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does what we think should be done-namely, to permit savings and loan associations to lend state wide in those states where the state savings and loan law permits state-wide lending by state chartered associations. Amendments to both the federal savings and loan law and the law relating to insurance of accounts are necessary. State associations are limited not only by their state law but also by the language of the FSLIC law (Title IV of the National Housing Act).

From 1933 until 1964, savings and loan associations were limited to lending within 50 miles of their home office plus such broader area as the association has served as a lender at the time its accounts became insured by the FSLIC. There are maybe 100 associations which have a so-called “grandfather clause" permitting a lending area beyond 100 miles from their home office. The 50-mile area was broadened to 100 miles in the Housing Act of 1964.

The draft of S. 3442 would continue this program of an orderly extension of association lending areas in keeping with modern transportation, the ability of associations to do an intelligent lending job at greater distances from their home offices and the need to remove some of the restrictions and restraints on the operations of our institutions. To avoid unfair competition or damage to the dual system concept, this bill provides that federals could lend state wide only in those states where state institutions could lend state wide. This is a step toward some greater flexibility in our institutions without, at the same time, involving any implications as to the future course of our business as a specialized home financing system.

Thirdly, the language beginning on page 7 through line 8 of page 8 would provide authority for our institutions to act as trustees for the limited purpose of accepting the retirement savings as self-employed individuals under the Keogh Act. The Keogh Act itself, as developed by the Ways and Means Committee and the Senate Finance Committee, would permit our institutions to accept funds of self-employed individuals as trustees, if our institutions had trust power. What we need is authority from the Banking and Currency Committees by amendment of the federal savings and loan law to permit our institutions to have trust powers for the limited purpose of handling this type of money. Such authority has been given by state legislatures to state chartered associations in nine states and we believe Congress should give this authority to federally chartered associations.

Today, practically all retirement savings under the Keogh Act are going into securities. Many Keogh Act programs are being handled by trust departments of commercial banks and, hence, the funds are invested primarily in securities. There are many other Keogh Act programs which provide a combination of investment of the money saved into life insurance and into a mutual fund and, as a result, the savings are going primarily into securities.

Retirement savings is ideal money for home mortgages—it is long term money and not particularly rate sensitive. It is the kind of "savings for a rainy day" money that our institutions used to get. Because the principal home financing institutions cannot today accept this kind of money, retirement savings of many self-employed individuals are not staying in the communities and are not available for home financing.

These three proposed changes in the savings and loan laws are modest changes but would be helpful in making our institutions a more viable business and more competitive for savings. There is nothing revolutionary about them and we urge that Congress act on them without waiting for more studies or any report by the forthcoming Presidential commission to study our financial system.

I have no specific comment as to other sections of the bill but would like to point out there is an increasing interest on the part of our business in FHA lending. We have a specialist on FHA programs on our staff, particularly the new programs of lending to lower income families. We have just concluded the first of three regional clinics we are sponsoring on the government programs for lending to low-income families such as under the FHA section 235 and 236 programs.

MIDDLE INCOME MORTGAGE CREDIT ACT This proposal, S. 3503, would substantially increase the lending capacity of the savings and loan business and it is an apporpriate way to reverse the depressing effect on housing of the actions of the Federal Reserve. I think we all might prefer that Federal Reserve policy be somewhat neutral in its action with respect

2 Arizona, Illinois, Maine, Nevada, New Jersey, New York, Oregon, Pennsylvania and Texas.

to the credit markets, but the Federal Reserve is, in fact, not neutral. In its efforts to achieve an even-handed role in the credit markets, it in fact discriminates against the mortgage market. The proposal by Senator Proxmire would redress that balance.

The general monetary controls as administered by the Federal Reserve have had a very selective impact and housing is carrying far more than its fair share of the burden of the anti-inflation program of this country. In the absence of selective credit controls and the use other anti-inflation weapons, we believe the proposal such as embodied in S. 3503 is most appropriate although the committee has heard the strong objections of the Administration and the Federal Reserve which, of course, were not unexpected. Furthermore, the consideration of S. 3503 is effective in stimulating the development and discussion of other alternatives.

If we have any reservations about this proposal, they relate to the specifics of it. A range of interest rates might be more appropriate than the specific 6% and 642% rates in the bill. The $25,000 figure for the cost of the housing unit involves the same problems as does the upper cost limit on loans which are found in various provisions of our housing laws. The $25,000 limit, for example, might prevent middle-income families needing a large house from taking advantage of this program in some of the higher cost cities of the country. But, as a way to redress the balance as to the unfair burden of housing credit which seems to always bear on the housing market in periods of restrictive monetary policy, the Proxmire bill deserves the support of the Congress.

S. 3503

The most recently introduced of the bills before your committee these hearings, S. 3508, would provide a basic new secondary market facility to be operated by a new corporation under the Federal Home Loan Bank Board. It is similar to proposals which received a good deal of attention in the early 1960s. The United States League was among those who participated in the development of this idea and we continue to believe that it is highly meritorious. It represents, however, long-range and fundamental legislation rather than the type of proposal which might have an immediate impact on the problems we face in 1970. Certainly, it should be studied when the committee holds hearings later which were described by Chairman Sparkman as “covering a broad spectrum of housing and urban affairs proposals”.

S. 2958

I have concentrated my testimony on those bills which are specifically oriented to savings and loan associations. We recognize, of course, that there is a great deal of interest in the Fannie Mae secondary market bill, S. 2958. We know that those institutions which are the principal users of Fannie Mae will offer useful testimony, particularly as to the question of whether or not the resources of Fannie Mae are or can be adequate to handle the FHA/VA sector and move into the conventional loan area.

Finally, let me present briefly a point of view with respect to mortgage interest rates and the adequacy of housing credit. It seems the record is clear that the one reason for the substantially reduced flow of funds into home mortgages and the high interest rates the past few years is that savings and loan associations have not been attracting the high share of the savings dollar which we attracted in the 1950s and the first years of the decade of the 1960s, and also that we have been forced to pay very high rates of interest to attract or keep the savings we do attract and keep. It is also evident that we are paying rates of interest to the very limit of our capacity. We are faced with a considerable squeeze on earnings as a result of the changes in rate ceilings in mid-January, and our institutions are thus forced to go to the very limits of the mortgage interest rate ceilings in the various states in order to pay enough to hold the savings we now have.

Various congressional proposals contemplate adding $2, $3, or $4 billion of federal money to the mortgage market with some of it to be transmitted to the market via our institutions. The members of the Banking and Currency Committee realize the importance of the savings and loan business but too few fully understand the size of our contribution to the mortgage market and the importance of a healthy, growing savings and loan business to housing and home financing

Last year was a fairly poor year for us and yet we made loans in the amount of $21.8 billion. In the years 1963, 1964 and 1965, our business made loans averaging $2 billion a month.

The simplest way for Congress to help the mortgage market and stimulate home building is to pass such laws or to get the Administration to take such steps as to increase the lending capacity of the savings and loan business by 20% or 25%. A 20% increase in lending capacity would increase the flow of residential mortgage credit by over $4 billion. This could mean the difference between famine and a reasonable supply of mortgage money. In this connection, the program announced by the Administration last week for a subsidy to the Federal Home Loan Bank System is well conceived as a way of getting maximum leverage in lending volume in the expenditure of tax dollars. Of the almost $22 billion made in home loans by savings and loan associations last year, $4 billion came from an increase in advances from the Bank System. Because of the very high cost of Bank credit, few savings and loan associations are continuing to borrow for loan expansion purposes. Subsidizing the advances of the Bank System could reverse the picture and permit savings and loans to continue to use Federal Home Loan Bank money for mortgage lending.

The CHAIRMAN. Our next witness, Mr. Oliver Jones, executive vice president of the Mortgage Bankers Association of America.

Mr. Jones, we have your paper. It will be printed in full in the record. You may proceed with it as you wish.

(The full prepared statement of Mr. Jones may be found at p. 219.)




Mr. Jones. Mr. Chairman and members of the Subcommittee on Housing and Urban Affairs, I appreciate having this opportunity to testify on legislation before this distinguished committee on behalf of the Mortgage Bankers Association of America (MBA).

As you know, mortgage bankers originate all types of real estate loans. They have been the principal catalysts in the FHA and VA programs, including the special-purpose programs created by Congress to house the urban poor, the elderly, and those in need of nursing care. Mortgage bankers originate mortgage loans not as investors, but as manufacturers whose product is a mortgage loan and whose market is the financial institution that purchases mortgage loans for its investment portfolio. The price of their product is determined by the availability of savings in the local market and their ability to draw savings from distant markets. They serve the Nation's home buyers by drawing savings from areas where they are least needed to invest in home mortgages in areas where they are most needed. Clearly, mortgage bankers have nothing to gain from high-interest rates and everything to gain from stable growth in the flow of savings into mortgage credit on a nationwide basis.

For this reason, MBA's current policy statement, which is being prepared for the printer and which will soon be mailed to you, recommends that the Congress:

Initiate immediately a comprehensive study of the Nation's financial structure as a whole to determine:

(a) The capacity of the system to allocate financial resources and meet long-term demands for credit;

(6) The effectiveness of the Federal Reserve System's operating tools:

(c) The feasibility of fostering single-purpose institutions versus the evolution of all-purpose financial institutions;

(d) The advisability of maintaining ceilings on savings deposits at financial institutions; and

(e) The means of reducing the disproportionate impact of monetary restraint on various sectors of the economy.

We understand that such a study is now being planned by the Presidential Commission on Financial Structure and Regulation. We urge that its participants be charged with the task of finding ways to reduce the frequency and minimize the selective impact of extremes of monetary policy.

The current housing crisis is now upon us. The impact of the crisis was softened by congressional action in 1968 that permitted the Federal National Mortgage Association to commit to purchase nearly $8 billion of FHA and VA mortgages and by the jursuit of more aggressive policies by the Federal Home Loan Bank System. The current crisis will not respond to emergency legislation in time to be useful before prevailing monetary policies have taken hold and a relaxation becomes feasible.

Now is the time to create legislation that will keep the housing industry from being the principal victim of tight credit policies in the future. We are pleased, therefore, that the legislation before this committee is designed to improve the operating apparatus by providing the tools needed for the mortgage market to meet the Nation's demands in all phases of the credit cycle.


Proposed Dual System of Regulating FHA-V A Interest Rate Ceilings

As you know, the Mortgage Bankers Association of America has long urged Congress to adopt the proposition that the home buyer would be best served by freeing FHA and VA interest rates from all statutory and administrative ceilings. We continue to believe that this is the only workable solution.

Testifying before the full committee on September 29, 1969, our President at that time, Lon Worth Crow, Jr., stated:

We do not, however, oppose the dual system recommended by the Commission. If the statutory ceiling is removed and the Secretary of HUD is somehow required to maintain the ceiling sufficiently close to the market to minimize discount-, the dual system may be a reasonable means of testing the feasibility of a free market system.

We are concerned, however, that the test will fail if the prevailing inflation is not reversed early in the prescribed three-year period. We are concerned that the no-discount provision places an albatross around the market's ability to test the concept of a free market and a truly free rate.

Theoretically, a free rate with no discount in the primary market should be feasible * * *. The discount system has been imposed on the market system for too long a period to assume that it can be removed entirely without further wrenching an already strained market.

Experience has shown that any Secretary of the Department of Housing and Urban Development finds it difficult to “maintain the ceiling sufficiently close to the market to minimize discounts.

The free market will not be tested, because neither prong of the dual system provides for a market-determined yield. At the same time, the choice available will generate administrative problems and confusion on the part of the borrowing public. The brunt of public re


sentment will be borne by the loan originator and, in turn, by Congress.

If Congress desires to maintain some control over these interest rates, we strongly urge that the dual system be replaced in this bill by a proposal that ties, by formula, the interest rate ceiling to an established market interest rate series.

We have opposed similar proposals in he past because no interest rate series will accurately reflect changing demand and supply conditions in the home mortgage market. We feel, however, that the long record of administered ceilings proves that an impersonally maintained ceiling would be more effective than the present arrangement, or the dual system. The Canadian Government took this step and was so successful in attracting funds that they have now moved to a completely free rate. Our staff is currently examining well-known interest rate series and, if desired, we can make a specific recommendation at a later date.

As an alternative to tying the ceiling to a known series, the committee might consider using a new series based upon actual mortgage transactions. Aspects of this alternative are as follows:

1. Establish a monthly series of mortgage yields collected and published by FHA and VA and based on actual mortgage loans.

2. Use the series established in this way to maintain the ceiling on FHA and VA mortgages by establishing a review every 3 months at which time the ceiling would be raised if the discount exceeded four points and lowered if the discount fell below two points. The change would be automatically and impersonally determined.

3. As recommended by the Commission on Mortgage Interest Rates, permit the discount to be paid by seller, buyer, lender, or real estate broker, or in any combination of these as negotiated

by the parties involved. These suggestions as well as the dual system deal only with the interest rate at the time the mortgage is originated. After that date, if interest rates fall the borrower can refinance, but if interest rates rise the lender is locked into a low-yielding investment. This process increases the vulnerability of thrift institutions to rising interest rates, as their capacity to retain and attract savings is limited by the yield on the mortgages they already hold.

Here, again, the Canadian Government has adopted a plan worth examining. It is a variable interest rate mortgage on a 5-year interval; that is, every 5 years the lender has the opportunity to review the loan and, if interest rates have risen, to increase the rate on the mortgage. The borrower has a limited time period during which he can refinance with another lender. Of course, if interest rates fall the borrower would, in any event, refinance the loan.


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Periodically, settlement or closing costs come under the spotlight of criticism arising from the wide variations in local practices, many of which are prescribed by State law. The issues involved are often confused with advance payments of insurance, taxes, and special assessments, which are also part of the closing costs.

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