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FEDERAL HOME LOAN BANK BOARD,
Washington, D.C., September 18, 1963. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate.
DEAR MR. CHAIRMAN: In response to your request the Federal Home Loan Bank Board hereby submits views with respect to S. 810 of the present Congress, which if enacted would become the Mortgage Market Facilities Act of 1963.
This bill would provide authority for the Federal chartering of an apparently unlimited number of private corporations of two kinds, mortgage insurance corporations and mortgage marketing corporations, as set forth in the bill.
These corporations would be under the supervision of a Joint Supervisory Board for Mortgage Insurance and Marketing Corporations. That Board would consist of two directors appointed by the President by and with the advice and consent of the Senate, one of them (the Chairman) to be a person familiar with the problems of the national mortgage market and the other to be selected from among persons recommended by the supervisors of banking in the various States, and three ex officio directors comprising the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, and the Chairman of the Federal Deposit Insurance Corporation.
The bill provides that any number of natural persons not less than five, citizens and residents of the United States, may apply to the Joint Board for authority to establish such a corporation, transmitting to said Board executed articles of incorporation. It further provides that if said Board is of the opinion that the incorporators are persons of good repute and the articles meet the requirements of the act the Joint Board shall issue or cause to be issued a certificate of approval, upon which the corporate existence is to begin.
No corporation could transact any business, except as incidental to its organization, until it had been authorized to do so by the Joint Board. However, the only condition set forth in the bill as to the granting of such an authorization is that the Joint Board be satisfied that initial capital of not less than $5 million par value has been subscribed at not less than par and paid in full in cash. A minimum subscribed initial capital of $25 million is provided for mortgage insurance corporations, but the reaching of that minimum is not declared by the bill to be a prerequisite to the issuance of an authorization to commence busi
No minimum other than said $5 million is provided for mortgage marketing corporations.
A mortgage insurance corporation would have authority to insure not less than 100 percent of the unpaid principal and interest of an eligible mortgage loan of not more than $30,000 and not over 30 years constituting a first lien on real estate in fee simple (or on a leasehold under a renewable lease for not less than 99 years or a lease having not less than 50 years to run from the date the mortgage was executed). Eligible mortgages would be required to be amortized as set forth in the bill; not to exceed 90 percent of appraised value as approved by the corporation or of the sales price, whichever was less; to be "on a one- to four-family residential property, or on a one-family unit in a multifamily structure and an undivided interest in the common areas and facilities which serve the structure, which is or will be occupied in whole or in part by the mortgagor”; and to be originated and serviced by an organization approved by the mortgage insurance corporation.
Payment of insurance would be in cash, upon (1) default of 91 days in any payment of principal, interest, or insurance premium, (2) the conveyance to the corporation of “clear title” to the property, and (3) assignment to the corporation of all claims of the mortgagee against the mortgagor or others arising out of the mortgage transaction, except such as may have been released with the consent of the Joint Board. Payment would include interest and allowances (including foreclosure costs) from the time of default, as approved under regulations of the Joint Board in effect when the mortgage was insured.
A mortgage marketing corporation would have authority to purchase, sell, and service mortgages, including participations, on one to four-family residential properties insured by such a mortgage insurance corporation or insured or guaranteed by an agency of the United States. It could issue, with the approval of the Joint Board, obligations up to a maximum of 20 times its capital, surplus, reserves, and undistributed earnings, but not in excess of its ownership, free of all "liens of encumbrances,” of cash, mortgages, and bonds or other obligations of or guaranteed by the United States.
National banks (and State member banks of the Federal Reserve System) would be freed as to the stock of both of these types of corporation, and as to the obligations of these mortgage marketing corporations, from certain of the statutory restrictions on their dealing in, underwriting, and purchase of securities. Federal home loan banks would be authorized to invest in such obligations, and Federal savings and loan associations would be authorized, up to maximum percentages of assets left blank in the bill as introduced, to invest in such stock and such obligations.
The Federal Home Loan Bank Board wishes to give the most frank and candid recognition to the laudable motives of those who have prepared this bill in the interest of improving the acceptability and the marketability of residential mortgages as investment media. The Board itself has long been interested in and has given a great amount of study to the problem of finding ways and means of effecting such improvement. The Board is not satisfied that the present bill would afford the most desirable method of furthering that end. There are set forth below a number of the questions which have led the Board to this conclusion.
In the first place, the Board has serious doubts both as to the adequacy of the regulatory and enforcement provisions of the bill and as to the provisions with respect to the agency (the Joint Board) which would administer them.
The insurance corporations and marketing corporations provided for by the bill would be financial institutions having wide and unregulated authority to issue to the public their stock (and in the case of marketing corporations broad authority to issue to the public their obligations), with their securities classified as exempt securities under the Securities Act of 1933, and with their structure and operations excepted from the Investment Company Act of 1940.
It would therefore be reasonable to expect that the bill would provide either by specific provisions or by the conferring of regulatory authority-a degree of regulation at least approaching that found necessary by experience with respect to comparable institutions, which in the case of these insurance corporations would be analogous to the regulation of insurance companies in the more active insurance States and in the case of these mortgage marketing corporations would be analogous to the regulation under the Investment Company Act of 1940, and the more enlightened State laws dealing with investment companies. This, however, is not the case.
First, it seems probable that on the filing of an application together with executed articles of association the Joint Board is required to issue a certificate of approval if said board is of the opinion that the incorporators are persons of good repute and that the articles meet the requirements of the act, which consist only of the name of the institution, the place where its principal office or place of business is to be located, and such information with respect to its capital stock and powers as the Joint Board may by regulation require. Further, although the bill provides that no corporation shall transact business (except as incidental to its organization) until it has been authorized to do so by the Joint Board, it seems probable that in view of sections 307 and 406 the Joint Board is required to issue an authorizaiton to commence business if it is satisfied that initial capital in the amount of not less than $5 million par value has been subscribed for at not less than par and paid in full in cash.
Thus it appears that the Joint Board would have no control, or no clear control, over the number or location of such corporations, regardless of any question of need and any question of undue injury to other such corporations or other financial institutions.
Second, the only specific regulatory powers of the Joint Board over such corporations would be of the sketchiest nature, relating only to their reports (sec. 203(a)); the approval of some (but not all) of the obligations and securities eligible for certain investments by insurance corporations (sec. 302 (a) (2)); the release of certain claims by mortgagees under mortgages insured by such corporations (sec. 303(a) (3)); the interest and allowances (including foreclosure costs) to be included in the payment of insurance by such corporations (sec. 303(b)); certain market information to be published by marketing corporations (sec. 402(2)); the issuance of obligations by marketing corpo rations (secs. 402(3) and 402 (4)), but not the issuance of stock by either type of corporation; and the extension of the time limit for the holding of title to and possession of certain real estate by either type of corporation (
(secs. 305 (7) and 404 (7)).
These specific regulatory powers are of the most minor and peripheral nature and do not touch the main issues of the corporate structure, corporate relationships, and business operations of the corporations authorized by the bill. While the Joint Board would be given express power to do all things necessary or incidental to the proper management of its affairs and the proper conduct of its business and to issue rules and regulations governing the performance of its functions (sec. 203(a)), it seems probable that this provision would not confer authority with respect to the affairs, business, or the functions of the corporations, except as expressly set forth therein.
Third, the enforcement provisions of the bill do not appear to be adequate. · They provide three types of enforcement proceeding, namely, forfeiture of charter (with consequent liquidation by the Joint Board), injunction, and removal of personnel, but neither separately nor collectively do these remedies seem to afford relief sufficient to protect the public and the investors in these corporations.
'The only ground under the forfeiture provision is violation, or failure to comply with “any of the provisions of this Act, or of any regulations prescribed thereurder." Similarly, the only ground under the injunction provision is that a person “has engaged or is about to engage in any acts or practices which constitute or, if consummated, will constitute a violation of any provision of this Act, or of any regulation thereunder." Neither provision purports to deal with such matters as unsafe or unsound practices, unsafe or unsound condition (even imminent or actual insolvency or impairment of capital), willful or negligent dissipation of assets, or other conditions which might make it dangerous to shareholders or creditors, or to the public, for the corporation involved to continue in business.
It is true that the removal provision applies whenever the Joint Board determines that a director, officer, attorney, employee, or agent of a corporation “has violated any law relating to such corporation or has engaged in unsafe or unsound practices in conducting the business of such corporation.” This, however, would not apply to unsafe or unsound conditions not due to unsafe or unsound practices, and even in the case of unsafe or unsound practices it would apply only to such as were engaged in by particular, identified personnel, as distinguished from being engaged in simply by the corporation itself.
Further, a charter forfeiture, which (inadequate though the grounds might be in the particular case) would be the only method provided by the bill by which the Board could obtain protective custody of the assets, would be obtainable only through court action. Such a proceeding could obviously be delayed through processes of appeal and certiorari, with accompanying grants of stay and supersedeas, even assuming that the provision that such suits may be in "a court of the United States of competent jurisdiction" would be sufficient to confer actual jurisdiction of the subject matter on specific courts, which is in itself not entirely clear.
Therefore, while the bill provides in subsection (a) of section 203 for power in the Joint Board to audit, inspect, and require examinations of these corporations, it is not apparent that any effective steps could be taken if insolvency, impairment, or other unsound conditions were thereby disclosed.
Additionally, as has been indicated, the Federal Home Loan bank Board has serious doubts as to the provisions of the bill with respect to the proposed Joint Board.
Specifically, the Federal Home Loàn Bank Board questions the feasibility of a five-member body with a majority of its composition consisting of three ex officio members having primary responsibilities as grave and time consuming as the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, and the Chairman of the Federal Deposit Insurance Corporation. It is true that the bill provides that each ex officio director may delegate his duties and responsibilities to an assistant, but this provision hardly seems adequate to assure the kind of responsibility to the Executive, the Congress, and the public that should exist in such a case.
The Federal Home Loan Bank Board notes the provision that all decisions of the Joint Board, to be effective, shall require the affirmative vote of at least three directors, at least one of whom shall be other than an ex officio director. This arrangement would in effect give a veto on any proposed action to the two appointed directors, if they cared to exercise such a veto. The Federal Home Loan Bank Board also notes that at least three members would be required to be connected, by official duties or by recommendation, with the banking field, while in the savings and loan field this would be true as to only one, the Chairman of the Federal Home Loan Bank Board.
It may be added that the Federal Home Loan Bank Board questions the requirements of the bill that the Joint Board's assessment receipts be paid into the Treasury and its expenses borne by appropriations. If the Federal Home Loan Bank Board were in favor of enactment of the bill it would feel that, after appropriations for the initial period, the Joint Board's receipts should be available for its expenditures as in the case of the existing Federal bank supervisory agencies. Similarly, it would feel that for the effective exercise of the Joint Board's functions that board's powers to employ and engage personnel and to incur, settle, and pay its obligations should be expressly freed from the restrictions of other laws.
MORTGAGE INSURANCE CORPORATIONS
As to the provisions of the bill on mortgage insurance corporations, the Federal Home Loan Bank Board does not wish to express the view that there is no need for a mechanism to provide insurance for so-called conventional mortgages.
The Board questions, however, the soundness of a provision permitting an indefinite number of relatively small, completely uncoordinated, and comparatively unregulated insurance companies to serve in this field. The Board believes that, as a minimum, a feasibility study should be made in depth before a determination is reached as to what if any measures should be taken to provide for such in
Furthermore, the Board is concerned that the mortgage insurance corporations authorized by the bill might, in consequence of their lack of regulation, be utilized for extraneous and undesirable purposes.
Thus, the bill provides that at least 50 percent of the capital of such a corporation shall be invested in obligations of or guaranteed by the United States and the remainder in other obligations or securities approved by the Joint Board, but as to all other funds of such a corporation it merely provides that such funds shall be "safely invested with due regard to the purpose of the corporation."
In this situation it would appear conceivable that (for example) a mortgage insurance corporation, while doing enough insurance business to preserve appearances, might actually be used and operated as an investment company not subject to the restrictions of the Investment Company Act of 1940 or of State or local regulatory laws applicable to investment companies, and at the same time not subject to effective regulation by the Joint Board.
The Board also notes that the lack of any regulation under the bill as to the intercorporate relations of such corporations could lead to situations in which (for example) a mortgage insurance corporation and a mortgage marketing corporation could be under common control and could deal with each other's affairs on an other than arm's-length basis. The potential dangers of such a situation are obvious.
Finally, the Board calls attention to subdivision (2) of subsection (a) of section 302, which provides that a mortgage insurance corporation shall set its insurance premium and allocate its initial capital so that there shall be maintained at all times unimpaired capital, surplus, and undivided profits in an aggregate amount, on the basis of market value, of not less than 5 percent of the unpaid principal of all outstanding contracts of mortgage insurance. The Board feels that such an inflexible provision, which would actually be incapable of certainty of compliance, would be undesirable, and that a provision under which insurance premiums would be fixed by the mortgage insurance corporations with the approval of the Joint Board, or under which the Joint Board would fix such premiums, would be preferable.
MORTGAGE MARKETING CORPORATIONS
With respect to the mortgage marketing corporations proposed by the bill, the title of the bill refers to these as "secondary market organizations for conventional and other mortgage loans,” thus indicating an expectation that these corporations would in some measure provide such a secondary market.
The Federal Home Loan Bank Board has long been interested in the question of the need for a secondary market for so-called conventional mortgages and the problem of what type of vehicle could successfully be established or utilized for that purpose. But the Board is not convinced that at the present time the need for a mechanism for a secondary market in such mortgages has been established. As in the case of the mortgage insurance provisions of the bill, the Board believes that a feasibility study in depth should precede a determination as to what if any measures should be taken for this purpose.
It seems clear to the Board, however, that the mortgage marketing corporations which would be authorized by this bill would not reasonably be calculated to result in the provision of anything that could properly be termed a secondary market either for conventional mortgages or for mortgages insured or guaranteed by agencies of the United States.
Rather, the Board would expect that, to the extent that they were established, these mortgage marketing corporations would function more in the nature of closed end investment trusts specializing in such mortgages, their purchases and sales being timed more to their own portfolio considerations than to the making of a continuous or relatively continuous market for such mortgages.
As such investment trusts they would, like the mortgage insurance corporations authorized by the bill, be free from the restrictions of the Investment Company Act of 1940 and of State and local regulatory laws applicable to investment companies, and likewise free from effective regulation by the Joint Board. It would not be impossible that they could in effect perform on an unregulated basis the same savings and primary lending functions now performed by savings and loan associations, and thereby threaten the public with the manifold dangers of exposure to unregulated financial institutions.
For the foregoing reasons, and even more fundamentally for the reasons of an economic nature set forth in my testimony on September 17, 1963, on behalf of the Board before the Subcommittee on Housing of your committee, the Federal Home Loan Bank Board does not favor the enactment of S. 810 under present circumstances.
Informal advice has been received from the Bureau of the Budget that there is no objection to the transmittal of this report from the standpoint of the administration's program. Sincerely yours,
JOSEPH P. McMURRAY, Chairman.
FEDERAL HOME LOAN BANK BOARD,
Washington, D.C., September 18, 1963. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.
DEAR MR. CHAIRMAN : In response to your request the Federal Home Loan Bank Board submits herewith its views with respect to S. 811 of the present Congress, which if enacted would become the Home Mortgage Corporation Act.
This bill would create a corporation, to be known as the Home Mortgage Corporation, which would be given power "to buy and sell, and otherwise deal in its discretion with, participation in mortgages on residentials properties containing not more than four family units.” Such mortgages would be required to be first liens on real estate in fee simple, or on a leasehold under a renewable lease for not less than 99 years or a lease having not less than 50 years to run from the date the mortgage was executed.
The management of the Corporation would be vested in a board (referred to in this report as the Managing Board to distinguish it from the Federal Home Loan Bank Board) consisting of the members of the Federal Home Loan Bank Board (3 in number) and the presidents of the Federal home loan banks (of which there are 11). The bill provides that the Chairman of the Federal Home Loan Bank Board shall name one of such presidents as Chairman of the Managing Board.
Under the bill, the Managing Board is to provide for the issuance of nonvoting capital stock of the Corporation, both common and preferred, in shares of $100 par value. On call of the Managing Board from time to time the Federal home loan banks are to subscribe to preferred stock in aggregate amount not over $50 million. Each successive partial issue within that aggregate is to be subscribed and paid for by each Federal home loan bank in proportion to the par value of its outstanding capital stock at the time of such call.
The bill provides further that each member of a Federal home loan bank shall be eligible to participate in the activities of the Corporation and that, subject to certain provisions for the making of deposits in lieu of stock purchase, each participating member shall subscribe to and purchase common stock of the