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of residential borrowing means that a larger proportion of home buyers borrow when interest rates are low than when interest rates are high.

It is obvious that housing building declines in periods of tight money. It is not clear, however, that less housing is constructed over a stretch of time long enough to cover periods of tight money and easy money together, relative to what would be constructed under more stable credit conditions.

Let me illustrate this by a few numbers.

Over the last 10 years, the average level of construction has been about a million and a half dwelling units per year, perhaps a little bit less than that. Around this average there have been marked fluctuations generated by swings in the supply of mortgage credit. My position is that if credit conditions over that period had been stable, so that residential construction had also been stable, the average would have been close to what it was in fact, about a million and a half units per year.

My reason for saying this is that there is no evidence that creditinduced instability reduces the efficiency of the residential construction industry, or increases the average level of unemployment in the industry, or in any other way raises the average cost of building a home. The evidence is far from conclusive, but the evidence now available does not suggest that construction, on average, would be higher if it was more stable.

As a matter of fact, it is not even clear that if credit conditions had been not only stable, but stable at a high level of availability, that residential construction would have been very much higher than it was. The basic elements of housing demand-household formation, increases in vacancies, and net removals from the housing stockare not very sensitive to the availability of residential mortgage credit over a long stretch of time.

This leads me to take the position, Mr. Chairman, that no prima facie case has been made that we should change our mortgage credit institutions for the express purpose of shielding the residential sector from the impact of tight money.

Now, I think that many of the proposals that have been made have merit from other points of view. Many of them have merit from the standpoint of improving the efficiency of the residential mortgage market, of providing for a more efficient distribution of funds within the residential sector. But I don't believe they have much merit from the standpoint of trying to shield the residential sector from the effects of tight money.

Furthermore, I don't think that any of the measures that have been proposed here today would significantly influence the vulnerability of the residential sector to tight money. My reasons for believing this are set forth in the paper prepared for the committee. Unless the committee has some questions on this, I will give the floor to the next speaker.

Thank you.

The CHAIRMAN. Thank you very much.

Mr. Julian Zimmerman?

Mr. ZIMMERMAN. Mr. Chairman, I, too, appreciate this opportunity to participate in the hearings on the important subject of mortgage

credit, and my views on mortgage credit as it pertains to the housing market can be briefly summarized, as can my recommendations for improvement.

I do not think there is justification for using mortgage credit, through regulation and control, as a countercyclical device to maintain economic stability. There is reason to doubt that such policy ever has been clearly established or intentionally implemented, I personally believe that such "policy," if it can properly be called that, actually serves as an "after-the-fact" rationale explaining away extreme swings which occur from time to time in our mortgage markets, which are, I think, usually the unintended side effects from various actions taken to serve generally unrelated purposes.

A countercyclical policy for the housing industry is neither consistent with our national housing policy nor our national housing needs. Our growing national housing needs cannot be met with mortgage credit available on a feast-or-famine basis or only when excess credit is available after serving all other needs. Yet, in recent years, this seems to have been the situation. Last year, for example, no major industry was adversely affected by tight money, save for reasons of price, except the housing industry. For it, credit was severely limited regardless of price. Savings and loan associations, mutual savings banks, and life insurance companies all suffered a sharp decline in loanable funds directly or indirectly as a result of regulatory actions which placed these institutions in a position from which they were unable to compete effectively for the savings dollar. My somewhat labored point is simple. Mortgage credit should be available to the home-buying public at all times, at least at a price, as is other credit available for all other goods and services at all times, at a price. It is time, I think, when the Nation's credit supply deserves to be better managed than on a "squeaking wheel" basis. And, above all, Peter should not be robbed to pay Paul, unless the effect on Peter is intended.

Too much time has gone by during which regulation has become the name of the game to hope for other than improved regulation. By various regulations, the ability of the various classes of investors and lenders to compete for funds is directly affected; the limitations on dividends and interest rates which can be paid being the most obvious. In this most important area where many different types of institutions exist, each organized to serve certain purposes and each regulated to an ever-increasing extent by different regulatory bodies, there has not always been the greatest coordination when significant actions were being considered. It is even doubtful whether the broad significance and effect of such actions, in the recent past, at least. has been appreciated, let alone fully considered. If this statement is exaggerated, then I would question the judgment of those who gave "careful consideration." yet failed to more accurately anticipate the consequences. Or was last year's seasonally adjusted drop in housing starts to a low of 850,000 an intended goal of responsible Government officials?

Currently we see an extraordinarily heavy corporate bond calendar which brings on still another extremely tight mortgage market. Unlike last year, institutions seem to be competing for funds on a fairly equal footing. Mutual savings banks and savings and loan associations

are again enjoying satisfactory deposit growth after virtually standing still last year, with the savings banks presently favoring the bond market for reasons of price, and the savings and loans, being precluded from such investments, becoming increasingly active in the mortgage market. Despite problems which always accompany tight money, it is encouraging to see more normal competitive relationships reestablished.

Should these present historically high markets worsen for various possible reasons, and should actions be contemplated to ease the strain in one sector or another, I ask again, what would the priorities for credit be and to what regulatory body should the housing industry look for its forum? I also would like to ask, should the housing industry be called upon to again bear the brunt of a credit shortage, what instrumentality would make this decision and on what authority? Since I do not believe the Federal Reserve Board presently holds a position of such exact and comprehensive responsibility or such total, broad objectivity, I suspect we have a void which should be filled, perhaps with expanded responsibilities for the Federal Reserve more clearly spelled out.

At any rate, the national housing policy, reflecting national needs, is clearly stated and, until and unless changed, one would think requires that actions be taken to accomplish the clear aims and objectives of such policy. If our national housing policy remains valid and if the public interest requires a sustained given level of mortgage credit, then other policies in conflict therewith should be changed.

As to my recommendations: Since less regulation seems unlikely, and perhaps even undesirable in so complex a field, then first I would recommend a more clearly defined national policy, both fiscal and monetary, intended to avoid either preference or prejudice to any private industry save for overriding national considerations. Second, it would seem to me there must be better coordination among various regulatory bodies to the end that conflicts and confusion inconsistent and incompatible with established national policy be avoided.

I hope these summary views are stated in a reasonably clear fashion. Again, I intend mainly to suggest that the need for mortgage credit is at least equal to other non-Government credit needs and should, therefore, be continuously available on competitive terms.

Thank you, Mr. Chairman.

Senator PROXMIRE. Thank you very much.

Mr. O'Keefe.

Mr. O'KEEFE. I have confined my paper to an analysis of pension funds and their impact on mortgage credit. For years I have listened to proclamations that pension funds are the great untapped source for mortgage money; that they constitute the reservoir from which the heavy demands for real estate credit can be satisfied. I think the conclusions of my paper will be a disappointment to those who accept such statements uncritically. On the other hand, I feel there is no basis for a pessimistic attitude, either.

Pension funds have played a relatively minor role in mortgage credit. At year end 1966, the total mortgage investment of private and public funds, excluding those controlled by the Federal Government, totaled $19.6 billion. While this is a large sum, it represented less than

512 percent of the $366 billion mortgage debt outstanding at that time.

Pension funds are growing at a rapid pace, although their rate of growth is expected to slow down. The assets of private, State, and local funds jumped from $8 billion in 1945 to $38 billion in 1955 to $119 billion in 1965. During 1966, they increased by an additional $11

billion.

For many reasons, private pension fund managers will invest the major portion of their new money in common stock. However, in recognition of the need to diversify, mortgages will also be purchased, and at a greater rate than they have been in the past. In fact, a trend toward mortgages developed some time ago. In 1955, noninsured corporate funds had only 1 percent of their total assets in mortgage loans. By 1965 this figure was increased to 5 percent. I have projected in my paper that, by 1975, the mortgage portfolio of the private, State, and local funds will increase from the present $19.6 billion to $50 billion or more. Admittedly, this is an impressive total. However, we must not overlook the fact that in the next decade mortgage credit needs will also grow rapidly. A growth rate of 7 to 9 percent annually appears reasonable. On this assumption, by the end of 1975, pension funds, with their $50 billion mortgage portfolio, will have increased their share of the mortgage debt from 512 percent, where it now stands, to perhaps 7 or 8 percent. Thus, these funds are becoming more important in the total credit picture. But it does not appear, within the foreseeable future, that they will become dominant.

Nevertheless, mortgage bankers should continue their strenuous efforts to sell the pension funds on mortgages. To simplify the task, steps can be taken to make mortgages a more attractive investment. Increased participation by funds would certainly enlarge the total mortgage pool. Their cash flow is comparatively unaffected by money cycles. Therefore, their greater involvement in mortgages would mean more stability in this credit area. Accordingly, my paper contains certain suggestions to make mortgages more attractive as an investment medium, especially FHA loans, which are a logical investment for the pension funds.

1. I suggest that FHA regulations be changed, allowing private lenders to originate and underwrite FHA loans under standards set out by FHA. This will greatly simplify originating procedures, which today are time consuming and therefore costly. I believe the generally satisfactory experience with 90-percent conventional loans, and the underwriting of VA loans by supervised lenders, justifies this step. FHA would be expected to police the activities of originating lenders and see that its standards were maintained.

2. The interest rate on FHA loans should be freed from regulation. I know I am not the only panelist to advocate this change. It is not because of greed or avarice that this recommendation is consistently heard. The simple fact is, a restricted rate seriously impedes the ability of a lender to originate an FHA loan in times of credit restraint. During these times it hurts, rather than helps, the potential home buver. Its existence accentuates rigidities in capital markets and I feel that compelling arguments can be advanced to iustify its abandonment.

3. The mortgage investor should be furnished with additional mortgage insurance protection. At the present time, FHA insurance is not

completely unqualified. In some circumstances the investor does not have full recourse to his insurance. Perhaps a comprehensive policy could be worked out in conjunction with private insurance companies at a relatively nominal additional charge to the borrower.

4. I feel the time has come to consider establishing varying insurance premium rates on FHA loans. It would seem that smaller premiums could be paid by borrowers obtaining more conservative loans. Also FHA could vary its contracts to provide insurance of less than 100 percent of a loan.

5. Additional study should be given to requiring that insurance claims be paid in cash rather than by the issuance of long-term debentures. The investor now sustains losses on the sale of debentures because of the yield differentials between the debenture interest rate. and the mortgage.

6. Steps should be taken to improve the secondary mortgage market for FHA mortgages. I feel that this is one of the more important contributions which could be made to improve the FHA mortgage as an investment medium. FNMA could establish a trading desk and continually bring buyers and sellers together in an auction market.

7. Finally, FNMA should be encouraged to make greater use of its participation certificates. This would bring into the market pension funds and other investors who are unwilling to hold mortgages directly but would purchase participations in pools managed by FNMA. Thank you, Mr. Chairman, for the opportunity to appear before your committee to present my views, which are covered much more in detail in the paper previously submitted.

Senator PROXMIRE. Thank you very much, Mr. O'Keefe.

Next is Mr. C. E. McCarthy, vice president, real estate loan department, Bank of America.

Mr. MCCARTHY. Thank you, Mr. Chairman.

We appreciate this opportunity to appear before your committee to discuss measures needed to provide an adequate flow of mortgage credit to meet our future housing needs.

This subject is of special importance to the people of California and other rapidly growing States in the West and Southwest. Our population growth requires a level of new residential construction which cannot be financed by local savings, and we are to some extent dependent on an inflow of mortgage funds from capital-surplus areas of the United States.

However, this dependence on the attractions of out-of-State funds and the methods which have been used to attract these funds have tended to magnify the impact of general changes in credit availability on the residential construction industry of California.

During the early years of the present decade, when the monetary authorities were pursuing an aggressively easy credit policy, the higher rates available at California savings and loan associations attracted a huge inflow of funds into these institutions. The savings and loan associations, and other lenders with available funds, actively solicited mortgage loans.

There is little doubt that excessive mortgage credit availability in California during the early 1960's contributed to overbuilding of residential units. In 1963, approximately 307,000 new dwelling units were started in the State, which was at least 75,000 units above normal de

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