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

nizes, as one must, that actuarily the basis for mortgage insurance is far from being established. Indeed, it may not be capable of ascertainment. The strength of FHA's reserves lies largely in the fact that FHA was instituted at a time when real estate values were depressed and that it grew most during a period when demand in such activity was high, foreclosures were low, and losses were minimal. It is certainly questionable that a new company or companies established at a time such as the present would be granted so long and so secure period of incubation.

Here, again, parenthetically, Mr. Chairman, I think it would be very helpful if your committee could secure from competent actuarial sources there are some who have been studying this matter-some comments about the actuarial nature of the insurance premium that might be required in this kind of a situation. We have had some conversations with some actuaries on an informal basis that are operating in the insurance field, and we find that there is serious concern and much uncertainty about this particular matter.

Third, if the insurance companies are to gain the confidence of investors and the acceptance of State supervisors, they would certainly have to have imposed upon them a considerable uniformity of premium, reserve requirements, mortgage terms, and operating standards, and would probably also have to be backed by some form of reinsurance or guarantee. If they had all this, the supposed advantages of competition might be almost eliminated.

The Mortgage Bankers Association, and mortgage bankers generally, I believe, may claim to be about as stalwart defenders of a private competitive market economy as anybody presently in the lists. At the same time, we recognize that certain economic operations may not be suited to competition. As an example, we could hardly contemplate having several competing Federal Reserve systems. We are not so sure but that mortgage insurance is in this category.

SECONDARY MARKET FACILITY

While there is some disagreement on the validity of the premise that the mortgage market can be improved through the conversion of mortgages into marketable debentures, there is almost no disagreement within the mortgage lending industry on the main anticipated benefits from an efficient secondary mortgage market. These may be listed as follows:

(1) Improve resources allocation in the general economy through a more marketable mortgage instrument traded in competition with alternative investments on the basis of market determined prices and yields.

(2) Improve allocation of funds between capital surplus and capital deficient areas.

(3) Greater liquidity of mortgage investments and consequently a greater desire by lending institutions to hold mortgages.

(4) Reduce borrowing costs through more efficient and competitive market processes.

(5) Reduce variability in the flow of funds into mortgages.

For three decades or more, the foregoing benefits have been cited as the basic purposes of one plan after another as institutional interests sought the "philosophers' stone" that would magically generate an

efficient secondary mortgage market. FNMA stands as the only concrete result, and even it in some instances may be said to have failed to generate a true "secondary" mortgage market, since the rules and regulations through which Congress from time to time has circumscribed the operations of that agency have tended to make FNMA a mortgage repository or in effect a primary lender.

The changes proposed by the American Bankers Association, as embodied in S. 810, are another attempt to discover the "philosophers' stone." The objectives of this proposal as well as earlier attempts should make it clear that all types of participants in the mortgage market have a stake in the success or failure of the proposed market facilities. Institutional differences and jealousies should, therefore, be set aside to examine the plan purely on the basis of its workability, its capacity to achieve the stated objectives.

Unfortunately, as noted earlier, the plan's proponents have not supplied the industry with the necessary analysis, and as a result, some segments of the industry, including the Mortgage Bankers Association of America, remain unconvinced. Without specific consideration of the problem areas and specific answers, it is not possible to agree or disagree completely with the proposal. Some of the questions specifically that need to be pondered are:

And here they are listed, Mr. Chairman. Let me just summarize them rather than read them in detail. I am sure that you and your staff will read them as time goes on.

First, would the marketing corporations remain in the market ready to buy and/or sell at all times?

And then we list certain other questions that need to be answered depending upon how you answer that question.

Secondly, over on page 11 there is the question of Federal charter, and we point out that, if you get Federal charters and therefore have some element of Federal support, How can you avoid some element of Federal regulation?

And we also raise the question about would the market support an unlimited number of market corporation, which of course the bill provides for, not how will the number be regulated.

Item No. 3, again, relates to the profitability of the marketing corporations, and we point out that it is in this area specifically that figures to make an objective analysis have been lacking.

On page 12, we raise some questions about the mortgage insurance corporations: Who will pay the insurance premium; how can the insurance corporation avoid getting high-risk loans only; what is the rationale for establishing the premium schedules, and so forth? (The complete text of the summarized material follows:)

1. Will the marketing corporations remain in the market, ready to buy and/or sell at all times?

If the answer is "No," or "Perhaps," how will the desired marketability be accomplished? Even a cursory review of the main objectives will make it clear that marketability is the keystone to an efficient secondary mortgage market. This is the sine qua non of any proposal to develop an efficient secondary mortgage market.

If the answer is "Yes," how will the marketing corporations avoid becoming repositories for mortgages? As a purchaser. FNMA's experience indicates that there should be no difficulty in developing an adequate volume of purchases. But even penalty prices may not forestall large-scale dumping of mortgages during periods of credit restraint. In FNMA's experience, purchases under the

secondary market operation rose during periods of restraint even though discounts amounted to as much as 5 percentage points.

Faced with a large volume of offerings, how can the marketing corporations develop a correspondingly large and broad market for privately insured conventional mortgages as long as investors are restricted by statute and by their own inhibitions from holding such mortgages? Do not existing statutes and practices make it highly probable that the marketing corporation will indeed become repositories and fail, thereby, to achieve the hoped-for objectives of an efficient secondary mortgage market?

If it is assumed, for purposes of discussion, that the privately insured conventional mortgage will eventually encourage the necessary changes in statute and lender standards, how can the marketing corporations survive in the interim? Is it not somewhat heroic to assume that they can survive by dealing in FHA and VA mortgages so long as the rates and prices of such mortgages can be altered without direct regard to market conditions, and in the face of FNMA's well-entrenched position in this market? If they can successfully do so, why is it necessary to develop a competitive mortgage and further compartmentalize the mortgage market? If it is argued that they can survive the transition period by dealing in privately insured conventional mortgages, how can the prices of such mortgages be isolated from the administered prices of FHA and VA mortgages? 2. Federal charters

If Federal charters are obtained for the marketing corporations and statutes are changed to permit federally chartered institutions to hold the privately insured conventional mortgages, can congressional price fixing be avoided? Even so, is it not equally necessary to obtain market oriented pricing of FHA and VA mortgages to assure the success of marketing corporations dealing only or largely in privately insured conventional mortgages?

Will the market support an unlimited number of marketing corporations? If not, how will the number be regulated? It has been held that the power of the Housing Administrator to charter any number of private national mortgage associations was a deterrent to the entrance of private capital in this area after 1934. If the need for Federal charters can be established, why is it desirable and/or necessary to create still another supervisory agency?

3. Profitability of marketing corporations

It is in this area specifically that figures to make an objective analysis have been lacking. What studies we have made, however, tentatively indicate to us that the figures focus attention on three questions that need answering:

1. What will be the commercial bank lending policy toward the marketing corporations? Will it vary if portfolio is predominantly conventional, FHA, or privately insured 90-percent conventional.

2. What will the market rating of the corporations' debentures be? Can it hope to better the rating for Baa corporate bonds? Dare it borrow heavily in the short-term market as FNMA does? Can it succeed without Federal backing or tax exemption?

4. Mortgage insurance corporations

Who will pay insurance premium? Need it be set up prior to sale to the marketing corporation or at time of origination?

How can the insurance corporation avoid getting high-risk loans only?

The legislation requires insurance corporations to pay principal and interest, including foreclosure costs from time of default to the time when clear title is handed over. However, it does not specify whether equity of redemption rights must be worked off to provide a clear title. In any event, the rate of loss on foreclosed mortgages will vary considerably among the various States. does the corporation propose to cost-out these differences? Variable premiums would not reduce the impact of State laws on out-of-State lending in some States. Equal premiums would discriminate at the expense of States where foreclosures costs are nominal.

What is the rationale for establishing premium schedules?

How

Although MGIC has been successful in its insurance operation, is there any evidence that the insurance has enhanced the marketability of the 90-percent privately insured mortgage? If not, how would the new corporations hope to generate marketability?

Even if it is assumed that none of the foregoing problems exist-why not seek the same objectives through FHA and FNMA? Why not reform rather than fabricate a new competitor, a new compartment, and a new complication?

Mr. NEEL. Continuing with the statement, Mr. Chairman, the testimony has obviously presented more questions than answers. That, however, seems to us to be the nature of this complex of problems at the present time.

Therefore, we in the Mortgage Bankers Association of America have felt so far that without presenting closed minds, it is in our best interests, as well as in the best interest of borrowers generally, to continue to urge the perfection and the extension of the FHA and the FNMA programs. It would be disastrous if in promoting those new vehicles contemplated by S. 810 or S. 811, we should lose or weaken the only existing institutions that can assuredly serve the national mortgage market.

While this statement has been addressed more to the provisions of S. 810 than those of S. 811 or S. 2130, the questions raised apply as well to the proposals in those bills.

We would also urge your committee in pursuing its studies on this subject to reexamine those previous suggestions as a basis for alternatives to the proposals contained in Senate bills 810, 811, and 2130. Thank you very much.

Senator SPARKMAN. Thank you, Mr. Neel. You have done a real service in posing the question.

Of course, you realize that these hearings are exploratory. And it is part of our desire to have these questions brought out, because we realize that there are many questions to be answered.

I notice your statement, though, with reference to the further development and expansion of FHA and FNMA. I have always felt that the greater degree to which we could get private industry to handle the housing programs and problems the better off we would be.

As a matter of fact, the Housing Act of 1949 in stating the housing policy set that out as a principle, that private industry should be encouraged to do all that it could and that Government participation would be limited to those areas in which private industry was not able to do the job.

I have long advocated, I believe you know, the establishment of some kind of central mortgage market, in the hope that we might lessen Government participation in housing and that we might encourage and extend private participation.

I just make that comment, prompted by your statement, about the further expansion of FHA and FNMA.

I certainly do not say this in any sense of criticism of either FHA or FNMA. Frankly, I do not know what American families would have done if we had not had these agencies to help develop, expand, and finance, through insurance and through guarantees-the VA, also, I will include in that-homes for American citizens.

But I believe strongly in the housing policy that was stated in the 1949 act, and certainly in that part that private industry should be encouraged to do all that it can, and the Government should step in only in those fields that private industry cannot well do.

Mr. NEEL. We would, of course, Senator, share your views that private industry has got to be active in these areas.

Of course, as we have pointed out and try to keep pointing outsimilar to the way the savings and loan industry keeps pointing out about its organizations-the Federal Housing Administration has