cross-section of Americans to participate in its benefits.

The state of America's housing will continue to depend on the state of America's economy more than on any other factor. Specific policies aimed at housing can help. But as our housing study concludes the forces which will do the most to shape the future of housing in America will be the forces of the marketplace: families with sufficient real income and sufficient confidence to create an effective demand for better housing on the one hand, and builders and credit institutions able to respond to that demand on the other.

But even as good housing has become a reality for most Americans, it is clear that certain important problems still exist. Two are especially significant. First, we are facing certain problems in providing adequate housing credit and we must move promptly to resolve them. Second, too many low-income families have been left behind: they still live in substandard, overcrowded and

dilapidated housing-and we must help them meet their needs. This message and the legislation I will seek from the Congress focus primarily on these two challenges.

I. Making Homeownership Easier

Credit is the life-blood of housing. Without an adequate supply of credit repayable over an extended period of time at reasonable interest rates, very few families could afford to purchase their own homes. Nor could landlords either develop an adequate supply of rental housing or make it available at reasonable rental charges. One of the most important actions the Federal Government has taken in the housing field was its decision in the 1930's to restructure our housing credit system. The introduction then of Federal insurance for low downpayment, long-term mortgages-first by the Federal Housing Administration (the FHA), and later by the Farmers Home Administration (the FmHA) and the Veter

ans Administration (the VA)-encouraged lenders to provide home mortgages on attractive terms to millions of American families.

At the same time, the Federal decision to insure savings deposits meant that billions of additional dollars began to flow into our banks and into thrift institutions, such as savings and loan associations. Other Federal policies led these institutions to invest most of this money in housing loans, creating vast new pools of housing credit.

Although these systems have served us well for a long time, the need for improvement has become increasingly evident in recent years. More and more, we find ourselves facing either feast or famine with respect to housing credit.

When interest rates are relatively stable, we find that we have an abundance of mortgage credit available on reasonable terms, as was true in 1971, 1972 and earlier this year. Whenever interest rates move up rapidly, however, mortgage credit becomes extremely scarce. This occured in 1966 and 1969 and it has been happening again in recent months. As a result, it has become more difficult for an American family to buy or sell a home. Even where credit is available, the combination of higher interest rates and higher downpayment requirements is pricing too many of our families out of the housing market.

Why does this feast or famine situation exist?

As I pointed out in my message of August 3rd on the reform of financial institutions, one principal reason is the fact that our thrift institutions are unable to compete effectively for depositors' funds when interest rates rise quickly. The problem is a structural one: savings and loan associations are now required to invest most of their deposits in residential mortgages, which carry fixed interest rates over long periods of time. When other interest rates rise rapidly, the interest rates on their mortgage portfolios cannot keep pace-and as a consequence neither can the rates they pay to their depositors. The result is that depositors often draw their savings out of the thrift institutions-or at least cut down their rate of savingleaving the thrift institutions with much less money to invest in housing. I believe this special problem can be met through the recommendations I described in my message of August 3rd.

But structural difficulties are only part of the problem. A number of additional factors also help explain why mortgage money is becoming so expensive.

One major cause is the housing boom itself, which has led to unprecedented demands for credit-and rising costs for money. In addition, inflationary fears have influenced lenders to raise their interest rates as a matter of self protection. Finally, the Federal Reserve Board has been working to restrict the money supply in order to fight inflation. Such restrictions are important, for without them we might win the immediate battle in housing

but lose the long-range war in the rest of the economy. including the housing field.

But even as we pursue a responsible monetary policy. we must avoid choking off the consumer credit which families require to meet their needs. That would also be dangerous to the economy. I am particularly concerned that the burdens of fighting inflation not fall unfairly on those who want to buy a home-or sell one.

We have a delicate and difficult balance to maintain. We cannot relent in the fight against inflation, which is our number one domestic problem. Nor can we expect to insulate housing from the effects of that effort. In fact, all of our measures to control inflation-including our efforts to hold down Federal spending are essential in keeping down both the price of housing and the price of money in the long run. This requirement necessarily limits what can be prudently done to stimulate housing credit in the short run.

Nevertheless, there are some actions that can be taken on the credit front-and I intend to take them. In fact, we have already launched a number of efforts. The Committee on Interest and Dividends has instituted voluntary guidelines designed to encourage banks to keep up their levels of mortgage lending. The Federal Reserve Board has engaged in similar efforts. The Federal National Mortgage Association has stepped up its mortgage commitment and purchasing operations to free up funds for further lending. The Federal Home Loan Bank Board has lowered the reserve requirements for lending operations of its member institutions and has stepped up its advancement of funds to them.

I am today announcing a number of additional administrative actions and legislative proposals designed to do two things: first, to help alleviate the immediate housing credit problem; and second, to improve for the longer term the supply of housing credit and the ability of our people to use it.

Easing Current Credit Conditions

1. Increasing the incentive for savings and loan associations to finance housing construction.

As money has become tighter, savings and loan institutions have become increasingly reluctant to commit housing construction loans for delivery at future dates. The reason is their uncertainty as to whether they will have enough funds to lend then at the interest rates which exist now.

Accordingly, the Federal Home Loan Bank Board will authorize a new program of "forward commitments" to savings and loan associations, promising to loan money to them at a future date should they need it to cover the commitments they now are making. This authority will cover up to $2.5 billion in loan commitments.

2. Providing interest rate assistance to federally insured borrowers.

The Department of Housing and Urban Development

will also join in the effort to ease the current mortgage credit problem by reinstituting the so-called "Tandem Plan" under the auspices of its Government National Mortgage Association. Under this plan, the GNMA will provide money for FHA-insured mortgages at interest rates somewhat below the market level. To encourage new construction, only mortgages on new housing starts will be eligible for this assistance. Up to $3 billion in mortgages for new housing will be financed under this arrangement, making loans available at attractive rates to tens of thousands of American homebuyers.

3. Increasing the size of mortgages eligible for Fed

eral insurance.

The Federal Government presently encourages lenders to put money into housing by insuring mortgages involving low downpayments and long repayment periods. The Government guarantees, in effect, that lenders will be protected in the event of a default on the loan. Such mortgage insurance, whether it is provided by the Federal Government or by private institutions, is particularly important in making mortgages available to younger families and others who do not have enough savings to make a large downpayment or enough income to make the higher monthly payments that come with shorter mortgage

terms.

The Congress periodically sets limits on the size of a mortgage loan which the FHA can insure and adjusts the downpayment requirement. The last time this was done was in 1968. Although realistic then, the current ceiling and downpayment terms are unrealistic in today's housing market. As a result, FHA insurance for multifamily units has been completely cut off and FHA-insured financing is impossible for any home purchase in a large and growing number of areas across the country.

To remedy this problem, I ask the Congress to authorize the FHA to insure larger housing loans on a low downpayment basis both for single and for multifamily dwellings.

Such a change would revive Federal insurance activity in areas where it has been curtailed. In addition, it would permit at least a partial resumption of housing loan activity in certain States where anachronistic usury laws impose interest ceilings lower than current market rates and therefore shut off mortgage lending. Many of these States exempt federally insured loans from such interest ceilings-which means that Federal insurance is a prerequisite for obtaining a housing loan in these jurisdictions. This makes it all the more important that the Congress act promptly on my proposal to expand the reach of our Federal mortgage insurance programs. Making Long-Term Improvements in the Credit System

1. Permitting homebuyers to pay market-level interest rates and still be eligible for Federal insurance.

In an effort to hold down the cost of borrowing, the Congress has limited the interest rates which a home

puts money into housing will supplement this artificially low interest rate by requiring a special additional payment. This payment-which is really prepaid interest-is made in a lump sum at the time the loan is made and is commonly called "points."

Although points are usually charged to the seller of a house, they are generally added to the selling price and thus are paid by the buyer just the same.

This practice can have a number of unfortunate side-effects. By raising the overall price of the home, points can also raise the size of the downpayment. Moreover, when the price of a house goes up, so does the cost of insuring that house, of paying property taxes on it and of making monthly mortgage payments. An added inequity arises when a home is resold before the mortgage term has run its course-which is the usual case. Since the points were paid to compensate the lender for what he would lose on interest over the full term of the mortgage, the lender can reap an unfair profit when the mortgage is paid off early.

In short, the ceiling on interest rates does just the reverse of what it was intended to do. To end this practice, I again urge the Congress to allow the FHA and the VA to insure mortgages carrying market rates of interest. This proposal would end the need for charging points; indeed, it would prohibit charging such prepaid interest points on these insured mortgages. Hopefully, those States which also have ceilings on mortgage interest rates will take similar action to eliminate their ceilings.

2. Authorizing more flexible repayment plans under federally insured mortgages.

Many innovative changes in housing finance have been introduced by the Federal Government. It is important that we continue to pursue such innovation-and one area that is particularly ripe for new experiments involves the schedule for repaying mortgages.

To further such innovation, I will seek legislation permitting the Secretary of Housing and Urban Development to allow greater flexibility in repayment arrangements for federally insured loans on an experimental basis.

One possibility which would be tested under this authority is that of gearing the level of repayments to expected changes in family income. Rather than making the same flat payment over the life of the loan, families would make smaller payments in the earlier years-when they are hardest pressed-and larger payments later onwhen their incomes are higher. This provision could help younger families purchase homes earlier in life than they can today and it could help them make an earlier purchase of the home in which they will eventually live, rather than making frequent moves from one home to another as their incomes rise.

3. Establishing a mortgage interest tax credit. As another means of ensuring a steady supply of housing credit, I will propose legislation which would

allow investors a tax credit on the interest they earn when they put their money into residential mortgages. This proposal would make investment in housing loans more attractive in two ways: first, it would make them more attractive to those institutions which traditionally have provided mortgage money; and second, it would give organizations which pool mortgages a better chance to compete for funds in the so-called "secondary market"from pension funds, insurance companies, various State institutions and the like.

Under my proposal, a tax credit of up to 3.5 percent would be provided on interest earnings to financial institutions which invest a certain percentage of their investment portfolio in residential mortgages. The greater the proportion of the portfolio invested in mortgages, the higher the tax credit on interest earned by all the mortgages in the portfolio. When at least 70 percent of a portfolio was invested in mortgages, the tax credit on the interest those mortgages earn would be 3.5 percent-the equivalent, at current interest levels, of an additional interest yield of more than one-half of one percent.

4. Furthering the development of private mortgage insurance companies.

Another significant proposal in the credit area concerns private mortgage insurance companies. These companies perform a function similar to that of the FHA, the VA, and the FMHA-they insure residential mortgages with lower downpayments and for longer terms than would ordinarily be available. However, the premiums they charge for such insurance are much lower than those of the Federal agencies. Such private mortgage insurance companies have become a significant factor in the housing market in recent years and we should encourage their continued development.

To help further this objective, I recommend that the Congress-along with the Administration-consider ways of allowing private mortgage insurance companies to purchase inexpensive Federal reinsurance. To this end, I will submit legislation which can provide a basis for this discussion. Such insurance would provide added protection to the owner of a mortgage and could speed the acceptance of private mortgage insurance, especially in secondary markets. It could thus make available even more sources of low downpayment, long-term home financing for prospective home buyers.

II. The Challenge of Low-Income Housing

Since 1937, the Federal Government has tried to help low-income families by providing housing for them. Over the years, nearly $90 billion of the taxpayers' money has been spent or committed for public housing projects and other subsidized housing programs.

These programs have been particularly active during the past few years. Since 1969, the Federal Government has subsidized nearly 1.6 million units of new housing and over 400,000 units of existing and rehabilitated

housing. These 2 million units will cost taxpayers an estimated $2.5 billion in each of the next few years and could cost us close to $50 billion altogether.

The Failures of Federal Housing Programs

But what have we been getting for all this money? Federal programs have produced some good housing-but they have also produced some of the worst housing in America. Our recent study makes this clearand so does my own experience.

I have seen a number of our public housing projects. Some of them are impressive, but too many are monstrous, depressing places-rundown, overcrowded, crimeridden, falling apart.

The residents of these projects are often strangers to one another-with little sense of belonging. And because so many poor people are so heavily concentrated in these projects, they often feel cut off from the mainstream of American life.

A particularly dramatic example of the failure of Federal housing projects is the Pruitt-Igoe project in St.

Louis. It was nominated for all sorts of awards when it was built 17 years ago. It was supposed to house some 2,700 families-but it simply didn't work. In fact, a study of this project was published two years ago with the appropriate subtitle: "Life in a Federal Slum."

Last month, we agreed to tear down this Federal slum-every unit of it. Almost everyone thought it was the best thing we could do.

Pruitt-Igoe is only one example of an all too common problem. All across America, the Federal Government has become the biggest slumlord in history.

But the quality of federally assisted housing is by no means the only problem. Our present approach is also highly inequitable. Rather than treating those in equal circumstances equally, it arbitrarily selects only a few low-income families to live in federally supported housing, while ignoring others. Moreover, the few often get a new home, while many other families-including those who pay the taxes to support these programs-must make do with inferior older housing. And since recipients often lose their eligibility for public housing when they exceed