The mortgage insurance and mortgage marketing corporations would be subject to State taxes to the same extent as State-chartered corporations.

The mortgage marketing corporations chartered by the Joint Board would issue (with the approval of the Joint Board) securities to obtain capital with which to carry on their operations. Since mortgages on one- to four-family properties would constitute the primary security for (and provide almost all of the income needed to pay the interest on) these obligations of the mortgage marketing corporations, it is reasonable to conclude that these obligations will be sold in the same general capital markets which presently provide funds for FNMA debentures and the securities of the Federal Home Loan Bank Board.

The obligations of the mortgage marketing corporations, however, would not have any Treasury backup, nor are they established or recognized as comparatively risk-free securities in the capital markets in which they would have to compete with FNMA debentures and Federal Home Loan Bank Board securities. Moreover, the mortgage marketing corporations could issue obligations equal to 20 times the sum of capital surplus reserves and undistributed earnings, as contrasted to the more conservative borrowing ratio of 10-to-1 to which FNMA is limited for its secondary market obligations. It is obvious, therefore, that the mortgage marketing corporations would have to pay substantially higher interest rates on their obligations than does FNMA and the Federal Home Loan Bank Board in order to obtain funds.

It is by no means certain that the existence of the obligations of the mortgage marketing corporations would add any funds to the total supply of investment capital available for financing of housing. The availability of obligations of the mortgage marketing corporations bearing an interest rate high enough to stimulate investor interest might draw from sources which would otherwise invest in similar obligations of the FNMA and the Federal home loan banks. The result of this proposal might simply be, therefore, that a proportion of the funds otherwise available for financing sales or rental housing through the facilities of these existing agencies would flow through this new competitive channel, raising the structure of interest rates on FNMA debentures and Federal Home Loan Bank Board securities in the process.

Considering the cost of underwriting the debentures, or other obligations issued by these mortgage marketing corporations, the rate of return necessary to sell the obligations, the cost of servicing mortgages which may be acquired, the need for return on the equity capital invested in these corporations, and the cost of insurance premiums established by the mortgage insurance corporations, it seems clear that the mortgage marketing corporations would be forced to deal in mortgages which bear a higher interest rate than do conventional loans presently being made by lenders for their own portfolio investment. The practical problem faced by the mortgage-marketing corporations with respect to the yields they must obtain to carry on successful operations might force them to become instruments for the making of high-interest-rate, high-risk mortgages.

These considerations also cause us to question the assumption that unimpaired capital and surplus equal to only 5 percent of outstanding insurance contracts held by the mortgage insurance corporations would be adequate to meet insurance claims in cash payments during any period of significant decline in real estate values. Although the mortgage insurance corporations would not insure loans having a loan-to-appraised-value ratio exceeding 90 percent, the required reserve would be inadequate to meet a decline of real estate values exceeding 15 to 20 percent. Unlike the FHA, which can pay claims in longterm debentures and needs reserves to pay only interest on such debentures, the mortgage insurance corporations, which would be chartered under this bill, would have to meet all losses on insured mortgages in cash. Furthermore, any individual mortgage insurance corporation under this bill would have far fewer opportunities for diversification of its total risk than does the FHA.

S. 810 does not appear to contemplate establishment of minimum property standards comparable to standards achieved under the FHA program as a protection to homeowners and lenders. In addition, the conventional mortgages acquired by mortgage marketing corporations would not have the benefit of uniform credit and property underwriting standards characteristic of FHA-insured and VA-guaranteed mortgages. These standards, as well as the Treasury backup, have been a major factor in the acceptance of FHA-insured and VAguaranteed mortgages throughout the country.

For these reasons we cannot recommend enactment of S. 810.

S. 881

S. 811 would establish a Home Mortgage Corporation authorized to buy and sell participations in mortgages on residential properties containing not more than four family units. The Corporation would be managed by a Board consisting of the members of the Federal Home Loan Bank Board and the presidents of the Federal home loan banks.

The initial capital of the Home Mortgage Corporation would be obtained through the issuance of nonvoting preferred stock. The Board would be authorized to issue up to $50 million of such stock. Each of the Federal home loan banks would be required to subscribe to the preferred stock issued by the Home Mortgage Corporation in proportion to the par value of its outstanding capital at the time the stock is issued.

Any member of a Federal home loan bank would be eligible to participate in the activities of the Home Mortgage Corporation. Each participating member would be required to subscribe to and purchase common stock of the Corporation approximately equal to 1 percent of the purchase price of the home mortgage participations which it sells to the Corporation. The bill would expressly authorize Federal home loan banks and Federal savings and loan associations to purchase the stock of the Corportaion. Pending the enactment of State enabling legislation, other members of the Federal home loan banks which do not have legal authority to purchase such stock could deposit 1 percent of the participations sold by them to the Corporation in cash in lieu of making the required common stock purchase.

The bill would authorize the Home Mortgage Corporation to borrow money and assume obligations up to 10 times the amount of its capital, surplus, and reserves. Ten percent of the net earnings of the Corporation would be required to be transferred to a reserve for losses until this reserve equals 50 percent of the Corporation's outstanding capital. Thereafter, at least 5 percent of net earnings would be required to be transferred to the reserve for losses until it is equal to 100 percent of the capital of the Corporation. The Board would be authorized to declare and pay dividends from the remaining net earnings of the Corporation.

A participation loan program for insured savings and loan associations was initiated by Federal Home Loan Bank Board resolution in 1957. Under this program an individual insured savings and loan association is presently permitted to participate jointly in the origination of a loan on a home (one to four family) located in an area outside its regular lending territory, if the balance at least 50 percent of the loan is retained by an insured association in that area. Where an insured association sells a participating interest in a loan which it holds, it can sell as much as 75 percent of the loan and must retain at least 25 percent. Not to exceed 20 percent of an association's assets can be invested in such participations.

Federal Home Loan Bank Board regulations issued to implement liberalizing amendments enacted last year to the basic Federal Home Loan Bank Board statute permit insured associations to sell participations in mortgages on condominium units and also on residential projects of five or more units.

Participating interests in loans sold by insured savings and loan associations since the inception of this program aggregated $2 billion by the end of 1962. Of this amount, $811 million were sold during 1962.

The program is growing rapidly and is effective in providing mortgage funds for insured savings and loan associations in capital shortage areas, particularly in the Western States. The testimony of the Federal Home Loan Bank Board, just presented to the committee, discussed the feasibility and administrative problems involved in S. 811 and the Housing Agency would accept the Board's judg ment in this regard.

S. 2130

S. 2130 is designed to empower the Federal National Mortgage Association to deal in conventional mortgages.

The bill revises section 302(b) of the Federal National Mortgage Association Charter Act so as to enlarge the scope of the Association's operations. It would authorize the Association, under its regular secondary market operations, to purchase, lend on the security of, and otherwise deal in conventional mortgages which do not exceed 80 percent of the appraised value of the security, and also when the loan-value ratio exceeds 80 percent, if the excess is covered by suitable mortgage insurance of an acceptable private insurer. The bill

would also eliminate certain existing operating restrictions applicable to the As sociation's secondary market operations: the prohibition against purchasing mortgages at a price exceeding par (100); the prohibition against purchasing mortgages offered by, or covering property held by, Federal, State, territorial, or municipal instrumentalities; and the mortgage amount ceiling of $20,000 for each family residence or dwelling unit (as to which existing law now provides several exceptions).

The bill would also expand the scope of the corporate activities under the secondary market operations, by empowering FNMA to buy, sell, etc., participations in mortgages; a type of transaction which has become markedly significant recently in the field of secondary market activity in mortgages. Conventional mortgages provide security for about two-thirds of the large sums of money needed, on a continuing basis, for the financing of both new and existing homes. It may become desirable at sometime in the future for some organization to assure a broad general secondary market for such mortgages. In considering this matter, the many years of FNMA experience under widely varying market conditions should be helpful. Its operations have been highly effective in providing liquidity for mortgage investments, especially in tight money periods when it has made substantial amounts of mortgage funds available in capital shortage areas.

There has not been sufficient time since S. 2130 was introduced last Tuesday for the Housing Agency to fully consider the possible effects of the proposal. We would like to continue our study of its provisions with a view to reporting our recommendations to the committee at a later time.

While we recognize the desirability of having available an effective market facility which would provide sources for mortgage lenders and investors comparable to those available to the financial community through the workings of the national exchanges for stocks and bonds, there are special problems peculiar to the mortgage market.

Basic to the effectiveness of any secondary market facility is the establishment of reliable standards for determining the acceptability of the mortgages for purchase. Only in this way can their marketability be established. This should also be an effective means of providing an incentive for greater uniformity in conventional mortgages generally and in establishing them as acceptable commodities over the Nation as a whole. This involves uniform standards of appraisal, mortgage instruments, property requirements, and procedures. It also involves uniform methods for determining the acceptable credit standing of mortgagors.

These and other related matters will be considered in our study of the legislation proposed in S. 2130.

Senator SPARKMAN. Mr. Baughman, let me ask you, are you prepared to express your opinion on this bill which would affect the Federal National Mortgage Association?

Mr. BAUGHMAN. Mr. Chairman, we have given this a great deal of thought and, even prior to the time the bill was initiated, of course, we have always been anxious to get as much money in the mortgage market as we can, because we recognize the problems that confront us on a large housing program such as we anticipate in the sixties.

The way we look at it, some of the things Mr. McMurray mentioned this morning are some of the things that we too have been studying; for instance, uniformity and some of these things are going to take a long time to work out.

And one of the important things again is the cost. If you get these costs prohibitive on an operation, the only thing you do is comparable to driving up interest rates and making it more difficult for people to buy homes.

And as far as we are concerned, we feel in FNMA that probably we can do the marketing job without too much difficulty. There would necessarily be some changes as to how we would go about it, at least in the early stages, in order to make sure that it was run with some degree of safety with a minimum of cost.

It does put a little additional cost onto people; for instance, if they have to go and get mortgage insurance, as Mr. McMurray indicated, that is another cost item. And the question is whether or not that would tend to hold down or adjust interest rates to the point where they would be lower than they would be on the ordinary investment in a mortgage without insurance. It does have that effect, I think. It could have that effect, anyway.

But we feel that FNMA could probably do what S. 2130 contemplates without some of the things in 2130 that we may not agree with. Whether we should buy mortgages over and above par, that is a moot question. Whether we should be permitted to buy mortgages from Federal, State, and local governmental bodies is another question I think that should be raised and thought out seriously before we obligate ourselves to do that.

Senator SPARKMAN. Senator Javits spoke of the total new mortgages, home mortgages, here as about $16 billion. Now, about what portion of that consists of what we call conventional mortgages?

Mr. BAUGHMAN. Well, at the present time I would think that 75 percent or better are conventional mortgages.

Senator SPARKMAN. What do you say?

Mr. BAUGHMAN. Seventy-five percent or better are conventional mortgages.

Senator SPARKMAN. Well, you include in conventional mortgages those that are made by the savings and loan associations; do you not? Mr. BAUGHMAN. I am including everything that is not insured or guaranteed.

Senator SPARKMAN. The savings and loan associations cover about 40 percent of the mortgage business; do they not?

Mr. BAUGHMAN. Yes; they do. Maybe a little more at the present

time.

Senator SPARKMAN. Around 40 percent or perhaps a little more. What percentage do the two agencies, the VA and FHA, cover? Mr. BAUGHMAN. At the present time I think it is slightly under 25 percent.

Senator SPARKMAN. Slightly under 25?

Mr. BAUGHMAN. Near 25 percent.

Senator SPARKMAN. So that would make about 65 percent. Then that would leave the mortgages made without connection with Government agencies of about 35 percent?

Mr. BAUGHMAN. Are you calling a savings and loan a Government agency?

Senator SPARKMAN. Well, I said without connection. They certainly have a connection with the Government in that they are backed up by the Home Loan Bank Board.

Mr. BAUGHMAN. I would still say that they are conventional loans. Senator SPARKMAN. You notice I did not use the term "conventional loan"; I did not use that term, because I fully understand the difference. But I was just trying to break down those three fields. What I am assuming is, or what I am thinking about is that the savings and loan associations are with this-I believe Mr. Semer referred to it as a captive market.

Mr. SEMER. Yes.

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Senator SPARKMAN. Capable of covering about 40 percent or a little more. I think it would be safe to presume that that will continue to be the situation. And the FHA and VA mortgages are, you say, about 25 percent?

Mr. BAUGHMAN. Yes.

Senator SPARKMAN. Then that would leave-I realize there is an overlap then there would be at least 35 percent that would have no insurance market except through commercial lending agencies, commercial banks, insurance companies, and so forth, that make direct or conventional loans?

Mr. BAUGHMAN. That is right.

Senator SPARKMAN. You are familiar with the study, I know, that the committee made a few years ago on the mortgage needs for the decade of the 1960's. Do you believe that there is going to be need for broadening the mortgage facilities that we have so as to be able to handle these new mortgage needs?

Mr. BAUGHMAN. I really believe so, Mr. Chairman. I think, in order to help the housing picture, it would be well to have a secondary market for conventional mortgages. One of the reasons I say so, I think a lot of these local institutions, such as commercial banks, and so forth, would take a greater interest in the mortgage market, mortgage investments, if they were assured that they had some place where they could seek or get liquidity.

Senator SPARKMAN. Yes. Thank you very much.

We could dwell at length on this, but we have two more witnesses. I appreciate very much all of you appearing and for the helpful discussion you have given us.

Our next witnesses are Mr. W. Evans Buchanan, the president of the National Association of Home Builders, and Mr. Thomas P. Coogan, past president of the Home Builders, now chairman of the NAHB Conventional Financing Committee.

in

We are very glad to have you gentlemen with us, and you proceed your own way.

STATEMENT OF W. EVANS BUCHANAN, PRESIDENT, NATIONAL ASSOCIATION OF HOME BUILDERS; ACCOMPANIED BY THOMAS P. COOGAN, PAST PRESIDENT AND CHAIRMAN, CONVENTIONAL FINANCING COMMITTEE; WILLIAM BLACKFIELD, FIRST VICE PRESIDENT AND CHAIRMAN OF GOVERNMENTAL AFFAIRS DIVISION; AND JOSEPH MCGRATH, STAFF DIRECTOR OF THE GOVERNMENT AFFAIRS DIVISION

Mr. BUCHANAN. Thank you, Mr. Chairman.

My name is W. Evans Buchanan, and I have a statement that I would like to have inserted in the record.

Senator SPARKMAN. Yes, that will be done.

(The prepared statement of Mr. Buchanan follows his oral testimony.)

Mr. BUCHANAN. Appearing with me this morning, along with Mr. Coogan, is Mr. William Blackfield, our first vice president and the chairman of our governmental affairs program.

Senator SPARKMAN. Glad to have you with us.