3. Continue to expand advances by the Federal home loan bank for mortgage lending purposes.

4. Create a secondary market for conventional mortgages, structured with particular attention toward funding patterns that fulfill the investment objectives of pension fund managers.

In closing, I want to have you know something about the tragedies which monetary whiplashing brings about. Factories are forced to shut down causing the inevitable layoffs. The building product distribution system goes through a people and financial convulsion. Builders must cease to employ their skilled workmen and many face bankruptcy. The officers of financial institutions-one way or another-have to say "We can't function to fulfill our purpose." But the people in this business love it--and you can count on them to be there when the means to move ahead are available. So my final bid is to ask the Federal Government to give us a hand toward achieving some stability and expansion in the flow of housing credit.

Thank you.

(The prepared statement of Mr. Rice follows:)

PREPARED STATEMENT OF JAMES V. RICE ON BEHALF OF THE HOME
MANUFACTURERS ASSOCIATION

Mr. Chairman, distinguished members of this committee, and ladies and gentlemen, my name is James V. Rice, and I am vice president, Mortgage Finance. Pease Company. My appearance before you is to testify on behalf of Home Manufacturers and their associates in the industrialized production sector of the housing industry.

Last Friday, Richard Moore, a black contractor engaged in both inner city rehabilitation projects and construction of new housing for low income families in Cincinnati, stopped by our office for a conference. After meeting for an hour. those of us participating realized he was in a jovial mood. Finally, the temptation to inquire about his good spirits became too much and someone asked: "What makes you so happy this morning, Richard?" His immediate response was this: "If I'd ever quit laughing, I'd break down and cry!"

It's in this atmosphere that I come to Washington, and I consider it of first importance to recognize the spirit of the people-both those who are seeking new houses and those who make up the industry that produces them. Places we live in are close to the land. Life inside these dwellings is intimate and filled with all the qualities of human existence-sometimes good, sometimes bad. The hundreds of thousands of people who make up the housing industry take on these characteristics. All of us feel a closeness to the land, and an intimacy with family life that has always been part of civilization. But forces largely beyond our control are now tossing us about as the supply of credit feeding the industry ebbs and flows.

It's quite true that the rate of new housing construction oscillates between high peaks and valley bottoms. This cycle has been repeated no less than four times since the middle 50's. Today, we're not only at the bottom of the valley. we're lying on the river bed, hoping to find solid rock from which to push up and begin the climb back. To illustrate this, it might be of interest for you to know, Congressman Ashley, that in your district of Toledo and its surroundings, mortgage loans made for new construction by savings and loan associations during November and December 1968, totaled 159. All loans closed for home purchase numbered 295. During the same period of 1969, these totals dropped to 64 and 185 respectively. This is a percentage drop of 59 percent for new construction, and of 53 percent for home purchases. Similar data for other areas is included as appendix A. A drop in loan activity of this magnitude means that the housing industry serving your constituents in Toledo is in a deep depression-not a recession Conditions this drastic seriously damage the ability of an important sector of our Nation's economy to perform efficiently and to create optimum value.

On September 9, 1969, A. W. Teichmeier. president, Building Materials, U.S Plywood-Champion Papers, Inc., spoke most effectively to this point in hearings before the Senate Banking and Currency Committee, which led to enactment of

the Patman-Proxmire Bill, now P.L. 91-151. I have included his statement as appendix B.

After 20 years experience in the housing industry, it seems to me that a key issue in what these hearings are about has to do with simple, honest, traditional American "fair play." And this question of fair play asks openly: "Is it right or wrong for one sector of our economy, the housing industry, to be denied an equitable access to credit, its very life-blood, as monetary and fiscal policies are invoked in the name of actions to achieve national goals?" This question applies equally to the situation during which too much credit is made available as well as to times like now when the flow of credit has been reduced to low levels.

The next issue asks whether housing needs of the American people are a true integral part of the public interest. But from an economic viewpoint, housing is not an exact science. Homes become the very essence of life patterns-and they always adapt to some characteristics of local setting and environment. Fully aware that cultural tastes are trending upward, incomes are trending upward and population is trending upward, the issue to be faced is this: "Is homeownership a desirable characteristic in our national life, and should a variety of dwellings continue to be made available for those who choose to rent, so that individual tastes may be served?"

The last issue simply asks the question: "Accepting the premise that an expanding housing industry is a necessity, from what sources will credit come, hopefully in some stabilized flow, to support it?"

Now let's return to issue number one, the "fair play" issue. This testimony is my basis for recommendations relating to H.R. 11. To assume that the housing industry will retain equitable access to credit sources when restrictive monetary policies are invoked just doesn't work. Following the shut-off of money for mortgage loans in 1966, high officials of both the Federal Reserve System and the Treasury Department publicly lamented the injustices done to people needing homes and to an entire industry which received the severe expensive shock treatment of shut-down . . . start-up. Legislation instituting regulation Q, the ratecontrol bill, received support because of the need for "fair play" generally recog nized between commercial banks and thrift institutions. But it didn't go far enough. Forgotten was the freedom of action left in the hands of the Treasury. When today's severely restrictive monetary policy was invoked at the beginning of 1969, regulation Q controlled rates paid for savings by commercial banks, mutual savings banks, and savings and loan associations within the 4 percent to 54 percent range. This set the stage for the Treasury to have a feast at the expense of savings accounts in these institutions. As the summer advanced and short-term rates moved into the 8 percent to 9 percent range, this is exactly what happened. The Treasury made bills and notes available in $1,000 denominations paying rates of 8 percent and more. To add to the irony, while serious disintermediation was in process, Congress passed, and the President signed, legislation authorizing the Federal Home Loan Bank Board to borrow up to $3 billion from the Treasury when mortgage markets are under severe pressure. This is Public Law 91-151 mentioned previously.

From repeated experiences in living through such events as the one recalled above, it's clear that any achievement of "fair play" relating to balanced access to money markets must be controlled. I would favor and support any measure "reating the power to keep activities of the Federal Reserve System, the Treasury and other financial agencies of the U.S. Government, such as the Federal Home Loan Bank System, FNMA, and FHA, in right relationships to each other as monetary and fiscal policies are being invoked to serve the general need.

Issue number two-the Home Ownership and Rental Choice Issue-focuses my testimony on portions of H.R. 13694 and H.R. 14639. Since World War II. Congress and the administrative agencies, now the Department of Housing and Urban Development, have conscientiously sought to deal with the housing problems of low-income people. In some instances, the results have been remarkably successful. By and large, however, failures predominate. Most of these failures resulted from weaknesses in the housing characteristics of architectural design, interior appointments and overall project environment, particularly in multi-family projeets. So I want to speak to those provisions that direct administrative responsibility to HUD and its related agencies. The procedures traditionally adapted to create housing under special assistance programs are those which destroy the production patterns of the private housing sector. In addition, HUD's field organization, charged with creating the anticipated fruits of existing legislation, seems already overburdened. Accordingly, I recommend that this proposed legis

lation shift the administrative responsibility from HUD to the private housing sector, through member institutions of the Federal Home Loan Bank System. Such legislation would add the quality of letting new developments take on local environmental characteristics. My experience also convinces me that this administrative direction would create housing of higher value.

The final issue, "Where is the money coming from?" directs our attention to L all of H.R. 15402, and the funding sections of H.R. 13694 and H.R. 14639. The : first task is to project requirements and find sources of family credit for home purchases-whether single-family houses, townhouses, condominiums or coop eratives. Thrift institutions, and the Federal National Mortgage Association are funding at least 90 percent of these kinds of loans now. Gross assets in savings and loans associations and mutual savings banks now total $250 billion. : Even a cursory projection of credit requirements-to fund home purchase mortgages only-indicates that these institutions must grow by $200 billion during the next decade to fulfill the expanding credit demand.

Legislative measures which enable this growth serve the American people by enabling families to choose their homes.

These three bills collectively offer the legislative promise of adding money to this credit supply. But it will take more, so let's consider potential sources of funds and both administrative and legislative measures that should be useful in securing the needed dollars.

Savings by the Public-Measures of most value here are those which encourage our people to save more money in thrift institutions. Recent economic history has proven that tax credits are successful inducements to encourage a desired channeling of money. The $200 dividend tax credit dates from the middle 1950's. The 7 percent investment tax credit of the early 1960's stimulated investment in plant and equipment. Pension plans have effectively provided tax credits through delaying the payment of taxes until employees reach periods of lower gross income levels. It would then seem just, and in keeping with our recent traditions. to allow tax credits for interest earned on savings which find their way into housing loans. I hope, and recommend, that such a provision becomes law.

Thrift Institutions Operations-The toll of inflation has been uniquely severe for all institutions having traditionally invested in long term, fixed interest rate securities. With competitive savings rates now in the 41⁄2 percent to 71⁄2 percent range, most thrift institutions have acute portfolio yield problems. This has hap pened because many responsible directors and managers of these firms acted through trust, built up over many years, that the United States dollar would remain stable in value-yesterday, today and tomorrow-that a dollar loaned today would be worth the same when paid back 5, 10, or 20 years from now. This trust has proven to have been misplaced. So now we have a massive nationwide situation in which long-term, fixed-rate, amortized mortgage loans and long-term government bonds have thrift institutions "locked-in" with static portfolios

It's only right that relief be provided these lenders-either from their borrowers through enablement of interest rate adjustments, or by some measure that would provide warehouse capability for old, low interest rate loans and securities. This situation even makes for a bad bargaining among our home-buying citizenry. The need to "average up" portfolio yields forces lenders to press for high interest rates on new loans. This then creates the situation in which a 1964 home purchaser still pays a gross rate on an FHA loan of 54 percent when today's family purchaser must pay 9 percent for similar financing. This hardly seems like true justice.

The Federal Home Loan Banks-High marks must be given this Federallychartered agency for its performance in making available $4 billion for mortgage lending during 1969. As a source of future funds, the industry anticipates that this expansion will continue and that gross assets of the banks will approach $60 billion by the end of the decade. Since violent fluctuations in money market interest rates seem to now be a way of life, the Federal Home Loan Bank Board could provide a useful service by building up cash "cushions" during times of relatively low interest rates to be used at later times to subsidize rates for money loaned to member institutions during times of relatively high rates, such as the present. At this point, I also want to pause and recognize the heroic performance of the Federal National Mortgage Association.

A Secondary Mortgage Market for Conventional Mortgages-In view of past successful experiences with federally-chartered, special purpose corporations it seems to me that a "Comsat" type, federally-chartered corporation offers real promise to improve operations in our entire housing credit system. Mrs. Sulli

van's and Mr. Barrett's bill is very close to this now. Security instruments that might be issued by such a corporation could be tailored to fit the investment patterns of pension funds, thereby achieving Mr. Patman's objective in H.R. 15402. What's even more important, the member institutions of the Federal Home Loan Bank System now constitute an originating source for extensions of mortgage credit in all the States and territories. If such a secondary market were now in operation, and thrift institutions were granted statewide lending auhority, every family in his Nation desiring to purchase a home and who qualified to do so would have equitable access to housing credit. Such a system simply does not exist today.

Now, let's turn briefly to the multi-family segment. The flow of funds into financing such units, particularly those in large projects, has remained reasonably stable during the past 18 months. Tax benefits and changes in the investment contract away from the long-term, amortized, fixed-interest-rate mortgage instrument have enabled builder-developers to use money at market rates successfully. High money costs, of course, translate into increased rents for people who live in these dwellings.

I hoped in my opening remarks to convey the feeling of warmth that flows among the men and women associated with housing. This testimony expresses and reflects the convictions of many experienced, talented and dedicated men who have spent their entire business careers in this field, and would like to participate in actions that help even out the peaks and valleys that so plague the industry.

In closing, I want to have you know something about the tragedies which monetary whiplashing brings about. Factories are forced to shut down causing the inevitable layoffs. The building product distribution system goes through a people and financial convulsion. Builders must cease to employ their skilled workmen and many face bankruptcy. The officers of financial institutions--one way or another have to say "we can't function to fulfill our purpose." But the people in this business love it--and you can count on them to be there when the means to move ahead are available. So my final bid is to ask the Federal Government to give us a hand toward achieving some stability and expansion in the flow of housing credit.

Thank you.

LOAN CLOSINGS-1- TO 4-FAMILY DWELLINGS, MEMBER INSTITUTIONS,
FEDERAL HOME LOAN BANK SYSTEM

STATEMENT BY A. W. TEICH MEIER, PRESIDENT, BUILDING MATERIALS, U.S. PLYWOODCHAMPION PAPERS INC., BEFORE BANKING AND CURRENCY COMMITTEE, U.S. SENATE, SEPTEMBER 9, 1969

Mr. Chairman, distinguished members of this committee, and ladies and gentlemen: My name is A. W. Teichmeier, and I am president of the Building Materials Business of U.S. Plywood-Champion Papers, Inc.

I appear before you to testify in behalf of Senate bill 2577, not as an expert on financial policy and the money market but as a businessman intimately familiar with residential construction, since my company is a leading supplier of the materials contractors use to build homes.

My advocacy of S. 2577 is based purely on pragmatic reasons. The purpose of the bill is to provide housing stability by making available long-term mortgages and construction loans through the savings and loan associations. The

S & Ls are the nation's leading supplier of mortgages and their traditional role has been to act as the funnel for the fuel which keeps our housing machinery in motion.

One does not have to be a financial expert to realize that the supply of longterm financing is the key to a stable housing industry, which we do not have now, Stability is the only condition which will allow the housing industry to meet the needs Congress itself has set for us. But we are again providing living proof that the housing industry is wildly cyclical, subject to ups and downs far beyond those experienced by the rest of the economy. And I submit that such fluctuations are inimical to our society as a whole, when compared to what would accrue from a stable, steadily growing, planned housing industry.

Let us look at the wild fluctuations that characterize today's housing industry. What happens on the downside quite simply-and it happened in 1966-is that one industry alone undergoes a recession while the rest of the economy remains prosperous.

This means that some builders-the small builders first and larger builders if the slump continues-are forced out of business. This means that a pool of skilled carpenters, masons, plumbers, electricians, bricklayers, painstakingly assembled, is scattered. It has been argued that they merely move over into nonresidential construction. Well, some do and some don't. Many enter other, more stable industries, and are lost forever to our business. After all, they can do this with ease, since the rest of the economy is still highly active.

Similarly, the unions cut back on their apprenticeship programs, and a shortage of all the skilled craftsmen I have listed becomes a lasting heritage of a housing slump. We are still feeling the shortage of labor induced by the 1966 credit crunch and housing recession.

Lumber dealers also suffer, and some go out of business. After all, contractors are among their key customers. Obviously, we in the building materials business also are forced to cut back. In some cases to close our mills, with the resultant disruption in the economies of the small towns where most mills are located. And we too find it difficult to reassemble our scattered work force once recovery comes.

All these factors add to the dollar cost of housing. On the upside, it costs money to train new crews, to bring them to the levels of proficency attained by their predecessors through years of experience. This start-up inefficiency, on both the builders' part and on the part of the suppliers as well, is reflected in the price of housing.

When high-cost money brings a downturn, the would-be homeowners suffer too. First of all, the man with the moderate income is forced out of the market. And as the housing supply tighten, even many so-called middle income customers find they cannot afford the home they want and need. Lenders get increasingly selective. Mortgage rates climb out of sight, and the market shrinks more and more, and homes cost more and more.

Exactly the same thing happens in the rental market. The vacancy rate approaches zero. As vacancies shrink, rents go higher, and we find ourselves attempting to fight inflation by driving up the costs of all homes !

The supply of some building materials, being inelastic in the short term. cannot respond quickly enough to the housing market gyrations. My own wood industry is a dramatic case in point.

The housing depression of 1966 cut producer capacity to the point that producers coudn't meet the sharp upswing of 1968-which saw not an orderly recovery but a frenzied bidding for material.

Last February, when one-family homes were being built at a projected annual rate of 1.9 million, demand outran the supply, and as a result our sanded quarter-inch AD softwood plywood was selling for $136 per thousand square feet and the Bellwether sheathing was $137.

Just two weeks ago, in August, when housing starts were at 1.3 million, the same plywood was selling at $61 and the sheathing at $79, and costs of materials or labor had not changed appreciably.

What do these wild fluctuations mean? They mean that the housing industry is a short-term industry, unable to plan for the long haul.

But what would happen if the industry were to be stabilized, if there were to be a planned steady growth pattern, instead of the wide swings?

In the first place, the nation would be in a better position to have its housing goals fulfilled. Our industry is committed to providing 26 million new housing units in 10 years. This year the goal was 1.83 million units, and current star's are only 1.3 million with a rate of 1 million now staring us in the face.