a correspondent or mortgage company and setting standards for mort. gages, they would have more direct control over the quality of the instruments they obtained than would be possible through purchase of debentures backed by a mortgage portfolio. So far, pension funds have demonstrated a preference for insured and guaranteed mortgages rather than conventionals, partly because of the insured and guaranteed feature, but also because of legal considerations involved in foreclosing out-of-State conventional instruments.

Some comments in support of a secondary market speak of making mortgages more liquid. We assume they mean more marketable because liquidity implies an instrument of short maturity. Without dwelling on this bit of semantics, mortgages are readily marketable at favorable price when money is easy or plentiful and not marketable, except at reduced prices, when money is tight. The same thing can be said for a far more standardized and higher grade instrument, Government bonds. The record of fluctuations in the price of Government bonds is far too well known to require discussion here.

It might be well to note briefly some legal problems in S. 810. In a number of respects it seems to create Federal supervision without providing the necessary powers to make that supervision meaningful. Should this bill receive favorable consideration on principle, a very thorough examination of its legal provisions would be necessary. Two points may illustrate the nature of the general problem.

One gap that seems to exist is that the Joint Board would be required to issue a charter, after certain minimum requirements were met, without inquiring into need for or the probability of success of the marketing or insuring corporations. The language of the bill appears to place no limit on the number of such corporations.

It also appears possible from the wording of the bill that an insurance corporation could simultaneously act as investment company without being subject to the Investment Company Act of 1940 or any standards or restraints commonly imposed on insurance companies. Perhaps this is only a technical point which could be cured by redrafting.

Insofar as S. 2130 is concerned, we have not had time to analyze the difference from S. 810 in permitting FNMA to purchase conventional mortgages. It is difficult to tell what the cost factors would be or how one evaluates the substitution of quasi-Government debt instruments for private issues. On the basic principles concerning a market, the same questions apply to S. 2130 as to S. 810.

Turning to S. 811, there are questions on this bill too. Some of them are closely related to those asked concerning S. 810.

At present associations deal directly with each other in arranging participation sales or purchases. One Federal home loan bank provides a clearinghouse service for its members, advising buyers of sellers. and vice versa. Though there is no organized mart or middleman, this is a true secondary market. To establish a market, one does not need a middleman, but buyers and sellers who can make contact with each other. When the buy-and-sell relationships become sufficiently numerous and complex, the market may support a middleman. In point of fact, many large security transactions are concluded outside formal markets.

S. 811 would create a corporation to buy and sell participations.. Again, the question of cost arises. Would the services rendered merit. the cost and would the corporation be able to sustain itself? Is this a necessary or essential cost? In other words, do associations have need for such a middleman?

The bill also provides for a payment into the stock of the corporation by selling associations of 1 percent of the amount sold. This may place the participation corporation at a substantial disadvantage. Associations can now deal directly with each other. Obviously, no association will offer participations to the corporation unless it cannot find other buyers. The corporation will be faced with an absence of offers except to the extent that funds have become generally so stringent or the mortgages are so unattractive for one reason or another that the seller can find no buyers. In the first instance, the bill appears to be creating a mortgage bank, and, in the other, a difficult problem for a corporation, the majority of whose board is elected indirectly by those offering mortgages. The interrelationships here apparent are so complex that further study seems imperative.

It is argued that there may be a need for such a corporation to assist small associations. Is there evidence that small associations exist who cannot find buyers and have used up their line of credit at the Federal home loan bank? We are not now aware of such evidence, though it may be obtainable.

There are policy questions inherent in S. 811 which we have not been able to resolve. First, the composition of the board of directors creates a potential problem. The 11 bank presidents and the three board members would constitute the board of directors. Here we have an instance in which those who, according to law, are subject to review and supervision by the Federal Home Loan Bank Board could possibly overrule that board in an area which touches upon the board's responsibilities under the several acts under which the board operates.

Nor does the bill, as proposed, spell out aims, objectives, or criteria for operation of the corporation. Could the corporation adopt policies which conflict with those set by the board?

In concluding these remarks, may I point out that the objectives which may be stated in support of these bills are indeed meritorious. What is needed is clearer demonstration that the objectives can be attained through these instrumentalities and that instrumentalities are feasible tools not in conflict with present arrangements or programs. It would be inadvisable to dismiss these bills out of hand, but until further evidence is presented on the issues raised in the foregoing comments, my position on these bills must be negative. I do believe this subcommittee is to be commended for its broad views on these issues and for its willingness to pioneer, by hearing these bills, in an area in which much light needs to be shed.

Informal advice has been received from the Bureau of the Budget that there is no objection to the presentation of this testimony from the standpoint of the administration's program.

Thank you.

Senator SPARKMAN. Thank you very much for a very thought ful presentation which you have given us. Even though you raised these

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questions, you posed them, I take it, as questions that need be explored, and you do think that it is a good thing for the subcommittee to explore these different proposals that have been placed before us. Is that right?

Mr. MCMURRAY. Yes, sir.

I would like to see, before these hearings are completed, a survey, based on history, anyway, to see how it would work under different circumstances and with different assumptions. And I think the proponents of the bill; Mr. Kurt Flexner is a very ingenious and brilliant man, as you know, he could present to the committee, the need under varying circumstances. For example, the conditions in 1957, 1958, 1961, and today, for interest rates on mortgages, the need for funds, what mortgages would probably have sold for what the corporate bonds at that time were selling for, what the demand for bonds issued by the proposed institution would be, and so on.

I think this kind of a survey would be extremely helpful, and I think it would shed much light on the problem and raise some very significant questions along the lines that we generally refer to in our

statement.

Senator SPARKMAN. You recall, of course, the report that our subcommittee made based upon hearings into future needs of the mortgage market.

Mr. MCMURRAY. Yes, sir.

Senator SPARKMAN. And you do recognize that there is a real prob

lem for us in that field.

Mr. MCMURRAY. Yes, sir.

Senator SPARKMAN. Senator Douglas?

Senator DOUGLAS. On page 10, Mr. McMurray, of your statement, you point out that a mortgage marketing corporation could borrow 20 times its capitalization; and this, I assume, is based on the text on page 20 of the bill?

Mr. MCMURRAY. Yes, sir.

Senator DOUGLAS. Now, where would it borrow the 95 percent of that capital?

Mr. MCMURRAY. Where would they borrow?

Senator DOUGLAS. Yes; where would they get their capital?

Mr. MCMURRAY. They would have to go into the market and sell their debentures.

Senator DOUGLAS. To whom?

Mr. MCMURRAY. To the people interested in investing in such debentures.

Senator DOUGLAS. Who would those likely be?

Mr. MCMURRAY. Well, the bill permits commercial banks, permits savings and loan associations to invest in these, and then there would be individual investors, pension funds presumably. The people that ordinarily

Senator DOUGLAS. You say permits commercial banks to lend? Mr. MCMURRAY. Yes, sir. The bill permits commercial banks, savings and loan associations, and others to invest in these securities. Senator DOUGLAS. Well, as you know, one of the problems in banking is to separate commercial banking from investment banking; commercial banking being credit primarily created by the banking system to finance working capital; and investment banking sweeping up the

savings of individuals and corporations and investing them in fixed capital. I mean that is the conventional distinction which is drawn between the two, which is frequently dishonored.

But do you see any danger here that banks would lend to these mortgage marketing corporations by creating credit which would then be invested in long-term securities? Because there is a great danger if you borrow short and lend long, so to speak.

Mr. MCMURRAY. Well, I do not see any more danger than there exists at the present time in doing that for other kinds of investments. Senator DOUGLAS. Do you think that such a danger does exist at the present time, that you get back created credit used to finance

Mr. MCMURRAY. When anything is abused, there can be a danger. The commercial banks do have long-term funds in the form of savings deposits. I can see no problem if they use some of these funds for debentures. In fact, I suppose the proponents would say this would be helpful.

Senator DOUGLAS. Helpful?

Mr. MCMURRAY. If it is abused, then, of course, I think you can get some serious problems like you had in 1929.

Senator DOUGLAS. Well, exactly so.

Mr. MCMURRAY. As a matter of fact, even assuming the optimum for this bill, I do not believe you would have an enormous amount of securities issued.

It does permit, as the bill provides, any number of such corporations which could put this amount of money out. But, of course, the market, in my judgment, would not encourage the formation of such corporations; nor am I inclined to think at the moment that there would be many takers of these kinds of bonds, especially if an enormous number of such corporations was formed.

So that, in terms of the magnitude of the securities issued, I think it would not be a danger at all. Besides banks may prefer direct investment in mortgages.

Senator DOUGLAS. Well, let me ask you, as a general principle, do you think that investment in houses should be financed primarily out of savings, exclusively from savings, or to what degree should bankcreated credit be used to finance houses?

Mr. MCMURRAY. I think, of course--and our savings and loans and Federal Home Loan Bank System is designed to do this, as you know, Senator

Senator DOUGLAS. To which?

Mr. MCMURRAY. To encourage thrift among people to make investments in long-term securities; in our case, mortgages. And I think primarily that is the best way to finance our housing program.

Senator DOUGLAS. Well, is it not dangerous when you have the creation of bank credit used to finance long-term investments?

Mr. MCMURRAY. It is a matter of fact, Senator. I think that, for example, this bill simply provides I mean, trying to defend the purposes of the bill-for the issue of long-term securities. This does not mean that if banks should buy those securities that short-term would necessarily get into the financing. Except for minor reliance on shortterm funds, I would be opposed to money-created financing for these organizations.

As I pointed out, I would like to see such a program work. But in honesty and in trying to help this committee and the Congress determine what it should do, I had honestly to raise some of the difficulties that I see.

But I think that-I do not see any part of this bill encouraging very much short-term money for use in long-term markets, in the mortgage market. I do not think that this bill does that.

Senator DOUGLAS. Well, if 95 percent of the loans is obtained from borrowed money, and if the borrowed money can be obtained from the commercial banks, and if the commercial banks can create the credit, why can you not have a considerable injection of

Mr. MCMURRAY. Well, Senator, that

Senator DOUGLAS (continuing). Short term-excuse me; just let me finish the sentence.

Mr. MCMURRAY. Yes; I am sorry.

Senator DOUGLAS. Why can you not have a considerable injection of bank-created credit for long-term investments?

Mr. MCMURRAY. Well, the BAA's would sell at the present time for 4.85, I think-4.85. These people would be investors, long-term investors. They are buying corporation bonds. So they are not speculators.

Now, you would suggest that they would go to the bank and borrow money to make these investments. Well, I doubt very much if borrowing from a commercial banker to finance these kinds of securities would be profitable. The borrower would probably have to pay 6 percent. So he would lose money.

Senator SPARKMAN. No; but you are lending for that individual to invest.

Mr. MCMURRAY. Assume he could borrow at 4 percent, and invest in 4.85. But he might find that if the market changes-and if the market changed by—that is, the yields went up to 51/2, he would probably suffer roughly a 20-percent capital loss. So that he would be subjecting himself to considerable risk.

Now, there are many people who say: "Well, this kind of thing is good; it creates the market." And that is all right, if some people want to do it. But I think substantialy they would not use shortterm credit to buy these BAA bonds.

I might say, also, I think I would like to see that BAA rating analyzed a little bit. After all, these corporations would have relatively high-risk mortgages. The person that made a loan for 70 percent on a 20-year maturity would not sell it to one of these corporations. The kind of loans that would be sold are 90-percent mortgages, and they would not be the best mortgages, because the original portfolio investor would keep it.

And to think that an investor would be willing to put his money in a corporation which had 100 percent of these kinds of mortgages as compared with the average savings and loan association, for example, which would only have some small percentage of the higher risk loans and who pay dividends of 4.85. Besides they would have an insured investment. The debentures of the proposed corporations would not be insured investments.

So I even doubt whether you would be able to sell these debentures for 4.85. But I simply take what has been stated in suport of this