Answer. The high cost of land suitable for lower income housing is one of the major problems that need to be overcome if we are to achieve the national housing goals and raise the levels of production to meet the needs of lower income families. This problem, of course, is compounded by a variety of interrelated factors. The scarcity of land suitable for lower income housing is frequently related to community attitudes as reflected in existing zoning patterns and local land use arrangements. The Department recognizes these problems and has taken a number of actions designed to bring about desirable changes. Under Operation Breakthrough, for example, the concept of market aggregation includes the objective of lowering land costs. The FHA Pilot CHOICE program, (abbreviation stands for Cost-effective Home Ownership in our Improved Contemporary Environment) which is designed to provide modestly priced homes for families of moderate incomes, seeks to reduce land costs through efficient and economical land development. The New Communities program under Title IV of the HUD Act of 1968 provides for the proportionate allocation of land for lower income housing in all new communities receiving Federal assistance under this program. The land set aside for this purpose must be reasonably priced in order to permit the construction of this type of housing. While these efforts are important, they can be only partially successful without the cooperation of local governments. Local actions must include the elimination of restrictive zoning which prevents or severely limits the use of land for lower incme housing. As I stated in my testimony we are now perfecting for introduction to the Congress legislation which would prohibit local legislative or administrative action discriminating against housing subsidized by the Federal Government. We are also recommending to the Council of State Governments that they propose State legislation providing for State review of local zoning, a Statewide building code, and Statewide standards for factory produced housing which can pre-empt local codes.

Changes in tax policies could also aid substantially in lowering land costs. A restructuring of the tax system should promote the use of land for lower income housing by providing appropriate incentives for such land uses and by discouraging land speculation.

The second part of your question states that "we should create an Urban Homestead Act to enable government to take over abandoned salvageable single or multifamily structures, rehabilitate such structures, and sell or rent them to lower income families at subsidized rates." This proposal is similar to what is being done now under the FHA 221 (h) and 235 (j) programs. Under these programs, private nonprofit organizations acquire deteriorating or substandard structures for rehabilitation and subsequent resale to lower income purchasers at subsidized interest rates. Assistance is also provided under this Department's urban renewal and model cities programs to local governments in their efforts to solve the problems created by the abandonment and deterioration of structures in urban areas.

The great number of abandoned structures in several cities continue to present a major problem, however. Usually, abandoned structures are so heavily vandalized that it is questionable that many of them could be salvaged. Currently, this Department is placing major emphasis on the development of improved rehabilitation programs which will provide a more effective response to this problem than has been the case in the past. While we are not yet in a position to make final recommendations, it may well be that a greater Federal involvement is desirable.

Question 4. On pages 24-25 of your testimony, you mention the problem of usury laws. Lets look at a situation with which we are all familiar. The ceiling on FHA and VA backed loans here in the District has been raised to 82%. while Congress has established an 8% limit on interest in the city. Since all available credit can find a market outside the District at 82% or more, mortgage funds here are virtually unavailable. What would be your reaction to Fannie Mae charging up to 8 percent, and up to 12 points, and HUD subsidizing the additional points?

Answer. There is a problem of equal treatment in the proposal you raise. Many jurisdictions had usury limits of 82% and above before the current period of tight money commenced and have subsequently raised their limits. The proposed subsidy would penalize these jurisdictions in favor of those with low usury laws.

While we recognize the difficulties created by the usury law for D.C. residents, we believe that the best solution would be to exempt FHA and VA loans

from the usury provisions of State or local laws. We have proposed such a provision in the Housing and Urban Development Act of 1970 which has been submitted to the Congress. The D.C. Government has also requested the Congress to pass legislation providing this exemption specifically for the District of Columbia.

Question 5. With regard to public housing could you please supply me with information as to the backlog of applicants?

Answer. Our current national backlog of families actively seeking low-rent public housing accommodations is in excess of 450,000. Every year, the backlog grows because of population increases and the shortage of available funds to finance additional units. For example in 1965, the total backlog was in excess of 392,000 families; by 1968, it had increased by 11.5% to almost 438,000 families.

Question 6. Could you supplement your response concerning the report of life insurance industry on insurance protection for home mortgagors against the hazards of disability, unemployment and death?

Answer. Subsequent to the submission of the Department's interim report in mid-January 1969, the insurance industry advisory group submitted to the Department a very thorough and informative report on the actuarial and administrative aspects of providing insurance protection for home mortgagors against hazards of unemployment, disability, or death.

An intensive review of this report has been completed, and tentative conclusions and recommendations on these matters have been formulated for discussion with the other federal agencies involved.

A report of the Department's conclusions is expected to be available in the near future.

Senator PROXMIRE. I notice in your statement on page you take pride and rightfully so in the accomplishments of FNMA, for FNMA developed the tandem plan.

All of these achievements, as you know, were under the leadership of Ray Lapin who was dismissed by the President for pursuing policies contrary to the objectives of the law.

Now, I am not a legal authority, but it seems to me that Ray Lapin did exactly what Congress intended. Moreover, your statement would seem to agree.

Secretary ROMNEY. Mr. Chairman, I am sure it was not that he was pursuing policies contrary to the law. I don't recall any such statement being made. He was discharged for other reasons.

Senator PROXMIRE. Policies not consistent with the law.

Mr. UNGER. I believe if I remember the President's letter it said perhaps not consistent with administration policies. Perhaps if we had the letter we can determine the wording.

Senator PROXMIRE. Yes, we will get it.

What I can't understand is how the administration can have it both ways. On the one hand, it dismisses Ray Lapin for not pursuing proper policies; then on the other hand it takes the credit itself for those very policies.

What were the policies which Mr. Lapin was pursuing which were contrary to law?

Secretary ROMNEY. No. 1, what FNMA was able to do was the combined effort of the Department and FNMA.

As the Secretary of HUD, I have to authorize FNMA's borrowing limits and I have to establish the rules and regulations and there has to be a very close working relationship between the two organizations. Basically the problem that developed was a problem in the organizational concept of the two organizations. Mr. Lapin seemed to feel that FNMA should operate as a completely separate autonomous organiza

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tion without keeping us informed about day to day things that affected our operation.

Let me give you an example. He cut off the District of Columbia without mentioning it to us. He was threatening to cut off several States without letting us know about it. It was basically this different sort of philosophical concept with respect to the relationship between the two organizations that made it necessary to make a change and to get a head who recognized that there had to be a creative partnership between the two organizations.

Senator PROXMIRE. Then the problem with Mr. Lapin was not working as a team man and not actions which were inconsistent with the law.

Secretary ROMNEY. I didn't say they were inconsistent with the law. Senator PROXMIRE. No, here is what the President said to Mr. Lapin when he dismissed him:

This action is taken because in my judgment the policies and practices pursued by you in that office are inconsistent with the objectives of applicable law and to the standards expected of officials holding positions of trust and competence under the laws of the United States.

Secretary ROMNEY. That is different because that talks about the objectives. I think one of the congressional objectives was to have a close working relationship here between the two organizations.

Senator PROXMIRE. It is my understanding also that Mr. Lapin indicated he was never invited to any staff meetings of HUD.

Secretary ROMNEY. This is not correct, sir. I invited Mr. Lapin to come in and see me and I invited him to meetings. He never initiated any contact with me to speak about and he didn't seem to recognize that I had to rely on him to bring to my attention matters affecting FNMA of importance that needed my action.

It is not true that I did not invite him to meetings. I did. I did not include him on my small policy group.

Let me go back to the question of the relationship between the two organizations. Congress certainly intended a different relationship than the relationship that normally exists between an independent private organization and a Government agency. Otherwise you wouldn't give the Secretary of HUD the responsibilities he has in connection with FNMA. The problem really arose over the question of the need for the close working partnership between the two organizations. I never at any time took the position that FNMA should be subject to the direction of the Department because it should not. We are carrying through on the congressional mandates with respect to the creation of the private organization and as far as I know the organization will be private to the extent Congress has specified as a result of it.

Senator PROXMIRE. The only point I had is that Mr. Lapin did seem to be a successful head of FNMA and you have indicated that in your testimony.

Secretary ROMNEY. I went down to the dedication of the building and I expressed appreciation of what he had done. As a matter of fact, I did that after he came in to tell us that he wanted to get out of FNMA and expected to do so between September and January 1st. He indicated that he felt he ought to be replaced by someone. As a matter of fact, he recommended five men to replace him and the man who replaced him is one of the five men he recommended.

The problem arose over this concept of what the relationship should be between the organizations. The problem doesn't exist today because there is a recognition that there is a mutuality of interest here that we have to work cooperatively to execute.

Senator PROXMIRE. I would like to ask you about my bill, S. 3503, that is a bill which would enable the Federal Reserve Board to discount mortgages by people held with incomes less than $10,000. I would hope you would take another look at this bill because it seems to me this meets a lot of objections you made to some of the other proposals. Here is something that won't affect the budget, would enable the Federal Reserve Board to balance this injection of funds by selling more Treasury securities in their open market operation.

In principle Mr. Burns seemed to think it was a good idea to be able to discount mortgages, although he didn't necessarily support my bill. In fact he did not support it. But I think this does have a lot of solid merit in that it would provide substantial funds for housing and the monetary authority that is responsible for seeing monetary policies are effective.

So, to the extent more funds go into housing, they are in a perfect position to see that doesn't upset the general monetary policy of this country.

Secretary ROMNEY. I will be glad to take a further look at it. But at this point my areas of concern are these: No. 1, if the Federal Reserve Board took in the mortgages and added them to the reserves that will increase the monetary supply and you have to deal with them from that standpoint. If they sell Treasury bills in the market then this increases the demand on the market and to some extent reduces the amount of money that would go from the private market into the housing market.

Senator PROXMIRE. Well, there is no other way you can avoid that. Secretary ROMNEY. You don't get a net gain.

The other thing is this: In the case of the Federal Reserve Board, currently they have one basic responsibility and that is to maintain the integrity of the dollar and protect it. If you begin to give that agency special purpose responsibility such as supporting housing and if you got housing in there you would soon get other things in there, you begin to dilute the Federal Reserve responsibility for protecting the integrity of the dollar.

Another way to do what you are talking about is to change the limits on 236 and 235. It can be done that way and more economically, in my opinion, because those programs are designed to grant the subsidy to families needed on the basis of income and so on. Whereas if we just granted it across the board through your approach, families who don't need it are going to have it as well as families who do need it.

Senator PROXMIRE. These are families with less than $10,000 and they cannot now buy a home without some kind of assistance. The trouble with 235 is that it is an expensive program; No. 2, it is stringently limited because of the budget restraints we have. We are all very conscious and aware of that. The program can help and I hope we can get 60,000 starts or more in this area but it is a program which is limited.

Secretary ROMNEY. We will have many more starts than the 60,000 in that area.

Senator PROXMIRE. I know. You are talking about the additional amount. I think this is a good supplement, but I don't think it meets it. It would be additional and helpful.

Secretary ROMNEY. Yes.

Another comment. In the case of 235 and 236, as the incomes change the amount of subsidization changes whereas under yours once they get it they keep it permanently. I think if you take a look at them it protects the public interest in this relationship better than the other

way.

Senator PROXMIRE. There is nothing in the Federal Reserve Act about the functions or the responsibilities of the Federal Reserve with respect to the integrity of the dollar. There is in the Employment Act of 1946 a clear provision for the Federal Reserve Board to pursue a policy of economic growth, minimizing unemployment consistent with a stable dollar. It seems to me this kind of action would be consistent with that.

Mr. Burns and so many others are so conscious that housing takes it right squarely on the chin, not only this time but it did in 1966 and whenever monetary policy is tightened. We have to do something, it seems to me, to overcome this or we are going to go through the same devastation for housing, maybe not next year or the year after but periodically.

You know, you are the outstanding expert in the Nation on how tight interest rates have destroyed housing to this serious extent.

Secretary ROMNEY. I don't say what is recommended here is going to be the ultimate solution to the problem. But I know what we are proposing here will go some distance in this area and will put us in a more favorable position. By getting FNMA and the Home Loan Bank Board in the conventional market, this would be very helpful. No. 1, by adding securities much more salable to the pension funds is going to be an important aspect of the situation because the biggest new source of savings is in the pension fund. The mortgage backed security and bonds lend themselves to tapping new sources of money for housing.

Now, in addition the experience we have had in making more effective use of FNMA and the Home Loan Bank Board this time contributes to this. I think the fact that we have developed a greater degree of cooperation on the part of many departments I have mentioned here as being responsible in the housing field at this time can have a carryover effect here. I don't think it was recognized a year ago or previously-the interrelationship between the decisions.

Senator PROXMIRE. These things will help, but the fundamental fact remains because housing is paid for over 25 or 30 years and because the money has to be borrowed almost entirely for housing you are going to have a monetary policy restricting housing severely even though the other measures you propose are good and will be helpful and will somewhat ease it. You still have the serious problem. We are going to inhibit monetary policy because of what is going to happen to housing, even though these measures you propose are going to help some.

During your testimony before the House Banking and Currency Committee you talked about the shortage of savings we are likely to have and if we want more money for housing we will have to take it