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.

SETTLEMENT COSTS

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.

The Department of Housing and Urban Development issued one study on closing costs over a year ago, but no actions followed. We understand that they are contracting with a university to look into this matter again. The National Conference of Commissioners on Uniform State Laws is developing a Uniform Real Estate Financing Code, which we anticipate will deal with this subject.

We agree with the need for a careful study of this area, but strongly urge the committee to avoid empowering individuals to set "reasonable" settlement costs before the facts are in hand. Without the facts, "reasonable" becomes a subjective judgment that is open to wide margins of error. If limits are unrealistic, they are apt to reduce the services and protection provided borrowers. If they ignore State law, they would risk cutting some States off from outside capital, particularly for FHA and VA mortgages. Long-distance lenders must protect the savings of their depositors and policyholders, a fact also prescribed by law; they will, therefore, shy away from lending in any State where a cloud has been placed over the mortgage instrument or any part of the lending process.

SPECIAL ADVISORY COMMISSION ON HOUSING

The annual housing report to Congress cannot become an effective planning instrument if it is based solely on the findings of the Department with little or no assistance from individuals who are actively engaged in the market. This is the thread from which the fabric of unattainable promises is woven.

From time to time, Secretary Romney has called industry representatives together to discuss industry problems. This is a welcome procedure, but the study of annual targets should be formalized as proposed in this legislation. We commend, therefore, the committee's active support of the proposal to create a Special Advisory Committee on Housing,

BROADENING THE NATIONWIDE SECONDARY MARKET

Several proposals in S. 3442 will break down barriers that have hampered the development of an efficient, nationwide secondary market for home mortgages. Although these proposals are not directly related to mortgage banking, we support their objectives and the specific recommendations.

Permitting greater flexibility in establishing the maximum home loan that savings and loan associations may originate will increase the probability that borrowers seeking to purchase housing in the higher price ranges will find funds available thereby contributing to their mobility, and place more used housing in the market for lower income families.

Permitting savings and loan associations to accept Keogh-type deposits for individual retirement plans will bring more savings into institutions largely devoted to investing in home loans.

Widening the primary lending area of savings and loan associations, particularly along market area lines, will broaden their markets and the number of persons they can serve-in relation to the economic structure of the markets instead of the accident of geography. We

note that the existing statute provides for mortgage lending by savings and loan associations in any standard statistical metropolitan area, up to 5 percent of their assets. This was a major step towards creating a nationwide secondary market for conventional home loans that should be extended and not reduced. It is not clear that this authority is retained by the changes in S. 3442. In the final analysis, the borrower will be served best when he is not limited to one or a few local lenders, but can deal with financial institutions that can lend anywhere in the Nation.

The proposal to permit national banks to make and hold conventional home mortgages equal to 90 percent of value is also a commendable step forward in reducing the differences in lending authorities among the various types of financial institutions-differences that tend to compartmentalize rather than unify the mortgage market.

FNMA AUTHORITY TO PURCHASE CONVENTIONAL MORTGAGES (S. 2958)

At the National Mortgage Banking Conference held in Chicago in late February, the Board of Governors of the Mortgage Bankers Association of America adopted the following policy, recommending support of this legislation:

Permit FNMA to deal in conventional home loans under appropriate safeguards that assure the marketability of conventional home loans purchased by FNMA. We feel that FNMA can be the catalyst needed to develop a conventional mortgage instrument that can be resold in the secondary market. This would provide conventional home mortgages with the liquidity that is needed to make them attractive investments to financial institutions. In this role, FNMA can provide the motivation to solve the problems of wide variations in appraisals, credit reports, property standards, State laws, and other lending restrictions on financial institutions.

The appropriate safeguards that we believe are vital to the success of this program are already in the basic FNMA statute as well as this legislation; that is, the mortgages purchased by FNMA must be generally acceptable to private investors must be marketable. We urge the Congress to emphasize this point in the legislation and with those responsible for promulgating regulations for this program. Restrictive. limitations, such as requirements for participation in the mortgage by the seller or prolonged recourse to the seller greatly reduce marketability. They are not only unworkable for mortgage bankers who originate 85 percent of the loans sold to FNMA and more than onehalf of all FHA and VA loans, such restrictions would hamstring FNMA's ability to do the job wisely assigned to it by Congress.

To stabilize the market for home mortgages, FNMA must be prepared to increase its purchases during periods of credit stringency and to increase its sales during periods of credit ease. In periods like 1969, if this legislation becomes law, large volumes of conventional home loans would be sold to FNMA, appropriately relieving pressure on the homebuilding and home mortgage markets. If these mortgages are not marketable, they will become lodged in FNMA's portfolio indefinitely. FNMA would be unable to sell them in periods when credit ease threatened temporary overbuilding. As a result, it would face any

subsequent period of credit restraint with a large ratio of debt to net worth and a greatly limited capacity to support the mortgage market. Moreover, if FNMA fails to generate a marketable instrument, the corollary impact of this legislation in contributing to a more efficient private market will be lost."

As a caveat to this discussion of FNMA's purchasing conventional loans, we would hasten to stress the importance of assuring that the conventional lending operations of FNMA will not modify FNMA's primary responsibility, which is to devote its resources to the support of the FHA-VA market. Language to this effect in the preamble to the bill would be most desirable.

MIDDLE INCOME MORTGAGE CREDIT ACT (S. 3503)

We are most sympathetic with the objective of the proposed Middle Income Mortgage Act. This portion of the demand for housing is drastically curtailed when monetary restraint reduces the supply of credit and increases the cost of the remaining supply. When this happens, middle-income families must postpone fulfillment of their housing needs, the Nation's housing supply falls behind the people's needs, and the demand for the services performed by mortgage bankers declines. Investors can turn to more attractive outlets for their funds, but mortgage bankers find their market sharply reduced.

Although we are in agreement with its objective and have obvious self-interest in its achievement, we seriously doubt that the objective can be accomplished by this legislation. If we understand the mechanics of the proposed legislation correctly, the Federal Home Loan Bank Board would be authorized, during periods of credit stringency, to issue $3 billion of certificates annually. These certificates would be limited to a 6-percent interest rate. Under the assumption that credit is tight, the certificates could not be sold in the private market. Therefore, the bill provides that the Federal Reserve System would be required to purchase the certificates.

The required addition of $3 billion of Federal Reserve credit to the financial system would provide a basis for an increase of roughly $18 billion in the money supply. The $3 billion purchase is two to three times the outstanding amount of Federal Reserve Bank loans to commercial banks at any time during 1969. The Federal Reserve could not permit an expansion of this magnitude to take place under the assumption of credit restraint. Accordingly, it would be forced to sell $3 billion in Treasury issues, thereby driving the interest rate on Treasury issues higher and encouraging further withdrawals of funds from thrift institutions. When the circle is closed, we would find that the general taxpayer had paid for a massive subsidy to middle-income families. If the Federal Reserve did not react in this fashion, the general public would still foot the bill in the form of the pernicious tax of inflation.

Moreover, the required spread between the 6 percent to 64 percent the FHLB may charge savings and loan association and the 612 percent they may charge home borrowers is inadequate to cover the cost of originating and servicing mortgages. Accordingly, saving and loan associations are not likely to be attracted to this source of funds. If the spread is widened to the point where such loans are attractive, it would

then become impossible to determine whether the $3 billion was a net addition to the supply of mortgage credit or a means of reducing the savings and loan association's cost of borrowing from the Federal home loan banks.

Mr. Chairman, that concludes our testimony, I want to thank you again for the opportunity to appear before this committee.

The CHAIRMAN. Well, thank you. You have given us a lot to think about. It is a very fine statement.

By the way, Senator Proxmire had to leave and he has left four questions that he wants us to submit to you for your answers in writing.

Dr. JONES. Fine.

(See p. 223.)

The CHAIRMAN. I am going to have to leave to keep an engagement. I think Senator Bennett wants to ask you some questions. I think you have done a splendid job in covering this whole thing and I do appreciate the statement you have made. It has its promising features or something that does have promising features. It also has its difficulties. doesn't it, as you pointed out right at the very end?

Dr. JONES. Very serious difficulty.

The CHAIRMAN. I did not announce, Mr. Jones, when you first took the stand, but I suppose everybody here was familiar with the fact that you were a member of the Commission on Mortgage Interest Rates and you know where you speak on some of these things because of the many long and difficult hassles that we had in that Commission in arriving at our conclusions.

Senator Bennett, if you do not object, I will leave it with you because I have an engagement downtown.

Senator BENNETT. All right. You probably won't get around the corner before the rest of us will be with you.

The CHAIRMAN. Well, thank you very much. By the way, you know, of course, we meet in the morning at 9:30, the full committee.

Senator BENNETT. Yes.

Dr. Jones, Senator Percy, before he left, handed me a list of six questions and I think, if it is all right with you, I will hand the list to you and if you would like to respond in writing to the committee, that would be appreciated.

Dr. JONES. That will be fine.

Senator BENNETT. Because not having written the questions, I don't feel I am in a position to follow them up intelligently. I was very interested in your referral to the forthcoming Presidential Commission. The only witness who has acknowledge that that Commission will probably have a very serious concern about the problems we are discussing here today. I believe that it can offer a great deal in the way of solutions to the problems.

I, also, am interested in your comment on page 9 which would indicate that the proposal made by the administration regarding the control of conventional loans that are going to be offered to FNMA would, I assume, effectively eliminate the mortgage banker from the process of originating loans, would it not?