the first three of which pertain directly to the Veterans Administration and consequently our comments will be limited to these three sections.

The first section would amend Public Law 90-301, as amended, to designate what is now section 3(a) of that law as paragraph (1) of section (a). The only change made in that subsection is to delete the terminal date of October 1, 1970, for the exercise of the authority of the Secretary of HUD to fix maximum interest rates and substitute January 1, 1972, therefor. Thus, it is an extension of one year and three months of such authority.

Although the balance of the first section of the bill as well as section 2 contain provisions substantially in conformity with the recommendations of the Commission on Mortgage Interest Rates in respect to dual interest rates, we note the absence of any provision for the sharing of discounts by the buyer and seller as recommended by the Commission. The Administration, as reflected in the testimony of the representative of HUD at the Hearings before the Subcommittee on Housing of the Senate Committee on Banking and Currency on September 25, 1969, indicated its willingness to go along with the Commission proposal to allow points to be paid by either buyer or seller as they may agree. Without further explanation we can only conjecture as to whether this omission by the sponsor of the bill was deliberate or inadvertent. We do not have any objection to the proposed further extension of the present temporary authority of the Secretary of HUD, after consultation with the Administrator of VA, to prescribe an interest rate in excess of six percent.

The first section of the bill would further amend what is now section 3(a) of Public Law 90-301 by adding three new paragraphs, numbered (2), (3), and (4). The proposed paragraph (2) would implement the second aspect of the dual interest rate system recommended by the Commission on Interest Rates to give the Secretary of HUD and the Administrator of VA authority to insure or guarantee mortgages and loans at whatever interest rate may be agreed upon by the borrower and the lender if the lender certifies it has made no charges in the nature of discounts in connection with the transaction. This authority would extend to commitments issued by the respective agencies prior to January 1, 1972.

We took the position before the Subcommittee on Housing of the Senate Banking and Currently Committee on September 25, 1969, that we believe the dual market system warrants a trial. However, we pointed out that it is a substantial departure from the approach used heretofore and, for this reason, it would seem there should be only a gradual and selective implementation of it. This is in line with the position taken by the spokesman for HUD in his testimony on that same date in respect to the free interest rate provision. In his testimony he indicated the Secretary may want to limit the experiment to loans covering multi-family projects in which the borrower is a sophisticated businessman able to bargain on reasonably equal terms with the lender.

We might point out that in view of the current permissible interest rate on GI and FHA loans of 82% per annum and the usury statute limitations on interest in the various states, the rate of interest which could be charged by lenders under the "free interest rate" provision would be little above the 82% rate in a number of states.

The proposed paragraph (3) would require the Secretary of HUD and the Administrator of Veterans Affairs to take appropriate steps to assure that prospective borrowers have adequate information as to four named items. These are:

(a) The alternative methods for establishing interest rates pursuant to this paragraph.

(b) Current mortgage interest rates and discounts in the area,

(c) The amount of any discounts to be charged each party to the transaction, expressed in terms of dollars and yield, and

(d) The amount of allowable settlement costs and other fees.

This provision also is in line with one of the recommendations of the Commission on Mortgage Interest Rates. We have no objection to this recommendation in principle. As was pointed out at the Hearings on September 25 on this point, we believe it would be necessary for VA to expand its system of collecting and analyzing data in order to provide the information required. Particularly troublesome would be the requirement that the borrower be informed as to "the amount of any discounts to be charged each party to the transaction, expressed in terms of dollars and yield."

Under existing procedures the VA has no way of knowing the amount of discount proposed to be charged or which actually was charged by a lender on a specific transaction. To accomplish the apparent purpose of this provision it would appear to be necessary for VA to require the lender to report, well in advance of loan closing the exact amount of any discounts to be charged so that VA, in turn, could inform the buyer and seller of said figures. In view of the fact that, as pointed out earlier, the proposed bill does not contain authority for the buyer and seller to share the discount, VA would be compelled to inform the veteran purchaser that no discount could be charged to or paid by him. In this connection we would recommend that there be added to paragraph (3) specific authority for the Secretary and the Administrator to require disclosure by lenders in such form as they may prescribe of discounts charged or to be charged. In any event the collection, analysis, and dissemination of the information required to be furnished to prospective borrowers would entail considerable additional manpower and other resources. It would be difficult for VA to undertake to absorb such work with the resources now available.

The proposed paragraph (4) would require the Secretary of HUD and the Administrator of VA jointly to report to the Congress immediately, and at least once during each three-month period thereafter, with respect to the adequacy of the interest rates established pursuant to the fixed rate authority and the relation of such rates and discounts to interest rates charged under the "free interest rate" provision. It would also require the Secretary of HUD and the Administrator of VA to jointly report to the Congress no later than July 1, 1971, an evaluation of the dual interest rate system and make recommendations as to permanent legislation with respect to interest rates on Government assisted mortgages. We have no objection to the recommendations as such except for the frequency of reports. We would suggest that six-month intervals would be more practical and meaningful. This requirement would also necessitate expansion of VA's system of collecting and analyzing data in order to measure the impact of both parts of the dual market system with the resultant need for additional manpower and other resources.

Section 2 of S. 3442 directs the Secretary of HUD and the Administrator of VA to prescribe standards covering the amount of settlement costs allowable in connection with financing Government assisted housing, to undertake a joint study and make recommendations to the Congress no later than July 1, 1970, with respect to legislative and administrative actions which should be taken to reduce mortgage settlement costs and to standardize these costs for all geographical areas.

Presently, and for many years past, the VA has been regulating maximum amounts which may be charged to a veteran borrower for closing costs and prepaid items. The lender is required to report to the VA in connection with each loan closed the amounts paid by the veteran borrower for all such items and if charges are made which are not authorized or which are determined to be excessive action is taken to remedy the matter. In our view accomplishment of the apparent purpose of this section of the Act would require regulation of fees and charges imposed on both buyer and seller. The study contemplated by the proposed bill would be quite complex and we would suggest that any report required to be made to the Congress on this subject be deferred until July 1, 1971.

Section 3 of S. 3442 would establish a special Advisory Commission on Housing consisting of 13 members appointed by the President. This Commission would submit an annual report to the President and to the Congress in the Fall of each year recommending a national housing policy for the coming year. This proposal was previously commented upon unfavorably before your Committee on September 25 by the representative of HUD. His unfavorable comment also represents the position of the Veterans Administration on this matter.

If the bill were enacted there would be no cost resulting from the extension of the authority to fix interest rates to meet market demands. There would be some administrative cost associated with the collection, analysis, and dissemination of information required to be furnished to prospective borrowers and to Congress. We are, however, unable to estimate how much this cost would be. We would have no objection to enactment of this legislation if amended in line with the changes suggested.

We are advised by the Bureau of the Budget that there is no objection to the presentation of this report from the standpoint of the Administration's program.

Sincerely,

RUFUS H. WILSON,
Associate Deputy Administrator

(For and in the absence of Donald E. Johnson, Administrator).

The CHAIRMAN. Our first witness this morning is the Honorable Preston Martin, who is Chairman of the Federal Home Loan Bank Board.

Mr. Chairman, we are pleased to have you with us, and you may proceed in your own way. We have a copy of your statement. The full statement will be printed in the record, which is usual (see p. 64). You may proceed as you see fit, to either present it to us or summarize it, or discuss it-just as you wish.

We are glad to have you before us again.

STATEMENT OF PRESTON MARTIN, CHAIRMAN, FEDERAL HOME LOAN BANK BOARD; ACCOMPANIED BY CARL 0. KAMP, JR., BOARD MEMBER, AND DR. R. BRUCE RICKS, DIRECTOR, OFFICE OF ECONOMIC RESEARCH

Mr. MARTIN. Thank you, Mr. Chairman.

I appreciate the opportunity of appearing before the committee. The chairman and the distinguished members have such a long record of concern and action in the fields affecting our people, particularly in the housing field.

I have with me today a fellow Board Member, from St. Louis, Mo., the Honorable Carl O. Kamp, Jr., several members of the staff of the Federal Home Loan Bank Board, including the gentleman on my right, Dr. Bruce Ricks, who is the Director of our Office of Economic Research.

I appreciate the opportunity to summarize the statement in view of the many pressures upon the committee's time.

Beginning at the bottom of the first page of the formal statement, as the committee is aware, the Federal Home Loan Bank System has been using every means at its disposal to provide credit to the housing markets. System advances to members were increased at a record $4 billion rate in 1969 and financed between 40 to 50 percent of the total increase in mortgage portfolios of savings and loan associations.

As savings flows into associations have diminished, associations and the housing market have become increasingly dependent upon the continued availability of System advances. Liquidity requirements were twice reduced, stimulating a shift from liquid assets to mortgages exceeding $1 billion.

Let me interpose, Mr. Chairman, if I may, and in all frankness and candor indicate to this committee that our Board does not feel that it can commit to an increase in 1970 at 1969's level of $4 billion in our advances to our members. There are limits to these policies during a period of tight money such as we have been experiencing. The ability of the System to continue to provide adequate advances is seriously jeopardized in 1970. The fact is that, as long as the System must remain self-supporting, the interest rate on advances must be

related to the System's cost on borrowed funds. The Bank System is absorbing part of its cost of money now, but its ability to do this is limited. At current interest rates at which the System must raise new money or refinance existing bonds, the rate on advances will soon be up to 8 percent and above.

For many savings and loans, advances are not becoming a substantial proportion of funds. Thus, any further increase in the rate on advances will further depress associations' earnings, already reduced by higher interest rates paid on savings. State usury laws and borrower resistance limit management's ability to pass on rising money costs. Under these conditions member associations are increasingly reluctant to borrow further from the System. In fact, they are becoming reluctant to hold outstanding their present level of advances. Some associations are retiring advances as rapidly as possible, at the expense of mortgage lending. In short, the System is "pricing itself out of the market." The most feasible solution to this problem is a congressional authorization of funds to the Federal Home Loan Bank Board which can be made available to the Federal home loan banks to hold their rate on advances below the cost of borrowed funds. This would allow associations to be able to afford both new advances and to continue to rely on existing advances. The result will be to provide the continued massive support to the mortgage and housing markets so deeply in the public interest. The Board and the administration are requesting that Congress authorize up to $300 million for this purpose, which would be expended over the next several years. The regional banks are charging below the cost of their money, as much as 50 basis points below, and averaging around 20 basis points

now.

We seek authority to commit now, but the expenditures would be spread over the term for the commitments-periods such as 5 years. This is a proposal that can bring short-run substantial benefits. The savings and loan industry is now underutilized as a mortgage originator. It has the manpower, the expertise to commit mortgage funds immediately, as more funds are made available to it at prices which it can afford.

We believe this measure cannot wait. Skilled mortgage and housing specialists are being laid off. Our proposal is to use an existing System apparatus, and it would have no need to set up a new expensive Government bureaucracy.

This proposal also has a substantial leverage factor. A relatively small subsidy on an advance can induce an association to use the funds and support a substantial volume of housing.

Take a simplified example: If it took an interest subsidy of 100 basis points, 1 percent, to induce an association to utilize advances to make new mortgage loans, this would require only $10,000 in cost absorption per year to support $1 million in advances. Even if the advances were to remain outstanding for 7 years, which is a typical life of a mortgage today, this means that $70,000 in cost absorption would support $1 million in mortgages a ratio of about 15 to 1.

Since associations may not require the advances for as long as the life of the mortgage, or the need for subsidizing the advance may not be necessary during its entire life, the ratio of mortgage volume generated per dollar of subsidy may well be above the 15-to-1 ratio. Further,

if the subsidy were less than 100 basis points, this would further increase the leverage.

I think it is the duty of our Board to point out to this committee that an improvement in general money market rates would tend to reduce System credit support. The Board is particularly concerned that, even with some moderate easing in general credit markets, borrower members may find it advantageous to use the resulting increase in savings flows not to increase their contribution in the mortgage market, but to retire their home loan advances, which are a more costly source of funds than savings.

There aren't many mortgages on the market, Mr. Chairman, and their volume on that market is declining. The Federal home loan bank advances, in contrast, are at historic highs, and the rates charged are likewise at their highest, and rising.

The behavior of associations in 1967 is a good example of what might happen in this respect. Despite a continued shortage of mortgage funds during 1967, associations reduced their advances by over $2.5 billion, to a level sharply lower than even the pre-1966 level of advances outstanding.

This canceled out much of the beneficial effect of the recovery in savings flows that occurred during this period.

The Board wants to prevent a repetition of this. The magnitude of the potential repayment of advances might be great enough to cancel out the beneficial effects of several other programs designed to increase mortgage flows. Under these conditions, System advances will have to continue to play a vital role as a source of funds even if monetary conditions produce some recovery in savings flows.

As important a role, however, as advances policy can play in supporting mortgage credit, it will not be enough, as the events of 1969 illustrated. For reasons of financial conservatism and of local mores, over 2,000 member associations continue to refrain from borrowing from the Federal Home Loan Bank System. In addition, advances can induce associations to add more mortgages to their portfolio, but do not provide a means whereby the vast mortgage-originating expertise of associations can be used to originate and package mortgages that would be held in some form by other institutions such as pension funds that have the financial resources to acquire substantially more mortgages in a period of tight money.

This is why the Board is proposing a secondary mortgage market facility, particularly aimed at conventional mortgages, by the Federal Home Loan Bank System, to broaden and deepen private secondary

market facilities.

I will summarize my testimony, Mr. Chairman, moving to page 6—our general counsel is now preparing legislation that would clarify existing language authorizing the Federal Home Loan Bank System to conduct such a secondary mortgage market in conventional as well as federally-underwritten mortgages. We envision that the legislation will allow the secondary mortgage facility to deal in mortgages originated by institutions whose accounts or deposits are insured by either the FSLIC or FDIC, so that the secondary market can take advantage of the mortgage-originating expertise of mutual savings banks and commercial banks, as well as member institutions, and to allow for the economies of operation of a broader secondary market.