long since, you might say, become what in effect is a system where the Government obligations in the area are of a very standby nature. One of the things we had hoped we might convince the Congress some day of is that the FHA, which as you well know does not require appropriations but only requires authority to use its own funds, which in turn are generated by borrowers in private industry, could have a little more flexibility to meet its needs.

So that in many, many respects FHA is what I would think you might accurately call a resource of private industry.

Senator SPARKMAN. Well, it certainly has minimum Government participation; but the Government participation is there. Mr. NEEL. Of course it is.

Senator SPARKMAN. There is no question about it.

Mr. NEEL. It is there. It is kind of like sterling on a piece of silver. The Government participation is also there, as you pointed out this morning, in the Federal Savings Loan and Insurance Corporation. It may kind of be like the part of the iceberg that is underwater; you do not think about it very much, but the fact that it is there makes it stable.

Senator SPARKMAN. That is right. And when you speak of standby support, lots of times it depends on just how strong and how substantial that standby is. We know that in some instances the Government standby is tremendous. We often think of FDIC, for instance, as being owned by the banks. The U.S. Treasury provides standby support for FDIČ, I believe to the tune of a maximum of $4 billion, or certainly it is a tremendous sum; maybe $2 billion. I have forgotten what the amount is that may be used in case of emergency. It is a tremendous sum.

Mr. NEEL. We have been also working, Mr. Chairman, in the area you mentioned earlier today in connection with uniformity of State laws. There are two specific areas that simply have got to be attacked more vigorously. One of them is the question of uniform mortgage foreclosure laws and uniform power of sale laws.

The various States, as you are familiar with, have completely conflicting views on these matters, and this is one of the things that makes it difficult to have a conventional loan as freely tradeable as an FHA loan, because all the laws have been modified to provide for the FHAtype of instrument.

Then we have been also doing a great deal of work in trying to improve the laws which relate to quote doing business-unquote, which, again, prevent money from flowing freely across State lines. We have been working with the commissioners on uniform State laws and we have been working with the legislatures in various States in an attempt to reduce the roadblocks to the free flow of funds and mortgages themselves.

Senator SPARKMAN. Yes, sir.

Well, we certainly appreciate your contribution.

Mr. NEEL. Thank you.

Senator SPARKMAN. I may say that, throughout the years, your organization has been most helpful to us in considering legislation for development of housing and particularly for the financing of housing. We appreciate it.

Mr. NEEL. Thank you, Senator.

(The material submitted by Mr. Neel, previously mentioned, follows:)

MORTGAGE BANKERS ASSOCIATION OF AMERICA, Chicago, July 13, 1953. Memorandum to: Members of the board of governors and mortgage market stabilization committee.

Enclosed you will find the latest revision of the proposal for the creation of a secondary market for insured or guaranteed home mortgage loans which has been prepared under the direction of the mortgage market stabilization committee. No conclusive action has been taken on the report by the executive committee or the board and the proposal is not for publication, at least at this time, but is furnished you for your information and confidential use only.

Any comments or suggestions which you may have to offer will be appreciated. BROWN L. WHATLEY.

PROPOSAL FOR THE CREATION OF A SECONDARY MARKET FOR HOME MORTGAGE LOANS INSURED OR GUARANTEED BY THE FEDERAL GOVERNMENT

I. WHY A SECONDARY MARKET FACILITY IS PROPOSED

A. THE FINANCING REQUIREMENTS OF THE BUILDING INDUSTRY

1. Homebuilding now a mass industry

During the last 20 years, homebuilding has achieved the status of a major industry. The size of its operating units has grown; the proportion of the total supply built by the larger operators has risen; and the practice of building for unknown buyers has become a major factor in the market.

Back of the construction organizations, and in many respects a part of the total industrial operation, are the producers and distributors of building materials and equipment. Like the new building organizations, the manufacturers and suppliers have geared themselves to meet a broad and growing demand. In other words, homebuilding has become a mass-production industry.

2. Dependable source of financing essential

As a result of this development, the financing requirements of the homebuilding industry are similar to those of other mass-producing industries: in order to maintain its operating units and improve its operating practices, it requires a dependable and relatively constant source of funds to finance the construction and sale of new housing.

At the same time, the homebuilding industry is peculiarly dependent upon borrowed funds both to carry its own operations and to finance its buyers. Unlike many industries having large amounts of permanently committed capital, homebuilding has little internal resources, while the mass of its buyers must also depend upon large amounts of credit.

Because of the importance of maintaining fluidity in the used-house market (on which new sales will more and more be dependent), a dependable supply of funds for this market is equally important. Because of the conditions described below, the housebuilding industry has less assurance of the kind of financing it requires than do other mass-production industries.

B. SHORTCOMINGS OF THE HOME MORTGAGE MARKET

1. Lack of constancy in earmarked funds

(a) Savings and loan associations provide the nearest thing to a constant source of home mortgage money. Their investments are almost wholly in home mortgages and they provide annually about a third or more of the total supply of funds for this purpose. This proportion, as well as the absolute amount of mortgage lending, has been increasing during recent years-testimony to the steadiness of this sector of mortgage lending in comparison with the rest. While this circumstance gives, year in and year out, a fairly dependable base for mortgage activity, it still leaves the bulk of the market subject to other influences. Moreover, since most savings and loan institutions do not have sufficient resources to finance large housebuilding developments, this type of operation is generally dependent on other credit sources.

(b) Other institutional mortgage lenders, comprising mainly life insurance companies, mutual savings banks and commercial banks, are mortgage lenders only incidentally to their role as general investing institutions. They usually limit their maximum participation in the mortgage market to some fixed relationship to their total assets, and they also vary the amount of their mortgage lending according to the relative advantage to be gained from other types of investment. Both these characteristic policies result in occasional marked increases or decreases in the amount of mortgage loans currently being made by them, or even in temporary withdrawals from the market.

Other types of investors (trusts, pension funds, and individuals) are less important and less dependable as mortgage lenders.

(c) The result is that the home mortgage market may find itself temporarily restricted in the supply of funds, for reasons that may be wholly unrelated to the demand for housing.

2. Unevenness of regional distribution of mortgage funds

(a) Surpius and scarcity areas are typical of the home mortgage market even in times when funds are generally available from the investors discussed above. In the older areas of the country, notably New England, the Middle Atlantic, and part of the Great Lakes regions, the funds available for mortgages often exceed the demand for loans. On the other hand, the South, the Southwest, and the West chronically are importers of mortgage money.

(b) Reasons for the unevenness are many. The main cause is that the savings of the country are created in or drawn into the older, more mature regions, and that the more rapidly growing sections of the country find their local resources insufficient for their needs. Metropolitan areas have greater access to funds than small, nonmetropolitan communities, which lack substantial local institutions and present an especially costly servicing problem. States with onerous foreclosure statutes often have greater difficulty in obtaining mortgage money than States in which foreclosure is simple.

(c) The result is that even in times when mortgage money is generally available, areas ranging in size from single small communities to whole regions may have insufficient funds to meet local demands. In times when money becomes generally stringent, these areas appear to suffer earlier and more drastically than more favorably situated localities.

3. Unevenness in economic distribution of mortgage funds

Because of high loan-to-value ratios and limitations on payment periods imposed by State law or supervision, most institutional lenders have been unable, under conventional loan practices, to serve the mass market with first mortgage financing. Consequently, where the market has to rely on conventional lending. risky and costly second mortgage financing usually becomes an unavoidable adjunct to the mortgage system.

C. PARTICIPATION OF THE FEDERAL GOVERNMENT IN HOME MORTGAGE FINANCING 1. Characteristics of Government home mortgage activities

(a) Scope: The Federal Government, under the direction of the Home Loan Bank Board, maintains a reserve credit system (the Federal Home Loan Bank System), mainly for savings and loan associations, and a system of share account insurance (Federal Savings and Loan Insurance Corporation). The Board also charters Federal savings and loan associations.

The Government operates a number of systems of mortgage insurance through the Federal Housing Administration and a special home loan guarantee and insurance system through the Veterans' Administration. Also through the Veterans' Administration, it provides a system of direct lending for veterans who are unable to obtain private financing within the terms fixed by statute.

Through the Federal National Mortgage Association, it maintains a reserve credit facility of a very limited and specialized character for institutions making FHA and VA loans.

(b) The purposes of these Government agencies are to give stability to mortgage lending activity, to broaden the geographic distribution of mortgage funds, mainly through private financial channels, and to give emphasis to the channeling of funds to the mass housing market.

The extent to which the agencies have achieved their objectives and the shortcomings they have encountered are briefly described below.

2. Accomplishments

(a) Home Loan Bank Board: The strength and stability to savings and loan associations provided by the Home Loan Banks and the FSLIC have in large measure accounted for the growth of savings and loan institutions. Through use of its chartering power, the Home Loan Bank Board has helped to provide loan sources in some heretofore underserviced areas.

(b) The Federal Housing Administration and the VA Loan Guaranty Service, by creating a standard form of low-risk mortgage investment, have increased the geographical and economic ranges of mortgage lending, particularly by life insurance companies and mutual savings banks. They also have augmented local sources of mortgage funds by encouraging commercial banks to make home mortgage loans. These agencies have gone far toward creating a national market in which insured and guaranteed mortgages may be traded. Largely through the influence exercised by these programs and the home loan bank system, complete and regular amortization has become standard practice, thus making unlikely such a collapse of the mortgage structure as occurred in the early 1930's.

(c) The Federal National Mortgage Association, especially prior to World War II, has been helpful in increasing the flow of funds into underserviced areas and in reducing the impact of temporary disruptions in the home mortgage market.

3. Shortcomings of the Federal programs

(a) Limited influence on conventional lending: Aside from the influence exerted through the home loan bank system, none of the Federal programs have had any effect in eliminating deficiencies in the conventional loan area of the market. Instead, they have resulted in the creation of parallel systems of mortgage lending and have developed a national market around these systems. (b) Limited appeal of Government programs: Only to a limited extent have savings and loan associations participated in the insured and guaranteed loans programs, the bulk of their operations remaining in conventional loans. Major participation has been on the part of banks and insurance companies. In other words, the greatest appeal of the Government programs has been to those institutions which characteristically show the most variability in their mortgage lending policies. As a result, the Government programs have been generally more susceptible to fluctuations in the availability of funds than home mortgage lending as a whole.

(c) Aggravation of variability in the flow of funds: The ordinary tendency of the guaranteed and insured programs to be subject to greater than normal fluctuations has been intensified by the insistence on maintaining maximum interest rates lower than what the market will accept on a par basis.

(d) Inadequate reserve credit facilities: The original purpose of the Federal National Mortgage Association was to provide a stabilizing force in the market by: (1) reaching new investment funds through the sale of its debentures; (2) providing a market for loans in underserviced areas; and (3) offering a source of liquidity to institutions carrying on large insured loan activity. Prior to World War II, the Association served fairly well in meeting these objectives. Recently, however, the purpose of FNMA has been directed to providing a market for economically dubious loans and to suporting the fixed, submarket interest rates.

D. PROBLEMS TO BE SOLVED

1. Improvements in conventional financing

The conventional loan system could be made a much more flexible and useful instrumentality if State laws regarding foreclosure and investment practices were amended so as to make possible a better geographic and economic distribution of mortgage funds. To the extent that this could be accomplished, the excuse for the Federal programs would be diminished.

The difficulty is that the conventional loan system is in reality 51 systems as created by State and territorial law, and the task of effecting the desirable improvements is a formidable one.

While this task should not be neglected, it seems also desirable, pending such action, to improve the functioning of the insured and guaranteed systems. The principal steps that could be taken to achieve this end are given below.

2. Flexibility in interest rates

The greater part of the difficulties in the distribution of mortgage funds would be eliminated if interest rates on FHA and VA loans could be set in accordance with the relation of the supply to the demand for funds in the market as of the time and place in which the loans were initiated. Such flexibility in rates is essential if the insured and guaranteed systems are to be an integral, dependable feature of the mortgage market, and if we are to maintain a market of nationwide scope.

3. Secondary market facilities

Although it is not possible, so long as submarket interset rates are allowed to persist, to measure the need that might otherwise exist for additional reserve credit facilities, it seems likely that not even a completely free interest rate would remove all the friction in the maket mechanism. It would still be doubtful that Hawaii and Massachusetts would have equal access to mortgage funds or that the transitory irregularities in mortgage funds would be entirely eliminated. On this probability there would still remain a place for a secondary mortgage market facility.

From a practical viewpoint, it would be most feasible to confine the operations of such a facility, at least at the outset, to transactions in Government-insured or guaranteed mortgage loans, which offer the minimum of difficulty in ultimate disposal to investing institutions.

If successful experience should warrant an expansion of the function of the facility to encompass other types of loans, that could be considered at a later occasion. In the meantime a greater degree of stability would be given to a sector of mortgage activity that has been represententing annually 26 to 36 percent of all home mortgage lending and which now comprises 44 percent of all outstanding loans on 1- to 4-family dwellings.

II. NATURE AND FUNCTION OF A SECONDARY MARKET FACILITY

A. WHAT A SECONDARY FACILITY SHOULD AND SHOULD NOT DO

1. Purpose

The purpose of a secondary banking facility for the home mortgage market would be to provide a reserve source of funds. To this end its purpose would be similar to that of the home loan banks. Its scope in one respect would be narrower in that it would deal only in Government insured or guaranteed loans. On the other hand, the scope would be wider than that of the banks in that it would deal with all types of institutional makers and holders of FHA and VA loans, and would be enabled to discount mortgage paper without, as well as with, recourse and to sell its holdings to other institutions as advantageous opportunities presented themselves. Like the banks, however, its character as a reserve, or last resort, source of funds should be clearly established.

The facility should be enabled to overcome shortages of funds occasioned by adjustments in institutional loan policies and by other transient conditions in the general financial markets. It might also temporarily serve to help make a market in remote or rapidly growing areas where the customary facilities for one reason or another were unable to meet the reasonable requirements for mortgage funds. It should, within specified limits, offer lending institutions a means for obtaining liquidity and, hence, add to the attractiveness of mortgages as an investment.

In short, the purpose of the facility would be to provide a measure of breadth, stability, continuity, and confidence to the market for insured and guaranteed loans which might not otherwise prevail.

2. Limitations

Equally important to the delineation of the purposes of a secondary facility are the limitations that should be imposed on it if it is not to be misdirected from its proper task. The resources of a secondary facility should be used neither to finance a speculative expansion of the housing market nor to bolster a market that is already glutted with oversupply.

A proper functioning of the facility presupposes interest rates that either are free to move with the market or are administratively set in a true relationship to current market conditions. Under no circumstances should the facility be used as a means for supporting interest rates lower than those at which persons of good credit are generally able to borrow money.