Much-Needed Prop

Already battered by soaring inflation and a declining economy, the nation's housing industry recently has been jolted by another blow: skyscraping interest rates that are drying up mortgage money and threaten to depress construction even further. A continuing slide in housing would seriously diminish chances for an economic upturn later this year, and last week the Administration attempted a rescue. President Nixon announced a series of steps that would pump $10.3 billion in cash and credits into the sagging industry.

The program includes:

> Authority for the Department of Housing and Urban Development partially to subsidize interest rates on mortgage loans guaranteed by the Federal Housing Authority or the Veterans Administration. Under the plan, lenders will make mortgage loans to new-home buyers at 8% interest, then sell the loans to the Government. In effect, the lenders will act as conduits to pass along to home buyers money from the Government at 8% interest, which is low in today's market. Some $3.3 billion will be made available under this program--supposedly enough to finance an estimated 100,000 homes.

> An increase of a quarter-point in the permissible interest rate on FHA-VA insured loans, to 8 3/4%, for buyers of either old or new houses. The boost is calculated to encourage more lenders to put their money into FHA-VA loans, which are limited to $33,000 per home.

> Permission for the Federal Home Loan Bank Board to buy from savings and loan associations and other lenders up to $3 billion of non-Government-guaranteed mortgages at 8 3/4% interest. Again, the lenders will be passing along cheap Government money to home buyers; the going interest rate on conventional mortgages is 9% to 9 1/2%.

> Authority for the FHLBB to make additional loans, up to $4 billion, to savings and loan associations at interest rates below the going market level. The S and Ls can then lend the money to home buyers.

The Government action came at a critical time. Housing starts have dropped from an annual rate of 2.5 million at the start of last year to 1.5 million now. The potentially most damaging threat to the industry came recently from Federal Reserve Board Chairman Arthur Burns. He bluntly declared that the Reserve was determined to cool inflation and vowed that the money supply would not be expanded to accommodate an "explosion" of business-loan demand, even if his policy meant that interest rates would skyrocket. Since then, rates have continued to climb to record levels; last week major banks lifted their prime rate on business loans by a quarter-point, to a dizzying 11 1/4%. As a result, there has been an accelerating flight of funds from S and Ls and other sources of mortgage money.

Nixon's new program should put a much needed prop under the housing market. Lewis Cenker, president of the National Association of Home Builders, called the moves "a realistic recognition of the disastrous effects that inflation and tight money are having on a major segment of the nation's economy." The program, however, is certain to keep upward pressure on nonhousing interest rates because, in order to get the cash to subsidize housing, the Government will have to step up its own borrowing in an already tight money market.

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