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(b) the place where the company's principal office or place of business is to be located;

(c) the amount at which the company shall be capitalized, which shall be not less than $1,000,000, and the number of shares which shall represent the company's capital;

(a) the names and places of residence of subscribers to capital stock under existing firm contracts, and the number of shares to be held by each such subscriber;

(e) such other information as the incorporating board may require by rule, regulation, or otherwise, and

(f) the fact that the articles of incorporation are submitted to enable the incorporators to avail themselves of the provisions of this title. Sec. 205. In the case of any application under section 204 hereof, after careful examination of all material submitted in connection therewith, and of any related facts, whether by special commission or otherwise, the incorporating board shall issue a certificate of incorporation to the federal mortgage investment company applying therefor, if it is determined that the company is lawfully entitled to be chartered under this title. No such company shall transact any business, except such as is incidental to its organization, until it has been chartered in accordance with this title and a certificate of incorporation has been received by it. The incorporating board shall not issue a certificate of incorporation to any such company until it has ascertained, by satisfactory proof submitted with the application, or otherwise, that at least 25 per centum of the company's capital stock has been subscribed to and paid for in cash, or in Government securities, or in first mortgages or such other first liens as are authorized investments for the company under this title: Provided, That the valuation of any such Government securities or first mortgages or other first liens for the foregoing purposes shall be subject to approval by the incorporating board.

SEC. 206. Upon being chartered under this title, a federal mortgage investment company shall be a body corporate, and as such, in the name designated in its certificate of incorporation, it shall have the following powers and authority :

(a) to originate, as mortgagee, or to purchase, and to service, sell, borrow on the security of, and otherwise deal in any mortgages which are insured under the National Housing Act, or insured or guaranteed under the Servicemen's Readjustment Act of 1944, chapter 37 of title 38 United States Code ;

(b) to originate, as mortgagee, or to purchase, and to service, sell, borrow on the security of, and otherwise deal in first mortgages, and such other first liens as are commonly given under the laws of the State or other jurisdiction in which the real estate is located to secure advances upon real estate held in fee simple, under a lease for not less than ninety-nine years which is renewable, or under a lease having a period of not less than fifty years to run from the date the mortgage was executed, together with the credit instruments, if any, secured thereby : Provided, That the amount of the principal obligation of any such mortgage shall not exceed 75 per centum of the value of the property, appraised in accordance with accepted appraisal principles, subject to any rules and regulations promulgated by the incorporating board ;

(c) to make payments of non-refundable capital contributions to the Federal National Mortgage Association, and to receive stock of such Association evidencing such capital contributions, and to held or dispose of such stock so acquired :

(d) in accordance with section 207 of this title, to borrow money through the issuance of notes, bonds, debentures, or other obligations;

(e) to deal with, rent, renovate, modernize, or sell for cash or credit, or otherwise dispose of, with a view to assuring a maximum financial return to the company, any property acquired by it as a result of foreclosure or other liquidation proceedings :

(f) to adopt and use a corporate seal ;
(g) to adopt, amend, and repeal bylaws governings its activities;

(h) to enter into any transactions in the exercise of any of its powers, and execute any instruments necessary or appropriate thereto; and do any and all other things necessary or incidental to the proper management of its

business or conduct of its affairs. SEC. 207. Each federal mortgage investment company is empowered and authorized to issue and have outstanding at any one time notes, bonds, debentures, or other obligations in an aggregate amount not to exceed twenty times the amount of its paid-up capital and surplus, and in no event to exceed the aggregate current unpaid principal balances of mortgages held by it and insured or guaranteed under the National Housing Act, or the Servicemen's Readjustment Act of 1944, chapter 37 of title 38 United States Code, plus the amount of its cash on hand and on deposit, and the value of its investments in obligations of the United States or guaranteed thereby, and of the Federal National Mortgage Association. Any such company may, if its bylaws so provide, accept any notes, bonds, debentures, or other obligations issued by it in payment of obligations due it at par plus accrued interest : Provided, That any such notes, bonds, debentures, or other obligations so accepted shall be cancelled and not reissued. Except with the approval of the incorporating board, no such company shall issue any notes, bonds, debentures, or other obligations until such time as the subscriptions to the full amount of its capital stock are paid for in full.

SEC. 208. All moneys of any federal mortgage investment company not invested in mortgages or other first liens as provided in section 206 hereof, or in operating facilities approved by the incorporating board, shall be kept in cash on hand or on deposit, or invested in obligations of the United States or guaranteed thereby, or of the Federal National Mortgage Association : Provided, That each such company shall accumulate and maintain such minimum reserves as the incorporating board shall by rules and regulations prescribe.

SEC. 209. Each federal mortgage investment company, including its franchise, capital, surplus, reserves, and income shall be exempt from taxation now or hereafter imposed by any State, county, municipality, or local taxing authority : Provided, That the foregoing shall not exempt the real and personal property of such company from taxation by any such taxing authority to the same extent according to its value as other such property is taxed.

Sec. 210. Any solvent federal mortgage investment company able to pay its debts as they mature may go voluntarily into liquidation and wind up its affairs on the vote of its shareholders owning two-thirds of its stock. In any such case, the shareholders shall designate one or more persons to act as a liquidating agent or committee, as the case may be, subject to rules and regulations promulgated by the incorporating board; and such board is authorized to supervise any such liquidation, until the claims of all creditors have been satisfied.

SEC. 211. The incorporating board shall have the power to order the liquidation and the winding up of the affairs of any such company, if it finds that the company is violating any provision of this title or any rule or regulation promulgated thereunder, or if it finds that the company is conducting its business in an unsafe and unbusinesslike manner. In any case in which the incorporating board finds that the capital of the company is substantially impaired, and if, within thirty days after it has notified the company of the existence of such impairment, the capital is not restored to its satisfaction, the incorporating board shall order the liquidation and winding up of the company's affairs. The liquidation under this section of any company shall be supervised by the incorporating board, and shall be subject to any rules and regulations promulgated by it, including but not limited to provisions for receiverships.

SEC. 212. The incorporating board is authorized to prescribe rules and regulations governing the operations of federal mortgage investment companies, and to carry out the provisions of this title, in accordance with the purposes thereof. Each such company shall be subject to examinations made by direction of the incorporating board, and shall make such report to the incorporating board at such times and in such form as the board may require; except that the incorporating board may, in its discretion, exempt from making such reports any such company if such company is registered under the Investment Company Act of 1940 to the extent necessary to avoid duplication in reporting requirements.

SEC. 213. No individual, partnership, association, or corporation, except companies chartered under this title, shall hereafter use the words “federal mortgage investment company”, or any combination of such words, as the name or a part thereof under which he or it shall do business. Every individual, partnership, association, or corporation violating this prohibition shall be guilty of a misdemeanor and shall be punished by a fine of not exceeding $100 or imprisonment not exceeding thirty days, or both, for each day during which such violation is committed or repeated. The provisions of section 709, title 18, United States Code, shall not apply to companies chartered under this title.

TITLE III-MISCELLANEOUS PROVISIONS SEC. 301. Section 3 of the Securities Act of 1933, as amended (15 U.S.C. 77c), is hereby amended by inserting at the end thereof the following new subsection (d):

“(d) The Commission may from time to time by its rules and regulations and subject to such terms and conditions as may be prescribed therein, add to the securities exempted as provided in this section any class of securities issued by a federal mortgage investment company under the Federal Mortgage Investment Company Act if it finds, having regard to the purposes of that Act, that the enforcement of this Act with respect to such securities is not necessary in the public interest and for the protection of investors."

SEC. 302. Section 304 of the Trust Indenture Act of 1939 (15 U.S.C. 77ddd) is hereby amended by adding the following subsection (f):

(f) The Commission may from time to time by its rules and regulations, and subject to such terms and conditions as may be prescribed therein, add to the securities exempted as provided in this section any class of securities issued by a federal mortgage investment company under the Federal Mortgage Investment Company Act if it finds, having regard to the purposes of that Act, that the enforcement of this Act with respect to such securities is not necessary in the public interest and for the protection of investors.”

SEC. 303. Section 18 of the Investment Company Act of 1940 (15 U.S.C. 80a18) is amended by adding at the end thereof the following:

“(1) The provisions of subparagraphs (A) and (B) of paragraph (1) of subsection (a) of this section shall not apply to federal mortgage investment companies chartered under the Federal Mortgage Investment Company Act."

SEC. 304. (a) Section 1242 of the Internal Revenue Code of 1954 is hereby amended by adding “or federal mortgage investment company” in the heading thereof immediately before the word “stock”, and by adding in paragraph (1) thereof, immediately before the comma, “or in a federal mortgage investment company chartered under the Federal Mortgage Investment Company Act”.

(b) Section 582 of the Internal Revenue Code of 1954 is hereby amended by inserting at the end thereof the following new subsection :

“ (d) Mortgage losses of federal mortgage investment companies—In the case of a federal mortgage investment company chartered under the Federal Mortgage Investment Company Act, if the losses of the taxable year from sales or exchanges of mortgages held by it exceed the gains of the taxable year from such sales or exchanges, no such sales or exchanges shall be considered a sale or exchange of a capital asset."

(c) (1) The heading of Part III of subchapter H of chapter 1 of the Internal Revenue Code of 1954 is hereby amended by adding after “Bank Affiliates” the words “and Federal Mortgage Investment Companies”, and by adding the following to the subheading thereof:

"SEC. 602. Deduction for additions to loss reserves of federal mortgage investment companies.

"SEC. 603. Exclusion for mortgage discounts of federal mortgage investment companies.

“SEC. 604. Deduction for amounts paid to holders of shares and obligations of federal mortgage investment companies."

(2) Part III of subchapter H of chapter 1 of the Internal Revenue Code of 1954 is amended by adding the following new sections:

"SEC. 602. Deduction for additions to loss reserves of federal mortgage investment companies.

"In the case of a federal mortgage investment company chartered pursuant to the Federal Mortgage Investment Company Act, there shall be allowed as a deduction an addition to a reserve for losses, relating to the sale, exchange, or total or partial worthlessness of mortgages held by such companies, in amount not exceeding 10 per centum of the taxable income of such companies, computed without regard to this section or to section 604 of this subchapter.

"SEC. 603. Exclusion for mortgage discounts of federal mortgage investment companies.

“In the case of a federal mortgage investment company chartered pursuant to the Federal Mortgage Investment Company Act, gross income shall not include the amount of any discount on a mortgage purchased or originated by such company until such discount has been realized, through sale or exchange of the mortgage or otherwise.

"SEC. 604. Deduction for amounts paid to holders of shares and obligations of federal mortgage investment companies.

“In the case of a federal mortgage investment company chartered pursuant to the Federal Mortgage Investment Company Act which for any taxable year distributes at least 90 per centum of its taxable income, computed without regard to this section or to section 602 of this subchapter, there shall be allowed as a deduction amounts paid with respect to stock or obligations issued by such company."

[From Savings Bank Journal, April 1963]

DETAILED STUDY OF ABA RESALE MARKET PROPOSAL (By Oliver H. Jones, director of research, Mortgage Bankers Association * * *

formerly associated with Stanford Research Institutes, University of California at Los Angeles, Federal Reserve Bank of Cleveland, Board of Governors, Federal Reserve System * * * coauthor, with Leo Greblor,” The Secondary Mortgage Market.”)

Participants in the mortgage market have long sought the philosopher's stone that would magically produce an efficient resale market for residential mortgages. Over the years, alchemists from nearly every segment of the industry have concocted their own formulas. Commercial bankers were among the exceptions until mid-1962 when their formula was unveiled by the American Bankers Association,

The ABA formula, as outlined in the Mortgage Market Facilities Act of 1963, would add three new institutions to the structure of the mortgage market. Under the authority of Federal legislation:

1. Mortgage insurance corporations, chartered by the Federal Government, would insure not less than 100 percent of the unpaid principal and interest of mortgages on one- to four-family residences. The insurance corporation's stock in trade would be fully amortized mortgages, limited to a 30-year term, a $30,000 sales price or appraised value, and a 90-percent loan-to-value ratio. The initial capital specifications require a minimum subscription of $25 million with $5 million paid n.

2. Mortgage marketng corporations would obtain Federal charters permitting them to purchase, sell, and service mortgages and participations on one- to fourfamily residences that carry Federal insurance or guarantee, or insurance of the proposed mortgage insurance corporations. They would also be permitted to raise funds through the sale of bonds, notes, or other obligations, with a maximum leverage of 20 times net worth. The initial paid-in capital would be $5 million.

3. A Joint Supervisory Board would be established under a Chairman, appointed by the President, with four Directors, including the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, the Chairman of the Federal Deposit Insurance Corporation, and a representative of the supervisors of banking in the various States. This new Federal agency would perform general supervision and regulatory functions, including the chartering of the insurance and the marketing corporations.

Unlike its predecessors, the ABA plan seeks improvement through private resources. No dependence is placed upon a central mortgage bank or an allpowerful Federal facility under any other name. It is also unique in its attack on the most nebulous and least efficiently organized segment of the resale market—the market for conventional mortgages. Like its predecessors, the plan reflects industrywide dissatisfaction with the organization of the mortgage market, particularly the performance of the thin and erratic resale market. If the resale market can, in fact, be improved, lenders, borrowers, and, indeed, the general economy will benefit specifically :

1. The most enticing benefit to institutional investors is an improvement in the liquidity position of their mortgage investments. By always having a place to sell mortgages, institutional investors could reduce their holdings of low-yield,

1 The views expressed are those of the writer and not necessarily those of the Mortgage Bankers Association. The association is among those neutrals who have not yet taken a position on the proposed legislation, and the proposal is now being studied by the appropriate committee of the MBA.

short-term investments that give their portfolios the desired liquidity balance and increase their holdings of mortgages. When market conditions change, they could move readily among alternative inestments.

2. The ability to shift investments between mortgages and alternatives would benefit the entire economy by improving the allocation of the Nation's resources. Without a secondary market, mortgages have tended to serve as a residual investment outlet for lending institutions; that is, an outlet for investment after the demands of Federal, State, and local governments and corporations have been met. With a secondary market, mortgages would become the competitive equal of investment alternatives, with shifts in either direction depending only upon relative prices and yields. Resource allocation within investors' portfolios and, thereby, within the marketplace, would not be hampered by the prevailing illiquidity of mortgage assets that restrains portfolio adjustments.

3. The anticipated benefit most commonly found in the preamble to various pieces of legislation that have gone to Congress in the last 50 years on this subject is that an adequate resale market will move funds from one area of the country to another, balancing the flow of funds between capital surplus and capital deficit areas and narrowing geographic rate differentials.

4. An adequate secondary market would also reduce the variability of the flow of mortgage funds. Having a workable resale market for mortgage loans, primary lenders would no longer need to make abrupt changes in the amount of new lending when portfolio adjustments are desired. The resale market would absorb and balance out the impact of portfolio adjustments. The tendency for changes in the yields on alternative investments to generate wide swings in flow of mortgage funds would be reduced and fluctuations in the flow of mortgage funds in response to changes in monetary policy would also be less abrupt.

5. Accordingly, borrowers would enjoy relatively lower costs generated by a steadier flow of mortgage funds, reduction of risks related to illiquidity, and pricing of mortgages according to economic conditions rather than artificial barriers to mortgage investment.

A close look at these expected benefits makes it clear that the prerequisite common denominator is the marketability of the mortgage instrument. Marketability, then, is a necessary condition for the development of an efficient resale market. Federal insurance and guarantee and appropriate enabling legislation have endowed FHA and VA mortgages with this characteristic, making it possible to shift ownership of mortgages and to lend over long distances. Private insurance, it is argued, would similarly endow conventional mortgages. Nevertheless, all of the expected benefits of a resale market have not accrued to FHA and VA mortgages. Investors holding federally underwritten mortgages do not enjoy the benefits of assured liquidity. The geographic movement of funds by this route is largely limited to life insurance companies and mutual savings banks. Overall reseource allocation as affected by shifts from and to mortgage investments has been distorted by inflexible interest rate ceilings and, as a result, an excessive degree of instability in the flow of mortgage funds. In short, marketability is a necessary but not a sufficient condition for the development of an efficient resale market for mortgages.

If the American Bankers Association-indeed, if any group of market participants is really serious about developing a resale market-it must recognize that a second condition must also be fulfilled : The creation of a ready market for mortgages. The liquidity characteristic so ardently sought by mortgage investors will exist only when an investor is assured of a place where mortgages now in his portfolio can be sold. Marketability alone will not suffice. A ready market does not assure investors that mortgages can always be sold at par any more than highly liquid Government securities can always be sold at par. But it does mean that the market genuinely needs a firm or institution that stands ready to buy and sell mortgages at any time, at prevailing market prices—a market maker. Through this institutional innovation and only through this innovation can the benefits that are constantly attributed to an efficient secondary mortgage market be achieved.

Proponents of any plan to improve the organization of the mortgage market through the development of an adequate resale market for residential mortgages can learn by asking, "Why hasn't the existing residential mortgage market developed secondary market facilities, particularly facilities for trading in FHA and VA mortgages?” The principal roadblock in the way of the development of a resale market is the existing compartmentalization of the primary mortgage market. Any corporation organized to make a market for mortgages, that is, to stand ready to buy and sell mortgages at prevailing prices, at any time, must

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