Senator PERCY. First, I would like to observe how pleased I am that now after experience of more than a year and a half ABA has concluded that the subsidized interest proposals which originated in this committee are basically sound. I must say we had a little concern at the time. It is a new field, a new venture, but I believe that this stamp of approval by a very fiscally sound, progressive-minded group of businessmen and bankers is very helpful, indeed.

Mr. ROBERTSON. Thank you

Senator PERCY. I would like to ask you a question about proposals, that would require commercial banks to invest a certain amount of their deposits in the housing field. I have resisted this proposal, feeling that it does not take into account the fact that we are holding bankers responsible for sound investments, for insuring that depositors can get their money back.

Would you care to comment on a proposal that would require, say, 35 percent of all your deposits being invested in housing, a proposal I have heard recently.

Mr. ROBERTSON. I think this could create a lot of problems. For one thing, there are areas which need housing much more than other areas. And if you are saying to the bank in an area where they have adequate housing, "You must have the 35-percent mortgage portfolio," this could create a real problem. The need for different types of loans varies by area.

We attempted to impress upon the member banks of the American Bankers Association the responsibility for supporting housing in their area to the extent that it is needed and even asked them during our last appeal this spring to put extra emphasis on housing. And I think the response has been great.

Senator PERCY. Mr. Robertson, at the bottom part of the same paragraph on page 5 you indicate that the subsidized market rate program results in more mortgage credit for each dollar spent by the Government than the direct loan program. This is certainly true. Does ABA also support the appropriation of funds that this committee has recommended for counseling, assistance and help to homeowners in order to give them more experience in budgeting, to upgrade their skills, to increase their income, so that we can wean them away from the subsidy in the 2-year review that we make, and then make that money available to other homeowners who need rehabilitation along with rehabilitated housing?

Mr. ROBERTSON. I do not know that we have ever made a statement directly on that, but I am sure that ABA would support this concept entirely.

Senator PERCY. Is this not what, in fact, bankers want to do? They want to help.

Mr. ROBERTSON. That is right.

Senator PERCY. They want to help the people who are making loans from them to be fiscally solvent and to get into a position so they can steadily repay loans, and in this case, to get away from a very high interest subsidy.

Suppose we are subsidizing a homeowner to 1 percent. If we can just increase his ability to pay to 3 or 4 percent, this would make that money available for someone else under the appropriation.

Mr. ROBERTSON. It sure does.

Senator PERCY. That is why I am particularly anxious to see the National Home Ownership Foundation established. The administration has recommended it, the committee has recommended it. we have done everything except get the funding from the House, and I think this modest investment would improve the capacity of the homeowner to pay these loans and to reduce his subsidy.

Mr. ROBERTSON. I agree.

Senator PERCY. If I could skip to the conclusion which you have reached in your comments, and I quote, “The ABA generally supports enactment of S. 3639."

A number of specific problems, including the transition to a new Mortgage Credit Assistance Act, are being called to our attention during these hearings.

I want to be certain that I understand your position. In view of the general support that you speak of, do you translate that to mean that you think we should enact this bill this year?

Mr. ROBERTSON. I would say yes.

Mr. O'NEILL. We have indicated support of the bill. Now information was brought out today that some of the States may have a problem with regard to changing some of the laws.

I think this would have to be investigated a little further to determine how much of a problem there was here. I am not sure that we are prepared to say on this particular point today. However, with regard to State laws, my suggestion would be that an amendment be prepared that would extend to mortgage insured under the Mortgage Credit Assistance Act, the same treatment or privileges as to mortgage insured under the National Housing Act.

But we do feel that this legislation is desirable.

Senator PERCY. You would like to see legislation this year, though? Mr. O'NEILL. Yes.

Senator PERCY. If we can remedy some of the problems, that is? Mr. O'NEILL. That is my understanding of ABA position, sir. Senator PERCY. Finally, we have heard testimony that the median income eligibility includes too many people, and that includes too few because it fails to include many that need this assistance.

These are two conflicting statements. We have heard testimony that the income eligibility is equitable, and also that it is inequitable because it fails to relate income-to-housing cost in an area.

Would you care to comment on the median income standards in the light of these comments?

Mr. ROBERTSON. Have we made any statement on that?

Mr. O'NEILL. We make a statement along this line in our prepared. statement. With regard to the 80-percent figure we felt possibly that figure might be reduced in order to be sure that we are hitting the low-income people and not getting into the higher income-to be sure that we are not subsidizing people who can afford housing on their own. I think that is what we are very much interested in. Our interest is in helping people who need support.

Senator PERCY. We also have testimony that indicated that the whole principle of subsidy is going to create chaos because one family pays the full mortgage cost, while they see another family who may have a television set, not paying their full housing costs, and are receiving a subsidy.

They refer to these other families as lazy, et cetera.

Is it your feeling that this is anything other than a fringe problem, one that we always have?

Mr. ROBERTSON. That's what I was going to say.

Senator PERCY. For the most part do you feel the recipients of housing assistance are deserving of homeownership? And that homeownership rather than being a disincentive, provides needy families an opportunity that would be a stabilizing element in America-not an unsettling one?

Mr. ROBERTSON. I think this is absolutely true. I think your idea of providing counseling, and so forth, ties in well with the overall program. I think that in any programs there are going to be abuses and as you say there are abuses in just about everything.

There are abuses in this program. I don't know how you eliminate all of them but I think it has provided a lot of housing that wouldn't have been available otherwise.

Senator PERCY. Thank you, Mr. Robertson, I am sorry I have to leave.

The CHAIRMAN. All right, Mr. Robertson.

Mr. ROBERTSON. Attempting to make mortgages at rates below the market rate, for example, only curtails the flow of credit into mortgages, and direct loan programs would entail rather large sums of appropriated money.

The subsidized market rate program, presented in the administration bill, would result in more mortgage credit for each dollar spent by the Government than either a direct loan program or one providing for interest rates below that set in the market. For that reason, we support the enactment of this provision.

The bill would provide for uniform treatment of subsidized housing programs. Income limitations used in determining those eligible to participate in subsidized housing together with the definition of income would be standardized.

Under S. 3639 80 percent of eligible families would be required to have an income not exceeding 80 percent of median the income in the area while 20 percent could have an income which exceeded 80 percent of the median income so long as it did not exceed the median income.

Possibly the 80-percent figure should be reduced to prevent the more affluent from participating at the expense of those with very low income.

Hopefully, the new provision dealing with allocations of subsidies as between eligible participants will direct the benefits of the subsidized housing program toward households with the lowest incomes, and for this reason we support its enactment. We also support the enactment of provisions exempting FHA and VA mortgage loans from State usury laws. The association believes usury laws only impede the flow of credit into mortgages when market rates rise above such artificial limitations.

The American Bankers Association generally supports the enact ment of S. 3639, which we believe will help the Nation reach its housing goals.

This concludes our statement and we thank you very much.

(The full prepared statement of the American Bankers Associa tion follows:)

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Under title I of the bill. simplifatka and mowudance would inlade the following: All loans would be insured under the Morage Credit ASSISTADE Act, rather than under the National Hebing At as in the past, and in the pow the number of existing programs would be reduced from OWN The Amenan Bankers Association applauds this more towards englibation and consolidation in the expectation that it will eliminate wowdete and overlapping programs These programs have been too complicated and self-defeating, resulting in a loss of interest on the part of lenders who do not have the time or adequate staff to ferret out details.

Another provision in the bill would authorize HUD to insure "advances” of mortgage funds to cover cost of materials and buidling components for hous ing that are located off-site but which will ultimately become part of the mortgaged property. The American Bankers Association recommends passage of this provision because it will facilitate financing of prefabricated plant-assembled construction materials. Factory-built housing is a real necessity if we are going to provide adequate housing for low-income families. However, the financing of off-site components will have to be carefully supervised and regulated because it will involve problems more characteristic of consumer or business loans, rather than of home financing. Adequate supervision may prove to be expensive for both lenders and the FHA.

The Secretary of HUD would be granted permanent authority to establis maximum interest rates on FHA insured mortgages and to experiment with interest rates when no discounts or "points" are charged. The ABA prefer

recommendation of the Commission on Mortgage Interest Rates for a dual market system which was included in the Emergency Housing Act of 1970, as passed by the Senate but which was eliminated in conference. Under this proposal of the Commission lenders and borrowers would have the option of a mortgage either with no interest rate ceiling and permitting no discounts or one with a timely administered interest ceiling permitting fully disclosed discounts. We are in accord with a trial period for this dual market system. In some circumstances, allowing intermediaries to charge "points" may be a requirement for a fuller distribution system for mortgage funds, if such intermediaries have a strong preference for receiving a portion of their income in this form. It is hoped, however, that the availability of an alternative pricing arrangement would reduce the use of the discount system, which at times has appeared to inhibit home building.

Another provision in the bill requires all mortgages and loans insured under the proposed mortgage credit assistance act in Title I. to become contingent obligations of (1) the General Insurance Fund and (2) the Special Risk Insurance Fund. Unassisted programs would be insured under the actuarily sound General Insurance Fund, while assisted programs would be insured under the Special Risk Insurance Fund which is not intended to be supported by actuarily adequate premiums. The American Bankers Association believes it is a sound policy to differentiate between soft and hard loans and recommends passage of these insurance provisions. We are hopeful this will be a forerunner of a more realistic premium for FHA loans. The Association in the past has opposed commingling of the Mutual Insurance Fund and other insurance funds in the belief that this might deplete reserves available for mortgages insured under the basic housing program (FHA 203). The Mutual Insurance Fund will not be carried over into the new program and it will continue to service obligations insured under Section 203 of the National Housing Act. This should prove to be a satisfactory compromise.

The bill requires that the various statutory dollar limitations on maximum mortgage amounts be replaced by a uniform, flexible formula based upon development costs of a prototype unit in each housing market. This new formula would be applicable to all home and multi-family mortgages. The Secretary of HUD would determine the application of the formula within each housing market area. We support this provision because we believe that FHA programs should have flexibility to meet different needs and conditions. In this regard, the formula should be drafted so that flexibility is effective at the local level and variations in labor and land costs and other considerations can be taken into account.

The new subsidized home ownership and rental programs would be similar to FHA Section 235 and 236. We believe that the subsidized market interest rate approach is sound, and indeed is preferable to other programs which provide mortgages at rates of interest below those set in the market place or by direct loans. Attempting to make mortgages at rates below the market rate, for example, only curtails the flow of credit into mortgages, and direct loan programs would entail rather large sums of appropriated money. The subsidized market rate program, presented in the Administration bill, would result in more mortgage credit for each dollar spent by the government than either a direct loan program or one providing for interest rates below that set in the market. For that reason, we support the enactment of this provision.

The bill would provide for uniform treatment of subsidized housing programs. Income limitations used in determining those eligible to participate in subsidized housing together with the definition of income would be standardized. Income limitations would be based on median income in the area. This would make the program more equitable and tie eligibiilty to local needs and conditions.

Under S. 3639 eighty percent of eligible families would be required to have an income not exceeding eighty percent of median income in the area while 20 percent could have an income which exceeded eighty percent of the median income so long as it did not exceed the median income. Possibly the 80 percent figure should be reduced to prevent the more affluent from participating at the expense of those with very low income. Hopefully, the new provision dealing with allocations of subsidies as between eligible participants will direct the benefits of the subsidized housing program toward households with the lowest incomes, and for this reason we support its enactment. We also support enactment of provisions exempting FHA and VA mortgage loans from State usury laws. The Association believes usury laws only impede the flow of credit into mortgages hen market rates rise above such artificial limitations.