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the "workhorse" of the home finance field. In fact, currently about 80 percent of all home mortgage loans in this country are conventionally financed. A secondary market facility for participations in conventional loans would make conventional loans extended by our institutions more liquid. It would also help to balance the flow of funds between capital surplus areas and capital deficit areas and thus tend to narrow the geographical differences in interest rates. Such a facility would also reduce the variability of the flow of mortgage funds by creating a steadier flow of such funds and alleviating abrupt changes in the conventional mortgage market when portfolio adjustment was necessary, and provide a more stable climate for home buyers in which to secure conventional mortgage financing.

Making home mortgage loans is basically a local business. Savings and loan associations are local institutions and are surrounded by certain legal requirements that require them to operate in their local area. Specifically, these are the area limitations contained in Federal laws and many State laws. Savings and loan associations cannot purchase conventional loans beyond their regular lending area. While savings and loan associations restrict their operations to the local lending area, yet there are situations in the country, particularly in the eastern part of the United States, where savings are accumulating faster than the demand for loans, and there are also situations in other parts of the country where the loan demand is greater than the accumulation of savings.

For a number of years the savings and loan business favored legislation to provide a secondary market bill to buy and sell conventional loans. We now favor this present bill which is limited to buying and selling of participations in loans. We believe that participation transactions should be encouraged above outright sale because it makes for greater care in credit analysis, appraising, and loan servicing. The selling institution still has at least a 25-percent interest in the loan, whereas in the outright sale of a loan if anything goes bad it is strictly the new buyer's "problem."

Another reason for shifting our plan to participations is the new savings and loan tax law. The regulations under it have not yet been promulgated, but the legislative history of the bill suggests that there will be definite limitations on the amount of buying and selling of loans which an association may do under the definition of a domestic savings and loan association. We feel confident, again based on the legislative history, that there will be no limitation on the buying and selling of participations, or at least no limitation that would seriously impair the participation loan program.

FSLIC insured institutions were authorized in 1957 to purchase participations in home mortgage loans on property outside the regular lending radius of the purchaser. Under this program, a savings and loan association, say in California, may originate a conventional loan and sell up to 75 percent of that loan to another insured savings and loan association anywhere in the country. As is the case in all new programs, it takes some time for them to become accepted and workable. The participation program has gradually taken hold. The figures available from the Federal Home Loan Bank Board show that from the inception of the participation loan program in 1957 to the end of 1962, inclusive, participation sales and purchases reached

approximately $2 billion. They are now running at an annual rate of approximately $1 billion. The following table shows the volume of participation loans by years in millions:

1957 1958.

1959--

$36 1960_.

144 1961.
204 1962---‒‒‒

318

478

811

This program is working very well, particularly between the larger institutions; however, smaller associations have not been able to participate as they may have liked to, both on the selling and buying side, because of the lack of sufficient and adequate staff to handle such transactions. It is these institutions particularly that require a secondary market facility in participations, where smaller associations can sell small blocks and smaller associations can purchase seasoned participations in small blocks.

The facility, of course, would also be of service to the larger institutions. The larger originators of mortgages prefer to sell participations in large blocks-such as one-half million dollars, or $1 million. A secondary market facility could purchase such large blocks and break them up into smaller blocks for the smaller institutions. Such institutions would like to enter the participation program but cannot buy large blocks the originators prefer to sell. This facility could also sell debentures to a wide variety of investors who are not interested in purchasing individual participations. Currently, there is no organized market for conventional loans. Conventional loans, of course, are quite different from FHA and VA loans, which can be sold to the Federal National Mortgage Association, or to life insurance companies, and to savings banks in the East. Conventional loans are far more local in character and do not have the uniformity of appraisal practices, forms, and underwriting standards that the FHA and VA programs have, and which uniformity, of course, can be enforced by a Government agency. Therefore, the participation principle whereunder the originator-servicer must retain at least a 25percent interest in the loan is an ideal vehicle on which to create a secondary market program.

Based on these considerations, we feel it desirable to create a secondary market facility, as provided in Senate bill No. 811. It provides for the establishment of a "Home Mortgage Corporation" which would buy and sell conventional loans from members of the Federal Home Loan Bank System. The Corporation would be operated by a Board of Directors consisting of the members of the Federal Home Loan Bank Board and the presidents of the regional Federal home loan banks. The Federal home loan banks, of course, are owned entirely by the member institutions, and no Government money would be involved. The "Home Mortgage Corporation" would also raise capital funds by requiring a stock purchase from those associations which sell participations in loans to the Corporation. This stock purchase would be in the amount of 1 percent of the face amount of such participations sold.

The Corporation could obtain further money by issuing debentures, or obligations, in an amount not to exceed 10 times its capital surplus and reserves. These debentures would be sold in the public market, and it is our hope and expectation that many of the purchasers would be purchasers whose funds would not normally go into the housing

market. In this way the total amount of housing credit would be increased rather than just reshuffled. We have high hopes that such debentures could be tailored to the needs of pension funds. To date relatively little pension fund money has found its way into housing. The long experience of the Federal Home Loan Bank System in the sale of debentures would be very valuable. The money market is already familiar with the Federal Home Loan Bank System and we think it would have confidence in this new subsidiary.

In conclusion, we feel that the secondary market program is desirable because it would provide an orderly market for the conventional loan, provide a better geographical distribution of mortgage money, and bring into the mortgage field funds that would otherwise not be available.

Senator SPARKMAN. Thank you very much, Mr. Warman. That is a very fine and clear statement.

I shall not go into detail in questioning, but there are a few things I would like to ask about. Some of them would be for clarification. I note with interest what you say about uniformity. You do feel that one of the important jobs to be done in connection with any arrangement that is set up is to work out a more nearly uniform system throughout the country?

Mr. WARMAN. Any national operation must tend to have uniform systems and forms of various types.

Senator SPARKMAN. Yes. That is what I mean.

I feel that, too. And, in fact, I feel that not only is that necessary if we develop new institutions for a secondary mortgage market which is proposed in these various bills, but it seems to me that it is a desirable goal to work toward. Whether we establish new organizations or not, we need a greater degree of uniformity.

Do you feel that the lack of uniformity contributes to the difficultyif I may use the term "difficulty"-or the lack of a ready market for the sale of mortgages in some sections of the country as contrasted to other sections; and that therefore it may have a rather significant effect upon interest rates that prevail?

Mr. WARMAN. Well, Senator, we have been gradually tending toward more uniformity, and as a matter of fact the participation program has done a great deal in that respect. Where an eastern institution buys participations from a western institution they have gotten together on forms, and this has tended to make things far more uniform.

And, of course, under the FSLIC requirements of records, and so on, the various types of forms are becoming more uniform around the country.

Senator SPARKMAN. Well, I am glad to hear it.

By the way, with reference to the participations, let me ask you, for my own information, what happens in case of default? What is the arrangement as far as any loss that may be incurred?

Suppose some purchaser holds a participation, we will say, of 10 percent. Does he sustain 10 percent of the loss, or how is that handled? Mr. WARMAN. Yes; they do. If there is a loss, the participants sustain the loss in the proportion of their ownership of the mortgage. As you are probably aware, under the regulations of the Federal Savings and Loan Insurance Corporation the participations

that are sold must be sold without recourse. So that there is no recourse on the original seller. So that, assume that they have a 50–50 interest, they share all losses 50-50.

Senator SPARKMAN. Thank you.

Now, you mentioned on page 5 of your statement that, if the Home Loan Bank Board handled this, there would be no Government money involved. Now, of course that is true in one way of looking at it. However, there is Government backing involved, is there not, through the FSLIC and the ability of the Home Loan Bank Board to go to the U.S. Treasury? Does not the Home Loan Bank Board or the FSLIC have the power to call upon the Treasury for sums that may be necessary in case of great need, up to a certain limitation?

Mr. WARMAN. In connection with the debentures issued by this Corporation and the capital that goes into it, there is no liability of the Federal Government.

Senator SPARKMAN. And there would be no liability so far as the Government is concerned at all?

Mr. WARMAN. That is correct.

Senator SPARKMAN. In other words, this would really be a separate operation from the general operations of the Home Loan Bank Board, would it not?

Mr. WARMAN. That is correct, sir.

Senator SPARKMAN. Additional, supplemental and separate, would be the proper description.

Now, you bring up the question about the difficulty in the participation program for small or smaller savings and loan associations. You say that the present participation system is working well only for the large associations and hardly at all, if I interpret your statement correctly, for small associations. Cannot the Federal Home Loan Bank Board or, for that matter, some private entrepreneur develop a clearing house to facilitate the buying and selling of participations, thereby making it possible for small savings and loan associations to take part?

Mr. WARMAN. We have attempted to operate in our office a clearinghouse. Of course, one of the difficulties with that is that people just do not keep us informed at all times of what they have available and the people who are looking for participations. Some of the Federal home loan banks, particularly the Federal home loan bank in San Francisco and the bank in Greensboro, have maintained clearinghouses and put out circulars from time to time of participations that are available.

But part of the problem, Senator, is that the small association may want to buy, say a hundred thousand or 200,000.

Senator SPARKMAN. I noticed that. In other words, the sale, the blocs are larger than they are able to buy, is that right? Mr. WARMAN. That is correct.

Senator SPARKMAN. Well, it seems to me I understand what you say; in fact, I was about to ask the very question if it is not largely a matter informing the savings and loan associations through some kind of a clearinghouse arrangement. It seems to me that there could be a breaking down of these blocs. There is one complaint I have about so many Government activities. I suppose it is more or less human nature. We want to do things in the easiest way. Sometimes,

I say—and I have argued this very strongly in connection with small business problems-sometimes we need to do a little more work and tackle these problems, in a harder way, to do more good.

This seems to be true with reference to the participation program. Perhaps if we worked at it a little harder we could work out a plan to break down these large blocs. We could work out a good flow of information. We could get it to the point where, if a small savings and loan association felt able to participate, even on a small scale, it might be

able to do so.

Mr. WARMAN. Part of the problem, of course, is that a large institution that originates a lot of loans prefers-yo might consider it the course of least resistance-large blocs. But this is true of mortgage bankers and everybody else who sells loans. They like to have as few people for whom they are servicing loans as possible, because this

Senator SPARKMAN. Sure. I have argued that with reference to the procurement program of the Government, particularly in the Defense Department. It is a whole lot easier for them to have a half a dozen billion dollar outfits to deal with, rather than several thousand little firms. But it is those little firms that are scattered out throughout the economy of the country and that have a relatively small number of employees in each particular plant but who in total are giving employment to a great many of our people and spreading it more evenly over the country. That is one reason that I have been strong for savings and loan associations.

I have brought this point up many times. A savings and loan association is a community affair generally but is a very great and effective factor in spreading our home financing throughout the country. Its lending radius is relatively small. They are in small communities where ordinarily you would not find a mortgage banking institution or where the insurance company might not have an agent or someone to represent it. These associations have done a great deal toward helping to equalize credit opportunities throughout the country.

Now, it seems to me that we can do still more by doing a little work, even hard work, if necessary, in this field of participation.

I realize that that is not the problem of the individual savings and loan association, and it is not the problem of the U.S. Savings & Loan League except so far as it is interested in the best job possible being done. But I think that you could do a great deal toward encouraging the Home Loan Bank Board and the various banks to work out arrangements whereby small associations may be able to buy and sell mortgage participations.

Mr. WARMAN. Now, the figures that I read before indicate that we are making progress in the participation program.

Senator SPARKMAN. Yes; but you also make the point that small associations are not doing well in the program-I picked this up from your paper; I am just guessing that it has been difficult for the smaller associations and that they are not participating as well as the big ones. And you point out there that one problem is this big bloc

sale.

Mr. WARMAN. Yes; that is right.

Senator SPARKMAN. Of course, it is easier to sell big blocs. I believe you referred to blocs of a half a million dollars, did you not,

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