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Mr. NEEL. Thank you, Mr. Chairman.

I would like to introduce Mr. Graham Northup, who has been with the Mortgage Bankers Association of America now for some 7 months as our director of Government relations.

Senator SPARKMAN. Yes. Glad to have you with us, Mr. Northup. Mr. NORTHUP. Thank you.

Mr. NEEL. Mr. Chairman, as you know from our longstanding personal acquaintance, I am the general counsel of the Mortgage Bankers Association of America, and have been counsel of that association since 1946.

You also recognize, from your long acquaintance with NBA, the nature of our organization and the fact that its membership is composed of many different kinds of institutions, mortgage bankers, savings banks, life insurance companies, some commercial banks, and a few savings and loan associations.

Our association has long been concerned about some of the irregularities and deficiencies in the secondary mortgage market. I examined some old files before coming up this morning to see how long ago we began studying this matter in any significant way. I found that as early as 1952 the then president of the association, Mr. Aubrey Costa, whom you know well, considered that this specific matter needed study, and at that time he set up a committee, all the members of which were individuals thoroughly familiar and competent in our field. I am sure you will recognize most of their names. The chairman was Aksel Nielsen, and the members were: John F. Austin, Jr.,

George H. Dovenmuehle, Harry Held, Ferd Kramer, Franklin D. Richards, James W. Rouse, and Milford A. Vieser. This committee worked with our economic consultant, Miles L. Colean, and myself, and we made a great variety of studies throughout the balance of 1952. We produced a report which was sent to our board of governors on July 13, 1953, and although it is perhaps of only historical interest, I have a copy of that report in case you would like to put it in the record.

Senator SPARKMAN. We shall be very glad to have it for the record. (The material mentioned follows Mr. Neel's oral testimony.)

Mr. NEEL. The report of the committee and the proposals it made were studied again by the Advisory Committee which President Eisenhower set up to study housing matters, and you will recall the voluminous studies which that Committee made and the recommendations in

its report.

Some time in 1959, this whole subject became the focal point of discussion between representatives of the National Association of Home Builders, the National Association of Real Estate Boards, and the Mortgage Bankers Association of America. After a good deal of thought, drafts of a proposal which would have made some changes in FNMA operations and which would have authorized new types of institutions to be chartered by FNMA-Federal Mortgage Investment Companies—was prepared and circulated.

On May 12, 1960, these proposals were introduced as S. 3541, by Senator Sparkman and Senator Capehart. I would like to call to your attention, Mr. Chairman, to your own remarks when you introduced this bill. I have with me a summary of the provisions of that bill, as well as the text of the bill as it was introduced, and here, again, I should like to suggest that these documents be made a part of the records of this hearing, together with a little explanatory material that we send out from time to time to our members.

Senator SPARKMAN. That will be done.
(The material referred to follows Mr. Neel's oral testimony.)

Mr. NEEL. As an aside, Senator, I might remark that I went back, for my own education, and reviewed the hearings which you held in May 1960. Mr. Robert Thorp testified for MBA. They are of tremendous interest, and I am sure that your staff will be guided by history as well as by present happenings. But the remarks which the various witnesses made at that time in the discussions of this same problem that we are talking about today are intensely interesting and very enlightening. Sometimes we forget what has happened, I think, and tend not to realize how much information there is in some of these older hearings.

In many respects, the Mortgage Bankers Association of America considers that the proposals embodied in Senate bill 3541 of 1960— if extended to conventional loans—are sounder, would go further toward meeting the problems that we are discussing, and would raise fewer problems than the proposals embodied in S. 810, S. 811, or S. 2130.

By 1960, the problems had become of such interest that the Life Insurance Association of America, the National Association of Mutual Savings Banks and the United States Savings and Loan League set up an advisory committee and financed a research program at the University of California in Los Angeles to study the secondary mortgage market. Although the Mortgage Bankers Association of America did not participate in financing this study, it did participate (through Mr. Colean, W. A. Clarke, and others) in discussions of the advisory committee. I would imagine that the study which was concluded in 1961 is perhaps the most exhaustive analysis that has ever been made of the secondary mortgage market and its problems. This study was written by Dr. Oliver Jones, who is now the director of research for the Mortgage Bankers Association of America, and Dr. Leo Grebler of the real estate research program of the University of California. I have a copy of the published volume with me this morning, and I am sure that you and your staff are familiar with it.

Senator SPARKMAN. I say that we do have a copy of that study, and it is part of our files.

Mr. NEEL. Thank you.

There is one quotation from that book which I should like to read because it seems to me that it points out a common failing we all have; we seek easy and simple answers to problems that just are not simple. Let me quote from the beginning sentence in chapter 11 of that study, page 171, where Dr. Grebler says:

There is no magic formula for gaining maximum efficiency of performance in the market for residential mortgages. The forces that have hampered the development of the secondary market and contributed to deficiencies in the general mortgage market are too numerous and diverse to yield to a simple

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sblütion. The entire market is heavily laden with statutory regulation at all levels of Government, complicated by legal intricacies that were established centuries ago, and confined by traditional, almost hidebound, lending practices. Clearly, any effort to attain a higher level of efficiency requires reforms on many fronts.

That quote was from the "Secondary Mortgage Market" by Drs. Oliver Jones and Leo Grebler, University of California, Los Angeles, 1961.

It was while Mr. Colean and other members of MBA were participating in the above study that we were made aware that the American Bankers Association was beginning some studies of its own. My records indicate that my first knowledge of this activity developed from conversations which I had with Mr. Harry P. Bergmann and Dr. Fiexner in the fall of 1960.

Dr. Flexner was thereupon invited to attend one of the meetings of the committee set up to review the UCLA research program, and I find several exchanges of correspondence between Nr. Colean and Charls Walker of the American Bankers Association in the winter of 1960 and the spring of 1961 dealing with this subject.

The first meeting of what now is referred to by the ABA as the "National Mortgage Market Committee,” took place, I believe, in New York City on September 29, 1961. While different individuals have attended the general meetings of the group, those persons identified with MBA who have attended include Robert Tharpe, Carlton Stallard, Dale Thompson, Aubrey Costa, Mr. Colean and myself. From the very outset, I should like to state for the record, it was made clear that MBA did not expect to take a position on these proposals and that the individuals there were there only to listen and discuss ideas without presuming to make any recommendations or without implying any commitments for themselves or MBA.

Very early in the discussions, mortgage bankers attending the meetings raised questions about the proposals. To indicate the nature of these questions, I quote from a memorandum prepared by Mr. Colean for the president of the Mortgage Bankers Association.

I have set out some quotes from that memorandum, Mr. Chairman, and I will not read them in detail, but as you go through them you will see that we did raise questions as to the nature of the proposals, as to the kind of board that should be set up, and whether you could have Federal chartering without recurring restrictions, and whether this cash payout was going to be practical, how you could make these loans viable all over the United States since most of the institutions could not, under present laws, invest in them; and, finally, in item 5, Mr. Colean indicated that evidence of the profitmaking potentials of the insurance or the marketing corporations or of the ability to offer yields attractive to investors is far from convincing.

(The full text of the summarized portion of Mr. Neel's statement follows:)

The plan, as now set forth, still raises a number of questions that need to be answered in order to prove its practicality and to elicit the support that it must have if it is to be enacted. Among the points to be considered are the following:

(1) The proposed Supervisory Board is a clumsy compromise between the commercial banks (especially the national banks) on the one hand, which will not accept the Federal Home Loan Bank Board, and the mutuals and other State-chartered banks, which will not accept the Comptroller of the Currency. Can such a compromise be functional? Would it be better to pick one or another of the existing supervisory agencies, or to create a completely independent one?

(2) Will it be possible to provide for Federal chartering without also incurring restrictions on interest rate, and other areas of managerial discretion? Are Federal charters needed? The reasons given are the supposed greater ease in obtaining investor acceptance and the needed statutory revisions. Are these reasons compelling?

(3) The insurance corporations are expected to pay cash at graveside on the full coverage of the defaulted loan, yet no study of the needed premium for such exposure has been made. Leaving the amount of premium to the individual companies, as now contemplated, could lead to competition on the basis of premium. The adequacy of the proposed insurance reserve may also be open to question.

(4) The insurance is applicable to loans of 30-year maturity up to 90 percent of value. In view of the fact that aside from savings and loan associations (which show no interest in the plan) and New York savings banks (in regard to a limited geographic scope), such loans cannot now be legally made and, also, since loans within present legal limitations do not require insurance, how will an insurance corporation pay its way until State laws have been changed? How are such changes to be undertaken-by the individual corporation, the Supervisory Board, or what? Yet, until such changes are made, the plan will be inoperative.

(5) Evidence of the profitmaking potentials of the insurance or the marketing corporations, or of the ability to offer yields attractive to investors is far from convincing.

Mr. NEEL. Satisfactory answers to these questions were not forthcoming, particularly as to the actuarial chances of success of the organization and its profitability. Although it was indicated that such information would be made available from time to time, it never was. For example, I quote from a letter that Dr. Flexner addressed to MBA's director of governmental relations, Graham Northup, as late as April 30, 1963. Dr. Flexner noted then that, quoting from him:

As I said earlier, more specific facts are needed to show the profitability and workability of this proposal, but these are now being developed and will be ready by the end of next week. * * *

To my knowledge, such figures were never provided for the committee, and you can understand the reluctance of the individual members of the Mortgage Bankers Association who had been working with the committee to subscribe to any of the proposals advanced by Dr. Flexner on behalf of MBA.

MBA's director of research, Dr. Jones, published some of his own reservations about the proposal which appeared as an article in the Savings Bank Journal for April 1963. In case your committee does not have this study available to it, I have a reproduction of it, which I would also like to include among the records of the hearing.

Senator SPARKMAN. Thank you. We will be very glad to have it. (The material referred to follows Mr. Neel's oral testimony.)

Mr. NEEL. Our concerns were finally reflected in the resolution of MBA's executive committee with respect to the proposal, which was approved by the board of governors of the Mortgage Bankers Association in its meeting on May 7, 1963. This resolution, which is the official policy at the present time of this association, states as follows:

It was noted that MBA has continuously favored the necessity of improving secondary market mechanisms as essentials of a national mortgage market, as set forth in its statement of public policy, dated March 15, 1962; however, the executive committee was not convinced that as now embodied in S. 810 (H.R. 2629) the ABA proposal is actuarily sound, economically feasible, administratively workable, or that it would improve the market mechanism for all segments of the mortgage finance industry. The comments in the study by Dr. Oliver Jones, MBA's director of research, appearing in the April 1963 issue of the Savings Bank Journal, reflect the concern of the committee.

The executive committee, in concurrence with the FHA, GI, and legislative committees, was of the opinion that a further strengthening of the programs of FHA and FNMA offer the best solution to the problems the ABA proposal seeks to deal with.

Accordingly, a motion was made, seconded, and carried to recommend to the board that the association continue to direct its efforts to the improvement of these existing programs.

I might say parenthetically, Mr. Chairman, that we have been working diligently in this field in many things that the FHA has been doing, for instance, the expansion of a program which we initiated in Greensboro, with which you are familiar, has been of material help and assistance in reducing the amount of time it takes to issue their commitments, which in turn makes the product which we are selling, under the FHA, much more salable throughout the country, because, after all, time is the thing that people worry about. So if you can provide them with knowledge as to whether they are getting a commitment or not quickly, you can compete with the other forms of paper that are being offered.

We still are of the opinion that in many instances, both for the borrower and for the lender alike, the FHA loan is by far the best bargain on the market.

I regret to say that many mortgage bankers, including myself, still consider that the proposals embodied in S. 810 raise as many doubts and questions as those that it would seek to answer. It is not, therefore, accurate to say that we who attended the ABA committee meetings "agreed" on these proposals or that they are based on any recommendations to which we subscribed.

Let me rephrase some of our doubts.

First, it is questionable whether the mortgage insurance function safely lends itself to any degree of competition. The success of FHA may be closely related to its having a near monopoly position.

If a number of private insurers were in the field, there might very well be a tendency to compete on the basis of terms. In this connection it may be noted that the several private mortgage guarantee insurance companies now operating seem to have found it necessary to offer lower insurance premiums and what would appear to be more favorable payment terms than does the Federal Housing Administration. Therefore, it seems to MBA that we should seek means of keeping FHA on its toes-such as dependence upon alert and marketminded trustees, and a well-balanced industry advisory board rather than facing it with competing institutions.

Second, the advantage of FHA as a nationwide system with uniform standards applicable everywhere is an essential element in the negotiability of FHA-insured mortgages and in reducing building costs. It is also an element in the security of the system because it provides for a maximum diversity of risk. It seems doubtful to us that even if FHA were out of the picture, any new insurance corporation would be likely to obtain the same scope or achieve the same confidence of investors and State supervisory agencies. The picture presented by investors needing to make regular inquiry into the management standards, the scope, the reserves, and the exposure of a multiplicity of private companies is not one that suggests an easy and confident use of their system. The picture becomes more discouraging when one recog

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