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operations as the land bank system and the intermediate credit banks), an administrative union of the Home Loan Bank System and the proposed secondary facility might be feasible, and the possibility should not be excluded from consideration. In any case, the importance of a close relationship to central credit and monetary policy should be maintained.
III. PROPOSED LEGISLATION
The following outline is designed to present the features of the legislation necessary to bring a secondary. mortgage market facility into being and to assure the attainment of the objectives stated in the previous sections of this report.
The outline is intended for the help of the legislative draftsman but does not presume to do his work for him.
B. OUTLINE OF LEGISLATION
An act to establish a secondary mortgage market facility. 2. Statement of purpose
To create a more equable distribution of mortgage funds throughout the Nation and to reduce the variations in the amount of funds that from time to time and from place to place are available for residential mortgage loans insured by the Federal Housing Administration or guaranteed or insured by the Veterans' Administration.
Comment.—The limited purpose enunciated above follows the reasoning and recommendations in the previous discussion. It envisages an institution created to deal with identifiable problems and avoids embarking upon any vast experimental operation. It would be possible for Congress to broaden the scope of the activities of the Fund as improvements were made in State legislation and as experience evidenced capacity to deal safely on a broader basis. 3. Corporate structure
There shall be established in the District of Columbia a nonstock, nonprofit corporation, known as the Federal Mortgage Fund, which shall have succession until dissolved by Congress.
The Fund shall have a Board of Directors consisting of three members appointed by the President with the advice and consent of the Senate, with compensation fixed at $15,000 per year, the Chairman of the Board to be designated by the President and to serve as chief executive officer of the Fund. Terms of the Directors shall be for 6 years, except that, at the outset, the terms shall be for 2, 4, and 6 years. The Directors shall appoint all officers and employees of the Fund, who shall serve at the pleasure of the Directors.
The Fund shall be an independent agency and shall make reports annually to the President and the Congress covering its operations and administrative policies. The Directors, however, shall receive the advice of the Board of Governors of the Federal Reserve System before issuing debentures or establishing buying and selling prices on mortgages acquired by the Fund and interest rates on loans made by it.
Comment.-The concept is one of an institution that is ultimately financed wholly with private funds and which involves no obligation on the part of the Government other than that already involved in the mortgage insurance and guarantee operations. At the same time, the institution is to be free from domination by any of the various interests in the construction or mortgage finance industries or by the governmental agencies operating the insuring and guaranteeing programs. The special corporate form and administrative setup provided for in the legislative outline is designed to accomplish these purposes. 4. Advisory Council
In the exercise of its functions, the Directors may utilize the advice of an Advisory Council consisting of 12 members, broadly representative of the geographic regions of the Nation and of the business interests related to residential mortgage lending, to be appointed by the President for terms of 1 year, and to meet at the call of the Board not less than three times each year. Council members shall be compensated for time actually spent on Council business and for necessary expenses in attending meetings, according to the customary allowances for such compensation.
Comment.—The object of the proposed Council is to assure representation of industry in the policymaking process. 5. Paid-in capital
The Fund shall have an initial capital of $20 million which shall be transferred from the capital account of the Federal National Mortgage Association and shall be in the form of a loan to the capital account of the Fund. The amount of this loan, with interest at the average yield on outstanding Government obligations as determined at the time of transfer, shall be repaid out of the earnings of the Fund, within a period not to exceed 10 years unless otherwise directed by Congress.
As a charge for doing business with the Fund, institutions eligible to deal with the Fund shall pay into the capital account of the Fund an amount as determined by the Board of Directors but not less than 1 percent of the face amount of any loan made by the Fund or of the outstanding principal amount of FHA or VA mortgage loans sold to the Fund.
Earnings in excess of estimated requirements for administrative expenses for the succeeding year shall annually be paid into the capital account. Capital accumulated in excess of the estimated loan and purchase requirements of the Fund may at the discretion of the Board of Directors be retained as excess reserves or be paid into the general fund of the Treasury.
Comment.—The capital setup as outlined follows from the type of proposed corporate structure. It provides a simple method for accumulating private funds from those who use the facilities of the Fund without imposing upon them any special responsibilities or granting to them any special rights or claims on the facility. 6. Eligibility
The Fund shall be authorized to conduct loan or purchase transactions with any mortgagee approved by the Federal Housing Administration for making insured mortgage loans and with any corporation, trust, or other institutional borrower having succession that is regularly engaged in the business of making loans guaranteed by the Veterans' Administration and is approved by the Directors of the Fund. The Fund shall have the right to refuse for cause to transact business with any otherwise eligible institution.
Comment.—The eligibility requirements are designed to assure that those doing business with the Fund are competent and responsible lenders capable of servicing mortgage loans. In principle these provisions are similar to those now governing FNMA operations. 7. Powers
The Fund shall have power to adopt and use à corporate seal; make contracts; sue and be sued; establish branches as may be deemed appropriate by the Directors; conduct business in any State, territory, or possession of the United States including the District of Columbia ; issue debentures as hereinafter provided ; buy, sell, and lend on the security of FHA and VA mortgage loans and otherwise invest its funds as hereinafter provided ; enter into and terminate contracts for servicing mortgages in its portfolio; foreclose defaulted mortgages, or purchase title in lieu of foreclosure or accept title for release of the mortgage obligation; deal with, renovate, sell for cash or credit, rent or otherwise dispose of any property acquired through foreclosure proceedings; and do all other things necessary or incidental to the proper conduct of its affairs.
Comment.—The requisite powers of the Fund are set forth, but, at the same time, a broad range of discretion is left to its Board of Directors in establishing operating policies and procedures. 8. Obligations
The Fund shall be authorized to issue and to have outstanding at any one time notes, bonds, debentures, and other obligations in an aggregate amount not to exceed 40 times the amount of its paid-in capital and in no case in excess of the outstanding principal amount of the mortgages, cash, and other assets held by it. The payment of principal and interest on such obligations shall be secured by a pledge of all assets and earnings of the Fund but shall not be otherwise guaranteed. The obligations shall be legal investments for any national bank or Federal savings and loan association and shall be eligible for purchase by the Federal Reserve banks on conditions to be established by the Board of Governors of the Federal Reserve System.
Comment.—The ratio of debentures to capital is identical to that in the present FNMA legislation. 9. Investment of funds
The funds of the Fund shall be invested in (a) mortgage loans insured by the Federal Housing Administration or guaranteed or insured by the Veterans' Administration which have been acquired from eligible institutions under conditions of eligibility as may be determined from time to time by the Fund; (b) loans made to eligible institutions on the security of such mortgage loans; (c) Government obligations; or (d) cash.
Comment.-The limitations on investment are in line with the limited purpose for which the facility is established. 10. Reserves
An amount equivalent to not less than 242 percent of the outstanding amount of the obligations of the bank shall be maintained as a reserve. The reserve shall be invested in U.S. Government obligations or held in cash and shall not be subject to any claim upon the Fund or be drawn for any purpose except to meet interest and principal payments on the Fund's obligations in amounts in excess of its earnings.
Comment.-Although none of the previous legislation respecting national mortgage associations has contained a reserve requirement, on the theory that the insurance and guarantees on its investments would provide adequate protection, it is felt that both the soundness of the operation and the acceptability of the debentures would be improved if additional protection in the form of reserves were provided for. 11. Discounts, premiums, rate of interest
In connection with its purchase and loan transactions, the Fund shall from time to time establish the amount of payment to capital, the rate of discount, if any, at which it will buy mortgage loans, the amount of premium or discount, if any, at which it will sell mortgage loans, and the rate of interest and other conditions on which it will lend its funds on the security of mortgage loans.
Comment. It is assumed that the agencies issuing and guaranteeing mortgages will follow a policy in respect to interest rates that will assure a reasonably close relationship to market conditions. The freedom allowed the fund in establishing discounts and premiums is intended to give strength to a flexible interest rate policy. 12. Liquidation of Government mortgage holdings
The Federal National Mortgage Association shall be terminated and all its assets shall be transferred in trust to the fund for management and liquidation. All assets of the RFC Mortgage Co. shall be transferred in trust to and managed and liquidated by the fund. All mortgage loans acquired by the Veterans' Administration under its direct lending program shall be transferred in trust to be managed and liquidated by the fund. All receipts from these trust accounts in excess of all servicing costs, all losses, and a management fee equivalent to one-twelfth of 1 percent per annum of the outstanding face amount of the mortgages in the trust accounts, shall be paid to the general fund of the Treasury except that, as to mortgage loans transferred from the Veterans' Administration, the net receipts shall be paid to the account of the Veterans' Administration. No assets of the trust accounts may be sold at less than par except with the concurrence or at the direction of the Secretary of the Treasury.
Comment.-The reasons for giving these liquidating functions to the fund are to provide greater economy of administration, and to assure a more orderly market for the mortgages held by governmental agencies and the new facility. 13. Taxation provisions
Franchise, capital, reserves, investments, and other property (other than real property) held by the fund and earnings of the funds shall not be taxable by the United States or any State, territory, or possession of the United States, or political subdivision thereof. The income from obligations issued by the fund shall be fully taxable in the hands of the holders of such obligations.
Comment.--The tax status of the fund is in general conformity with that previously proposed for national mortgage associations. 14. Federal depository
The fund shall be authorized to receive deposits of public money and to serve as a financial agent of the Government of the United States.
LETTER TO MEMBERS, No. 26-60, ISSUED MAY 17, 1960
8. 3541 AND H.R. 12216, TO PROVIDE ADDITIONAL FINANCIAL FACILITIES IN THE
FEDERAL NATIONAL MORTGAGE ASSOCIATION, TO PROVIDE FOR THE INCORPORATION OF FEDERAL MORTGAGE INVESTMENT COMPANIES
DEAR MEMBER: On May 12, 1960 Senators Sparkman and Capehart introduced S. 3541 (by request). Representative Rains introduced the same bill as H.R. 12216 (also by request). These bills would make certain changes in the present programs of FNMA and would authorize the incorporation of "Federal mortgage investment companies."
The text of the remarks made by Senator Sparkman in introducing S. 3541 is attached.
The question of the need for additional secondary mortgage facilities has always been a subject in which MBA has been interested and there have been expressions concerning MBA's attitude in all the policy statements which have been issued in the last few years and which have been adopted officially by the board of governors.
As far back as August 1952, when Aubrey Costa was president of MBA, the board of governors authorized him to set up a committee to study what should be done to improve the operations of FNMA or to establish a different kind of secondary mortgage facility.
The committee was appointed by Mr. Costa, and the members were Aksel Nielsen, chairman, John F. Austin, Jr., George H. Dovenmuehle, Harry Held, Ferd Kramer, Franklin D. Richards, James W. Rouse, and Milford A. Vieser.
The committee did a great deal of work during the years 1952, 1953, and 1954, but for various reasons, no specific bill was prepared and no final action was taken as a result of the committee's work.
The National Association of Home Builders has been talking for many years about the creation of what they have termed a “central mortgage bank," and there have been indications from time to time that the home builders would actually sponsor legislation for the creation of such a facility. In 1959 when the Home Builders Association became especially vocal in this field, MBA President Walter Nelson appointed a committee to meet with the homebuilders to see whether some means could be found of bringing the views of the two organizations into something that resembled harmony. Messrs. Nelson, Bass, and Tharpe were appointed to this committee. A number of meetings were held with the homebuilders and a good deal of basic agreement was reached but no joint public expression of views by the two associations was ever agreed upon.
During the past several months there have been more and more indications that a number of industry groups were working on some form of proposals for a new type of secondary mortgage facility and that the subject was also being considered by staff personnel of the Senate and House Banking and Currency Committees. Early in April representatives MBA, the ational Association of Home Builders, and the National Association of Real Estate Boards met to see whether there was any program of action that could be developed upon which the industry could agree.
The first meeting took place on April 13. MBA President Bass, General Counsel Neel, and Consulting Economist Colean attended this meeting for MBA. After a good deal of discussion, the homebuilders presented a draft of a proposal which was modified in many respects from their earlier suggestions and it soon became clear that the three associations might very well agree on proposals which would be helpful to the economy in general and to the housing industry in particular.
As a result of the April 13 meeting, work was begun to attempt to draft a bill which would both make some changes in FNMA's operations and provide for a new type of institution to be called Federal Mortgage Investment Company, which would be chartered by FNMA along the lines of the old regional mortgage associations authorized by title III of the National Housing Act before it was repealed.
The proposals were put in bill form and were discussed and amended at a second meeting between representatives of the three associations, which meeting was held in New York on May 2, at the time of MBA's eastern mortgage conference.
Following this meeting, those members of MBA's executive committee who were present in New York considered the proposals in detail with other members of MBA's board of governors. Those present at this meeting were Messrs. Bass, Tharpe, Costa, Dovenmuehle, Shutz, Thompson, and Stallard.
There was general agreement among those present at this meeting that the proposals as they were being developed merited support by the association, and there was general agreement that if the bill as drafted was actually introduced in the Congress and thus had to be discussed by the representative of the association scheduled to testify before the Senate Banking and Currency Committee's Subcommittee on Housing on May 18, that it would be desirable for the associations representative to express support of the measure even though there would not have been an opportunity by that date to advise the entire membership of the board of governors of the details of the proposal and to secure approval from them. It was felt that the executive committee should take this responsibility in view of the fact that the general language in the current MBA policy statement would indicate approval of a proposal along the line of that being discussed, and the feeling that since representatives of MBA had participated and taken such a prominent part in the preparation of the proposed bill, the association should take credit for the work done by its representatives.
You will find with this letter the text of the proposed bill in its present form and a brief analysis of what the major provisions of the bill would accomplish.
The text of the proposed bill has already been distributed to all members of the board of governors who have been invited by President Bass to express their views to him at their earliest opportunity. President Bass has also indicated to me that he would welcome expressions of opinion from all members of the association concerning this proposed legislation.
A representative of MBA is scheduled to testify on May 18 concerning the various bills now before the Housing Subcommittee of the Senate Banking and Currency Committee, and also on May 25 on the new housing bills which have just been introduced by Representative Rains (H.R. 12152 and H.R. 12153), and which will be summarized in the next Washington newsletter. Sincerely yours,
SAMUEL E. NEEL, General Counsel.
[Excerpt from the Congressional Record, May 12, 1960) INCORPORATION OF FEDERAL MORTGAGE INVESTMENT COMPANIES
Mr. SPARKMAN. Mr. President, on behalf of myself, and the Senator from Indiana, Mr. Capehart, I introduce, for appropriate reference, a bill to provide additional financial facilities in the Federal National Mortgage Association, to provide for the incorporation of Federal mortgage investment companies, and for other purposes.
The bill is introduced by request, in order to provoke study and discussion. The idea of a central mortgage bank has been of great interest for a long time. As the present occupant of the chair, the distinguished Senator from Maine, Mr. Muskie, who is a member of the Subcommittee on Housing of the Committee on Banking and Currency, well knows, we have discussed the subject in committee many times. Considerable research has been done over the last few years, and now three of the great organizations interested in the matter—the National Association of Home Builders, the Mortgage Bankers Association, and the National Association of Real Estate Boards—have come forward with a suggested bill.
As I have said, I introduce the bill at their request at this time for the reason that hearings are now in progress in the Subcommittee on Housing concerning housing legislation for this year. The hearings have been running during this week, will resume on Monday, and will continue through next week.
Some persons will want to discuss this very kind of program in the course of the hearings, so I think it is well that a specific bill be before the Senate.
I have not had an opportunity to study the bill in all its details. I cannot say that I am familiar with all its features. I do endorse the central idea, and have done so for a long time.
I think it would mean much for the obtaining of needed credit and stabilization of the home mortgage market in this country if there were such an organization as the one which is proposed.
My introduction of the bill does not mean that I endorse every feature of it at all. I endorse the central thought, and hope that the bill may serve as a basis from which a satisfactory central mortgage program may be evolved.
Mr. President, I ask unanimous consent that a statement I have prepared concerning the bill may be printed at this point in the Record.