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Corporation in an amount "approximating" 1 percent of the dollar amount paid by the Corporation for its purchase of participations in "home mortgage loans" from such member.

Except as otherwise authorized by the Corporation, each such member would be required to continue to hold such common stock in an amount not less than 1 percent of the outstanding balances of the participations sold by it to the Corporation and still held by the Corporation. Stock held by a member in excess of “such 1 per centum minimum" would be required to be redeemed at par by the Corporation when offered by the holder, unless the capital, surplus, and reserves of the Corporation would be reduced to less than one-tenth of its obligations then outstanding.

The Federal home loan banks and Federal savings and loan associations would be expressly authorized to purchase stock "as herein provided.” Other Federal home loan bank members not having legal authority to purchase such stock would be permitted, “until State law is amended to authorize such purchase,” to make “deposits” as set forth in the bill, in lieu of stock purchase. The Managing Board would be authorized to retire any or all of the Corporation's stock if the capital, surplus, and reserves of the Corporation would not be reduced to less than $50 million or one-tenth of the dollar amount of its outstanding obligations, whichever was greater. Stock senior as to time of issuance would have first entitlement to retirement, at the election of the stockholder.

For the purposes of the act, the Corporation would have power to borrow money and to issue notes, bonds, debentures, or other such obligations upon such terms and conditions as the Managing Board might determine, the amount of such obligations outstanding at any one time not to exceed 10 times the capital, surplus, and reserves of the Corporation. Such obligations would be declared legal investments for "federally chartered savings and loan associations"; whether this would apply only to Federal savings and loan associations or also to some or all savings and loan associations of the District of Columbia and the territories and possessions is not clear.

The bill would amend the Government Corporation Control Act to include the Home Mortgage Corporation in the list of “mixed ownership Government corporations” in that act. Since there would ot at any time be any Government capital in the Home Mortgage Corporation the reason for such inclusion is not apparent. Further, the effect which such inclusion would have is not clear, in view of the fact that audits of mixed-ownership Government corporations under that act are only for periods in which Government capital has been invested therein and the further fact that a mixed ownership Government corporation from which Government capital has been entirely withdrawn is not subject, during the period it remains without such capital, to the provisions of that act as to the depositaries for banking or checking accounts and as to the issuance of obligations and the purchase or sale of direct or guaranteed obligations of the United States.

By the title of the bill, its purpose is stated to be to enable Federal home loan banks to implement their services to their member institutions by establishing a secondary markeing facility for participations in conventional home mortgage loans.

The Board is of the opinion that at the present time no adequate evidence of need for the establishment of a mechanism for a secondary market in such mortgages has been presented. In any event, the Board believes that a careful and thorough feasibility study should precede a determination as to what if any measures should be taken for this purpose.

In particular, the Board doubts the appropriateness of the provision of the present bill, S. 811, for a Managing Board consisting in minority of the members of the Federal Home Loan Bank Board and in majority of the presidents of the Federal home loan banks. The banks of which they are presidents are under the supervision of the Federal Home Loan Bank Board, and the Board feels that it would be an undesirable reversal of roles for such presidents to be placed in an alternative situation in which they would, in effect, have authority to overrule the members of the Board.

For the reasons set forth above, and even more fundamentally for the reasons of an economic nature set forth in my testimony of September 17, 1963, on behalf of the Board before the Subcommittee on Housing of your committee, the Board. does not favor the enactment of S. 811 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.O., September 18, 1963. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate.

DEAR MR. CHAIRMAN: The Federal Home Loan Bank Board has received your request for a report of S. 2130 of the present Congress, which would amend the provisions of the National Housing Act relating to the Federal National Mortgage Association.

Under the bill, the authority of FNMA to deal with FHA insured and VA insured or guaranteed mortgages would be broadened so that it would also have authority to purchase, lend on the security of, service, sell, or otherwise deal in any mortgages insured under a contract of insurance and by an insurer generally acceptable to private institutional mortgage investors, as determined by FNMA, or which, though neither insured nor guaranteed, are of a quality generally acceptable to such investors and otherwise meet generally the standards of the Association under section 304 of that act, the so-called secondary market section. In addition, the bill would repeal subsection (d) of section 304, which provides that the Association may not purchase participations in its operations under that section.

The purpose of the bill, as indicated by its title, is to empower the Federal National Mortgage Association “to deal in conventional mortgages and to provide otherwise for its further development as a secondary market facility." The implication is that the amendments which would be made would be designed to provide in some measure a secondary market facility for the conventional mortgages (including those insured otherwise than by FHA or VA) which would be covered by the bill.

As has been noted in its report to you on S. 810 of the present Congress, the Federal Home Loan Bank Board has for a long time 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 used for that purpose.

The Board is of the opinion that at the present time no adequate evidence of the need for this sort of mechanism for a secondary market in conventional mortgages has been presented. As is set forth in its reports on S. 810 and S. 811, the Board feels that, as a minimum, there should be a thorough and care. ful feasibility study before a determination is made to proceed with legislation intended to provide for such a market.

For these reasons the Board does not favor the enactment of legislation such as S. 2130 at the present time.

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.

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM,

Washington, September 27, 1963. Hon. A. WILLIS ROBERTSON, Chairman, Banking and Currency Committee, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: This is in response to your requests for reports on S. 810, that would provide for the Federal chatering of mortgage insurance coporations and of mortgage marketing corporations to insure and to deal in, respectively, conventional mortgages ; S. 811, that would create a Home Mortgage Corporation within the Home Loan Bank System with authority to deal in participations in

mortgages; and S. 2130, that would expand the operations of the Federal National Mortgage Association to include conventional home mortgages.

The objective of each of the three bills is to improve the marketability of mortgages not presently underwritten by the Federal Government. The Board believes that certain questions arising from these proposals should be carefully considered and resolved before action is taken with respect to any of the three.

The mortgage insurance corporations chartered under S. 810 would be required to pay “in cash without delay" insurance claims arising out of loans that are in default for a period of 91 days. Just how long such a corporation could meet this requirement during an extended period of decline in real estates prices poses a serious question, particularly in view of the further mandate in the bill that "there shall be maintained at all times unimpaired capital, surplus, and undivided profits * * * of not less than 5 percentum of the unpaid principal amounts of all outstanding contracts of mortgage insurance.” The experience with guaranteed mortgages in the 1930's was that they became frozen illiquid investments. This raises a serious question whether the liquidity of the proposed mortgage insurance corporations could be assured during an extended period of unfavorable real estate market conditions, protection against which their insurance policies are presumably to be issued.

S. 810 would permit mortgage insurance corporations to insure mortgage loans having a loan-to-value ratio of up to 90 percent of the appraised value of the property and maximum maturities of 30 years. It seems clear that this provision would serve to encourage a relaxation of mortgage credit standards. Already in the postwar period, these standards have been progressively relaxed, partly in an effort to meet a pent-up demand for housing and partly to stimulate the economy. In the Board's view this is not the time to give even implied legislative sanction to a further relaxation of these standards.

The Board has serious reservations about provisions of S. 810 which would allow national banks to invest up to 5 percent of their capital and surplus in the stock of mortgage insurance corporations and up to an additional 5 percent in the stock of mortgage marketing corporations. This would be in addition to whatever obligations were purchased by national banks. Furthermore, the bill would permit a national bank to deal in, underwrite, and purchase for its own account, obligations of mortgage marketing corporations. The Board believes that investment banking should be kept separate from commercial banking and the existing exceptions to this rule should not be broadened to authorize underwriting of the securities envisaged under S. 810.

In the case of the proposed mortgage insurance corporations, it appears from the language of S. 810 that the Joint Board would be required to charter any and all applicants once the Board “is of the opinion that the incorporators transmitting the articles of association meet the requirements of the act.” This provision apparently would permit a number of mortgage insuring associations to be chartered, each insuring conventional home mortgages at possibly differing premium rates. If so, the result might be to fragment further and impede rather than to improve-present markets for conventional home mortgage loans.

One possible alternative in the direction intended by S. 810 would be to improve the acceptability to the market of present Government programs by removing the statutory requirements requiring administratively determined interest rate ceilings on FHA-insured and VA-guaranteed home loans. The Board, as you know, has long advocated the removal of these statutory requirements as one step toward improved primary and secondary home mortgage markets.

S. 811 would establish a precedent in authorizing Federal home loan banks, by participating through the Home Mortgage Corporation in conventional first home mortgage loans, to advance funds directly on mortgage security. Under existing legislation Federal home loan banks may make advances to member institutions, usually collateralled by mortgages or U.S. Government obligations, and insured savings and loan associations may participate in mortgages among themselves. Under S. 811 no minimum or maximum participation is proposed. Thus, the Home Mortgage Corporation could assume a very large share of each loan and consequently of the total risk.

The Board is also concerned about provisions of S. 810 and S. 811 which would appear to work against the maintenance of loan quality. S. 810, for example, would provide for 100-percent insurance of principal, interest, and approved allowances from time of default on insured conventional loans ; such insurance, if granted, would seem to offer originators of insured loans little incentive to maintain loan quality. S. 811 would appear to shift mortgage risks to the proposed Home Mortgage Association to the extent of its participation, which under the terms of the bill could be any share of less than 100 percent.

It is apparent that the extension of the activities of the Federal National Mortgage Association into the conventional mortgage field, as is provided by S. 2130, would present a number of special problems not necessarily present in the case of Government guaranteed or insured mortgages. As has been mentioned recently in testimony before your Housing Subcommittee, these problems involve uniform standards of appraisal, mortgage instruments, property requirements, and procedures, as well as uniform methods for determining the acceptable credit standing of mortgagors. It is noted also that S. 2130 contains provisions which apparently assume the enactment of S. 810, or at least those provisions of the latter bill relating to the Federal chartering of mortgage insurance corporations with respect to which the Board has already commented. Sincerely yours,

WM. MOC. MARTIN, Jr.

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION TO THE COMMITTEE

ON BANKING AND CURRENCY, U.S. SENATE, ON S. 810, 88TH CONGRESS S. 810 would create an agency of the executive branch of the Federal Government to be known as the Joint Supervisory Board for Mortgage Insurance and Marketing Corporations (Joint Board). The bill would authorize the Joint Board to charter mortgage insurance corporations organized to insure conventional mortgage loans and mortgage marketing corporations organized to create a secondary market for conventional and other mortgage loans.

Under the bill any five or more individuals who are citizens and residents of the United States may obtain a charter as a mortgage insurance corporation, if the Joint Board is satisfied that such persons are of good reputation and that the articles of association meet the requirements of the act. A mortgage insurance corporation must have an initial subscribed capital of $25 million represented by a $100 par value stock, and will not be authorized to commence business until $5 million of the initial capital has been subscribed and paid in cash. The board of directors must be elected by the stockholders. The corporation would be authorized to insure mortgagee loans meeting certain requirements specified in the bill and would be required to fix insurance premiums so as to maintain at all times an unimpaired capital and surplus of not less than 5 percent of the principal amount of all insured loans.

Under the bill any five or more persons who are citizens and residents of the United States may obtain a charter as a mortgage marketing corporation, if the Joint Board is satisfied that such persons are of good reputation and that the articles of incorporation meet the requirements of the act. Such corporation would not be authorized to commence business until an initial capital of at least $5 million, represented by shares of stock of $100 par value each, has been subscribed and paid in cash. The corporation must have a 'board of directors of at least nine persons elected by the shareholders. The mortgage marketing corporation would be authorized to purchase, sell, and service mortgages and participations in the mortgages which have been insured by a mortgage insurance corporation chartered under the act, or insured and guaranteed by an agency of the U.S. Government. Subject to certain limitations as to the aggregate amount of securities a mortgage marketing corporation may have outstanding, the corporation would also be authorized to issue debt securities secured by such insured mortgages.

The Joint Board would have authority to grant charters to mortgage insurance corporations and mortgage marketing corporations and the power to issue regulations setting forth the type of information required to be included in applications for charters. The Joint Board would also have authority to promulgate regulations governing the performance of its functions; to issue subpenas and hold hearings; to audit, inspect, and examine corporations chartered under the act; to require the filing with it of such reports as it may specify from time to time; to institute injunctive actions to restrain violations or prospective violations of the act or any regulations thereunder; and, after a hearing, to cause the removal of directors, officers, or employees of mortgage insurance or mortgage marketing corporations for violations of the act or the regulations, or for unsafe or unsound practices in conducting the business of such corporations. In addition, the Attorney General, at the instance of the Joint Board, is authorized to bring actions, based on violations of or noncompliance with the act or regulations, for forfeiture of the charter of a mortgage insurance or mortgage marketing corporation.

The Joint Board also has the responsibility to act in certain specific situations, including: approving investments of mortgage insurance corporations; promulgating regulations prescribing the form of information permitted to be published with respect to the purchase and sale of insured mortgages by mortgage marketing corporations; consenting to the release of certain claims by mortgage insurance corporations; prohibiting the sale of debt securities by mortgage marketing corporations if the Joint Board determines that such sale is not in the public interest; and prescribing general regulations governing underwriting fees, maturity, redemption, rates of interest, discount, or other terms of sale of debt securities by mortgage marketing corporations.

The bill would add a new paragraph (12) to section 3(a) of the Securities Act of 1933, adding to the classes of securities exempt under that section any security issued by a mortgage insurance corporation or by a mortgage marketing corporation as defined in the bill. The bill would also add a new paragraph (16) to section 3(c) of the Investment Company Act of 1940, excepting from the definition of investment company any mortgage insurance corporation or mortgage marketing corporation as defined in the bill.

This Commission expresses no opinion as to the policy underlying the creation of the Joint Board and the authorization for the chartering by the Joint Board of mortgage insurance and mortgage marketing corporations. The Commission's comment is restricted to the impact of the bill on the Federal securities laws.

Although the bill appears to contemplate that the primary sources of capital for the financing of mortgage insurance and mortgage marketing corporations will be national banks and Federal savings and loan associations (both of which are authorized to invest in securities of mortgage insurance and mortgage marketing corporations) and other financial institutions, it would appear that the issuance of securities by these corporations will necessarily involve large public offerings to many segments of the investing public which may not be aware of, or have access to, sufficient information concerning the operations of, and risks involved, in these corporations. The scope of the Joint Board's regulatory and supervisory authority over these corporations would not appear to provide for public investors the same degree of protection which would be afforded by the Securities Act of 1933. Nor is it indicated that in exercising its authority to deny issuance of debt securities unless in the “public interest” the Joint Board could apply safeguards comparable with those included in the Securities Act. Although the authority of the Joint Board to control the operations of these corporations might provide some protection for investors, it does not appear that investors would have adequate disclosure of all the material information necessary to the making of an informed investment decision. Accordingly, it does not appear appropriate to exempt securities issued by these corporations from the registration requirements of the Securities Act of 1933.

It would also appear that a mortgage marketing corporation would be a brokerdealer within the meaning of the Securities Exchange Act of 1934, since it would be dealing in mortgage and mortgage participations which are securities within the meaning of that act. We note that the bill does not provide any exemption from the provisions of that act. Because of the nature of its assets, a mortgage marketing corporation would probably experience considerable difficulty in complying with certain provisions of the Securities Exchange Act.

With respect to the proposed exception of mortgage insurance and mortgage marketing corporations from the definition of investment company in the Investment Company Act of 1940, it appears that these corporations are not the type companies which would properly be subject to regulation as investment companies.

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION TO THE COMMITTEE

ON BANKING AND CURRENCY, U.S. SENATE, ON S. 811 S. 811 would establish the Home Mortgage Corporation, a Federal corporation with power to buy and sell, and otherwise deal in its discretion with, participations in mortgages on residential properties containing not more than four family units. The management of the corporation would be vested in a Board consisting of the members of the Federal Home Loan Bank Board and the president of the Federal home loan banks. The Board would have power to adopt

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