ADMINISTRATIVE EFFORTS

Several bills are now before Congress to change that machinery. Efforts are being made to make the Federal Reserve more sensitive to housing needs. Pension funds are being encouraged to invest in the mortgage market.

The administration is attempting to channel more funds through federal agencies, and a major housing bill is being prepared with the help of Housing and Urban Development.

The decline in housing production must and will be stopped," the President said last month. If it isn't, the country will never hit that goal of 26 million more units in this decade.

Mr. BARBA. Well, I just want to read two sentences, if it is all right. Senator PROXMIRE. All right. Go ahead.

Mr. BARBA. That says "money is being drained from the housing market to more profitable investments elsewhere." Then he goes on. Senator BENNETT. That begs the question. My point is and I agree with you there is too much substandard housing in the United States. We should replace it as fast as we can. But I remember many years ago when a witness before this committee said every American is entitled to a new house. I don't believe that. So, I submit, Mr. Barba, what you are saying to us today is that it is your industry that is suffering very badly and you want additional Federal funds because you believe you serve a social purpose.

But I don't think there are Americans who are actually without shelter or who actually cannot get shelter. So, let's realize that we have some problems here, fundamentally we are still wrestling with this problem of inflation. And we are wrestling with the problems related to it.

In the course of this I, for one, am not willing to destroy the responsibility and power of the Fed to maintain stability in our economic system.

Mr. BARBA. Senator Bennett, I at no time am suggesting that because builders are

Senator BENNETT. Mr. Chairman, I have taken much more than my share of the time.

Senator PROXMIRE. Did you want to say something, Mr. Barba? Mr. BARBA. I just want to submit our policy statement for the record and for this committee's reading. I will see that copies are included in our testimony (see p. 245).

Senator PROXMIRE. I want to tell you gentlemen that I very much appreciate your coming up here and emphasizing the urgency of the situation. I would like to say a couple of things in response to Senator Bennett.

He said the way to do this is through appropriations. I think everybody here knows that we are not going to increase the appropriations by anything like that amount. This is a route that takes billions of dollars. The President is in no position to do it; if he did, the Congress wouldn't go along with it. There is no way we could get the money to begin to solve this problem.

Senator Bennett made a very constructive criticism of my bill, it needs a sliding scale. We shouldn't have this at a $10,000 cutoff, and is wrong, and I intend to amend the bill.

I think the half percent spread isn't enough. It should be maybe three-quarters of a percent or maybe 1 percent. That is a technicality

that I intend to improve. I think the fundamental justification is that the Federal Government created the problem for housing through the Federal Reserve and the Federal Government has an obligation to see that we adopt policies that are not independent of the Congress to enable housing to live, not to be crucified in 1966 and crucified as it is going to be again this year.

If the Federal Reserve provides $3 billion for housing, there is no reason on the face of the earth why it can't balance it by compensatory monetary policy to open market operations in the other sector of the economy.

Senator Bennett serves a good purpose when he points out there is no gain without pain. You are going to have to help housing by taking it from some other place. Either you are going to reduce the strength of your inflation fight or take it from some other place.

There are substantial employee resources in housing, and we should take it from those areas like business investment planning equipment that are going ahead at an unsustainable rate and are probably foreshadowing a capital depression.

I see no reason why public policy shouldn't adapt to these facts of

life.

Mr. RoGG. I had the privilege of serving on the Commission of Mortgage Credit with Senator Bennett, and I want to tell you I enhanced my own understanding of it and learned his great concern for the solution of the problem. I would not want the record to reflect in any way that he did not share those same basic objectives of housing the American people all the way through.

Senator BENNETT. I share it. My own feeling is that we are nearer the end of the tunnel than some of us realize, and we may be applying drastic remedies at a time when the remedies will do more damage than good. I can understand concern very, very definitely.

You have suffered, there isn't any question about it. Not entirely because of this administration's policies. But because of the private decisions of thousands of citizens who are discovering that the stock market is a better place to hope for profit than an investment or a deposit in a savings and loan association. That is all part of the story. Unless we get to the point where we are going to tell people that you have to deposit a certain percent of savings at a fixed interest, you are not free to invest your money as to please, you will never find a permanent solution to this kind of problem.

Mr. ROGG. I am more hopeful about finding permanent solutions because of the kind of attention paid us in the last year. We are very pleased with the awareness Secretary Romney expressed at the problem.

We have some immediate needs in which we must differ, but we feel much more responsiveness all the way through, and we are pleased with the administration's awareness of the problems, too, as well as this committee.

Senator BENNETT. Thank you very much.

(The full prepared statement of Mr. Barba and additional material follows:)

STATEMENT OF THE NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. Chairman and members of the subcommittee, my name is Louis R. Barba and I am a builder from Chatham, New Jersey. I appear before you today as President of the National Association of Home Builders.

Our Association represents a membership of 51,000, affiliated in 481 local and state associations throughout the country. We estimate that our members build about two-thirds of all the homes and apartments constructed by professional builders.

The lack of a stable supply of residential mortgage funds available in amounts adequate to sustain production levels needed to house our citizens has brought this industry to the brink of disaster and is steadily worsening an already serious housing shortage.

During the month of January, housing starts on a seasonally adjusted basis fell to 1,166,000 units. This compares to 1,878,000 in January of 1969. Even worse, building permits issued in January, on a seasonally adjusted annual basis, were at a level of 952,000 units, 23.4% below the previous month.

I need not detail at great length the problems facing us today. The members of this Committee are well aware of them and have done their best during the past year to provide relief.

FNMA SECONDARY MARKET

One of the proposals now pending before the Subcommittee, S. 2958 introduced by the Chairman, is one which for years NAHB has urged the Congress to enact. This would provide a secondary market facility for conventional mortgages to backstop that important area of residential credit in the same fashion as FNMA helps the FHA-VA market.

This need has never been more vividly illustrated than during the past year when the FHA-VA mortgage market was enabled to survive solely through the support of the FNMA, while the conventional mortgage market has now virtually disappeared.

FNMA has been supporting the FHA-VA market at a commitment rate of close to $8 billion in recent months and has been purchasing mortgages at a rate close to $6 billion. If it had not been for this massive support, there would have been little or no production of FHA-VA housing. Accordingly, we believe that the time has come to extend this type of support to the conventional mortgage market. We support S. 2958 which would accomplish this purpose.

During the past year and a half that FNMA has been a private corporation, it has been operated at levels far exceeding any of the past. It has done this successfully and demonstrated its ability to obtain the funds needed to support its mortgage purchase operations. We therefore believe that the time has come to give it this greater responsibility.

Under S. 2958, FNMA would be authorized to purchase a mortgage not insured or guaranteed by the Federal Government provided the unpaid principal balance does noe exceed 80% of the value of the mortgage property. The bill would also permit the purchase of debt-to-value ratio mortgages higher than 80% but only where the excess is insured or guaranteed in a manner determined by FNMA to be generally acceptable to other institutional mortgage investors.

One of the important results that should flow from granting this authority to FNMA, in addition to assisting the conventional morgage market, would be the ultimate standardization of the mortgage instrument and of the various conditions that apply to residential mortgages in the 50 states. This alone would have a beneficial effect. Standardizing the mortgage instrument should itself help improve the conventional loan market over and above whatever help is provided by the assistance of the secondary market facility.

We believe this new authority to FNMA should be expressed in broad legislative language, coupled with Congressional direction that FNMA impose such conditions and restrictions on its purchases as may become necessary from time to time in light of the constantly changing credit situation.

For this reason we do not support the series of restrictive amendments which have been proposed as additions to S. 2958 by FNMA and HUD.

Although we are in agreement with the purposes of some of these amendments, as we understand them, we believe that as statutory requirements they would prove too rigid in practice and that their purposes could be better accomplished administratively.

For example, two of these amendments would require sellers to retain a 10% participation or, alternatively, to agree to a repurchase or a substitution of mortgages should there be a default within three years.

Many mortgage originators may not be in a position to retain an accumulation of such significant participations if they are to continue to operate at any reasonable level. Further, the participation requirement may very well destroy or materially inhibit the marketability of the mortgage. A three year requirement to buy back mortgages, in a period of temporary economic difficulty in its operating area, could certainly bankrupt a small mortgage originator who had elected to take this approach.

The necessity for and the feasibility of these requirements, in our opinion, can be better determined by FNMA in its actual operations. We expect that FNMA will approach this new area of activity cautiously and experimentally until it has accumulated some experience in dealing with conventional mortgages. This being the case, we think FNMA should not be put into a statutory straight jacket at the outset.

We fully support the intent of the suggestion to the Committee that 90% of the mortgages purchased under the new authority be no more than one year old. However, here too we believe this objective could better be accomplished by a general Congressional directive to FNMA, leaving to FNMA the exact method of accomplishing the goal of the proposal-development of a true secondary mortgage market designed basically to assist in achieving the house production goals of the country.

We object strongly to one of the recommended amendments, that the conventional mortgages sold to FNMA be limited to the FHA mortgage amount ceilings. This is an arbitrary and artificial limit on a conventional secondary mortgage market operation which involves a class of mortgages on which no such limit is otherwise applicable.

For these reasons we urge that S. 2958 be adopted as introduced and that the Committee in its Report direct FNMA to exercise its regulatory powers to accomplish the purpose of these additional recommendations of HUD.

FHLBB SECONDARY MARKET

S. 2508, also pending before the Committee, would set up a further means of providing a secondary market for conventional mortgages, the Federal Mortgage Marketing Corporation under the control of the Federal Home Loan Bank System. This Corporation would be empowered to purchase residential mortgages from any member of a Federal Home Loan Bank. Thus, this bill would create a secondary market facility within the Home Loan Bank System.

We endorse this proposal. The housing needs of this nation are so great that there is clearly room for both of these financial aids for the conventional mortgage market. Furthermore, the mortgage originators with whom FNMA would deal under its new authority are generally not part of and are not likely to become a part of the Home Loan Bank System. Conversely, savings and loans are accustomed and would probably prefer to deal with institutions within their own System. S. 3508 is expressly designed for this purpose.

With respect to the limiting amendments which have been suggested by HUD and the Bank Board for S. 3508, our position is the same as I have mentioned with reference to S. 2958. We believe that the creation of a secondary market facility for conventional mortgages within the Home Loan Bank System should be kept as flexible as possible in its basic statutory authority. The controls exercised by the new Corporation should be administrative in nature following general guidelines in the Report on this bill.

We do support, however, one of the amendments proposed by Chairman Martin of the Bank Board. He suggests that the new Corporation should be authorized to deal with all institutions insured by FSLIC and FDIC. The authority created by S. 3508 should be as broad as possible, even though we believe it is unlikely there will be many commercial banks using this facility.

MORTGAGE CREDIT ACT

There are two other pertinent bills pending before the Committee. I would like to comment on each of these briefly.

The first is S. 3442, introduced by the Chairman. This bill, termed the Mortgage Credit Act of 1970, would implement several of the recommendations contained in the Report of the Commission on Mortgage Interest Rates issued last August.

We agree with and endorse all but one of the provisions contained in S. 3442. We especially favor the proposed Special Advisory Commission on Housing that the bill would establish. This Commission would be instructed to submit, not later than the first of November of each year, an annual report to the President and Congress recommending the number of housing units which should be produced in the ensuing fiscal year. It would also report on the activities which the Federal Government should undertake to assure this production level. This would provide a needed additional source of information for the establishment and evaluation of the annual housing goal by the President. The one provision which concerns us is contained in Section 1 of S. 3442. This would establish, until January 1, 1972, a dual approach to interest rates that could be charged on FHA-VA mortgages. Under one approach, there would be a free interest rate determined by the market but with no discounts allowed. Under the second approach, the Secretary of HUD would set the rate at the level he believed necessary to meet market conditions, leaving the subject of discounts to be worked out between the buyer and the seller of the home.

We do not support this proposal. The first approach, if adopted by a lender, could lead to even higher interest rates. The second approach ignores the fact that a discount, charged at the time a loan is placed, is in fact an element in the cost of that house just as any other cost in its construction.

Our recommendation, therefore, is that the Congress extend permanently the authority of the Secretary of HUD to set maximum interest rates for FHA-VA mortgages at whatever level is necessary to meet the mortgage market. Together with this extension of authority, the law should also be amended to provide that mortgage discounts are an allowable cost of financing and should be included in the mortgage.

MIDDLE INCOME MORTGAGE CREDIT ACT

The other bill pending before the Committee is S. 3503, introduced by Senator Proxmire. This bill is entitled the Middle Income Mortgage Credit Act. It would authorize the Federal Home Loan Bank System to issue up to $3 billion a year of special housing certificates to be purchased by the Federal Reserve System at an interest rate not in excess of 6%. These funds would in turn be made available to home buyers with incomes of $10,000 or less to purchase homes at a cost not in excess of $25,000. These loans would bear an interest of not more than 62%.

We endorse the bill. In today's mortgage credit situation, it is the middle income family which is losing out. It is far easier for the low income family with HUD subsidy assistance available to finance the acquisition of a home. The bill recognizes that the key to today's problem for many middle income families is that they cannot afford a home because of the current high rates of interest. It has been suggested at these hearings that a better approach to this problem would be the Administration's proposal to set aside $300 million to be used over a period of years to bring down the cost of Home Loan Bank System advances to individual savings institutions.

While we endorse this proposal, we also think it does not get at the problem to which S. 3503 is directed-extremely high interest rates which in themselves are depriving people of housing. Additionally, the Administration's proposal seems to depend upon appropriations and S. 3503 does not. We do believe, however, that the bill which results from these hearings should include whatever legislation is necessary to accomplish the Administration's plan.