Systematic Mess

As millions of families who tried to buy or sell a house last year learned to their dismay, mortgage credit is something like an umbrella that collapses when it rains. Three times since 1950, the output of new housing has dived after the Federal Reserve tightened up on money to thwart inflation. No other major U.S. industry is quite so vulnerable to swings in monetary policy. Last year the money squeeze gave housing its worst setback since World War II.

The cost of mortgage loans rose to a 40-year peak and the construction rate of private new houses and apartments sank from 1,735,000 to 826,000 units a year.

Housing has since recovered part way from its lonely depression, thanks to lower interest rates and a renewed flow of mortgage money. Lately, however, mortgage rates have rebounded more than two-thirds of the way back to their 1966 heights. If the rise in interest rates continues, as many analysts expect, it can only siphon funds away from mortgages again. Warns John G. Heimann, vice president of the Manhattan investment-banking firm of E.M. Warburg and mortgage consultant to Housing Secretary Robert C. Weaver: "The fragmented, highly specialized mortgage system, responsible to so many agencies, has fallen behind, never to catch up."

Structural Flaws. Congress has also begun to suspect--quite correctly--that something fundamental is amiss. New Jersey Representative William B. Widnall, ranking Republican member of the House Banking Committee, last month voiced fears that financial strains may inflict "permanent damage" on the housing industry and "lead to an intolerable housing shortage in the years ahead." Last week in the Senate, Alabama Democrat John Sparkman's housing subcommittee resumed what promises to be a lengthy search for cures. Most of the witnesses agreed that mortgages have become the chronic invalid of finance because of structural flaws in the mortgage market. "Under present regulations of the Federal Home Loan Bank Board, the growth in savings and loan associations that supported home-mortgage financing is past," warned Washington Economist Robinson Newcomb. According to Newcomb, the "future looks dark" unless there are "changes in the rules of the game."

S & Ls normally supply 44% of the money to finance homes; mutual savings banks and commercial banks each provide another 14%. Thus 70% of the $275 billion tied up in residential loans (mostly of 20-to 30-year duration) comes from passbook savings subject to almost instant withdrawal. When inter est rates rise rapidly, S & Ls and savings banks are caught in a pincers. To keep their savings accounts, they must pay higher interest, but their income from existing loans remains fixed. So they curb new lending.

Many other investors regard mortgages as a last-choice outlet for money. Pension funds, the nation's fastest-growing pool of savings, have put a mere 8% of their $100 billion hoard into mortgages. Because of monthly collections and bookkeeping, lack of standardization and archaic foreclosure laws in many states, mortgages are clumsy and costly to handle. Restrictions on interest rates (6% maximum in ten states, 7% in six) divert funds elsewhere. Only Government-backed mortgages, less than a fifth of the total, can be readily traded among investors. The 6% interest ceiling on FHA and VA loans, handiwork of the congressional easy-money bloc, not only makes some investors shun them but also gives rise to the unwelcome system of "discounts" to lift yields. Mortgages' cumbersome complexity keeps their interest cost to home buyers higher than need be.

Stymied by Squabbles. Over the next 30 years, rising U.S. population and incomes are expected to create a demand for more new housing than the nation has built since the Pilgrims landed at Plymouth Rock. To finance it, S & Ls and mutual banks need more lee-way to attract and invest funds--partly to tap new sources of saving and partly to end the feast-or-farnine swings in mortgage lending. Builders have pressed for years to expand HUD's Federal National Mortgage Association into a central bank trading in conventional as well as FHA and VA mortgages, to which it is now confined. Bankers oppose any larger role for Fannie Mae, charging that the agency often disrupts the mortgage market it is supposed to steady. Last year, for example, Fannie Mae not only supported an above-the-market price for certain types of mortgage offerings but also suspended buying mortgages more than four months old or larger than $15,000 (a limit that favors the South and Southwest). Commercial bankers figure that they could take over part of Fannie Mae's job if Congress would allow them to make loans above today's 75% limit when backed with private FHA-type insurance. Other proposals include lifting the self-defeating 6% interest ceiling on FHA and VA loans, arid devising European-style mortgages with interest rates that fluctuate with the money market. Few stand much chance of quick adoption.

While industry squabbles, prices of new homes are rising--5.5% a year since 1962. Ironically, would-be home buyers who wait for interest rates to fall run a real risk of paying more for their housing.

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