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funds would be to give us backup authority here and we think it is a useful authority and we would like to have the $11/2 billion on a useful basis.

Senator BROOKE. In this committee's record, it was recommended that HUD undertake a study of Federal subsidies for low rental public housing. It was also requested that that study be submitted to the committee by October 1, 1970. Could you inform the committee what progress has been made on the study and to what extent the Federal agencies or local organizations have been invited to participate?

Secretary ROMNEY. I have to confess I am not in a position to give you an up-to-date report on it, I will be glad to check into it and give you a report in writing but I do not have the information at my fingertips.

Senator BROOKE. I wish you would. It would be helpful to the committee. Thank

you. (The following information was received for the record :)

ANSWERS TO QUESTIONS SUBMITTED BY SENATOR BROOKE Question 1. In this Committee's record, it was recommended that HUD undertake a study of Federal subsidies for low rental public housing. It was also requested that the study be submitted to the Committee by October 1, 1970. Could you inform the Committee what progress has been made on the study and to what extent the Federal agencies or local organizations have been invited to participate?

Answer. Since enactment of the Housing and Urban Development Act of 1969, this Department has been intensively reviewing the adequacy of the financing formula for the low rent public housing program. One result of this analysis has been the proposal in our 1970 legislation providing for a comprehensive approach to the financial problems facing local housing authorities. This new simplified approach will permit payments to meet any future deficits that may arise, and is intended to provide a “permanent” solution to the public housing's financial problem, to the extent that money alone can do so.

However, the Department is firmly convinced that money alone cannot provide a “permanent” solution, unless steps are also taken to improve management effectiveness and efficiency, increase tenant responsibility, and achieve a good social and economic cross-section among the residents of public housing projects.

In addition to developing a new legislative approach, the Department has also initiated a number of studies and actions directed to other aspects of the problem as a part of an on-going review and evaluation of the program. Among the activities underway are :

1. Compilation of data on the financial needs of housing authorities, as well as analyses of the major problems facing those in financial difficulty.

2. The provision of special technical assistance and counseling service by knowledgeable experts in the field to certain seriously troubled authorities desiring such assistance.

3. The initiation of a joint study with the Department of Health, Education and Welfare on the issue of payments made to welfare recipients for housing purposes.

4. An in-depth study of management characteristics in a selected number of housing authorities in order to identify policies and practices which contribute to both problems and successes in achieving sound housing operations. This study is being carried out by the Urban Institute in close consultation with the Department and will examine a wide range of factors, including an analysis of income and other characteristics of tenant families.

5. The conduct of a demonstration of means of improving tenant participation in public housing management, which is being carried out in two housing projects in Washington, D.C. The demonstration is being supervised by the Department's Office of Research and Technology, which is also studying a range of housing management issues.

6. An in-depth examination of tenant-management issues in such areas as lease provisions and grievance procedures, which is being carried out with the close cooperation of local agency and tenant representatives.

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7. An examination of local housing authority reserves to determine the level at which they should be funded in view of existing and proposed legislation. These studies and activities are expected to make an important contribution to the improvement of housing policies and practices as well as identify whether any further subsidy needs may exist.

The Department plans to work with appropriate organizations and agencies as well as consult with the Congressional Committees in carrying out these activities. The results of these and other studies and activities will be made available to the Committee as they are completed and will be a part of the report we will be making to the Congress by October 1, 1970.

Senator PROXMIRE. Senator Cranston?

Senator CRANSTON. I appreciate your dedication, I know your problems in overcoming the current crisis in housing. There are many interesting aspects of your statement, such as getting rid of the workable program requirement. The stress on homeownership is a sound one and I hope specific programs will lead us in that direction.

I do have some questions about some aspects of what you said. I think it is rather shocking, however, I fully understand the need to get around usury laws when we talk about homes for people without too much income.

Since housing standards in the FHA-VA section were up 18 percent over the previous year, why was it necessary to increase the interest ceiling for these loans ?

Secretary ROMNEY. Let me show you that on a chart, Senator. What this chart basically shows is the level of interest rates on new corporate Aa bond issues. These rates were below the FHA secondary new market rate until December of 1969. The FHA-VA maximum rate was adjusted back in 1968 because the rise in corporate and other interest rates. Then we adjusted the rate again in January 1969 because we though we could attract additional money into the mortgage market by competing with the high interest level on other issues.

We knew that housing investment was sliding off at that point. We tried to make the mortgage market more competitive at that point by bringing additional money into the mortgage market.

Senator CRANSTON. Did it drop off in September after that step was taken?

Secretary ROMNEY. We took that step last winter. That was taken in late January of 1969. I took that step shortly after I came into office.

Senator CRANSTON. What was the impact ?

Secretary ROMNEY. Housing continued to slide. We have no way of measuring precisely what the impact was. It certainly didn't attract additional money. Its impact, if anything, was to hold money that might not otherwise have stayed. But as you can see, maintained the FHA rate while the rate on corporate Aa issues went up above it late last year. It was clear then that the money was moving out of the mortgage market rapidly and we had to take some action to hold what was in there. Our increase last December was basically done for that purpose.

No one deplores, more than I do, what has happened to interest rates and wage rates in the past year. I have said on many occasions that as far as I am concerned the high interest rates and the high wage rates that affect the housing industry are indefensible. They are exorbitant and equally indefensible and are essentially the result of the same thing

I don't think either one is defensible but I have to try to protect housing in relationship to what is going on in the rest of the economy.

Senator CRANSTON. Was FNMA something above 80 percent of the FHA-GI loans during the short period!

Secretary ROMNEY. Yes; there were short periods when it was up to 80 percent. For the year as a whole, it was 50 percent. That was another reason had to move. The cost they were having to pay for money was above 742 percent, so they were borrowing money at rates above what they were lending money for, and it would only have been a matter of weeks before FNMA would have been out of business.

I had no alternative in terms of keeping FNMA in business in view of the level of their lending rate.

Senator CRANSTON. They were still making money at that period of time, were they not?

Secretary ROMNEY. No, sir; they were losing money at that period of time.

Senator CRANSTON. Did FNMA make any request for increasing the interest rate?

Secretary ROMNEY. Yes, sir.
Senator CRANSTON. When was that?

Secretary ROMNEY. The matter was raised in the summer and became very urgent in the fall.

Senator CRANSTON. Who requested it in FNMA?

Secretary ROMNEY. Ray Lapin was urging it and the Board was urging it.

Senator CRANSTON. With regard to the bill you indicate interest in, S. 3342, if mortgage is under VA, wouldn't the effect of that be still a further increase in the rate ?

Secretary ROMNEY. Is this the sentence, “Under the other option, the mortgages could bear an interest rate mutually acceptable to either borrower or lender, providing the lender certifies that he

. neither charged or collected any discount with respect to the transaction” ?

Senator CRANSTON. Wouldn't that lead to higher interest rates?

Secretary ROMNEY. That is one of my concerns. That is why I think the program ought to be initiated at a time when we have a more normal credit situation. Unquestionably, this would have that effect because if you don't have a discount, the interest rate is going to be higher.

Senator CRANSTON. Wouldn't it be wiser to delay that particular measure until we are certain there would not be higher interest rates ?

Secretary ROMNEY. I don't think you should legislatively, because hopefully we are going to get an easing here, at least the economy is softening, no question about that, and it seems to me it would be well to have discretionary authority to put this into effect whenever the market circumstances justify.

I think we ought to try it. My understanding is that Canada has had a free interest rate market during this credit crunch. As you know, they have been through an inflationary period perhaps more intensive than ours. My understanding is that the lending rates held up better in Canada because of people willing to pay higher interest rates. I know they got up to 9 or 10 percent.

I don't think we would get a fair test of this if we put it in at the present time.

Senator CRANSTON. Another point, it is my understanding that you did not raise the interest ceiling with respect to 221(d) and 221 (h) programs. Why did you raise the ceilings on the other programs?

Secretary ROMNEY. Because 221 and the others are fixed by statute at below market interest rates.

Senator CRANSTON. You would have, if you could ?

Secretary ROMNEY. No; these mortgages are not intended to be privately held. It is the 235 and 236 mortgages that are market rate.

Senator CRANSTON. Does that mean the Government has to pay more money?

Secretary ROMNEY. Sure. The Government is now paying about $19 billion a year interest on the Federal debt. When I first came to this town, the whole Federal budget was $4 billion.

Senator CRANSTON. Wouldn't the action have the net effect of raising the subsidy the Government would have to pay with respect to these programs

Secretary ROMNEY. Yes; it does. The increased interest costs, the higher interest rate reduces the number of subsidized units that can be built with a given amount of money under 235 and 236.

Senator CRANSTON. What action has to be taken to counterbalance that and the problems that confront low income people?

Secretary ROMNEY. The most important action is to curb inflation and that is in the economic and fiscal areas that I have already discussed. In my opinion, the most important thing we can do is have a surplus in the budget. If you have a surplus in the budget so Treasury isn't out there competing with other borrowers, more money is going to flow into the mortgage market.

We also need a modernization of the present economic policies in this country regarding the price and wage area.

Senator CRANSTON. Last year the administration supported an increase in taxes for savings and loans and an increase was put into it. Now, you are suggesting there should be a subsidy, in effect, to savings and loans. It seems to me these actions are somewhat inconsistent. I wonder if, during the consideration of the tax reform act last year, there was any discussion of the problem this would lead to in this pinch?

Secretary ROMNEY. I don't know of any discussion in that period. This problem arises now because, as a result of the high interest rate advances that have been made to the savings and loan associations by the home loan banks, there is concern about their paying off those loans as repayments come in rather than reinvesting in mortgages. Unless they can get additional money at a lower interest rate, we will have a shrinkage of the money in the mortgage market.

That is the basic reason for this proposal.

Senator CRANSTON. The only point is that to raise taxes on one hand and give them a subsidy on the other, it doesn't make sense. I think my time is up.

Senator PROXMIRE. When I was questioning you last we were discussing the subsidy of mortgage interest through the Home Loan Bank Board. The second point was that you recommended $1.5 billion of GNMA's special assistance funds be transferred from one pocket to another and this is something you were asked about by Senator Brooke. I would like to point out that bookkeeping transfers don't add to increased housing support. The fact is that you already have $1.2 billion in GNMA and there doesn't seem to be any planning in the present budget on page 342, which indicates they don't expect to use this through fiscal 1971. Our calculations show that less than $1 billion of this would be expended if the present budget is accurate and correct. So they have 1.2 billion now and you add another 1.5 billion and it would just be unused in one section rather than the other.

Secretary ROMNEY. No, we are using what we have. The Presidential authorization special assistance money we can use in the manner indicated is being used. What we are saying is when we use the 650 million we have on 236, and it will be used on 50,000 units, then we will need additional money for the 236 program. In the case of the 235 program, we have 500 million that is applied there and that will take care of 33,000 units and after applying that to the 33,000 units, we will need this additional money.

Senator PROXMIRE. Well, you can use up to a billion dollars, but the budget indicates that you have $1.2 billion now in GNMA. So when you transfer another $1.5 billion you are just transferring it from one account to another and not making more of it available in housing.

Secretary ROMNEY. I am trying to figure out where this billion figure comes into the picture and what relevance it has.

Senator PROXMIRE. I have before me on page 342 of the present budget the Department of Housing and Urban Development under mortgage credit. We will get another copy for you. It totals 1970 estimate which would be $546 million. That is for all of 1970. On the assumption that about half of that has already been expended, if we divide that by 2, we get $275 million. You add that to the amount planned to be expended in 1971 or about $617 million, it adds un to a little less than a billion dollars. If this is what the President plans to expend in 1971, you could transfer all you want to into this fund, it won't help.

Secretary ROMNEY. You are talking outlays and I am talking commitments. They are two different things. The outlays can be well below the commitments.

Senator PROXMIRE. Outlays and commitments are different, that is one of the things that the administration did. They shifted from outlays to commitments.

Secretray ROMNEY. That gets back to the budget process developed under President Johnson. We need for commitment purposes more than we now have and we need that $1.5 billion as backup. The outlays will be below that because of the time factors involved.

Senator ProxMIRE. I am pressing the same point Senator Brooke was pressing and I just hope this is used. It would appear it will not be used fully, if for 1971 the outlays will be less than a billion dollars. It is true the commitments will be higher, but I am not encouraged with that.

Secretary ROMNEY. These commitments run over 2 or 3 years so obviously the outlays are going to be less than the commitments.

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