MORTGAGING INSURANCE COMPANIES

The bill proposes the Federal chartering and supervision of mortgage insuring companies organized by at least five incorporators with a minimum subscribed capital of $25 million in stock having a par value of $100 a share.

These corporations would insure 100 percent of the principal and interest on mortgages for 1- to 4-family houses. We recommend that this be changed to "up to 100 percent.

Our idea here in this area, Senator, is in order to meet the market, and particularly in relation to the overall availability of housing, that it might be important that they might want to only insure say the top portion of loans, or they may only want to insure portions of participations. Again they might want to go up to the maximum of 100 percent.

We believe that 100 percent insurance is excessive in the light of other provisions of the bill providing for cash payment which would include interest and allowances including foreclosure costs-from time of default. We recommend that this be changed to require the payment of such interest and allowances from time of default in the form of a certificate of claim to be redeemed if and to the extent that the sale of the foreclosed property brings a price greater than the unpaid principal balance due on the mortgage at the time of acquisition. We believe that this assumption of some risk by the mortgagee would materially strengthen the financial integrity of the insurance companies.

Also, S. 810 contemplates that the property will be conveyed to the mortgage insurance corporation, and the certificate of claim would facilitate the carrying of these properties by the corporation. This is necessary in the light of FHA's experience which establishes a minimum reserve for acquired property of 22 percent with losses running about 15 percent. For example, the average loss on 4,406 units sold by the FHA for 6 months ending December 31, 1961, was $1,728 per property, or a 15.8 percent loss.

These mortgage insurance corporations could be in serious difficulty if they had to realize, upon the sale of acquired properties, more than the unpaid principal balance due on the mortgage.

During the development of this legislation the argument was advanced that it was not necessary to provide for a Federal charter and Federal supervision of these corporations. Proponents of this argument point to the existence of several private mortgage insurance companies, organized under State charters, which, at least in the case of one, are beginning to make a substantial impact on the conventional mortgage market.

We believe the Federal chartering of these corporations is vital to their success because of the archaic State laws which have compartmentalized the residential mortgage market. The conventional mortgage needs a degree of uniformity in order to achieve necessary mobility of funds from capital-abundant areas to capital-scarce areas. This can be accomplished more readily by a Federal charter. A mortgage market facility, whether it provides for mortgage insurance or a secondary market, needs the sponsorship of the Federal Government in the form of a charter to overcome the statutory restrictions in a majority of the States.

The Federal chartering of these privately owned institutions was endorsed in effect by the report of the committee on Federal credit programs, transmitted to the President early this year. Here is what the report says on this point:

GOVERNMENT INCENTIVES FOR PRIVATELY OWNED INSTITUTIONS

In some cases, unnecessary substitution of public for private credit can be minimized by providing financial incentives to establish Government-sponsored, privately owned and operated financial institutions. This approach is most unlikely to be feasible when a credit gap exists which can be filled privately with limited initial Government aid, and when some pioneering work is recognized to be essential, and/or on an experimental basis, has already been initiated. The Federal home loan banks and the three groups of institutions supervised by the Farm Credit Administration provide important examples of the use of this approach. The small business investment companies chartered and supervised by SBA are the latest examples.

MORTGAGE MARKETING CORPORATIONS

The bill provides for the Federal chartering of mortgage marketing corporations by at least five incorporators and a minimum initial capital of $5 million in stock with a par value of $100. These corporations would be granted the authority to buy and sell mortgages on one- to four-family homes, including FHA and VA mortgages, and to issue bonds or other obligations up to a maximum of 20 times its capital, surplus, and undivided profits.

An effective secondary market for conventional loans is an essential prerequisite to the organization of this market. The seller of a conventional loan today seeking a secondary market must find his own buyer. Methods of selling these loans today are not only cumbersome but very time consuming and as such increase the costs of mortgage credit.

While we endorse in principle this part of S. 810, we are not unmindful of the results of its approval, along with approval of S. 811, which would create a separate secondary market facility within the framework of the Federal Home Loan Bank System.

Do we want to fragmentize or Balkanize the secondary market for residential mortgages? This would be the result if the secondary market facilities envisioned in S. 810 and S. 811 were to exist with Federal Government sponsorship alongside the present highly effective secondary market operation of the Federal National Mortgage Association.

Perhaps we ought to consider first how we can expand the powers of FNMA so that it could accomplish the objectives of the proposed secondary market facilities envisioned by both S. 810 and S. 811.

Our study of this resulted in the drafting of S. 2130 and its introduction, at our request, by the chairman of the subcommittee. The bill would authorize FNMA, in its secondary market operations, to purchase conventional loans which meet generally the standards of FNMA in its secondary market operations. Under this authority FNMA could purchase loans originated by federally chartered savings and loan associations as well as national banks. In addition, FNMA would be authorized to purchase loans "which are insured under a contract of insurance and by an insurer which are generally acceptable to private institutional mortgage investors-as determined by the

Association." Under this latter authority FNMA could purchase loans which are insured by private mortgage insuring companies federally chartered under title III of S. 810. Of course, FNMA would continue to purchase FHA-insured and VA-guaranteed mortgages.

With respect to uninsured loans FNMA could purchase such mortgages only where the outstanding principal balance did not exceed 80 percent of the appraised value of the properties covered thereby unless payment of such excess amount is insured or guaranteed.

Also, the bill would repeal the present provisions of the FNMA Charter Act which prohibits the Association from purchasing participations in mortgages. This latter restriction is removed in order to permit FNMA to purchase mortgages, or participations therein, originated by saving and loan associations.

The bill S. 2130 is designed to accomplish the same objective as title IV of S. 810, in addition to accomplishing the objectives of S. 811. However, instead of having three different mortgage market facilities we would have one, and this one would be the facility which has had years of experience in operating a secondary market on a sound, businesslike basis-a facility over $90.3 million of whose common stock is today owned by private individuals.

For many years we have witnessed, and participated in, discussions by public and private groups vitally interested in the mortgage market, over the creation of a central mortgage reserve facility which would give the entire residential mortgage market the liquidity which it needs to meet the growing housing demands of the American people. Years of experience attest to the capabilities of the Federal National Mortgage Association to accomplish this objective.

Our association has advocated the extension of FNMA purchasing authority to the conventional market for several years, but we have been deterred in pressing for this objective by some question as to whether FNMA could purchase conventional mortgages out of its borrowings-10 times its capital, surplus, and undistributed earnings or be limited to making such purchases out of capital. However, our study of the matter, coupled with assistance from agency lawyers, has led to the conclusion that FNMA would be able to make such purchases out of its borrowings.

Thus, FNMA would have the same authority as the secondary market operations contemplated by S. 810, but would have the impressive advantage that inures to any organization which has earned in the financial world the enviable reputation of the Federal National Mortgage Association. Thus, under the authority of S. 2130 FNMA could do within a relatively short period what it would take years for a new secondary market facility to accomplish.

In conclusion, we urge that the subcommittee approve the Federal chartering of private mortgage insuring companies, as contemplated by title III of S. 810, and in lieu of title IV of S. 810 and S. 811, approve S. 2130 to provide for a secondary market facility for all conventional loans within the present framework of the Federal National Mortgage Association.

Senator SPARKMAN. Thank you, Mr. Farrer. It is a very interesting and provocative statement. I have enjoyed your presentation.

One question that comes to my mind: just how FNMA would function. You know through the years this question of expanding FNMA has come before our subcommittee many different times.

Mr. FARRER. Yes, sir.

Senator SPARKMAN. There has always been some difference of opinion as to whether FNMA should function as, shall I say, a public service organization, or whether it should function as a profitmaking organization. In the act of 1954 it was divided, as you know, and made a two-headed agency, one a secondary mortgage market facility on a profit-making basis with the users of it subscribing to the stock with the idea that eventually that part of FNMA would be wholly owned by private capital. Yet it retained its function as a market facility for special assistance programs and programs of that kind.

It has always been a little difficult for me to grasp FNMA as a two-sided institution: a private body on one side and a public body on the other.

It seems to me that your proposal would continue that, except to add a third wing to it which would have as its function the buying of conventional mortgages. I suppose it would really be an expansion of the secondary market, the private side of the operation. Mr. FARRER. Yes, sir; that is what is envisioned here.

Senator SPARKMAN. Can you separate it? As long as you have the twofold makeup, you still have a Government agency. In other words, you just can't separate it and have the private agency.

Again I may say that down through the years there has been a feeling on the part of the committee that it would be very fine if we could devise some system so as to let Government participation in housing be as little as we can get along with. We recognize that there are some programs that probably can never succeed except with Government assistance. There are some that actually are not outright subsidy programs but I suppose some people would say they are subsidized. I have in mind particularly the low-interest-bearing program for low and middle income families and programs of that kind.

Don't you believe-and I will say this is what seems to me, although I am open to conviction-don't you believe that it would be better if we could devise some kind of a central mortgage market that would be private in the same sense that banking institutions are private in this country? In other words, regulated or supervised by the Government but left to operate completely in the private field?

Mr. FARRER. As you know, Senator, this really is at the moment a quasi-corporation, because in addition to the

Senator SPARKMAN. I realize it is at the present time and probably will be for a long, long time. In fact I am not so certain that it ever will succeed in being wholly privately subscribed. I don't know. Some people may have felt that was true when the Federal Deposit Insurance Corporation was set up, although we know it has paid off the Government stock subscription, and other organizations we have seen pass into private hands or at least out of public stock ownership. So maybe it will. Maybe this part of FNMA may someday become a completely private operation, although progress to that end is rather slow.

Mr. FARRER. Yes; except we are approaching over $90 million in common stock.

Senator SPARKMAN. But how much will it take?

Mr. FARRER. About $158 million, I believe, is the preferred stock that is sold by the Federal Government.

Senator SPARKMAN. $158 million you think would pay it out? Mr. FARRER. Yes, sir.

Senator SPARKMAN. I didn't realize. I thought it was more than that. If that is true, it is entirely possible that the goal will be obtained someday.

Mr. FARRER. The Congress, of course, must do this, even though in the 1954 act you did provide for the fact that someday the common stock could retire the preferred stock and that at that point it would be privately owned.

To this degree I would almost, on a speculuative basis, say that today you could probably market a sufficient number of shares of this stock to retire the preferred stock if that were the choice of the Congress.

Senator SPARKMAN. The thing that appeals to me with reference to S. 810, particularly, is the fact that it does place this operation in the private field, as I understand it, from the very beginning. The only connection that the Government has with it is in the field of regulation or supervision.

Mr. FARRER. Right.

Senator SPARK MAN. I thought I would mention that point. We certainly appreciate your appearing before us.

Mr. FARRER. Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Kimbrel, Dr. Flexner, and Mr. McCarthy, representing the American Bankers Association.

We are glad to have you gentlemen. I believe we have your prepared statement. You may proceed as you wish.

I did not identify you except as representing the American Bankers Association. Will you for the benefit of the record give the title of each of you!

STATEMENT OF M. MONROE KIMBREL, CHAIRMAN OF THE BOARD OF THE FIRST NATIONAL BANK, THOMSON, GA., PRESIDENT OF THE AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY CHARLES E. McCARTHY, VICE PRESIDENT OF THE BANK OF AMERICA, SAN FRANCISCO, CALIF.; AND DR. KURT F. FLEXNER, DIRECTOR OF THE ABA'S MORTGAGE FINANCE COMMITTEE

Mr. KIMBREL. Thank you Mr. Chairman.

My name is M. Monroe Kimbrel. I am chairman of the board of the First National Bank, Thomson, Ga., and president of the American Bankers Association. I am accompanied by Mr. Charles E. McCarthy, vice president of the Bank of America, San Francisco, Calif., and Dr. Kurt F. Flexner, director of the ABA's Mortgage Finance Committee.

I appear today in support of S. 810, the proposed Mortgage Market Facilities Act of 1963.