Once again, when you look at the home financing structure, these forces tend to accentuate money market directions. When bonds are selling where they are today, it would be very hard for the manager of a mutual savings bank portfolio-and I am not taking cracks at the mutual savings bankers-not to buy a triple A at a 6-percent yield—a net yield because there is no other real charge except safekeeping. What justification can he have if he buys a mortgage at net 6-percent yield when the aforementioned bond is available?

Mr. COAN. Recognizing all these factors, and I am sure you are absolutely right, any man who works for a financial institution is obligated to get the highest yield on investments he makes for his employer. However, is there something failing in our institutional arrangements which makes it so that we have a surplus supply of funds on the one hand and a shortage of funds on the other, so that somehow or other we are not getting the funds interchanged the way they should be?

We are constantly reminded that there is only one basic source of capital-savings and price is dictated by the supply of capital in relation to the demand. Here is a case where the supply-that is, savings is more than adequate for current demand and yet the price quoted in the marketplace seems to be far out of line with this supplydemand relationship.

Mr. HEIMANN. There are lots of mistakes and breakdowns in the entire system.

No. 1 is the difficulty or the ease with which you can make an in

vestment.

Secondly, the ease with which money can flow from one sector of the country to another sector.

Thirdly, the marketability of the investment once you own that piece of paper.

Again, all of these problems tend to be accentuated in the mortgage market because the mortgage is the most difficult piece of paper with which to work. So when everything else vis-a-vis is relatively attractive, then the portfolio manager goes to the nonmortgage security because it is easier and has greater marketability.

The answer to your question, Mr. Coan, if I may, is, "Yes"; there are lots of reasons why this happens, because the mortgage is a difficult instrument with which to work.

Mr. COAN. Anybody else?

Mr. KLAMAN. Do you want me to speak in direct response to the particular situation in 1966 ?

Mr. COAN. I would rather discuss today's market rather than what it was in 1966, because I think

Mr. KLAMAN. I'm sorry, I meant the current 1967 situation. It is true, as you suggested, that savings banks and savings and loans are now experiencing record, or near-record, savings inflows. But the legacy from the 1966 experience is that each institution is rebuilding its liquidity position. So that you find the savings and loan associations, with a savings inflow four times as high as a year ago, placing only half as much in mortgages as a year ago, because in the past few months they have repaid $2.8 billion of Federal Home Loan Bank advances. If saving flows continue large in coming months, as I expect,

there will be more money available for mortgages from these institutions.

With respect to savings banks, you will recall from Dr. Ensley's statement that they have put more money into home mortgages this year than any other lender. In fact, they are the only lender group that has put more money into mortgages so far this year than last. At the same time they have invested heavily in corporate bonds bearing yields which, as Mr. Heimann has pointed out, are at near-record highs again. And it is these high yields which has influenced mortgage rates. Mortgage money is available but at rates which must be competitive with bond yields. And the movement in FHA yields in recent months should lay to rest the view that the national mortgage market is sluggish in responding to changes in capital market developments. Mortgage prices rose substantially from late 1966 to early 1967, which means yields dropped substantially. FHA mortgage yields then turned right around again accompanying-with only a slight lag—the dramatic upturn in bond yields.

To sum up, then, mortgage money is available, but at high rates because of developments in the bond markets. And you get all kinds of views, Carl, as to why corporate borrowers are so heavily in the market. I believe that they are discounting the future heavily and overborrowing now, hoarding credit as it were, because they are fearful of a great credit crunch later in the year when the Treasury enters the capital markets to borrow heavily in the face of such expected huge Federal deficits. There is a large supply of funds, but also great demands which results in an equilibrium at a very high interest

rate.

Mr. JACKSON. I think to directly answer your question concerning where you are getting calls from savings and loan associations looking for mortgage investments when at the same time this panel has indicated that the discounts on FHA and VA loans are going up is due primarily to the fact that if you look at FHA statistics, you will find that savings and loan associations own a relatively, if not very, small percentage of all the FHA loans made. You will find that historically this system has not been an active participant in the FHA market. You will find, on the contrary, that the savings banks, the commercial banks, and the life insurance companies have been the primary source of this type of financing. You will find that these other type institutions are not insulated in the mortgage market to the extent that they have had alternative investments very readily and primarily in the corporate bond markets.

Mr. COAN. Does this not reflect, therefore, a deficiency in the system? The Government has spread its protective wing over the savings and loan institutions by establishing the Federal home loan bank system, by insuring their depositors against loss, and by giving them certain tax concessions. At the same time, the Federal Government has set up an FHA system to help in the financing of homes. In fact these two programs were approved in the same law. But they are not working efficiently together for some reason or another. And at this particular time the deficiencies show up in a most glaring way. I am not trying to be critical of the thrift institutions; I am just trying to look for some solution to what seems to be a serious imperfection in the present market situation.

Mr. LILLER. Perhaps this is an oversimplification in trying to answer your question, but the savings inflow also competes back with these 6 percent corporate bonds because the savers who were putting money into the thrift institutions and commercial banks, too, now have the opportunity of purchasing that 6 percent corporate security. This, then, forces the inflow to cost a great deal of money.

Savings and loan associations in our part of the country are paying 5.25 percent. Therefore, they cannot invest their money at that 6 percent interest rate.

Mr. COAN. Yes.

Dr. Rogg, do you have a comment?

Dr. ROGG. Yes, sir; I have a couple of comments.

One of them is I am a little disturbed about the continuing emphasis upon the current scene. I know it does indicate the utter inadequacies of current institutional arrangements for the kind of problems you have. But if you are going to stick with the current scene for a moment, one of the problems has been that the homebuilding industry took a beating last year and the volume of mortgages has not been as high in the first part of this year as it was in the first part of 1966, as a matter of fact.

The second point is that builders going to these institutions wanting money earlier in the year are finding that money is high because of high interest rates in conventional savings and loan lending. The rate is high for funds which will be called upon later in the year and are committed at this point in time.

So you do have this timing problem all the way, and you do not get perfect response because there is a lag in the way the business operates.

But I am much more concerned about some of the other issues than I am about this because we are really talking about some fundamental problems in the period ahead. We are talking basically about whether there is any kind of agreement that the institutional framework now will be adequate to supply the needs 10 years hence, which I assume is what the focus of this particular study and series of roundtables is about.

We feel and have presented information to this committee based on the kinds of studies we have had made which suggest that there will be enormous demand in the next 10 years which, by current institutional arrangements, cannot be met. And I wonder whether we should not be devoting ourselves to discussion of this particular kind of problem.

Mr. COAN. So you are optimistic that the present situation which appears to me, anyway, to be getting worse, is only temporary and will soon disappear?

Dr. ROGG. No, I did not say that.

Mr. COAN. I thought you just said that the critical problem is the long-range one.

Dr. ROGG. I thought we were going to deemphasize the current. Mr. COAN. I agree, but when we start a discussion of the longrange issue, invariably we find ourselves coming back to the current issue. During these hearings the witnesses consistently brought up problems related to the current situation.

By the way, I do not know whether Senator Mondale is going to get back or not, but I think we ought to go on for a little while longer and see if he can get back, and if not, just adjourn the meeting.

Why do we not talk a little more, then, on your suggestion that the real issue is the long-range issue.

Let me just say this: Secretary Weaver came before us and presented a series of tables and projections on the supply and demand for mortgage credit which indicated an adequate supply of credit to meet our Nation's needs over the long haul up to 1975. He made a certain number of assumptions, of course, on employment, income, savings, and other economic data. They are probably optimistic assumptions but he said they were reasonable projections. I assume he meant reasonable projections of recent experience.

I would like to get from each of you-and I will ask you first, Dr. Rogg, have you had a chance to look at that material, and are you satisfied that his final conclusion was, in fact, a sound one?

Dr. ROGG. No, I am emphatically not satisfied.

I am afraid that this is really the issue. We would much more associate ourselves with the study that Robbie Newcomb did for us. He responded very directly to Secretary Weaver's assessment of the long-term mortgage requirements, and it is our feeling that the figures presented earlier with the Department understated the size of capital funds requirements in the period ahead. And for that reason would lull us into a kind of false security about the whole nature of existing institutional arrangements and the flow of mortgage credit. Mr. COAN. Are you being critical of the estimates for requirements; that is, the demand for funds? Are you satisfied with the estimates of the supply?

Dr. ROGG. I had not examined it that carefully.

Mr. COAN. The supply side is based on certain assumptions. One assumption, it seems to me may be questionable, that is, projecting the future inflow into the thrift institutions by basing it on recent savings experiences. I am wondering whether this is a reasonable premise.

Robbie Newcomb suggested that this is not a reasonable projection, that, in fact, unless corrective action is taken, the thrift institutions will not continue to get their share of funds, of savings as they have in the past.

What is your comment?

Dr. ROGG. I would certainly subscribe to the notion that the kind of growth you have seen in the last 20 years will not continue in the next 10 without some change in existing institutional arrangement.

You have a couple of experts of mutual savings banks. I would much prefer

Mr. COAN. Would the representatives of mutual savings banks like to respond to this point?

Dr. ENSLEY. Thank you, Mr. Coan.

I think, as you look down the road, two things are important. First, that we make sure that we improve our institutional arrangements in such a way as to increase the aggregate amount of savings in the economy so that there will be ample funds available for all of the capital requirements that we must meet-in housing, in air pollution, in mass transportation, in urban renewal, and in all sorts of other highly important private and public programs.

Secondly, that we improve our institutional arrangements in such a way that we can even the flow of savings throughout the cycle and avoid, not only shortages of mortgage credit, but also excesses which led to deterioration in credit quality in the late 1950's and early 1960's, according to the findings of the highly respected National Bureau of Economic Research. As a result of problems created in this period, adjustments have been made difficult for the housing business in the more recent period.

We need to strengthen the mortgage-oriented institutions that are competing for savings so that they can promote thrift throughout the entire cycle. This implies broader investment powers, quite frankly, so that not only savings banks, but other institutions as well would be in a position, if we face another crisis like 1966, to devote more than 100 percent of savings growth to housing credit, as savings banks did last year.

The Congress should consider improving the institutional structure now-to repair the roof while the sun is shining, perhaps temporarily to provide for the long-run increase in, and smoothing out of, the flow of savings throughout the business cycle to assure that the various demands upon the capital market will be met at reasonable costs to borrowers.

Mr. COAN. Would someone else like to comment?

Mr. JACKSON. All the people on the panel have said in their more detailed statements that they recognize there is but one single capital pool that we recognize, and the big job is to keep this capital pool going. And also, I believe most every organization that has testified before this group feels that inflation, of course, would be one of the greatest penalties that this capital pool could encounter. And, therefore, as a result, not only of that, that we need to contain inflation by some more fiscal means rather than depending entirely on monetary means which we saw in 1966. And that this, in fact, may be the basic job that the Congress or the administration could face in approaching this problem from a long-range point of view.

Mr. COAN. Does anyone else have a comment?

Mr. WEINER. I would like to address myself to one of the points stated here by Dr. Ensley with regard to the question of the excess flow of credit and deterioration which took place. I would like to suggest that this is not because the demand for housing and the need for housing was not there and constantly growing, but rather that we had not developed the tools and the forms by which we could use and meet those demands, many of which lay in the area of the moderate- and low-income factor?

The rent supplement program and the kind of subsidy to meet those low-income housing needs combined with the flow of credit to the institutions at times, particularly when the demand for middle-income and higher income housing may be slightly off, will produce in our opinion the kind of flow of credit for housing and the need that will help muddle it out. So that one of the solutions lies in effectively developing the tools and programs that will give us the opportunity to provide that housing for the families that we cannot provide now. Secondly, that I do not know whose roof is not leaking right now, without trying to overdramatize the situation and looking at it purely at the moment from the layman's point of view, the homebuilder