Mortgages: 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.