The significant thing is that because of the time lag, 54.9% of the mortgages we now hold are for less than 6% interest even though for several years our new loans have been considerably above that rate.

If the interest rate structure were such that we could attract savings to our institutions as we attracted savings in earlier years, much of today's housing problem would disappear. The following table shows the net savings gain for our institutions in each of the years since 1960.

1960

1961

1962

1963

1964

TABLE II.-Net Savings Gains at Savings and Loan Associations

If our institutions could gain the savings momentum we had in the first half of the decade of the 1960s, we would be gaining in savings approximately $14 to $15 billion annually instead of the $4 billion we gained in 1969. This difference of $10 billion in savings gain would finance 500,000 homes in one year (assuming an average loan of $20,000).

Not enough people may realize how significant the savings and loan business is to the mortgage market. Last year, which was a poor year for us, our institutions made $21.8 billion in home loans. (The source of the funds for last year's lending was as follows: $4 billion came from the net savings gain, $12 billion came from loan repayments, $4 billion from increase in advances from the Home Loan Bank System and $1.5 billion from a reduction of liquidity.) Congressional proposals suggest adding $2-, $3- or $4-billion to the mortgage market. In the years 1963, 1964 and 1965, our institutions loaned $2-billion a month.

Chart 5 shows the annual amount of loans made by our associations and also private housing starts year by year. The simplest way for Congress to help the home mortgage market and stimulate home building is to pass such laws, or to get the administration to take such steps, as to increase our lending capacity by 20% or 25%. Money that comes to savings and loan associations-in contrast to other institutions will be invested wholly in mortgages, primarily on single family homes.

I know that this committee is very interested in housing for low-income families and inner-city lending. The basic purpose of the Housing Act of 1968 was to stimulate a flow of funds into housing for low-income families. Programs authorized by this act are new, but our institutions have been getting involved with them. In order to help our people learn how to make these loans, the United States Savings and Loan League has scheduled three urban lending clinics in the next few weeks. The first will be held next Monday and Tuesday in Chicago. We will have clinics in March in Washington, D.C. and San Francisco. I have here an announcement of these clinics. When we started the program, it became very evident that in our office we really didn't know how many of our members had been participating in various types of low-income and inner-city loans. As a result, we sent questionnaires out to our members and the returns are just beginning to come in. To date, the figures look something like this: Approximately 65 associations have reported the following activity:

FHA 235 loans: Over $17 million in loans made on over 1,150 units. FHA 236 loans: Over $17.7 million in loans made on 1,276 living units. Section 221 (d) (3) construction loans: Approximately $55 million in loans made which increased the living unit supply by about 3,600 units.

Sections 221(h) and 235 (j) rehabilitation loans: $1,400,000 in loans on 125 units.

Turnkey construction loans: Over $27.5 million in loan funds on 1,433 new living units.

Section 23: Almost $19.5 million in loan funds on over 2,000 units. In addition, we know of the following projects:

Community Federal of St. Louis is involved in a 148-unit 221 (d) (4) project for $1,600.000.

Loyola Federal of Baltimore has invested almost $6,000,000 in FHA Market Rate Rent Supplement Projects.

CHART 5

Atlantic Federal in Baltimore, in addition to being involved in FHA 236 loans, has invested $800,000 in 74 units of a Market Rate Rent Supplement project.

First Federal of Detroit has a $5.8 million project for construction funds on a 288 unit development and another $5.6 million in 221(d) (4)s providing housing for 392 families.

Decatur Federal in Georgia is the fee owner of 111 unit low-rent housing project leased to the Public Housing Authority of Decatur.

The Coffeyville (Kansas) Federal has financed two 221(d) (3) projects with 150 apartments and is now involved in a $665,000 below-market investment rate project of 47 units and a 30-unit section 235 project.

Cleveland's Second Federal is supplying the funds for a 420 unit section 236 project involving a $5,841,000 permanent loan by that association. These are but examples of a considerable activity by our associations in this type of lending. We would be happy to give the committee a more complete summary when all the replies to our survey are received. You should know that the Federal Home Loan Bank Board is heavily promoting this type of association activity. Articles describing association involvement in inner-city lending has appeared in each of the last three issues of the JOURNAL published by the Board. We pushed the idea through our publication, SAVINGS AND LOAN NEWS. The February issue of NEWS has its feature article on serving the black customer. The March 1970 issue will have its feature article on inner-city lending.

A few months ago, the Federal Home Loan Bank Board announced it would make ten-year advances to our members at contract rates of interest to permit our associations to finance federally sponsored inner-city projects. There has been a great deal of interest in this on the part of our business but it has been too soon for any projects to have been started with this kind of money.

We, of course, would make a lot more of these loans if we had more money to work with. I mention this to assure the Congress that our associations are ot ignoring the lower-income families in their efforts to serve the housing needs of the American people.

The Federal Home Loan Bank Board has been very diligent in keeping money flowing to our institutions from the Bank System. However, this money costs the Bank System currently about 82%, which, at the moment, it lends to our institutions at a rate of 72% to 74%. Savings dollars are now costing our institutions from 5% to 6% as a result of the changes last month in Regulation Q ceilings and the necessary increases in savings and loan rate ceinligs. Obviously, our institutions cannot afford to take much more than 7% money from the Federal Home Loan Banks. And even paying savers from 5% to 6% is not producing any new funds for lending. The new higher rates have not done a thing for us.

Since the first of the year, savings balances in our institutions have shrunk about $1.8 billion. This drop in savings means there are 80,000 homes we are not going to finance. What we ought to have is a $1.6 billion gain which we very easily could have had if we had not had the Treasury competing with us in the consumer savings market and if we could have what we have earnestly requested, namely, a one-half point spread over the rates paid by the commercial banks. preferably at a level which would have permitted us to keep our cost of money low enough to permit us to charge reasonable rates to home buyers.

In connection with the competitive efforts of the banks to obtain savings. there is a very disturbing recent development which the banking agencies have shown no signs of trying to arrest. I refer to the issuance of very high rate subordinated notes sold directly by commercial banks and obviously aimed at attracting consumer savings dollars. This started with the First Pennsylvania Bank. I have here an advertisement that appeared in the Philadelphia Inquirer on January 6. At about the same time, a small bank in Kankakee, Ill., came out with a similar offering. Here is a copy of the ad which appeared in the Kankakee paper. We thought that with the new high rates authorized by the Federal Reserve under regulation Q, the banks would not pursue this particular method of getting more money-and much of it from our institutions-but we were wrong. Since the regulation Q ceilings were changed, a commercial bank in Atlanta, one in Denver and another in Cincinnati have come out with these kinds of offerings— and the rates are rising higher. Here are samples of these ads. If this kind of thing is allowed to spread, it will completely dry up whatever mortgage money is still available from our institutions. (The advertisements referred to may be found on page 443.)

The federal savings and loan law, of course, authorizes associations to issue subordinated obligations like this. But, we cannot pay 71⁄2%, 8% and 81⁄2% for money and make mortgage loans except at unconscionable interest rates.

The commercial bank system has been very resourceful in finding new sources of money to keep their profitable high rate lending machine going. They have developed a variety of ways to get what can be called "black market" money, and the Federal Reserve has been notably slow to eliminate the black market. They have secured Eurodollars and dollars from off-shore branches known as "virgin dollars". They have pursued the device of selling commercial paper often through their holding companies, and now they are offering subordinated note issues to savers. If this kind of thing is allowed to continue, it is going to usher in a savings rate war of great magnitude which can result in lasting damage to our system of financial institutions. In the early 1930's, the Congress established interest rate ceilings on savings and time deposits in order to prevent excessive competition among banks for funds because the Congress knew this kind of competition was in part responsible for the collapse of many banks at that time.

Another example of action by the bank regulatory agencies to the detriment of the savings and loan business is the announcement last weekend that the banks will be able to offer gifts costing as much as $10 for the opening of new accounts. The savings and loan business admittedly started this practice a long time ago, but at the request of the business, the Federal Home Loan Bank Board since 1954 (for the last 16 years) has regulated gift practices to gifts costing $2.50. But now we have the banking agencies and the Federal Home Loan Bank Board reluctantly had to go along-condoning gifts costing up to $10 plus freight-and this is a wholesale price. This is going to result in a great deal of churning around of money as people withdraw their savings from one institution to qualify for gifts at another. It will substantially increase the cost of money. Last fall, Congressman Ashley introduced H.R. 15064 regarding give-aways and we appreciate his constructive and timely interest in the problem. Perhaps the solution would be a complete ban on give-aways as was done in California. Frankly, this business needs help from the Federal Reserve or help from Congress to make the banking agencies regulate the competitive game in a manner which will avoid a repetition of this kind of financial chaos and folly and which will permit institutions committed to the home mortgage market to stay alive.

It is well recognized that financial institutions, other than savings and loan associations, have virtually deserted the home mortgage market. Other lenders are putting that kind of money into loans on commercial property and apartment buildings, in both of which they can get an equity kicker and into corporate bonds where interest rates are very high or where a convertible feature permits a variation of piece-of-the-action financing. In all of the other types of debt other than home mortgages, either (1) higher interest rates are available (like 82% to 9% on federal agency securities), (2) the debt is short term, (3) equity kickers are customary, or (4) the interest is exempt from federal income tax. How can the home mortgage compete in the face of those advantages of other investments? The home mortgage loan is considered by investors today to be a poor investment, and that is the reason all lenders except savings and loan associations are boycotting this market.

The home mortgage is considered to be a poor investment because it is too long in term. Loans for 25 to 30 years are not good loans in periods of inflation or inflationary expectations. Equity kickers are not possible with home mortgage loans. The interest rate is low because home buyers and home borrowers cannot afford to pay any more than they are paying and state usury ceilings in many States limit the rate lenders can charge to 8% and in some cases to 7%. One reason savings and loan associations are having trouble competing for funds in these free savings markets is because our assets are invested in loans which are neither competitive in this kind of environment nor in the "free" investment market all financial institutions except savings and loan associations enjoy".

Chart 6 shows what has happened to our lending in the past two years. The loan commitments outstanding shown on the chart predicts a disastrous period ahead for lending by associations and, hence, for home building. This is the result of the "free" market for savings.

Of course, it is not enough to suggest the problem. These hearings have been arranged so Congress can develop a program of action to assure that this kind of condition is not allowed to drift on and on.

41-658 0-70- -30

I have a wide variety of suggestions which I will present so that this Committee may consider some of the options available.

(1) One thing that can be done is to improve the nature of the mortgage instrument itself. I submit as part of my testimony an article that was written by Professor Edward E. Edwards at Indiana University entitled "The Home Mortgage Prime Case for Product Improvement." Basically, three things can be done to make the mortgage instrument competitive with other investments.

A. Encourage the development of so-called variable interest rate mortgages with an interest adjustment clause so the interest rate on the loan would go up or down as the lender's cost of money goes up or down, or as interest rates generally go up and down. This practice is followed in England by the building societies, our counterpart associations in that country, and there has been a fair amount of interest in this idea in this country but very little use of it. Most of our people are convinced that variable interest rate mortgages cannot be generally written for conventional loans unless the Congress provides for adoption of a similar plan for FHA and VA loans.

B. Making mortgages short term would help, but very few people want to go back to the mortgage practices of the 1920s when all except savings and loan