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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

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

a 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 at a very low ebb right now.

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

(In thousands of units)
1970 (preliminary) estimated :
January

1, 166 February

950 March

950 April

1, 000 May

1, 000 June

1, 050 July

1, 100 August

1, 150 September

1, 200 October

1, 250 November

1, 300 December

1, 300 Projected average-

1, 150 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, MORT-
GAGE 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

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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 812 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.

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We believe it desirable that the conventional mortgage market be served by one source of secondary financing, if possible. We recognize, however, that while there is some degree of overlap, the mortgage market is basically divided into two segments, one of which (primarily mortgage bankers) is accustomed to dealing with FNMA, the other (primarily savings and loans and banks) with the Federal Home Loan Bank System or comparable regulatory bodies. It may be necessary, therefore, to have two secondary conventional mortgage market facilities in order effectively to accommodate all mortgage market participants.

Whatever system is established as a secondary source of funds for conventional mortgage loans, it will be necessary for the regulatory authorities to establish detailed procedures and requirements regarding the appraisal of the real property covered by the mortgage, the underwriting of the credit of the borrower, and other essential elements of mortgage lending. These problems have already been dealt with for FHA and VA loans through the adoption of rules and regulations by the Federal Housing Administration and the Veterans Administration, and similar requirements will doubtless have to be established for any system under which public funds are used for the purchase of conventional mortgage loans.

The establishment of basically uniform standards is essential if we are to have a truly secondary market for conventional mortgage loans, where these mortgage instruments will be readily marketable. Such marketability will add to the attractiveness of mortgage loans for investors and should broaden considerably primary sources of mort

In our opinion, the adoption of a free market rate for FHA and VA loans will substantially increase the use of this method of financing home purchases, with a correspondent reduction in the need for the adoption of another form of support for the national residential mortgage market. Recent improvements in the processing and in the procedures of the FHA have substantially lessened the time required for the processing of FHA mortgage applications. Further improvements could probably be made, including authorization for the underwriting of individual loans to be done by the lender, similar to the procedure followed by the Veterans' Administration. The primary factor inhibiting the increased use of FHA and VA financing is the limitation on the contract rate of interest with the resulting imposition of substantial discounts which are unacceptable in the marketplace.

Our statement does not include any comments on S. 3503 because it was received by us after the statement was prepared and filed. I would like to make a few comments on that bill in view of Senator Proxmire's interest in it.

We believe the injection of $3 billion into the housing industry would certainly be helpful to housing. We caution, however, that if injected in the manner provided in the bill it may be inflationary and self-defeating unless adequate steps are taken to eliminate $3 billion in spending in other areas. If this is put on top of other funds being spent in our economy,

it would merely drive interest rates even higher and make the thrift institutions supplying the large part of the conventional and insured home loans even more unable to compete for funds. We suggest that

gage credit.

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