Many of the organizations submitting Breakthrough proposals are consortiums, which have strong overall capability for the total housing business. These team organizations have financial muscle and are prepared to use it-to raise construction financing, and even to help obtain financing for ultimate sale of the units they produce.

Several states have moved to overcome barriers to volume and more economical housing production.

Several building trade unions have also taken constructive action to facilitate improved housing production systems.

In short, I am more confident than ever that housing can again be produced in large volume, at high quality, with effective use of all types of labor, and at controlled costs that most Americans can afford. I intend to push ahead on this as hard and fast as I can. I hope we can break through code, zoning, and trade practice barriers using a voluntary approach with the authority we now have. But if it turns out that we cannot, we will have to develop alternative measures that will enable all American families to benefit from the free flow through itnerstate commerce of improved materials, technology, and financing techniques. 2. We do know that action is needed now to provide more effective ways of encouraging orderly urban growth. In the next 30 years, our population will increase by 100 million people. We cannot afford to continue haphazard and fragmented urban development. We need effective tools for encouraging metropolitan-wide planning and action in general, and in particular for encouraging the assembly of large land sites, at reasonable cost, and in suitable locations. Efforts are also needed to encourage removal of barriers to the development of balanced community housing and other facilities. State involvement in land use controls and land development must be increased. Some states and European nations have lessons on which we should begin to draw.

Our Department has been working with the Urban Affairs Council to develop new approaches in the new communities field. The Council is meeting this week to consider this subject.

3. It is imperative to find ways to remove the present discouragement—and indeed to provide positive encouragement-for maintenance, repair, and rehabilitation of existing buildings and neighborhoods. In many metropolitan areas, the present housing supply is being destroyed or abandoned faster than it can be replaced. Last year's Tax Reform Act began to deal with this problem at the national level. But state and local effort is also necessary, because the present local property tax system penalizes the maintenance and improvement of housing and other property. We in the Department are studying these problems and this Committee may also wish to do so.

4. Prompt action must be taken to increase substantially the supply of both skilled and unskilled construction labor. The exorbitant construction wage settlements reached over the past year reflect a basic shortage of qualified workers. This shortage will become even more acute as housing production expands to levels consistent with the 10-year goal.

Entry into apprenticeship programs and union membership must be made more open, especially to minority citizens. Training periods must be substantially shortened, particularly for housing workers. Manpower and vocational training for construction workers must be substantially increased. Some progress is being achieved in some cities-but much more must be done, and quickly. The Cabinet Committee on Construction is about to submit specific recommendations to the President in this area.

5. We must insure the availability of construction materials at reasonable cost. Particular attention must be given to increasing the nation's supply of softwood timber. Meeting our housing goals will require perhaps as much as 50% more softwood timber by 1978. Some of this need will be filled through the development of reasonably priced lumber substitutes. HUD is working on this. But substitutes will not be enough. To meet this pressing need without damage to our woodlands environment, we must promptly improve the management of public and private timber resources. The National Forest Timber Conservation and Management Act, which proposes an accelerated management program for national forests, is a first step. I urge its enactment.

6. So far, I have concentrated on the physical and financial aspects of our national housing problem. But the social aspects are just as important. And as I have frequently said: "Every American should have the opportunity to live within a reasonable distance of his job and daily activities."

To realize this goal, we must do two things: (a) we must greatly expand housing opportunities for low income families and particularly members of minority groups, which have frequently been limited by artificial barriers; and (b) we must make core cities more attractive to middle and upper income whites. We have been giving urgent attention to the ways in which we and other departments administer existing programs, to make sure that our approach is consistent with these goals. We have also identified certain legislative measureswhich will eliminate artificial barriers to expanded housing opportunities for all Americans. We will shortly be recommending—

Elimination of the workable program requirement for the remaining kinds of subsidized housing to which it still applies;

Elimination of the local government resolution requirement for leased public housing; and

A new statutory provision prohibiting local legislative or administrative action discriminating against housing subsidized by the Federal Government. These three steps do not meet the total need. But they are realistic measures which can help broaden the range of housing opportunities for families of low and moderate income, particularly minority group families.

7. Finally, I want to mention several other specific items in the legislative package we will be submitting in the next few weeks.

Our 1970 legislation involves an effort to consolidate and streamline the multitude of narrow and separate legislative authorities that now make up our overall housing program. We have combed all the existing housing legislation and managed to combine scores of narrow, single purpose authorities into several broad basic programs. We have retained significant special features of the many individual existing authorities—including their ability to serve a wide income spectrum-but have standardized their common elements, such as the income limits of families eligible to participate, the percentage of income that assisted families will contribute to their housing expense, and the definition of income. In addition, we have replaced the existing rigid and inequitable dollar limitations on the cost of subsidized housing units with a flexible formula geared to the cost of producing moderate income housing in the many housing market areas throughout the country.

Our 1970 legislation will also include two extremely promising innovations in public housing. We intend to utilize the public housing program to produce increased opportunities for homeownership. Our program involves an immediate transfer of title to families capable of maintaining their own homes-with as much subsidy available to them to achieve homeownership as the Federal Government now pays for them as renters in public housing projects.

Finally, we will propose to make available for public housing, subject only to the limits contained in the statutory annual maximum authorized by the United States Housing Act of 1937, the full subsidy necessary to make up the difference between the rents actually collected with respect to specific public housing dwelling units and the operating costs attributable to these units. This legislation will be coming to the committee as soon as final clearances are obtained within the Administration.

Our new housing legislative proposals will complement the new departmental organization now being implemented at HUD. Among other things, we now have all housing production programs grouped under a single assistant secretary for housing production and mortgage credit. Thus, we are in good shape organizationally to get maximum benefit from consolidating and streamlining present housing programs. Together, these steps should put us in better position to meet the critical housing and urban development needs of the coming decade.

SPECIAL PROBLEM OF FINANCE-10-YEAR NEED

I come now to the financial state of the housing sector and what can be done to improve it.

Let me first try to place some dimensions on the probable need for housing finance in this decade. These estimates will be spelled out in greater detail in the Second Annual Report on the 10-year Housing Goal to be submitted soon. A revised projection of the housing path needed to meet the 10-year goal, and estimates of the amount of funds needed to finance those new units, are shown in Tables II and III. 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 may 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 $20 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.

PROPOSED LEGISLATION NOW BEFORE THE COMMITTEE

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

8. 2958 would authorize the Federal National Mortgage Association to purchase and deal in conventional mortgages if the outstanding principal balance does not exceed 80% of the value of the mortgaged property or if the balance above 80% 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 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 at 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 three years of purchase, the mortgage is found defective or 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 one 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 legis

lation will also provide for maximum mortgage amounts identical to those authorized for FHA-insured mortgages.

While I believe that authorizing FNMA to deal in conventional mortgage is most desirable, we should proceed with caution in implementing the 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 contain 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 mortgagee, 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 mortagee 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 dialogue 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.

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 62% interestrate mortgage credit available to families with annual incomes below $1,000. 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 undersirable 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 $20 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 their advances, which 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. But if transferred to the other authority, they 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 246 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. 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 two 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