to shy away from getting any more of that kind of money. In fact, associations today are not only refraining from borrowing additional money but are inclined to repay the Federal Home Loan Bank system. So, in order for it to be practical for associations to again borrow money and refrain from repaying the bank system-which they would do by diverting new savings flows from mortgage lending the Federal Home Loan Banks must get in the position of stabilizing the rate on advances as well as lowering the rate on new money advanced.

These kinds of things can be accomplished with some subsidy to the Federal Home Loan Bank system. It should not take more than $100 million a year to do this job and we hope that money markets will improve over the next year so that even this limited program can be terminated.

If savings and loan people can be assured that bank credit will be available at reasonable rates and without having to sign notes that permit bank officials to raise the rates on outstanding advances, we believe that savings and loan associations will immediately begin. to talk to home builders about new projects, be willing to make new loan commitments and begin again to finance the sales of existing houses.

Our business would like nothing more than to get our loan departments back to work. We would like to be able to do the job that we are in business to do-namely finance home building and home buying and make permanent loans on the security of mortgages in our communities.

Savings flows are beginning to improve but we need more than better savings to produce a resurgence of savings and loan lending. We need assurance that Federal Home Loan Bank credit will be available at reasonable rates.

This we think the administration proposal would do. It is also the very essence of the Proxmire bill. I know of nothing that would do more for home building at the moment than this type of financial assistance to the Federal Home Loan Bank system.

The legislative implementation should be quite simple in terms of the language involved. The impact on this year's budget would not be so great as to cause any real problem for the Appropriations Committee. We would hope that the necessary authorization and appropriation could be voted within the next 30 days.

I hope that there can be this kind of congressional action for immediate relief of the mortgage market and then consideration by the Congress of broader, more substantive legislation relating to secondary markets, FHA interest rates and a variety of changes in savings and loan laws that could make our business more competitive with respect. to the savings of the American public.

The CHAIRMAN. Thank you, Mr. Strunk.

Let me ask you just one or two questions.

In the bill which I introduced, the buying and trading of these conventional mortgages would be limited to members of the system. It has been proposed that that should be expanded to members of the FDIC and I see no reason why the coverage shouldn't be extended to all legitimate handlers of mortgages who might be eligible to sell and buy from this plan.

What is your thought on that? In other words, should it be limited to members of the bank system?

Mr. STRUNK. Speaking purely as an executive of the United States Savings and Loan, I would say we can find reasons why it should be limited to savings and loan people, but to be more broadly concerned about the housing market, we would have no real objection to extending it beyond the members of the Federal Home Loan Bank System. The object of the Congress is to get more money for housing by a variety of ways and we would not want to say no, it should only be by savings and loan associations.

The CHAIRMAN. That sounds reasonable to me. As you point out, we are trying to get as much money in the home mortgage market as we can. Trying to stimulate it all we can.

Mr. STRUNK. In that connection, if the legislation that you propose is implemented, that would start this corporation with $100 million in savings and loan money. I would say others who might come in who haven't contributed to that pool of capital ought to pay a little bigger price or in some way supplement that capital for the privilege of doing business with it.

The CHAIRMAN. Yes.

Senator Bennett?

Senator BENNETT. I read your statement though I wasn't here to hear it.

How do you suggest that the $3 billion proposed to be made available in S. 3058 be allocated?

Mr. STRUNK. This would be allocated to the Federal Home Loan Bank Board to the Federal Home Loan Banks and I assume this would be done on some mathematical formula relating to size and so forth.

Senator BENNETT. How would the local savings and loan decide between two customers, which was going to get the subsidized rate and which was going to have to pay the market interest rate? Because obviously there could only be 150,000 customers who would have the advantage of this low rate.

Mr. STRUNK. Of course there are the income limits.

Senator BENNETT. I know, but there are more than 150,000 people within those limits, aren't there?

Mr. STRUNK. I would think this poses a real problem but savings and loan associations have been in the process of selecting one borrower from another quite a bit of the time the last several years. I would say they would have to do it on the basis of credit worthiness, the employment record, the character and a variety of things.

Senator BENNETT. In other words, the man whose credit worthiness was greatest would pay the high interest rate and the man whose credit worthiness was less would be given the advantage. Is that the way you visualize it?

Mr. STRUNK. No, I would turn it around. Here are two people, both of whom qualified under the technical terms of the law and whatever rules would be put under it. Both of them qualify in income and so forth. I think within that group you have to give it to the fellow most likely to pay it back.

Senator BENNETT. In other words, the man who needs it less gets the subsidy and the man who needs it most doesn't get

it.

Mr. STRUNK. Yes. You have to make selections and it would be difficult.

Senator BENNETT. All right. Because it has a fixed limit of $10,000, the man whose income is $10,000 pays 812 percent and the man whose income is $9,999 pays 612 percent. The difference between the current market and the subsidized rate would produce about $500 difference in the interest cost for the first on a $25,000 mortgage. So the person with a slightly lower income has nearly $500 a year greater income when mortgage costs are deducted. This certainly reduces the incentive to work for an increase in income.

I suppose you must be prepared to demonstrate that this man doesn't have an income of more than $10,000, you are prepared to show his income tax return or some other way to show that he qualifies. It seems to me there are a lot of things in here that may look fine at first glance but which represent very serious problems.

Mr. STRUNK. I would agree, Senator Bennett, and I commented we had a quarrel with some of the details of it. You bump into this problem all the time in connection with 235 and 236 with respect to public housing limits and everything else. This is just a fact of life in trying to help people.

Senator BENNETT. On those there is a flexible range. On this there is a fixed point.

Mr. STRUNK. I think, as I said that would be the quarrel I would have with these particular specifics of it.

Senator BENNETT. If the Fed has to pump $3 billion into this program, it has two choices. It either creates $3 billion of new money or takes the $3 billion out of some other area. Which do you think the Fed should do?

Mr. STRUNK. I would think it would depend in part on the monetary posture of the country at the time. But I think we have to recognize that inflation is the big problem, the fundamental problem in the country and our housing problems relate to that in part.

I think housing does have to take second place to the price level problem and the inflation problem.

Senator BENNETT. Are you suggesting that the Fed should not create new money, it should take it from some other segment?

Mr. STRUNK. At this point. I don't know to what extent the Fed might be ready to increase the money supply but it would depend on the appropriateness of the money supply to answer that question. I can't say whether the Fed should or should not increase the money supply to some extent. But I would say the Fed would have to take roughly equivalent amounts out from some other sector unless it was willing to go into some other credit control devices to deal with the inflation problem.

Senator BENNETT. For the last year and a half, partly because of the uncertainty of the tax bill, municipalities and State governments have not been able to sell their obligations.

Do you think, therefore, the Fed should allocate a certain amount of money and handle them in the same way? In other words, once you start this system of saying here is a segment of our economy for

the disadvantaged and therefore we must use the monetary system to give them an advantage, can you deny that, for instance, to the man who is trying to sell municipal bonds? He has no market either at the moment.

Mr. STRUNK. Well, I might say in that connection, that users of that credit have the advantage of their securities being tax exempt. Senator BENNETT. With that advantage they haven't been able to sell them.

Mr. STRUNK. That is because of the same problem the mortgage market has run into, these artificial ceilings in State laws.

Senator BENNETT. Would you be willing to include them in 3505, require the Fed to set aside a certain amount of money for them? Mr. STRUNK. Senator Bennett, I have

Senator BENNETT. It is the same situation. In other words, we are embarking here, I think, on a dangerous new course, to say that a single segment of the financial market is going to have a privileged access to the Fed and that the Fed must supply their need at the expense of all the other segments of the market. Once you start down that road you would be surprised at the number of people who can make a case for the fact that their source of income has dried up too. You talk in your statement about evenhandedness, do you think it is evenhanded to give the mortgage market to the disadvantaged and deny it to others?

Mr. STRUNK (Continued.) The problem is, in the general credit control, it has had a highly selective effect, primarily on State and local government finance and residential mortgages.

Senator BENNETT. Would you recommend that we amend S. 3503 to take care of the needs of local governments?

Mr. STRUNK. I would agree this gets you into that problem and if local governments have a severe credit shortage such as we have had in the mortgage field and I don't know that they have, maybe they have, I would say this kind of approach would be logical, extending that to other socially desirable areas where credit is clearly shown and where the problem here is long-term financing for people who cannot afford to pay higher interest rates. Short-term credit has not suffered in this period but we are dealing with credit that has been hurt in terms of the available supply, because of the long-term credit, it hasn't had an inflation protection factor in it and you are dealing with people who are weak in priorities and ability to pay for credit.

Senator BENNETT. What about the small businessman?

Mr. STRUNK. He gets, of course, short-term credit and that does not have the problems long-term credit has in terms of the problem the lender has in making long-term commitments at these rates for fixed dollars.

Senator BENNETT. But he is still at a disadvantage in this tight money situation?

Mr. STRUNK. Yes, in terms of the big corporations, but he is not at a disadvantage because of the nature of the borrowing instruments. The nature of the borrowing instrument where equity kickers are not possible, the problem there is a long-term obligation at fixed rates. Senator BENNETT. I admit he is different but that does not put any money in his pocket. In the end he does not get the money any more than the home builder.

You made one statement here that S & L's are beginning to repay their advances to the Federal Home Loan Bank Board. Do you have any figures? Is that increasing?

Mr. STRUNK. I do not know if I said they are beginning to repay their advances. I might have been in error. I said I think they are attempting or inclined to. I do not have any figures.

Mr. SLIPHER. I think the last weekly report showed about $40 million coming back in and $70 million going out. Some are beginning to repay.

Senator BENNETT. The total advances are still increasing, however? Mr. SLIPHER. Right. They always increase in the early part of the period. They will taper off. There will be a net repayment here. Senator BENNETT. These advances are temporary in nature and there has to be a turnover, is that right?

Mr. STRUNK. Not necessarily. They are refinanced. They are typically written on 1-year terms and then they are extended. If the association needs that money for lending, and goodness knows they do, these notes would be refinanced or reextended.

The problem is that this money that was borrowed last year at 6 and 614 and later 612 are now costing these institutions a lot more and this high cost money is hurting them in terms of their expense picture.

Senator BENNETT. The fact is that the Home Loan Bank Board is still increasing its advances to the industry.

Mr. STRUNK. Yes, sir, but we have been having a major savings loss until recently. If and when, and unfortunately we are beginning to see more favorable savings flows now, the question is what will the business do when the savings flows are in the black instead of the red. They have not had any money to pay back the bank system until recently.

Senator BENNETT. I just have one further question. Do you support the concept that the earlier two witnesses suggested, that there should be tax exemption for income from interest earned on savings?

Mr. STRUNK. Yes, sir.

Senator BENNETT. Do you extend that to commercial banks for their savings departments?

Mr. STRUNK. Senator Bennett, we have been discussing within our organization and savings and loan people for some time this concept of tax incentives for savings. It appears to me part of the problem in this country in the years ahead is that we do not have enough savings capital. Enough to do the jobs we want to do in this country in terms of road building, school building, home building, and everything else.

The use of tax incentives for thrift is something that I think the Congress ought to give careful consideration to. Monies that go into the savings departments in commercial banks to a great part are used to finance State and local governments. As you said, this is an important area of need, too.

Personally, I say that concept ought to be spread throughout the whole picture.

Senator BENNETT. What about credit unions?

Mr. STRUNK. I think they are a very desirable form of saving and I would extend this and broaden it to all types of savings, whether it be credit unions, commercial banks or savings and loan associations.

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