1966-69

rate of about 1,500,000 units per year, which in those days was a pretty good rate. (As a matter of fact, that rate, while low by today's housing needs, would look pretty good right now in comparison with the current home building rate.) This was essentially a non-inflationary period. The GNP ranged from $384 billion to $419 billion. Interest rates on Treasury bills averaged 1.8%, AAA corporate bonds were yielding 3.15%, FHA loans were written to yield 4.6 to 4.8%, Regulation Q ceilings were 22% and savings and loan associations were paying generally 3% to 3%.

Note that the flow of funds into various types of debt today are almost three times that of the four-year period of the 1950s. The shortage of credit for housing today is not due so much to a shortage of total credit (although there is a shortage of capital in relation to total demand) as it is to the fact that housing is getting a much smaller share of the total. Home mortgages in the last four years have received only 18.8% of the total credit compared to about twice that share in the four-year period of the 1950s. Note how much more is going into multi-family, commercial and farm mortgages than in the 1950s. Except for farm loans, these are mortgages where equity kickers or piece-of-the-action financing are possible. The Federal Government has been a much more significant user of funds than in the 1950s along with the corporate and foreign bond market. This, by the way, is practically all domestic bonds and not foreign, but the data are classified in that manner.

One obvious reason for the substantially reduced flow of funds into home mortgages is that savings and loan associations have not been attracting the high share of the savings dollar we once attracted. Chart 3 shows net savings gains in our institutions, and we also show the GNP each year. We are getting less money from a much bigger economy. The two basic reasons for the reduced flows into savings associations are: (1) The American people are not placing their savings in financial institutions as they once did. Savings have been going into mutual funds, pension plans and, in recent years, of course, into securitiesmostly government securities. The Federal Treasury (and the various Federal agencies) are the biggest competitors we have today. (2) Commercial banks have been much more aggressive and very successful competitors for savings. While we once paid a full percentage point more than commercial banks paid for savings, we now may pay only one-half point more on passbook accounts and one-fourth point more on certificates.

Because of the growing promotion of certificate accounts by both banks and our institutions, we regard our effective rate advantage as a quarter of one percent. The "advantage" cut from one full percentage point which we had in the 1950s to the one-quarter point spread of recent years is a great difference, and basically accounts for the greatly reduced flows of savings to our associations. The present difference between our rates and those paid by the commercial banks is not enough to offset the full service concept of the commercial banks, the difference between some 30,000 commercial bank offices and 9,500 saving and loan association offices, and the greater advertising power of the banks.

One of our problems, of course, is the difficulty in paying higher rates than we now pay even if the rate ceilings permitted. Chart 4 is reproduced from the Economic Report of the President transmitted to the Congress early this month. I have brought the chart up to date reflecting on it the effect of the most recent changes in the rate ceilings on our cost of money. As is clearly evident from this chart, savings and loan gross earnings have been rising very slowly even though mortgage interest rates have increased sharply in the last few years. We have a problem because of the very nature of the assets in which we invest and because we did the kind of a job that Congress wanted us to do in the years past.

SOURCE Federal Home Loan Bank Board, U.S. Department of Commerce

CHART 4

Mortgage Yields and Dividend Rate of Federal
Savings and Loan Associations

TOTAL INTEREST RECEIVED AS PERCENT OF AVERAGE MORTGAGE LOANS HELD. 2/TOTAL DIVIDENDS PAID AS PERCENT OF AVERAGE SAVINGS CAPITAL.

SOURCES: FEDERAL HOUSING ADMINISTRATION AND FEDERAL HOME LOAN BANK BOARD.

Reproduced from Economic Report of the President, February 1970

The nature of our earnings problem-and the reason we cannot afford to pay any higher rates for savings-is illustrated in the following table, which shows generally the years in which our institutions made the $140 billion in home loans now on our books and the average interest rate in each of these earlier years. TABLE 1.-YEAR OF ACQUISITION AND CONTRACT RATE OF THE $140,200,000,000 IN MORTGAGE LOANS HELD BY SAVINGS ASSOCIATIONS AT YEAREND, 1969