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And in this chart we show the magnitude of new funds required to meet the housing goals. You will note in 1969, with a production of about 1,450,000 units, it took about $20 billion in mortgage credit to finance those units.

By the time we get up to the goal level in 1978, we will have to have about $53 billion of mortgage credit. So you have to increase the amount of money going into mortgages by about $33 billion in order to get up to that goal level. Instead of the $20 billion a year, you have to have around $53 billion a year. That means we have to take some very significant steps in getting that additional money into mortgages and that is why I put such emphasis in my earlier statement about a budget surplus.

You are not going to meet the housing goals of this country unless you do one of two things. Unless you have a surplus in the Federal budget so that private funds can be attracted into the housing market or unless you set up some form of Federal control over funds and their flow into housing.

For the current year, realistic estimates indicate some further decline in housing starts during the next few months-almost regardless of what action is taken now. But a recovery can and should be induced and underway by summer. For the full calendar year, we are striving to achieve approximately 1.4 million starts, with the rate in the final months well above this level. We also expect about 450,000 mobile home shipments for the year, giving a total of 1.8 to 1.9 million new dwelling units produced.

No one could be more distressed than I am at the Nation's mounting and increasingly serious housing shortage, or more aware of present and future needs and the steps that must be taken to meet them. We must be honest in our appraisal and recognition of the need, and we do have the resources to meet the needs-but as a Nation we have not yet been willing to make the commitment needed.

I defy anyone to identify a physical shortage or need whose solution involves more complicated economic, social and governmental considerations. Money is only one of scores of requirements. But because that is the focus of this hearing, let me sketch the magnitude of this requirement.

For the current calendar year, we estimate a net new residential mortgage need of about $2012 billion. This should be enough to finance 1.4 million housing starts plus turnover of existing houses. It compares with $19.8 billion of net new residential mortgages provided in 1969. Yet, this year's need is still only half the amount that will be needed a few years from now.

One thing is clear, both for the immediate period ahead and over the decade: any significant budget deficit, by absorbing available savings, will make it most difficult to obtain enough private financing for housing unless borrowing by some other sector is deliberately restrained. Financing of housing must receive a higher priority in dividing the total national product. Meeting the housing goals and needs will require nearly doubling annual housing production, and ways must be found to finance this from private sources.

You can only do what the total national product will permit and if more is going to go into housing, then it has to come from other sectors unless we can put into housing the national growth that comes along.

PROPOSED LEGISLATION NOW BEFORE THE COMMITTEE

Several bills now before the committee seek to deal with aspects of the housing finance problem.

S. 2958 would authorize the Federal National Mortgage Association to purchase and deal in conventional mortgages if the outstanding principal balance does not exceed 80 percent of the value of the mortgaged property or if the balance above 80 percent is guaranteed in a manner acceptable to FNMA.

There is a real need for a facility along the lines proposed in this bill. While we support the objective of S. 2958, there are practical problems involved which cause us to have serious reservations about the specific method of FNMA support being proposed. Very shortly, the Administration will be forwarding its 1970 housing legislation which will include bills to authorize secondary market facilities for conventional mortgages in both the Federal Home Loan Bank System and the FNMA. The legislation will attempt to deal with the many practical problems we see in this area.

One of the problems involved is to devise assurances that the mortgages purchased are economically sound and of a type that will be acceptable to the market for purposes of resale. At the present time, FNMA primarily relies on FHA and VA mortgage insurance and guarantees for this assurance. Indeed, other national lenders also rely to a great extent on such governmental protection when they originate or purchase a volume of sales housing mortgages at a distance from their home base. Another major problem concerns the assurance that funds will not be diverted from the low- and moderate-income segments of the entire housing market, whether conventionally financed or government assisted.

To deal with these problems, our proposed legislation will require, for a least an initial experimental period, that the lending institution selling the mortgage agree to share a certain percent of any loss incurred or else agree to repurchase the mortgage if, within 3 years of purchase, the mortgage is in default.

Commitments to purchase mortgages prior to origination would only be authorized where there is an agreement to repurchase. Thus, there will be continued inducement to originate only mortgages of a quality which the institution would consider acceptable for mortgages retained in its own portfolio. Also, only 10 percent of the conventional mortgages purchased by FNMA would be permitted to be more than 1 year old, thus assuring that the bulk of the purchases will go into additions to housing funds. In order to avoid the diversion of scarce credit resources from low- and moderate-income housing production, our legislation will also provide for maximum mortgage amounts identical to those authorized for FHA-insuranced mortgages.

While I believe that authorizing FNMA to deal in conventional mortgages is most desirable, we should proceed with caution in implementing this authority. Given existing market conditions, the pressures on FNMA to support FHA and VA mortgages, and the current capital structure of FNMA, it would be unwise to have FNMA immediately move into the conventional market on a large scale. Nevertheless, it is appropriate to authorize the activity now so that it can be used at the earliest practicable time.

S. 3442, another bill before the committee, would implement many of the recommendations of the Commission on Mortgage Interest Rates.

The first section of the bill would provide that FHA-insured and VA-guaranteed mortgages may be originated under either of two options, depending on the preferences of the borrower and lender.

Under one option, the mortgages would be subject to an interest rate ceiling established by the HUD Secretary and VA Administrator and involving whatever discounts may be imposed. Under the other option, the mortgages could bear any interest rate mutually acceptable to borrower and lender, provided the lender certifies that he has neither charged nor collected any discount in connection with the

transaction.

The main issue that this dual market proposal raises is whether we are prepared to permit more freedom in FHA-VA interest rates than has been the case before now. I think such increased freedom would be desirable, both in order to introduce greater flexibility into the market, and as a way to permit the elimination of discounts. Our 1970 legislation will continue a dual market proposal very similar to that contained in S. 3442.

The first of the two options provided in S. 3442 is essentially a continuation of the present system. With respect to this option, it would be desirable to have the statute expressly provide that where a discount is collected by the mortgage, the several parties to the transaction may negotiate to determine what share of the discount each will pay. The requirement in S. 3442 that the mortgagee disclose the full amount of the discounts or points-collected from each of the parties to the transaction is most desirable because it would help prevent duplicatory charges.

The second option is intended to provide an alternative to the use of discounts. The discount problem has been especially troublesome in our assisted housing programs. Many nonprofit sponsors of multifamily projects simply have no way of absorbing any discounts, and even under the section 235 homeownership program, builders cannot absorb more than a certain amount before losing money on their operation. To be able to get rid of discounts in these situations would, I think, be all to the good.

We now operate under an administered ceiling on interest rates, however, and the market is used to this system. Since current conditions in financial markets offer little opportunity for any reasonable test of new approaches, I would not propose to go to a free rate system immediately, even if I had the authority. Any legislation that does authorize such a free rate system should, I think, leave the timing of implementation to the discretion of the Secretary.

We support those provisions in S. 3442 which would direct the Secretary of HUD and the Administrator of Veterans' Affairs to prescribe standards governing the amounts of settlement costs allowable in connection with FHA and VA assisted housing. However, we recommend an extension to July 1, 1971, of the date for reporting the results of the joint study on possible actions to help reduce and standardize settlement costs.

S. 3442 also calls for establishment of a special advisory commission "consisting of both government and private participants, including representatives of low- and moderate-income groups" to recommend in the fall of each year a national housing policy for the coming year. These recommendations are to be discussed in the President's annual housing report and, to the extent possible, serve as a basis for determining fiscal and monetary policy.

We in HUD are actively-and I think successfully-seeking to increase housing's priority. But I do not support the introduction of this formal, special advisory commission into this process.

Administration policy on housing emerges out of a continuing dialog among all interested departments and agencies against the background of other national and international conditions and objectives. A one-shot contribution to this process from an outside commission simply would not be of much help.

In other words, I don't need another committee; we need a little more concentration of the responsibility, rather than a further diffusion of responsibility, which is what this would bring into the picture. I want to make clear that I do not object to-and indeed fully support the idea of continually bringing outside views to bear on the policy formulation process. We have been doing this in the Department on a flexible and timely basis, and we intend to continue doing so. I think this is a more productive way to proceed than that proposed in S. 3442.

S. 3503, another bill before this committee, is designed to make 612 percent interest rate mortgage credit available to families with annual incomes below $10,000. I do not favor this bill for two reasons. First, the Department already offers homeownership subsidies to substantially the same income group proposed to be benefited by this bill. Second, the money market operations contemplated by the bill would have undesirable effects upon economic stabilization policy and on financial markets.

Under our present section 235 homeownership program, the interest rate payable by the homeowner can be reduced to a level as low as 1 percent. The income limits for eligibility under section 235 range up to $10,000 for families of between 4 and 10 persons in places where incomes are high. But they are generally much lower for the country as a whole, thus better serving families on a basis of real need. Also, the families aided under section 235 must themselves make contributions commensurate with their ability to pay. If it were the desire of Congress although I recommend against it-the formula for section 235 income limits could be adjusted upward to the S. 3503 level, accomplishing the objective of the bill in a more efficient and equitable way.

ADMINISTRATION PROGRAM TO MEET 1970 FINANCING NEED

As I indicated, the administration supports the goal of more money at reasonable cost for housing. We have been considering a number of possibilities since the Cabinet Committee on Construction was established last fall. I think we now have a program that can do the

job. Our goal for this year is to provide the $2012 billion of net new residential mortgage credit that we estimate is needed to finance 1.4 million housing starts.

1. The first step is to maintain adequate direct support of the mortgage market through FNMA and the Home Loan Bank System. This will be done.

To be certain that such support can be continued, legislation is being prepared to authorize a subsidy for the Home Loan Bank System. This subsidy would cover part of the high costs the System has been paying to raise funds in the open market. The banks would then not have to charge too high a rate on their advances to member savings and loan associations. If the rate on advances is not reduced, associations may divert money away from mortgages to repay advances, now outstanding as they become due. This would make the supply of mortgage money even more scarce than it is. With the subsidy, we hope to maintain the volume of net new residential mortgage lending by savings and loan associations near last year's rate of about $9 billion. Without the subsidy, I would have no confidence that we would get the needed mortgage flow from the savings and loan industry.

We have also appraised FNMA's ability to continue its extensive support of the mortgage market. We do not see or anticipate the need for a subsidy or other special assistance for that institution, and we expect FNMA to continue meeting its commitments out of its own

resources.

2. To provide additional direct governmental support of the mortgage market, we will also be asking for a transfer of the $1.5 billion of special assistance funds authorized last year from section 305 (g) where it is now to the more flexible authority provided by section 305 (c). In their present form, we cannot use these funds efficiently.

It is much more efficient to use these funds under section 305 (c). Basically, what this will permit is the use of these funds under the tandem approach rather than on a par basis which is very flexible.

If transferred to the section 305(c), these funds could be used to buttress our joint GNMA-FNMA operations and thereby provide significant support as needed to the subsidized programs.

3. As a related measure, we will submit a supplemental budget request to increase our contract authority under sections 235 and 236 by $25 million each. This will bring these programs to the levels authorized in the 1969 Housing Act. The backlog of applications for subsidy reservations under these programs suggests that the extra funds would quickly lead to increased housing starts.

We have only about $5 million left for interest subsidization for these two programs. In the case of 236 we have applications totaling $163 million of interest subsidy. In the case of 235 we have applications on hand totaling $33 million. So the $50 million supplemental request is well below applications already on hand for these programs. We badly need this money in order to add about 60,000 units to our starts program for the balance of this fiscal year.

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