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bylaws and make general rules and regulations for the organization and operation of the corporation.

The corporation would be subject to the Government Corporation Control Act as a mixed-ownership Government corporation and would be required to render annual reports to the Congress. The corporation would be a depository of public money when designated for that purpose by the Secretary of the Treasury, and could also be employed as fiscal agent of the United States.

The Board would be required to provide for the issuance by the corporation of nonvoting stock, both common and preferred. The preferred stock would be issued to the Federal home loan banks in amounts proportionate to the par value of their outstanding capital. Members of the home loan banks would be required to subscribe for the corporation's common stock in an amount approximately 1 percent of the dollar amount paid by the corporation for its purchase from such members of participations in home mortgage loans. Only members of home loan banks could participate in the activities of the corporation.

The corporation would also be authorized to issue notes, bonds, debentures, and other obligations upon such terms and conditions as the Board determines, but the total amount of such obligations outstanding at any one time could not exceed 10 times the sum of its capital, surplus, and reserves. No restriction as to who may purchase such obligations is contained in the bill.

The preferred and common stock which the bill would authorize the corporation to issue would appear to be exempt from the registration requirements of the Securities Act of 1933, under the exemption contained in section 3(a) (2) of that act. Similarly, the debt securities which the bill would authorize the corporation to issue would appear to be exempt under section 304(a) (4) of the Trust Indenture Act of 1939. Furthermore, it would appear that under section 2(b) of the Investment Company Act of 1940, the provisions of that act would not apply to the corporation. Accordingly, S. 811 does not appear to have any effect on the administration of the Federal securities laws, and the Commission has no comment on the bill.

SECURITIES AND EXCHANGE COMMISSION,

Washington, D.O., September 20, 1963. Re S. 2130 88th Congress. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: This is in response to your letter of September 12, 1963 requesting a report on S. 2130. We have examined the bill, and since it does not seem to have any effect on matters within the Commission's jurisdiction, we have no comment on the bill. Sincerely yours,

WILLIAM L. CARY, Chairman.

THE GENERAL COUNSEL OF THE TREASURY,

Washington, September 16, 1963. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN : Reference is made to your requests for the views of this Department on S. 810, to authorize the chartering of organizations to insure conventional mortgage loans, to authorize the creation of secondary market organizations for conventional and other mortgage loans, to authorize the issuance of debentures upon the security of insured or guaranteed mortgages and to create a joint supervisory board to charter and examine such organizations, and for other purposes, and S. 811, to enable Federal home loan banks to implement their services to their member institutions by establishing a secondary marketing facility for participations in conventional home mortgage loans.

The Treasury Department is in sympathy with the objective of developing more effective private institutions to improve the market for home mortgage loans. The bills' general objective of reliance on private funds is consistent with the statement of the President's Committee on Federal Credit Programs that: "If the credit needs apparently arise from gaps in the private credit structure, a logical first step is to try to remove them by broadening the lending authority of existing private credit institutions, or even by authorizing new types of private institutions which do not require Federal financial aid.” The Department also recognizes the value of mortgage insurance and marketing facilities in achieving this objective. The accomplishments of the Federal Housing Administration and the Federal National Mortgage Association have amply demonstrated the value of these approaches. The Department feels, however, that further study is necessary in order to determine the most effective means of making further progress in this area.

With respect to provisions in S. 810 relating to the insurance of conventional mortgages, e.g., it is not clear whether adequate facilities will be provided by State-charter mortgage insurance companies or whether there will be a need for Federal support. If further study indicates that State-chartered institutions will not be adequate there remains a question as to whether the Federal Government can best fill the gap by chartering new organizations or by broadening the activities of existing Federal agencies.

In the interests of developing a greater reliance on the private market, it would appear preferable to charter private insurance and marketing organizations rather than resort to increased direct Federal action in these areas. It is not clear, however, whether the proposed insurance and marketing organizations would be regarded as truly private. In light of precedents and the uniqueness of Federal charters, the use of such charters might suggest a degree of financial recourse to the Federal Government. If it is contemplated that the proposed corporations would not be regarded as Government-sponsored enterprises, there is a serious question as to whether the costs of providing adequate reserves for losses, plus necessary administrative expenses, would be low enough to make their services attractive. If, in order to assure the success of the proposed corporations, it becomes necessary for the Federal Government to provide some financial backing then it would seem more appropriate to rely on existing Government-sponsored agencies rather than create new ones.

With regard to the secondary market provisions of S. 810 and S. 811, the nature of the geographical need for such assistance is not clear. On the strictly local level, of course, there would presumably be little need for addi. tional facilities. As to the developing of national markets, however, there would appear to be a far greater need for improving existing arrangements in order to provide for increased mobility of mortgage funds. The President's Committee on Federal Credit Programs considered this problem of developing an effective national mortgage market and recommended : "* * * that Federal agencies, in cooperation with States, intensify their efforts to promote the development of uniformity in State laws and regulations pertaining to mortgage contracts (including originations, foreclosures, and title claims).” Thus, the Congress may wish to consider the proposed legislation from the standpoint of whether it is the most effective approach to the development of a fairly standardized loan contract and the removal or reduction of the major legal deterrents to interstate lending.

The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the administration's program to the submission of this report to your committee. Sincerely yours,

G. D'ANDELOT BELIN,

General Counsel. TREASURY DEPARTMENT,

Washington, D.C., September 19, 1963. Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN : Reference is made to your request for the views of this Department on S. 2130, 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.

In a report submitted to your committee on September 16, 1963, on S. 810 and S. 811, the Department stated in effect that further study was necessary in order to determine the most effective means of making progress in improving the market for home mortgage loans. The Department raised as one of the problems that should be included in such a study the question of whether it would be more appropriate to provide a secondary market for conventional mortgages by chartering new organizations or by relying on existing Federal agencies. Consideration of S. 2130 would provide a suitable occasion to study the latter aspect of the matter along with the related features of the other proposed legislation.

The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the administration's program to the submission of this report to your committee. Sincerely yours,

G. D'ANDELOT BELIN,

General Counsel. Senator SPARKMAN. Senator Douglas, do you have any opening statement?

Senator DOUGLAS. No.

Senator SPARKMAN. Our first witness this morning is Mr. Joseph P. McMurray, the Chairman of the Federal Home Loan Bank Board.

And, Mr. McMurray, Mr. Chairman, we are glad to have you before us. We will be pleased to have you proceed in your own way. We have copies of your testimony. Handle it as you see fit.

For the benefit of the record, identify the gentlemen who accompany you.

STATEMENT OF JOSEPH P. MCMURRAY, CHAIRMAN, FEDERAL HOME

LOAN BANK BOARD; ACCOMPANIED BY KENNETH SCOTT, GENERAL COUNSEL; AND HARRY SCHWARTZ, ADVISER TO THE BOARD AND DIRECTOR OF RESEARCH, FEDERAL HOME LOAN BANK BOARD

Mr. McMURRAY. Mr. Chairman and members of the subcommitee, I am very happy to be here again with you and to testify on this important legislation.

I would first like to present Mr. Kenneth Scott, our new General Counsel. He comes from California. And Mr. Harry Schwartz, who is the adviser to the Board and Director of Research, who also comes from California.

The bills before you are aimed at a purpose which has long been at the forefront of discussion in Government, financial circles, and the academic community. And as the Senators know, I had the opportunity of working with the committee in the years gone by in hearings on this subject.

I should like to point out that I am not here as a proponent of these bills but merely as the head of an

agency with responsibility in this general area. The Federal Home Loan Bank System was conceived, in part, to improve the flow of funds among areas. This represents an attempt to deal with at least one of the problems which proponents of a secondary market regard as significant. The aims of those who seek to improve the secondary market are meritorious. More than one observer has remarked on the desirability of such a program

from a theoretical point of view. In my tenure on the Federal Home Loan Bank Board, I cannot recall a single colleague who has not endorsed the goals sought by secondary market proponents and I, too, have endorsed the several aims.

Practical fulfillment of these aims is fraught with many problems. Not all of them involve feasibility. The theoretical arguments contain propositions which may not be supported by the real world. Consequently, these comments on S. 810, S. 811, and S. 2130 are not designed as a final position on any or all of the proposals, nor are they directed to these bills alone. The remarks we are submitting here today attempt to present the issues which must be answered if any approach is to take wing and become airborne.

A brief sketch of the present program of the Federal Home Loan Bank System may present a picture of what is already in existence in the way of aids to at least one set of institutions in the mortgage market and perhaps to the market as a whole. Basically, the advances granted by the Federal home loan banks and and the participation program authorized by the Board and the Federal Savings and Loan Insurance Corporation provide members of the Federal Home Loan Bank System with tools to cope with some of the problems under discussion.

Proposals for a credit facility to support the residential mortgage market date back, as the Chairman pointed out, at least to 1918. It was not until 1932, after a major collapse in the housing and mortgage market, that the Federal Home Loan Bank System was created. Legislative history reveals that two plans had been proposed. One was the present system and the other a system of mortgage banks.

Under the mortgage bank concept, the instrumentalities created would have owned mortgages and bought or sold as market conditions changed. No explicit trail of reasoning was left in the legislative history, but collateral comment suggests that Congress was chary about the pricing, purchasing, and inventorying problems in a mortgage bank. Furthermore, the nonstandard character of mortgage instruments makes such a proposal even in today's environment extremely difficult.

Congress and the administration chose the present system. Credit extended by the Federal home loan banks is collateralized by mortgages or U.S. Government obligations and may be unsecured under certain conditions. The main point, however, is that the ownership of the securities remains with the investor, and the investor also continues to carry the risk. The standards are firm and clear; there is no need to determine a price in a market which can hardly be described as continuous and in which the instruments are widely different in character and quality.

The House report on the Federal home loan bank bill set forth a number of aims. These included provision of funds to meet short- or long-term financing needs of member institutions and the transfer of funds from areas of surplus to areas of shortage. Today, about $3.8 billion in advances are outstanding to member institutions. While this figure is really small, less than 4 percent of member assets, the effects of this program are notable. Because of this program member institutions have been able to meet swings in the mortgage market far more smoothly than some other lenders. We would point out, in all fairness, that other lenders can shift between mortgages and other instruments which may be more attractive at times. Nevertheless, the advance mechanism has provided a buffer permitting member institutions to absorb surges in the mortgage market, whatever their cause.

Yet, this has occurred in such a way as to meet the tests which a rational market would impose. For example, when rates on advances increased sharply in late 1958 and in 1959, advances fell below expectations until the rate structure declined. There are limits to which mortgage rates can be pressed without discouraging a significant number of buyers and builders. Consequently, the effects of the money and capital markets do get transmitted through the advance mechanism without, however, causing abrupt, discontinuous shifts in lending.

Since 1957, the Federal Home Loan Bank Board has permitted insured institutions to buy mortgage participations from other insured institutions. Initially, the program started slowly. Acquaintance with the techniques involved grew gradually. While only about $2 billion has been traded under this program, last year alone $800 million was transferred among insured associations, an increase of 60 percent from 1961, and almost four times the volume in 1959. Almost 60 percent of the sales originated in the San Francico district, which includes California where the demand for mortgage money has been particularly strong for some years.

Not all of the sales by associations in the San Francisco district leave that area. From 20 to 30 percent of the participations are purchased by associations within that district, reflecting shifts of funds among associations within the region. There are nine States, I believe, in that region. The remainder are widely distributed. The strongest net buying areas are the Boston, New York, Chicago, and Topeka districts, each of which bought more than $50 million net

last year,

Linked with the program on advances, the participation mechanism becomes a very efficient transfer mechanism. Associations in regions requiring more income opportunity can borrow from a Federal home loan bank to acquire participations when yields are attractive. The net effect is to cause substantial shifting of funds among regions.

Yet, these two programs have not completely eliminated rate differentials among different markets. Quick references to FHA and VA mortgage quotations will demonstrate that FNMA, given its acknowledged success, has not eliminated rate differentials for insured and guaranteed mortgages. There are costs to transferring money and servicing instruments at a distance. Money will not move unless there is a differential. Theoretically, the differential is compressible to the zero point. Practically, this may not be so, particularly in the mortgage market. Purchase and servicing costs, foreclosure laws, and variations in risk, real or imagined, reduce the need for a differential. Even in the market for business loans, which is exceedingly fluid, rate differentials exist among regions despite the willingness of many banks to lend over extensive geographical areas.

It is possible that the flow of funds alone cannot cure rate differentials among regions. Aside from frictions which can only be overcome at a cost reflected in rates, there exist congeries of other market factors that require exploration and evaluation. Particularly where we deal with a highly differentiated instrument such as a mortgage loan or a business or consumer loan, there may be factors that cannot be erased merely by transferring money among regions. This does not mean that we should ignore the problem. Certainly, the freedom of transfer that does exist has helped reduce rate differentials in all our markets. But, perhaps, we should not grasp too readily a promise to do more without very substantial demonstration of the cost of the new or revised transfer mechanism.

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