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 Twice legislation was enacted directing the agencies to control discounts, but the legislation was repealed since instead of the hoped for result, it effectively shut off the flow of mortgage credit.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 necessary 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.

The CHAIRMAN. Thank you, Mr. Brownstein. Let me ask you two or three questions.

You endorse the bill that I introduced giving authority to FNMA to handle conventional mortgages. Later I introduced a bill to provide the same thing for the Federal Home Loan Bank Board, my statement being that I thought one, if not both, ought to have that authority.

What would you feel as to the Home Loan Bank Board having it; and if only one agency will have that right, which do you think should have it?

Mr. BROWNSTEIN. Well, I would agree with you that it would be highly desirable that the Federal Home Loan Bank Board have authority as well as FNMA.

My offhand reaction, Senator, if this were to be confined to one agency, would be that FNMA could probably provide the facility somewhat better. This has been their business for a good many years and I think they could fit a conventional mortgage buying procedure into their current operation with very little difficulty.

The CHAIRMAN. In the early part of your statement-I failed to see it in the printed statement but I was not following the statement at the time you said something about, I believe, packaging mortgages and issuing debentures that would draw in new sources of funds. Did I understand that right? Is that what you suggested?

Mr. BROWNSTEIN. There is a provision in the Housing Act of 1968 which authorizes GNMA, the General National Mortgage Association, to guarantee mortgage backed securities. That has been put into effect so far as the pass through or a modified pass through is concerned, which means that this can be done to guarantee that the amount that the mortgage calls for in payments will pass through to the investor.

There is authorization in that legislation for the issue of bonds as well. They can be for fixed terms at a fixed rate. That is what it really is going to take to make these securities attractive to investors because they can fit them to their portfolio with whatever term they consider desirable.

Secretary Romney has recently announced that they are about to put that procedure in effect and I do think that that would be very effective.

The CHAIRMAN. Senator Bennett.

Senator BENNETT. Mr. Chairman, I just have one comment. On page 10 of your statement you discuss two approaches to the solution of this problem through tax exemption. That, of course, is not in the purview of this committee.

Mr. BROWNSTEIN. I understand that, Senator Bennett.

Senator BENNETT. The administration suggested in its tax packageand I think it is still alive-that the tax rates on income from mortgages, either to savings and loan associations or to banks, be less than the full tax rate, that there be a partial exemption. Are you suggesting complete exemption?

Mr. BROWNSTEIN. Not necessarily. I think that it depends on which one of the approaches is taken. If there is an exemption given to savings, then there would be some limitation on what the amount of those

savings would be or what the amount of the income on the savings would be in order to qualify for the exemption.

Second, I mentioned insofar as the large denomination securities are concerned that they might be exempt in whole or in part.

Senator BENNETT. Well, I guess I missed the reference to tax exemption on savings. I was concerned with tax exemption from the interest earned. I assumed that that was all interest earned on mortgages. You are suggesting tax exemption from savings?

Mr. BROWNSTEIN. Yes. That is at the bottom of page 9, Senator Bennett.

Senator BENNETT. We have just been through the process in the finance committee of increasing the taxes on the savings and loan associations. I question whether we are about to turn around and go back.

Mr. BROWNSTEIN. Well, it seems to me that if we are going to have the concern that indeed we must have to stimulate a flow of mortgage credit, it is going to be necessary to take a look at what we have done in the far as well as the recent past.

Senator BENNETT. Well, then, you are going to enter a completely new field and suggest that one type of investment, namely, savings used for home building, shall be tax exempt from Federal taxes while other types would not be tax exempt. I feel sure that pressure would then be exerted on us to continue to widen that field because home ownership is not the only form of investment that may be socially important.

I think that is kind of a dangerous route to take. I just express that opinion here. Anyway, as I said, it is not in the purview of this committee.

No other comment, Mr. Chairman.

The CHAIRMAN. Senator Proxmire.

Senator PROXMIRE. During the hearings on Monday and Tuesday, we discussed the proposal that FNMA establish a secondary market for conventional mortgages and we were concerned about the loss that might develop. There were a couple of alternative ways of meeting that loss. One is through a private insurance. Another is through participation.

I wonder if you could give us your thinking on these two approaches, which would be most effective and desirable?

Mr. BROWNSTEIN. I am somewhat troubled, Senator Proxmire, if the participation route is followed because it seems to me that if you are going to create an effective secondary market those mortgages ought to be marketable, and one of the aims of FNMA ought to be to try and sell them when market conditions improve in the capital market.

If you require a participation, their marketability is going to be lost and those mortgages are going to be, in effect, frozen into FNMA's portfolio. I think that there is considerable merit in the private mortgage insurance approach to minimize the loses on high ratio mortgages. Senator PROXMIRE. Do you see any difficulties in using mortgage insurance?

Mr. BROWNSTEIN. No, sir. None of great significance.

Senator PROXMIRE. You have said that even easing monetary policy, if it is eased-and there is some question as to how much it will be if it is-but you say that this would not help much in the short run.

Then on page 9 you say that "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."

Have you had a chance to review the proposals of the administration? Secretary Romney gave us yesterday the seven-point short-term program which he felt would be a substantial answer to our problems. I wonder how you feel about that program. Do you think it is adequate?

Mr. BROWNSTEIN. I saw the seven points, Senator Proxmire. I also saw the estimate that at best starts would be 1.4 million, which is at last year's level. I would hope for more. I would hope that we could do better, and it would seem to me that one of the significant omissions is in not requesting additional subsidy authorization.

When the Housing Act of 1968 was enacted the basic authorization in the subsidized programs took into account projections of what it would take to build the 6 million subsidized units over a 10-year period.

Increased costs and increased interest rates have reduced by nearly 40 percent the number of units which can now be produced with those authorizations. Some of this was made up in the 1969 act which authorized an additional $25 million for section 235 and $25 million for section 236.

Senator PROXMIRE. That is an intereseting statistic. Will you repeat that?

Mr. BROWNSTEIN. Yes. Increased costs and increased interest rates have reduced by about 40 percent the number of units which can be produced with the contract authorization specified in that basic 1968 legislation in the sections 235 and 236 programs. I would hope that the administration would make up for this by asking for additional authorization.

Senator PROXMIRE. So the conclusion is that if we are going to stand still with our previous program we have to increase authorizations 40 percent?

Mr. BROWNSTEIN. Yes, sir.

Senator PROXMIRE. Or find some other way of doing it. One of the advantages—and I am delighted that you feel it has merit-in the proposal we have made in S. 3503, providing for discounting mortgages at the Federal Reserve discount windows, is that you provide a substantial amount and you do it without this terribly difficult problem of going through the budget, which is going to be difficult we know for a number of years now. It would do it in a way in which the monetary authorities would be so conscious of it that they would be prepared and able, it seems to me, to counterbalance any adverse effect this might have on inflation by taking corresponding monetary action in selling Government securities, or at least not buying as many.

Mr. BROWNSTEIN. You are also channeling it to those who are really in dire need today, the group with incomes of no more than $10,000 who are buying houses appraised at no more than $25,000. This is a group that is having tremendous difficulties in getting financing.

Senator PROXMIRE. I just have one other question. This relates to mobile homes. Yesterday I was shocked and surprised and disappointed

to have the Secretary of HUD say that he was including mobile homes in the 26 million goal of housing starts for the next 10 years. This would actually mean the nonmobile homes, as I recall, would be reduced in its goal to 21 million.

I do agree with him that mobile homes have improved a great deal and they do provide some kind of shelter for people, but that was never our intention, at least my intention as the sponsor of that amendment, in specifying our goals.

I wonder how you felt in HUD when we passed this legislation when you were in HUD and how you felt about mobile homes being part of that?

Mr. BROWNSTEIN. At that time I would agree that the mobile homes were outside the goals. I do not believe that they were contemplated. However, as you suggest, mobile homes are shelter and they are a very good form of shelter.

As a matter of fact, 90 percent of the units being produced at a cost of under $15,000 are mobile homes. Actually, mobile is somewhat of a misnomer. They are put on a site and they stay there. They are now producing units which are very functional, very serviceable, and very attractive.

Senator PROXMIRE. By and large, do they not deteriorate a lot more rapidly and depreciate more quickly?

Mr. BROWNSTEIN. There have been tremendous improvements in them in the last several years and I really cannot answer you specifically because I would doubt if there has been enough experience with the kind now being produced. Some of the homes that they are now manufacturing, Senator Proxmire, are very substantial.

Senator PROXMIRE. Well, then, how do you feel about amending the goals to include mobile homes?

Mr. BROWNSTEIN. I would want to think about that some more. I do not think you can ignore them because they are here and they are in fact providing acceptable housing.

Senator PROXMIRE. Without further consideration, you would not say we should just automatically amend our goals to include mobile homes?

Mr. BROWNSTEIN. I would want to think about that some more.

Senator PROXMIRE. In view of the fact that many people have testified, and you seem to imply in your statement-perhaps I read something that is not there that the 26 million housing starts as a goal was modest and limited in view of what we really need, perhaps we simply ought to add mobile homes to this amount.

Mr. BROWNSTEIN. I believe that the 26 million goal was a conservative estimate on need.

Senator PROXMIRE. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Percy.

Senator PERCY. Mr. Brownstein, I have three quick questions. I believe some of our good Midwestern companies are in your Council of Housing Producers, and I would be interested to know how you were able to buck the trend so much last year and increase the production of these 15 producers by 30 percent in a year when there was an industry decline. What was the secret of your success and is it applicable to other producers?