Mr. Chairman, I do not pretend that the battle against inflation is easily won. I do say that we are in danger of ignoring a vital human need through a series of administration policies which threaten to dry up money for housing, housing for those who cannot afford to pay the exorbitant costs of money. If we are serious about providing à decent home and a suitable environment, if we mean what we say about meeting our own goals, then we must begin to build housing now, and that cannot be done without money. The lives of too many cities are at stake to forget this goal. We should instead make it

real.

Mr. Chairman, I have with me the administrator of our Housing and Development Administration in New York City, Mr. Albert A. Walsh. And he will be delighted to try to answer any questions you may have.

(Mr. Lindsay's prepared statement follows:)

PREPARED STATEMENT OF HON. JOHN V. LINDSAY, MAYOR OF THE CITY OF NEW YORK

Mr. Chairman and members of the committee, I deeply appreciate this opportunity to testify before you on the crucial impact of present economic conditions on housing production, especially as they relate to urban needs. Over the past 35 years we have consciously developed a national housing policy designed to provide safe and decent housing, at reasonable costs, to all income groups. This committee has been intimately involved in the evolution of this policy, and many of its individual members have made valuable contributions to it. Present economic forces-unchecked inflation, tight money, high interest rates are now placing the continued implementation of this national goal in jeopardy. Unless immediate federal action is taken, our critical housing emergency will become a national disaster.

Hopefully, these hearings will be the first step in the development of a national strategy to meet this housing emergency and provide increased housing production at reasonable costs to buyers and tenants.

The current economic situation has created a twin dilemma for housing. Inflation has meant that the costs of producing housing have skyrocketed. At the same time, tight money policies, resulting in part from federal anti-inflationary efforts, have nearly dried up the supply of mortgage money, and caused interest rates on residential mortgages to rise to levels not known for generations in this country.

Let me cite an example of the effect of these twin pressures on housing. In 1966 a moderate income family was able to purchase a $16,300 home with monthly mortgage payments of $100. Now, as a result of increased costs, the same home would cost approximately $18,500 or, to put it another way, the same $100 monthly payment would only buy a $12,000 home. Moderate income families have virtually been priced out of the housing market.

The overall implications of this national credit-inflationary squeeze for urban areas are obvious. Cities desparately need new housing to replace their deteriorating stock and to house low and moderate income families. The 1968 Housing and Urban Development Act, offering dramatic new production tools and pledging as a national goal 26 million new or rehabilitated units-6 million devoted to low and moderate income families-over a ten year period, was applauded by the cities as the beginning of a new era of residential construction. But now less than a year and a half after the Act's passage, the national housing production rate is at an all time low and chances of achieving a production rate necessary to reach anywhere near 26 million units by 1978 are extremely remote.

The only way to reverse this bleak picture is to restructure our national priorities. Housing, one of the most vulnerable segments in the economy, must be protected from the full force of the current economic crisis.

As these hearings proceed, the committee will have the opportunity to hear from industry leaders, mortgage experts and housing economists to evaluate the merits of various proposals to increase the supply of mortgage money and reduce mortgage interest rates. These witnesses are far more qualified than I to discuss which mechanisms are best suited to achieve this purpose.

I would therefore like to devote the remainder of my remarks to the effect of this credit-budget-inflationary squeeze on New York City, concentrating on our multi-family housing programs to assist low, moderate and middle income families. Our city's problems are the same as those faced, or about to be faced, by every city in America trying desperately to admnister housing programs theratened with imminent collapse because of national economic forces over which we have no control.

The enormity of New York City's housing needs cannot be overstated. Our rental market is nearly non-existent, with a vacancy rate hovering at slightly over 1%. Private rental construction is effectively at a standstill due to the greater attractiveness of alternative investments. For example, rents in a new office building are 21⁄2 times those from a comparable new residential building. This has placed the burden for new multi-family housing on governmentally assisted programs.

Of the existing stock of rental housing, nearly one out of every five units is deteriorating, dilapidated or lacks plumbing facilities; nearly half of the units are 40 years old or more, with prospects of this trend toward deterioriation continuing. In mid-January, during our cold wave, I was forced to declare a heat emergency to handle the 26,000 complaints we received in one week from people who had inadequate heat or hot water.

A large number of habitable apartments are reduced to shambles or withdrawn from the market because in poorer areas, rents families can afford to pay do not even meet the operating and maintenance expenses of the building. The terrifying fact is that in New York City more housing is being withdrawn from the market than added to it.

Yet, the statistics don't really express the enormity of the housing crisis. Knowing the crisis is to visit a ghetto apartment to be greeted by falling plaster, plugged up plumbing, rats, roaches, filthy hallways and holes in the walls and floors. The crisis somehow becomes personal when examining the charred ruins of a tenement where three children were burned to death because a neighbor turned his oven on to warm an apartment which had been without heat for 3 days.

All New York is not, as the media would like the country to believe, a cosmopolitan oasis composed of quaint restored Brownstones. For a great number of our families it is instead a cold vermin infested tenement whose cracked and crumbling walls are a grim daily indictment of those whose promises have not been kept. It is a constant reminder of unrealized dreams of a better life.

To meet this crisis New York City has assembled the most extensive housing effort in the country. We have developed innovative approaches to solving housing problems, emphasized scattered-site housing and assisted in developing community based sponsors for housing. We have matched our promises with moneyfor this fiscal year $67 million of city's capital budget will go for housing and development activities.

As virtually the only multi-family housing builder in New York, we use three basic mechanisms to provide additional decent housing for middle, low, and moderate income families: Mitchell-Lama, Public Housing and Section 236. Under the city Mitchell-Lama program, the city floats long term bonds, the proceeds of which are used as mortgage money at an interest rate slightly above the City's cost of borrowing. It was initiated in 1957 as a means of supplying housing to middle income families, a group which has traditionally found it difficult to obtain housing in New York.

New York City had the first public housing program in the country and for over 30 years we have mounted the nation's largest program for low income families. The section 236 program, enacted in 1968, was welcomed by the city as a major tool to provide moderate income families with housing.

Realizing that the cost of building housing in New York is especially high, we provide additional assistance in the form of land write-down and local tax abatement for housing to reduce further the monthly costs to families.

Our most recent efforts are to "piggyback" these programs so that a single project will accommodate families of low, moderate and middle income. To accomplish this, we use the Mitchell-Lama program, with 236 interest reduction contracts and use rent supplements and/or public housing leasing for some of the units.

A year ago we were optimistic about the number of housing units the city could initiate, especially with theassistance of the new section 236 program. In

fact our governmentally-assisted production record of over 13,000 starts in 1968 was a sign of real progress and a goal of 30,000 units by the year 1970 was set as a realistic measure of our capabilities.

However, 1969, turned our optimism to pessimism. Inflation, tight money and high interest rates diminshed our hopes and the 1969 production level of slightly less than 8,000 units reflects the impact of these economic conditions in four major areas:

1. Municipal Credit.—The fantastic increase in the cost of money occuring in the past two years and general increases in construction costs has limited the usefulness of the Mitchell-Lama program. The effectiveness of the program-to provide low interest mortgage money for housing—has been minimized as the rate of municipal bonds increased. Our most recent long term bonds went for 7.4% and indications are that a current housing issue will cost 7%% to 7%.

In 1957, the program was providing 3% money, building housing for $25 a month a room and serving incomes of $5,000 to $10,000. Today, it is 72% to 74% money, $55 to $60 per room rents and incomes of $11,000 to $20,000 These rents already reflect the impact of an 80% tax abatement program and, many times, a land write-down.

To reorient the program and make it more relevant to the pressing housing needs of the city, we were forced to make the decision to use 236 assistance on most Mitchell-Lama projects.

New York City is not the only area where this situation has prompted housing finance agencies to emphasize the use of 236 funds to make their projects more responsive to needs. Many States such as New Jersey, Michigan, Illinois, have programs similar to Mitchell-Lama and will find them useful now only when coupled with 236.

2. Construction Costs.-Inflation, rising costs of materials, and high wage settlements have created a nationwide problem of rising construction costs. These costs are increasing at the phenomenal rate of approximately 1% a month. The impact of these cost increases immobilized our public housing and FHA moderate income programs last year because of federal statutory limits in both programs. Because of our extensive programs, we were the first city to experience the cost increase problem, but by the end of the year, the whole country was confronted with statutory limits that in no case reflected actual construction costs.

In November Congress raised the public housing limit to $4200 per room, and increased by 15% the mortgage limits for FHA moderate income programs. But this provides only temporary relief.

The $4200 limit reflected costs in November; by Spring new public housing projects will exceed these limits. Our FHA projects face the same constraints. Many new projects are already over the new limits. Since most of the FHA sponsors are community based nonprofits, this is a critical problem. They have no access to funds to make up the difference between actual costs and statutory limits. If these rigid limits remain in force, the city may be forced to use its limited resources to absorb the differences, an estimated $15 million over the next 18 months.

3. Mortgage Financing-As the mortgage squeeze tightened in the middle of 1969, our FHA program was nearly halted because of difficulty in obtaining construction loans and the permanent mortgages.

As members of the committee are well aware, the then 72% FHA mortgage interest rate did not reflect the real cost of obtaining mortgage money. To obtain financing, discounts were required. Since nonprofit sponsors have no way to pay for the cost of these discounts, financing for the projects seemed impossible without some additional assistance.

The newly announced GNMA/FNMA Tandem Plan will provide this assistance. But any curtailment of the Tandem Plan during periods when discounts are prevalent will bring disaster to New York City's and the Nation's effort to build Section 236 housing.

4. Lack of Federal Funding-The final and most serious impediment to achieving our anticipated construction schedule of 30,000 units a year is the lack of 236 funds, which will be used in connection with a major portion of this housing. The problem is that the anticipated demand for these funds will far exceed the amounts presently appropriated or even authorized. The reasons for this relate to the whole inflationary cost problem.

First, 236 has been an extremely popular program throughout the country as communities are attempting to use it to ease their own tight housing markets. 41-658-70-3

Second, as the interest rates in the bond market increase, state and city housing agencies will seek to lower per room costs by using 236 subsidies. Third, increased costs and especially increases in mortgage rates mean the need for larger subsidies. When enacted, the program subsidized the difference between 64% and 1%; now the difference is between 82% and 1%. The recent increase in FHA interest rates created the need for an additional annual subsidy of nearly $300 per unit in our pending applications.

In New York City alone, to proceed with our current backlog of housing, we need approximately $20 million in 236 money for the current fiscal year. Of this $20 million indications are that only $5 to $10 million will actually be available for New York City projects.

For the next fiscal year, we estimate that our 236 requirements will increase to $45 million; authorizations for the entire nation are only $125 million, a completely inadequate figure.

To summarize, inflation, tight money and high interest rates are having a crushing effect on communities throughout the nation as they attempt to provide safe and decent housing for their low and moderate income families. Action must be taken to overcome this impact; these programs must continue.

The first action that must be taken is the recognition, as a national priority, of the goals of the 1968 Housing Act. This means that the 1968 goals will be considered as equal in importance to the need to curb inflation. Further, this means that the Administration will begin to examine, critically and seriously, possible solutions, such as the ones you develop during these hearings, to the mortgage credit crisis.

The administration has placed the curbing of inflation as its primary domestic goal. This is urgently needed because of the detrimental effects inflation has on every American family, especially those of middle income and below. Yet the cost of curbing inflation cannot be charged against imperative human needs. Government fiscal and monetary policy designed to curb inflation must not at the same time curb our efforts to eliminate slums, squalor and deprivation.

Closely related to the question of reorienting priorities is the need to remove constantly reiterated goals and promises from the realm of rhetoric into the world of reality. By this I mean adequately authorized and fully funded housing programs.

I urge Congress to act immediately to appropriate the unused authorization of $45 million in contract authority for the Section 236 program. Similarly, a $600 million supplemental appropriation for urban renewal is essential to our housing programs and must be acted upon without delay. This money will provide additional housing sites, and reduce, through land write-down, the monthly cost of housing.

As members of this committee, you are in a position of realizing the impact of recent governmental policies on housing production. It is incumbent upon you and your counterparts in the Senate to reevaluate continuously and, independently of Bureau of Budget recommendations, authorization levels for all programs: Section 235, section 236, rent supplement, urban renewal and public housing. Likewise it is incumbent upon the Appropriations Committee to fund fully these programs.

Another step in achieving adequate and sustained levels of production is the establishment of a realistic and reasonable method for the adjustment of mortgage and cost limits when they hinder the production of nonextravagantly designed housing for low and moderate income housing.

Last year. New York City supported flexible formulae for the FHA and public housing programs. As you are well aware, this approach would permit the Secretary to adjust limits to reflect changes in construction costs. This proposal was supported by nearly every large city, many smaller cities, the League of Cities and the National Association of Housing and Redevelopment Officials. We again support this approach. Flexible limits, using 1969 as a base year will eliminate these statutory limits as road blocks to new production.

A final concern for the production of low and moderate income housing must be to find new sources of mortgage financing. The crisis of the last few years has brought some action. The Insurance Industry pool, the conversion of FNMA into a private association, the FNMA/GNMA Tandem Plan, the National Corporations for Housing Partnerships. the incentives to housing investment contained in last year's Tax Reform Act are encouraging steps at directing new investment capital and mortgage money into the housing field.

However, more emphasis needs to be placed on completely now mortgage sources. There are two prime targets-pension plans and federal trust funds. The development, by the administration and Congress, of programs designed to encourage the investment of pension funds and permitting the investment of federal trust fund monies into the mortgage market should be a first order of business.

Mr. Chairman, this topic of mortgage credit is an extremely difficult, yet urgent, one. You and the Committee face an herculean task in developing policies to provide for the needs of the housing industry during economic cycles such as we are now experiencing. If New York City can be of any assistance in the development of your recommendations, please let us know.

As always, it is an honor to appear before you and the committee and once again I wish to express my deep appreciation for your invitation.

Chairman PATMAN. Thank you, sir. Mr. Mayor, you know the reason why we can't get housing money, is the big corporations. They are lenders and also they are borrowers of money. They are in a position where they can pay more interest than other people because, first, the laws of the country don't prohibit them as a corporation from paying more than a certain amount, say 8.5 or 10 percent. There is no limit to it, and if they pay, say, 20 percent that is a realistic rate of about 10 for them, because of the tax laws and the ability to deduct the interest that they pay which reduces considerably the amount of effective interest they pay. There are several things in our tax laws that enter into this thing in a big way. That is the reason I say that we should give real consideration to separating the marketplace interest rate from housing, and needs like housing. You can't pay the rate of interest that is required in order to get housing money.

Now, in the marketplace, of course, you will always have to pay 10, 12, 15 percent because you are competing in the marketplace with not only the corporations that can pay any rate of interest, but you are also competing with the concerns that have gambling casinos, or are speculating and things like that, and I don't think people in competition on interest rates for housing purposes should be compelled to compete with people like that. They just obviously cannot possibly compete. That is the reason that our housing market, I think, has dried up.

Don't you think that we should give consideration to getting away from the marketplace on the question of availability of funds for housing, Mayor Lindsay?

Mr. LINDSAY. I think you are on the right track. I think it is sound to be thinking in these terms. It is consistent with our own view that unless a flow of mortgage money, borrowed money, is made available, we cannot possibly produce housing. We simply are not going to produce it because the ordinary person, the ordinary wage earner, simply can't afford it. If we produce housing in New York City at the market interest rate and do not use the collection of tools, minimal as they are, that are available to hold down the cost of money, then we are producing housing at over $95 per room per month, and that is a conservative estimate.

Therefore, it is understandable that this kind of housing has only produced, in a very limited way, luxury housing for high-income people in a very small area of our city, largely in certain sections of Manhattan. Beyond that we simply cannot produce housing that anybody can afford, even high-income people or nearly high-income people at the current cost of money.