not object to the new language, but we would urge retention of the "modest design" concept.

In the final analysis, the success of flexible mortgage limits will de pend heavily on how the formula is applied and administered. It will be important to establish as many market areas as necessary to reflect adequately the different conditions in each area. Periodic review and updating to keep abreast of changing developments will also be essential.

For maximum administrative efficiency, local and regional HUD offices will need to have as much authority as possible. Moreover, a careful balance will need to be struck, in administering the new flexible formulas, between realistic adjustments in cost and mortgage limits and the need to discourage inflationary price advances. Recognizing these caveats we believe the flexible mortgage formula approach has inherent merit and deserves to be implemented.

We note that the current rent supplement program would not be continued as a separate entity, giving way instead to the new subsidized multifamily housing program in section 502, which is pat terned more after the present section 236 than the rent supplement

program.

However, the bill does provide that with respect to 20 percent units in any project, the Secretary could make assistance payments on behalf of tenants whose incomes are too low to afford the basi rental.

This would mean that fewer low-income families would be able to afford even the subsidized housing this section would provide than can be accommodated today in rent supplement projects, because present funding levels for rent supplements represent nearly 40 percent of the total appropriations for section 236 and rent supplements com bined. In our view, there should be a higher percentage allocated for the larger subsidies under section 502.

We believe that the emphasis of this program should be to maximize housing for low-income families, although we agree that it is wise so cial policy to encourage a variety of income groups in each project. It would be a mistake, in our judgment, to raise income limits to the me dian in the community and cut back the share of funds that might otherwise go to low-income families. We would recommend that percent of all units be eligible for deeper level subsidies rather than percent.

We endorse the provisions of S. 2049 which would permanently re move statutory interest rate ceilings on federally insured loans and permit the Secretary of HUD to set rates necessary to meet market de mands. We are particularly pleased that the Secretary would be at thorized to establish differential rates for the various mortgage pr grams. This would reflect differences in market acceptance and ris and assure an improved channeling of funds into those programs less acceptable than others to private lenders.

The National Association of Mutual Savings Banks has long advo cated the elimination of FHA/VA interest rate controls. Ceiling rates have never really served their intended purpose of protecting borrow ers against high interest costs. When ceilings have been out of step with the market, funds have either been channeled into higher yielding financial instruments or consumers have one way or another paid the

ost of discounts necessary to bring administered mortgage rates up to e level of market yields.

Only by large Federal expenditures through special assistance prorams can arbitrarily low mortgage rates be sustained, such as through he new GNMA tandem plan. This program, under which FHA and A mortgages up to $22,000 or $24,500 are purchased at above-market rices, segments and adversely affects the federally insured mortgage arket. The lower-priced housing market is singled out for support, ut no income eligibility limits are established under the new GNMA indem plan, as they are under regular subsidy programs.

It is conceivable that higher income families could be the beneficiries of this new Federal program, either through the purchase of >wer priced homes than they can afford, or even of second homes. With respect to the dual rate system proposed in the bill, we favor his approach as we did last year, if the Congress is unwilling to proide for a completely free interest rate. We are aware of the objections hich have been posed by some to the dual rate system on the grounds hat it is overly complex and would prove confusing to market articipants.

Such fears are unwarranted. Depending upon individual circumtances, we believe that lenders could readily decide whether to origiate mortgages at a market-determined level without discounts, or at ceiling rate established by the Secretary of HUD, with discounts. The choice is clear, voluntary and uncomplicated.

In addition, in our testimony last year we supported and support gain that discounts imposed on FHA and VA mortgages be subject f negotiations between the buyers, seller, or any other party to the ransaction.

Mr. Chairman, this concludes our statement. We recognize that it oes not include comments on a number of housing and community evelopment proposals, nor on the administration's revenue sharing roposal. We believe that a number of these proposals have merit, ut our membership simply has not had an opportunity to evaluate hem in sufficient detail to offer the committee useful comments. The CHAIRMAN. Thank you very much, Mr. Quinn.

Now, Mr. Hovde, would you proceed with your statement? Your tatement will be printed, as I stated. You present it as you see fit.

TATEMENT OF DONALD I. HOVDE, CHAIRMAN, REALTORS' WASHINGTON COMMITTEE, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, ACCOMPANIED BY JOHN C. WILLIAMSON, SECRETARYCOUNSEL

Mr. HOVDE. Thank you, Mr. Chairman. I am Donald I. Hovde of fadison, Wis., chairman of the National Association of Real Estate Boards, and I have with me Mr. John C. Williamson, our secretaryounsel to our national association.

Mr. Chairman and members of the subcommittee: I am grateful or this opportunity to present the views of the National Associaion of Real Estate Boards in regard to several bills now under onsideration.

Senate bill 2049. We endorse in general this bill to revise and consolidate where necessary the many complex housing programs which

make up the National Housing Act. However, we have some observstions and criticisms which may, hopefully suggest some changes by the subcommittee.

Section 4 of the bill gives the Secretary the authority to esta lish maximum interest rates for the FHA program. However, there language in the section which puzzles us because it appears to give the Secretary the authority to establish different interest rate ceiling for different mortgages under the same program. We seriously question the desirability of vesting such authority with the Secretary, and s statement of August 2 before this subcommittee is silent as to ho this would be implemented. If it is intended that this authority would be limited to regional variations, appropriate limiting language shoul be employed.

Subsequently, in the bill there is authority for the so-called du system whereby an optional free rate would be permitted provide that no discounts would be levied.

While we supported the dual system in prior testimony, we prefer a provision in last year's revision bill and regret that it was not i cluded in the draft submitted by the department. I refer to the pr vision which would permit the payment of discounts or points on FHA or VA mortgage to be the subject of negotiation between the buyer, seller, and any other party to the transaction.

The fairness of this is so obvious as to make unnecessary and fur ther elaboration on our part. Had this been enacted last year, it won not have been necessary for the department to invoke the extraordinary step of subsidizing a portion of the seller's or builder's unreasonable obligation in this area. While we concede the benefit that flows from the extension of GNMA's tandem plan to many sellers, we find it difficult to accept it as a rational substitute for permitting both buyer and seller to negotiate this matter.

Conceding that the tandem plan was forced by the absence of: statutory provision to deal with the payment of discounts, we turn for one moment to the tandem plan itself. For the first time special assistance funds are used to purchase mortgages on existing homes which represents a laudable break with the past.

Nevertheless, our attention has been directed to the inadequacy of the statutory limits of $22,000 and $24,000 for a four- or more-bedroom unit. It was inevitable that one special assistance funds were te be used for the unsubsidized mortgage, pockets of inequity would raise particularly in areas where costs dictate higher mortgage amounts

We must conclude that if the tandem plan is to succeed in its o jective, the GNMA charter should be amended so as not to preclude the benefits of this program going to families who happen to live in the higher cost areas of the north and west.

In last year's consolidation bill the Secretary was authorized to establish for each housing market area the prototype cost of a dwelling of modest design. In this year's version the "modest design" limita tion is omitted. Instead, "good design" is encouraged, and the Secre tary is mandated to take into account "extra durability for econom cal maintenance of assisted housing."

We recommend that the subcommittee restore the "modest design" limitation in order to assure continued efforts toward reduced hous ing costs. Maximums tend to become floors. Every form of persuasic

hould be employed in the drive to construct adequate housing of nodest design for the subsidy programs.

The bill makes eligible for subsidies all "lower income families" and hese are defined as families whose incomes do not exceed the median ncome for the area. Further upward adjustments are authorized which learly make eligible for subsidies substantially more than half of the ountry's population.

This unfortunate result brings the response that the income limit is not that important because a family must pay something less than 20 percent of its income toward principal, interest, insurance and taxes. Nevertheless, this program has a great potential for divisiveness in our ommunities, and the contributing factor is that the program does, in act, hold out a false hope to millions of American families that they, oo, are entitled to some subsidy.

The program thus feeds the well-known revolution of rising expecations and unless it is reduced to more modest proportion in terms of he range of its beneficiaries, then we had better steel ourselves for a new round of new and daring programs to feed this revolution.

Last year's revision bill provided a formula whereby 20 percent of he contract authority could be employed to provide a deeper subsidy for low income families. Under this formula a maximum subsidy equal o 60 percent of monthly home ownership expenses could be provided. The Secretary, in his testimony last year, was most eloquent in his justiication of this deeper subsidy. He said:

The formula would for the first time permit this low income group to be served In a home ownership as well as a rental program, and represents a significant extension of home ownership opportunity to lower income families.

This year the administration's consolidation bill contains no such provision. Yet, the need to direct this program to lower income families s more pressing.

We urge the subcommittee to not only restore this provision to the ill but to increase the 20 percent to 40 percent. This would insure that at least 40 percent of the contract authority would be used for a lower income group than would be otherwise accommodated. We also recommend that "lower income families" be redefined to mean those families whose total income does not exceed 80 percent of the median income in the area.

One of the reasons that the section 235 program has become so controversial is because of its lopsided production orientation. Poor families could be assisted in purchasing an adequate moderately priced existing home, but the door is slammed shut because the family must have at least five minor children or it may be disqualified because of other restrictions imposed by the FHA in the wake of the Secretary's insistence that only 10 percent of section 235 authority be allocated for existing housing.

It may be that the program was enacted originally as a means of restoring the starts which were lost when interest rates went from 7 percent to 812 percent in the 1966-70 period. Certainly, with a 7 percent rate and the GNMA tandem plan, the Congress might well consider restoring the section 235 program to what should have been its only justification-assisting a poor family to become a homeowner.

It is no answer to the plea for a greater role for the existing home in this program to recite the recent disclosures of substandard new and existing housing being acquired by poor famiiles under the program.

The FHA never had the right-indeed, it is prohibited-to insure mortgage on a home that does not meet minimum property require

ments.

We, therefore, recommend that this year's housing bill include language effectively removing any distinction between new and existing homes in the administration of the program. The ultimate test shoul be the ability of the home purchaser to finance the home of his choice if the home is adequate to meet his needs, meets minimum property requirements, is moderately priced, and the family meets the incom qualification.

Early this year our association adopted a policy statement endorsing the administration's general and special revenue sharing proposal. A copy of the policy statement is attached.

We, therefore, recommend approval of S. 1618 or similar legislation which has as its objective the consolidation into a more flexible syster of the major existing categorical grant programs relating to community development.

We believe it is essential to the preservation of our federal system that a start be made to reverse the flow of power in America. This can be done by vesting in local elected officials the power to make the detaile decisions affecting community development-decisions now made Federal officials.

While we appreciate that some measure of Federal responsibility should follow the flow of money from the Treasury back to the cite and towns from whence it originated, we believe that this can be a complished and still free local officials to use the money on the basis of locally determined community development needs and priorities. thereby shifting decisionmaking authority from Federal officials to local officials.

Today substantial local energy is required to cope with the detail of project applications and to keep up with the boundaries of many grant-in-aid statutes and regulations. This energy should be diverted to greater achievement in community development through local de sionmaking.

We are aware of S. 2333, an alternative proposal introduced by th chairman. This has the same objective as special revenue sharing to the extent that it would consolidate several existing community develop ment grant programs into a single, more flexible system of Federal sistance. Its enactment would make substantial contribution toward the objective we seek, the vesting of greater decisionmaking power local officials.

with

Thank you very much, Mr. Chairman. That concludes my presenta tion and we submit it for the record along with our statement of policy on shared revenues, which is attached hereto.

(The complete statement of Mr. Hovde follows:)

Statement of DONALD I. HOVDE, CHAIRMAN, REALTORS' WASHINGTON COMMITTE

OF THE NATIONAL ASSOCIATION OF REAL ESTATE BOARDS

Mr. Chairman and Members of the Subcommittee:

I am grateful for this opportunity to present the views of the National Associ tion of Real Estate Board* in regard to several bills now under consideration.

*The National Association of Real Estate Boards consists of approximately 1,600 bar of realtors located in every State of the Union, the District of Columbia and Puerto R The combined membership of these 1,600 boards is approximately 500,000 persons actors engaged in the business of brokering, managing, and appraising residential, commercia industrial and farm real estate.