(MONEY Magazine) – Some critics of price-level adjusted mortgages (PLAMs) ((Mail: A Caution from Kemp, July)) are alarmed because nominal payments can seem quite high if inflation accelerates. In real terms, however, PLAM payments remain constant, and they begin much lower than payments on a traditional mortgage. Other critics argue that consumers cannot be trusted when faced with such an instrument. As a supporter of free markets, I believe nearly every expansion of consumer borrowing choices benefits both the economy and potential borrowers. HUD should empower the FHA to support PLAMs and let the consumers choose for themselves. Anthony Downs Washington, D.C. A prominent economist, Downs was for 18 years a member and then chairman of Real Estate Research Corp., a think tank. He has been a consultant to HUD and the White House and is currently a senior fellow at the Brookings Institution.

Some of us who have served at the Department of Housing and Urban Development under Secretary Jack Kemp do recognize PLAMs as a potential tool to help achieve his goal of expanding home ownership for low- and moderate-income families. I served as HUD chief of staff under him until August 1989. PLAMs are very different from graduated-payment mortgages or other existing mortgage instruments that tease the borrower with low initial rates. The PLAM assures the borrower that future payments will be greater than initial payments only if inflation persists. Most importantly, unlike other mortgage instruments that protect the lender with high interest rates applied to a shrinking principal balance, the PLAM protects the lender by indexing the principal balance. Without inflation eroding the principal, the lender can charge a rate of interest that excludes any inflation premium. This inflation protection is passed on to the borrower in the form of a low, uninflated interest rate. Some people express fear that PLAMs will prove a nightmare to borrowers if family income and home values do not keep pace with inflation. These are valid concerns for all types of mortgages. A properly constructed PLAM, however, need not place the borrower at any greater risk than would be the case under a traditional mortgage. Furthermore, a PLAM offers more options to adjust for this risk than traditional mortgages do; with them, a higher down payment is the major form of lender protection. Wendell W. Gunn Stamford, Conn.