EMERGENCY HOME FINANCING

MONDAY, FEBRUARY 2, 1970

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The committee met, pursuant to notice, at 10:15 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman (chairman), presiding.

Present: Representatives Patman, Barrett, Sullivan, Ashley, Moorhead, Stephens, Gonzalez, Hanna, Gettys, Annunzio, Rees, Galifianakis, Griffin, Hanley, Chappell, Widnall, Dwyer, Halpern, Johnson, Mize, Brown, Williams, and Wylie.

Chairman PATMAN. The committee will please come to order.

We are expecting the mayor at any time. As soon as he comes in he will be our first witness, but I have a statement to make and Mr. Widnall and Mr. Barrett have statements to make.

The hearing that we open here this morning marks a time in the Nation's history when half the population-virtually all moderate income families have been priced out of the housing market. To assert that the country is experiencing a housing crisis is to understate the situation. Effective action must be taken immediately or the country will find itself overwhelmed by disaster in terms of its unmet housing needs.

Our main objective in these hearings is to find additional and alternative sources of funds at reasonable interest rates to meet our housing needs and goals as set forth in the 1969 Housing Act, 2.6 million a year or 26 million in 10 years.

Housing starts plummeted from an annual rate of 1.9 million starts at the beginning of last year to 1.3 million by December, a drop of 32 percent to a level which is half the annual housing goal. In effect, the Nation is moving away from achieving that goal at about the same speed it should be approaching it. We are now building 6.5 housing units per 1,000 persons which is less than the rate achieved 20 years ago and far less than the rate which was achieved in 1968 by many other countries.

There is no encouragement for the future in the President's Economic Report. Given today's costs for land, construction, and financing, the report clearly indicates that only 10 million housing units can be expected to be constructed between now and the end of 1975, 16 million short of 26 million units called for in the national housing goals by 1978.

Studies conducted by the House Banking and Currency Committee staff reveal that 28.4 million households-101 million people cannot now afford payments on a $20,000 mortgage, the minimum loan for

an adequate house in today's ruinous high-interest, tight-money economy. In order to afford an FHA mortgage of this size with a term of 30 years, a family must have a gross income of at least $13,000 and be able to make monthly payments of at least $226 for principal, taxes, insurance, maintenance, and, above all, interest. That minimum monthly payment of $226 reflects an astounding, almost unbelievable effective interest rate of 9 percent. Over the life of the mortgage it will require interest payments totaling about $38,000. In other words, that $22,000 house is going to cost the owner a grand total of nearly $58,000 before he owns it outright.

Even if the would-be moderate income homebuyer is credit worthy and is willing to pay the price, he may never sign a deed because mortgage money simply is not available to him at many lending institutions across the country. Only 45 percent of all FHA field offices report the availability of adequate loan funds. High interest rates on short-term securities are draining lending institutions of savings deposits which comprise the vast bulk of residential mortgage funds. Savings and loan associations, which provide over 40 percent of all residential mortgage loans, reported a net savings loss of nearly $1 billion last year. Similar conditions also prevailed at mutual savings banks, commercial banks, and insurance companies. By year's end the average mortgage originated by these institutions ranged from $28,800 for savings and loans up to $47,700 for life insurance companies. By this time practically every housing expert in the land was saying that only the poor, because they qualified for federally assisted housing, or the rich, because they qualified for anything, could afford to purchase a home. I wish even that were true. The fact is that the Department of Housing and Urban Development reported there were about 200,000 assisted housing unit starts last year, about one-third of the annual requirement to meet the national housing goals.

The price situation for apartment dwellers is even worse. With a vacancy rate down to a record post-war level of nearly one percent, new two-bedroom units in apartment houses in major urban areas are renting for $200 to $250 and three-bedroom units for $250 to over $300. Yet, these are not luxury apartments by any means. In many instances these high rents reflect the fact that insurance companies have written themselves in for a piece of the action-a piece of the income from such property-in addition to charging sky-high interest rates on loans. They call it hedging against inflation.

I want to advise the committee we must go into this question of not only a person being required to pay the maximum rate of interest and then maintain compensating balances in a bank free of charge, and then in addition give the bank a piece of the action which in effect means several times the rate of interest that can legally be required in a State. We must do something about that. That must be stopped. Recently, contracts have been made in which banks and insurance companies are just permitting the person who gets the loan to have the benefits of the first 10 years. At the end of 10 years, the insurance company or the bank takes it over entirely. And I think our committee should give that early consideration.

In reality, such practices serve as booster shots that strengthen inflation.

This is a thumbnail sketch of the failure of our system, as it is now structured, to even approach fulfillment of the Nation's housing needs. The history of that failure didn't begin with the credit crunch of 1969. It has existed through 5 credit crunches during the past 20 years. This is a constant condition and it raises questions about our housing economy that can no longer be ignored. Can the system, relying almost entirely on the private sector, as it does, be expected to meet the national housing goals without change? If not, what changes can and should be made in the private sector. If the private sector cannot realistically be expected to meet our housing needs, regardless of change, what new public instruments and institutions can and should be created to fill the gap?

In this connection, there are four pieces of legislation which will be under consideration by the committee during this hearing and the weeks that follow. Three of these four are designed to provide the additional sources of mortgage funds at reasonable rates necessary to achieve the national housing goals.

H.R. 13694, introduced by Congresswoman Sullivan, would create a Home Owners Mortgage Loan Corporation.

H.R. 14639, which I have introduced, would create a National Development Bank which could make direct loans or guarantee loans similar to the Reconstruction Finance Corporation that did such a wonderful job over a 22-year period.

H.R. 15402, which I also introduced, is designed to encourage tax exempt private pension funds to invest a significant portion of their assets in low- and moderate-income housing paper insured or guaranteed by the Federal Government.

H.R. 11, which was introduced by me, would have a positive effect not only on housing, but on the entire economy of the Nation. The measure would reorganize the Federal Reserve Board so that it could be made to function in ways which would carry out national policies as they are established by the administration and Congress. I do not believe that there is a central bank in the world except our own that doesn't recognize its social responsibility to the government under which it is operating.

(The text of H.R. 13694, H.R. 14639, H.R. 15402, and H.R. 11 follow :)

[H.R. 13694, 91st Cong., first sess.]

A BILL To assist in meeting the housing goals of the American people by creating the Home Owners Mortgage Loan Corporation

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SHORT TITLE

SECTION 1. This Act may be cited as the "Home Owners Mortgage Loan Corporation Act".

FINDINGS AND PURPOSE

SEC. 2. The Congress finds that the many programs of Government, intended to assure good housing for the American family at prices it can afford, are incapable of achieving their goals during recurring periods of tight money and high interest rates. Many credit-worthy families are being and have been denied mortgage financing on reasonable terms, not because of their inability to repay the obligation but because private funds needed for home financing have been diverted into other investment avenues. Such funds as are available for home

recommendations it may have for additional legislative, administrative, and other action to achieve the purpose of this Act.

AUTHORIZATION OF APPROPRIATIONS FOR ADMINISTRATIVE EXPENSES

SEC. 9. There are authorized to be appropriated such sums as may be necessary for the administrative expenses incurred by the Corporation in carrying out this Act.

AMENDMENTS TO OTHER LAWS

SEC. 10. (a) Section 101 of the Government Corporation Control Act is amended by inserting "Home Owners Mortgage Loan Corporation;" after "Government National Mortgage Association ;".

(b) Section 5315 of title 5, United States Code, is amended by adding at the end thereof the following:

"(92) Members, Board of Directors of the Home Owners Mortgage Loan Corporation."

[H.R. 14639, 91st Cong., first sess.]

A BILL To establish a Development Bank to aid in financing low- and moderate-income housing, employment opportunities for unemployed and low-income citizens, and public facilities in certain urban and rural areas

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

§ 1. Short title

This Act may be cited as the "Development Bank Act”.

§ 2. Findings and purpose

The Congress finds that inflation and high interest-tight money policies are making it impossible to meet the national housing goals for low and moderate income families, and provide urgently needed public facilities and employment opportunities for those Americans trapped in depressed urban and rural areas by circumstances over which they have virtually no control. Accordingly, the Congress finds it necessary to establish a Development Bank to provide credit on reasonable terms and technical assistance for:

(1) Low- and moderate-income housing;

(2) Public facilities to meet social, health, and educational transportation, and other needs in depressed urban and rural areas;

(3) Improvement, expansion, and establishment of businesses and industries providing employment opportunities at adequate wage rates for unemployed and underemployed persons;

(4) Supporting public facilities required by such businesses and industries; and

(5) Promoting private investment in such projects and facilities.

§3. Definitions

(1) The term "low and moderate income" shall be identical to definitions made by the Secretary of Housing and Urban Development in establishing criteria by which families qualify for occupancy of dwellings supplied under the low- and moderate-income rental and home ownership programs of the National Housing Act.

(2) The term "public facility" means the structures and equipment owned and operated by State and local governments to provide medical, social, educational, transportation, and other services.

(3) The term "supporting public facilities" means those facilities which are usually publicly owned and are necessary for the operation of businesses and industries, such as roads and sewer and water systems.

(4) The term "depressed urban and rural areas" means those areas which may be designated without regard to political boundaries by the Secretary of Labor, the Secretary of Commerce, and the Director of the Office of Economic Opportunity on the basis of the most recent appropriate annual statistics for the most recent available calendar year, as having a rate of unemployment of at least 6 per centum for the preceding calendar year, or a high rate of underemployed persons whose income does not exceed the level of poverty as that level