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F<|r release QXI delivery

Statement by

Arthur F, Burns

Chairman. Board of Governors of the Federal Reserve System




t i l

before the

Committee on Banking and Currency

House of Representatives

February 7, 1970

*-fc V

I welcome your ir&llkktibh tdfc'iffegfcftttH* vi&Wss 6f the
Board of Governors of the Federal Reserve System on conditions relating
to the production financing, and use of housing*
As a national resource,= housing ranks high on both econoihic
and social grounds»

The construction of new homes and apartments

absorbs the efforts of a major industry. The fortunes of this industry
influence the course of production and employment in many other
branches of the economy.
Even more importantly, the provision of decent housing for
alj. families is among our most pressing needs, as Congress recognized
in laying down a decennial goal for the production of new and rehabilitated housing. Besides the volume of housing production, the price and
quality of available shelter are of vital significance*

Prices of

homes and rents have of late been rising rapidly, reflecting not only
higher financing costs but also inflated prices of labor, land, and

If these costs are not brought under control., the quality

of all housing will be bound to suffer*
1 assure you that the Federal Reserve Board is deeply concerned about the recent decline in production of housing and the
further rise in costs of buying, financing, and operating new and
existing dwellings•

Housing starts have been declining for three

consecutive calendar quarters now*

By last December the seasonally

adjusted annual rate of 1,245,000 private housing starts was the
lowest in two and one-half years*

The downtrend has come at a time

when demand for both new and existing accommodations has generally
remained strong*

As a result, the vacancy rate for dwellings available

for sale or rent has become disconcertingly low.
At the same time, I think it is well to note that the
performance of the housing industry over the past year has surpassed
the expectations of many experts.

Adherence to a policy of monetary

restraint, which has been a necessary part of our national effort to
bring inflationary pressures under control, has led to very tight
credit market conditions and has clearly constrained home-building.
Nevertheless, private housing starts in 1969 as a whole came within
3 per cent of the total in 1968•

If we include new public housing

starts as well as shipments of new mobile homes, last year f s combined
output of about 1,890,000 units actually exceeded the preceding year's

Measured in these terms, the gross addition to our total stock

of shelter in 1969 was, by a slim margin, the largest in 19 years.
The n^t flow of funds into residential mortgages also reached a new
record of nearly $20 billion, 5 per cent above the 1968 level.
The totals that I have cited for last year conceal,
however, the movement within the year*

We need to recognize that the

month-to-month trend of total housing starts over the past year, even
including mobile homes, has been distinctly downward, and I fear that
the totals may go still lower in the months immediately ahead•
Despite everything that has been done to bolster the flow of funds
into housing, reduced credit flows through mortgage lending institutions


and lenders1 preferences for other types of investment have sharply
curtailed the amount of money available for housing.

The environment

affecting savings flows to these institutions has been particularly
adverse in recent weeks, and many of these institutions are no
longer in a position to make large commitments of funds for future
deliveries of mortgages•

Moreover, reflecting the curtailed availa-

bility of funds, the terms of mortgage credit — that is, interest
rates, downpayments, and credit standards--have tightened, thereby
exluding otherwise willing buyers from the market.
Of course, housing is not the only economic sector in
which spending is being restrained by tight credit conditions.


is well known, many State and local government units have had difficulty in selling bonds to finance their capital outlays.

Funds for

commercial construction have become increasingly hard to come by,
and many projects have been delayed because their promoters were
unable or unwilling to obtain financing at prevailing terms.


business firms—small firms in particular--also have been unable to
obtain all the credit they desired, especially as the ability of
banks to lend has come under increasing constraint.

Even some very

large corporations have announced cancellations or stretchouts of
capital spending programs, at least partly because of the difficulty
and cost of financing*

It is the very essence of monetary restraint

that many economic units find it difficult or impossible to carry
through all of their spending plans.

This is the way that total

spending is curbed and an overheated economy cooled down to a
manageable condition.

It should be kept in mind> also, that the problems of the
housing industry are not related solely to tight credit. Unusually
large wage settlements have been,.cbntributing powerfully to a further
advance in the total cost of constructing dwellings*

New labor

contracts negotiated last year called for an average first-year wage
increase of as much as 14 per cent* according to Bureau of Labor
Statistics figures on settlements affecting 1,000 workers or more,
whether employed in residential or other construction. According
to one widely-cited privately compiled index, the average cost of
constructing a new dwelling rose by more than 8 per cent in 1969,
the largest annual increase since 1948, Land values also continued
their long-term upward trend as did typical operating costs for
both houses and apartments,
Measures taken to aid housing in the past year,
A number of measures have been taken within the past year
to bolster the supply of resources available for housing and to shift
some of the burden of credit restraint away from this sector• Paramount among these actions has been the Administrations program to
bring Federal finances under strict control, as indicated in the
austere budget presented to the Congress earlier this week*

A budget

surplus is essential in achieving a proper mix of fiscal and monetary
policies for restoring conditions that favor sustainable economic

There can be no doubt whatever that the single most important

contribution toward improving housing market conditions would be
success in the present struggle to check inflationary trends


and expectations,,

This f of course, has been the principal objective

of the monetary policy of the Federal Reserve System over the past

Nonetheless, it must be recognized that it takes time to

overcome an inflationary momentum that has gathered headway over a
span of years datitig all the way back to 1964,
As credit and fiscal measures were adapted last year to
our overriding need to cool down the nation's highly inflationary
condition, special steps were simultaneously taken to lessen the
impact of tight credit on housing.

The principal Federal agencies

supporting housing provided an unprecedented amount of assistance
to the mortgage market»

The combined net purchases of home and

multi-family mortgages by the Federal National Mortgage Association
and the Government National Mortgage Association totaled a record
$4,3 billion*

That accounted for more than a fifth of the total net

expansion in outstanding residential mortgage debt*

In addition,

the Federal Home Loan Banks during 1969 extended a record $4 billion
in net advances to savings and loan associations* This assistance
was equivalent to 45 per cent of the total expansion in mortgage
portfolios at all savings and loan associations„
The capacity of the savings and loan associations to
advance funds to the mortgage market was also sustained as the
Federal Home Loan Bank Board reduced S6& minimum liquidity requirements^

The reductions, of one-half percentage point each in June

and November 1969, altogether released approximately $1.3 billion for
additional mortgage investment.

The record amount of funds funneled into the mortgage market
by these Federal agencies partly counterbalanced the reduction in net
savings inflows to savings and loan associations and mutual savings banks
that occurred last year.

It should be pointed out, too, that the

relationship among maximum cellng rates on time and savings accounts
that could be offered by financial institutions was such that the commercial banks suffered the largest decline in the share of total credit

Thus, mutual savings banks and savings and loan associations,

which are major sources of funds for housing finance, were protected
from inter-institutional competition by the structure of ceiling rates
on time and savings accounts--a notable departure from the 1966
As 1969 progressed, however, and as market interest rates
continued to rise further above ceiling rates on time and savings
accounts, all types of financial institutions came under increasingly
severe pressure.

It was no longer a question of one type of institu-

tion gaining at the expense of another but of all losing savings funds
heavily to the securities markets.

Under the circumstances, the

Federal Reserve Board felt that a general upward adjustment in ceiling
rates could no longer be delayed and, after consultation with the
other regulatory agencies, an increase in the ceilings for member
banks was announced late last month.

The FDIC and the Federal Home

Loan Bank Board adopted similar measures.

As a result, all institu-

tions now have somewhat higher rate ceilings, including the ability
to offer new one- and two-year time instruments at premium rates.
Maximum permissible rates on large CD's ($100,000 and over) were also

raised appreciably, and the savings and loan associations were permitted to offer such instruments at higher rates for the first time.
The higher ceilings generally are intended to help preserve, and
eventually to enhance> the flow of savings to the private financial
institutions* and thereby to give support to the flow of housing
Also in January, contract interest rates on FHA-insured
and VA-guaranteed mortgages were raised for the first time in 12

The increase brought returns on such investments closer in

line with yields available on other types of capital market instru~
ments, and should help to make such mortgages more acceptable to
lenders in competition with other investments. Unfortunately, the
one percentage point rise in contract rates on these Governmentunderwritten mortgages failed to match fully the increase that had
taken place over the previous year in bond market yields.
There have been a number of other steps taken in recent
months to aid housing. Last September, the Administration ordered a
reduction of 75 per cent on new contracts for Federal construction
projects until conditions ease. This step was followed by a vigorous
effort, which has proved moderately successful, to persuade State
governments to carry out similar postponements of construction work
under their jurisdiction. All this was done with a view to releasing resources, wherever possible, for homebuilding.
Finally, in 1969, nearly a dozen States raised their usury
ceilings applicable chiefly to conventional home mortgages. The

-8increases brought these limits to more realistic levels that: allowed
buyers of residential properties who are dependent on this predominant
type of mortgage financing to compete on more equal terms with other
users for the scarce supply of credit funds *

What more can be done?
These recent measures have contributed significantly to
the surprising performance of housing under the very stringent credit
conditions of 1969«

However, as the continuing problems in the

housing market clearly indicate, more remains to be done, particularly
if we are to enhance the potential for achieving the long-run housing
objectives of the nation.
In the immediate future, it will be vital to preserve the
taut fiscal position outlined in the Administration's budget*


a tight rein on Government expenditures will, of course, require
discipline on the part of both the Executive and Legislative branches
of Governments

Such a fiscal policy is an essential element in bring-

ing inflationary pressures under control and in laying a basis for
moderation in over-all credit conditions. When this happens, the cost
of credit for housing transactions will, obviously, move down.
But as long as credit remains in rather short supply, the
financing of new housing is likely to be restricted.

Housing is a

sector highly sensitive to the cost and availability of credit*


part this is because housing expenditures involve relatively large
amounts of long-term credit with fixed interest charges that are large
relative to other and moire variable costs over the life of the dwelling.

And in part it is because the depc^it^ty ihstitutibns, which
date the lion's share of total mortgage demands, are uil&ble to compete
for funds on the same high interest terms that borrowers in the operi.
market are prepared to pay.
For this reason, the Federal Reserve Board supports the
continued large-scale extension of credit by specialized housing
finance agencies, such as FNMA. and the Federal Home Loan Banks, under
current conditions. The Board also supports the principle of aiding
disadvantaged families by subsidizing their mortgage debt burden by
means of appropriated funds* We do not favor, however, tapping Federal
Reserve credit for the support of a restructuring of credit flows, no
matter how worthwhile the immediate objective may be. Special-purpose
lending by the Federal Reserve for housing would be likely to lead to
demands for other types of special lending as well. Taking such
assets into Federal Reserve portfolios would require us to make
correspondingly heavy offsetting sales of Treasury securities in order
to keep control of the reserve base, and that would lead to a weakened
market position for Treasury securities * I assume, of course, that no
one is suggesting that the credit needs of housing or other special
sectors, however worthy, should be monetized by superimposing them on
the money and credit totals that would otherwise be appropriate for
the nation as a whole• To compel the Federal Reserve to follow such
a policy could lead to a disastrous inflation.
In addition to providing for a continuing substantial flow
of Government-assisted funds into housing--while making certain that

-10it is financed through the housing agencies rather than with newly
created Federal Reserve credit—we also believe that everything
possible should be done to enhance the attractiveness of mortgages
to private investors.

In this connection, there is considerable

room for improving the characteristics of the mortgage instrument
and the institutional practices associated with issuing, holding, and
retiring mortgages. For example, greater standardization of laws and
customs is needed with respect to the origination of conventional
mortgages and with respect to the foreclosure of all types of
mortgages. We also support the provision of facilities—such as that
envisioned by GNMA. guaranteed securities—that would package mortgages
in sufficiently large lots to be attractive to pension funds and other
institutional investors*

It would also be desirable if the States, as

well as the Federal Governments would continue to weed out restrictions
that unnecessarily limit mortgage lending by size of structure, location
of property, or terms of credit.
Of course, nothing will help very much in stimulating
private investment in mortgages, unless the yield available on such
investments can be as attractive as that on alternative outlets for
funds. Some 21 States and the District of Columbia still impose ceilings of 8 per cent or less on home mortgages, particularly on conventional loans which are the principal form of this type of credit*
Although these limitations were originally designed to protect borrowers,
we should recognize that economic conditions change and that interest
rate ceilings that are below the market operate in practice to discriminate against borrowers by denying them access to sources of credit


available at going market rates* We think that artificial barriers to
competitive rates on mortgages should be lifted, or at the very least,
administered flexibly.
To give an added incentive to member banks in meeting the
publicfs needs for long-term mortgages as well as other types of
credit, the Board of Governors again wishes to recommend that the
Congress permit member banks of the Federal Reserve System to borrow
from the Federal Reserve Banks on the security of mortgages or any
other sound asset at the regular discount rate. Mortgages are only
an example of the kinds of collateral involved.

The adoption of this

recommendation would not, of course, solve all the problems of the
mortgage market by any means, but we believe that this step«-which
should be taken in the interests of efficiency in any event—could
prove to be of some benefit in stimulating mortgage lending by member
Another helpful step would be to liberalize the authority
of national banks to make real estate loans• For conventional
mortgage loans, the loan-to-value limit should be raised from 80 to
90 per cent, and the maximum maturity from 25 to 30 years; for loans
on large construction projects, the maximum maturity should be
extended from three years to five years. You will recall that the
Commission on Mortgage Interest Rates recommended these amendments
in its report filed last year, and your Committee included provisions
to carry out this recommendation in H. R. 15091, as reported to the
House, These provisions were retained in the bill passed by the House,
but were dropped by the Senate-House conference committee*

Taking a still longer perspective, further measures will
be required to release the full potential of private enterprise to
respond to our nation's shelter requirements*

Substantial additions

to the supply of skilled construction labor, for example, will be
forthcoming under the expanded and redirected manpower training
programs of the Federal Government. Another promising attack on the
housing problem is HUD's "Operation Breakthrough,ff which aims to cut
construction costs by relying on mass production and factory
technologies as well as by modernizing building codes and labor
practices. These and other approaches should help to dampen rising
construction costs, which in part have reflected, but also have been
a major source of, inflationary pressures.
The Board al,so recommends that further detailed study be
given to establishing a broad secondary market for conventional
residential mortgages, recognizing the technical problems involved.
Such a market for conventional mortgages would depend in part on the
standardization of the instrument, including more uniform procedures
involving property inspection and loan origination.

In the interim,

to gain experience with a two-way market, the Board suggests that the
FWIA experiment with operating a trading desk for outstanding
Government-underwritten loans. By facilitating portfolio adjustments,
FHMA-'s trading desk could enhance the appeal of this type of mortgage
issued under standardized terms and conditions that conform to broad
public policy.
In summary, improvements over recent years in Governmentsponsored financing of housing and in laws and regulations surrounding

^lathe private financing of housing have contributed to a significantly
better maintenance of housing starts in 1969 than in the previous
tight money period of 1966; I have no doubt that further improvements
in the structure of the mortgage market are possible and practicable,
and that these will enhance the performance of the housing industry
in the future.
The Board is studying ways and means to lighten the burden
of monetary restraint on the mortgage market without impairing the
use of monetary policy in achieving national economic objectives*
There is great need to focuss as we hope many will, on seeking out
ways to increase the attractiveness of mortgage instruments to private
investors> to shift the flow of credit towards the housing market,
and to lessen the cyclical impact of alternating tight and easy credit
conditions on housing production and finance•