associations wrote mortgages that had to be renewed or extended every five years. C. Another possibility to ease the long maturity barrier would be to permit so-called "balloon notes" or non-level monthly payments. (2) A second range of alternatives would be to encourage or require greater lender participation in home mortgages. The suggestion that pension funds would have to invest a minimum part of their assets in mortgages in order to continue to enjoy the tax exemption is an example of this type of program. Another would be to provide that mortgage interest would be fully or partially exempt from federal income tax in the hands of the investor. Of course, implementation of this idea would be the responsibility of the Ways and Means Committee. (3) A third area of action by the Congress would be to appropriate substantial sums of money for use in the housing field. A. H.R. 13694 by Mrs. Sullivan is an example of this approach. B. Another would be to make certain the Treasury Department actually implements the authority granted by the Congress last year to invest up to $4 billion in the Federal Home Loan Bank System. This, of course, would not be low-price money because the law provides that the Treasury Department advance money to the Bank System at the Treasury's cost. The Treasury's cost today is high, but, of course, not quite as high as what the Federal Home Loan Bank System raises by sale of its own obligations. C. There is also the possibility of Federal Reserve support of obligations of the Federal Home Loan Bank System and the Federal National Mortgage Association along the lines of the proposal that was advanced last fall in the Interest and Dividend Rate Control Bill. D. Along this same line, the Treasury could withdraw its opposition to full implementation of mortgage backed securities as authorized in the Housing Act of 1968. The programs thus far developed by the Government National Mortgage Association for issuance of mortgage backed securities in connection with this program may best be described as "tokenism". Of course, such proposals, with the exception of the Federal Reserve advancement of money to the Bank System and the use of Ginny May government backed securities, have the disadvantage of adding to the government's budget, and even $2-billion to $3-billion per year would not be adequate to solve the problem that faces us. In connection with proposals for federal or Treasury funds for home mortgages, we thoroughly favor the use of the existing institutional framework for this purpose as against creating new instrumentalities and more government overhead. In the middle of the 1930s, when the government was pumping money into the mortgage market, the Treasury and the Home Owners' Loan Corporation invested funds directly in the accounts of our institutions. This money was, of course, all invested in home mortgages and subsequently repaid by our institutions. Savings and loan associations are specialists in the making of home mortgage loans, and we can be trusted to handle any government funds that might be made available to the Federal Home Loan Bank System as a result of action by the Congress to appropriate funds for home mortgage loans of a certain type, interest rate, etc. Our institutions are locked in to the mortgage market, and whatever funds we get certainly will be invested in home loans. Assuming Congress agrees that there is a real national emergency in housing, there could be direct appropriations to be used by the Federal Home Loan Bank System in subsidizing advances to savings and loan associations. This could be under an arrangement that would assure that the funds were promptly reloaned to low and moderate income families at reasonable interest rates. (4) Another way to help the home mortgage market would be to take action which would result in savings and loan associations getting a larger share of the savings dollar. A. The most obvious way to help savings and loans attract a much larger share of funds would be to provide a tax exemption for the interest or dividends paid by savings and loan associations to savers along the lines of the bill introduced by Congressman Hanna. This proposal would exempt from federal income tax the interest paid on savings deposits up to $750 by institutions which invest in home mortgages. If there is one single thing Congress could do to stimulate the flow of funds into our institutions and hence into home mortgages, it would be to provide that kind of incentive to savers to place their funds with us. This proposal was developed initially by the National Association of Home Builders and, of course, we support it very strongly. B. The simplest and most direct way to help the savings flow of institutions is to stop the devastating competition from small denomination Treasury securities and government obligations. This can be done administratively and I can assure you that we have dutifully and repeatedly taken our plea to the Treasury Department during the past year. The drain on our savings is apparent from first hand experience at the tellers window, from the reports of dealers of securities, and from the tremendous increase in traffic at Federal Reserve offices. Actually, no one disputes the fact that hundreds of millions of dollars of small and medium savings that would normally be in savings and loan associations has found its way into Treasury obligations. But, we are told that there would be severe congressional criticism of any action to suspend the sale of small denomination issues. We think this is exaggerated and that a majority of Congress would give a higher priority to the problem of combating disintermediation, the mortgage shortage, and the housing crisis than they would to the laudable but less essential question of guaranteeing small savers the highest possible return. C. Another possibility would be for Congress to make certain that the savings rate ceilings set by federal agencies provide a larger spread between the rates the banks can pay and the rate our institutions can pay. Frankly, a half point spread on passbook accounts and a quarter point spread on certificate accounts is not enough for savers to prefer our institutions in comparison to the commercial banks. Studies made at the University of Pennsylvania in connection with the Friend Report suggest that 50 basis points or a one-half point differential is needed to offset the advantage the banks have through their full service banking operation. The banks can offer the savers checking accounts, consumer loans. mortgage loans and just about anything else, including travel and computer service! So far as competition for savings is concerned, the most important of these is the family checking account. The ceilings of banks, of course, would have to be low enough so we could live under ceilings one-half point or threefourths point higher than the ceilings for the banks. It doesn't do much good for the mortgage market to authorize us to pay, for example 7% when our assets are yielding only 6.3%. Savings money obtained at the rate 5% to 6% rates we are now authorized to pay already is costing the home borrower more than he really should have to pay. In connection with rate control, there is an urgent need to prevent the chaotic situations which occurred on January 20 and 21 when higher rates were authorized, effective immediately. The new rates were released through all the public media and savers were well aware of the higher rates. However, the institutions themselves lacked detailed information and had a totally inadequate opportunity to adopt new policies, new savings instruments, etc. It was as confusing as if the Post Office were to announce right now that, effective at noon today, all postage rates would be changed. We suggest that the rate control law be amended to require a 15-day notice period for any future changes so as to provide a more orderly transition. D. There are some other things Congress can do to improve our competitive position and, when added together, could help make ours a more viable business and more competitive for savings, particularly with the commercial banks. 1. The most obvious improvement would be to permit our institutions a limited type checking account. Chairman Patman for years has suggested this for our institutions and the credit unions. Today, it is obvious that our business needs more competitive tools. The suggestion that we should be able to offer a limited checking account was the most important single recommendation made by Dr. Friend in his study of the savings and loan business for the Federal Home Loan Bank Board. We have drafted a bill to accomplish this which is very similar to H.R. 29 by Chairman Patman, but would provide even greater assurance we would not be entering into the money creating business of the commercial banking system. Our draft provides that in addition to having a 100% liquidity reserve for checking account demand deposits, this type of service would be available only to individuals and to those organizations or firms that are in the real estate and mortgage business. We would never develop much in the way of new deposits with a checking account service, but we would be able to offset some of the advantages the commercial banking business now has over us in providing services to savings depositors. 2. We think our institutions ought to be able to act as trustees for the limited purpose of accepting retirement funds set aside by self-employed people under the Keogh Act. Keogh Act savings are today going into secnrities. This is ideal money for home mortgages, but today these funds are not staying in the communities and are not available for mortgage loans. We think our institutions can and should be able to accept this kind of money. The basic Keogh Act developed by the Ways and Means Committee would permit our institutions to accept this money as trustees, if our associations had trust powers. What we need is the authority from the Banking Committee for our institutions to have trust powers for the limited purpose of handling this type money. Such authority has been given by legislatures to state-chartered associations in nine states, and we think Congress might appropriately give this authority to federally chartered associations. Until the federal associations have this authority, our business cannot effectively promote this program. 3. It would be very helpful if Congress would authorize the Federal Home Loan Banks to buy loans and generally operate a limited secondary market in mortgages, primarily conventional mortgages, for our institutions. There are many associations which will not borrow money from the Home Loan Banks or will only borrow a limited amount. Legislation along the lines of that which was in the House version of the Interest and Dividend Rate Control Bill last fall would give the Bank System an alternative way of serving member institutions and would channel more Federal Home Loan Bank credit into the mortgage market. It would permit the Home Loan Banks to offer mortgage backed securities and generally improve the whole functioning of the Bank System. 4. The Friend Study and the Commission on Mortgage Interest Rates suggested that the geographical area in which associations make loans should be extended. We believe the laws should be changed to permit our institutions to make loans statewide (as against the present limit of a 100-mile radius of the home office) in those states where state law permits this broader lending. 5. We would like to be able to compete with commercial banks for certain types of deposits of state and local governments. Since new rules for FSLIC insurance were put into effect about two and one-half years ago, we have lost millions of dollars of this type of money which we once had. What we need to get this money back and to get more of it is to have either the Congress change the FSLIC law to permit us to provide 100% insurance on the deposits of state and local governments in our institutions, or give our associations the authority to do what the banks are able to donamely, pladge government bonds or other assets against these deposits. Prior to 1967, we were able to put the deposits of local governments on our books in such a way as to provide virtually 100% deposit insurance. In cooperation with the FDIC, the Federal Home Loan Bank Board, however, rewrote the rules and we lost that device. The banks have had a virtual monopoly on this kind of money ever since. These are good deposits, and our institutions can certainly use them. We should be placed on an equal footing with the banks in attracting this kind of money. 6. A number of technical changes are needed in the Federal Home Loan Bank Act to improve the functioning of this system. I will not go into detail here, but they relate to the requirements for purchase of capital, eligibility of collateral and the disposition of the net earnings of the Federal Home Loan Banks. 7. Finally, we suggest the FSLIC law, which sets certain minimums for the loss reserve of our institutions, provide a greater time to meet the requirement that reserves for new institutions must reach 5% of savings. The present 20-year minimum period presents an insurmountable requirement for an association which has been organized in the last 15 years. The 20-year minimum period should be extended to 30 years. The suggestion no doubt will be made that these changes in the savings laws should await the findings and recommendations of the new Presidential Commission to study our financial system. I would suggest, Mr. Chairman, that the housing crisis cannot wait that long. There is nothing revolutionary in these proposals. They have either been before congressional committees before or have been recommended in careful, thorough studies such as those conducted by the Commission on Mortgage Interest Rates or the Friend Study for the Federal Home Loan Bank Board. We don't need more studies to tell us how to improve the savings and loan business. What we need is congressional action to implement the many that have been made. As a matter of fact, there are many actions that should be taken immediately without waiting for a major housing bill or legislation that might be processed next summer or fall. I am supplying to the Committee at this time the legislative drafts to accomplish each of the detailed changes in the savings and loan laws suggested here, together with some other technical changes on our laws that it would be helpful to have made. Finally, let me say that the home mortgage borrower cannot possibly compete, in the foreseeable future, on even terms for money with the federal government, large corporations or with borrowers who offer a piece of the action. The home mortgage market competed adequately for funds in the 1950s, but the mortgage market had several advantages at that point which it does not now have. The savings and loan business enjoyed much more favorable tax treatment. It enjoyed greater advantages in Regulation Q ceilings, and, of course, we did not have the inflation-biased, saving-short economy we have today. With respect to our tax status, we know that the clock is not going to be turned back. We really doubt we are ever going to have a substantial advantage over the commercial banks in terms of rates of interest we pay for savings deposits. In view of these facts of life, we urge that the Congress provide us some real flexibility in our urgent task of attracting savings. Every time we have come to Congress for additional powers of one kind or another, the commercial banks have opposed us. The commercial banks have few restrictions on their activities but the savings and loan business has many. We think that the scale should be better balanced. It will have to be balanced a great deal better if there is to be adequate flows of funds into the savings and loan business. The real key to a bet ter housing and mortgage market is a substantial increase in the lending capacity of the savings and loan business. The record is quite clear. When the savings and loan business has a lot of money to lend, the mortgage market is a healthy market. The problems of the mortgage market began to develop in late 1965 when the savings and loan business for the first time in a generation found itself unable to attract a significant share of the saver's dollar. The home mortgage market cannot survive in a highly competitive, completely "free" money market. Inflation may disappear as a problem but the home buyer will never have credit at prices adequate to his needs if he must compete for money with General Motors or the federal government, just as the small businessman will never be able to compete for credit with the large corporation. If the Congress wants to see an adequate flow of funds into housing and home mortgages, it will have to intervene in the functioning of the free market and in various ways guarantee a flow of funds into mortgage-oriented institutions. If it doesn't, then 10 or 15 years from now, we will not be able to refer to America as a nation of home owners. Hon. RICHARD M. NIXON, UNITED STATES SAVINGS & LOAN LEAGUE, DEAR MR. PRESIDENT: In your television press conference of December 8, your comments made clear once again the determination of your administration to pursue conservative fiscal practices as part of your program to fight the cost-ofliving spiral. We subscribe entirely to your statements and we commend you for them. We support you and your administration in these efforts, just as each year since 1966, we have backed passage of fiscal restraints by the Congress. Most recently, in mid-1969, and in cooperation with the Treasury Department, we worked vigorously to help achieve extension of the tax surcharge. As for monetary policy, we have been supporters of the Federal Reserve Board, although we have been discouraged about the failure of major commercial banks to cooperate with the objectives of its policies of credit restraint and, at times, at the tardiness of the Board of Governors to take prompt regulatory steps necessary to assure this cooperation. It has been eighteen months since imposition of the tax surcharge and one year since the Federal Reserve initiated a program of monetary restraint. Your administration is to be congratulated on its persistence in efforts to solve the inflation problem. There is some evidence now of a slowing down of the economy. Nevertheless, interest rates are daily reaching new peaks, there is no clear indication that real price stability will be achieved in the foreseeable future, and apparently many feel that inflation will be with us for a long time, as suggested by the recent report that a Commerce Department-Securities and Exchange Commission survey indicating another sharp increase in plant and equipment outlays in 1970. Continued high interest rates in the face of evidence of a decline in business activity and the limited progress toward stability in prices raise in our minds some serious questions as to whether the classic fiscal and monetary restraints now being employed are equal to the task of halting the inflation momentum that has been generated since mid-1965. While we share your administration's aversion to price and wage controls and other direct controls, we suggest that there be some early deadline for determining whether new or different anti-inflation techniques might not be needed to supplement, modify or replace those now in use. We urge your consideration of the need and desirability of selective credit controls particularly over consumer purchases and lending. While we recognize the desirability of monetary restraint, the problem has been that general monetary controls have had a very selective impact. Despite efforts by the Federal Home Loan Bank System and the Federal National Mortgage Association, housing is again carrying more than its fair share of the burden of generally restrictive monetary policy. Present policy is also highly selective as to the availability of credit for state and local governments and for small business. Credit for these purposes is rapidly disappearing and we submit it is inequitable for a program of credit to have such an effect in just a few areas. If high interest rates persist much longer, the country will be faced with a real housing crisis and the federal government will be called upon to inject massive amounts of money into the housing market. The budget impact of this could be quite severe. Because general controls have such a selective impact, we believe it is appropriate to use selective controls as a supplement to general credit restraint. While an end to the inflation spiral would relieve the pressing problem at hand, the inequities of credit allocation may be a long-run problem from the point of view of consumers, small business firms, state and local governments and the housing and real estate market. With the 1970s now promising to be a decade of relatively low savings levels and heavy credit demand, monetary policy as it is now applied would continue to work in favor of large corporations at the expense of other borrowers. Some dramatic new steps such as the imposition of controls over consumer purchases and lending would demonstrate anew the determination of the administration to win the fight against inflation, and will serve to convince the American consumers and business firms that price stability can and will be achieved under your administration. If the administration of monetary policy in an even and more balanced way in the 1970s is not an attainable goal, then we believe the administration and Congress should develop a program of fiscal techniques which will shelter various specialized groups within the economy that are dependent for their existence on receiving an equitable share of available savings and credit. Sincerely, JOHN H. RANDOLPH, Jr., President. STATUTORY AMENDMENTS PROVIDING SAVINGS AND LOAN ASSOCIATIONS GREATER FLEXIBILITY IN OBTAINING LENDABLE FUNDS EXHIBIT A LIMITED CHECKING ACCOUNTS Sec. 1. Section 5, subsection (b), paragraph (1) of the Home Owners' Loan Act of 1933, as amended, is amended by adding after the words "30 days" in the third sentence the words "or in the case of checking deposits,"; by adding in the last sentence after the term "savings accounts" the first place it appears the words "other than checking deposits,"; and by adding at the end the following: "Subject to such rules and regulations as the Board may prescribe, an association may accept from a natural person and from a corporation, association or other firm or organization operated primarily for purposes of building, equipping, acquiring, selling, financing or insuring of residential real estate, checking deposits or accounts subject to withdrawal on demand, including deposits of its own funds, may honor demands for withdrawal of such deposits in the form of negotiable checks and drafts, and may become a member of a clearing facility, including the power to pledge assets or satisfy other reasonable conditions |