We do not support the idea of a mortgage interest rate tax credit in lieu of the bad debt deductions now provided savings and loan associations and mutual savings banks in the Internal Revenue Code. This idea comes from the Hunt Commission. I know that this may be a subject for other congressional committees, and so I will not dwell on it at length in this statement, except to point out some serious problems as follows:

1. If one type of lending is to receive a direct tax subsidy through a tax credit, then there will be tremendous pressure to extend this tax treatment to other worthy causes.

2. There is a built-in incentive in any tax credit approach to charge higher mortgage rates-and thereby receive higher tax subsidies. 3. It would remove the stabilizing effect of present requirements compelling savings and loan associations to invest in home loans. 4. Its impact falls unequally on similar-sized lending institutions. If a new tax provision for housing is felt necessary at this time we suggest a tax incentive for savings deposited in thrift institutions. Not only would this attract new funds to the institutions specializing in home finance, thereby enabling lower mortgage rates, but it would serve an important anti-inflationary function for our general economy as well.

Legislation introduced by Senator Brooke and Senator Taft is in the right direction.

We do not see the need of nor do we support the proposal to provide assistance to private mortgage insurance companies the idea that the FHA should be a reinsurer for such companies. There are a number of substantial and well-financed private mortgage insurance companies in this country today.

They do not need this type of Government support. One of the most successful and encouraging developments in the mortgage field in recent years has been the development of private mortgage money.

This has been a most successful private enterprise venture and should not be regulated or taken over by the Federal Government which is precisely what the administration's program would do for it. Private mortgage insurance is today accepted in the secondary markets as well as the primary markets. Behind this proposal, apparently, is the thought that this would encourage pension funds and life insurance companies to invest in conventional mortgages.

We see no reason why such investors have to be encouraged to invest in conventional mortgages by offering the crutch of the Federal Government. Billions of dollars of private funds have been going into conventional mortgages without Federal reinsurance of the PMI's.

A major part of the President's message deals with the question of low cost housing. The U.S. Savings and Loan League was not among those who viewed with distaste or alarm the program initiated in the Housing Act of 1968 and particularly they suffered from bad newspaper publicity related to FHA foreclosures in general-often foreclosures which did not involve the assisted programs at all.

As you may know we joined with the National Association of Home Builders, and the National Association of Mutual Savings Banks in engaging Anthony Downs of Chicago to make an exhaustive, independent survey of the whole question of housing subsidies and how best to approach the problem of providing better housing and better

living environment for low-income families. We subscribe to his conclusions which essentially are that of all the ways to help lowincome families in their search for better housing, and the 235 and 236 approach is the best.

As we noted in our testimony to your committee last April, the experiences of the savings and loan business with the section 235 and 236 programs were good. We believe that the overall record of these programs was such that it did not deserve the summary execution given them by the administration in January.

We question, too, the reliance on a completely new and still experimental housing allowance program or direct cash assistance to provide for the housing needs of Americans in the lower economic brackets.

I think that the costs of a broad housing allowance program versus the cost of subsidies via the 235 and 236 programs should be looked at very carefully. We find it hard to believe that the housing allowance program would be significantly less costly in the long run than the 235-236 program.

Possibly housing allowances or general income maintenance should be the principal means of assisting the very lowest income families in obtaining adequate shelter. But a production subsidy along the lines of the 235 program may be needed as well, for areas of tight supply and for the moderate income families above poverty but below median income levels who can afford to pay some, but not all of the interest costs involved in home ownership.

The Senate took a significant step Monday in restoring flows of funds to the mortgage market, and for our part the United States League will do what is necessary and appropriate to expand savings and loan participation in the financing of homes for lower income families under whatever program Congress decides is most appropriate for effective action to bring better housing to all American families.

Thank you, sir.

The CHAIRMAN. Thank you very much. I have a question that Senator Packwood asked me to put to you as follows:

In his housing message, the President suggests that approval of mortgage interest tax credit for financial institutions will supply a steady supply of funds for housing needs. Do you agree with this conclusion?

Mr. STRUNK. No; Senator. We think it actually results in further destabilizing the housing market. This tax credit is too gimmicky. It may look good today, but it could easily be changed in another period. It is important to understand, I believe, that this tax credit would not be an additional tax incentive. It would be in lieu of the present bad debt deduction that Congress has carefully developed over the years to permit the thrift institutions to grow and to have strength. The administration program would take away our bad debt allowance and substitute for it this tax credit, and this tax credit could come and go.

It could be changed just as the 7-percent investment tax credit provided for new plant and equipment. If we ever lost our bad debt allowance and then lost this tax incentive also, our institutions would be very vulnerable. It is important that this business, that is locked into housing and mortgage credit, that the institutions stay alive.

because if we lose our bad debt allowance, and then this other thing is changed around someday it might strike a mortal blow, you know, the preservation of the institutions themselves.

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For that reason, we don't like it. As I say, it is part of the Hunt Commission proposal, and we don't like the Hunt Commission proposal at all, because it would phase out the savings and loan business into the commercial banking business.

The CHAIRMAN. You answered two questions in one. I was going to ask you about the Hunt Commission report. You say you don't like it.

Mr. STRUNK. No, sir; we will be happy to come back and tell you why not.

The CHAIRMAN. We will certainly ask you back.

Your answer with reference to the tax credit was really one of preference, in other words, you would rather keep what you have got. Mr. STRUNK. Correct.

The CHAIRMAN. It has worked very well, hasn't it?

Mr. STRUNK. Yes; our institutions, as you know, until this last July have done very well. The status quo has not been unkind to our institutions as such, and we have, I think, provided great support to the housing market. We don't see the reason to dump one thing that has worked quite well and substitute something for it that really is quite unknown.

The CHAIRMAN. As I see it, one of your great concerns now, and I hope what we did the other day will ease that concern, is competing in the market for deposits.

Mr. STRUNK. Yes, sir.

The CHAIRMAN. For savings.

Mr. STRUNK. Yes, sir.

The CHAIRMAN. If the insurance coverage should be increased above the $20,000 level, as it has now, would that have any material effect do you think, on bringing in savings?

Mr. STRUNK. It would have a helpful effect. With respect to just how much, I couldn't say. Twice in credit crunches like we have had Congress has increased the insurance coverage, first to $15,000 and then to $20,000 and both times it did bring in new money. It was an expression of congressional confidence in the savings and loan business, and a pat on the back, and this is a good thing to do.

So it would help; it helped the last two times; and I think it would help again.

The CHAIRMAN. How about the adequacy of the insurance fund to carry that?

Mr. STRUNK. Senator, the way insurance actually operates the FSLIC does provide 100 percent insurance in effect, because very seldom do they liquidate an institution and pay out just $20,000 to the depositor. What happens is, they may work out mergers with other institutions and the effect of it is in effect 100 percent insurance, although we can't say that.

This would have no implications with respect to that.

The CHAIRMAN. Pretty much the same pattern that the FDIC has been using for years.

Mr. STRUNK. That is correct; and that is the best way to do it. The CHAIRMAN. Senator Proxmire?

Senator PROXMIRE. This tax incentive was explained to us by Secretary Lynn. He indicated that it would not apply, for example, if a bank had 8 percent of its funds in mortgages, they would get no credit. If they went to 10 percent, they would get credit for the whole amount. He felt this would be a very sharp and decisive way and that it would mean that banks which by and large have less than 10 percent would, in order to take full advantage of it, move rapidly into this, and mortgage money would become more available and interest rates would tend to drop.

Do you think it would have that effect?

Mr. STRUNK. As I understand the arithmetic and all this has never been spelled out to us, we have not seen all the numbers in the final print. But as the President's message indicated, it would provide about a 50-basis-point incentive or subsidy for the mortgage industry.

So if a mortgage is a 7-percent mortgage, it would in effect yield. the lender 7%. Fifty-basic-point incentive at times wouldn't amount to much when the prime rate is at 10. At other times, when general money market rates are lower, and when corporates are lower, it would, of course, encourage the banks to go into mortgages.

So I think it could have somewhat of a destabilizing effect. Senator PROXMIRE. Maybe I misunderstood. If they have to maintain a certain level in order to get their credit, I think they would be unlikely to liquidate their mortgage portfolio under almost any circumstances to get below 10 percent.

If they do they lose the whole thing. So it seems to have that element in it, at least.

Mr. STRUNK. My impression was that the financial institution would get the half point credit only if it had 70 percent invested in mortgages.

Senator PROXMIRE. I understand you are right, and I am wrong. I don't think commercial banks have anything near 70 percent of their deposits invested in mortgages.

It might have an effect on switching banks between tax-exempt securities.

So they wouldn't qualify. Would this have a bad effect on savings and loans as such?

Mr. STRUNK. As I understand the proposal, and we have not seen all the fine proposals but the idea is that the tax incentive would just about offset or compensate for the bad-debt deductions we have at this point.

So going in

Senator PROXMIRE. Suppose we should give you both?

Mr. STRUNK. That would be different. That would be great.

Senator PROXMIRE. We need something to give housing a shot in the arm. Maybe we ought to do that.

Mr. STRUNK. The bad debt arrangements have permitted our institutions to put money-more money-into reserves than they could otherwise do. We could put only half of our net into reserves. These institutions have to put money into reserves if they are going to grow.

There is a certain minimum reserve level that the law says that has been maintained, and then if the institutions are going to grow, and take in savings, we have to put in reserves somewhat in proportion to our growth and savings deposits.

So what we had has permitted us to accumulate reserves generally in keeping with our growth. If they eliminate that, then we have to have something to take its place. But as I say, going in, the two may offset each other, but as I say, this is pretty gimmicky, and it could be 7 percent today and 3 percent another day, depending on somebody's judgment as to how much housing needs to be stimulated.

Senator PROXMIRE. You make very helpful contributions in saying that the S. & L. has engaged Anthony Downs to make this study, and after intensive research, he is a highly competent firm out there. They concluded that 235 and 236 is the best way to get low income housing. Do you know of any studies that contradict this?

Mr. STRUNK. Maybe the ones from HUD do, but none from private institutions.

Senator PROXMIRE. We haven't had this kind of documentation before. Then you say that you find it hard to believe that the housing allowance program would be significantly less costly in the long run than the 235 and 236 programs. We made a calculation to contrast 235 and 236 with the administration's estimate of the cost of the housing allowance.

They say $8 to $11 billion a year. With the continuation and the completion of the present $6 million low and moderate income housing based on the present methods, that the housing allowance would cost, approximately 4 to 5 times as much. But you make this conclusion that the housing allowance is more costly based on analysis, but not based on research.

Is that right?

Mr. STRUNK. Just an observation. As I note, Secretary Romney was very critical of the 235 and 236 programs. He was projecting and he was getting enormous numbers in terms of the overall cost of this program, and I never subscribed to that kind of an analysis, and I am a little suspicious of the numbers I see here in terms that the housing allowance program in the long run would be a better way and cheaper way, and so forth.

This isn't necessarily the thing I have been majoring in.

Senator PROXMIRE. Thank you, Mr. Strunk. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Strunk.

[Complete statement of Mr. Strunk follows:]