these risks, the essential point is that stringent credit conditions cause severe difficulties for mortgage lenders and perhaps more so for thrift institutions which are so dependent on a savings inflow.

As I pointed out in my opening remarks, most of the problems of the mortgage market are external rather than internal. This should not, however, preclude our examining various proposals for improving the mortgage market. Nevertheless, we cannot focus only on the mortgage market.

The London Economist of January 31, in speaking of recent British experience, says in part: "The Minister of Housing, Mr. Greenwood, had to say that only 367,000 houses had been completed in 1969, a drop of 11 percent from the previous year. Even worse, from Labour's point of view, was the news of the slump in house starts during 1969. These fell from 394,000 in 1968 to 344,000, representing a drop of 9 percent in the public sector and 17 percent in the private sector. Not since 1958 have so few private houses been started in any one year. It is the shortage of mortgage money which pushes out borrowers."

The experience in Great Britain is particularly relevant because some of the British practices are held up as a model. The view expressed in the Economist compels our attention. It is the shortage of money that is the crucial point, and the availability of mortgage money frequently depends more on the economy in general than on the mortgage market itself.

Germany, which has a well developed mortgage market, experienced a decline in housing starts between 1965 and 1967 of roughly 15 percent. Only in 1969 did France, which has a very old and still inadequate housing stock, regain the level of starts reached in 1965. Indeed, in 1967, housing starts in France were off by almost 25 percent from the 1965 high. In each case, credit stringency generally induced the observed results.

While we may profit from some further steps to improve the mortgage market we should be ever vigilant about those forces which affect credit conditions. The recommendations made to this committee by Dr. Burns, Dr. McCracken, Professor Thurow, and Dr. Jones regarding fiscal policy emphasize the crux of the problem which faces us. One cannot escape the view of Government officials, business leaders, and economists that the demand for capital of all kinds is likely to be strong for some years. In these circumstances, the need for a fiscal policy which takes account of this problem is essential. So long as inflation and excessive credit demand are rampant, institutions such as FNMA and the Federal Home Loan Banks can provide an important but only an incomplete buffer to the shortages in the mortgage market. Nor can improvements in mortgage market techniques or structures offset the ravages of inflation and an excess of credit demand over supply. The way we run our economy and the Federal budget seems far more important for the mortgage market than other considerations. FNMA, the Federal Home Loan Bank System, and other devices can help us buy time when the economy becomes overheated. If we do not use that time to set matters straight, the mortgage market will come under severe pressures which even our buffering techniques will not offset sufficiently.

Mrs. SULLIVAN. Mr. Brownstein.

STATEMENT OF PHILIP N. BROWNSTEIN, ON BEHALF OF THE COUNCIL OF HOUSING PRODUCERS

Mr. BROWNSTEIN. Thank you, Madam Chairman and members of the committee.

I am pleased to be here today on behalf of the Council of Housing today.

As Mr. Hunter says, housing starts were off 3 percent in 1969, but the experience of the members of the council went counter to that. Their starts were up 30 percent in 1969. Nevertheless, we have not come close to achieving the housing goals that were set in that landmark legislation of 1968. And it seems to me that we now must consider the long-range problem of what we do about meeting those goals.

When the Housing Act of 1968 was passed-and it was passed with bipartisan support of the Congress it was hailed as the Magna

Charta of housing. One thing that it did was to quantify the production goals that would be needed to eliminate substandard housing conditions in this country over a period of 10 years. And this was to be done through the production of 26 million units during that period of time, 6 million of them involving some form of subsidy.

But now we have the problem of achieving these goals. And we have the further problem of providing housing for the affluent as well as the deprived.

I have mentioned in my statement here a number of impediments and constraints, but I will confine my comments here, Madam Chairman, to the problems of mortgage credits.

Mrs. SULLIVAN. Please.

Mr. BROWNSTEIN. This will indeed be a serious problem in the achievement of the goals. Because to construct 26 million units over the next 10 years is going to mean about $500 billion in mortgage credit. And this, I think, is on a fairly conservative estimate of about $19,500 unit.

We have been in a severe period of mortgage credit shortage. Let me say that had it not been for the Herculean efforts of the two agencies represented by the gentlemen at my right and left, we would be in even more dire circumstances than we are today, because it is only because of what was done through the infusion of credit by the Bank Board and by FNMA that the FHA-VA sectors performed as well as they did, and indeed did show an increase in 1969 over 1968. But it looks to me as though there is very little relief in sight, despite the fact that we have had some rather optimistic reports on some loosening of the monetary restraints that have been imposed in order to curb the inflationary trends that we have been experiencing. Even if there is an easing in monetary policy its immediate effect in reducing the strain in mortgage credit will not be felt.

And now I will turn to page 8 of my statement:

When one considers the timelag between the flow of savings, mortgage commitments, and actual advances, you have to conclude that at best there may be some improvement by mid-1970. And this will happen only if there is an improved savings flow to the thrift institutions which traditionally have supported the mortgage market.

Capital demands are going to continue strong in the face of increasing population, technological advances, and greater affluence of our society, plus the governmental commitment to do something about poverty, substandard housing, and improved living conditions for all Americans, including guaranteed minimum income.

There is a grave doubt, in my judgment, that capital sources can or will keep pace with demand, and unless measures are taken to bring about a contrary result housing will continue to suffer disproportionately.

What these measures must be are, of course, the critical factors. But clearly there must be a reassessment of priorities and housing is going to have to be accorded some special treatment. For too long the credit needs of the housing industry have been on a catch-as-catch-can basis with all other credit users. And the position has been taken that if there is some period of stringency it is probable that it will be for a relatively short period of time, and you will get over it as you get over other dislocations.

But accepting the premise of more periods of capital shortage than abundance in the decade ahead, we no longer can permit housing to fend for itself if we are to achieve the housing goals and even come close to meeting the Nation's housing needs.

To begin with, there must be a way of attracting funds to those institutions which are the heavy suppliers of mortgage credit. Some suggest this be done by the creation of a tax incentive to the saver whose savings find their way into the mortgage market.

Congressman Hanna's bill, H.R. 14660, would do this. The exemption from taxation of the interest earned, up to some specified amount, on savings which are channeled into mortgages would not only create an incentive to save but it would also tend to bring the savings to where it would do the most good from the standpoint of providing housing.

As an alternative, or possibly as a supplement, the FHLBB and FNMA could be authorized to issue large denomination securities, tax exempt in whole or in part, the proceeds of which are reloaned to institutions originating mortgages at some reasonable specified amount above the borrowing rate.

This would tap a different source of investment capital, avoid the disintermediation problem, and could be very effective in attracting additional sources of mortgage credit.

A third possibility would be making the interest income from blocks of newly originated home mortgages acquired by investors exempt or partially exempt from taxation. In order to assure that the low and moderate income families derive the benefit of the mortgage supply, it would be well to fix a ceiling on the maximum mortgage amount.

It should be recognized also that the loss of revenue from taxation would be largely offset by the increase in the GNP and the resultant tax receipts brought about by the production of the residential construction which would be stimulated through any of these measures.

An additional point for consideration is a facility for improving conventional loan financing. With the difficulty thrift institutions have been experiencing in obtaining and holding savings, it is essential that a backup source be provided for the marketing of conventional mortgages.

And I was pleased to hear Chairman Martin say that they are working on a proposal of this kind.

I think that there is another reason why this becomes important. And that is because, as FHA gets more involved in programs aimed at treating social needs, it is clear that all mortgage activity which can be channeled to the private market will take some of the strain off FHA's limited resources. There has frequently been the problem of FHA being authorized to spend enough of its funds to handle the myriad of functions it is asked to perform. It becomes essential from time to time to establish priorities and clearly in a climate such as faces our Nation today the socially oriented programs cannot be allowed to flounder.

The logical answer to this dilemma is a smoothly functioning and operating secondary market for conventional mortgages. Congressman Hanna has introduced legislation dealing with this subject which would achieve such an objective and a similar bill was introduced by Senator Sparkman in the Senate.

And this proposal would go a long way toward the achievement of the objectives.

I know that the committee is considering a number of other measures aimed at improving the supply of credit for home financing, and particularly aimed at tapping sources that traditionally have not gone into mortgages, such as pension funds.

An important mechanism for tapping this source of capital is the mortgage-backed security authorized by the Housing Act of 1968. There was an announcement in this morning's papers that the first of these securities has been guaranteed and issued. This is fine. But so far they apply only to the pass-through or the modified pass-through type security.

To be fully effective the market is going to require that the securities be for fixed terms, and have various maturities in keeping with investor demand. Securities of this kind will satisfy any portfolio need, and the GNMA guarantee, of course, is going to give them credibility and a very high acceptability rating.

HUD has reported that they have been working on the procedures talking with the Treasury Department on adopting this fully modified type of security. But if the pension funds are to be interested in them in large volume, I think it is important that this type of security be approved, so that, as I said earlier, there can be fixed terms and various maturities in keeping with the investor demand.

The industry faces a rocky road ahead, and we are all concerned about lagging so badly in meeting our Nation's housing needs.

It is encouraging that there is a substantial increase for funding in the subsidized housing programs included in the 1971 budget request recently submitted to the Congress. Nevertheless, increases in costs and in the interest rate will mean a reduction in the number of units which may be assisted by nearly 40 percent from the original estimate of those which could have been aided with the authorization contained in the 1968 act.

The 1969 Housing Act recognized this, and authorized an additional $25 million for section 235, and $25 million for section 236.

We would urge that the entire authorization be appropriated, and that an additional authorization be provided, so that the slack may be taken up in meeting the housing goal production.

And in this connection, Madam Chairman, and members of the committee, the homeownership program under section 235, and the rental program under 236, are not serving the needs of large numbers of low-income families who cannot meet the mortgage payments or rental payments calculated at the 1-percent interest rate.

In order to broaden the base of participation we would like to suggest that the interest be fully subsidized, and that even some part of the principal amortization be covered by the subsidy, if necessary to qualify a deserving low-income family for homeownership.

One other thing that I think is important, and that is, forward funding of the subsidy programs. And this is proposed in the current budget request. We believe that it deserves the favorable consideration of the Congress.

Thank you, Madam Chairman.

Mrs. SULLIVAN. Thank you, Mr. Brownstein.

We will include in the record at this point your prepared statement. (The prepared statement of Mr. Brownstein follows:)

PREPARED STATEMENT OF PHILIP N. BROWNSTEIN ON BEHALF OF THE COUNCIL OF HOUSING PRODUCERS

Mr. Chairman and members of the committee, it is a pleasure for me again to have the opportunity to testify before this distinguished committee, and I appear today as the spokesman for the Council of Housing Producers.

The Council of Housing Producers is made up of 15 of the largest housing producers in the industry. Actually their experience has gone counter to that of the industry as a whole since in 1969 the members increased their production over 1968 from 30,003 units to 41,720 units, an increase of more than 30 percent. This represents 3 percent of the total housing starts of last year. Nevertheless, the total starts of about 12 million units falls far short of what was needed to meet our housing goal of 26 million units by 1979.

When the Housing and Urban Development Act of 1968 became law we had high hopes that at last the tools were being provided which would make reality out of the promise made nearly 20 years earlier of providing a decent home in a suitable living environment for all Americans. It was hailed as the Magna Carta of housing, and for the first time it quantified production goals in clear and unambiguous terms: It would be the aim of this Government to see that in the next decade 26 million dwelling units would be provided. Recognizing the inability of many families to compete in the open market for adequate shelter, 6 million units would be needed involving some form of subsidy.

The theory of the subsidy was very simple. To bring the shelter cost within reach of the income level being served; to create an effective demand out of a demonstrated need. This was to be achieved through the traditional public housing channel, the fledgling rent supplement program which had survived strong opposition and at last was making some headway, and through new and bold interest subsidy programs involving rental and cooperative housing under section 236 and homeownership for low income families under section 235.

This landmark legislation came into being with widespread bipartisan congressional support because it was recognized that during a great period of national prosperity, time had stood still for many, particularly in urban areas. This paradox was portrayed by Wilfred Owens in his fable on urban transportation in which he said:

"At the national level our inhabitants were very rich, but at the local level they often turned out to be quite poor. And, as luck would have it, they all lived at the local level."

But to produce the housing needed for the affluent as well as the deprived is the challenge now facing the industry. The provision of adequate dwelling units traditionally has presented sticky problems. And inflation had added a dimension of adversity of giant proportions.

Let's look at some of the facts and some of the problems other than financing which will be dealt with later.

Land prices have increased at an annual rate of about 10 percent.

The wage rate of construction workers went up about 15 percent in the past year.

The cost of materials increased during the past year by about 4% percent. Overall construction costs rose more in the last 12 months than at any time in the last 24 years.

The home priced at $25,000 a year ago is selling today for $27,500, an increase of 10 percent.

And aside from the cost problems, housing is suffering disproportionately. Though our gross national product has increased 236 percent since 1950, housing's share of the GNP has actually declined from 6.7 to 32 percent, by nearly one-half. Housing production has declined not only in relative, but in absolute terms.

In 1950, the peak year for housing in the postwar era, there were 12.9 dwelling units produced for each 1,000 people in our population. In 1969 we were building at about one-half that rate-6.2 units per thousand.

Once the world's leader in housing production, today the United States has fallen behind Japan, Russia, and Western Europe. While the quality of our housing is superior, and homeownership more common than in most other countries, the fact remains that our production is not keeping pace with demand. The development of publicly assisted housing is closely associated with the weakening general production picture. In 1969-the first year of the 10-year program-the Department of Housing and Urban Development reports that