Given the demographic patterns which affect the mortgage market, the traditional avenues for investment and their impact on housing funds, the priority position that mortgage credit occupies in the capital market, and past proposals which might act as incentives for growth in the area of mortgage credit, a few avenues of exploration begin to emerge.

HOW TO INCREASE THE TOTAL AMOUNT OF FUNDS AVAILABLE IN THE CAPITAL MARKETS AND, IN
TURN, THE MORTGAGE MARKET.

Earlier discussion indicated the difficulty of reducing demands for funds by competitors of the mortgage market in order to increase funds available to the mortgage markets. Even though this approach may be difficult and have limited potential, : it should be explored. As an example, the next largest user of capital funds is the government itself. Unlike most users of credit, the government has the alternative of reducing expenditures and/or raising taxes in order to reduce borrowing. If carried far enough, the government could even become a net supplier of credit to the economy if it ran a surplus and began to pay down the national debt. As noted, however, the government is a special case that cannot be used as an example to be followed by the private sector of the economy that does not have mandatory taxing powers.

Reducing competition for funds by the nonhousing private sector requires more ingenious methods than for government.

HOW TO REDUCE THE COMPETITION FOR FUNDS BY THE NONHOUSING SECTOR OF THE ECONOMY

. Even if total capital funds in the economy were ample and competition for funds by other users were limited, the availability of funds in the mortgage market is still partly dependent on the ease with which investors can put their funds out through mortgages. In some instances, the impediments to investing funds in mortgages have been very real. However, these obstacles can be overcome.

One of the biggest problems in the supply of mortgage credit is due to the heavy dependence of funds from one source, thrift institutions, which are subject to the vagaries of consumer savings and investment activities and disintermediation. Moreover, compared to the capital markets, the mortgage market is relatively unsophisticate No true nationwide market exists for mortgage funds, such as in the market for securities. Some success in integrating the mortgage and capital markets has been made, however.

HOW TO IMPROVE WAYS OF ATTRACTING FUNDS TO THE MORTGAGE MARKET

A corollary to the attraction of funds to the mortgage market is removal of barriers to funds going into the mortgage market. In the current economic climate the outstanding examples of barriers are those states that have low usury ceilings on mortgage interest rates. These low usury ceilings simply ration mortgage credit toward other states.

In a broader context, the issue is one of avoidance of credit rationing in the mortgage market: During past periods of economic restraint and credit tightness, all forms of mortgage credit suffered. However, this indiscriminate restraint makes little sense for financing existing home sales. The turnover of housing that is already built satisfies housing demand without placing a burden on scarce resources. Thus, the policy issue becomes one of finding ways of insulating the financing of sales of existing real estate from the efforts to restrain economic activity during the peak phases of a business boom in the economy.

HOW TO INSULATE THE MORTGAGE MARKET FOR EXISTING HOME SALES FROM THE IMPACT OF
GOVERNMENT ECONOMIC RESTRAINT

If the objective of government economic policy is to restrict demand for scarce. commodities and scarce labor, then credit should be rationed for uses that would mean additional demand. However, sales of existing housing represent a way of satisfying demand for shelter without increasing demand for materials and labor to produce new housing."

Very simply, in periods of economic restraint, credit rationing could favor use of mortgage funds for existing home purchases.

III. CRITERIA FOR RECOMMENDATIONS

The following criteria were used as guidelines for the Task Force recommendations: Recommendations had to be feasible from the points of view of both Congressional and Executive branches of the Federal government and from the point of view of the Association's membership.

Most recommendations focused on means of increasing the supply of mortgage credit by attracting new types of mortgage investors.

Recommendations were analyzed from both emergency and permanent points of view.

Emphasis was given to private sector solutions to the supply of mortgage finance, with recognition that federal involvement and/or subsidies could sometimes be necessary.

IV. SPECIFIC RECOMMENDATIONS

Recommendations for Emergency Implementation

In times of a really severe credit availability problem, the Task Force recommends three short-term emergency standby recommendations: special assistance programs with HUD, the use of tax exempt municipal bonds, and credit priorities.

The special assistance programs would be similar to those used in the past under the GMMA Special Assistance Programs such as the Tandem Program and the Brooke-Cranston Program. In these programs GMMA buys mortgages at a greater than market price to support mortgages and then resells the mortgages to the market at the going rate. GNMA would then absorb whatever loss was entailed. The mortgages could either be for a specific type of mortgage such as a particular type HUD subsidy program, or for all mortgages in general such as would be the case under the typical Brooke-Cranston Program. The Task Force supported this program, however, conditional upon the special assistance programs being used for both 'new and existing housing" and "single and multifamily". In the past, HUD and GMMA have administered this program for new multifamily housing only.

The Task Force also recommended the use of tax exempt municipal bonds as a short-term emergency standby proposal during time of an economic downturn. The program would be designed with a "trigger" cechanism based on a combination of S&L deposit flows coupled with both new and existing home sales. A "reverse trigger" would also apply, which would deactivate use of this program when economic conditions improved. Use of tax exempt municipal bonds to finance housing as a permanent tool

is discussed in the next section.

As another recommendation for use in times of credit stringency, the Task Force recommends some sort of credit priority. This could take the form of higher down payments and higher interest rates for "speculative" (non-owner occupied) loans, or similar types of earmarking. Credit priority could also take the form of giving an advantage to housing investment in comparison with other forms of investment. The Task Force felt strongly that any such allocation should be used directly for housing, not to provide for the purchase of automobiles or vacations or similar "consumer" type uses. As mentioned, the Task Force feels that inflationary pressures, could make such action necessary, but feels that any for of credit priority should only be used in the most extreme cases of credit stringency and that further review of this tool may be appropriate.

Recommendations for Permanent Implementation

In terms of long-term recommendations the Task Force recommended tax exempt municipal bonds (with certain guidelines), several incentives to increase savings, development of a market for conventional mortgage backed securities and creation of a secondary market for vendors' liens, and other recommendations.

The Task Force favors the use of tax-exempt municipal bonds in principle, but with certain limitations and constraints. Traditionally, tax-exempt mortgage bonds have been directed toward the development of multifamily mortgages for low income rental housing. The primary mechanism for issuing these bonds has been the state housing finance agencies. Since 1970,34 states have created housing finance agencies and in 1978 alone, they raised more than $4.5 billion. Although some northern states have had considerable activity in this area, most of the heavier utilization of these programs has taken place in the Southwest and West.

Additionally, state housing finance agencies have issued $5.7 billion in single family bonds since 1970 with $2.8 billion offered in 1978 alone.

This

A new development in tax-exempt mortgage bonds has begun to snowball. initiative is in the area of tax-exempt single family mortgage bonds offered by municipalities.

In

Only approximately 15 states currently allow municipalities to issue single family mortgage revenue bonds, but the number is growing rapidly. 1978, $550 million was issued in tax exempt single family mortgage bonds. April 1, 1979 localities had sold over $1.6 billion of these issues and are expected to market a total of approximately $4 billion this year.

By

The Congressional Budget Office anticipates that by 1984, some $20 to

$35 billion in issues will be marketed by muncipalities and state finance agencies.

Home buyers have low interest mortgage loans available

City officials find that these issues attract affluent families to

their cities

Investors appreciate a new source of tax-free earnings

More homes are sold at lower costs -- a stated boom to the housing industry.

Conversely, there are some drawbacks to the programs:

Tax-free bonds are costing the federal government tax losses of approximately $22.5 million for each $1 billion in bonds issued. In 1980 revenue losses of $340 million are expected and by 1984 between $1.6 and $2.1 billion will probably be lost unless some restraints are imposed

These bonds may be skewing housing aid toward middle and upper income families. for that reason, HUD does not believe that the government is getting its money's worth by funneling aid to that sector of the population.

Savings and loan institutions and mortgage bankers are concerned that their earnings for servicing these loans will not compensate for their losses in conventional loans.

As a result of these fears, the Administration has established a Task Force comprised of Treasury, HUD and the Office of Management and Budget. The result of this group's work will be in the form of a legislative proposal to be introduced on behalf of the Administration which would include an income ceiling for recipients of these mortgages and a targeting feature for distressed neighborhoods. President Carter last January, announcing his Budget stated that such bonds ought to be limited to financing housing for low and moderate income people or achieving National Housing Policy objectives.

The usage of municipal. tax-exempt single family bonds will also come under close Congressional scrutiny in the immediate months ahead.

Both the House Ways and Means Committee, having jurisdiction over tax policy, and House Banking Committee, having jurisdiction over housing policy, have announced hearings on this issue for early summer.

Representative Al Ullman, Chairman of the House Ways and Means Committee, has recently offered legislation which:

Removes tax-exempt status for the interest income on mortgage subsidy bonds or any obligations from which proceeds are used indirectly or directly for mortgages on owner-occupied residences

Allows for tax-exempt interest on bond issues from which substantially all the proceeds are to be used to provide veteran's residences, and

Permits tax-exempt financing for residential real property projects for lower or moderate income rental housing.

The Ullman bill is co-sponsored by Representatives Reuss, Chairman,House Banking Committee; Ashley, Chairman House Banking, Housing Subcommittee; Conable, Banking, Minority member House Ways and Means Committee and Stanton, Ranking Minority member, House Banking. It is anticipated that the Senate Banking Subcommittee on Housing, chaired by Senator Harrison Williams (D-NJ), will be conducting hearings on this issue within the next few months.

The Task Force recommends that for municipal bonds (to finance housing) to be eligible for tax exempt status the following criteria must be met:

Proceeds from the bonds must be used for low income families and for low priced housing (low income families and housing are defined, in general, as those which do not exceed 80% of the median level or which do not exceed 100% of median in community revitalization or development areas.)

The loans would be for a maximum of five years (with a 40-year amortization schedule) to permit periodic review of the borrowers 'eligibility. The refinancing would be guaranteed if eligibility requirements are met.

The third criteria these bonds must fill is that they should provide no "windfall" profit for lenders or for underwriters. For example, a lender could not charge more than current normal rates, such as three-eighths-of-one-percent for servicing.

The funds could not be used for refinancing a home owned before the program went into effect or financed originally by the current owner under any means other than tax exempt municipal bonds.

The Task Force feels that the use of proceeds of tax exempt bonds might be useful as an alternative for current Federal housing subsidy programs and could either replace or supplement current programs.