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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

rescribe 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 thě 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 642 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

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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

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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4. The above measures relate to direct Government support of the mortgage market. We have also been developing ways to increase support from private sources. In the past 2 weeks, the Treasury Department, on behalf of the administration, has held a series of preliminary meetings with representative investor groups, including the life insurance companies, leading members of the Business Council, some of the most important commercial bank managers of pension funds, and leaders of the commercial banking system with a view toward enlisting their voluntary support for the mortgage market this year.

In 1969, banks, insurance companies, and private pension funds as a group made a net investment of $3.3 billion in residential mortgages, though by the fourth quarter the annual rate of flow was down to only $1.3 billion. Almost all of this total came from commercial banks.

In other words, the insurance companies were pretty well out of it and the pension funds have not been brought into this mortgage market in any significant way.

The Treasury has been talking to leaders in each of these lender groups in terms of the need to move as quickly as possible to restore the volume of private funds available for housing. It is difficult to translate new commitments into precise timing for the take down of funds. But if these three major diversified lenders—commercial banks, life insurance companies, and private pension funds—would as a group increase their mortgage activity to about $6 billion, this would be of considerable help.

Voluntary support from State and local government retirement funds will be sought to supplement this flow. Through the voluntary program we hope to obtain about 30 percent of the total amount of residential mortgage money needed for the year.

In view of the preliminary nature of the conversations held so far, it is obviously not possible to give any assurance on specific targets at this time. But each of the groups contacted expressed full awareness of the gravity of the housing situation, and a desire to help reverse the trend. Leaders of the life insurance industry, for example, plan to make an intensive survey of the probable size and direction of their investment flows in 1970 and 1971. If this survey indicates inadequate flow of funds into housing from the industry, they will take affirmative steps to help meet the goals referred to earlier.

My own view is that the goal for increased residential mortgage lending by these groups of institutions is attainable on a voluntary basis.

In other words, I am hopeful it will be attained.

The amount of money sought, while substantial in relation to recent experience, is within the range of what these institutions have done previously. Treasury and HUD officials intend to follow the industry efforts closely. By the beginning of May, we should know whether this kind of voluntary approach is eliciting a significant flow

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of new mortgage commitments. We will carefully review the situation at that time to see whether additional measures are needed.

I think the fact that Congress gave the President a blank check on credit control should be very useful in getting voluntary action on the part of these groups. It may be, if we don't get the needed voluntary action, that other forms of action would be recommended other than credit control. But in any event, we think that these organizations should be given an opportunity to respond voluntarily, particularly in light of the fact that we have only recently been able to get the mortgage-backed security on the market and we will have the mortgage-backed bond available for these investment purposes in the very near future. These are new instruments for investment in the mortgage market and should be particularly attractive to the pension funds.

I should indicate that I view the coming months as a testing ground. This Nation needs housing. One way or another that housing will be built and financed. Now that the economy is beginning to cool off, lenders have good reason to support this effort and begin shifting more of their assets into mortgages. The extent to which that shift does or does not take place voluntarily will be a significant indication of what if any further steps the Government must consider to deal with the mortgage market problem.

5. To make it as simple as possible for the various institutions to invest funds in the mortgage market, we are now prepared to go

ahead with a major program for mortgage-backed bonds guaranteed by GNMA. I will submit regulations governing these bonds for publication in the Federal Register shortly. After 30 days for comment and resolution of any technical details, we hope to see an issue in the market by midspring. The Federal Home Loan Bank Board is prepared to accumulate a pool of $200 million of mortgages to back the sale of a bond issue at the earliest possible time, and I am confident other pools can be assembled as necessary. The stimulus from our voluntary program will help the market for all mortgage-backed securities.

6. To provide still further flexibility to the mortgage market, legislation will shortly be proposed, as I stated previously, to create secondary market facilities for conventional mortgages in both the Federal home loan banks and FNMA.

7. Through other provisions of our 1970 housing bill, we will seek increased flexibility and strength in the FHA-VA sector of the mortgage market. These include the experiment with a dual market system for FHA-VA mortgages previously discussed; and also legislation to exempt FHA and VA mortgages from the interest ceiling imposed by State usury laws. Many States already provide such exemptions

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