could have had if we had not had the Treasury competing with us in the con sumer savings market and if we could have what we have earnestly requested. namely, a one-half point spread over the rates paid by the commercial banks. preferably at a level which would have permitted us to keep our cost of money low enough to permit us to charge reasonable rates to home buyers.

In connection with the competitive efforts of the banks to obtain savings there is a very disturbing recent development which the banking agencies have shown no signs of trying to arrest. I refer to the issuance of very high rate subordinated notes sold directly by commercial banks and obviously aimed at attracting consumer savings dollars. This started with the First Pennsylvania Bank. I have here an advertisement that appeared in the Philadelphia Inquirer on January 6. At about the same time, a small bank in Kankakee, Ill., came out with a similar offering. Here is a copy of the ad which appeared in the Kankakee paper. We thought that with the new high rates authorized by the Federal Re serve under regulation Q, the banks would not pursue this particular method of getting more money-and much of it from our institutions-but we were wrong. Since the regulation Q ceilings were changed, a commercial bank in Atlanta, one in Denver and another in Cincinnati have come out with these kinds of offeringsand the rates are rising higher. Here are samples of these ads. If this kind of thing is allowed to spread, it will completely dry up whatever mortgage money is still available from our institutions. (The advertisements referred to may be found on page 443.)

The federal savings and loan law, of course, authorizes associations to issue subordinated obligations like this. But, we cannot pay 72%, 8% and 82% for money and make mortgage loans except at unconscionable interest rates.

The commercial bank system has been very resourceful in finding new sources of money to keep their profitable high rate lending machine going. They have developed a variety of ways to get what can be called "black market" money, and the Federal Reserve has been notably slow to eliminate the black market. They have secured Eurodollars and dollars from off-shore branches known as "virgin dollars". They have pursued the device of selling commercial paper often through their holding companies, and now they are offering subordinated note issues to savers. If this kind of thing is allowed to continue, it is going to usher in a savings rate war of great magnitude which can result in lasting damage to our system of financial institutions. In the early 1930's, the Congress established interest rate ceilings on savings and time deposits in order to prevent excessive competition among banks for funds because the Congress knew this kind of competition was in part responsible for the collapse of many banks at that time.

Another example of action by the bank regulatory agencies to the detriment of the savings and loan business is the announcement last weekend that the banks will be able to offer gifts costing as much as $10 for the opening of new accounts. The savings and loan business admittedly started this practice a long time ago, but at the request of the business, the Federal Home Loan Bank Board since 1954 (for the last 16 years) has regulated gift practices to gifts costing $2.50. But now we have the banking agencies and the Federal Home Loan Bank Board reluctantly had to go along-condoning gifts costing up to $10 plus freight and this is a wholesale price. This is going to result in a great deal of churning around of money as people withdraw their savings from one institution to qualify for gifts at another. It will substantially increase the cost of money. Last fall, Congressman Ashley introduced H.R. 15064 regarding give-aways and we appreciate his constructive and timely interest in the problem. Perhaps the solution would be a complete ban on give-aways as was done in California. Frankly, this business needs help from the Federal Reserve or help from Congress to make the banking agencies regulate the competitive game in a manner which will avoid a repetition of this kind of financial chaos and folly and which will permit institutions committed to the home mortgage market to stay alive.

It is well recognized that financial institutions, other than savings and loan associations, have virtually deserted the home mortgage market. Other lenders are putting that kind of money into loans on commercial property and apartment buildings, in both of which they can get an equity kicker and into corporate bonds where interest rates are very high or where a convertible feature permits a variation of piece-of-the-action financing. In all of the other types of debt other than home mortgages, either (1) higher interest rates are available (like 82% to 9% on federal agency securities), (2) the debt is short term, (3) equity kickers are customary, or (4) the interest is exempt from federal income tax. How can the home mortgage compete in the face of those advantages of other investments? The home mortgage loan is considered by investors today to be a poor investment, and that is the reason all lenders except savings and loan associations are boycotting this market.

The home mortgage is considered to be a poor investment because it is too long in term. Loans for 25 to 30 years are not good loans in periods of inflation or inflationary expectations. Equity kickers are not possible with home mortgage loans. The interest rate is low because home buyers and home borrowers cannot afford to pay any more than they are paying and state usury ceilings in many States limit the rate lenders can charge to 8% and in some cases to 7%. One reason savings and loan associations are having trouble competing for funds in these free savings markets is because our assets are invested in loans which are neither competitive in this kind of environment nor in the "free" investment market all financial institutions except savings and loan associations enjoy".

Chart 6 shows what has happened to our lending in the past two years. The loan commitments outstanding shown on the chart predicts a disastrous period ahead for lending by associations and, hence, for home building. This is the result of the "free" market for savings.

Of course, it is not enough to suggest the problem. These hearings have been arranged so Congress can develop a program of action to assure that this kind of condition is not allowed to drift on and on.

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I have a wide variety of suggestions which I will present so that this Committee may consider some of the options available.

(1) One thing that can be done is to improve the nature of the mortgage instrument itself. I submit as part of my testimony an article that was written by Professor Edward E. Edwards at Indiana University entitled "The Home Mortgage Prime Case for Product Improvement." Basically, three things can be done to make the mortgage instrument competitive with other investments.

A. Encourage the development of so-called variable interest rate mortgages with an interest adjustment clause so the interest rate on the loan would go up or down as the lender's cost of money goes up or down, or as interest rates generally go up and down. This practice is followed in England by the building societies, our counterpart associations in that country, and there has been a fair amount of interest in this idea in this country but very little use of it. Most of our people are convinced that variable interest rate mortgages cannot be generally written for conventional loans unless the Congress provides for adoption of a similar plan for FHA and VA loans.

B. Making mortgages short term would help, but very few people want to go back to the mortgage practices of the 1920s when all except savings and loar

associations wrote mortgages that had to be renewed or extended every five years. C. Another possibility to ease the long maturity barrier would be to permit so-called "balloon notes" or non-level monthly payments.

(2) A second range of alternatives would be to encourage or require greater lender participation in home mortgages. The suggestion that pension funds would have to invest a minimum part of their assets in mortgages in order to continue to enjoy the tax exemption is an example of this type of program. Another would be to provide that mortgage interest would be fully or partially exempt from federal income tax in the hands of the investor. Of course, implementation of this idea would be the responsibility of the Ways and Means Committee.

(3) A third area of action by the Congress would be to appropriate substantial sums of money for use in the housing field.

A. H.R. 13694 by Mrs. Sullivan is an example of this approach.

B. Another would be to make certain the Treasury Department actually implements the authority granted by the Congress last year to invest up to $4 billion in the Federal Home Loan Bank System. This, of course, would not be low-price money because the law provides that the Treasury Department advance money to the Bank System at the Treasury's cost. The Treasury's cost today is high, but, of course, not quite as high as what the Federal Home Loan Bank System raises by sale of its own obligations.

C. There is also the possibility of Federal Reserve support of obligations of the Federal Home Loan Bank System and the Federal National Mortgage Association along the lines of the proposal that was advanced last fall in the Interest and Dividend Rate Control Bill.

D. Along this same line, the Treasury could withdraw its opposition to full implementation of mortgage backed securities as authorized in the Housing Act of 1968. The programs thus far developed by the Government National Mortgage Association for issuance of mortgage backed securities in connection with this program may best be described as "tokenism".

Of course, such proposals, with the exception of the Federal Reserve advancement of money to the Bank System and the use of Ginny May government backed securities, have the disadvantage of adding to the government's budget, and even $2-billion to $3-billion per year would not be adequate to solve the problem that faces us. In connection with proposals for federal or Treasury funds for home mortgages, we thoroughly favor the use of the existing institutional framework for this purpose as against creating new instrumentalities and more government overhead.

In the middle of the 1930s, when the government was pumping money into the mortgage market, the Treasury and the Home Owners' Loan Corporation invested funds directly in the accounts of our institutions. This money was, of course, all invested in home mortgages and subsequently repaid by our institutions. Savings and loan associations are specialists in the making of home mortgage loans, and we can be trusted to handle any government funds that might be made available to the Federal Home Loan Bank System as a result of action by the Congress to appropriate funds for home mortgage loans of a certain type, interest rate, etc. Our institutions are locked in to the mortgage market, and whatever funds we get certainly will be invested in home loans.

Assuming Congress agrees that there is a real national emergency in housing, there could be direct appropriations to be used by the Federal Home Loan Bank System in subsidizing advances to savings and loan associations. This could be under an arrangement that would assure that the funds were promptly reloaned to low and moderate income families at reasonable interest rates.

(4) Another way to help the home mortgage market would be to take action which would result in savings and loan associations getting a larger share of the savings dollar.

A. The most obvious way to help savings and loans attract a much larger share of funds would be to provide a tax exemption for the interest or dividends paid by savings and loan associations to savers along the lines of the bill introduced by Congressman Hanna. This proposal would exempt from federal income tax the interest paid on savings deposits up to $750 by institutions which invest in home mortgages. If there is one single thing Congress could do to stimulate the flow of funds into our institutions and hence into home mortgages, it would be to provide that kind of incentive to savers to place their funds with us. This proposal was developed initially by the National Association of Home Builders and, of course, we support it very strongly.

B. The simplest and most direct way to help the savings flow of institutions is to stop the devastating competition from small denomination Treasury securities

and government obligations. This can be done administratively and I can assure you that we have dutifully and repeatedly taken our plea to the Treasury Depariment during the past year. The drain on our savings is apparent from first hand experience at the tellers window, from the reports of dealers of securities, and from the tremendous increase in traffic at Federal Reserve offices. Actually, no one disputes the fact that hundreds of millions of dollars of small and medium savings that would normally be in savings and loan associations has found its way into Treasury obligations. But, we are told that there would be severe congressional criticism of any action to suspend the sale of small denomination issues. We think this is exaggerated and that a majority of Congress would give a higher priority to the problem of combating disintermediation, the mortgage shortage, and the housing crisis than they would to the laudable but less essential question of guaranteeing small savers the highest possible return.

C. Another possibility would be for Congress to make certain that the savings rate ceilings set by federal agencies provide a larger spread between the rates the banks can pay and the rate our institutions can pay. Frankly, a half point spread on passbook accounts and a quarter point spread on certificate accounts is not enough for savers to prefer our institutions in comparison to the commercial banks. Studies made at the University of Pennsylvania in connection with the Friend Report suggest that 50 basis points or a one-half point differential is needed to offset the advantage the banks have through their full service banking operation. The banks can offer the savers checking accounts, consumer loans, mortgage loans and just about anything else, including travel and computer service! So far as competition for savings is concerned, the most important of these is the family checking account. The ceilings of banks, of course, would have to be low enough so we could live under ceilings one-half point or threefourths point higher than the ceilings for the banks. It doesn't do much good for the mortgage market to authorize us to pay, for example 7% when our assets are yielding only 6.3%. Savings money obtained at the rate 5% to 6% rates we are now authorized to pay already is costing the home borrower more than he really should have to pay.

In connection with rate control, there is an urgent need to prevent the chaotic situations which occurred on January 20 and 21 when higher rates were authorized, effective immediately. The new rates were released through all the public media and savers were well aware of the higher rates. However, the institutions themselves lacked detailed information and had a totally inadequate opportunity to adopt new policies, new savings instruments, etc. It was as confusing as if the Post Office were to announce right now that, effective at noon today, all postage rates would be changed.

We suggest that the rate control law be amended to require a 15-day notice period for any future changes so as to provide a more orderly transition.

D. There are some other things Congress can do to improve our competitive position and, when added together, could help make ours a more viable business and more competitive for savings, particularly with the commercial banks.

1. The most obvious improvement would be to permit our institutions a limited type checking account. Chairman Patman for years has suggested this for our institutions and the credit unions. Today, it is obvious that our business needs more competitive tools. The suggestion that we should be able to offer a limited checking account was the most important single recommendation made by Dr. Friend in his study of the savings and loan business for the Federal Home Loan Bank Board. We have drafted a bill to accomplish this which is very similar to H.R. 29 by Chairman Patman, but would provide even greater assurance we would not be entering into the money creating business of the commercial banking system. Our draft provides that in addition to having a 100% liquidity reserve for checking account demand deposits, this type of service would be available only to individuals and to those organizations or firms that are in the real estate and mortgage business. We would never develop much in the way of new deposits with a checking account service, but we would be able to offset some of the advantages the commercial banking business now has over us in providing services to savings depositors.

2. We think our institutions ought to be able to act as trustees for the limited purpose of accepting retirement funds set aside by self-employed people under the Keogh Act. Keogh Act savings are today going into securities. This is ideal money for home mortgages, but today these funds are not staying in the communities and are not available for mortgage loans. We think our institutions can and should be able to accept this kind of money.