the middle-income area can be solved much more inexpensively for the Treasury through private rather than public financing.

In the low-income housing area, present activity levels are less than 30 percent of the average goal of 600,000 units per year to be built or rehabilitated. The most direct attack on this problem is contained in the Federal budget for 1970 which contains $1.5 billion for aid to such housing. Principal reliance will be placed on interest subsidies that reduce the cost of renting or buying a home, and upon public housing in urban and rural areas. The banking industry is already participating and will participate much more fully in these programs. In view of the commitments planned in the President's 1971 budget to meet the housing goals in this area, two of the bills before this committee, H.R. 14639 and H.R. 15402, which are designed to do almost the same thing, are likely to be unnecessary. Existing legislation is in all probability going to produce the desired results.

As a part of the attack on our inner-city problems, our association has organized an urban affairs committee made up of prominent bankers sincerely interested in minority and urban matters. One of the basic aims of the committee is to combat urban blight through the flow of more adequate credit for innercity housing rehabilitation. At the moment we are in the process of requesting major banks to quantify on a local basis their obligations and aims in this area.

Turning now to specific figures on the role of commercial banks in housing finance, their participation is large and growing, not only in dollar magnitude but also in relation to other mortgage lenders.

During the past 5 years, for example, commercial bank residential lending has increased by 55 percent. This compares with a 38-percent increase for savings and loans, 33 percent for mutual savings banks, and 18 percent for the life insurance industries.

Commercial banks, now holding almost $45 billion in residential mortgages, have continued to gain relatively on all other mortgage lenders. If trust fund holdings are included, banks would be the second largest class of lender in the residential field.

The banking contribution to housing finance has been by no means confined just to mortgage lending for housing acquisition. The usual data do not include the $3 billion of loans for modernization and repair; $4 billion or more in holdings of securities issued by Federal agencies concerned with housing; the more than $5 billion in loans to financial institutions specializing in housing finance, and the bulk of the $60 billion in local, city, county and local subdivision obligations, much of which is used to develop the necessary support facilities for housing such as streets, water and sewer facilities. In other words, the total financing package in which banking is engaged is related in many ways, both directly and indirectly, to the number of new houses that are built. In addition, we can count $3.5 billion in loans to the construction industry, to say nothing of the lending that takes place to the manufacturers and suppliers of construction equipment and materials.

Much of this large volume of lending and investment can only be estimated. But the most educated guess we can make would bring the total to something like $120 billion, which would indicate, I think, most emphatically the very great stake which banks have in the housing industry as a whole, and would present a record which I think

would compare very favorably with the credit extended by any other class of lender.

During the past year banks, more than any other institutional class, bore the brunt of the tightest money period in modern times. While the deposits in savings and loan associations and mutual savings banks grew in 1969 by $4 billion and $3 billion respectively, the savings and time deposits of commercial banks actually declined by $11 billion. Despite this huge outflow of funds, commercial banks expanded their housing loans by $3.25 billion, an increase of 8 percent. In comparison, the residential mortgage holdings of savings and loan associations increased by 7 percent, and of that percentage a substantial part represented advances from the Federal Home Loan Banks, a good part of which holdings are being carried by the banking industry, and $1.3 billion represented by reductions in their liquidity requirements. Of the other two most important institutional lenders, the mutual savings banks increased their loans by 4 percent and the life insurance industry by 1 percent.

Much has also been made of the successive increases in the prime rate charged by commercial banks. Bankers, it is said, take quick advantage of a tight money situation. The simple truth is that banks are only the instruments and not the originators of governmental anti-inflation policy.

What is germane here is the record of commercial banks with regard to rates which they charge on housing. According to Federal Home Loan Bank Board's most recent data at the end of last year, commercial banks were charging an effective rate of 7.8 percent on new home loans, including fees and other charges. Comparable figures for other institutional lenders were 8.3 percent for the savings and loan industry, 8.6 percent for the life insurance industry, 8.5 percent for mortgage companies, and 7.8 percent for mutual savings banks. The average rate for all lenders was 8.25 percent.

The story does not end there. From December 1968 to December 1969, while commercial banks were losing time and savings deposits in record volume, their effective rates on new home mortgages were increased an average of only three-fourths of 1 percent. At the same time rates charged by others were increasing more than 1 percent.

In conclusion, may I say we are quite proud of the record of the commercial banking industry in the housing field. But we can do better and must do better and we are the first to admit that. And when the fetters of inflation are eased, we will have a far greater opportunity to expand our services to homebuilders and home buyers. In the meantime, we are organizing a task force whose objective is an immediate and substantial flow of private funds into the mortgage market. Thank you, Madam Chairman.

Mrs. SULLIVAN. Thank you, Mr. Rogers, for your condensation of the testimony.

(Mr. Rogers' prepared statement and attachments follow:)

PREPARED STATEMENT OF NAT S. ROGERS ON BEHALF OF THE AMERICAN BANKERS

ASSOCIATION

Mr. Chairman and members of the committee, I am Nat S. Rogers, president of the First City National Bank of Houston, Tex., and president of The American Bankers Association. I appreciate this opportunity to offer your committee the full cooperation of the commercial banking industry in solving our pressing

housing problems. We know there are problems-serious problems. The bills before this committee and the many other bills before the Congress clearly demonstrate the extent of the search for effective solutions.

As bankers we are greatly concerned with this problem, and our concern includes not only the financing of housing for the general commercial market, but also government assisted housing for low- and moderate-income families.

Adequate housing at a price people can afford has moved from the realm of political oratory to that of formal and precise national objectives. In fact, 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 and Urban Development Act of 1968 said this goal could be met by constructing or rehabilitating 26 million houses in this decade, of which 6 million would be for low- and moderate-income families.

The housing situation we find ourselves in represents a complex of many problems: From the inner-city to the limits of suburbia, from the competition for resources and disintermediation to the upward pressures on construction costs. Not the least of these problems is the matter of the alarmingly downward trend of housing starts in the face of our increasing population.

We cannot take much comfort from the fact that 1969 saw a total of 1.9 million housing units started or produced. Of this total 400,000 were mobile homes. Private conventional housing in December fell to 1.2 million units, down more than 33 percent from the January pace and the trend is still headed downward. Even if mobile units are included the goal requires an increase of more than 50 percent above the current rate of starts.

I want to assure this committee that The American Bankers Association supports the national housing goal and that the commercial banks of this country pledge to do their part to achieve it. Many commercial banks have already demonstrated their awareness of the need and of the goal by allocating progressively larger shares of their resources to housing. I will give you some figures on this at a later point in my testimony. First let me outline a few facets of the problem as we see them.

We all know 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 restraints rather than by fiscal responsibility. This lopsided reliance on monetary stringency has created the present high levels of interest rates. It is an environment in which demands for mortgage credit cannot compete successfully, in which the word "disintermediation" has become all too familiar. High interest rates and the consequent "disintermediation" have taken their toll of the general commercial housing market where the national target has been set at 2.0 million units a year. To be sure, the credit squeeze has greatly compounded the problem-a shrinking supply of housing in the face of a growing need. Indeed, the demographic problem of rapidly increasing family formation, arising from the post World War II growth in birth-rates, is upon us in full swing. The need for additional housing is immediate.

But we also have problems stemmng from the pressure of socially desirable projects on available credit supplies. The most publicized of these are air and water pollution, but no less pressing are the demands for student loans, for financing community facilities, schools, hospitals, mass transportation, and other urban and rural needs. As the President said in his Economic Report, "If we fail to tailor our demands consciously to resources available, the likely consequences would be both misdirection of resources and inflation." And more of the latter would only aggravate our housing problems.

In arriving at solutions, therefore, our first and foremost task is to check inflation convincingly. A number of indicators now point to a softening in the economy which we hope will bring a reduced rate of price inflation. However, these indicators have yet to be translated into the easing of monetary policy and substantially lower rates of interest. This can come about only if a system of priorities geared to the possible, as the President emphasized, is strictly observed.

Although credible inflation control will go far toward providing the environment in which the goal of 2.0 million housing units usually for the general market might be met, there will always be competing demands for resources and credit. In the face of these demands a high order of priority for housing must be recognized. The need is here now-we cannot wait. Moreover, even

a more favorable atmosphere of lower interest rates and subsiding disintermediation may not produce the required volume of home building activity. More positive measures are called for and The American Bankers Association intends to meet the challenge.

Accordingly, we are presently organizing a task force comprised of bankers with great expertise in the realty investment and mortgage field. These men expect to come up with constructive and innovative ideas for increasing the supply of mortgage funds. In this endeavor they will meet with and seek the ideas of other lending institutions: savings and loan associations, mortgage companies, mutual savings banks, and life insurance companies. They will also cooperate with the National Association of Home Builders, the National Association of Real Estate Boards and other groups to solve the many interrelated problems of making more credit turn brick and steel and lumber, and all of the other countless products required, into dwellings at prices and rates today's families can afford.

We will develop affirmative plans and programs. If this means asking banks to commit scarce funds in the present tight money situation, that will be done. And, although such action will be voluntary, we expect substantial results.

The importance and seriousness of the housing problem might well require extraordinary measures. This should certainly include 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 multi-family housing-to stimulate construction for middle- and lowerincome families. However, the Administration's proposed 5 percent deduction would not be nearly enough to reduce mortgage rates on middle- and lowerincome housing to reasonable levels on a competitive basis with the after-tax return on alternative investments. By way of illustration, a 61⁄2 percent mortgage rate with an allowable deduction of 25 percent for tax purposes would be equivalent to a nondeductible 8% percent return at a 50 percent marginal rate of tax. Competition would quickly and effectively reduce the rates on mortgages eligible for deduction. In so doing, private enterprise would have a suitable incentive to demonstrate its ingenuity and capability.

Utilization of such a tax incentive is a highly efficient method of directing mortgage fund flows at a fraction of the cost to the Treasury compared to direct subsidy expenditures. In fact, at the current rate of interest on Treasury borrowing, plus administrative costs and losses on defaults, the annual cost of the $10 billion program under H.R. 13694 would be about $240 million. Instead, this sum could be used as a tax incentive in the form of a 25 percent deduction from the interest earned on privately financed 61⁄2 percent mortgages. In that case, $30 billion in qualifying mortgages would result in the same $240 million annual cost to the Treasury. This is three times as much home financing as the proposed bill would provide. Equally important is that through the use of private financing the rate charged home owners would have build-in flexibility to move downward if prevailing rates on nonqualifying mortgages decline. In contrast, mortgages under H.R. 13694 would remain rigidly at 61⁄2 percent until changed by legislation or by administrative determination.

Motivation might also take the form of reducing reserve requirements of banks, or further reducing liquidity requirements of other depository institutions against savings invested in residential mortgages. This could easily unfreeze a substantial sum for home mortgages use.

Another incentive which might be used to make the housing market more attractive to savers would be to permit a deduction from interest subject to tax 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 taxpayer.

We also urge the adoption of other suggestions providing for a fuller utilization of existing resources. In particular, I refer to past recommendations of the American Bankers Association relating to a secondary market for conventional (other than FHA or VA) mortgages and increased mortgage lending authority for national banks.

The association has been recommending for a number of years that FNMA be empowered to establish a secondary market for conventional mortgages in addition to the FHA and VA loans now handled. This would introduce sorely

needed flexibility and mobility to the mortgage market generally, permitting more efficient use of available funds in a much larger sector of the market than is presently accommodated by FNMA.

Also recommended are amendments to section 24 of the Federal Reserve Act governing real estate loans of national banks. The more important of these recommendations provide for authority to increase the maximum terms of construction loans from three years to five years, and terms of final mortgages from 25 years to 30 years. Also authorized would be an increase in the maximum loan to value ratio on these final mortgages from 80 percent to 90 percent. (Appended to this prepared statement is a description of recommended changes to section 24.)

It might be mentioned that some of these changes are similar to those included in H.R. 15091, as reported by your committee but omitted in the conference. All of these recommendations would improve the existing private market for residential mortgages and would provide more money for housing.

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, non-penalty discount rate. This would add a certain degree of liquidity to mortgages which they do not now have, and would thus encourage mortgage holdings by bank lenders. We recommend that interim financing of construction also be included in this list of eligible paper.

We believe, therefore, that private initiative and private credit should be tried before adopting another more expensive and less efficient system of direct subsidies, as embodied in H.R. 13694. We all agree that the purpose of that bill is laudable, particularly because it applies to medium-income housing, which probably needs the most encouragement in the general market area. But we are firmly convinced that, given the needed motivation, the problems in the middle-income area can be solved much more inexpensively for the Treasury through private rather than with public financing.

In another direction, the techniques of mass production should be applied to housing on a much wider scale than has been tried before. We endorse HUD's "Operation Breakthrough." Rising labor, material and land costs are pricing conventional housing out of the reach of prospective buyers. Factory built housing may be the key to the future. Although this is being increasingly realized, lenders have not always been in the forefront of those recognizing the need for such methods. To this end we must enlist the cooperation of the construction unions since lower-cost, medium-income housing is in their interest too. Archaic building codes and zoning laws which might inhibit modern methods should be updated in recognition of the acute housing problems. Lastly, we should insist that the new techniques also be used to create esthetic design in order to dispel the vision of dreary stereotypes called to mind when mass produced housing is mentioned.

In the area of low-income housing, present activity levels are less than 30 percent of the average goal of $600,000 units per year to be built or rehabilitated. The blight of decaying, unhealthy, substandard housing must be arrested. Slums are as much a part of environmental pollution in our cities and towns as smog. and in many respects much more dangerous.

The most direct attack on this problem is contained in the Federal budget for 1971 which includes $12 billion for aid to low- and moderate-income housing to meet the national housing goal. As stated in the Budget in Brief: "The 1971 budget authorizes commitments to provide almost 600,000 units of assisted housing. Principal reliance will be placed upon interest subsidies that reduce the cost of renting or buying a home, and upon public housing in urban and rural areas." At a construction cost of as little as $10,000 each, 600,000 units would require at least $6 billion. This means that private resources will have to do most of the job through direct lending on new or rehabilitated property and through purchases of local housing assistance bonds. The banking industry will participate fully in these programs.

In view of the commitments planned in the President's 1971 budget to meet the housing goals in this area, two of the bills before this committee, H.R. 14693 and H.R. 15402, designed to do the same thing, are likely to be unnecessary.

In fact, some provisions of the bills before the committee would create serious equity and legal problems. For example, H.R. 15402 requires the mandatory allocation of a portion of pension funds to mortgages on low-income housing. We firmly believe that interference with the function of trustees in discharging their responsibilities to beneficiaries would vitiate and erode the whole process of