We are convinced that a major shortcoming in our national housing effort for the past two decades has been our preoccupation with short-range solutions which touched on the symptoms but not the causes of our difficulties. We have almost totally disregarded the fundamental reasons why our highly technologically advanced society cannot produce systems of home financing without crises which come every time it is necessary, for economic reasons, to impose fiscal and monetary restraints. All of us familiar with the problem realize that housing is the principal user of credit which has been forced to do with substantially less during these periods of stringency. It is fundamentally wrong that the housing industry so vital to the welfare of the people is the one least able to compete in tight money periods. Given the present financial structure of our nation's credit markets, it is a fact which we cannot escape that housing cannot compete with governmental and commercial users of credit for the savings dollars when demand is high in the capital market.

The conclusion seems almost inescapable that total savings dollars in this country will not in the foreseeable future provide enough money to meet all the demands of all credit users. For the past several years it has been housing, almost exclusively, that has been deprived. Structural changes in our arrangements for residential financing are necessary to help housing compete on more even terms with its major competitors for savings dollars. Long-term solutions that are going to prove effective will have to be directed at achieving a more equitable flow of credit for housing.

We are encouraged by Secretary Romney's recent statement that the Adminis tration has urged three major sources of investment money, which in recent years have avoided or sharply reduced home mortgage investments, the commercial banks, the insurance companies, and the pension funds, to voluntarily allocate approxmiately $6 billion to the residential mortgage market. This action would significantly help to redistribute savings dollars on a more equitable basis, and is responsive to the basic long-term problem.

Before proceeding with specific recommendations, I want to express our position generally that long-term savings can be increased only if there is confidence in the future value of the dollar. 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. I shall now comment briefly 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 states 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 Advisors. 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.

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 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 regulation-free 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 tendancy 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 home owner 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 cross fire 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. 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% more to pay all closing costs. Anything which can be done to reduce these costs would be greeted with approval by our industry.

Section 4 of the bill makes three important changes in the laws pertaining to savings and loan associations, and we recommend their approval. First, the Federal Home Loan Bank Board would be authorized to set an administrative ceiling, above which associations would be required to maintain special accounts in lieu of the present statutory $40,000 mortgage ceiling. Second, savings and loan associations would be permitted to act as trustees for Keough type self-employed retirement trust funds, and third, the "primary lending area" would be expanded beyond the present 100 mile limit to any area authorized under state law. We believe that all of these changes would prove to be beneficial, and we urge their enactment.

We also endorse section 5 of the bill, which would permit national banks to make mortgage loans of up to 90 percent of value over a 30-year period instead of the present limits of 80 percent and 25-years. This change is responsive to present conditions, and we support it.

Another high priority objective is the requirements that federal agency obligations bear high enough minimum denominations to minimize competition with mortgage-oriented thrift institutions. This measure too would help to

reduce the affects of disintermediation by channeling more funds into the mortgage market and away from its competitiors. It is one of the steps that must be taken to assure more money for home buyers. It is directly responsive to the fundamental problem.

Savers are becoming aware of yields on their savings. They know that a return of 8 percent on a federal agency obligation means more income than the 5 percent their savings and loan association may pay on passbook savings, even though they they may not be aware of the greater risks in terms of liquidity, negotiability and the absence of insurance features.

We are not unmindful of the arguments of those who contend that such an action would discriminate heavily against the less affluent savers in our country. It would, but at the same time it might provide some mortgage financing to people in that same category who today cannot obtain it. However reluctant we might be to take this step, we must face the incontrovertible fact that it would help the beleaguered mortgage market.

We are aware of recent changes increasing minimum denominations of FNMA and FHLBB obligations and Treasury bills of $10,000. Certainly, this is helpful although we believe the minimum, to be fully effective, should be $25,000.

I have had an opportunity to study the bill, S. 3503, introduced by Senator Proxmire, and identified as the Middle-Income Mortgage Credit Act. This is an ingenious proposal which would make available at the Federal Reserve Board's discount window, up to $3 billion to the Federal Home Loan Bank Board. The money, thus made available to the Board at 6 percent (the present rediscount rate), would be advanced to savings and loan associations and be reserved for loans not exceeding 62 percent for homes costing $25,000 or less and for families whose gross annual incomes do not exceed $10,000.

I do not believe that this spread of one quarter to one half percent is sufficient to induce savings and loan associations to use this mortgage fund.

If it is necessary to reorder our national priorities and to facilitate thereby a reallocation of financial resources to the residential mortgage market, then it is difficult at least at this early stage of my study to find a valid basis for opposition to using the discount window of the Fed to contribute to this reallocation. We have sent copies of the bill and the Senator's remarks on introduction to the members of the Realtors' Washington Committee for their study and recommendations during our spring legislative conference in Washington later this month. We will then be in a position to state the official policy of our Association on the bill when hearings are held on housing legislation later in the session.

SUPPLEMENTARY STATEMENT OF CHARLES P. LANDT, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS

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 disappointed 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 three-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 three-year repurchase agrement, 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.

The CHAIRMAN. Our next witness is Mr. Norman Strunk, another long-time friend before this committee.

We welcome you back and Mr. Steve Slipher. I am glad to have you both. We have the prepared statement and you know our custom, so proceed as you see fit.

STATEMENT OF NORMAN STRUNK, EXECUTIVE VICE PRESIDENT, U.S. SAVINGS & LOAN LEAGUE, ACCOMPANIED BY STEPHEN SLIPHER

Mr. STRUNK. We appreciate the opportunity to testify here today on several bills dealing with housing and home financing. In order to focus attention on the immediate problems related to mortgage credit and to save the time of the committee, I will file my full statement which relates more to legislative proposals making structural changes in our mortgage credit system than action that can be taken to help the home building business this year.

We cannot overemphasize the fact that home building and home. financing needs some prompt and immediate action by the Congress. What we need is quick passage of legislation along the lines of Senator Proxmire's proposal incorporated in S. 3503 and congressional implementation of the administration proposal calling for a $300 million subsidy to the Federal Home Loan Bank System. Both would keep Federal Home Loan Bank credit flowing to the mortgage market this year as an important source of funds for home building and home buying.

Let me say briefly with respect to the interest rate bill and the secondary market bills (S. 3442, S. 2958 and S. 3508) and the forthcoming administration bill to provide secondary market facilities for conventional loans, that these programs, while highly desirable, are somewhat more long range and are not a solution to the immediate problem facing us.

We particularly support the savings and loan sections of S. 3442 which would implement a number of the recommendations of the Com

mission on Mortgage Interest Rates with respect to savings and loan laws. They would make our business a more viable business and permit us to be more competitive for savings. There is nothing revolutionary about them and they are noncontroversial in the savings and loan field.

Clearly, it would help improve the flow of funds into housing if the marketability of conventional loans could be improved. We have long felt that savings and loan associations should be given the choice of borrowing money from the Federal Home Loan Bank system on the security of their mortgages or selling their mortgages outright to the banks.

There are many associations which prefer not to borrow money or prefer to limit their borrowings to modest percentages of their total assets. The idea is that these institutions would be given the opportunity to sell mortgages to the Federal Home Loan Banks and thus broaden the flow of funds from the bank system into our institutions and then into the local mortgage markets. We agree with the concept presented by the chairman of the Federal Home Loan Bank Board to you on Monday with respect to this proposal.

Of all the proposals that have come to our attention, the one that is most likely to be immediately helpful upon congressional enactment and the one least likely to have major budget impact is the proposal to subsidize to some extent the landing program of the Federal Home Loan Banks. This is the so-called $300 million subsidy which has been discussed in the press and as Chairman Martin outlined to you in his testimony.

Last year, savings and loan lending was maintained in the face of a substantial decline in savings by a $4 billion increase in advances from the Federal Home Loan Bank system to savings and loan associations. Our institutions made $21.8 billion in home loans and of that, $4 billion came from increases in advances.

Under present circumstances and without some arrangement to subsidize the interest rates of the Federal Home Loan Banks, we doubt that savings and loan associations will continue to increase their advances from the bank system in order to make loans.

Today, Federal Home Loan Bank money costs our institutions from 712 to 734 percent and this rate is likely to go to 8 percent before long. Savings and loan associations cannot and will not borrow money at 8 percent to make home loans. We think associations will, however, borrow money at 612 or 7 percent for lending purposes.

The Federal Home Loan Bank system is now subsidizing advances to some extent in that they are lending money at a rate less than the cost of the money. This cannot be continued indefinitely nor can the rate be lowered.

Few people realize that the cost of Federal Home Loan Bank advances is subject to an interest adjustment or "escalation" clause. Thus, when the Federal Home Loan Banks raise their rate on advances they not only raise it on new money borrowed but also on existing advances.

Associations that borrowed money early last year at 612 percent are now paying 71⁄2 or 734 percent on those same dollars. The plain economics of association operation causes savings and loan executives