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Chairman PATMAN. Thank you, Mr. Mayor. When Mr. Jones finishes, members of the committee would like to interrogate you three gentlemen.

Mr. Jones, you are recognized. You may proceed in your own way. STATEMENT OF OLIVER H. JONES, EXECUTIVE VICE PRESIDENT, MORTGAGE BANKERS ASSOCIATION OF AMERICA

Mr. JONES. Thank you, Mr. Chairman.

Mr. Chairman, members of the committee, my name is Oliver Jones. I am executive vice president of the Mortgage Bankers Association. I will skip some of the descriptive information in the text that describes mortgage banking. I do want to make one specific point.

Mortgage Bankers serve as a transmission belt, moving savings from capital surplus areas to capital deficit areas by originating loans in their local areas and selling them to investors. This chracteristic of mortgage banking is particularly relevant to today's discussion because it means that mortgage bankers do not benefit from high interest rates. They prosper when interest rates are steady and private financial institutions are actively investing in mortgages.

As I read the bills before this committee, it seems to me they tackle three basic and important problems.

1. "Unconscionably" high interest rates.

2. Inability to finance the demand for housing, and therefore a depressed homebuilding industry.

3. Inability to provide adequate housing for the Nation's poor families.

None of these problems will be resolved until confidence is restored in the future value of the dollar. The recorded history of the relationship between interest rates and the expectation of inflation is long and clear.

Every time in recorded history when the sovereign clipped the coin of the realm to obtain the money needed to finance a war, the result has been-inflation, expectation of further inflation, and higher interest rates. When we tried to finance the Vietnam war without increasing taxes or reducing other Federal expenditures, the Federal budget was pushed into a $25-billion deficit and the Federal Reserve was forced to create money to finance that deficit-we clipped the coin of the realm, encouraged the expectation of inflation and forced interest rates to historic high levels.

As an economic force, then, the expectation of inflation is and has been pervasive since the fall of 1965-which also marks the beginning of the deterioration of the home mortgage market to its present low level. It has encouraged business to spend for plant and equipment at an accelerated rate, discounting higher interest rates by the tax rate and the anticipated rate of inflation. It has driven savers from thrift institutions, limited in the rate of interest they may pay savers to a level that barely exceeded the loss through inflation, to the securities markets. It has driven investors from home mortgages to higheryielding investments, including Treasury issues; investments which, unlike mortgages, were free to pay the interest rate required to attract savings.

In this environment, the subsidies implicit in the bills before us would widen the spread between the fixed mortgage rates recommended and the cost of borrowing to the new FNMA-like corporations and, thereby, increase the cost of the subsidy. They would add to the cost of credit of all kinds and of goods of all kinds. This statement would be true of any subsidy for any purpose that reduces or removes the projected budget surplus, because no offsetting reductions in Federal expenditures were made in other areas. Even in this great Nation, there is a limit to our wealth and our capacity to produce.

The prevailing psychology of expectations is not the shortrun condition of earlier postwar credit cycles. Corporate investors have become accustomed to some degree of inflation for a quarter of a century. Despite occasional periods of steady prices, they find that the prices have increased significantly over the average life of any longterm investment. A mere abatement of the present degree of inflation will not, therefore, ameliorate their deep-rooted expectation that over the longer life of their investment in plant and equipment the value of the investment will increase, or it will be more costly to build a few years from now. Similarly, savers will not be willing to lend their funds for long-terms obtaining a premium for anticipated depreciation in the value of their savings.

This is a serious problem that can no longer be evaded. Neither the rich nor the poor can escape this most indiscriminate and cruel form of taxation. Neither the U.S. Treasury nor the man in the street_can escape the resulting increase in the cost of borrowing funds. As long as the expectation of inflation pervades the financial markets and the minds of individual spenders and savers, credit for housing. for all levels of government, and for corporations will be scarce relative to demand. Interest rates will remain high and the cost of subsidizing housing for the poor will become increasingly expensive-even for the Federal Government.

HOUSING FOR THOSE WHO CAN AFFORD TO BUY

We find ourselves in the present predicament as a result of serious errors in judgment on the part of the fiscal and monetary managers. Such errors of judgment will recur, whether the Federal Reserve maintains its present degree of independence or is made directly responsible to the administration. The likelihood of their recurrence will be greatly increased, if the existing balance of power is heavily tilted by granting the administration more power to influence Federal Reserve policy.

Even if the prevailing expectation of inflation is brought under control, human errors of judgment will undoubtedly recur in the future. What is indeed needed, therefore, is to find a way for home buyers, who have the means to enter the market on the basis of their own financial capacity, to compete more effectively for credit, particularly during periods of credit restraint. It is worth noting that this is the first credit cycle in the postwar years that administration authorities did not welcome a reduction in housing and mortgage lending as a means of restraining an overheated economy. But having noted this significant change in attitude, what can be done to strengthen the home buyer's ability to compete?

Much has already been done, or at least has been started. Congress set the stage for the creation of a private FNMA in the Housing and Urban Development Act of 1968. It is anticipated that this may be accomplished by May of this year. In the meantime, the shift of FNMA borrowings from the Treasury to private sources of funds made it possible for FNMA to provide massive support to the home mortgage market in 1969. Unfortunately, the time that FHMA made available to the fiscal and monetary managers to engineer a correction was not used very wisely. The demand for credit from all sources remains massive, inflation persists and the housing crisis deepens.

The 1968 act also promised a new tool to make the home buyer a more competitive borrower in the mortgage-backed security guaranteed by the Government National Mortgage Association (GNMA). Again, unfortunately, resistance within the administrative branch of the Government delayed the promulgation of regulations for use of a "passthrough" security until November 1969 and the fully marketable bond, so desperately needed, remains a mere promise. In fairness, it must be stated that the failure to correct the faults plagueing the economy provides good reason to delay issuance of regulations for the full-bond instrument. Moreover, the "passthrough" security is now operable and a number of mortgage bankers are already negotiating with GNMA to market the first issues. We will be working closely with GNMA to educate issuers and investors and to encourage the use and development of this new market instrument.

The Mortgage Bankers Association of America has been and is a strong supporter of home mortgage investment by pension funds and over the years has contributed more to the achievement of this goal than any other single group. We strongly believe that an end, not only to inflation but the continuous nature of inflation in this country would do more to bring pension funds into direct mortgage investment than any other thing, particularly a mandatory tax disincentive. Here again, the GNMA guaranteed securities will open many more doors than the proposed legislation in attracting pension funds to home mortgages. Surely this instrument is an infinitely better way to attract savings from pension funds and smaller financial institutions that cannot afford the cost of maintaining a mortgage department than the clear threat implicit in the legislation before us.

A study has been initiated to create a uniform land transaction code, through private financing, which should vastly improve the mortgage instrument itself and encourage more widespread investment directly in mortgages.

These are meaningful changes. Congress should encourage their implementation rather than develop new vehicles that can only weaken their chances of success by further dividing the market.

These changes still leave the question of high interest rates and credit scarcity during periods of credit restraint. During such periods, credit would be less scarce for housing, if all of these changes were fully operative. Housing would share in the reduced supply of credit rather than being cut off from the supply of credit.. An improved capacity to compete would keep funds in the mortgage market and accelerate the period of correction. Nevertheless, the resulting intensification of competition for funds would drive rates up.

The answer is clear enough. During periods of credit restraint or credit ease, borrowers, whether the Treasury, a new Federal agency, or the home buyer, must pay for the cost of credit on a competitive basis or no one will save. The basic economic as well as political questions are: Should the economically capable home buyer be subsidized by taxpayers in a futile attempt to provide him with a lower interest rate? Should these resources be used to subsidize the lowincome family that cannot finance needed housing at any interest rate? Surely, the massive problem of housing the less affluent and the perilous social problem of the widening gap between the poor and the affluent must elicit an answer that demands a full test of the 1968 legislation and husbands Federal resources to house the less affluent.

HOUSING THOSE WHO CANNOT AFFORD TO BUY

Whether credit is tight or easy, many American families can be adequately housed only through funds provided by Government through direct or indirect subsidy. Here too, Congress has already promised great strides in the 1968 legislation. Highly innovative progratus designed to obtain private participation through national housing partnerships and to subsidize the difference between the interest rate savers demand in a competitive market and the rate borrowers can afford were established in new programs under sections 235 and 236.

Again, unfortunately, Congress provided an inadequate appropriation in fiscal 1969 and delayed the 1970 appropriation until December of 1969. Even so, the bulk of the funds appropriated have been committed or are already in the pipeline. Mortgage bankers with commitments for constructoin and permanent financing of section 236 housing, already arranged with private financial institutions, are now being told that no funds are available for the interest subsidy.

Both the housing partnerships and the 235-236 programs should be given a fair test to determine their ability to provide housing for low-income families. Appropriations for section 235 and 236 programs should be reconsidered in the supplemental budget for this fiscal year. The latter program, at long last underway, will be strengthened by the new tandem program which is virtually worked out between GNMA and FNMA with the encouragement of Secretary Romney. If the funds cannot be found to make these programs work, where will the funds come from to finance subsidies under the bills now before this committee?

A top priority to provide housing for low-income families that is made effective by reducing other demands on Federal resources is necessary but not a sufficient condition to get the job done. The three F's of financing low-income housing are funds, forebearance and, above all, flexibility. Assuming that funds are provided, the very nature of the family's income demands an unusual degree of forebearance when income falters and a degree of flexibility that is rare in administering Federal programs.

In the past, the tendency has been to apply standards for housing, credit worthiness, and regularity of monthly payments that are similar to those applied to more affluent buyers. Programs become strangled by red tape, administrative rigidities, and costly delays.

The home buyer is expected to measure up to budget management standards that he has never before achieved. New housing takes precedence over rehabilitation or livable, used housing. Maintenance is expected, but the family income is inadequate to meet monthly payments and also maintain the property. None of these faults would be corrected by merely providing credit, not even at below market in

terest rates.

The following illustration is merely one preliminary suggestion for further study and analysis. There may be many more that can be designed to overcome some of the problems of housing low-income families. This is intended only to be illustrative; it is not complete and it is not an official MBA recommendation.

First, the entire problem must be clearly separated from ongoing FHA programs and concepts.

Create a Federal corporation which would be a subsidiary of GNMA that purchases home mortgages originated by FHA-approved mortgagees for low-income families.

Eligible mortgagors would be low-income families who have a record for reasonably regular rental payments, regardless of the

amount.

Eligible properties would have inside plumbing, adequate space for family, habitable, reasonably well-maintained, meets the standards of the community, whether equal to or less than present FHA standards, and be new or existing housing.

Interest rate should be as low as possible while providing incentive for investors, within the framework of the section 235-236 programs. Term of the loan should be open, to permit extended periods of forbearance, use of funds periodically for maintenance, adjustment of monthly payment from a level that equals current rental payments to higher levels as income increases. Adjustments should maintain same ratio of payments to income as the initial payment. The initial payment should provide for some reduction in principal, however moderate.

Downpayment should be minimum and varied according to family financial condition.

SOURCE OF FUNDS

The initial capital from Treasury to be replaced with certificates of ownership interest in pools of mortgages. Certificates sold to individuals and financial as well as nonfinancial institutions in $100 denominations. Purchases treated as charitable contributions for tax purposes. No dividends or interest flowing to ownership interest until GNMA determines that the pool is on a workable basis or the pool is fully paid out. This obviously would require an extensive sales campaign. The initial loss in Treasury revenue would be less than direct Treasury investment which is not replaced except by payment of the mortgage. The long term involved before the pool would be paid out suggests that the certificates should also be free of inheritance taxes. This suggests no need for FHA insurance or a Federal guarantee. Servicing. The originating mortgagee would service the mortgage for GNMA and would manage the property for 0.5 percent of the outstanding balance of the loan or a flat monthly payment negotiated with GNMA.

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