restraint in the Federal Government. And most of them lie with the Pentagon.

Mr. WYLIE. Thank you.

Mrs. SULLIVAN. Mr. Rees.

Mr. REES. Thank you. This is a question that could be addressed to all three witnesses. And if Mr. Wallace and Mr. Rogers don't have enough time, I wish they might comment on it later or give a short

memo.

In many countries the banking authorities require that banks direct a certain percentage of their reserves into designated priority areas. For example, in Argentina I think the reserve ratio is something like 45 percent, but a portion of that can be directed into whatever areas the Government figures is strategic.

What do you think we might be able to do with that in the United States. Right now for a city bank I think the reserve ratio runs around 17 percent. If we increased the reserve ratio to, say, 25 percent, and said that 25 percent of that reserve ratio can be directed into strategic areas such as housing and in that mandatory direction give those reserves automatic FDIC-type insurance, don't you think this could do a lot to alleviate the problem of the housing market?

Mr. STEVENSON. I think it is a very interesting and significant suggestion. It would have a redistributive effect on the allocation of capital by banking institutions. I don't have a final opinion on it. I certainly do think it deserves very, very careful consideration. It has a great deal of merit to it.

Mr. REES. I think this is in a way what you are doing with your State program. You are directing it into specific areas, where in the past banks with State deposits could use it for any purpose they

needed.

Mr. STEVENSON. I think that it is right. There is a corollary there. Mr. WALLACE. Congressman Rees, let me say that you would really get results if banks were told their investment in some type of housing Loans could be made from their reserves. At present, banks earn nothing on the amounts they hold in reserve, and they would jump at the opportunity to convert some of these nonearning assets into earning investments.

Mr. REES. In order to help Mr. Stevenson get to his next appointment, I will cease my questioning.

Mrs. SULLIVAN. Thank you.

Mrs. Heckler.

Mrs. HECKLER. Thank you, Madam Chairman. And Mr. Stevenson, I have enjoyed your statement very much. I have just one question, although there are many that come to mind, but one basic one that I would like to hear your judgment on.

You referred in one of your answers to the statutory rate ceiling in Illinois on interest rates. Of course, this is a problem that is cropping up all over the country in many States where statutory ceilings have been established.

Now, I wonder from your experience as a State treasurer whether or not you would consider a statutory rate ceiling effective or desirable under present economic conditions?

Mr. STEVENSON. Well, it is quite clear that our existing 6 percent limitations are unrealistic. The rate limitations will have to be raised.

They will be raised in the case of many of our governments including local subdivisions such as the school districts at a session of the general assembly in the State of Illinois in April. To what level it would then be necessary to raise rates, I would hesitate to say at this point. It depends a lot also on the institution that we are talking about. For instance, the Illinois Building Authority has a long track record, has a double A rating. It could sell bonds in the marketplace today at a much lower rate than many of our other agencies.

Mrs. HECKLER. I wonder about the desirability of a fixed rate.
Mr. STEVENSON. Eliminating it entirely?

Mrs. HECKLER. Does it work? Obviously, it is

Mr. STEVENSON. I think there should be a limitation, but I am not sure that there aren't alternatives to an inflexible rate. For instance, Mr. Wallace has, I know, many ideas on this on how it might be done. It might be geared to the prime rate or the rediscount rate, or in the case of-I am not sure of this, Bob, who I trust will follow with some comments-it could apply to borrowings by public institutions, longterm borrowings, but the thought has been advanced that in some cases statutes which establish high rates in times of tight money might also permit under certain conditions renegotiation of those rates at subsequent times. This with a view more to individual borrowings, the usury problems that we also face.

I am not sure that anybody has worked out a real alternative to the fixed rate which can be reviewed periodically by the legislature and in this case most of our agencies will have to be raised to at least 7 percent.

Mrs. HECKLER. Will have to be raised to 7 percent?

Mr. STEVENSON. At least.

Mrs. HECKLER. And you don't think there is a suitable alternative. mechanism for the State, for State financing. Is that your feeling? Mr. STEVENSON. I think there may be a mechanism but I don't know what it is at the moment.

Mrs. HECKLER. But you consider more flexibility

Mr. STEVENSON. We have to raise the rates to give our institutions more flexibility within which to borrow now. They can't borrow at all, many of them. I have had to help school districts lately in the State. They have a 6-percent rate and they haven't been able to sell their tax anticipation warrants in many cases without our investment program, again, helping the banks in turn to buy the tax anticipation

warrants.

Mrs. HECKLER. What would you think of the Federal Government establishing a fixed rate?

Mr. STEVENSON. I think it would be very hard to do partly because of the differences that do exist between the types of agencies issuing bonds, and also because of the differing rate structures across the country.

We have, for instance, quite a difference between downstate Illinois and upstate Illinois. I was talking with a friend of mine just yesterday who just bought a house. He had no trouble in one little community downstate getting his loan. And he got it at 7 percent. If he were living in Chicago, he would be lucky to get it at

Mr. WALLACE. He would be lucky to get it.

Mr. STEVENSON. He would be lucky to get it period.

Mrs. HECKLER. Thank you, Madam Chairman.

Mrs. SULLIVAN. Mr. Crane, I think you have a short question.

Mr. CRANE. Yes. Thank you, Madam Chairman. Mrs. Heckler took one of my questions. The other one is a very brief one. You mentioned how these State funds have been made available, and I must say I think it is a very imaginative and commendable program.

I was wondering in this connection of the two banks that you mentioned, are they Chicago city banks?

Mr. STEVENSON. There are the two urban division banks.

Mr. CRANE. Right.

Mr. STEVENSON. One is the Hyde Park Bank & Trust Co., which is on the south side of Chicago. The other bank is not in a very likely community. It is in Highland Park, but it is servicing the North Chicago-Waukegan area.

Mr. CRANE. One other quick question, and that is at the end of your testimony you indicated that you hoped the spirit of cooperation would prevail but if it didn't that coercive programs may be in order. I wonder if you have any guidelines to suggest as to what actions might be taken if that spirit of cooperation doesn't prevail.

Mr. STEVENSON. The proposal before this committee for a national development bank is one that I think deserves serious consideration. Also, the proposal for a homeowners loan corporation. I am not sure to what extent two such institutions are necessary. It might be possible to create a development bank which could provide credit for both housing and for all sorts of other public needs. Those are two examples which I think under present circumstances already deserve, and I am sure they will get, very serious consideration by this committee.

Mr. CRANE. Thank you.

Mrs. SULLIVAN. We thank you, Mr. Stevenson, and I am sorry we kept you this much overtime.

Mr. STEVENSON. I wish I could stay longer.

Mrs. SULLIVAN. You may be excused.

Mr. STEVENSON. Thank you very much.

Mrs. SULLIVAN. Mr. Rogers and Mr. Wallace, I am sorry that we have kept you this long. But if you will start, Mr. Rogers, with the summarizing of your statement and then Mr. Wallace will follow, and then we will begin the questioning.

STATEMENT OF NAT S. ROGERS, PRESIDENT, AMERICAN BANKERS

ASSOCIATION

Mr. ROGERS. Thank you very much, Madam Chairman.

I will make a summary, as you have requested, and make it as brief as possible. I would like the privilege of filing a longer statement which will contain more detailed facts respecting the views we have over this problem together with an appendix suggesting some specifics with respect to liberalizing the mortgage lending authority of national banks. And in view of Mr. Hanna's request, I would like also to submit an analysis of the net cost to the Government of direct appropriations for the purpose of financing additional housing as compared to a tax incentive approach which I would suggest.

Mrs. SULLIVAN. Fine. Without objection, your entire statement and your additional information will be made part of the record.

Mr. ROGERS. Thank you very much.

Housing is the only major industry for which a fairly specific goal has been mentioned by legislation. The Housing Act of 1949 declared a goal of "a decent home *** for every American family," and the Housing Act of 1968 said this goal could be met by constructing or rehabilitating 26 million housing units in this decade, of which 6 million would be for low- and moderate-income families.

We are presently producing housing at less than one-half the required rate; and if mobile homes are included, at two-thirds the required rate. Consequently, all of us must recognize that we have a big job to do. I want to assure this committee that the American Bankers Association supports this national housing goal, that commercial banks of this country intend to share a growing part in achieving it.

It is generally recognized that the root cause of the problem is inflation-one in which housing prices have increased faster than most other prices. The fight against this inflation has been waged almost entirely by monetary restraint rather than by fiscal responsibility. This has created an environment in which mortgage credit cannot compete successfully, and in which the word "disintermediation" has become all too familiar. The result is a shrinking supply of housing in the face of a growing need. Indeed, the secondary effects of the post World War II growth in birth rates is upon us in full swing, and it must be met.

Looking first at the general commercial market, credible inflation control will go far toward providing the environment in which the goal by private sources of 2 million housing units annually might be met, but there will always be competing demands for resources and credit for other socially desirable purposes. Even a more favorable atmosphere of lower interest rates and subsiding disintermediation may not produce the required volume of homebuilding. Positive measures are called for and we intend to assist as fully as possible to meet the challenge.

Consequently, we are presently organizing a task force of bankers with the greatest possible expertise in the fields of realty investment and mortgages. These men expect to come up with constructive, innovative ideas for increasing the supply of mortgage funds. They will meet with and seek the ideas of other segments of the housing industry who are interested in thins problem: savings and loan associations, mortgage companies, mutual savings banks, and life insurance companies. They will cooperate with the National Association of Homebuilders, the National Association of Real Estate Boards and hopefully other groups that may be involved. We think the problem is too big for any one single segment of the private economy, and is one that we all need to get together on to pool resources and ideas and see if we cannot come up with a broad program that will be responsive to the needs.

We will, therefore, develop, and in the short run we hope, affirmative plans and programs. If this means asking banks to commit scarce funds in the present tight money situation, this will be done. And, although such action of necessity must be voluntary, we believe that substantive results will occur.

The importance and seriousness of the housing problem may well require extraordinary measures. This should certainly include the consideration of tax incentives and other motivations to channel more funds into the housing market.

For example, in keeping with the administration's proposals on the tax reform bill, a certain portion of interest earned on residential mortgages might be made deductible from the tax base. Eligibility for deductions could be limited to mortgages on homes valued at less than $25,000—and a comparable amount per unit of multifamily housing. This would stimulate construction for middle and lower income families. The administration's proposed 5 percent deduction would not be nearly enough to reduce mortgage rates on middle and lower income housing to reasonable levels on a competitive basis with the after-tax return on alternative investments. To be truly effective it would require a deduction several times that percentage. For example, instead of increasing the net cost of direct lending by the Government at a subsidized rate as described in H.R. 13694, the same amount may be approached as a tax incentive in the form of a 25-percent allowable deduction from qualifying mortgage interest. This would provide at least three times as much privately financed middle income housing as would $10 billion of Government lending under the proposed bill.

Another tax incentive to make the housing market more attractive to savers would be a deduction from interest on savings in financial institutions. This might take the form of a percentage deduction or, alternatively, an exemption of say the first $50 or $100 of all such interest received by the taxpayers. This would be an inclination to see a flowback into the financial intermediaries of funds which could then be translated into housing loans.

We also urge a fuller utilization of existing resources. In particular, I refer to the past recommendation of our association calling for a secondary market for conventional mortgages.

For a number of years we have recommended that FNMA be empowered to establish a secondary market for conventional mortgages in addition to the FHA and VA loans. This would bring sorely needed flexibility to the mortgage market, permitting more efficient use of available funds in a much larger sector of the market than is presently accommodated by FNMA.

Appended to my prepared statement is a description of our recommended changes to section 24 of the National Housing Act. And I have already referred to that. Briefly, the most important of these recommendations provide for authority to increase the maximum terms of construction loans from three to five years, the terms of final mortgages from 25 years to 30 years, and to increase the maximum loan from an 80-percent to a 90-percent ratio.

We also strongly support the recommendation of the Federal Reserve Board to permit member banks to discount mortgages or any other sound asset at the regular, nonpenalty discount rate. This would add a certain degree of liquidity to mortgages that they do not now possess and would encourage mortgage holdings by bank lenders.

We believe, therefore, that private initiative and private credit should be tried before adopting another more expensive and less efficient system of direct subsidies based on public borrowing. We are firmly convinced that, given the needed motivation, the problems in