I forgot what the other part of your question was, sir.

Senator PROXMIRE. Well, that was it, I wanted to know whether or not you felt this was a fair substitution.

Mr. BARBA. NO. The housing goals which Mr. Romney addressed himself to, if I recall correctly he said that or suggested that perhaps the housing goals were not sufficient in total count. In other words, he is looking beyond the 26 million.

Senator PROXMIRE. We can get together on that, then, because we agree in view of what happened in the last year and a half they undoubtedly aren't.

One of the concerns about FNMA buying conventional mortgages is the high risk involved in such mortgages.

Are you concerned about this? Would you agree the provisions requiring private insurance for mortgages at 80 percent or more of loan to value ratio?

Mr. BARBA. We don't think there is a high risk involved but we do feel there is going to be a period of exploring and experimentation. FNMA or the Home Loan Bank, both those bodies are sufficiently knowledgable about the areas of mortgages, and so on, that they are not about to take outlandish risks and will go about this program slowly until they acquire some provisions.

Senator PROXMIRE. You have the alternative of either participation or insurance.

Mr. BARBA. You are talking about "MGIC" type insurance, above the 80 percent?

Senator PROXMIRE. Yes.

Mr. BARBA. For the mortgage banker that would probably be a good substitue so they could get a higher ratio let's say 90 percent instead of the 80 percent. I don't think the savings and loan per se, the institutions would be greatly affected one way or the other on the 80 percent. Senator PROXMIRE. Just one other question for you.

I was interested in your comment on page 7 opposing the dual rate system on FHA-VA mortgages. You say this will hurt home buyers. It seems to me the present administrative ceiling can hold down rates in a rising market and can help lower rates in a declining market.

Would you agree?

Mr. BARBA. Yes, I would agree. We don't have a free money market. You know, there is no opportunity to observe that anywhere. Maybe during the 1950's we did, during those years. But right now it is on the level of take it or leave it.

Senator PROXMIRE. Right now it is what?

Mr. BARBA. Take it or leave it on the present basis. Ten percent, 9 percent.

Senator PROXMIRE. The bargaining power is so much more powerful in the hands of the lender than the borrower?

Mr. BARBA. Of course.

Senator PROXMIRE. Senator Bennett?

Senator BENNETT. Thank you, Mr. Chairman.

As Senator Proxmire knows, I am not supporting S. 3503 and I have some grave question about it.

You have given it your unqualified support. You realize to start with there are going to be only 150,000 homes built under this system, con

sidering an average mortgage of $25,000. So you are going to have a lottery. If this proposal were accepted, certain people would get, a mortgage loan at not more than 612 percent and other people would have to pay the market rate of about 81/2 to 9 percent. You have a rigid figure. If a man whose income is $10,001 is going to pay 812 percent or whatever the market is and the man whose income is $9,999 is going to get it for 612 percent the difference can mean about $500 in the cost of interest, the first year on a $25,000 house.

This, in my opinion, is not flexible enough and it would be almost impossible to operate.

Do you recognize that problem?

Mr. BARBA. We recognize one overriding problem or answer and that is there are no funds in the mortgage market today except for FNMA.

Senator BENNETT. You think this is going to put additional funds in and you are willing to set up this opportunity for favoritism in order to get them?

Mr. BARBA. I think somewhere in my testimony we said that these bills that I am testifying on today are not the sole answer, but they are a partial answer. There are other measures under consideration by the Congress, for instance the Teague bill to provide investment of part of National Service Life Insurance funds in VA mortgages. You have this for $3 billion, you have the Sullivan bill and a number of other bills and if you put this aggregate together it is going to help housing immediately.

There is nothing on the horizon to indicate that the savings and loans or the mutual savings banks or the insurance companies or pension funds are to give any additional consideration to housing.

The insurance companies are out of the business. As a matter of fact, some of the larger ones have closed out their mortgage departments. So they are completely out of the business. The pension funds are involved only to a small degree and we have made suggestions about that. Now, the Treasury has increased its minimum amounts of notes from a thousand to ten thousand. That has been a great assist, and we have advised the President of the United States that we feel he made a major move in that effort.

But when it comes to the overriding needs of housing, I must admit, sir, that the funds are just simply not there. We would be grateful for $3 billion.

Senator BENNETT. I recognize the problem, but do you think that it is worth setting up this rigidity for 150,000 homes, when there are other alternatives?

Mr. BARBA. That would be 150,000 homes we wouldn't have.

Senator BENNETT. The second question, do you think the savings industry is going to pay 6 percent and lend the money out at 61⁄2 percent?

Mr. BARBA. I think it would be under 7 percent.

Senator BENNETT. The bill puts a limit on it at 612.

Mr. BARBA. That would be an administrative decision by the Home Loan Bank Board. As it flows to the Home Loan Bank Board they would have to make their own arrangements to meet these reqiure

ments

Snator BENNETT. The next question.

Assuming that the Fed retains its independence, to operate the monetary policy, do you think it should take this $3 billion from other segments of the money market or that it should create $3 billion of new money and breach its program of attempting to control inflation?

Mr. BARBA. I know the feeling of the Fed on this matter. I think they have testified here on the matter. The question is, isn't is about time that the Federal Reserve Board recognizes that housing is a basic need of this country. It has a greater priority than some of the other needs that the Fed is supplying funds for.

Senator BENNETT. The Fed is supplying funds to the market and is not attempting to allocate them.

Now for the first time, this proposal would chip away at the independence and judgment of the Fed and say they must put $3 billion into housing regardless of their judgment and now I am asking you, if that were done, whether you think the Fed should take that $3 billion out of the overall money market or put $3 billion additional funds in, in violation of its attempt to control the inflation?

Mr. BARBA. I recognize that the Fed is not allocating funds for any particular purpose. But by its operations it has directed its monetary policies against housing.

Senator BENNETT. The Fed in its open market operations does not discriminate against any sector. Those who are unable to compete for funds in the market just don't get funds. It is the operation of a free market that directs the allocation of funds against housing, not the Fed.

Now for the first time you would say to the Fed, this much of your independence is lost. You have to allocate this money to housing. I am asking you, and you are not answering my question, whether you think the Fed should generate new money for this purpose and thus weaken its attempt to control inflation or whether it should attempt to take it away from other segments of the market?

Mr. BARBA. My answer is Yes, but I am going to let Dr. Rogg, who is our chief economist, answer.

Mr. ROGG. I would like to suggest to you, sir, that we think the housing needs of the country require consideration of a different kindSenator BENNETT. Well, all right.

Mr. RoGG. Let me finish my answer to the question. It requires consideration of a different kind than they had in previous years. I would like to suggest that we think monetary policy has gone about as far as it should. We supported the program last year. At this point we think there is a need for some easing of monetary policy. We think there is a need of aiding in the direction of the housing industry.

This Congress passed a bill last year which would have provided for selective credit controls and would have enabled the Fed to use some allocative powers. We are talking about the national resources in a manner that is responsive to the needs of the American people. We think the Congress determines what the Fed's role is. The Fed's independence for years has been a protected area, and I agree generally with that. But I think also the Fed gets its direction for what its purposes are. You did that in the Employment Act in 1936, the Banking Act. The notion that at no time is the Reserve to be touched is really not the question.

The question is how do you use it most effectively.

Senator BENNETT. Then your short answer is that the Fed should create new money for this purpose?

Mr. ROGG. If need be, yes, sir.

Senator BENNETT. If you believe that, what should the Fed do in the crisis that the cities are now facing? They are finding it impossible to sell municipal bonds. Should the Fed be required to buy unsold municipal and State bonds because their need is just as great as yours? Mr. ROGG. That is not the question under discussion. We would be glad to discuss a bill or a proposal.

Senator BENNETT. This is part of the same problem. S. 3503 proposes a legislative breach in general monetary policy by requiring the Fed to allocate a resource. If they generate new money, then you and I can understand that this is going to be a step away from their attempt to control inflation.

I think they are about to loosen up on the supply of money generally. But in terms of the needs of the entire economy and not in terms of the need of a particular industry or social purpose. I for one am not prepared to say to the Fed that we, for political reasons, are now going to determine how you must allocate monetary resources. I recognize the problem, I recognize the seriousness of it. I think if it is to be solved, Congress should solve it in terms of appropriations, rather than an invasion of the responsibility of its chief monetary authority. But you apparently don't. You seem to feel that since the Fed has this power, Congress should force it to use the power for your benefit. Right behind you are the municipals and the states and small businesses and others who have a similar problem. Once you breach that, every time an industry gets into trouble, its representatives will tell us they are entitled, just as the housing industry was, to direct access to the Fed.

Our appropriations process disappears and our control disappears. Mr. ROGG. We are not talking in terms of the need of the industry alone. And if we were, we would have no claim on public policy of this nature. We are talking of the needs of the American people. Senator BENNETT. I know we are not meeting our housing needs, but I believe we sometimes are prone to overreacting when we have a financial interest. How many people are sleeping under the stars? Mr. BARBA. That same question was asked of me by a newspaper reporter in Philadelphia back in January of this year. I happened to address the association this year and there were about 350 people present. After my address he came up and said, "But Mr. Barba, there is no one sleeping out in the cities." I suggested to him perhaps he is living in the wrong neighborhood. Perhaps he has closed his eyes to the situation as it exists.

I want to include in the record here-I just cut this out—it is an item by John Cunniff, and this article is dated May 3. I haven't had a chance to read it

Senator PROXMIRE. What paper is that?

Mr. BARBA. This is the Newark Evening News. It is an AP report. Senator PROXMIRE. Without objection that article will be printed in the record.

(The article is reprinted as follows:)

[From the Newark (N.J.) Evening News, Mar. 3, 1970]

FUNDS SCARCE HOUSING SLUMP A WEAKNESS IN THE FINANCIAL MACHINERY

(By John Cunniff)

NEW YORK-Attended by social consequences that could sour the spirit of the country for years to come, the United States steadily falls behind its goal of 2.6 million housing units a year.

The Housing and Urban Development Act of 1968 set the goal. Inflation and the battle against inflation are aborting it. Money is being drained from the housing market to more profitable investments elsewhere.

In January, the annual rate of housing starts dropped to 1,116,000 units. More ominous, the issuance rate of building permits nosedived, indicating that the number of starts will drop even lower in coming months.

The nature of housing is changing also. Much of the present construction is apartment house style. Individual house construction is becoming less common. And hundreds of thousands are turning to mobile homes.

RUSTY SKILLS

No matter what is done now to change the rapidly eroding housing industry, it never again will be the same. In order to maintain its skills, any industry must offer work to its members.

Jobs are plentiful in most areas of the economy. When skilled workers leave the housing industry, therefore, they may leave for good. And the same may be said for many small builders.

As a consequence, the house of the future is increasingly going to be made at the factories of large companies that can take advantage of automation, and which can offer steady employment to workers.

Although it is not official economic policy to damage the housing industry as it exists, it is an almost inevitable consequence of such policy. Government officials from the president down concede this.

ASKS WHY

Why, then, do they permit it? A lot of people are asking that question every day, including of course the 51,000 members of the National Association of Home Builders.

Testifying before a congressional committee last month, NAHB president Louis R. Barba stated: "It is almost beyond belief that we can allow an industry that has proven to be a great national resource . . . be crippled so seriously."

The conventional explanation is that the economy must be brought back into balance through the use of fiscal and monetary restraints. That means tight money. And it also means high interest rates, which are the price tags on money. Housing migh very well get its share of financing if it could pay higher rates. However, for complicated economic reasons, the so-called thrift institutions, including savings and loan association, are restrained from open competition for funds.

TURNOVER

Mortgages also mean that money is tied up for long periods of time. And so, with interest rates on an escalator, many lenders would rather see their money loaned out for shorter periods of time. They want turnover.

The result of this situation is documented by a report from the Federal Home Loan Bank Board. In January, it said, savings and loan asociations saw $1.41 billion drained from their accounts. Their lending power grows weaker.

The major housing question now before the American people is this: Can the nerve network of the nation's monetary system be considered sensitive to national needs and goals if such a situation is permitted to exist?

Says Barba: "The current crisis. . . does not spring from any failure in the productivity of the private housing industry. It is a failure of national policy and of the financial machinery of the country . . .

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