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 you 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?

Mr. RICE. Senator Sparkman, I will be open and say my confidence in accomplishment lies here in the Congress and that I would support it. We have experienced ups and downs by those in authority for a long time and have lost confidence.

The CHAIRMAN. Do you mean by that we ought to move quickly?
Mr. RICE. I think so.

The CHAIRMAN. As you know, these are questions that Senator Proxmire would ask you if he were here. As you know, Congress enacted legislation last year giving the President the authority to impose selective credit controls to help channel funds into the mortgage market. Do you and your members have a position on that? Do you favor the immediate use of this authority?

Mr. RICE. Senator Sparkman, we were actively engaged in supporting this legislation and find that we are appalled, in view of the events that have taken place, that it hasn't been used in some form.

The CHAIRMAN. Secretary Romney is forecasting only 1,400,000 housing starts in 1970. Even with the package of legislation that is to be recommended by the administration, you know, of course, in the housing goals which we wrote into the law of 1968, we ought to build 2 million or more units.

Senator TOWER. Two point seven, I believe, Mr. Chairman.

The CHAIRMAN. Well, it would be 26 million in 10 years, plus 3 million replacements. Averaged out over the years it would be about 2,700,000, but I would say at the very minimum we ought to build 2 million or more this year. What is your reaction to that?

Mr. RICE. This is the first of March, 2 months are gone. From the volume of commitments I see being issued in the field there is going to be no substantial pickup possible before June or July and I would reduce—I would say it will be remarkable if we do 1.3 million. The CHAIRMAN. Senator Tower.

Senator TOWER. Let's say we pass legislation that provides ample funds for mortgages. What is the actual capacity of the industry to produce, given the finances?

Mr. RICE. If you say in 6 months, obviously there are going to be distortions because we have dropped off to a very low level.

Senator TOWER. Let's say in a year's time, what do you think the capacity would be?

Mr. RICE. I would be pressed to take it up to a 2 or 2.3 million rate in a year. Over a period stabilized the adjustments would take place. The system doesn't turn on and turn off easily over a 12-month period. It certainly can arrive at a stabilized, solid production rate over a 3-year period.

Senator TOWER. What do you think you have the capacity to do, given the funding that would be provided by legislation?

Mr. RICE. I have no doubt about the ability of the industry to produce the housing. Take the rate you want to set, I am convinced the industry can do it. If there is some reasonable assurance of a stabilized flow of credit.

I might just give you a specific example. We analyzed the area. around Toledo and financing for new housing starts were off 59 percent during the months of November and December as compared to the year before. November and December of 1968. This is very close

to a total shutdown. This is not true in all places of the country but there has been a sharp setback in starts. This means that activity is low ebb right now.

at a very

Senator TOWER. If we act with dispatch and get the legislation passed by the end of the year, how many new starts would we get? Mr. RICE. I would have to answer by the month. I would be glad to write you that answer if you would like.

Senator TOWER. Yes, that would be fine.

(The following information was received for the record:)

Projected Housing Starts

(Private including farm)-U.S. seasonally adjusted annual rate

Mr. RICE. It is a month-by-month effort to produce houses. We were going at a 2 million rate in January of 1969. I don't know where

we are now.

The CHAIRMAN. 1,100,000, I believe, in January.

Mr. RICE. I suspect it is going to be lower than that in February. The CHAIRMAN. 1,125,000 for January, I was told. It probably fell off a little more. The bill is 3503 that you have been discussing by Senator Proxmire and that would provide $3 billion additional money supply which would enable the building of 150,000 units. If that should become available, do you think the building industry could build those additional units?

Mr. RICE. No question about it.

The CHAIRMAN. All right. Senator Proxmire, I have asked your questions. I will say this to you now. He said in the beginning he is so strong for your bill he wishes he had thought of it himself. Senator PROXMIRE. Wonderful. We are very grateful for that and we are grateful for your support. We need it.

I have no questions.

The CHAIRMAN. Next will be Mr. Krout, senior vice president, chairman, Mortgage Investments Committee, National Association of Mutual Savings.

Mr. Krout, your statement will be printed in full, you may proceed as you see fit.

42-120-70- -21

STATEMENT OF JOHN E. KROUT, SENIOR VICE PRESIDENT OF THE PHILADELPHIA SAVING FUND SOCIETY, AND CHAIRMAN, MORTGAGE INVESTMENTS COMMITTEE, NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS; ACCOMPANIED BY DR. SAUL B. KLAMAN, VICE PRESIDENT OF THE NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS

Mr. KROUT. I have with me Dr. Saul B. Klaman. My statement is fairly short and I would like to run through it if I may. I don't think it will take more than 10 minutes.

The savings bank industry, as one of the Nation's major suppliers of mortgage credit and as a leading holder of FHA and VA loans, has a vital interest in these bills. Savings banks hold three-fourths of their assets in mortgage loans, mostly on residential properties. Since World War II, four-fifths of the growth in savings bank assets has gone into mortgage loans. In 1969, a period of severe credit stringency and reduced saving flows, the volume of mortgage loans added to savings bank portfolios was equal to their deposit growth. The National Association of Mutual Savings Banks has long advocated the elimination of FHA/VA interest rate controls. In our statement before this committee at its hearings on September 29, 1969, relating to the report of the Commission on Mortgage Interest Rates, we supported the Commission's recommendations that the statutory 6-percent interest rate ceiling on FHA and VA mortgages be abolished and that a dual FHA/VA pricing system be given a 3-year trial period, as suggested in the Commission's report. We regard the dual system as a step toward an absolutely free market rate.

The elimination of discounts on mortgages written at a competitive market rate would clearly increase the flow of funds into the FHA and VA markets. The necessity of collecting a sizable discount in cash, in lieu of additional interest spread over the life of the loan, adversely affects housing markets by restricting the availability of maximum financing and by discouraging builders from developing residential properties for sale. Further, many originators, particularly direct lenders, are reluctant to charge substantial discounts to their customers. As a result, when FHA ceilings are low relative to other market rates, these lenders tend to abandon the FHA/VA mortgage market. For these reasons, we support the dual FHA/VA interest rate system provided for in S. 3442, subject to the following qualifications: 1. We believe that a negotiated rate should be permitted for a period of 3 years following the enactment of the authorizing legislation. S. 3442 would terminate the authorization for a negotiated rate on January 1, 1972, which we do not regard as sufficient time to test the new method.

2. With respect to the continuation of the administratively determined maximum rate, we recommend that the discounts necessary to adjust that rate to the market rate be permitted to be paid by either the seller or the buyer of the property. The current requirement that the discount be absorbed by the seller not only restricts normal activity in real estate markets, but it tends to result in the discount being included in the price of the house. The borrower in effect pays the

cost of the discount and, in the process, housing prices are driven up. As the current requirement that sellers absorb discounts has discouraged building and real estate transactions with FHA/VA loans and has failed in its purpose to protect borrowers, there is no reason why the discount payment should not be negotiated by the parties in the marketplace.

3. We strongly recommend that S. 3442 be supplemented with a provision declaring FHA and VA loans to be free from usury limitations under State law. Such limitations have already seriously impaired the availability of mortgage credit at the present administratively determined rate of 82 percent on FHA and VA loans, and this problem will take on added significance under the dual market system. Attached to this statement is a draft of the language which we suggest be included in S. 3442 as a solution to this important problem, which we called to this committee's attention in our September 1969 testimony.

We are aware that some market participants feel that a duel pricing system in the FHA/VA market would be confusing. We do not view this as a substantial problem. Depending upon their own circumstances, lenders could easily decide whether to originate mortgages (1) at a market-determined level without discounts, or (2) at a ceiling rate established by the Secretary of HUD, with discounts. The choice is clear, voluntary and uncomplicated.

With respect to the establishment of a secondary market or source of funds for conventional mortgages, our association has studied with interest various proposals which have been made from time to time in recent years. As a matter of principle, we support the establishment of a secondary source of funds for conventional loans, which could supplement traditional mortgage loan sources in periods when savings and loan associations, savings banks, and other mortgage lenders are unable to generate sufficient funds to meet a reasonable mortgage demand. On the other hand, we think it important that a secondary market facility be truly secondary in nature, that it not supplant private financial institutions in their role as primary mortgage lenders and that it be so structured that in times of credit ease conventional mortgage loans will be available for sale in the market place.

The enactment of S. 2958, authorizing the Federal National Mortgage Association to deal in conventional mortgages, would certainly represent a step forward toward the establishment of a secondary conventional market. Unfortunately, this bill does not provide any details as to the manner in which such a market would be established. But FNMA is particularly well suited, by reason of its experience in dealing with FHA and VA loans, to establish an appropriate secondary source of financing for conventional loans.

We understand that legislation will shortly be introduced for the purpose of authorizing the Federal Home Loan Bank Board to purchase, sell, and otherwise deal in conventional mortgages originated by financial institutions. The fact that a very large portion of conventional residential financing has traditionally been provided by members of the Federal Home Loan Bank System would certainly require serious consideration to be given to the legislation to be submitted by the FHLBB.