Milwaukee had hundreds of units ready for approval and you cut them off. Doesn't this demand by the cities indicate a big housing

need?

How can you justify proposing only 150,000 units next year?

Secretary LYNN. Did you say next year? What we are talking about is what the President proposes for the balance of this year.

We are talking about in addition over 100,000 units that we are still processing in the pipeline, 200,000 more units, 150,000 of which would be new construction.

Senator PROXMIRE. The 150,000 new construction is what I was talking about.

Secretary LYNN. Plus the 100 that is still in the pipe.

Senator PROXMIRE. My time is up, Mr. Chairman.

Incidentally, I have some questions I would like to submit for the

record.

Secretary LYNN. Fine.

[The Department submitted the following answers to Senator Proxmire's questions for the record:]

1. Mr. Secretary, the Douglas Commission and the GAO have both found that billions of dollars could be saved in meeting the housing goals if the power of the Government to borrow money was substituted for the private market's borrowing of funds. The Government can borrow at about 1 to 2 percentage points lower than can the private market.

The GAO said this could save $2 to $5 billion in meeting the housing goals. Apparently you did no serious study of this proposal. But you have asked about it since late August.

Recently one of your staff called my office to give the objections. We found them almost frivolous—that such borrowing would raise the interest rates, be inflationary, etc.

Have you done any serious study of this matter? Do you have for us a detailed study which we can subject to examination and criticism, or have you just written it off with verbal objections?

Since the cost of housing is at the root of the problem, and since the cost of money is the biggest single cost, why not treat this seriously?

Answer. We have been studying direct lending proposals very seriously.
Our efforts have included:

1. A theoretical study, done on contract for the housing study by Jack M. Guttentag of the University of Pennsylvania.

2. An internal study which attempts some empirical estimates of the importance of some of the phenomenon outlined by Guttentag.

3. Consultations with the staff of the Council of Economic Advisers to get their views on the advantages and disadvantages of direct lending.

The main conclusions of our analysis are as follows:

1. Whether a given amount of housing production is financed by direct Government loans or by issuing private mortgages, the same amount of credit has to be raised on the nation's credit markets. When credit is tight, as at present, an increase in the amount of credit demanded for housing implies that less is available for other uses, such as consumer loans, state and local government and business investments. The true economic cost of raising extra credit for housing is what that credit would have produced in other sectors. This true economic cost will exist whether the credit is raised by Government debt issues or mortgages, even though budget costs may differ. While budget costs are important, true economic costs should be the primary consideration in designing policies.

2. The credit can be attracted to housing at a lower interest rate with Government debt issues than with mortgage financing simply because Government debt issues are more desirable to investors. One of the main reasons that Government debt is more desirable than mortgages is that it is more liquid, that is to say, the existence of a highly developed market makes it easier to dispose of it quickly. 3. At any point of time, investors will have adjusted their portfolio to achieve the mix between Government debt, mortgages, and other investments that best

suits their needs. In order to get them to accept the added Government debt issued as a result of a direct loan program, the interest rate on the Government debt will have to be raised. Since the increase in Government borrowing could be substantial, a significant interest rate increase might be required. For example, one program analyzed by GAO would involve a $6 billion issue in the first year. This compares to new Government borrowing of about $20 billion over the last few years and expected refinancing of about $120 billion this year. Given the large amount of new borrowing and refinancing which occurs every year, it only takes a small increase in interest rates to wipe out a substantial part of the savings estimated by GAO. The increase in interest costs is reversed as the loan is repaid, but in the GAO program net repayments do not accrue for many years, and, therefore, future interest rate benefits must be discounted heavily.

4. Initially, additional upward pressure is placed on interest rates because a direct lending program would have an inflationary impact. This results from the highly liquid nature of the Government debt. Investors like to have highly liquid investments in their portfolio, because they then have to hold less cash to protect themselves against unanticipated needs, i.e., more of their wealth can be invested in income earning assets. Therefore, the replacement of mortgages with Government debt allows investors to use some of their cash balances for additional lending, thus increasing the velocity of money in the economy and creating an economic expansion. The Federal Reserve can offset this effect by selling bonds and reducing the money supply, but this raises interest rates further.

We have attempted to obtain quantitative estimates of the importance of these conclusions. The task is not easy, because most models of the economy are not well suited to the analysis of a direct loan program. However, a simulation of FNMA debt-financed purchases of mortgages has been done using the Brookings Institution economic model and the effects would be very similar to those of a direct loan program. In this model, a program of the magnitude envisioned by GAO causes an increase in Treasury bill rates of about 30 basis points for the first six months of the program. Later increases are less serious and as noted previously, interest rates are lowered eventually. Assuming that other Government debt is affected comparably, the present value of the extra interest cost of the whole program to the Treasury is about $2.5 billion and completely offsets the savings estimated by GAO. Other models indicate a smaller interest rate effect and the state of the art is such that precise estimates are not possible. However, given the uncertainty on these matters, our concern can hardly be called "frivolous."

We are forwarding the Guttentag paper, our internal paper, and a cony of correspondence with the CEA to your office. We shall be pleased to work closely with your staff if you require any more detailed information.

2. Mr. Secretary, why are you “terminating" the Section 235 program? In Milwaukee it worked and worked fine. We had no foreclosures. But we had good HUD management.

In Detroit, you had failures. But there was wholesale corruption by HUD officials and their private counterparts. You had bad management. And, I am told, the foreclosures were not just Section 235 units, but effected (sic) most of the programs.

How, in those circumstances, do you blame the program? Isn't this merely a cover-up of HUD mismanagement, ineptness, and in some cases corruption?

You're throwing out the baby with the dirty bathwater. (What were 235 closures in Detroit? What proportion of total?) (HUD will say that 7 percent of all 235 units are foreclosed and they predict it will rise to 20%).

Answer. The subsidized housing programs were not evaluated solely by whether they failed or succeeded in one particular geographic area, or by whether they had a high or low rate of foreclosure. The National Housing Policy Review examined nationwide many aspects of the programs focusing mainly on their cost-effectiveness, equity, social impact, in addition to such specific issues as foreclosure rates and HUD acquisition costs.

As you know, the study concluded that a program emphasizing use of the existing stock of housing and giving more freedom of choice to lower income families by providing direct cash assistance to purchase or rent decent housing rather than by providing new housing itself appears to be the most promising way of achieving the goals of the Housing Act of 1949.

The Study further determined that direct cash assistance would succeed at lower costs per low-income family served. The Section 235 program, on the other

hand, provides relatively large benefits per family served ($1,087 in Federal costs annually), even though the average program beneficiary is not low-income ($6,750 in 235, or substantially above the low-income line of $4,275).

3. Mr. Secretary, over the years the poor have gotten a pretty raw deal from HUD, FHA, and the Federal bureaucracy.

In 1949, we pledged to build 810,000 units of public housing in six years. It took HUD and its predecessors 20 years to do that.

FHA took part in red-lining the ghettos. That didn't stop until 1968.

For years FHA had restrictive covenants written into its insurance agreements. Because of the tax laws to deduct interest and property taxes paid-which I am for the bulk of all housing subsidies have gone to those with upper middle and upper incomes.

Now, you are abandoning any substantial new starts for public housing, for 235, and are postponing any new program at all until after 1975.

HUD broke faith with the poor and moderate income families in the past. In view of that Record, instead of abandoning the programs, don't you have a moral obligation to carry them out, to make them work, and to house the people of this country?

Answer. Our moral obligation is to develop programs that will work towards the national goal, reaffirmed by this Administration, of "a decent home and a suitable living environment for every American family." The initiatives contained in the President's September 19 Message on Housing, including the full scale analysis and development of the direct cash assistance approach are steps in the direction of meeting our moral obligation-decent housing for all American families.

On the other hand, the National Housing Policy Review showed that the present programs are neither equitably nor cost effectively moving towards that objective, while at the same time they are isolating poor Americans from the mainstream of American life.

In meeting our immediate obligation, we intend to process applications for 200,000 additional units in fiscal year 1974, 150,000 units of which would be new construction and 50,000 of which would be existing units leased under the Section 23 program.

Senator PROXMIRE. I am sorry to interrupt you but I want to say that although I have been a little adverse this morning and although we do disagree on the fundamental principles here, I have great admiration for your ability. I just wish you were on our side. Then we really would have a great housing program.

Secretary LYNN. Thank you for the kind comment.

Senator WEICKER. There is one aspect of your theory that I do not quite understand. I was mulling over it here, and in the course of your testimony, you indicated that the direct-payment portion of the program is not expected to provide the principal thrust for new construction.

Actually, you expect this to take place by virtue of normal market forces, et cetera.

Secretary LYNN. What I was saying is that the increase in units in the country will come primarily from market forces, but there are a group of our pepole in this country who, through lack of money just cannot enter into that market even though there is housing available. There are people on the waiting list that is right—because their only choice is to get into public housing or to get into subsidized housing.

What we are saying is that using the market forces for middle America to produce more housing overall thus creating vacancies, and using cash, assuming we can come up with an operational program that makes sense, to put in the hands of the people that cannot afford to make it in the marketplace, we can provide decent housing over a

period of years to all of the people who need it. This will be possible because of the safe and sanitary housing that has been made available by those market forces.

Senator WEICKER. Then I gather you give considerably more importance to the direct payment than in the initial responses to my questions.

Secretary LYNN. Then I misunderstood your questions, Senator. What we are saying is that direct cash assistance looks like the best possible approach for helping lower income families and that we want additional time to come up with an evaluation of an operational program.

Senator WEICKER. How does that relate itself to new construction rather than to an increase in rent?

I still don't understand.

Secretary LYNN. Because, if you have a healthy rate of construction, you are continually increasing existing housing. As real income of Americans grows, one of the desires, or expectations of Americans who have jobs is to move from their first home, whether it is rented or otherwise, into a second home whether it is rented or owned, in a third home and so on. This is a phenomenon that has occurred in this country over many, many years.

Senator WEICKER. It has occurred over many years without interruption. If we follow your theory, we should be in good shape now. Secretary LYNN. No, because there are a group of Americans that do not have the wherewithal, the money to take advantage of the units available on the market.

Senator WEICKER. So, I get back to my initial questioning, and that is what is it that the Government participation in public housing is, now in the form of cash, period.

Secretary LYNN. At least the main thrust would be in the form of cash-one of the things we would have to look at as part of our study would be to see whether there are parts of the country where market forces have not provided enough overall housing and where, accordingly, you would have to have a construction program.

Senator WEICKER. Lastly, I was reminded that the reduction in the housing in the last 20 years was due to the demolition of urban housing. There is no question of the fact that substandard housing in the cities was being torn down. But in their place shopping centers, et cetera, went up, not new housing. That was the basis for one replacement theory.

So. I do not accept, in other words, the figures that you are basing your argument on as to the demolition or elimination or substandard housing. It has not been replaced.

Secretary LYNN. No: but Senator, then you would look at the overcrowding figure, would you not? You would anticipate if this has just been destruction and no other housing made available for people to move into, the overcrowding figures would increase substantially. It has been the opposite. The overcrowding has gone down, too; the dilapidated housing has gone down, too; the population has grown at the same time; and yet all of these figures show progress.

Senator WEICKER. The population of the cities has not grown.
Mr. HYDE. I must add, Senator

Secretary LYNN. I am talking national figures at the moment. Senator WEICKER. I am talking about any major city in the United States with the exception of your newer cities.

Mr. HYDE. Let me correct one statement, Senator.

Our records do show that at the end of 1972, the number of dwelling units replaced, where they had been destroyed in urban renewal, had reached the 1-for-1 replacement overall nationally, and more that 50 percent of those were for low and moderate income families.

We have turned that corner.

Senator WEICKER. I do not see in the payment of money to these individuals a construction incentive.

Secretary LYNN. What is happening in all the cities of the United States is a rapid deterioration of existing housing and there are two ways of affecting housing.

For example, I have a letter from two planners in Cleveland who looked at this situation with regard to neighborhoods that are teetering in Cleveland, that look like they may decline and go under. Their analysis is that the best possible thing that could happen there is direct cash assistance, because you have landlords and owners who have increasing costs, whether they are taxes, or energy costs, or maintenance and repair, but the only people who are eligible to live there don't have the kind of money to pay for that kind of maintenance and repair.

So, what we are doing is we built new and we accelerated the process of tearing down what already exists.

Senator WEICKER. I am going to give you an opportunity to try to end up on a positive note. Are we putting our housing program in the hands of landlords, et cetera? Are we going to do a job that the U.S. Government has tried to do, albeit sometimes unsatisfactorily?

Secretary LYNN. We are giving freedom of choice where they live, and putting money in their hands that they can find on the market safe and sanitary housing. We do require cooperation from communities. As I said before, there are very definite links of a program of this kind with the Better Communities Act approach. We would look to the communities to be doing what they should be doing by way of being sure that housing is safe and sanitary and the like.

Senator WEICKER. When you mentioned a few minutes ago that there should be a construction component, would you determine what that ought to be?

Secretary LYNN. No, one of the things we have to be looking at in this connection is as to where that kind of construction may go.

Senator WEICKER. I think you are going to find that I am going to be a lot more prone to approving the type of legislation that you put before us if I see a construction component, rather than the concept here. Take the money and everything will turn out all right.

Secretary LYNN. As I said, we want to replace the new construction approach. We need it during this interim period as things are. But as to the future, this is one of the reasons we want this little extra time to get a better handle on the specific situation, nationally.

It would appear that we are not in bad shape but we do not know just how much there will be as to tightness of a market from place to place, and we have to get some better dope on that subject.

Senator WEICKER. Just speaking again for myself, let me urge you, because frankly, I am going to think about it before the bill goes to