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You may proceed as you see fit. Read it, discuss it, or summarize it.
Mr. RICE. Thank you, Mr. Chairman.
The CHAIRMAN. We are glad to have you.



Mr. Rice. Thank you. I am vice president, mortgage finance, Pease Company, Hamilton, Ohio. My appearance before you is to testify on behalf of the Home Manufacturers Association and their building product company associates in the industrialized production sector of the housing industry.

I count it an honor to appear before you, and to have an occasion to recognize the understanding, sensitivity, and awareness of Congress for the meaning of dwelling places in the lives of our people.

I want to thank in particular this committee, your outstanding leadership, and your fine staff for accepting the challenge to improve conditions in our field. It has been my privilege to work with you

for the last few months.

During times of financial turbulence when one specific sector of the economy is virtually choked off from normal access to credit markets, a high level of activity develops to invoke emergency relief measures. A number of these have been tried since World War II, but the results have been spotty at best. An example of this was FNMA's special assistance program No. 10, instituted during 1958. Inertia within the construction industry, within the processes of housing finance and within credit markets themselves combined to prevent specific emergency efforts from accomplishing their stated purposes. In general, momentum gained from normal forces have been the means of recovery.

For this primary reason, my testimony is concentrated on three issues that have long-range consequences. These are.

1. The current challenge to the longstanding national policy that encourages homeownership.

2. The unbalanced power relationships among the Federal Reserve System, the U.S. Treasury and the Federal agencies like the Federal Home Loan Bank System, that have repeatedly performed to destroy equitable access to credit sources by the housing industry.

3. The need to face honestly the simple question, "Where is the money for housing coming from ?” Let's begin by reviewing the highlights of the last 40 years. In the depths of the depression, Congress dramatically stated the case for homeownership by creating the means to make it possible. First through passing the landmark legislation establishing the Federal Home Loan Bank, the Federal Savings and Loan Insurance Corporation, and by authorizing Federal charters for savings and loan associations.

The primary purpose of this legislation was to create sources of credit for use in both building and owning homes. This was followed with two other acts that moved toward the same goal—that of creating the Home Owners Loan Corporation and the Federal Housing Administration. Both served to direct investment into housing.

Following World War II, all this legislation bore fruition. By 1965, 69 percent of the families in this Nation were homeowners. Since that time, massive forces originating primarily in credit markets have caused serious erosion to the meaning of this national policy. Certainly today, most young families—at all income levels—are unable to secure the financing required on terms they can afford with which to purchase homes. As our sociologist search out the frustrations of the "generation gap,” we must continue to remind them that options open to young families as to where and how they can live have been sharply curtailed during the recent past. People in our firm constantly field this question from young couples, “What can we do to buy a home?” An honest answer is most cases is: “You've come along at the wrong time in history. It would have been simple 5 years ago, but not now. Our only counsel is to save more money and hope conditions change."

Since arriving this morning I received a copy of S. 3503 dealing with the Middle-Income Mortgage Credit Act and I think this speaks to this issue.

So this is an issue of intangibles. What does it mean in the life of the Nation to keep this national policy alive and meaningful, not only to the younger generation, but to lower income families, now possibly seeing economic hope of owning a home for the first time? Current conditions among the sources of housing finance make a cruel charade of this policy.

Issue No. 2. The results of actions in the past decade among the Federal Reserve System, the Treasury, and the related Federal agencies at housing's expense is a national scandal. Reporting on conditions in the economy before a meeting of the National Industrial Conference Board on February 27, the Under Secretary of the Treasury, Dr. Charles Walker, stated:

Since the third quarter, the economy has been a plateau of approximately equal increase and decline in its various sectors, with the exception of the crippled private housing industry.

This same statement could have been made in December 1966 and December 1958. I submit that actions taken by monetary authorities have worked unconscionably and knowingly against the housing sector of the economy. Since the discipline is lacking among these authorities to maintain any semblance of balance, their authority must be controlled in the future. The only source of power evidencing the will to do so is the Congress. I urge that whatever legislation is required be enacted, to maintain equitable access to credit markets by the housing industry as monetary policies shift. I commit the support of my industry group toward this end.

Solutions to issues 1 and 2 take form through restatement of a longstanding, traditional part of the American dream and through adjustments that bring about simple old-fashioned fairplay. But these rechanneling kinds of solutions won't work to solve the problem posed by issue No. 3, “Where is the money coming from ?”

For the present sources of housing finance to fulfill the industry's demands for credit during the next 10 years, one development must take place that dominates all others. The savings and loan industry must, through growth in assets and through servicing mortgage portfolios for others, increase their funds advanced by $250 billion. This would be at an annual expansion rate of $25 billion. These numbers seem to fit compatibly with those presented by Secretary Romney last week.

For this to happen we really have to go to work because present structures, tax provisions, and the industry's relative competitive position with other seekers of investment funds are such that the job isn't being accomplished now. It won't be in the future without significant new resources. The ability of these special-purpose thrift institutions to compete for savings has eroded badly during the past 3 years. In 1967 savings capital increased in S. & L.'s by $10.5 billion. The year 1968 saw this figure drop to $7.1 billion and in 1969, the sum was a disastrous $3.9 billion.

So the question becomes, “What is a feasible balancing of money sources to enable these institutions to make net mortgage investment increases of $25 billion each year of the next decade ???

Three areas of activity lie before us--two existing, one proposed. The first area, and the traditional one, is savings by the public.

I think I would like to say here that the product savings and loans are selling today just is not getting the job done. There are a number of proposals, and it seems to me that our role as a product manufacturer is supporting them, but it seems to me this has not been honestly faced.

Encouragement of regular savings offers a potential source of $13 billion annually. As the second source, Federal home loan banks have demonstrated the ability to make advances for mortgage lending at a stable annual rate of at least $6 billion. The third source, structured to supply the final $6 billion would be a new, true secondary market for conventional mortgages.

In considering new legislation, our attention need be focused on methods to encourage families to save money in institutions that invest in mortgages, and on creation of the secondary market for conventional mortgages. Let's begin with measures that encourage savings. The allowance of tax credits is a method that has proved successful in adjusting the discretionary use of funds for special purposes. Recent economic history has recorded the effectiveness of the $200 dividend tax credit to encourage investment in equities. The 7-percent investment tax credit of the early 1960's stimulated investment in plant and equipment. Pension plans have encouraged businesses to help their people make financial preparations for retirement through effectively providing tax credits on income received when levels of gross incomes are substantially lower. It seems just, and in keeping with our recent traditions, to allow tax credits for interest earned on savings which find their way into housing loans. Accordingly, with the objective of achieving a $13 billion net growth in savings capital in savings and loan associations, ask and encourage this committee to seek out a joint venture relationship with the Ways and Means Committee to the end that this might happen.

Now to the subject of a secondary market for conventional mortgages. This will cover my specific testimony of S. 2958. It seems to me that the history of the Home Owners Loan Corporation during the 1930's and 1940's offers significant insight toward finding the right plan to create a new mortgage market with a $6 billion annual investment potential. This Federal agency advanced funds for housing mortgages primarily through thrift institutions. It was done so successfully that upon liquidation it returned a net profit to the Treas

ury in excess of $30 million. The same kind of plan offers the promise of being equally successful today.

For this reason my first choice for a secondary mortgage market plan would be to create a Comsat type, federally chartered corporation. Savings and loan associations should be eligible investors in its equity securities. Since pension funds are expected to approach $300 billion in assets during the next decade, among the Corporation's purposes should be to tailor its securities issues to fit the investment patterns of pension fund managers.

I support unequivocally provisions of S. 2958 which grants authority to FNMA to create a secondary market for conventional mortgages. I would remind the committee, however, that FNMA is shouldering a heavy load now, which can only increase in the future, and there may be limits as to what its expansion can be.

Proposals to create a secondary mortgage market within the Federal Home Loan Bank System are being openly discussed by the Bank's Board and its Chairman, Dr. Preston Martin. I support these, too. You may have now gathered that I feel extraordinary measures will be required to achieve a net new annual investment in housing mortgages of $25 billion by savings and loan associations.

I also strongly believe that this $25 billion net annual expansion is high priority objective among all public interest measures. Housing credit is not expended. It creates lasting values and eventually finds its way back into the economic mainstream through monthly repayment schedules, Our monetary authorities have been reluctant to recognize that credit extensions into housing have an affect opposite to that of short-term credit. When advanced into homeowner or investor mortgage loans, the money is immobilized for a long period of time. When the present period of inflation is carefully analyzed at some time in the future, the conclusion may very well be reached that a stable flow of housing credit during the years between 1965 and 1969 would have served to relieve substantial upward pressures in the cost of living. This then would have been an added tool in the battle against inflation.

Much attention is being directed by leading economists toward the possibility of administering monetary policy through controlling money supply. The housing industry badly needs a controlled money supply. At some point in time the decision will be reached to make the required financing available to build the housing our people need. The most efficient way—and the way that would do more than anything else to help control costs—is to have the flow of credit stabilized. When new savings by the public can range from $10.5 billion down to $3.9 billion over a 3-year period, some source that can commence to flow on a stand-by basis must be ready. The Federal home loan banks can and do provide a partial solution, but if already being counted on to advance six billion new dollars annually, it is not feasible to assume that the ability can be developed to generate an additional $5 to $7 billion to replace savings that do not materialize.

So this leaves the yet-to-be-created secondary market for conventional mortgages as the means to balance off variations in savings patterns of the public. To do the job properly will require an institution with access to credit sources that may vary from $6 to $13 billion annually. This challenge is so great that nothing short of a strong policy


holding high priority for accomplishment, together with access to some type of middle-income housing fund, with sources of standby credit for any promises of success.

My testimony now turns to S. 3442, which I support unequivocally. Allowing interest rates on mortgages insured by FHA and guaranteed by VA to seek their own market level certainly offers the promise of reducing the initial cost of housing. I would predict, however, that use of this legislation by investors other than FNMA would be extremely limited for several years. Most private institutional investors now hold portfolios of predominantly lower-than-market yield securities. This has created a real pressure on earnings. Discounts have been a means to help solve this problem. It would seem to me that freeing the interest rate without the provision to disallow any discounts so that negotiations might take place among interested parties would bring about more results.

In S. 3503, I am so impressed with it, the only thing I can say is I wish I had read it before giving this testimony.

In closing I want to pay tribute to the people who make up the housing industry. This is a sector of our national life that has always been close to the land. Much warmth, trust, and respect flows among its various, integrally related businesses. My testimony expresses and reflects the convictions of many experienced, talented and dedicated men who have spent their entire business careers in this field, and would like to participate in actions that help even out the peaks and valleys that so plague the industry. I think


should know, however, something about the tragedies which monetary whiplashing brings about. Factories are forced to shut down causing the inevitable layoffs. The building product distribution system goes through a people and financial convulsion. Builders must cease to employ their skilled workmen and many face bankruptcy. The officers of financial institutions-one way or another -have to say “we cannot function to fulfill our purpose.” But the people in this business love it, and you can count on them to be there when the means to move ahead are available.

So my final bid is to ask the Federal Government to give us a hand toward achieving some stability and expansion in the flow of housing credit.

Thank you.

The CHAIRMAN. Thank you very much Mr. Rice.

I was going to ask you a question on behalf of Senator Proxmire about 3503. You endorse it to the extent you say that you wish you thought it up yourself.

Mr. RICE. That is right.
The CHAIRMAN. I will see that gets to Senator Proxmire.

Let me ask you this: you realize we are considering several bills here at one time in the hope of finding some relief for the housing situation. According to the testimony of some of them, including Mr. Martin and the Chairman of the Home Loan Bank Board, work is being done on other proposals that have come before us. Now, some have urged that this was so urgent that we get relief that we ought to go on and take these steps that are ready now, even if we had to consider a second housing bill during the year. What are your thoughts on that?

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