at a much lower level than the CPI.

I personally doubt that the rate of inflation has been this low, so using this index for a PLAM would tend to make it a "blended" PLAM/SFPM, and its "real" rate would consequently have to be much higher than the real PLAM rate using the CPI as the index.

Figure 4 shows the percentage changes in the CPI compared with those of disposable income per capita. This figure may be used to assess the average payment risk. While quarterly changes in these series are not exactly synchronized, there is a general tendency for income to keep pace with the CPI.

Figure 5 shows the percentage changes in the CPI compared with those of housing prices. This figure may be used to assess the average equity risk. (The house price series used here is published by the Commerce Department, and it purports to show the price changes for a "standard" house, a house whose specifications do not change over time.) Except for a few quarters, house prices tend to rise at a slightly faster rate than the CPI. Thus, both payment and equity risks using the CPI are, on average, not "excessive."

Conclusion

The conclusion should not be startling.

Inflation-Indexed Mortgages (or PLAMS) are capable of qualifying many households now excluded from the homeownership sector. About two million households now renting should be able to become homeowners by using the Inflation-Indexed Mortgage.

Inflation

Indexed Mortgages should be attractive to investors, by providing them with a

FIGURE 4

PERCENTAGE CHANGES IN THE CPI AND DISPOSABLE INCOME
PER CAPITA (ANNUAL RATE)

26

20

15

10

5

0

-6

A

-10

FIGURE 5

PERCENTAGE CHANGES IN THE CPI AND HOUSE PRICES
(ANNUAL RATE)

-16

positive real rate of return. Thus, more capital should be attracted to the home financing market, especially from pension funds, whose basic function makes inflation-indexed investments a natural.

I conclude with a recommendation for depository institutions.

Currently,

many financial institutions could experiment with indexation, at first on the liabilities side of the balance sheet. Financial institutions could "test the waters" by offering 2- or 3- percent Inflation-Indexed Savings Accounts. This would (1) help them immediately by bringing down their current cost of funds, and (2) be a precurser to the authorization of Inflation-Indexed Mortgages. One of the alleged problems with Inflation-Indexed Mortgages is its initial low cash flow (see Table 1 above). Depository institutions could use this weakness as a strength, by starting off with indexed deposits. All certificates of deposit with maturity of at least 3.5 years are no longer under the restrictions of Regulation Q, which limits deposit rates offered by federally insured financial institutions.

Also, "Jumbo CDs," CDs with $100,000 minimum balance, are beyond the control of Reg. Q. The experiment could thus begin immediately with these types of deposits. I am and have been an avowed advocate for Inflation-Indexed Mortgages. The increased funds they would make available for housing and the enormous benefits for consumers are benefits that far offset the risks of these mortgage instruments.

Mr. LUNDINE. And now, I would like to introduce Roger Willcox, president of the Community Cooperative Development Foundation, whose written statement has been given out and also in its entirety will be made a part of the record.

Mr. Willcox, if you can summarize your remarks.

STATEMENT OF ROGER WILLCOX, PRESIDENT, COMMUNITY COOPERATIVE DEVELOPMENT FOUNDATION, SOUTH NORWALK, CONN.

Mr. WILLCOX. First, I would like to say I am sorry Mr. Gonzalez had to leave because Mr. Paul Yzaguirre, president of the National Council of La Raza got me involved in my present effort to develop a private index debenture and loan system for the Fund for an OPEN Society, of which he is chairman.

My experience with index loans in practice goes back-and this is described on the second page of my testimony-goes back to the late 1950's, when I was president of FCH Services, Inc., the operat-* ing arm of the Foundation for Cooperative Housing which had a contract with the Agency for International Development. We were asked by the cooperatives in Chile to develop an index and debenture and loan system, so they would have some kind of a mortgage system in Chile.

At that time they had no mortgage money available and thousands of families were trying to build houses without mortgages, buying a few bricks at the end of each payday. It took them years and years to build a house. They lived in a shack alongside of the house they were building, and after 10 or 15 years, to have something they could move into it.

AID did make available the money. The president of the U.S. Savings & Loan League, Mr. Arthur Courshon, and our general counsel, David L. Krooth, put together the technical aspects of an index savings and loan system which was put into effect. It proved an immediate success.

It offered savers a 2-percent interest rate and annual readjustment. For annual readjustments, they selected the average wage index published by the Chilean Government, an index used for all indexing in Chile at that time.

Savers got 2 percent interest plus annual readjustment by an index of average wages. Borrowers got mortgage loans based on a 4.5 percent interest and annual readjustments in accordance with the same index.

That procedure worked very well for many years until the seventies, when political and other instability hit the country, and inflation rates shot up over 50 percent.

With inflation rates 10 to 20 percent, the system worked. But when inflation went over 50 percent per year, it began to break down.

Some of the reasons for that are outlined in this testimony. With the Chilean success behind us, I personally helped get the system introduced into Brazil, where it spread like wildfire, and as previously testified is the basic system for mortgages in Brazil.

I also was asked to go to Argentina, but that was more difficult. The Argentinian banking and Government officials didn't believe

that they should introduce indexing. It meant that they were bowing to the forces of inflation. The fact that they had had 1,000 percent inflation-

Mr. MCKINNEY. I didn't mean to interrupt, but how is housing indexed to 135 percent inflation per annum?

Mr. WILLCOX. In those days, the typical mortgage payment was worth less than the postage stamp necessary to mail it into their central mortgage institution, and they still wouldn't go to indexing.

They have since, but they wouldn't back in the 1960's. Even with $25 million of hard American currency available through the InterAmerican Bank as bait and they still wouldn't touch it.

In the United States—and this is my concern for the past several years-the question is whether we can introduce an index debenture and loan system. My feeling is, and I am an economist also, and a graduate of MIT, among other places, that we can. The average rate of inflation as measured by the average weekly earnings index has only been 7 percent per year since 1972.

An average of 7 percent compares beautifully with the problems index mortgages had to confront in South America, where inflation was running up to 20 to 40 percent per year.

With our modest annual rate of inflation, plus the fact we have such a huge and diversified economy, the United States looks like an absolute natural for an index debenture and loan system.

Beginning on page 4 of my testimony is a brief outline and attached to the testimony is a six or seven-page detailed outline of a program developed for the tax-exempt Fund for an OPEN Society which has been borrowing money from private sources and making advantageous loans to those people who they believe are worthy of special assistance.

The program that we have in mind would provide from 2- to 5percent interest rate to savers, with an annual readjustment on the average weekly earnings index basis. Not included in my testimony, but because of the interest of Mr. McKinney and others, here is a chart.

I have copies for you. [The chart follows:]