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F o r R e l e a s e ori D e l i v e r y F r i d a y , J u n e 9 , 1972 7 : 3 0 p . m . P . D . T . (10:30 p . m . E . D . T . ) INTEREST RATE DISCRIMINATION, SAVINGS F L O W S , AND N E W P R I O R I T I E S IN H O M E F I N A N C I N G Remarks By Andrew F . Brimmer Member B o a r d of G o v e r n o r s of the Federal Reserve System U p o n A c c e p t a n c e of the Alumnus Summa Laude Dignatus A w a r d for 1972 P r e s e n t e d by the U n i v e r s i t y of W a s h i n g t o n A l u m n i A s s o c i a t i o n Washington Plaza Hotel Seattle, Washington J u n e 9 , 1972 INTEREST RATE ISCRIMINATION, SAVINGS FLOWS AND NEW P R I O R I T I E S IN HOME F I N A N C I N G By Andrew F. Brimmer" I a m b o t h p l e a s e d and f l a t t e r e d to h a v e b e e n s e l e c t e d as the A l u m n u s S u m m a L a u d e D i g n a t u s of the U n i v e r s i t y of W a s h i n g t o n A s s o c i a t i o n for 1 9 7 2 . Alumni I k n o w t h a t this is the h i g h e s t h o n o r w h i c h Association can bestow upon an a l u m n u s . Moreover, by the long-standing t r a d i t i o n , the U n i v e r s i t y o f W a s h i n g t o n i t s e l f d o e s n o t a w a r d honorary degrees. distinction So in a n o t h e r s e n s e , this A w a r d is a l s o the h i g h e s t w h i c h c a n b e g r a n t e d in a s s o c i a t i o n w i t h the University. Once I was informed of my selection, I gave a great deal of t h o u g h t to the w a y s in w h i c h I m i g h t e x p r e s s m y a p p r e c i a t i o n for the a p p r o v a l w h i c h this U n i v e r s i t y c o m m u n i t y has s h o w n for the m e a g e r e f f o r t s w h i c h I h a v e b e e n m a k i n g in the p u b l i c s e r v i c e . If I w e r e a m u s i c i a n , p e r h a p s I c o u l d h a v e c o m p o s e d a s y m p h o n y to e x p r e s s m y g r a t i t u d e . w e r e a p o e t , p e r h a p s I could h a v e w r i t t e n a s o n n e t to d e m o n s t r a t e If I the h u m i l i t y w i t h w h i c h I a c c e p t the A w a r d . B u t I a m neither of these. Instead I a m a n e c o n o m i s t involved in the f o r m u l a t i o n and i m p l e m e n t a t i o n o f n a t i o n a l e c o n o m i c p o l i c y . If I h a v e a n y s k i l l s a t a l l , it is in t h a t a r e a t h a t they m u s t b e e x p l o i t e d . C o n s e q u e n t l y , I c o n c l u d e d t h a t it m i g h t b e a p p r o p r i a t e on this o c c a s i o n m e to focus o n a t l e a s t one a s p e c t o f p u b l i c p o l i c y w h i c h has m e a g r e a t d e a l in r e c e n t m o n t h s . F r o m m y p o s i t i o n of s h a r i n g * M e m b e r , B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m . for concerned responsibility I a m i n d e b t e d to s e v e r a l m e m b e r s of the B o a r d ' s s t a f f for a s s i s t a n c e in p r e p a r a t i o n o f these r e m a r k s . M r . J a m e s K i c h l i n e had o v e r a l l r e s p o n s i b i l i t y c o o r d i n a t i n g the s t a f f ' s c o n t r i b u t i o n s . M r s . B a r b a r a O p p e r a s s i s t e d w i t h a s s e s s m e n t of the e f f e c t s of i n t e r e s t r a t e c e i l i n g s o n savings flows and b e h a v i o r of l e n d e r s . M e s s r s . F r e d T a y l o r a n d B e r n a r d F r e e d m a n h e l p e d w i t h a n a l y s i s of d e v e l o p m e n t s in h o m e f i n a n c i n g . H o w e v e r , the v i e w s e x p r e s s e d h e r e a r e m y o w n a n d s h o u l d n o t be a t t r i b u t e d to the B o a r d ' s s t a f f - - n o r to m y c o l l e a g u e s on the B o a r d . the for the the the - 2 for the n a t i o n ' s m o n e t a r y p o l i c y , I h a v e b e c o m e i n c r e a s i n g l y troubled b y the e x t e n t to w h i c h the F e d e r a l G o v e r n m e n t ' s c o n t r o l o f m a x i m u m r a t e s of i n t e r e s t w h i c h c a n b e p a i d on s a v i n g s d e p o s i t s in f i n a n c i a l i n s t i t u t i o n s has d e v e l o p e d into discrimination against small savers. M o r e o v e r , that discrimination a p p e a r s to b e the p r i n c i p a l s o u r c e of a p r i v a t e s u b s i d y w h i c h a c c r u e s m a i n l y to m i d d l e - c l a s s b o r r o w e r s w h o o b t a i n m o r t g a g e funds for the p u r p o s e o f purchasing suburban housing. T h u s , p u b l i c p o l i c y w h i c h set o u t m o r e t h a n 35 y e a r s ago to s t r e n g t h e n a g r o u p o f f i n a n c i a l i n s t i t u t i o n s w i t h the f u r t h e r a i m o f f o s t e r i n g improve- m e n t s in h o u s i n g for the n a t i o n ' s c i t i z e n s has in t h i s c a s e e v o l v e d into a p o l i c y w h i c h t o d a y runs c o u n t e r to c e r t a i n of our b a s i c h o u s i n g and o t h e r economic objectives. T h e s e o b j e c t i v e s for low- a n d m o d e r a t e - i n c o m e w e r e g i v e n a h i g h p r i o r i t y in the N a t i o n a l H o u s i n g A c t of 1 9 6 8 . housing This d i v e r g e n c e in n a t i o n a l p o l i c y a i m s is a l s o o c c u r r i n g a t a time w h e n one p a r t of our housing g o a l s — t h a t part aimed at enhancing better housing opportunities our central cities--is lagging in behind. S o , a f t e r a c a r e f u l e x a m i n a t i o n of the l i n k a g e s a m o n g i n t e r e s t rate c e i l i n g s , s a v i n g s f l o w s , a n d the d i s t r i b u t i o n a n d a v a i l a b i l i t y of home financing, I h a v e c o n c l u d e d t h a t the time h a s c o m e for the F e d e r a l b a n k s u p e r v i s o r y to c o n s i d e r e l i m i n a t i n g the l i m i t a t i o n s o n i n t e r e s t r a t e s w h i c h i n s t i t u t i o n s c a n p a y to a t t r a c t s a v i n g s . financial A t the s a m e t i m e , h o w e v e r , I r e a l i z e that these restraints cannot be removed a t once. N e v e r t h e l e s s , I think w e s h o u l d n o t l o s e a n y m o r e time in a d o p t i n g m e a s u r e s w h i c h w i l l induce institutions—especially these savings and loan associations which have benefited from r a t e c e i l i n g p r o t e c t i o n - - t o u n d e r t a k e the r e c o n s t r u c t i o n w h i c h is a p r e c o n d i t i o n if t h e y a r e to s u r v i v e in the y e a r s a h e a d . In the r e m a i n d e r of t h e s e r e m a r k s , I w i l l e x a m i n e e a c h of these points more fully. agencies - 3 O r i g i n s a n d S c o p e of I n t e r e s t R a t e Ceilings T h e p r e v a i l i n g s t r u c t u r e of m a x i m u m i n t e r e s t r a t e s on c o n s u m e r - t y p e s a v i n g s and time d e p o s i t s a t c o m m e r c i a l payable banks, m u t u a l s a v i n g s b a n k s a n d s a v i n g s a n d l o a n a s s o c i a t i o n s is s h o w n in Table 1, attached. January, 1970. These s p e c i f i c c e i l i n g s have b e e n in e f f e c t S e v e r a l f e a t u r e s of this s t r u c t u r e a r e w o r t h since noting. T h e r i c h v a r i e t y of i n s t r u m e n t s o f f e r e d b y the t h r e e types of institutions stands out. E s s e n t i a l l y , the d e p o s i t a r i e s h a v e a t t e m p t e d to t a i l o r the forms of a c c o u n t s o f f e r e d to a p p e a l to the ( r o u g h l y m e a s u r e d b y m a t u r i t y ) a n d y i e l d p r e f e r e n c e s of s e g m e n t s o f the s a v i n g p u b l i c . particular T h e s t r u c t u r e of m a x i m u m r a t e s is e s s e n t i a l l y i d e n t i c a l for m u t u a l s a v i n g s b a n k s and loan associations liquidity (MSB's) and savings ! (S&L s). A t c o m m e r c i a l b a n k s , — ^ the c e i l i n g s v a r y f r o m 4 . 5 0 p e r c e n t on p a s s b o o k a c c o u n t s to 5.75 p e r c e n t o n c o n s u m e r - t y p e 2/ of d e p o s i t s — w i t h a m a t u r i t y of 2 y e a r s a n d o v e r . JL/ 2/ certificates T h e l o w e s t rate is It s h o u l d b e n o t e d that m a x i m u m r a t e s that m a y b e p a i d b y m e m b e r b a n k s a r e e s t a b l i s h e d b y the B o a r d of G o v e r n o r s u n d e r p r o v i s i o n s o f R e g u l a t i o n Q ; h o w e v e r , a m e m b e r b a n k m a y n o t p a y a r a t e in e x c e s s o f the m a x i m u m r a t e p a y a b l e b y State b a n k s or t r u s t c o m p a n i e s o n like d e p o s i t s u n d e r the laws of the S t a t e in w h i c h the m e m b e r is l o c a t e d . B e g i n n i n g F e b r u a r y 1 , 1 9 3 6 , m a x i m u m r a t e s t h a t m a y be paid b y n o n m e m b e r i n s u r e d c o m m e r c i a l b a n k s , as e s t a b l i s h e d b y the F D I C , have b e e n the same as those in e f f e c t for m e m b e r b a n k s . It s h o u l d b e r e m e m b e r e d that the d i s c u s s i o n a t this p o i n t is r e s t r i c t e d to c o n s u m e r - t y p e d e p o s i t s! . In the c a s e of c e r t i f i c a t e s of d e p o s i t of $ 1 0 0 , 0 0 0 a n d o v e r ( C D s ) the c e i l i n g s in e f f e c t b e g i n n i n g January 21 through June 2 3 , 1970, were 6-1/4 per cent on maturities of 3 0 - 5 9 days a n d 6 - 1 / 2 p e r c e n t o n m a t u r i t i e s of 6 0 - 8 9 d a y s . Effective June 24, 1970, m a x i m u m interest rates on these maturities w e r e s u s p e n d e d u n t i l f u r t h e r n o t i c e . On C D ' s of 90 to 179 d a y s , the c e i l i n g is 6 - 3 / 4 per c e n t ; o n C D ' s o f 180 d a y s to 1 y e a r , the c e i l i n g is 7 p e r c e n t , and on m a t u r i t i e s of 1 y e a r o r m o r e it is 7 - 1 / 2 p e r c e n t . T h e l a t t e r two r a t e s h a v e b e e n in e f f e c t since J a n u a r y 2 1 , 1 9 7 0 . - 4 assigned to p a s s b o o k s a v i n g s in p a r t i a l r e c o g n i t i o n of the h i g h d e g r e e o f l i q u i d i t y p o s s e s s e d b y these a c c o u n t s . scaled upward as maturities Other rates are lengthen. In the c a s e of M S B ' s a n d S & L ' s , the p a s s b o o k r a t e is set a t 5 . 0 0 p e r c e n t , a n d for o t h e r types o f i n s t r u m e n t s the r a n g e is 37 f r o m 5 . 2 5 p e r c e n t to 6 . 0 0 p e r c e n t for d e p o s i t s of 2 y e a r s a n d o v e r . — ' T h e s p r e a d f a v o r i n g S & L ' s a n d M S B ' s (0.50 p e r c e n t a g e p o i n t p a s s b o o k accounts and 0.25 percentage point on other is i n t e n d e d to adjust on instruments) for the i n h e r e n t a d v a n t a g e c o m m e r c i a l b a n k s h a v e in a t t r a c t i n g s a v i n g s a n d time a c c o u n t customers. W h i l e a g r e a t d e a l o f a t t e n t i o n h a s f o c u s e d o n the i n t e r e s t r a t e c e i l i n g s in the l a s t five or six y e a r s , the c e i l i n g s a f f e c t i n g b a n k s h a v e b e e n in e f f e c t for o v e r 36 y e a r s . commercial From January 1, 1936, until J a n u a r y 1 , 1 9 5 7 , the m a x i m u m r a t e p a y a b l e on s a v i n g s d e p o s i t s and on time d e p o s i t s w i t h m a t u r i t i e s o f 6 m o n t h s or m o r e w a s unchanged a t 2 - 1 / 2 p e r c e n t . T i m e d e p o s i t s o f 90 d a y s to 6 m o n t h s h a d a m a x i m u m r a t e o f 2 p e r c e n t , a n d t h o s e of 30 to 89 d a y s h a d a c e i l i n g of 1 p e r c e n t . In 1 9 5 7 , a l l of t h e s e r a t e s w e r e r a i s e d b y 1/2 p e r c e n t a g e p o i n t — e x c e p t d a y time d e p o s i t r a t e w h i c h r e m a i n e d a t 1 p e r c e n t . f o r the 3 0 - 8 9 This new r e m a i n e d i n t a c t for five y e a r s — u n t i l J a n u a r y 1 , 1 9 6 2 . schedule F r o m the l a t t e r d a t e , the p a s s b o o k r a t e r e m a i n e d a t 4 p e r c e n t u n t i l J a n u a r y , 1 9 7 0 , 3/ The m a x i m u m rates for m u t u a l savings banks are e x c e p t in M a s s a c h u s e t t s . F o r s a v i n g s a n d l o a n c e i l i n g s a r e s e t b y the F e d e r a l H o m e L o a n B a n k S e p t e m b e r , 1 9 6 6 , t h a t B o a r d had no l e g i s l a t i v e such rates. s e t b y the F D I C , a s s o c i a t i o n s , the Board. Until a u t h o r i t y to fix - 5 w h e n it w a s r a i s e d to 4 . 5 0 per c e n t . In c o n t r a s t , the m a x i m u m r a t e o n some f o r m of t i m e d e p o s i t w a s c h a n g e d e a c h y e a r t h r o u g h ( e x c e p t for 1968 1967). R a t i o n a l e for I n t e r e s t R a t e Ceilings H o w e v e r , the r e a l s t o r y of i n t e r e s t r a t e c e i l i n g s in r e c e n t y e a r s b e g i n s w i t h a d e c i s i o n b y the F e d e r a l R e s e r v e B o a r d in e a r l y December, 1965. A t t h a t t i m e , the B o a r d d e c i d e d to r a i s e the m a x i m u m r a t e p a y a b l e on time d e p o s i t s to 5 - 1 / 2 per c e n t for a l l m a t u r i t i e s from the p r e v i o u s l e v e l s of 4 p e r c e n t o n a c c o u n t s of 3 0 - 8 9 d a y s a n d 4 - 1 / 2 per c e n t on d e p o s i t s of 90 d a y s a n d o v e r . decision, In r e s p o n s e to that n u m e r o u s c o m m e r c i a l b a n k s p r o m p t l y p o s t e d h i g h e r r a t e s in a v i g o r o u s e f f o r t to a t t r a c t f u n d s . W h i l e s o m e of the i n c r e a s e d a t c o m m e r c i a l b a n k s t h r o u g h the S u m m e r o f 1966 r e p r e s e n t e d n e w as w e l l a s funds d i v e r t e d from the s e c u r i t i e s m a r k e t s , a inflow savings substantial p r o p o r t i o n w a s p u l l e d o u t of S & L ' s b y t h e h i g h e r r a t e s o f f e r e d b y b a n k s . T h e i n t e n s i t y of this c o m p e t i t i o n for funds a m o n g b a n k s a n d o t h e r i n s t i t u t i o n s led to the p a s s a g e of l e g i s l a t i o n in S e p t e m b e r , 1 9 6 6 , g r a n t i n g a u t h o r i t y to the F e d e r a l R e s e r v e B o a r d , the F D I C , a n d the H o m e L o a n B a n k B o a r d to c o o r d i n a t e i n t e r e s t r a t e c e i l i n g s deposits. These supervisory agencies promptly established a s t r u c t u r e of r a t e c e i l i n g s that r e m a i n e d g e n e r a l l y u n c h a n g e d on until 4/ January 1, 1970. 4/ The c e i l i n g s s e t in S e p t e m b e r , 1 9 6 6 , w e r e : 4 p e r c e n t on c o m m e r c i a l b a n k p a s s b o o k a c c o u n t s and 5 p e r c e n t on t h e i r o t h e r c o n s u m e r - t y p e deposits; 5 p e r c e n t on a l l m u t u a l s a v i n g s b a n k d e p o s i t s ; a n d 4 . 7 5 p e r c e n t on r e g u l a r a c c o u n t s a n d 5 . 2 5 p e r c e n t o n t e r m a c c o u n t s a t savings and loan a s s o c i a t i o n s , w i t h some geographical exceptions. - 6 W h e n m a x i m u m interest rate ceilings on deposits were first i n s t i t u t e d f o r a l l t h r e e t y p e s of d e p o s i t a r y i n s t i t u t i o n s , the o b j e c t i v e w a s to m o d e r a t e the loss o f s a v i n g s f u n d s s u f f e r e d b y the nonbank intermediaries. A s a l r e a d y i n d i c a t e d , p a r t of the loss r e p r e s e n t e d t h e i r i n a b i l i t y to c o m p e t e w i t h c o m m e r c i a l b a n k s for f u n d s f r o m a p u b l i c i n c r e a s i n g l y a w a r e o f the r i s i n g a l t e r n a t i v e available on m a r k e t instruments. yields In a d d i t i o n , a n o t h e r p a r t o f the l o s s s i m p l y r e p r e s e n t e d d i r e c t s h i f t s of s a v i n g s a c c o u n t s f r o m a l l d e p o s i t - t y p e a s s e t s to h i g h e r - y i e l d i n g m a r k e t i n s t r u m e n t s . Imposition o f d e p o s i t r a t e c e i l i n g s c o o r d i n a t e d for a l l t h r e e of the m a j o r s a v i n g s a c c o u n t i n t e r m e d i a r i e s c o u l d n o t i n s u l a t e t h e m f r o m the relative attractiveness of current yields on m a r k e t instruments. the c e i l i n g s c o u l d — a n d d i d — p r o t e c t the n o n b a n k i n s t i t u t i o n s e n g a g i n g in r a t e c o m p e t i t i o n w i t h c o m m e r c i a l b a n k s u n d e r disadvantageous to the n o n b a n k i n s t i t u t i o n s . clear t h a t — g i v e n But from conditions A t the t i m e , it s e e m e d the h i s t o r i c a l l y h i g h l e v e l of m a r k e t interest r a t e s a n d the f a r g r e a t e r r e s p o n s i v e n e s s o f c o m m e r c i a l b a n k s 1 earnings to c u r r e n t m a r k e t y i e l d s — a n y e f f e c t i v e e f f o r t o n the p a r t o f n o n b a n k d e p o s i t a r y i n s t i t u t i o n s to m e e t the i n t e r e s t r a t e competition e x e r t e d b y c o m m e r c i a l b a n k s w o u l d h a v e e r o d e d s e r i o u s l y the v i a b i l i t y of M S B ' s a n d financial S&L's. In the s h o r t - r u n , the b a s i c o b j e c t i v e o f p r o t e c t i n g the n o n b a n k depositary institutions by m e a n s of coordinating ceilings was the m a i n t e n a n c e o f s t a b i l i t y in the f i n a n c i a l s e c t o r of the economy. - 7 O v e r the l o n g - r u n , the a i m w a s the c o n t i n u a t i o n o f r e l a t i v e l y institutions providing home mortgage credit.—^ specialized In o t h e r w o r d s , the s e r v i c e to the p u b l i c p r o v i d e d b y these c o o r d i n a t e d d e p o s i t rate c e i l i n g s w a s p e r c e i v e d as a r e l a t i v e l y s t e a d y a n d a m p l e s u p p l y of home m o r t g a g e a v a i l a b l e a t m o r e r e a s o n a b l e cost than w o u l d o t h e r w i s e have b e e n credit possible. M a r k e t Competition and Deposit Flows T h e i m p a c t of m a r k e t y i e l d s o n d e p o s i t flows a t institutions—and i n d i r e c t l y the e f f e c t s of y i e l d d i f f e r e n t i a l s on the a v a i l a b i l i t y of h o m e m o r t g a g e f u n d s — i s f of the S6cL s. financial i l l u s t r a t e d b y the e x p e r i e n c e To a s s i s t in that a s s e s s m e n t , s e v e r a l statistical m e a s u r e s w e r e c a l c u l a t e d for e a c h q u a r t e r for the y e a r s (1) the a v e r a g e o f f e r i n g r a t e s o n t o t a l S&L d e p o s i t s 1965-71: (shown in T a b l e 2); (2) the d i f f e r e n t i a l b e t w e e n these a v e r a g e r a t e s and the y i e l d s on 6-month Treasury bills; of t h e s e c a l c u l a t i o n s and (3) d e p o s i t g r o w t h a t S & L ' s . The results (which c o v e r s e v e r a l i n t e r e s t r a t e c y c l e s ) •k a r e s h o w n in C h a r t I . T h e b o t t o m p a n e l of the c h a r t (tracing the e x c e s s o f S&L d e p o s i t r a t e s o v e r T r e a s u r y b i l l y i e l d s ) r e p r e s e n t s r e l a t i v e a t t r a c t i v e n e s s of S&L claims c o m p a r e d w i t h m a r k e t 5/ the instruments. B e h i n d this r a t h e r e x p l i c i t s t a t e m e n t , o t h e r — p e r h a p s m o r e s u b t l e r - r e a s o n s a l s o h e l p e d to form the b a s i c r a t i o n a l e for setting the c o o r d i n a t e d c e i l i n g s . F r e e c o m p e t i t i o n on d e p o s i t r a t e s w o u l d n o d o u b t h a v e led to the failure of some l a r g e n o n b a n k d e p o s i t a r i e s , p a r t i c u l a r l y g i v e n the n o n l i q u i d s t a t e of m a n y o f them in the F a l l of 1 9 6 6 . A n y such o c c u r r e n c e s w o u l d have f u r t h e r d e s t a b i l i z e d f i n a n c i a l m a r k e t s a l r e a d y s u f f e r i n g f r o m c o n s i d e r a b l e u n c e r t a i n t y . M o r e o v e r , e v e n i n g - o u t the s e c t o r a l i m p a c t of r e s t r i c t i v e m o n e t a r y p o l i c y b y s o m e c o n v e n i e n t m e t h o d w a s d e s i r a b l e to p e r m i t p o l i c y to focus m o r e o n a g g r e g a t e c o n d i t i o n s less encumbered by inherently unstable sectoral conditions. ^ C h a r t s I and II f o l l o w T a b l e 5. - 8 I n the top p a n e l o f the C h a r t is s h o w n the p a r a l l e l q u a r t e r l y of g r o w t h in d e p o s i t s a t t h e s e rate institutions. In g e n e r a l , the p a r a l l e l i s m b e t w e e n S & L d e p o s i t growth r a t e s a n d the r e l a t i v e a t t r a c t i v e n e s s of the i n s t r u m e n t s o f f e r e d f S & L s is s t r i k i n g . by T h e i n f l o w t e n d s to a c c e l e r a t e w h e n the y i e l d s p r e a d t u r n s i n f a v o r of (or b e c o m e s l e s s u n f a v o r a b l e to) S & L deposits- c o m p a r e d w i t h the r a t e o f r e t u r n a v a i l a b l e on a l t e r n a t i v e o u t l e t s short-term balances. Of c o u r s e , the o b s e r v e d p a t t e r n r e f l e c t s expected response of wealthholders to c h a n g e s in c o m p a r a t i v e O n the o t h e r h a n d , c l o s e i n s p e c t i o n o f the C h a r t for the yields. indicates t h a t the g e n e r a l p a r a l l e l i s m b e t w e e n d e p o s i t g r o w t h r a t e s a t S & L ' s a n d r e l a t i v e y i e l d s is n o t p e r f e c t , n o r is it r e p e a t e d e x a c t l y cycle after cycle. growth F o r i n s t a n c e , a d e c l i n e to a n e a r - z e r o q u a r t e r l y r a t e in d e p o s i t s o c c u r r e d d u r i n g b o t h 1 9 6 6 a n d late 1 9 6 9 . However, the e a r l i e r e x p e r i e n c e w a s a c c o m p a n i e d b y a n a d v e r s e y i e l d s p r e a d of l e s s t h a n 100 b a s i s p o i n t s — w h i l e the l a t t e r w a s a s s o c i a t e d w i t h a nearly 300 basis p o i n t adverse yield d i f f e r e n t i a l . More recently, d u r i n g the t h i r d q u a r t e r of 1 9 7 1 , d e p o s i t g r o w t h w a s m a i n t a i n e d h i s t o r i c a l l y h i g h r a t e s — e v e n d u r i n g j u s t t h a t p a r t o f the at quarter p r e c e d i n g the N e w E c o n o m i c P o l i c y in w h i c h the y i e l d s p r e a d h a d a c t u a l l y b e c o m e a d v e r s e to S & L claims. - 9 One d e v e l o p m e n t w h i c h m a y h a v e h e l p e d t h r i f t institutions to m a i n t a i n d e p o s i t g r o w t h in the face of a d v e r s e c h a n g e s in y i e l d s p r e a d s is the s i z a b l e i n c r e a s e in a c c o u n t s w i t h m i n i m u m requirements. term These accounts currently represent about 45 p e r cent of t o t a l S&L c l a i m s a n d a b o u t 20 p e r c e n t of m u t u a l s a v i n g s deposits. banks P r i o r to 1 9 7 0 , the p r o p o r t i o n s w e r e i n s i g n i f i c a n t . 1 The r e s t r i c t i o n s in these a c c o u n t s l i m i t i n g w i t h d r a w a l p r i o r to m a t u r i t y — or t h e p e n a l t y c o s t s i m p o s e d w h e r e a n y w i t h d r a w a l is possible—imply t h a t s h i f t s p r i o r to m a t u r i t y e i t h e r w o u l d n o t o c c u r or w o u l d tend to o c c u r o n l y if the f i n a n c i a l g a i n s from s h i f t i n g w o u l d m o r e than 6/ o u t w e i g h the p e n a l t y costs.— M o r e o v e r , w i t h the c o n s i d e r a b l e i n c r e a s e in t e r m a c c o u n t s , existing passbook account holders m a y now be a more homogeneous group. C o r r e s p o n d i n g l y , e x i s t i n g p a s s b o o k a c c o u n t h o l d e r s a r e n o d o u b t far less interest-sensitive t h a n t h o s e p r i o r to the J a n u a r y , 1 9 7 0 , r a t e c e i l i n g c h a n g e s that e s t a b l i s h e d the p r e s e n t t e r m a c c o u n t structure. P r i o r to 1 9 7 0 , p a s s b o o k a c c o u n t h o l d e r s m a n i f e s t e d v a r y i n g a n d often, in the a g g r e g a t e , c o n t r a d i c t o r y m o t i v e s for m a i n t a i n i n g those a s s e t s * s o m e p e r s o n s used t h e m to s t o r e c o n t i n g e n c y f u n d s , o t h e r s a s a r i s k free i n v e s t m e n t , a n d o t h e r s — a t least at t i m e s — a s the h i g h e s t y i e l d i n g of a l l generally comparable available financial a l t e r n a t i v e s . 6/ Since In o t h e r w o r d s , o n m i n i m u m t e r m a c c o u n t s w h e r e w i t h d r a w a l is p o s s i b l e w i t h a p e n a l t y p a y m e n t , the i m p l i c a t i o n is t h a t the y i e l d s p r e a d r e q u i r e d to e l i c i t a s h i f t w o u l d h a v e to be larger t h a n t h a t r e q u i r e d to d r a w f u n d s from a s i m p l e p a s s b o o k a c c o u n t , the d i f f e r e n c e b e i n g the d i s c o u n t e d v a l u e o f the p e n a l t y . - 10 t h o s e a c c o u n t s w e r e in e f f e c t d e m a n d c l a i m s , w h e n t h e r e w a s a s i g n i f i c a n t c h a n g e in their y i e l d s compared with yields on other types of a s s e t s , there occurred a c o r r e s p o n d i n g — a n d in f l o w s . rapid—shift S i n c e t h e 1970 r a t e c e i l i n g c h a n g e , h o w e v e r , t h e r e h a v e s u f f i c i e n t i n t e r n a l s h i f t s o f f u n d s a t d e p o s i t a r i e s so t h a t remaining p a s s b o o k account holders m a y no longer be r e s p o n s i v e to c h a n g e s in m a r k e t y i e l d s . non-yield motives a safe contingency the especially They either have for holding those claims been predominantly (such a s the d e s i r e for f u n d ) or t h e y r e g i s t e r l i t t l e e f f e c t i v e d e m a n d other financial assets because their individual balances are for too small. F i n a l l y , there m a y a l s o h a v e e v o l v e d a m o r e a d v a n c e d o f s o p h i s t i c a t i o n a m o n g d e p o s i t o r s in t h r i f t institutions—reflecting their earlier experience w i t h switching from thrift claims market securities. Perhaps they now k n o w — i f that t h e r e a r e r e a l a n d s o m e t i m e s c o n s i d e r a b l e into they did not know f i r s t t i m e t h e y s h i f t e d o u t of d e p o s i t c l a i m s into m a r k e t be absorbed. stage the instruments— costs that also must Costs associated with market securities would c o s t s o f s a f e k e e p i n g , a b s o r p t i o n o f m a r k e t r i s k in the p r i c e include or l i q u i d i t y of the a c q u i r e d a s s e t , a b s o r p t i o n of c r e d i t r i s k o n some i n s t r u m e n t s , a s w e l l as t r a n s a c t i o n c o s t s . have increased In f a c t , t h e s e l a t t e r c o s t s ( p a r t i c u l a r l y w i t h r e s p e c t to G o v e r n m e n t securities) as m a n y b a n k s a n d s e c u r i t i e s d e a l e r s i m p o s e d c h a r g e s f o r t h e first - 11 time d u r i n g the 1969 p e r i o d w h e n t h e r e w a s a n e x t r a o r d i n a r y volume o f i n d i v i d u a l a c t i v i t y in t h a t m a r k e t . costs— or more widespread recognition—would This recognition of suggest that m a r k e t yields n o w w o u l d h a v e to b e h i g h e r t h a n d e p o s i t r a t e s b y a c l e a r l y c o m p e n s a t o r y a m o u n t to m e r i t switching. Discriminatory Consequences of Interest Rate Ceilings A t this p o i n t , w e c a n t u r n to a c o n s i d e r a t i o n o f inequitable effects of interest rate ceilings. the As indicated the i m p o s i t i o n o f these c e i l i n g s d i d p r o d u c e s o m e p u b l i c above, benefits. Y e t , t h e s e b e n e f i t s to the p u b l i c w e r e o b t a i n e d a t some c o s t s to the p u b l i c — c o s t s w h i c h a r o s e d i r e c t l y f r o m the e x i s t e n c e o f d e p o s i t interest rate ceilings themselves. Because of these c e i l i n g s , financial r e a l r e s o u r c e s w e r e p r e v e n t e d f r o m b e i n g fully r e s p o n s i v e to p r e v a i l i n g and supply pressures. and demand L e t m e s t r e s s , h o w e v e r , that these costs were r e c o g n i z e d f u l l y a t the time c e i l i n g s w e r e i m p o s e d . But on balance the c e i l i n g s w e r e s e e n a s n e c e s s a r y to a c h i e v e the l a r g e r g o a l s of h e l p i n g protect s e c u l a r a n d c y c l i c a l s t a b i l i t y in the h o m e m o r t g a g e m a r k e t . O n e o f the i m p o r t a n t c o s t s i n v o l v e s the p u b l i c ' s f o r e g o i n g the d i f f e r e n c e b e t w e e n the c e i l i n g r a t e s a n d c o m p e t i t i v e (normally higher) r a t e s w h i c h the m a r k e t w o u l d o t h e r w i s e h a v e d e t e r m i n e d . interest does not accrue u n i f o r m l y , different groups. deposit T h i s loss "of or proportionately, among T h e l o s s t e n d s to h a v e a r e g r e s s i v e i m p a c t p r i m a r i l y because individuals and households with small savings balances have to - 12 few o p t i o n s w i t h r e s p e c t to e a r n i n g a s s e t s a m o n g w h i c h t h e y choose. can In f a c t , t h e i r r a n g e o f c h o i c e s w a s f u r t h e r r e s t r i c t e d by a c t i o n t a k e n in F e b r u a r y , 1 9 7 0 , b y the F e d e r a l G o v e r n m e n t r a i s i n g m i n i m u m d e n o m i n a t i o n s of T r e a s u r y b i l l s a n d A g e n c y i s s u e s $ 1 , 0 0 0 to $ 1 0 , 0 0 0 . the from Thus, while depositors with larger balances may e f f e c t i v e l y w e i g h the m a r k e t y i e l d d i f f e r e n t i a l s a g a i n s t the generally g r e a t e r s a f e t y , l i q u i d i t y , a n d c o n v e n i e n c e of d e p o s i t c l a i m s , a c c o u n t holders w i t h smaller balances do not have those alternatives The resulting inequity would available. b y definition be less pronounced if the b e n e f i t s a c c r u e d a m o n g g r o u p s s y m m e t r i c a l l y w i t h the loss o f interest. T h e r e a r e two m a i n g r o u p s t h a t a r e the p r i m e b e n e f i c i a r i e s o f b e l o w - m a r k e t deposit ceiling rates: (1) the o w n e r s o f the i n s t i t u t i o n s u n d e r t h e s e c e i l i n g s and (2) operating the r e c i p i e n t s o f h o m e m o r t g a g e m o n e y m a d e a v a i l a b l e t h r o u g h the p r o t e c t i o n a f f o r d e d b y the ceilings. F o r the m o s t p a r t , t h e s e b e n e f i c i a r i e s a r e n o t the s a m e p e r s o n s as those w h o lose interest on d e p o s i t s — a t least not contemporaneously. T h e f a c t o r s w h i c h m i g h t p r o d u c e this d i v e r g e n c e c a n b e more fully. traced T a k i n g the two g r o u p s o f b e n e f i c i a r i e s s e p a r a t e l y , one s h o u l d f o c u s f i r s t o n the p r o f i t p o s i t i o n o f t h e i n s t i t u t i o n s under protective deposit rate ceilings. T o the e x t e n t t h a t operating coordinated c e i l i n g s k e e p d e p o s i t r a t e s b e l o w w h a t they w o u l d h a v e b e e n in the a b s e n c e o f r e s t r a i n t s , the c o s t of f u n d s u s e d b y t h e i n s t i t u t i o n s is k e p t artifically low. If the y i e l d s e a r n e d b y t h e s e i n s t i t u t i o n s w o u l d h a v e b e e n the s a m e r e g a r d l e s s o f the p r e s e n c e o r a b s e n c e o f d e p o s i t r a t e - 13 c e i l i n g s , the a r t i f i c i a l l y low c o s t o f f u n d s c r e a t e d b y the ceilings p r o d u c e s a " s u r p l u s " o r p r i v a t e " s u b s i d y " that a c c r u e s to the o w n e r s of the institutions. S e c o n d l y , in a t t e m p t i n g to i d e n t i f y the p r e s e n c e of a d e p o s i t - c e i l i n g s u r p l u s , it is n e c e s s a r y to d e t e r m i n e (or s i z e ) whether the r e t u r n s o n i n v e s t m e n t s h e l d b y the f i n a n c i a l i n s t i t u t i o n s vary i n a f a s h i o n t h a t is p a r a l l e l to the d i f f e r e n t i a l b e t w e e n a m a r k e t d e t e r m i n e d d e p e s i t r a t e a n d the c e i l i n g r a t e . a p r i v a t e s u b s i d y is p r o d u c e d b y the In o t h e r w o r d s , if i n s u l a t i o n of the d e p o s i t a r y i n s t i t u t i o n s f r o m i n t e r - i n d u s t r y c o m p e t i t i o n , a t l e a s t p a r t o f the w i n d f a l l g a i n s of the f i n a n c i a l i n t e r m e d i a r i e s w o u l d p r o b a b l y b e p a s s e d o n to b o r r o w e r s in the f o r m o f m o r t g a g e i n t e r e s t r a t e s b e l o w t h o s e w h i c h the m a r k e t w o u l d n o r m a l l y g e n e r a t e . The rate ceilings c l e a r l y h a v e s h i e l d e d those i n s t i t u t i o n s s p e c i a l i z i n g in h o m e m o r t g a g e lending. M o r e o v e r , the e v i d e n c e s u g g e s t s s t r o n g l y that p a r t o f the b e n e f i t s h a v e b e e n p a s s e d o n to h o m e b u y e r s in the f o r m o f a g r e a t e r volume of f u n d s — w h i c h the b o r r o w e r s g o t a t b e l o w m a r k e t Benefits of Interest Rate rates. Discrimination T h i s l o g i c a l c a s e for the e x i s t e n c e o f c o s t s a n d b e n e f i t s o f i n t e r e s t r a t e d i s c r i m i n a t i o n is a l s o s u p p o r t e d b y the a v a i l a b l e statistical evidence. T h e f i r s t p o r t i o n o f this e v i d e n c e is c o n t a i n e d i n T a b l e 2 , s h o w i n g the r e l a t i o n s h i p b e t w e e n the a v e r a g e interest r a t e on c o n v e n t i o n a l m o r t g a g e s w r i t t e n a g a i n s t n e w h o m e s a n d a v e r a g e r a t e s o f f e r e d b y S & L ' s d u r i n g the y e a r s 1 9 6 4 - 7 1 . the It should be - 14 f n o t e d t h a t the m a r g i n b e t w e e n m o r t g a g e y i e l d s a n d r a t e s p a i d b y widened s i g n i f i c a n t l y a f t e r the i m p o s i t i o n o f c o o r d i n a t e d r a t e in l a t e 1 9 6 6 . T h i s i n c r e a s e in the y i e l d s p r e a d — o n its S&L s ceilings face—suggests that these institutions gained significantly by realizing a larger " m a r k u p " b e t w e e n t h e i r c o s t of f u n d s a n d the r e t u r n s o n a v a i l a b l e new investments. F u r t h e r m o r e , one can attribute a sizable o f the h i g h e r m a r k u p to the i m p a c t of the c e i l i n g s in a n proportion environment of generally high m a r k e t interest rates that prevailed through H o w e v e r , t h e r e is r e a s o n to b e l i e v e t h a t , d u r i n g 1970. the p e r i o d s i n c e 1 9 6 6 , the m a r k u p w a s a c t u a l l y s m a l l e r t h a n it m i g h t o t h e r w i s e h a v e b e e n w i t h o u t the d e p o s i t r a t e c e i l i n g s . It is c l e a r t h a t s i n c e 1 9 6 6 h o m e m o r t g a g e i n t e r e s t r a t e s h a v e b e h a v e d in a m o s t u n e x p e c t e d m a n n e r r e l a t i v e to o t h e r l o n g - t e r m c a p i t a l m a r k e t y i e l d s . A s C h a r t II s h o w s , the d i f f e r e n t i a l b e t w e e n c u r r e n t i n t e r e s t r a t e s on home mortgages and yields on both income-property mortgages corporate bonds has changed d r a s t i c a l l y . and P r i o r to 1 9 6 6 , h o m e m o r t g a g e s a c t u a l l y c a r r i e d a n i n t e r e s t r a t e c o n s i s t e n t l y h i g h e r t h a n that o n corporate debt. S i m i l a r l y , the d i f f e r e n t i a l w a s f a i r l y narrow—but s t e a d y — b e t w e e n home mortgages and those on m u l t i f a m i l y and properties. commercial S i n c e 1 9 6 6 , it is d r a m a t i c a l l y c l e a r t h a t h o m e m o r t g a g e i n t e r e s t r a t e s d i d n o t k e e p p a c e a t a l l w i t h the s i z e of the in t h e s e o t h e r l o n g - t e r m i n t e r e s t r a t e s . increases To some e x t e n t , of c o u r s e , state u s u r y c e i l i n g s w e r e a l i m i t i n g f a c t o r o n the s i z e a n d r a p i d i t y o f the r i s e - 15 of at least some home mortgage r a t e s . B u t e v e n in s t a t e s w h e r e c e i l i n g s p o s e d n o c o n s t r a i n t , the g e n e r a l p a t t e r n s t i l l usury prevailed. G i v e n this e v i d e n c e , it is r e a s o n a b l e to c o n c l u d e that d e p o s i t i n t e r e s t r a t e c e i l i n g s a f f e c t i n g the d o m i n a n t s u p p l i e r s of h o m e m o r t g a g e funds m i g h t h a v e p l a y e d s o m e r o l e . If o n e is to a r g u e t h a t c o o r d i n a t e d d e p o s i t c e i l i n g s w e r e s u c c e s s f u l in stabilizing f l o w s to the n o n b a n k i n s t i t u t i o n s , t h e n the i m p l i c a t i o n is t h a t they r e c e i v e d m o r e l e n d a b l e funds than they w o u l d h a v e in the a b s e n c e of the c e i l i n g s . f Since S & L s particularly have little alternative but to lend on h o m e m o r t g a g e s , it m i g h t b e t h a t the u n u s u a l l y low h o m e m o r t g a g e i n t e r e s t r a t e s d u r i n g that period can l a r g e l y be t r a c e d d i r e c t l y the i m p a c t of the s u c c e s s o f d e p o s i t c e i l i n g to rates. By e x t e n s i o n , t h e n , h o m e m o r t g a g e b o r r o w e r s d u r i n g the p e r i o d s i n c e 1966 a l s o b e n e f i t e d b e c a u s e t h e i r b o r r o w i n g c o s t s w e r e l o w e r than p r e v i o u s y i e l d r e l a t i o n s h i p s w o u l d h a v e s u g g e s t e d . kept As i n d i c a t e d e a r l i e r t h e s e l a t t e r b e n e f i t s a c c r u e d p r i m a r i l y to m i d d l e i n c o m e b o r r o w e r s w h o p u r c h a s e d h o m e s in the R e l a t i v e G r o w t h of S u b u r b a n suburbs. Housing T h e i m p r e s s i o n that s u b u r b a n h o m e o w n e r s shared appreciably in the b e n e f i t s p r o v i d e d b y i n t e r e s t r a t e c e i l i n g s a l s o g a i n s f r o m the s t a t i s t i c s r e l a t i n g to h o m e b u i l d i n g a c t i v i t y . support I d e a l l y , to t r a c e the t e m p o of h o m e b u i l d i n g in s u b u r b a n a r e a s c o m p a r e d w i t h the p a c e in c e n t r a l c i t i e s , o n e s h o u l d h a v e d a t a s h o w i n g the d i s t r i b u t i o n of - 16 h o u s i n g s t a r t s b e t w e e n the two l o c a t i o n s . Unfortunately, that i n f o r m a t i o n is a v a i l a b l e for m e t r o p o l i t a n a r e a s as a w h o l e — a n d f o r the s u b u r b s a n d c e n t r a l c i t i e s s e p a r a t e l y . However, data not relating to p r i v a t e b u i l d i n g p e r m i t s for n e w h o u s i n g u n i t s d o d i s t i n g u i s h b e t w e e n c e n t r a l c i t i e s a n d s u b u r b a n a r e a s , a n d t h e s e can b e u s e d as a 7/ r o u g h p r o x y for n e w s t a r t s . and T h e s e d a t a a r e s h o w n in T a b l e s 3 4. A s t h e s e s t a t i s t i c s i n d i c a t e , the c e n t r a l c i t i e s 1 n e w h o u s i n g p r o d u c t i o n e d g e d d o w n s l i g h t l y d u r i n g the p e r i o d while the s u b u r b a n s h a r e r o s e s o m e w h a t . of metropolitan areas In 1 9 6 2 , (SMSA's) accounted for s h a r e of 1962-67 the s u b u r b a n a r e a s 60 p e r cent of the n u m b e r o f p e r m i t s i s s u e d , c o m p a r e d w i t h 40 p e r c e n t for c e n t r a l c i t i e s . By 1 9 6 7 , the s u b u r b a n s h a r e h a d c l i m b e d to n e a r l y t w o - t h i r d s o f the p e r m i t s i s s u e d in S M S A ' s , a n d the c e n t r a l c i t i e s to j u s t o v e r o n e - t h i r d . share had shrunk I n t e r m s of t h e v a l u e o f n e w h o u s i n g r o u g h l y the s a m e p a t t e r n w a s 7V 1 units, evident. W h e n u s i n g p e r m i t d a t a as a p r o x y for h o u s i n g s t a r t s , s e v e r a l l i m i t a t i o n s m u s t b e n o t e d . T h e s e i n c l u d e : (1) D a t a on h o u s i n g u n i t s a u t h o r i z e d b y b u i l d i n g p e r m i t s r e l a t e to the t i m e o f p e r m i t - i s s u a n c e r a t h e r t h a n to the actual start of construction. (2) D a t a on b u i l d i n g p e r m i t s c u r r e n t l y cover 13,000 permit issuing localities. However, data on private h o u s i n g s t a r t s c o v e r a l l a r e a s in the U . S . , i n c l u d i n g t h o s e n o t c o v e r e d b y b u i l d i n g p e r m i t s y s t e m s . A c c o r d i n g to C e n s u s B u r e a u e s t i m a t e s , a b o u t 86 p e r c e n t of a l l p r i v a t e h o u s i n g u n i t s w e r e c o n s t r u c t e d in p e r m i t - i s s u i n g p l a c e s in 1 9 7 0 . (3) P r i v a t e h o u s i n g s t a r t s include farm housing u n i t s , b u t permit data are treated as n o n f a r m a l t h o u g h a n e g l i g i b l e n u m b e r of p e r m i t s a r e i s s u e d for u n i t s l o c a t e d on farm properties. (4) N e i t h e r s t a r t s n o r p e r m i t d a t a i n c l u d e mobile home shipments. (5) C e n t r a l c i t y p e r m i t d a t a f i r s t b e c a m e a v a i l a b l e in 1 9 6 2 . - 17 B e g i n n i n g in 1 9 6 8 - - a y e a r in w h i c h the n a t i o n ' s housing g o a l w a s e s t a b l i s h e d a n d in w h i c h the l a n d m a r k H o u s i n g a n d Urban Development Act was p a s s e d — t h e distribution of homebuilding b e t w e e n s u b u r b s a n d c e n t r a l cities has r e m a i n e d e s s e n t i a l l y H o w e v e r , in 1 9 7 0 , t h e r e w a s a t e m p o r a r y u p s u r g e in c e n t r a l activity unchanged. city a c t i v i t y a s a r e s u l t o f a s u b s t a n t i a l i n c r e a s e in the p r o d u c t i o n of s u b s i d i z e d u n i t s — p a r t i c u l a r l y of u n i t s l a u n c h e d u n d e r S e c t i o n 235 a n d 236 o f the 1 9 6 8 A c t . Of c o u r s e , the l o n g - t e r m m o v e m e n t o f p o p u l a t i o n f r o m c e n t r a l c i t i e s to s u b u r b s w o u l d a c c o u n t for the b u l k of the i n c r e a s e d f o r m o r t g a g e f u n d s in the s u b u r b a n parts of m e t r o p o l i t a n B u t the c e n t r a l p o i n t m a d e h e r e still seems to h o l d : areas. homebuilding r e s p o n s e to the m i d d l e - i n c o m e s u b u r b a n d e m a n d h a s b e e n a beneficiary demand in special of b e l o w - m a r k e t r a t e m o r t g a g e funds m a d e a v a i l a b l e S 6 c L ' s — w h i c h in turn c o u l d tap savings flows a t a b e l o w - m a r k e t by cost of funds m a d e p o s s i b l e b y the e x i s t e n c e o f c e i l i n g s on the m a x i m u m r a t e s of i n t e r e s t p a y a b l e on d e p o s i t s . National Housing Goals: T a r g e t s and Performance In a b a s i c s e n s e , the r e c e n t p a t t e r n of f i n a n c e d in the m a i n b y homebuilding— a flow of funds s u b s t a n t i a l l y i n s u l a t e d b y i n t e r e s t r a t e c e i l i n g s — i s n o t w h o l l y c o n s i s t e n t w i t h the n a t i o n a l h o u s i n g g o a l s e s t a b l i s h e d b y C o n g r e s s in the H o u s i n g a n d U r b a n D e v e l o p m e n t A c t of 1 9 6 8 . T h e targets set c a l l e d for the p r o d u c t i o n of 26 m i l l i o n n e w a n d r e h a b i l i t a t e d h o u s i n g u n i t s o v e r a 1 0 - y e a r p e r i o d - 18 e n d i n g in 1 9 7 8 . specified A s p a r t of the 26 m i l l i o n u n i t that 6 million units (5 m i l l i o n n e w u n i t s a n d 1 m i l l i o n r e h a b i l i t a t e d u n i t s ) w e r e to b e p r o v i d e d families. goal, Congress for low- a n d m o d e r a t e - i n c o m e T o p r o m o t e this e n d , C o n g r e s s e s t a b l i s h e d the S e c t i o n 2 3 5 a n d 2 3 6 s u b s i d y p r o g r a m s in the s a m e A c t . A l t h o u g h there w e r e n o s p e c i f i e d u r b a n - s u b u r b a n established to d i c t a t e w h e r e the s u b s i d i z e d low- a n d quotas moderate-income u n i t s w e r e to b e c o n s t r u c t e d , it w a s e v i d e n t t h a t the C o n g r e s s e x p e c t e d to see a s i g n i f i c a n t e x p a n s i o n in the h o u s i n g s u p p l y in the inner-city. In the f i r s t p l a c e , the 1968 A c t w a s p a s s e d f o l l o w i n g the 1966-1968 u r b a n d i s t u r b a n c e s , and it w a s i n t e n d e d to m e e t o n e of the identified causes. In a d d i t i o n , the l e g i s l a t i v e h i s t o r y of the v a r i o u s A c t s c l e a r l y r e f l e c t s the i n t e n t of C o n g r e s s to s t i m u l a t e c o n s t r u c t i o n of low- a n d m o d e r a t e - i n c o m e h o u s i n g in the p a r t i c u l a r l y in c o n n e c t i o n w i t h u r b a n r e n e w a l In p r a c t i c e , h o u s i n g p r o d u c t i o n housing the inner-city, programs. (which i n c l u d e s m o b i l e h o m e s ) h a s h a d a m i x e d p e r f o r m a n c e w i t h r e s p e c t to the s t a t e d g o a l s , a l l o w i n g the fact that these have been raised as underlying conditions p e r m i t t e d c l o s e r a p p r o x i m a t i o n of the d e c e n n i a l a v e r a g e . for have A s s h o w n in T a b l e 5 , d u r i n g the f i s c a l y e a r s 1 9 6 9 - 7 2 , t o t a l p r o d u c t i o n is e s t i m a t e d to h a v e e x c e e d e d the g o a l s b y 8 p e r c e n t . The a c t u a l achievement has a h e a d o f the t a r g e t in e a c h y e a r s i n c e 1 9 7 0 . In 1969 and 1970, a barely n o t i c e a b l e s h o r t - f a l l o c c u r r e d — u n d o u b t e d l y a r e f l e c t i o n of the r e s t r a i n t o n c r e d i t a v a i l a b i l i t y in t h a t p e r i o d . run The total severe production - 19 of h o u s i n g is e s t i m a t e d to h a v e exceeded the g o a l b y 12 p e r c e n t in f i s c a l y e a r 1 9 7 1 a n d b y 20 p e r cent in 1 9 7 2 . H o w e v e r , w h e n p r o d u c t i o n of s u b s i d i z e d a n d u n s u b s i d i z e d is e x a m i n e d s e p a r a t e l y , a d i v e r g e n t trend is e v i d e n t : units the o u t p u t o f s u b s i d i z e d u n i t s ( i n t e n d e d to e a s e the h o u s i n g p r o b l e m s of low- a n d moderate-income groups—particularly in c e n t r a l c i t i e s ) h a s b e h i n d s c h e d u l e in t h r e e o f the four y e a r s . production run ahead of schedule. fallen O n l y in 1 9 7 0 did subsidized In fiscal 1 9 7 1 , it d r o p p e d to 95 p e r c e n t o f t a r g e t , a n d in f i s c a l year 1 9 7 2 , p r o d u c t i o n is e s t i m a t e d d r o p p e d f u r t h e r to 72 p e r c e n t of the o b j e c t i v e . W i t h i n the to h a v e subsidized u n i t s , the s h o r t - f a l l h a s b e e n e s p e c i a l l y n o t i c e a b l e in the c a s e o f rehabilitated units. F o r the first four y e a r s o f the n a t i o n a l program, the s u p p l y of r e f u r b i s h e d s u b s i d i z e d u n i t s w a s r u n n i n g a t r o u g h l y t h i r d s of the t a r g e t . two- T h e s u p p l y of new s u b s i d i z e d u n i t s o v e r the s a m e period was about 8 per cent below target. H o w e v e r , this o u t c o m e w a s a t t r i b u t a b l e p r i m a r i l y to the strong s h o w i n g r e c o r d e d in 1 9 7 0 . In the c u r r e n t f i s c a l y e a r , p r o d u c t i o n of n e w s u b s i d i z e d u n i t s is e x p e c t e d to r e a c h o n l y 73 p e r c e n t of the stated target. In c o n t r a s t , the p r o d u c t i o n of u n s u b s i d i z e d u n i t s h a s m e t o r s u r p a s s e d the t a r g e t in t h r e e of the four y e a r s e n d i n g in f i s c a l 1972. In the c u r r e n t y e a r , t o t a l o u t p u t in this s e c t o r is e x p e c t e d to e x c e e d the g o a l by m o r e than o n e - t h i r d — w i t h new c o n s t r u c t i o n r u n n i n g a h e a d of t a r g e t b y t w o - f i f t h s a n d m o b i l e h o m e s b y o n e - f i f t h . F o r the four - 20 y e a r s c o m b i n e d , it is a n t i c i p a t e d t h a t u n s u b s i d i z e d u n i t s m a y the g o a l s b y 13 the t a r g e t b y 17 3 per per cent. For new c o n s t r u c t i o n , output m a y exceed surpass p e r c e n t , and for m o b i l e h o m e s the e x c e s s m a y b e a b o u t cent. A g a i n , w h i l e focusing on the i s s u e f r o m a d i f f e r e n t perspective, t h e s e d a t a a l s o l e n d w e i g h t to the c e n t r a l t h e m e of the a r g u m e n t presented here: o u r t r a d i t i o n a l a p p r o a c h to f i n a n c i n g housing- b a s e d e s s e n t i a l l y o n the m o b i l i z a t i o n a n d r e c h a n n e l i n g o f s a v i n g s b y S&L's and other depositary i n s t i t u t i o n s — i s not ideally suited to m e e t the n e e d s a r i s i n g f r o m the n e w p r i o r i t i e s a s they w e r e r e c a s t the Housing Act of 1968. If w e a r e to a t t a i n t h o s e goals—particularly a s they r e l a t e to l o w - i n c o m e f a m i l i e s in c e n t r a l c i t i e s — w e r e q u i r e a s i g n i f i c a n t l y e n h a n c e d e f f o r t b y the F e d e r a l will Government. I n the f a c e of this p r o s p e c t , I w a s p e r s o n a l l y distressed c o n s i d e r a b l y b y the r e c e n t d i s c l o s u r e s o f m i s c o n d u c t of p u b l i c and private individuals in i n v o l v e d in the F e d e r a l l y - s u p p o r t e d officials programs u n d e r t a k e n w i t h f u n d s p r o v i d e d u n d e r S e c t i o n s 2 3 5 a n d 236 o f the 1 9 6 8 Housing Act. I w a s e q u a l l y d i s t r e s s e d b y the r e p o r t e d r e a c t i o n s of s o m e of the top F e d e r a l G o v e r n m e n t o f f i c i a l s w i t h r e s p o n s i b i l i t y programs. for the A t a d i s t a n c e , of c o u r s e , I h a v e n o w a y of m a k i n g a n a s s e s s m e n t of the d i f f i c u l t i e s a s s o c i a t e d w i t h the s u b s i d i z e d effort. Y e t , the n e e d for the p r o g r a m s is c l e a r l y e v i d e n t . independent housing Thus, I b e l i e v e p e r s o n a l l y t h a t it w o u l d be p r e f e r a b l e to c o n c e n t r a t e o n d i s c o v e r i n g - 21 a n d p u n i s h i n g — t h e c r i m i n a l elements-^-if a n y — t h a t m a y h a v e into a s m a l l p a r t of the o v e r a l l e f f o r t — r a t h e r entire a p p r o a c h — a s are infiltrated t h a n to s c r a p the I u n d e r s t a n d some p e r s o n s i n v o l v e d in the p r o g r a m recommending. R e c o n s t r u c t i o n of S a v i n g s Institutions T h e p r o b l e m s s u r r o u n d i n g the p r e s e n t s u b s i d i z e d program are mainly s h o r t - r u n — a l t h o u g h housing the e x c e p t i o n a l r i s k s inherent in h o m e b u i l d i n g in the i n n e r - c i t y a r e n o t likely to d i s a p p e a r in the near-term. In the l o n g - r u n , I b e l i e v e that w e a s a n a t i o n w i l l h a v e to r e v a m p o u r s a v i n g s i n t e r m e d i a r i e s to enable t h e m to s e r v e our p r e s e n t a n d future r e q u i r e m e n t s — r a t h e r w h i c h are no longer pressing. than to s e r v e p a s t purposes And on this a g e n d a of c h a n g e , the e l i m i n a t i o n of i n t e r e s t r a t e c e i l i n g s o u g h t to h a v e a h i g h As I h a v e s t r e s s e d s e v e r a l t i m e s , c o o r d i n a t e d place. deposit i n t e r e s t rate c e i l i n g s w e r e v i e w e d as a p r a c t i c a l m e a n s o f protecting a s e c t o r of the e c o n o m y d u r i n g a p e r i o d of h i g h o r r a p i d l y r i s i n g m a r k e t interest rates. I p e r s o n a l l y shared that v i e w . A t the time these c e i l i n g s w e r e i m p o s e d , t h e r e w a s a g e n e r a l r e c o g n i t i o n of the p r i c e t h a t w o u l d have to b e p a i d b e c a u s e of the i n e q u i t i e s involved. B u t o n b a l a n c e , that p r i c e w a s g e n e r a l l y seen as a c c e p t a b l e . decision w a s m a d e in the late Summer of 1 9 6 6 — n e a r l y But that six y e a r s ago. In the e n v i r o n m e n t that h a s n o w e m e r g e d , there n o l o n g e r s e e m s to b e the n e e d for the p r o t e c t i o n a f f o r d e d b y these c e i l i n g s . t h e i r c o s t s now o u t w e i g h the b e n e f i t s they c a n provide. In m y judgment, - 22 In the first place, current m a r k e t interest rates which deposit claims must compete are considerably below rates. against ceiling T h u s , f o r the m o s t p a r t , the c e i l i n g s c u r r e n t l y a r e n o p r a c t i c a l c o n s t r a i n t on the r a t e s d e p o s i t a r i e s w o u l d h a v e to o f f e r to a t t r a c t f u n d s . This c o n c l u s i o n is s t r o n g l y i m p l i e d b y the l a r g e v o l u m e o f i n f l o w s in r e s p o n s e to i n t e r e s t r a t e s a t — o r the p r e s e n t c e i l i n g s . In a d d i t i o n , t h e n o n b a n k s a v i n g s currently below— institutions a r e n o w i n a m u c h s o u n d e r f i n a n c i a l p o s i t i o n t h a n t h e y w e r e in 1966 w h e n t h e y h a d to face r a p i d l y r i s i n g c o m p e t i t i v e i n t e r e s t rates. T h e y h a v e h a d t h e i n t e r v e n i n g y e a r s to a c q u i r e h i g h - y i e l d i n g assets, a n d the r e s u l t s a r e quite v i s i b l e . gross F o r e x a m p l e , the a v e r a g e r e t u r n o n S & L ' s m o r t g a g e p o r t f o l i o i n c r e a s e d f r o m 5 . 7 9 p e r c e n t in 1 9 6 5 to 6 . 3 8 p e r c e n t in 1 9 7 0 . M o r e importantly, savings institutions have undergone a n o t i c e a b l e restructuriig of their d e p o s i t c l a i m s , a n d the r e s u l t has b e e n a n i n c r e a s e in their r e s i s t a n c e to i n t e r e s t r a t e competition. For instance, as mentioned above, accounts with minimum term requirements h a v e g r o w n f r o m i n s i g n i f i c a n t a m o u n t s f i v e o r six y e a r s a g o to over ! t w o - f i f t h s o f S & L s d e p o s i t c l a i m s a n d to a b o u t o n e - f i f t h o f m u t u a l savings banks granted 1 deposits. F i n a l l y , the n o n b a n k i n s t i t u t i o n s h a v e b e e n (or h a v e m o r e fully u t i l i z e d ) b r o a d e r a l t e r n a t i v e s w i t h to b o t h t h e i r s o u r c e s and u s e s of f u n d s . Among these, advances respect from the F e d e r a l H o m e L o a n B a n k B o a r d n o w o f f e r far m o r e o p t i o n s a s to m a t u r i t y a n d p r e p a y m e n t f e a t u r e s t h a n w a s the c a s e in the p a s t . a d v a n c e s h a v e p r o v i d e d a n i m p o r t a n t s o u r c e of c o n t i n g e n c y These funds—not - 23 j u s t for S & L ' s b u t a l s o for a s m a l l b u t g r o w i n g n u m b e r o f m e m b e r mutual savings banks. M o r e g e n e r a l l y , the l a t t e r i n s t i t u t i o n s have 1 d i v e r s i f i e d t h e i r a s s e t p o r t f o l i o s g r e a t l y s i n c e the mid-60 s—most d r a m a t i c a l l y b y a c q u i r i n g large v o l u m e s of c o r p o r a t e securities. Savings and loan associations have been granted w i d e r authority m a k e s h o r t e r - t e r m loans for p u r p o s e s such as e d u c a t i o n , m o b i l e and short-term construction to homes, financing. In this c h a n g e d e n v i r o n m e n t , d e p o s i t i n t e r e s t r a t e b e g i n to a s s u m e c o s t s d i s p r o p o r t i o n a t e to the b e n e f i t s . c o s t s e n c o m p a s s c o n s i d e r a t i o n s b o t h of e q u i t y a n d ceilings These efficiency. A s s t r e s s e d a b o v e , the i m p a c t of c o o r d i n a t e d r a t e ceilings is to l i m i t the m a x i m u m r e t u r n a v a i l a b l e on d e p o s i t c l a i m s , b u t b e n e f i t s that r e s u l t f r o m this l i m i t a t i o n do n o t n e c e s s a r i l y to d e p o s i t o r s . T h u s , those individuals who choose deposit the accrue claims— f o r r e a s o n s of s a f e t y , c o n v e n i e n c e , l i q u i d i t y , l a c k o f a l t e r n a t i v e s , or similar m o t i v a t i o n s — a r e r e s t r i c t e d from r e c e i v i n g the b e n e f i t s ( i n c l u d i n g h i g h e r y i e l d s ) t h a t can r e s u l t from i n t e r e s t r a t e competition. G i v e n the c o m p e t i t i v e s t r u c t u r e into w h i c h c o o r d i n a t e d c e i l i n g s h a v e f r o z e n the d e p o s i t a r y i n s t i t u t i o n s , the p u b l i c ' s d e p o s i t s a r e a t t r a c t e d to a c o n s i d e r a b l e e x t e n t b y such a n c i l l a r y d e v i c e s l o c a t i o n of b r a n c h o f f i c e s . as give-aways The d e p o s i t i n g p u b l i c ' s loss is r e f l e c t e d in a c o r r e s p o n d i n g g a i n — w h i c h is v a r i o u s l y d i v i d e d the p r e v a i l i n g l e v e l of c a p i t a l m a r k e t y i e l d s ) a m o n g b o r r o w e r s a n d the o w n e r s or m a n a g e r s of d e p o s i t a r y and (depending partly on home mortgage institutions. - 24 By effectively eliminating price competition, rate ceilings a c t u a l l y f o r c e savers to s u b s i d i z e the cost of d e p o s i t funds to intermediaries. As a b y - p r o d u c t , the less e f f i c i e n t i n s t i t u t i o n s are i n s u l a t e d f r o m the m a r k e t p r e s s u r e s n o r m a l l y g e n e r a t e d b y p r i c e c o m p e t i t i o n o n the part o f thriving f i r m s . Consequently, pressure on t h e s e less e f f i c i e n t firms to r e s t r u c t u r e their a s s e t composition, to c u t o p e r a t i n g c o s t s , or to o t h e r w i s e b e c o m e m o r e e f f i c i e n t is dampened considerably. In the long r u n , this kind of p r o t e c t i o n is s e l f - p e r p e t u a t i n g , for the w e a k e r firms r e m a i n w e a k a n d in need of c o n t i n u e d s p e c i a l a t t e n t i o n in o r d e r to s u r v i v e . If t h e r e w e r e no o t h e r c o n s t r a i n t s — such a s those that might b e i m p o s e d b y c o n s i d e r a t i o n s of m o n e t a r y and f i s c a l p o l i c y or factors r e l a t e d to w a g e a n d price controls — I environment b e l i e v e that in the c u r r e n t r a t e ceilings could b e e l i m i n a t e d . Of c o u r s e , they w o u l d h a v e to b e p h a s e d out g r a d u a l l y to m i n i m i z e d i s r u p t i o n of c a p i t a l m a r k e t s , a n d p a r t i c u l a r l y of the h o m e m o r t g a g e m a r k e t . B u t to f o r e s t a l l the n e e d to r e i m p o s e ceilings if i n t e r e s t rates w e r e to i n c r e a s e d u r i n g some s u b s e q u e n t p e r i o d , the n o n b a n k i n s t i t u t i o n s w o u l d need f u r t h e r r e s t r u c t u r i n g — i f they a r e to h a v e the e a r n i n g s flexibility n e e d e d to m e e t strong rate c o m p e t i t i o n in the l o n g - r u n . T h i s basic r e s t r u c t u r i n g w o u l d e m c o m p a s s a f u r t h e r d i v e r s i f i c a t i o n in b o t h the n a t u r e a n d the t e r m structure of their a s s e t s . In a d d i t i o n , perhaps f u r t h e r p r o g r e s s could a l s o b e m a d e in the a l r e a d y s t r i k i n g diversification 8/ in the t e r m s t r u c t u r e of their c l a i m s . — "§7 T h i s g e n e r a l theme and s p e c i f i c s u g g e s t i o n s , of c o u r s e , h a v e b e e n s t r e s s e d m a n y times b y others as w e l l — m o s t r e c e n t l y b y the P r e s i d e n t ' s C o m m i s s i o n on F i n a n c i a l S t r u c t u r e a n d R e g u l a t i o n — k n o w n w i d e l y a s the H u n t C o m m i s s i o n . - 25 Concluding Observations B e f o r e c o n c l u d i n g , one r e m a i n i n g q u e s t i o n s h o u l d b e h o w w o u l d the s a v i n g s i n s t i t u t i o n s r e s p o n d in a n a t m o s p h e r e f r e e r p r i c e c o m p e t i t i o n and w i d e r a s s e t c h o i c e s . savings i n s t i t u t i o n s — l e s s raised: of Specifically, would encumbered by restrictive asset choices—be m o r e a c t i v e in p r o v i d i n g funds n o t j u s t to f i n a n c e h o u s i n g in g e n e r a l b u t to f i n a n c e h o u s i n g for low and m o d e r a t e i n c o m e in c e n t r a l cities? groups—especially T h e r e a r e two i m p o r t a n t r e a s o n s to b e l i e v e that- l e f t to t h e m s e l v e s — t h e y w o u l d if a n y t h i n g a l l o c a t e less m o n e y to this high priority goal. In the f i r s t p l a c e , p a r t of the restructuring t h a t w o u l d b e n e c e s s a r y for S&L's e s p e c i a l l y to r e m a i n v i a b l e in a w o r l d w i t h o u t c e i l i n g s w o u l d involve a s i g n i f i c a n t i n c r e a s e in the p e r c e n t a g e o f their a s s e t s c a r r y i n g s h o r t m a t u r i t i e s , so t h a t their a v e r a g e p o r t f o l i o r e t u r n s w o u l d b e m o r e r e s p o n s i v e to c h a n g e s in current interest rates. S e c o n d l y , w i t h fewer r e s t r i c t i o n s , o n e w o u l d e x p e c t the i n s t i t u t i o n s to r e s p o n d e v e n m o r e f u l l y t h a n they do to r e l a t i v e y i e l d s — o n c e currently the d i f f e r e n t i a l r i s k s i n v o l v e d in c e n t r a l c i t y l e n d i n g a r e t a k e n into a c c o u n t . M o r e o v e r , there has been strong i n d i c a t i o n t h a t the n e t y i e l d (adjusted for r i s k ) o n m a n y o f the loans in c e n t r a l c i t i e s is far b e l o w w h a t w o u l d be i n d i c a t e d b y contract interest rate comparisons. In f a c t , the o b s e r v e d b e h a v i o r of the p r i v a t e institutions simple financial to d a t e s u g g e s t s t h a t — t o m e e t s o m e of the s o c i a l g o a l s i n h e r e n t in i n n e r - c i t y l e n d i n g — t h e y h a v e had to s e t a s i d e a p o r t i o n of t h e i r p o r t f o l i o to b e c h a n n e l e d into a s s e t s specific carrying - 26 above-average risks. T h i s b e h a v i o r r e p r e s e n t s a n a t t e m p t to o v e r r i d e s i m p l e r i s k / r e t u r n c a l c u l a t i o n s in o r d e r to e x p a n d the s u p p l y of f u n d s to a r e a s w i t h a h i g h s o c i a l p r i o r i t y — b u t w h i c h a r e unprofitable. economically W i t h o u t these s p e c i a l p r o g r a m s , it s e e m s c l e a r f u n d s w o u l d n o t h a v e b e e n a l l o c a t e d to this k i n d o f l e n d i n g . that The e x p e c t e d f u t u r e r e t u r n s i m p l y w a s too far b e l o w t h a t w h i c h c o u l d b e e a r n e d o n o t h e r k i n d s of loans or o n p r o p e r t i e s l o c a t e d o u t s i d e of the i n n e r city. That asset allocation behavior was probably affected (and t h e n o n l y m a r g i n a l l y ) b y the e x i s t e n c e of d e p o s i t r a t e c e i l i n g s only one sense. in T o the e x t e n t t h a t the c e i l i n g s k e p t the c o s t of f u n d s a r t i f i c i a l l y b e l o w the m a r k e t c o s t o f f u n d s , the institutions c o u l d p a s s o n p a r t of t h a t b e n e f i t b y a c q u i r i n g a l a r g e r p o r t i o n of r i s k y assets—similar to the w a y they in e f f e c t a p p e a r e d to p a s s o n the m a j o r share o f t h i s b e n e f i t to s u b u r b a n h o m e b o r r o w e r s b y o p e r a t i n g w i t h h o m e m o r t g a g e i n t e r e s t r a t e s l o w e r than w h a t they m i g h t o t h e r w i s e h a v e In a world without deposit interest rate been. ceilings—particularly o n e c h a r a c t e r i z e d b y s t r o n g d e m a n d s for l o a n a b l e f u n d s — t h e r e r e a s o n to e x p e c t a g e n e r a l a t m o s p h e r e of m u c h k e e n e r p r i c e than now e x i s t s . umbrella G i v e n that p r o s p e c t — a n d is e v e r y competition in the a b s e n c e o f the a f f o r d e d less e f f i c i e n t firms b y the d e p o s i t r a t e ceilings- e v e n g r e a t e r w e i g h t w o u l d p r o b a b l y b e g i v e n b y l e n d e r s to r e l a t i v e e x p e c t e d y i e l d s a s a d e t e r m i n a n t of a s s e t a l l o c a t i o n s . Consequently, u n l e s s t h e r e w e r e s o m e w a y to i m p r o v e the e x p e c t e d p r o f i t a b i l i t y of i n n e r - c i t y l e n d i n g , the p r i v a t e a l l o c a t i o n o f f u n d s to this s e c t o r be e x p e c t e d to d e c r e a s e . could - 27 F o r these r e a s o n s , w h i l e I f a v o r r e m o v i n g i n t e r e s t c e i l i n g s a t a n a p p r o p r i a t e time to lessen d i s c r i m i n a t i o n rate against s m a l l s a v e r s , I a m a l s o c o n v i n c e d that such a s t e p w o u l d n o t improve the c h a n c e s of a t t a i n i n g o u r n a t i o n a l h o u s i n g g o a l s . contrary, those chances might actually be lessened. O n the T h u s , s i n c e the n e e d to p r o v i d e b e t t e r h o u s i n g for low- a n d m o d e r a t e - i n c o m e g r o u p s is s t i l l a n u r g e n t o n e , I a m l e f t w i t h the c o n v i c t i o n that w e w i l l r e q u i r e more— rather than l e s s — F e d e r a l financing assistance and other support this purpose. - 0 - for Table 1 Consumer-Type Deposit Rate Ceilings (Effective January 2 1 , 1970) (Per C e n t ) T y p e of D e p o s i t 4.50 Passbook 30-89 day multiple Commercial Banks maturity Interest Rate Ceilings Mutual Savings and L o a n Savings Banks^/ Associations^/ 5.00 5.00 4.50 V 90 d a y s to 1 y e a r m u l t i p l e m a t u r i t y 5.001/ 5.25 5.25 3 0 d a y s to 1 y e a r maturity 5.00 5.25 5.25—/ M u l t i p l e or s i n g l e m a t u r i t y certificates 1 year but under 2 years 5.50 5.75 5.751/ M u l t i p l e or s i n g l e m a t u r i t y c e r t i f i c a t e s 2 y e a r s and o v e r 5.75 6.00 6.00$/ 1/ single M u l t i p l e m a t u r i t y t i m e d e p o s i t s i n c l u d e d e p o s i t s that a r e a u t o m a t i c a l l y r e n e w a b l e a t m a t u r i t y w i t h o u t a c t i o n b y the d e p o s i t o r a n d d e p o s i t s t h a t a r e p a y a b l e a f t e r w r i t t e n n o t i c e of w i t h d r a w a l . 2/ M a s s a c h u s e t t s s a v i n g s b a n k s and s a v i n g s and l o a n a s s o c i a t i o n s m a y p a y u p to 5 . 2 5 p e r c e n t o n p a s s b o o k a c c o u n t s . S a v i n g s b a n k s m a y pay u p to 5 . 5 0 on a c c o u n t s w i t h a term of a t least 90 d a y s . L o n g e r term a c c o u n t s h a v e the same c e i l i n g s h o w n a b o v e . (Effective A u g u s t , 1970). 3/ A v a i l a b l e in a l l s t a t e s e x c e p t n o t e the a b o v e e x c e p t i o n ' for M a s s a c h u s e t t s S & L s . The a c c o u n t p a y i n g 5 . 5 0 per c e n t in M a s s a c h u s e t t s m u s t c a r r y a $ 1 , 0 0 0 m i n i m u m a n d a m i n i m u m term of 180 d a y s . 4/ 6 m o n t h s to 1 y e a r , $ 1 , 0 0 0 m i n i m u m . _5/ $ 1 , 0 0 0 m i n i m u m a n d 9 0 - d ^ y p e n a l t y . M i n i m u m m a y b e w a i v e d to m e e t s a v i n g s b a n k c o m p e t i t i o n . 6/ $ 5 , 0 0 0 m i n i m u m , 9 0 - d a y p e n a l t y and 10 y e a r s m a x i m u m t e r m . M i n i m u m m a y b e w a i v e d to m e e t s a v i n g s bank competition. Table 2 R e l a t i o n s h i p of A v e r a g e C o n v e n t i o n a l M o r t g a g e I n t e r e s t R a t e s on N e w H o m e s to A v e r a g e R a t e s O f f e r e d b y S a v i n g s a n d L o a n A s s o c i a t i o n s (Per c e n t ) (2) (1) A v g . Conventional I n t . R a t e - N e w HomesF H A Series Avg. Offering Rate on S & L S h a r e s 1/ (3) Differential (1) - (2) 1964 I II III IV 5.80 5.80 5.80 5.80 4.29 4.30 4.30 4.31 1.51 1.50 1.50 1.49 1965 I II III IV 5.80 5.80 5.80 5.92 4.32 4.32 4.32 4.33 1.48 1.48 1.48 1.59 1966 I II III IV 6.07 6.32 6.55 6.68 4.34 4.42 4.59 4.71 1.73 1.90 1.96 1.97 1967 - I II III IV 6.52 6.45 6.53 6.63 4.78 4.79 4.73 4.75 1968 - I II III IV 6.77 7.10 7.30 7.32 4.77 4.79 4.81 4.83 2.31 2.49 2.49 1969 7.60 7.83 8.33 4.84 4.85 4.86 4.88 2.76 2.98 3.32 3.45 1970 - I II III IV 8.55 8.55 8.57 8.42 5.15 5.20 5.21 5.21 3.40 3.35 3.36 3.21 1971 7.77 7.63 7.83 7.75 5.23 5.23 5.24 5.25 2.54 2.40 2.59 2.50 _1/ I II III IV I II III IV 8.18 P a r t i a l l y e s t i m a t e d by F e d e r a l R e s e r v e B o a r d staff. 1.74 1.66 1.80 1.88 2.00 Table 3 New Housing Units Authorized In Permit-Issuing N u m b e r o f U n i t s (In t h o u s a n d s ) Places Total Inside SMSA ' s In central Total cities 10,000 Place Series 1962 1963 1,187 1,285 985 1,059 390 406 40 38 202 226 1,463 1,610 81 80 12,000 Place Series 1963 1964 1965 1966 1967 1,335 1,286 1,240 972 1,105 1,079 1,035 992 775 899 406 380 340 264 308 38 37 34 34 34 256 251 247 197 205 1,610 1,529 1,473 1,165 1,292 83 84 84 83 86 1,141 1,353 1,324 1,352 1,907 918 1,105 1,074 1,068 1,549 308 398 386 417 542 34 36 36 39 35 223 249 250 284 358 1,292 1,508 1,467 1,434 2,052 88 90 90 94 93 Year 13,000 Place Series 1967 1968 1969 1 9 7 0 n/ 1971^ p = preliminary Per cent central c i t y p e r m i t s of Outside total permits SMSA's inside S M S A ' s MEMO: Private Housing Starts P e r m i t s as a per cent of starts Table 4 New Housing Units Authorized In Permit-Issuing Places V a l u a t i o n (In m i l l i o n s of d o l l a r s ) Year Total Inside SMSA's In central Total cities P e r cent c e n t r a l city p e r m i t s of total permits inside S M S A ' s Outside SMSA's 10,000 Place Series 1962 1963 13,438 14,606 11,161 3,988 4,151 36 35 2,277 2,578 12,000 Place Series 1963 1964 1965 1966 1967 15,213 15,242 15,385 12,649 14,509 12,288 12,300 12,411 11,829 4,154 4,030 3,783 3,040 3,471 34 33 31 30 29 2,925 2,942 2,974 2,481 2,679 13,000 Place Series 1967 1968 1969 1970J 1971 15,004 18,319 18,623 19,169 27,870 12,089 14,947 15,068 15,170 22,536 3,471 4,517 4,611 5,351 6,943 29 30 31 35 31 2,914 3,372 3,555 4,000 5,334 p = preliminary 12,028 10,168 Table 5 Housing Goals and Production ( T h o u s a n d s of u n i t s ) Fiscal Year: 1969 : Goal Actual 7» o f g o a l a c h i e v e d Total Production 2,001.0 Subsidized Units New Total Construction Rehabs Total 363.0 368.7 100.1 50.0 33.0 1,540.0 1,502.6 97.6 1,090.0 1,062.9 97.5 450.0 439.7 97.7 60.0 1,535.0 1,795.9 117.0 1,060.0 41.0 68.3 475.0 437.1 92.0 575.0 420.2 73.1 75.0 49.0 65.3 1,680.0 2,330.0 138.7 1,230.0 1,780.0 144.7 450.0 550.0 1,435.0 1,318.4 91.9 228.0 6.558.0 7.434.1 113.4 4,820.0 5,638.6 117.0 1,738.0 1,795.4 103.3 198.0 191.6 96.8 155.0 162.9 105.1 43.0 28.7 66.7 1,803.0 1,805.6 1970: Goal Actual "A o f g o a l a c h i e v e d 1,850.0 1,832.1 99.0 310.0 329.5 106.3 260.0 296.5 114.0 1971: Goal Actual 7o of g o a l a c h i e v e d 2,040.0 2,275.7 111.6 505.0 479.8 95.0 445.0 438.8 98.0 1972: Goal . Actual— % of goal achieved 2,330.0 2,799.2 120.1 650.0 469.2 72.2 1969-1972: Total Goal Actual2/ 7o of g o a l a c h i e v e d 8,221.0 8,904.2 108.3 1.663.0 1.470.1 88.4 E s t i m a t e d b y HUD Partially estimated by HUD Homes 1,440.0 1,436.9 99.8 1,997.2 99.8 If 2/ Unsubsidized Units New Mobile Construction 66.0 151.7 66.5 NOTE: 1,358.8 128.2 101.6 122.2 All g o a l f i g u r e s a r e t h o s e p r e s e n t e d in the Third Annual Housing Goals Report, prepared by the S e c r e t a r y of H o u s i n g and U r b a n D e v e l o p m e n t , June 29, 1971. Chart I Yield Differential and Deposit Growth at Savings and Loan Associations as is Points Chart II Differentials Between Contract Interest Rates on Conventional Mortgages on New Single Family Homes JL/ and (1) Multifamily and Commercial Properties and (2) Corporate Bonds (In Basis Points) Basis Points 50 V \ Multifamily and 1'iuii.xiaiuiijr ouu Commercial Property Mortgage 2/ -50 \» V / S N \ N V W -100 \ X 1V N \ \ N Direct Placement Baa-Quality \ (Straight Debt) 2/ ^ -150h- I 1 2 1/ 2/ I 1 J I I I I I 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1961 1962 1963 1964 FHA Series (U.S. Average). Data for life insurance companies. 1 I I I 2 3 4 1965 I I I 1 I I I 2 3 4 1966 1 2 I I 3 4 1967 II 1 2 M I 3 4 1 1968 1 I I 2 3 4 1969 '• W " X L / , x \ 1 ) > 1 1 2 3 1970 M 4 I 1 2 3 . 1971 4
@FedFRASER