discounts could continue to be charged by the mortgagee. There would be an added authorization for a free 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 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 Twice legislation was enacted directing the agencies to control discounts, but the legislation was repealed since instead of the hoped for result, it effectively shut off the flow of mortgage credit.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 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 necesasry 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 Home Building 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 percent to 64 percent. The certificate would be saleable 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 62 percent. Assuming an average mortgage amount of $20,000, this would permit up to 150,000 families to achieve home ownership annually who probably would be unable to do so otherwise. We believe there is much merit in this type of proposal.

Thank you for the opportunity of presenting this statement on behalf of the council.

The CHAIRMAN. Next is Mr. Charles P. Landt, chairman of the Subcommittee on Mortgage Finance, Realtors' Washington Committee of the National Association of Real Estate Boards, and accompanying him will be our old friend, Mr. John C. Williamson.

We are glad to have both of you gentlemen before us. We have a copy of your statement. You may proceed as you see fit.

STATEMENT OF CHARLES P. LANDT, CHAIRMAN, SUBCOMMITTEE ON MORTGAGE FINANCE, REALTORS' WASHINGTON COMMITTEE OF THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, ACCOMPANIED BY JOHN C. WILLIAMSON, SECRETARY-COUNSEL Mr. LANDT. Mr. Chairman and members of the committee, I appreciate this opportunity to testify before the subcommittee on behalf of the National Association of Real Estate Boards. Our association consists of approximately 91,600 realtors who are members of more than 1,570 local boards of realtors. Realtors are engaged primarily in the business of brokerage, appraising, and management of all types of residential, commercial, industrial, and farm real estate. The interests and activity of these members extend to all real estate-related fields, including mortgage banking and homebuilding.

Mr. Chairman, in the interest of time, I am going to skip a couple of pages of preliminary, but I would like to have it all put in the record.

The CHAIRMAN. It will all be put in the record. (See p. 193.)

Mr. LANDT. I think we can best spend our time today reacting to specific bills that are before the subcommittee.

Inflation, and more significantly the expectation of, or national resignation to, inflation generates pressures on the capital market not only because of the presence of borrowers less sensitive to soaring interest than home buyers, but also because there is reluctance to save in the first place when the dollars that might otherwise be saved are expected to buy more at present than in the future. We must end the inflation psychology that now grips this country.

Last November, the National Association of Real Estate Boards approved an eight-point program which is attached to this statement for insertion in the record at this point. (Statement of policy follows:)

STATEMENT OF POLICY ADOPTED BY THE DELEGATE BODY OF THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, NOVEMBER 13, 1969

The present limited availability and excessive cost of mortgage money is but one in a series of crises which underscores the grave defects in the structure of the mortgage market. Housing construction starts are declining at an alarming rate and housing goals are receding from view. The nation faces a housing shortage of grave proportions unless the Congress takes immediate action to neutralize the disproportionate burden shouldered by housing in the administration of fiscal and monetary policies as follows:

1. Direct the Treasury to lend funds to the Federal Home Loan Bank Board sufficient to assure availability of an adequate supply of residential mortgage money;

2. Exempt FHA and VA loans from the application of any state usury laws; 3. Free the interest rates on FHA-insured and VA-guaranteed mortgages; 4. Authorize FNMA to deal in conventional mortgage loans;

5. Direct HUD and GNMA to carry out immediately the mandate of the Congress by guaranteeing marketable securities issued by FNMA or other originators against pools of mortgages thereby moving from the present policy of guaranteeing only pass-through securities which have a limited effect on attracting new money into residential mortgages;

6. Authorize use of a portion of the National Service Life Insurance Fund to be made available to purchase VA-guaranteed mortgages;

7. Exempt from federal income taxation a portion of the interest paid to depositors in mortgage-oriented thrift institutions;

8. Increase the minimum denominations of government agency bonds to minimize depositor withdrawal of funds from mortgage-oriented thrift institutions.

Mr. LANDT. I shall now comment on some of the recommendations which are directed at the primary objectives of achieving long-range solutions to the structural problems of the mortgage market. They also bear directly on the bills pending before this subcommittee.

One of the most important of these solutions, in our opinion, is the creation of a national secondary market for conventional loans. Various proposals have been introduced that would authorize either the Federal National Mortgage Association or the Federal Home Loan Bank Board, or both, to establish such a market.

While we believe that the Federal National Mortgage Association is eminently qualified to serve this vital need, we appreciate the advantage of a parallel secondary market in the Federal Home Loan Bank Board which is equipped primarily to serve the savings and loan associations.

Our association has contended for many years that we must take steps to make the conventional mortgage a nationally marketable commodity. Once a national secondary market is created, whether in FNMA, or in the Federal Home Loan Bank Board, or both, it will be necessary to develop national standards relating to appraisals as well as the mortgage instrument itself. Thus a conventional secondary market in FNMA would act as a catalyst for the necessary changes in State laws to rid the conventional mortgage of the legal rigidities and impediments which make its marketability across State lines almost impossible at present. Such an institutional reform should prove beneficial in attracting money to the mortgage market which has been going to competing users of credit.

We are heartened by the recent statement of Secretary Romney that he supports a national secondary market for conventional mortgages, and we also note references to advantages of such a market recently published in the annual report of the President's Council of Economic Advisers. We recommend enactment of S. 2958 which would achieve this objective as well as S. 3508 which relates to a secondary market in the Federal Home Loan Bank System.

Mr. Chairman, I want to call your attention to a supplement which I believe has been passed out to you and I want to comment on that at the present time.

Following the final preparation of this testimony, we were afforded an opportunity to review the testimony of FNMA President Hunter and Secretary Romney which set forth certain elements of a secondary market for conventional loans which depart somewhat from the bill S. 2958, introduced by the chairman and which our Association supports.

We are disapointed in the restrictions which the administration would impose on FNMA's entry into the conventional market. We refer to the requirement that FNMA would purchase only a 90-percent participation in a mortgage, or the whole mortgage if the lender agrees to repurchase the loan or to substitute a loan which is current if there is a default within a 3-year period from date of purchase. We detect in this recommendation an attempt to equalize as much as possible the conduct of a secondary market for conventional loans

as between the savings and loan associations and FNMA. Of course, to do so would be to exclude mortgage bankers from any participation in the secondary market for conventional loans. This might be all right for the savings and loan associations, which may be unduly sensitive to competition, but the result would be to defeat the principal purpose of a secondary market for conventional loans in FNMA.

FNMA and the FHLBB are different agencies with different statutory objectives. Conditions which might be appropriate for the Federal Home Loan Bank System, because of its unique relationship to savings and loan associations, are not necessarily applicable to mortgage originators who are not creatures of and regulated by FNMA. It is our position that the greatest benefit of a secondary market for conventional loans in FNMA is the results which would inevitably flow from the development of national uniform standards for conventional mortgages. We had hoped that FNMA would be compelled to develop national appraisal standards as well as a requirement for standardization of the mortgage instrument itself. If FNMA is to be limited to the purchase of mortgages with a 10-percent participation by the seller or a 3-year repurchase agreement, where is the incentive to develop the standards which we believe would be the most beneficial result of a conventional secondary market?

On the other hand, S. 2958, introduced by the chairman, reflects an appreciation of the more than 30 years of experience of FNMA in operating a secondary market. It assumes and appropriately—that FNMA would look beyond the mortgage instrument itself in determining its eligibility for purchase, and that it would develop standards regarding appraisals and the instrument which must be followed in making the mortgage eligible for purchase. This has always been a responsibility of FNMA. FNMA has always looked beyond the security of even an FHA or VA mortgage and has reserved the right to decline to purchase even insured mortgages if they did not meet FNMA standards. We have always defended the right of FNMA to do this. We are concerned that the administration's recommendations, if approved, would defeat the most important objective of FNMA's entry into the conventional market. We strongly urge approval of S. 2958 as introduced by the Chairman.

Another point I would like to mention briefly, which is not in here, one of the missions of FNMA is that some day hopefully we will have a little easier money and FNMA will want to sell some mortgages. I question how marketable these participating mortgages would be to the life insurance companies and the others.

The requirement that there be a repurchase agreement if the loan gets into default I think is bad. This put a lot of people out of business in the 1930's. This must be done within 1 year. I believe history shows pretty well that the big delinquents on mortgages occur in the first year of the mortgage. It takes the home buyer a period of time to adjust his income and his expenses to get used to making payments and delinquents are always highest during that year. So the repurchase just would not work, in my opinion.

We now turn to a discussion of S. 3442. This bill would enact some of the basic recommendations of the National Commission on Mortgage Interest Rates. Section 1 embraces the dual market system for

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determining the allowable rate of interest on FHA and VA mortgages. We favor this provision because we believe that more money will be available to mortgage borrowers under a comparatively regulationfree system than under a system which imposes from time to time an unrealistic statutory ceiling not responsive to market demands.

In supporting the dual market system, we wish to make it clear that we have no particular affinity for high interest rates. If we felt that the dual system would contribute to the general upward tendency in interest rates, we would surely be opposed to its enactment. But experience has shown, however reluctant any of us may be to admit it, that there is very little relationship between the statutorily imposed ceiling rate and the actual demands of the market. Government can save borrowers from exorbitant interest rates only by denying the opportunity to secure mortgage financing in the first place.

We believe the only permanent solution is to abolish all statutory or administrative controls over the rates which may be charged on FHA and VA mortgages, although we support the dual provision because it is at least a step in that direction. It has been the experience of realtors that high discounts are a far greater deterrent to mobility in housing than high interest rates. It is not possible to calculate the quantitative effects of high discounts, but it should be borne in mind as each homeowner decides against the purchase of a home more adaptable to his needs, as many as three or four purchasers of homes are lost. He will not buy a new home, no one will be buying his present home, nor will anyone be moving into the home which the purchaser of his home may have placed on the market. In the final analysis, it is unconscionable to expect a seller to use his equity to help a purchaser obtain mortgage financing.

We have one concern about the dual system, in this regard, which we would like to express. In view of the lack of popularity of discounts among sellers, we are concerned that many brokers may end up in a crossfire between the seller, who obviously would prefer the free rate with no discount because it preserves his equity, and the buyer whose sole concern is buying the home with as low an interest rate as possible.

I could just see some of the wild advertising that would come out. One guy would advertise no discount at a higher lending rate and the truth-in-lending people would really be confused then.

Nevertheless, we support the proposal on a trial basis, because we are convinced that the experience will demonstrate the merits of a totally free system.

Section 2 of the bill would authorize the Secretary of HUD and the VA Administrator to prescribe standards governing the amount of mortgage settlement costs allowable in a given area and also recommend to the Congress possible legislative and administrative actions that could be taken to reduce mortgage settlement costs. Our membership is well aware of the disastrous impact that closing costs have on a buyer who has scraped his money together to meet the required downpayment only to find he may need as much as 25 percent more to pay all closing costs. Anything which can be done to reduce these costs would be greeted with approval by our industry.