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For Release on Delivery
Tuesday, November 12, 1968
11 a.m. E.S.T.


Remarks By

Andrew F. Brimmer
Board of Governors of the
Federal Reserve System

Before the

76th Annual Convention
of the
United States Savings and Loan League

Convention Hall
Miami Beach, Florida

November 12, 1968

Andrew F. Brimmer*

In appraising some of the contributions which central banking
policy can make toward expanding the availability of funds for home
financing, I will focus initially on the short-run outlook for the residential mortgage market.

Next I will explore some of the opportunities

for structural improvements which might make the often-times uneasy
relationship between the central bank and home-financing intermediaries
somewhat more comfortable.

Let me say immediately, however, that the

following discussion must necessarily steer clear of any suggestions
about prospective monetary policy or about the probable course of interest

Moreover, these comments must also be taken as an expression of

my own personal views.
The main points covered in these remarks can be summarized
Both residential construction and mortgage market
activity may show considerable strength over the
near-term. Just how much strength, of course,
will depend heavily on the ability of financial
intermediaries (particularly savings and loan
associations) to compete for funds.

Given the delicate balance established among
commercial banks and savings institutions in
the competition for funds during the last few
years, I am personally convinced that the
existing structure of maximum interest rates
payable on time and savings deposits should be
kept in place for the time being.

^Member, Board of Governors of the Federal Reserve System. I am
grateful to Mr. Bernard N. Freedman of the Board's staff for assistance
in the preparation of these remarks.


However, I am also convinced that in the longerrun it would be better to keep interest rate
ceilings on-a standby basis, thus permitting a
wider scope for market decisions in the allocation of savings flows. In the meantime, it is
desirable to press on with structural improvements which would strengthen the competitive
position of home financing institutions and
enhance the efficiency of residential mortgages.
In my opinion, the above approach is much more
promising than some of the recent suggestions
that the Federal Reserve provide support to the
mortgage market through the direct purchase of
debt issues offered by Federal Government housing
finance agencies.


Nevertheless, I do recognize that the Federal
Reserve, through normal market operations undertaken in the conduct of monetary policy, can help
to enhance the marketability of Federal agency
issues -- including those of the housing agencies.

Short-Run Outlook for Residential Mortgages
The prospects for the residential mortgage market during the
next year will be influenced to a considerable extent by several developments not directly related to housing.

Undoubtedly, if the negotiations

seeking an end to the Vietnam War are successful, the outlook for housing
and mortgage financing -- along with many other important sectors of the
economy -- will be altered greatly.

Since there is no way to assess this

possibility, it must remain as a principal source of uncertainty.

In the

same vein (and partly reflecting the domestic impact of the Vietnam military
effort), the outlook for inflation and the new Administration1s fiscal
policy —

especially the question of continuation of the 10 per cent sur-

tax after mid-1969 -- can only be recognized at this point as important
considerations to be kept in mind.

Because of these uncertainties —


-3the continuing deficit in our balance of payments —

the course of

monetary policy must necessarily be less clear than one might ordinarily
conclude it should be -- given the magnitude of the fiscal restraint
measures adopted last June.

Nevertheless, although it is an obvious

point, one must note in passing that the greater the degree of relaxation
in monetary restraint that can be undertaken, the stronger will be the
housing and mortgage markets in the year ahead.
While judgments differ as to the details, there seems to be a
rough consensus among housing economists placing housing starts in the
neighborhood of 1.65 million units in 1969.

This would represent an

increase of 10 per cent over the 1.50 million units which may be achieved
in 1968.

The projection for next year seems to rest on a reasonably

sound basis:

During the last few years, the short-fall of actual construc-

tion compared with its long-run growth rate apparently has resulted in a
backlog of unmet demand of about 400,000 residential units.

Since vacancy

rates this year have been the lowest recorded in more than a decade, the
replenishment market should be fairly strong.

The potential expansion of

the regular market for shelter should also be considerable in the year

Net household formation may be at least 1 million, and net demoli-

tions of existing structures may run 500,000 or more.

Therefore, the

level of housing starts might be around 1.5 million units under normal

Given the pressure of replenishment demand already mentioned,

the projection of 1.65 million total starts for 1969 does not appear

-4In the end, however, the strength of these demand factors will
have to be

tested against supply conditions which can be expected to

prevail as 1969 unfolds.

Even in the face of relatively modest effective

demand for new residential units, shortages of construction labor have
continued in a number of areas across the nation.
costs have risen sharply.

As a consequence, labor

Recently, costs of building materials have also

moved higher. Upward pressures on land costs have not only continued but have
actually accelerated.

One would ordinarily expect these cost

to have an adverse impact on housing demand.


However, although recent

survey results appear to differ on this point, there is some evidence
suggesting that the continuing rapid advance in home prices (amounting to
at least 5 per cent per year for single-family houses) has stimulated -more than it has dampened -- the demand for residential units.
Turning to the mortgage market, it seems that the probability
of a substantial decline in interest rates on mortgages has been discounted
by the market.

Consequently, it appears that the availability of funds --

much more than their cost -- will be a dominant influence on transactions
in both new and existing real estate in the coming year.

During the first

half of this year, mortgage holdings of all lenders rose at a seasonally
adjusted annual rate just over $26 billion; in the third quarter, the rate
of expansion was almost the same ($25 billion).

Thus, during the first

three quarters of 1968, the net increase in all types of mortgages outstanding was substantially above the average recorded in the same period
last year.

However, compared with the gains registered in the final

-5quarter of 1967 (when recovery from the late 1966 low was still in progress),
the average quarterly rise this year has been smaller.
As the current quarter began, the mortgage market continued
to show considerable strength.

However, there were also scattered indica-

tions that conditions were somewhat tighter than they were during the
summer following the adoption of the fiscal measures last June and the
lessening of pressures in the money and capital markets.

As interest

rates on competing capital market instruments rose somewhat faster in
October, mortgage yields in the sensitive secondary market area also turned
upward again. For example, yields on FNMA1 s six-month forward purchase commitments of Government-underwritten home mortgages climbed steadily through
October to close the month at about 7.24 per cent. Although this level was still
substantially below the peak of 7.71 per cent set last June, it does represent a
noticeable advance from the yield level prevailing at the end of September.
On the other hand, during the third quarter, mortgage lenders
accelerated their commitments to make future loans -- partly to take
advantage of high yields which many thought would not prevail much longer.
Net savings inflows to thrift institutions were sustained through and after
the mid-year interest crediting period.

In each of the first three quarters

of this year, savings accounts in these institutions rose at an annual rate
of just over 6 per cent.

The expansion of time and savings deposits at

commercial banks was somewhat more varied, growing in each quarter,
respectively, at annual rates of 7 per cent, 3.2 per cent, and 17.9 per

Moreover, the spread between gross yields on mortgages and competing

market securities (though less than the 100 basis points in September) has

-6kept mortgages relatively more attractive as an investment outlet than
was the case early this year.
Looking to the year ahead, as I mentioned above, the extent to
which savings institutions can meet the expected rise in demand for real
estate mortgage loans will depend substantially on their ability to
compete for funds -- especially for consumer-type savings.

Aside from

the impact of the factors cited above (including the course of domestic
inflation and monetary policy) institutional ability to compete will also depend
heavily on the structure of maximum rates of interest which can be paid
on consumer-type time and savings deposits.

Interest Rate Ceilings and the Competition for Savings
While I personally accept the view that the existing interest
rate ceilings should be kept in place, it is not a comfortable position
for me.

It will be recalled that since September, 1966, the Federal

Reserve Board, the Federal Home Loan Bank Board (FHLBB), and the Federal
Deposit Insurance Corporation (FDIC) have been authorized to set maximum
rates of interest payable on consumer-type deposit claims.

However, it

might not be recalled quite so readily that the Federal Reserve and the
FDIC since the 1930fs had been required to establish ceiling rates on
time and savings deposits in commercial banks, while the FHLBB had no
authority to do the same with respect to insured S&Lfs.

In addition to

covering the latter, the 1966 legislation (which has been extended yearto-year) also broadened the basis that can be used in establishing the
rate ceilings.

-7A principal aim of the 1966 legislation was to shift the
distribution of funds flowing to financial intermediaries to provide a
more favorable position for S&L's (and to a lesser degree for mutual
savings banks) compared with commercial banks.

A basic underlying motive,

stressed when the legislation was before the Congress, was the desire to
improve the availability of mortgage funds.

Given the sharp changes

which occurred in the distribution of savings during 1966 (partly as a
result of an increase in maximum interest rates payable by commercial
banks but also as a result of a steep climb in market yields), I believe
the structure of rate ceilings adopted in that year was necessary.


structure, you may recall, involved a maximum of 4 per cent on commercial banks'
passbook savings, 5 per cent on their consumer-type time deposits and
5-1/2 per cent on their large denomination CD's while for S&Lfs the
maximum passbook rate was typically 4-3/4 per cent.

Although a few

modifications have been made in the ceilings since then, the structure
of maximum rates has remained essentially unchanged for over 2 years.
Over this period, of course, market interest rates varied
considerably -- declining substantially during the early part of 1967
but generally rising or easing very little since then.

Under these

circumstances, the existence of the interest rate ceilings and their
effects on the competition for funds have been the focus of much
discussion -- some of it heated -- among participants in the financial

From time-to-time, I am urged by commercial bankers to support

an increase in the ceilings on consumer-type time and savings deposits

-8(or better still their complete removal).

Even more frequently, I hear

complaints from bankers about the advantage of 75 basis points which
S&Lfs have over banks in the maximum rates payable on passbook savings.
At other times, I receive complaints from S&L officials about the
competition from commercial banks because of the latterfs ability to
offer up to 5 per cent on consumer-type CD's -- the "Golden Passbook11
being a special target of criticism.

In reporting these comments, I do

not intend to suggest that there is widespread unhappiness with the
existing interest rate ceilings.

However, I do think they are indicative

of the kinds of difficulties which must be encountered when bank regulatory
authorities are called upon to engage so directly in setting prices.
For this reason, as I have stated numerous

times, I think it

would be a serious mistake for Federal agencies to get into the habit of
substituting their judgments as to a desirable interest rate structure -on a quarter-to-quarter basis -- for those of management officials responsible for the conduct of the affairs of particular institutions.

In my

opinion, it would be better not to have any mandatory ceilings (as is
currently the case under the temporary authority now in force).


under normal circumstances, I would favor removing the ceilings entirely -although I would like to see a continuation of standby authority to reimpose
the ceilings if a serious disequilibrium were to emerge among those institutions competing for savings flows.
In reaching this conclusion, I am not unmindful of the fact that
some depositary institutions (particularly S&Lfs) compete in imperfect
markets and thus run the risk of losing deposits (or gaining them at a

-9slower pace) if they were to attempt a reduction in rates while their
competitors continued to advertise higher rates.

Given this situation,

I am convinced that the rate ceilings should be kept in place for the
time being.
Need For Structural Reforms
On the other hand, I also think it is highly desirable that
efforts to bring about reforms in the structure and techniques of operation of depositary institutions (again especially among S&L!s) should be

Consequently, I applauded the FHLBB's encouragement of S&Lfs

to modify the structure of their liabilities by putting more stress on the
sale of savings certificates -- offering higher yields on longer maturities
rather than making across-the-board adjustments on regular accounts.


the same reasons, I also applauded the efforts to enact the federal charter
bill in the last Congress, because this would have broadened considerably
the instruments available to institutions to compete more vigorously for

It also would have created much wider investment opportunities.

Hopefully, the S&L's (despite the benefits they derived through the amendments to the 1968 Housing Act) will not abandon their efforts to help bring
about these needed reforms.
On the other hand, while I think we are well advised to stress
the improvements required to strengthen the position of thrift institutions,
we ought not to lose sight of the significant changes already occurring in
the structure and functioning of the mortgage market.

For example, the

market for existing homes traditionally has been a major user of mortgage
funds; the volume of transactions in this part of the market has normally

-10run as much as 2 to 3 times greater than the volume in the market for new

In the early years of this decade, when funds were much more ample,

when interest rates and other terms were relatively easy and when opportunities
for refinancing were much wider -- it was to the market for existing homes
that lenders turned to keep their funds employed.

During the last few years,

however, there has been an increased tendency to by-pass regular lender
channels as sellers of old homes have allowed buyers to assume outstanding
mortgages carrying interest rates much more attractive than those currently
Increased reliance on assumptions of existing mortgages is only
one of many indications that the market is becoming more efficient in the direct
use of mortgage funds from regular lender sources. And this increased efficiency
has apparently been supported by other developments as well. For example, equity
participations in real estate ventures, particularly by life insurance companies
but also by others, have grown in place of direct investment in mortgages.
This has reflected investor awareness of the greater yield potential offered
at a time of rapid appreciation in real property values mentioned earlier,
compared with the yields on fixed market instruments.

The trend has also

reflected both the lure of the special tax advantages that still accrue from
apartment and related ownership, and the possibilities opened by the
expanded capital and management requirements for new ventures.
Another perhaps less obvious illustration of factors that have
promoted greater efficiency in the use of direct mortgage funds from conventional sources has been the shift by FNMA to regular weekly auctions in
connection with its secondary market activity.

Instead of buying outright

-11eligible Government-underwritten home-mortgages at a set price, since
last May FNMA has offered, in effect, standby commitments that may or
may not be taken down within 3 months, 6 months or a year at the option
of the bidders.

Among other benefits, this change has allowed FNMA to

make a greater immediate contribution to activity with a much smaller
outlay of its own resources.
Such institutional changes will inevitably have a bearing on the
volume of commitments builders will be able to secure for new construction.
Even so, if the availability of mortgages is to be assured in the long-run,
basic improvements in traditional sources of funds -- that is, in flows
to major lender groups -- will have to come.

Also, the differential in

favor of mortgages vis-a-vis bonds and other types of investments will
have to be maintained,if not improved, if life insurance companies and
mutual savings banks (two of the lender groups with relatively broad
investment options) are to return to their traditional positions in the
mortgage market.

Also, as seems possible, commercial bank mortgage

financing -- which has already expanded significantly in recent years -will have to grow further.

In addition, the structural adjustments in

funds-flows resulting from the removal of the statutory ceiling on
Federal Government-underwritten home mortgages last May and the raising
of usury ceiling limits for conventional mortgages in certain states -particularly in the Northeast where such ceilings had been especially
low -- will have to be preserved.

-12The Federal Reserve and the Mortgage Market
As I have said, steps such as these discussed above


designed to bring about greater stability in the flow of funds into mortgages -- should be applauded by all of us.

In my opinion, efforts in that

direction are far more promising than are proposals that the Federal
Reserve support the mortgage market directly.

Such a proposal was

debated and rejected, although narrowly, by the Senate last summer.
This was in an amendment adopted by the Senate Banking and Currency
Committee to S.3133, a bill to extend the temporary authority for establishing ceilings on rates payable by banks and thrift institutions to
attract savings —

which was discussed above.

The amendment would have

authorized the Federal Reserve System to purchase, directly from the
agencies involved, obligations issued or guaranteed by Federal agencies.
And it would have directed the Federal Reserve to make such purchases
"when alternative means cannot effectively be employed, to permit financial
institutions to continue to supply reasonable amounts of funds to the
mortgage market during periods of monetary stringency and rapidly rising
interest rates.11
This proposal was opposed by the Administration and by the
Federal Reserve.

Speaking for the Board of Governors, Chairman Martin

testified in opposition to the proposal before the House Banking and
Currency Committee on June 27.

The basic objections to the proposition

were expressed in one paragraph in that testimony:

-13"Such a directive would violate a fundamental principle
of sound monetary policy, in that it would attempt to use the
credit-creating powers of the central bank to subsidize
programs benefiting special sectors of the economy. There are,
of course, legitimate grounds for concern about the mortgage
market, just as there are many other areas in which Federal
support programs may be called for. But thus far the Congress
very wisely has refrained from attempting to finance such
programs through creation of money by the central bank. At
a time when confidence in our ability to manage our financial
affairs responsibly is being severely tested, we simply cannot
afford to create the impression that we are about to embark
on a new support program to be financed in such a fashion.11
If this support operation were directed at assuring something
approaching a normal flow of funds into mortgages, the amounts involved
could be massive, perhaps as much as $9 billion at annual rates.


purchases of FHLBank and FNMA issues in such magnitudes would, of course,
mean that we would have to make offsetting sales of Treasury bills, to
avoid an inflationary increase in bank reserves.

And such sales would

push Treasury bill rates higher, at a time when (by hypothesis) interest
rates were already rising rapidly.

The Federal Reserve would then face,

as Chairman Martin pointed out, "the difficult choice of abandoning the
effort to support the mortgage market, or continuing it notwithstanding
its inflationary impact, or attempting to make offsetting sales of
Treasury obligations at the risk of disrupting the market for Treasury
Large-scale sales of Treasury bills by the System would pose
another problem, too, for thrift institutions and the mortgage market.
As interest rates rose under the pressure of such sales, savings could be
diverted from depositary institutions directly to the market, thus reducing

-14the supply of funds available for the principal mortgage lenders.


yields on mortgages would decline relative to other investments, so
that lenders who were free to do so would tend to shift out of mortgages.
The end result, then, would be a massive substitution of Federal
Reserve funds for private funds in the mortgage market, which would benefit
neither lenders nor borrowers in that market.
Let me add that the Federal Reserve recognizes an obligation
to assist thrift institutions in emergency conditions, as a lender of
last resort.

Standby procedures to accomplish this purpose were authorized

by the Board in 1966, and the System study of the discount mechanism
released last July reiterates our readiness to meet this obligation.
Moreover, since September, 1966, the Federal Reserve System has
had authority from Congress to buy and sell in the open market all Federal
agency issues (including those offered by FNMA and FHLBanks) which are
direct obligations of, or fully guaranteed as to principal and interest,
by the agency.

System transactions have taken the form of repurchase

The gross volume of such agreements has been over $1.7 billion

since late 1966, and housing agency issues have accounted for more than
one-half of the total.
Currently there are roughly $21 billion of outstanding obligations
issued by the Federal Home Loan Banks, the Federal National Mortgage
Association, the Federal Land Banks, the Federal Intermediate Credit Banks,
the Banks for Cooperatives and the Tennessee Valley Authority.


agency issues represent almost one-half of the total Federal agency debt


Over the last decade the volume of debt issued by all

agencies has more than quadrupled.

Roughly two-thirds of the total

presently outstanding consist of short-term issues maturing within one
year, and only about 10 per cent is composed of long-term issues due
after five years.
Agency issues are generally fairly close substitutes for U. S.
Government debt; the same investor groups that hold regular Treasury
debt are typically holders of agency debt as well.

Yields on agency debt

ordinarily vary in about the same pattern as those on Treasury debt of the
same maturity.

While the levels of yields on agency debt are generally

somewhat above those on Treasury issues, they are below yields on private
securities of comparable maturity.

As general credit conditions change

from ease to tightness, yield spreads between Treasury and agency debt
tend to widen, reflecting the somewhat greater liquidity and marketability
of Treasury issues.
Also, spreads vary depending on the relative size of changes in
new debt offerings in the two markets.

For example, in the first half of

1966 when general credit conditions were tightening, the volume of new
agency debt was being expanded at an unprecedented pace, largely as a
result of expanded FNMA and Federal Home Loan Bank issues.

At the same

time, the Federal Government was meeting a sizable part of its new money
requirements through a new program of sales of Federal participation
certificates in lieu of straight Treasury debt.

Spreads between yields

on Treasury and agency debt under the circumstances widened to as much as

-1675 basis points.

In periods of relatively easy money, however, the

spread on short-term issues ranges from 10 to 25 basis points, moving
to the high end of the range and above as credit conditions tighten.
The persistent tendency for yields on agency debt to maintain
a spread above those on Treasury issues is partly a reflection of
differences in default risk.

But in addition —

although the secondary

market for agency issues has developed substantially in recent years


Treasury issues are still generally assumed to have greater marketability.
This is particularly true of Treasury bills, but even Treasury coupon
issues are viewed as more tradable, particularly among longer maturities.
This is so partly because individual agency issues are of substantially
smaller size than individual Treasury issues, which makes it more difficult
for dealers to trade them.

It should be noted, however, that trading

activity among short-term agency issues is generally as large as that for
Treasury coupon issues of similar maturity.

Also short-term debt of the

six separate agencies is relatively homogeneous, and typically trades at
roughly commensurate yield levels.
As I noted above, some Federal Reserve System transactions during
the last two years have been conducted through repurchase agreements
involving agency issues.

These transactions have tended to strengthen the

agency market by encouraging dealer willingness to hold securities in
position as they intermediate between buyers and sellers.

Since nearly one-

half rf this debt outstanding consists of housing agency issues, strengthening of the agency market also contributes marginally to an improved market
for home mortgages.