the option to convert to the short-term interest rate instrument or would have purchased insurance. This extreme assumption was made in order to obtain an upper limit to the estimated cost of the program.* It was also assumed that the income from the short-term interest rate instrument was based on a simple average of the Treasury bill rate and the commercial paper rate and that fixed-rate mortgages earned a simple average of interest rates on long-term government and corporate bonds prevailing at the time the mortgage loan was originated. These long-term interest rates were used rather than the mortgage rate because mortgage rates during the period were affected by the institutional structure that actually prevailed, which presumably would not have existed if the proposed program were in effect. It is likely that the mortgage rate over the period would have behaved like other long-term interest rates.

It is further assumed that when the government had a positive net income from the program, (i.e., when it was a net receiver of funds from mortgage lenders) it invested the proceeds in a payment fund at the Treasury bill rate and that when it exhausted its accumulated earnings in the fund, it borrowed at the then existing Treasury bill rate. Mortgage loan repayments by households were assumed to follow a path consistent with HUD and Federal Reserve Board figures.

As is illustrated in the attached table, for most of the period the government would have run a surplus from the program: The surplus may be interpreted as the insurance premium from insuring against interest rate increases. It is only in 1974, a highly unusual year by anyone's standards, that the payment fund would have gone into deficit. The government would have paid out more than it took in for the years 1966, 1968-69 and 1973-74. These were the years when thrifts were experiencing difficulties in competing for deposits. The results clearly suggest that the program would not have been a drain on the Treasury even when it is assumed that all mortgage loans would be covered by the program. On the basis of these calculations, it would appear that the proposal is viable from a fiscal viewpoint.

In the calculations, it is assumed that all mortgage loans were entered into the program. It is highly likely that mortgage lenders would not want to swap all of their fixed-interest-rate income for the short-term interest rate income. After all, short-term interest rates can fall as well as rise. Thus, the scope of the program is exaggerated in the calculations. The scope could be reduced further by limiting the program only to those lenders who hold sizeable proportions of their assets in mortgage loans, more than, say, 50 percent of their assets in such loans. Thus, with these refinements we could have a change in substance without form. Savings and loan associations and mutual savings banks would be able to retain their commitment to mortgage lending but could do so without trying to rely on Regulation Q and other federal restrictions to keep them viable. By receiving the going short-term rate on their mortgage loans, these institutions could always pay enough to retain their deposits under these circumstances; depositors would have no incentive to shift into Treasury bills, money market funds or other competing assets when short-term rates rise. The thrift institutions

It is an upper limited program because it is assumed that no significant refinancing

occurs.

could compete effectively for houshold savings and be assured of a much steadier and more reliable source of funds for mortgage lending.

While the proposals made in this paper deserve further study and elaboration, they suggest that a federal program that protects thrift institutions against interest rate increases would greatly reduce the possible deleterious effects on housing of financial reform.

1 The difference between the income from fixed rate mortgage icans and income based on short-term interest rates. A positive figure indicates a net flow to the government, a negative figure indicates a net flow to financial institutions.

2 The cumulative sum of the net income flows plus interest income on investment of the fund and less interest cost when the fund is in deficit.

EVALUATIONS OF SELECTED SUBSIDIZED

HOUSING PROGRAMS

(By Richard L. Wellons*)

This paper presents a general description of several major Federal subsidized housing programs and a brief review of various analyses of the effectiveness of these programs. Included are the most significant subsidized programs of the Department of Housing and Urban Development, Section 235 homeownership assistance, Section 236 rental housing assistance, and the low-rent public housing programs, and the major housing program of the Farmers Home Administration, the Section 502 homeownership loan program. For each program, a general description is given of the kind of assistance provided and persons benefited, followed by activity levels (volume of unit production and outlays) as available for recent years. Factual data on costs, impact and equity are shown where applicable together with a brief review of critical and favorable analyses in terms of program costs, efficiency, equity, and positive or adverse secondary effects resulting from the program.

HUD SUBSIDY PROGRAMS

SECTION 235.-HOMEOWNERSHIP ASSISTANCE PROGRAM

Established by the Housing and Urban Development Act of 1968, as amended, Sec. 235 provides subsidized home-buying assistance to moderate and lower-income families. Two-thirds of the families served in 1973 had adjusted incomes between $3,600 and $8,400. Eligible families must have incomes not exceeding 80 percent of the median area income. (The former eligibility standard effective before the 1974 Housing Act was based upon 135 percent of public housing income.) Payments are made to lenders on behalf of homebuyers to reduce mortgage interest rates to as low as 1 percent. The homebuyer must make monthly debt-service payments totaling 20 percent of family income. New commitments were suspended administratively in January 1973. A modified Sec. 235 program, which reduces interest rates to as low as 5 percent, is to be reinstated by HUD effective January 1976, with the release of $264.1 million in previously appropriated funds.

ACTIVITY LEVELS

Economic Analyst, Congressional Research Service, The Library of Congress. Paper prepared for the Financial Institutions and the Nation's Economy (FINE) Study of the House Committee on Banking, Currency and Housing.

1 (Including administrative expenses, taxes foregone and GNMA losses).

Some evaluations have considered total budgetary and per unit costs to be excessive. Others have pointed out that such costs are misleading when based on costs of the program's earliest years. Since experience indicates that owners' incomes rise and subsidy payments are reduced as owner-occupancy continues, the average payment over an average 11-year life might be about one-half of the $948 cited for just 1972. In fact, the average subsidy payment per family was $552 for those recertified in the first half of 1974, down from $576 in 1973. This reduction was associated with a slight increase in average income of the families, and other changes. The unit cost of $948 shown above appeared in a HUD assessment called Housing in the Seventies, a Report of the National Housing Policy Review, first published in October 1973.1 This HUD report derived an average unit cost of $948 from a relatively small sample of Sec. 235 units, many of which were located in high cost areas. Such a sample may have skewed the 1972 unit cost to a relatively high figure, and may account in part for the discrepancy between the 1972 cost and the lower 1973 and 1974 average costs derived from much larger and more diverse samples.

Another cost consideration is how prices of new 235 units compare with those of comparable new conventionally financed units. The HUD study Housing in the Seventies did not demonstrate that 235 construction costs were higher. The Technical Record study found, in fact, that 235 units sold for $1.55 less per square foot than comparable unsubsidized homes. A 1,200 square foot house under the Sec. 235 program sold for $1,860 less than comparable unsubsidized houses. This may be because 235 homes are generally produced in quantity for a practically assured market. Both greater mass production and faster selling time would tend to hold down builder's costs and result in a lower selling price. Evaluations sympathetic to 235 also contend that even if new conventional units were available at lower prices their volume would not be sufficient to meet the objectives of the 235 program, nor could they reach lower income families without the subsidy.

Since rehabilitation is sometimes cheaper than new construction, some consider it more efficient for housing large families in that it can provide more space per dollar invested. However, other evaluations question whether it is possible to produce enough rehabilitated units to meet the needs Sec. 235 was designed to serve. The state of the rehabilitation industry, being relatively undeveloped, may not be capable of responding to a policy emphasizing rehabilitation. Moreover, only new units can achieve dispersal and certain other subsidy objectives.

1 Some of the figures listed throughout this paper under the sections on cost, equity, and efficiency considerations are taken from the HUD Report Housing in the Seventies, and are so indicated. Also from the Housing in the Seventies report are tables on income distribution that appear under each section on equity considerations.