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Mr. Chairman, this has been a long statement about complicated programsbecause the problems we are dealing with are serious and complicated. Let me summarize briefly what I believe needs to be done. For the long run, we need

To push HUD's Operation Breakthrough to the hilt;
New actions to encourage more orderly urban development;
New ways of encouraging maintenance and rehabilitation;
Prompt action to increase the supply and training of construction workers;
Enactment of the National Forest Timber Conservation and Management

Act;

Legislation eliminating barriers to truly open communities so that all people can live within a reasonable distance of their jobs and daily activities; and

A comprehensive consolidation of HUD programs. To meet the more immediate financial problems of the housing sector, we need to

Continue the extensive support of FNMA and the Home Loan Bank System and provide a subsidy for the Bank System to do so;

Transfer $1.5 billion of FNMA special assistance to a more flexible authority;

Provide $25 million each in supplemental contract authority for Section 235 and 236;

Enlist voluntary support for the mortgage market from commercial banks, life insurance companies, private pension funds, and state and local retirement funds;

Proceed as fast as possible to bring mortgage-backed bonds guaranteed by GNMA into the market;

Enact legislation providing a secondary market for conventional mortgages; and

Enact further legislation providing increased flexibility for FHA-VA interest rates. As these steps are taken, I am confident we will have made a major start toward solving both the current and the long run housing problem.

SECONDARY MORTGAGE MARKET AND MORTGAGE

CREDIT

WEDNESDAY, MARCH 4, 1970

U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,
SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 5302, New Senate Office Building, Senator John Sparkman (chairman of the subcommittee) presiding.

Present: Senators Sparkman, Proxmire, Bennett, and Percy.

The CHAIRMAN. Let the committee come to order, please. We are hopeful that other Senators will come in. Several of them have indicated they will be here but we had better get started because we have a rather heavy program. The Senate meets at 11:30 this morning.

Our first witness today is an old friend, Mr. P. N. Brownstein. He is now under the title of counsel of the Council of Housing Producers. That sounds rather promising. We are glad to have you with us again. We do have copy of your statement. Your know our custom. We print your statement in full in the record regardless of how you treat it. You may read it, summarize it, or discuss it (see p. 181).

STATEMENT OF PHILIP N. BROWNSTEIN, COUNSEL OF THE COUNCIL

OF HOUSING PRODUCERS

а.

Mr. BROWNSTEIN. Thank you very much, Mr. Chairman.

I am very pleased to have the opportunity again to meet with this distinguished committee and today I am appearing as the spokesman for the Council of Housing Producers. This is a group of 15 of the largest housing producers in the industry.

While 1969 certainly was anything but a banner year for the housing industry, actually the Council of Housing Producers went counter to the industry trend and increased their production over 1968 from 30,003 units to 41,729 units, an increase of more than 30 percent. This represents 3 percent of the total housing starts last year.

But the total starts of slightly under 11,2 million units falls far short of what was needed to meet our housing goal of 26 million units by 1979. And the January starts figure of 1,166,000 coupled with the substantial drop in building permits certainly leaves little room for optimism in the near term trend for meeting housing demands.

I have gone into many of the reasons that have caused this, Mr. Chairman, in my statement, which I will not go into in my comments to the committee here, but rather will deal principally with the subject that is troubling most of us today and that is the availability of mortgage credit, or the unavailability of mortgage credit.

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It certainly seems to me that viewing this from the long term we are in for a protracted period of mortgage credit shortage. There is little hope for optimism in the capital markets supplying the credit that is going to be needed if we are to achieve the housing goals that were established in that landmark legislation of 1968 of 26 million units over the next 10 years with 6 million of them involving some form of subsidy. If you look at this fairly conservatively and if you estimate that the average mortgage amount to produce the 26 million units is somewhere in the range of $19,500—and I think certainly looking at it for 10 years that is a conservative estimate-it will take over $500 billion in mortgage credit in order to meet that goal. So we have to look for new sources, new instruments, new ways of satisfying our country's mortgage needs.

As a matter of fact, we have had a very dire condition in the mortgage market in the last year and had it not been for the tremendous efforts of the Federal Home Loan Bank Board and FNMA we would now be faced with an even more dire housing problem than the one we have.

Unfortunately, there is very little immediate relief in sight, although some of the responsible officials have indicated that the time may

be approaching when some easing in the money supply may occur. But even if an easing in the monetary policy should occur, it will have little immediate effect in reducing the strain on financing housing. When you consider the timelag between the flow of savings, mortgage commitments and actual advances, you have to conclude that at best there may be some improvement by mid-1970. This will happen only if there is an improved savings flow to the thrift institutions which traditionally have supported the mortgage market.

Viewing the long range problem does not present a much brighter hue. Capital demands are going to continue strong in the face of increasing population, technological advances, and greater affluence of our society, plus the governmental commitment to do something about poverty, substandard housing and improved living conditions for all Americans, including guaranteed minimum income. There is a grave doubt, in my judgment, that capital sources can or will keep pace with demand, and unless measures are taken to bring about a contrary result housing will continue to suffer disproportionately.

What these measures must be are, of course, the critical factors. But clearly there must be a reassessment of priorities and housing is going to have to be accorded some special treatment. For too long the credit needs of the housing industry have been on a catch as catch can basis with all other credit users. The position has been that housing takes its place in the capital market along with all other competitors, and if this caused stringency it would likely be for only a temporary period. Accepting the premise of more periods of capital shortage than abundance in the decade ahead, we no longer can permit housing to fend for itself if we are to achieve the housing goals and even come close to meeting the Nation's housing needs.

To begin with, there must be a way of attracting funds to those institutions which are the heavy suppliers of mortgage credit. Some

suggest this be done by the creation of a tax incentive to the saver whose savings find their way into the mortgage market. Bills have been introduced which would do this. The exemption from taxation of the interest earned, up to some specified amount, on savings which are channeled into mortgages would not only create an incentive to save but it would also tend to bring the savings to where it would do the most good from the standpoint of providing housing.

As an alternative, the FHLBB and FNMA could be authorized to issue large denomination securities, tax exempt in whole or in part, the proceeds of which are reloaned to institutions originating mortgages at some reasonable specified amount above the borrowing rate. This would tap a different source of investment capital, avoid the disintermediation problem, and could be very effective in attracting additional sources of mortgage credit.

À third possibility would be making the interest income from blocks of newly originated home mortgages acquired by investors exempt or partially exempt from taxation. In order to assure that the low and moderate income families derive the benefit of the mortgage supply, it would be well to fix a ceiling on the maximum mort

gage amount.

It should be recognized also that the loss of revenue from taxation would be largely offset by the increase in the GNP and the resultant tax receipts brought about by the production of the residential construction which would be stimulated through any of these measures.

The chairman's bill S. 2958 deals with another critical area and we would recommend its approval. This would authorize FNMA to provide a market for conventional mortgages. With the difficulty thrift institutions have been experiencing in obtaining and holding savings, it is essential that a backup source be provided for the marketing of conventional mortgages. Another strong argument in favor of this type of facility is that as FHA becomes more involved in the programs aimed at treating social ills, it is clear that all mortgage activity which can be channeled to the private market will take some of the strain off FHA's limited resources. There has frequently been the problem of FHA being authorized to spend enough of its funds to handle the myraid of functions it is asked to perform. It becomes essential from time to time to establish priorities and clearly in a climate

a such as faces our Nation today the socially oriented programs cannot be allowed to flounder. The logical answer to this dilemma is a smoothly functioning and operating secondary market for conventional mortgages.

There is also before your committee the chairman's bill, S. 3442. Among other things, the bill would create a dual interest rate limitation on FHA insured and VA guaranteed mortgages. A ceiling would be set as at present under which discounts could continue to be charged by the mortgages. There would be an added authorization for a freo interest rate conditioned upon no discounts being charged.

The discount mechanism has always created difficulties when they have gotten beyond the range of reasonable tolerance. Not only have they been onerous on the builders, but they have been particularly burdensome on the sellers of existing homes who often have seen what they thought to be their equity virtually eliminated by a substantial

a

discount in addition to the commission and other expenses of sale. The control of discounts has been a perplexing matter to the Congress as well as to the administering agencies. Twice legislation was enacted directing the agencies to control discounts, but the legislation was repealed since instead of the hoped for result, it effectively shut off the flow of mortgage credit.

The bill would authorize the dual system on a trial basis, in effect, and require an evaluation by the Secretary and the Administrator and a joint report to the Congress.

We believe there is merit in giving the system a trial. There are two things which we would suggest :

One-clearly the interest subsidy programs would have to operate under the fixed ceiling, but in view of the tandem plan operation, this should cause no great difficulty, and,

Secondly, in the case of mortgage rates clearly out of line the administering agency should raise a question and withhold approval until a satisfactory explanation is received or rate adjustment is made.

The bill would direct the Secretary of HUD and the VA Administrator to control closing costs. Certainly we are in accord with the view that such costs should be held to a minimum. The agencies now have regulations and procedures requiring that such costs be reviewed for reasonableness and approve only those customary in the area. To the degree these can be strengthened effectively without shutting off credit to the programs it is certainly worth review.

We support the Advisory Commission on Housing proposed in the bill. Such a commission should focus attention on the Nation's housing needs and be a strong force in helping channel the resources neces

a sary to meet the housing goals.

We are also pleased to support the provisions in the bill which may stimulate additional savings and mortgage activity for savings and loan associations. These associations which have so strongly supported the homebuilding industry will require additional authorizations in order to remain competitive and to continue providing the bulwark for satisfying home purchase needs as they have in the past.

We also favor the provision which would authorize national banks to make 90 percent, 30-year term mortgage loans.

We were also asked to comment on Senator Proxmire's bill, S. 3503, which he introduced on behalf of himself and 16 other Members to provide mortgage financing at reduced interest rates for middle income families. The bill would authorize the FHLBB to issue certificates aggregating no more than $3 billion annually to be advanced at an interest rate of 6 to 614 percent. The certificate would be salable through the Federal Reserve System. Such advances are required to be reloaned to families having a gross annual income of no more than $10,000 to acquire homes appraised at no more than $25,000 at an annual interest rate of no more than 612 percent. Assuming an average mortgage amount of $20,000, this would permit up to 150,000 families to achieve homeownership annually who probably would be unable to do so otherwise. We believe there is much merit in this type of proposal.

Mr. Chairman and members, that concludes my statement. Thank you very much.

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