(4) The financial assistance should be flexible, varying with the income of the recipient. This makes for the most efficient distribution of available funds as between recipients at various income levels. It permits assistance costs to decline as the income of the buyers or tenants improves and they are able to carry a larger share of their housing costs.

Section 202 of S. 3029 requests an additional $40 million in rent supplement authority for fiscal year 1970, plus additions of $100 million in each of the subsequent three fiscal years. Because of the urgency of our urban problems and the need to provide substantial improvements in the housing available to low-and moderate-income families, the life insurance business has actively financed urban housing projects developed through the present rent supplement program. There are, of course, many ways in which government assistance can be made available for the support of low-income housing. The rapid advance of construction costs and the inflation of land values, have run well ahead of the lagging incomes of many economic groups, and have placed decent housing out of reach for many city dwellers. Appropriate steps for solving this rapid advance would be to reform building code regulations and practices and to make increasing efforts to improve efficiency and productivity in the construction industry. As an aid to those families who have been priced out of adequate housing, it has been our experience through the special $1 billion urban investment program that the rent supplement program represents a workable approach which deserves the continued support of the Congress. Here again a key element of the rent supplement method is the flexibility provided through reductions in the supplements for individual tenants as their income rises.

Related to the problem of federal support of low-income housing is the proposal to provide technical and financial assistance to non-profit sponsors of lowand moderate-income housing projects. In working with these projects, it has been our experience that a definite need exists to provide encouragement to nonprofit sponsors who are actively seeking to find specific solutions to local housing needs. Quite often these groups are church organizations working on a neighborhood basis, but lacking the financial resources or professional skills to carry forward the necessary details of architectural plans, market surveys, application procedures, etc. While the need for better housing is a national problem, implementation of specific project plans necessarily takes place at the local level. Substantial federal programs have been developed to support housing projects sponsored by non-profit groups, and technical and financial assistance is a necessary adjunct to the success of these programs.

Section 203 of S. 2700 and Section 302 of S. 3029 would authorize the Secretary of HUD to establish interest rates on FHA mortgage insurance programs "at such levels" as the Secretary finds necessary to meet the mortgage market. We strongly endorse this provision of the bill as a vital element which is needed to permit an enlarged and sustainable flow of private investment funds into FHA mortgage programs. This endorsement similarly extends to H.R. 10477, which passed the House on March 26 and was referred to the Senate Committee on Banking and Currency.

As shown in the attached memorandum, past experience clearly demonstrates that fixed statutory rate ceilings on FHA insured mortgages and VA guaranteed mortgages, such as the present 6 percent ceilings, have failed of their purpose. Instead of protecting the homeowner from higher rates and heavier carrying costs on his mortgage, they merely result in choking off the flow of funds into FHA and VA mortgages in periods of credit stringency. In such periods, as interest rates on competing credit instruments rise, FHA and VA mortgages become less attractive to investors because of the arbitrary rate ceilings, with the result that the flow of funds into such mortgages dwindles sharply. Our support for more flexible interest rates on FHA and VA mortgages is based on the simple proposition that the returns on these mortgages must be competitive with returns on alternative investments if a normal flow of private funds into these mortgages is to be assured.

Title IX of S. 3029 entitled "National Housing Partnerships", provides for the stimulation of low-income housing through the creation of private corporations which would build, rehabilitate, purchase, lease, own or manage housing or related facilities. We view this proposal with deep interest as one of great potential benefit in finding solutions to our urban problems through the active participation

of private business. This approach would open the door to activities by the business sector to develop new methods and experiment with new techniques through the mobilization of private capital resources and organizational skills on a national basis.

Title X of S. 3029 would authorize additional direct and insured loans in rural areas for low- and moderate-income families, where assistance is not available from other sources including the new programs provided for in sections 101 and 201. In considering this proposal, we would urge the Congress to emphasize the need for strict enforcement of the eligibility restrictions on loans provided under this section. Many institutional lenders, including life insurance companies, stand ready to serve the mortgage market in rural areas through private financial channels.

We would also like to comment in general terms on S. 3028, the "National Insurance Development Corporation Act of 1968", which would expand the availability of essential property insurance coverage in the nation's cities. While we have not studied this proposal in detail, we would urge Congress to recognize the urgent need for programs which will provide insurance for inner cities properties. We believe that adequate fire and casualty insurance in core areas is an essential prerequisite to stimulating the inflow of private financial capital to revitalize residential housing and commercial properties in the blighted areas of our nation's cities. We believe that the objectives to be served by S. 3028 are a necessary adjunct to the program to improve urban housing conditions under S. 3029.

We did not request an opportunity to appear during the recent hearings but we would appreciate it if this letter could be made a part of the hearing record. Sincerely,

AMERICAN LIFE CONVENTION,

ARTHUR S. FREEMAN, Director of Economic Analysis.
LIFE INSURANCE ASSOCIATION OF AMERICA,

RALPH J. MCNAIR, Vice President.

MEMORANDUM OF AMERICAN LIFE CONVENTION AND LIFE INSURANCE ASSOCIATION OF AMERICA RE INTEREST RATES UNDER FHA PROGRAMS

Title III of S. 3029, Section 302, would authorize the Secretary of HUD to establish interest rates on FHA mortgage insurance programs "at such levels as he finds necessary to meet the mortgage market." We strongly endorse this provision of the Bill as a vital element which is needed to permit an enlarged and sustainable flow of private investment funds into FHA mortgage programs.

The fundamental difficulty with a fixed statutory rate ceiling on FHA insured mortgages has been the considerable time lag in adjusting such rates to competing market rates on other investments, with the result that the flow of investment funds into FHA mortgages has dwindled sharply during periods of expanding economic activity and rising market rates. Instead of protecting the homeowner from higher rates and heavier carrying costs on his mortgage, the effect of the fixed interest rate ceiling has been to cut back the amount of credit available for home purchase. There have been repeated instances of such credit stringencies in the home mortgage market during the post-war period, and the present 6 percent statutory ceiling is responsible for holding down the credit available to homebuyers seeking FHA insured mortgage funds. A similar situation has prevailed for VA guaranteed mortgages which have been subject to a statutory ceiling that can be no higher than the ceiling on FHA insured mortgages under present law.

The procedure by which statutory ceilings on FHA-VA mortgages reduce the availability of funds to homebuyers has been well established in our postwar experience. During periods of rapid economic expansion and a general increase in the demands for funds in the money and capital markets, interest rates on corporate bonds and conventional mortgages have typically advanced, sometimes very rapidly. At those times when interest rates on competing credit instruments

were rising, contract rates on FHA and VA mortgages were held down below going market rates because of the statutory ceilings, and these mortgages became less attractive to investors. Lending institutions were reluctant to acquire FHA and VA mortgages at the substantial discounts that developed and they accordingly reduced sharply their forward investment commitments for these mortgages. When the statutory rates were adjusted upward, after a time lag, the flow of investment funds into FHA and VA mortgages were typically resumed as these instruments became more competitive with other investment outlets. The invesment experience of life insurance companies in FHA and VA mortgages parallels the difficulties encountered by other mortgage lenders. There have been four notable periods of mortgage credit stringency which illustrate these market difficulties: (1) mid-1952 to June 1953; (2) early 1956 through most of 1957; (3) the end of 1958 through most of 1960; and (4) throughout 1966. As shown in Table 1, each of these periods produced a decline in the forward commitments for FHA and VA mortgages because fixed interest rate ceilings held the FHA and VA mortgage rates below market rates available elsewhere in the financial markets.

In the case of both FHA and VA loans, the present 6 percent statutory limitation on the rate of interest allows for some competitive adjustment through the use of discounts, but this has not been an acceptable method to many life insurance companies because of public misunderstanding of the function of discounts in providing a competitive investment return. With the reluctance to acquire FHA and VA mortgages at deep discounts and with responsibility of life insurance companies to their policyholders to invest funds at reasonable returns consistent with risk, it is not surprising that investment in FHA and VA mortgages suffered drastically in the tight money market conditions existing in 1966. In fact, even today fixed interest rate ceilings, in the presence of higher yields on competing investments, are acting to channel funds away from home mortgages subject to ceilings.

Our support for more flexible interest rates on FHA and VA mortgages is based on the simple proposition that returns on these mortgages must be competitive with returns on alternative investments if a normal flow of private funds into these mortgages is to be assured. Unless rates are flexible, the credit available to buy houses most certainly will dry up in periods of credit stringency. This is the clear evidence of the past. Looking ahead, the chances are high that the economy will continue to face repeated and sustained periods of rapid growth, when the aggregate demands for funds in the capital markets will press against available loanable funds. The danger is that during these periods inflexible contract rate ceilings will remove many institutional investors from the FHA and VA mortgage market.

Adoption of a flexible rate for FHA mortgages would not only stimulate the flow of investment funds into financing of normal FHA mortgages, but is essential to attract funds into the low- and moderate-income housing programs proposed under Section 101 and Section 201. Stated another way, continuation of a 6 percent ceiling on FHA mortgages would increase the difficulties of implementing the homeownership supplement proposal as well as the proposed rental housing assistance program for low- and moderate-income families. Life insurance companies participating in the $1 billion urban program have committed substantial amounts toward rent supplement housing projects which carry a 6 percent rate ceiling and permit only modest discounts. The net return to investors on these mortgages is therefore only slightly above 6 percent, at a time when life companies are placing funds in other outlets at rates considerably higher. Other institutional lenders apparently have not found a sufficient attraction in the 6 percent yield to channel their funds toward these rent supplement projects. In brief, flexible market rates on low-income housing programs are essential if private investment capital is to be mobilized in the market place.

TABLE 1.-NEW COMMITMENTS MADE BY REPORTING LIFE INSURANCE COMPANIES FOR VA AND FHA MORTGAGES AS PERCENT OF TOTAL RESIDENTIAL MORTGAGE COMMITMENTS MADE

[The allocation of funds by life insurance companies for VA mortgage investment has been volatile. In late 1952 and early 1953 new commitments made for VA mortgages by a sample of reporting life insurance companies accounted for less than 10 percent of their total new commitments for residential mortgages. When the prescribed rate on VA mortgages was adjusted upward in May 1953 to equal the FHA rate, VA mortgages became attractive relative to other available investment outlets; by the third quarter of 1954 VA mortgages accounted for 55 percent of total residential commitments made by the reporting sample of life insurance companies. Beginning in the second quarter of 1956, rates on other investment outlets began a marked rise; although the prescribed maximum for FHA loans was adjusted upward in December 1956, the statutory ceiling on VA loans (then 4% percent) prevented a similar adjustment in VA rates. The FHA share of residential mortgage commitments promptly picked up in 1957 while VA commitments fell to a negligible proportion. Although the VA and FHA prescribed rates were again equated for a short time in 1959, from September 1959 to May 1961, VA loans were again at a rate disadvantage relative to FHA loans. Both types of loans have been at a rate disadvantage that has been particularly marked since 1965]

Note. Data are from a sample of life insurance companies representing about 65 percent of the assets of all U.S. life insurance companies. New commitments include those made during a month and still outstanding at the end of that month. Commitments for FHA mortgages include those for multifamily properties.

Source. Life Insurance Association of America.

STATEMENT OF HAROLD HAGEN, WASHINGTON REPRESENTATIVE, AMERICAN PUBLIC

WELFARE ASSOCIATION

On behalf of the American Public Welfare Association I wish to express support for the general provisions of S. 3029, "The Housing and Urban Development Act of 1968," and for S. 3028, “The National Insurance Development Corporation Act."

While this legislation would provide benefits, directly or indirectly, to the great majority of Americans, it is of special interest to our Association because of the

great potentialities it offers for meeting some of the most urgent and overriding needs of low income families-the need for adequate housing and the need for improving the quality of life in our cities. This is a realistic and practical measure. It recognizes that new housing must be built and old housing restored on a massive scale, and that a variety of approaches must be utilized, including the greatly expanded participation of private capital. And it recognizes that the model cities program must be given the necessary support to carry forward the momentum that is now being generated, in coordination with an urban renewal program that would have a new mandate for flexibility and innovation.

The American Public Welfare Association is the national nembership organization representing the field of public welfare. Membership consists primarily of state and local public welfare departments and individuals who are employed or who have an interest in public welfare. The central purpose of the Association is to provide leadership for the development and maintenance of adequate and effective programs of public welfare throughout the country. We are fully aware that this objective cannot be attained in isolation, or that the needs of the people dependent upon public welfare can be served through this program alone. The total range of facilities and services must be available for all persons in the community, and among these adequate housing is one of the first priorities.

The Association has developed a statement of Federal Legisaltive Objectives, which recognizes that all of these complementary programs must move forward apace. With respect to the field of housing and urban development, these objectives include the following statement:

"There must be bold and innovative measures for improving the quality of life in the nation's cities, including the expansion and strengthening of programs for the renewal and revitalization of blighted areas and for providing adequate housing for low-income families. Close coordination must be maintained, however, between the physical construction and restoration programs and the social services. Therefore, the public welfare programs should be enabled to deal more comprehensively and flexibly with urban social problems."

Although the foregoing statement was officially approved by our Board of Directors in 1966, and similar statements years before that, it is strikingly consistent with the directions taken by the measures now before your committee. Our endorsement of this legislation, therefore, is not casually given, but rests on the careful consideration of the legislative requirements for housing and urban development as seen from our point of view.

Of the range of programs affected by this bill, public welfare agencies in their day-to-day activities are most closely associated with public housing. We find special encouragement in the proposals to provide assistance for the private financing of small-scale projects and individual units which would be available for occupancy by persons in the public housing income range. In addition to stimulating the needed new construction, such an arrangement would open the way for much-needed innovation and flexibility in planning.

The feature that is most directly and immediately related to the program activities of public welfare agencies, however, is the proposal to authorize grants to public housing agencies to assist in financing tenant services for families living in low-rent housing projects. Public welfare agencies regularly provide social services, within the capacities of their staff and other resources, to all families receiving public assistance. Since a substantial proportion of public housing tenants are on public assistance, the public welfare workers have a very good understanding of the service needs of these families-not only for social services, but for a broader range of services designed to assist tenants to derive maximum benefit from the facilities provided by public housing, and to take constructive leadership in assuming the responsibilities that go along with group living. These are services that should be available to all tenants. But they are services that are properly the function of management, and they will not be provided by anyone else if management does not do it.

While this lies outside of the area of public welfare responsibility, public welfare workers are keenly aware that very few of these services are now being provided because the public housing managements do not have funds for this purpose. This is a most serious gap, and is a deterrent to the attainment of the full potentialities of the public housing program for improving the quality of life, not only for those in public housing, but for the total community. We therefore strongly urge the adoption of the proposed authorization of funds for tenant