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Senator PROXMIRE. Thank you very much, Mr. Keith. This is a fine statement and you certainly covered the grounds well and concisely.

I especially appreciate, of course, your support for the bill I introduced. And you do have some constructive suggestions on providing more flexibility in the bill.

I think these are suggestions we want to take into consideration. In general you appear to approve, which I do, too, the constructive proposals of the administration.

Some of them you say will be helpful, and you think they are useful. Overall, do you think they are enough, are they adequate?

Mr. KEITH. No; I don't think they are extensive enough to meet the real crush we are in at the moment.

Senator PROXMIRE. Do you think they fall short?
Mr. KEITH. Yes.

Senator PROXMIRE. How far short? One measure might be that they project 1.4 million housing starts for the coming year.

Mr. KEITH. Yes; that is what I was going to call attention to, Senator, which Mr. Barba said may turn out to be an optimistic projection under current conditions. But even if it is achieved, I certainly hope it will be, that is still a long distance away from the overall level of housing production activity that is called for by the housing goals.

Senator PROXMIRE. On page 2, you say in your first sentence in the third paragraph, with respect to S. 2958, which would authorize the Federal National Mortgage Association to establish a secondary market for conventional mortgages, you say subject to certain studies we question the desirability of this step under prospective financing conditions.

Would you expand on that, the reason why you question that?

Mr. KEITH. What we have in mind there, Senator, is the very large volume of commitments that FNMA will be required to take to support the existing sphere of operations; namely, FHA-insured and VAguaranteed loans.

We do know that normally the intervention of FNMA, to the tune of about $8 million in commitments last year, has supported that market. I think what we would be somewhat apprehensive about from the standpoint of broadening FNMA to include conventional mortgages would be the demands for purchases of conventional mortgages might well become so large as to limit the financial capability and the staff capability for FNMA to carry out their present charge.

Senator PROXMIRE. It has been suggested that Congress pass emergency legislation within the next 30 days to cover the immediate problems for housing while postponing until later in the year for establishing secondary markets for conventional mortgages and so forth.

Do you agree we should act quickly on the emergency legislation to try to provide a basis for prompt action ?

Mr. KEITH. I would agree on that. I think it would be at the same desirable to move as promptly as possible on the longer term legislation. I realize that the administration has not yet set up their own legislative program.

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I would assume that would be forthcoming very shortly. I don't know whether Secretary Romney spoke to that point before the subcommittee or not. I didn't notice it in the statement.

Senator PROXMIRE. Well, he said, I am informed, that he had completed his work but that orders in the Government were reviewing it and he repeatedly complained about the fact that he had to deal with a committee, while in every other similar Government operations the Government puts one man in charge. It seems to me we have to act now to meet the emergency. Mr. KEITH. I would agree. Senator PROXMIRE. Senator Bennett.

Senator BENNETT. I am not going to engage in the discussion of S. 3503, but I have one question to ask for my information outside of your testimony.

Do you think it would help the availability of funds for housing if Congress should provide for, say, a 5-year review of mortgage rates, so instead of the rate being set for the life of the mortgage, that the mortgage holder would have an opportunity every 5 years to determine whether or not he wished to change the rate ? Isn't part of your problem today the fact that a mortgage is an instrument of such a long life that many people who might otherwise be willing to invest for a shorter period of time, particularly in view of inflation, don't wish to commit their funds for 25 or 30 years?

Mr. KEITH. I certainly appreciate that has been an important factor, particularly as I understand it, in the life insurance company field in curtailing their mortgage investments, because of the long term.

I am familiar with some proposals, Senator, along those lines. As far as our organization is concerned, we haven't arrived at any definite impression of this. It would present a problem to the homeowner, if he lacked the assurance of a fixed interest rate over the life of the mortgage, of course.

On the other hand, the figures indicate that the typical homeowner changes homes every 6, 7, or 8 years, so even though his mortgage

Senator BENNETT. If the mortgage rates are going down the homeowner usually can refinance at his will at a lower rate.

Now, our problem is to get more money into the mortgage market. Do you think this might be an effective device?

Mr. KEITH. I certainly think it is worth exploration, Senator.
Senator BENNETT. I believe it is used in Canada.

Mr. KEITH. Yes. I believe it is used in some Scandanavian countries. Of course, it has been used in South America, but there the inflation is so much more severely, this is the only way they could get any money at all, to provide for an annual review.

Senator BENNETT. While we are looking at all kinds of devices and ideas to increase the volume of money available to the mortgage market, I wonder if we shouldn't be looking at this, too.

Mr. KEITH. I would think so.
Senator BENNETT. No further questions.
Senator PROXMIRE. Thank you very much, Mr. Keith.
Our next witness is Mr. Nat Rogers.

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STATEMENT OF NAT S. ROGERS, PRESIDENT, THE AMERICAN BANKERS ASSOCIATION AND PRESIDENT OF THE FIRST CITY NATIONAL BANK OF HOUSTON, TEX.

Mr. ROGERS. Thank you very much, Mr. Chairman, and Senator Bennett.

In the interest of conserving your time, I would like to take the liberty of summarizing the comments which would be submitted to the committee in full and I trust could be made a part of the record · (see p. 277). Senator PROXMIRE. Without objection, yes.

Mr. ROGERS. I would like to testify on the four bills already commented on by other witnesses this morning, all of which intend to increase the flow of funds into

mortgages. We all know there are vexing and difficult problems in the area of home financing. The extent of the search for effective solutions is clearly indicated by these bills and the many others now before the Congress.

We all know the root cause of our problems is inflation-an inflation in which housing prices have increased faster than most other prices. For example, the price of an average section 203 single-family home has risen 29 percent over the past 5 years. In comparison the cost of living as measured by the Consumer Price Index increased 19 percent over the same period.

The fight against this inflation has been waged almost entirely by monetary restraint rather than by fiscal responsibility. This greatly unbalanced reliance on monetary stringency has induced the highest levels of interest rates in over a century. It is an environment in which demands for mortgage credit cannot compete successfully, in which the word "disintermediation” has become all too familiar. In arriving at solutions, therefore, our first and foremost task is to check inflation convincingly.

Yet even with this, there will always be competing demands for resources and credit. In the face of these demands a high order of priority for housing must be recognized. Positive measures are called for and the American Bankers Association intends to help meet the challenge.

Accordingly, we have organized a task force comprised of bankers with great expertise in the realty investment and mortgage field. These men have met at an organization meeting and have already developed some constructive and innovative ideas for increasing the supply of mortgage funds.

The task force will meet with and seek the ideas of other lending institutions : savings and loan associations, mortgage companies, mutual savings banks, and life insurance companies. They will also cooperate with the National Association of Homebuilders, the National Association of Real Estate Boards, and other groups to solve the many interrelated problems of making more credit turn brick and steel and lumber, and all the other countless products required, into dwellings at prices and rates today's families can afford.

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In its initial organization meeting a week ago today, the American Bankers Association housing task force set as a 1970 goal for commercial banks a net increase of $4.3 billion in residential mortgage holdings, $1 billion or 30 percent, more than the $3.3 billion net increase in such lending in 1969.

Taking into account repayments, this means about $14 billion in newly acquired home mortgages.

Turning now to the specific legislation before this subcommittee, the American Bankers Association endorses much of what is proposed, but we have reservations about some provisions.

Concerning S. 2958, as indicated in testimony on a number of occasions, the association has long been in favor of a secondary market for conventional mortgages and we heartily endorse Senator Sparkman's bill.

Nearly three-fourths of commercial bank residential mortgages, and over seven-eighths of those held by savings and loan associations, are in conventional loans. These tie up institutional funds for lack of an effective secondary market.

S. 2958 establishes the proposed facility in the Federal National Mortgage Association, where it belongs. We believe that FNMA, with its experience in operating a secondary market for VA and FHA mortgages, would be the most logical institution to operate a similar market for conventional mortgages.

Another bill before your subcommittee, S. 3508, would also establish a secondary market for conventional mortgages but would do so through a new corporation established within the Federal Home Loan Bank Board rather than the FNMA.

It would only cover savings and loan associations. We see no reason for a limited proposal such as this. It would be far preferable to establish a market covering all mortgage lenders, and we therefore favor S. 2958 over S. 3508.

With respect to S. 3442, covering some of the recommendations of the Commission on Mortgage Interest Rates, the American Bankers Association generally favors this legislation, although we do have some reservations about one of its provisions.

This is to grant trust powers to Federal savings and loan associations for Smathers-Keogh (H.R. 10) self-employed pension funds purposes. We do not think it desirable to grant such trust powers to savings and loan associations even for the limited purpose of permitting them to serve as trustees for retirement plans for the selfemployed.

Basically, the reason is that these associations are not subject to the same type of regulation and supervision as are trust companies and the trust departments of banks. However, we have what we believe is an effective alternative.

We suggest that a new subsection be added to section 405 of the Internal Revenue Code similar to that covering U.S. retirement bonds. Nontransferable certificates of deposit could be issued by savings and loan associations and by banks for an indefinite period of time, not redeemable until age 591/2 or death.

Interest would be due and payable only upon redemption. The conditions and restrictions necessary to qualify the savings certificate for income tax purposes could be outlined in special Treasury Department regulations, which in turn could be incorporated by reference or verbatim-in the special savings certificates.

Moreover, the terms and interest rates on such certificates would have to meet the requirements set by the supervisory agencies.

Such self-employed retirement funds would be an ideal source of money to savings and loan associations and to commercial banks, because they would be extremely long-term investments, and therefore suitable for housing loans.

With the above pension plan alternative, we endorse S. 3442. In particular the legislation would do a singular service to the cause of adequate mortgage money flows by dealing squarely with the problem of ceilings on VA and FHA mortgages.

The recommendation of the Commission on Mortgage Interest Rates to replace the present unworkable system of discounting insured and guaranteed mortgages with a dual interest rate system is one of the most valuable contributions of the Commission.

Concerning the other provisions of S. 3442, let me just say that our association endorses them. However, there is another recommendation of the Commission on Mortgage Interest Rates which is not included in S. 3442, which we commend to the subcommittee.

This is to make any housing mortgage of good quality eligible for use at the Federal Reserve discount window without requiring a penalty discount rate. The Chairman of the Federal Reserve Board has endorsed the idea and there is growing support for such a provision both within and outside the Federal Reserve System.

We recommend that recognition be given to the special purpose and nature of residential mortgages eligible for rediscounting. Although we do not recommend a specific term, little would be gained for improving the availability of home financing if the usual period of borrowing at the discount window is strictly enforced.

The availability of the discount window, together with appreciably longer terms of borrowing, would add a significant degree of liquidity to mortgages which they do not now have, and would

thus encourage mortgage holdings by bank lenders. We recommend further that interim financing of construction also be included in the list of eligible paper.

The association has more serious reservations on S. 3503. This bill, entitled “the Middle Income Mortgage Credit Act,"contains the following provisions:

(1) The Federal Home Loan Bank system would be empowered to issue up to $3 billion in housing certificates each year.

(2) The proceeds of the housing certificate issues are to be loaned to eligible savings and loan associations, at rates between 6 and 614 percent. The borrowing institutions would, in turn, lend these funds to middle-income families, $10,000 a year or less, on homes priced at $25,000 or under at an effective rate not exceeding 612 percent, plus the usual insurance premium where applicable.

(3) Although the language of the bill is unclear the intent is apparently to channel Federal Reserve credit directly to the Federal home loan banks for advances to eligible institutions. The mechanism, described in the bill as discounting at 6 percent, is in reality an outright sale of 6 percent obligations to the central bank.

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