25 1 2 estate loans which are insured by mortgage insurance cor porations organized under the Mortgage Market Facilities 3 Act of 1963." 4 FEDERAL HOME LOAN BANK ACT 5 SEC. 503. Section 11 (h) of the Federal Home Loan 6 Bank Act, as amended (16 U.S.C. 1431 (h)), is amended 7 by inserting before the last comma the following: ", in bonds, 8 notes, or other obligations of mortgage marketing corpora9 tions organized under the Mortgage Market Facilities Act of 11 12 1963". HOME OWNERS' LOAN ACT OF 1933 SEC. 504. Section 5 (c) of the Home Owners' Loan Act 13 of 1933 (12 U.S.C. 1464 (c)) is amended by adding at the 14 end thereof the following new paragraphs: "Without regard to any other provision of this subsection any such association is authorized to invest not more than per centum of its assets in stock of a mortgage insurance corporation and is authorized to invest not more than of its assets in stock of a mortgage marketing corporation, as such corporations are defined in the Mortgage Market Facilities Act of 1963. "Without regard to any other provision of this subsec tion, any such association is authorized to invest not more 24 than per centum of its assets in bonds, notes, or other 26 1 obligations of a mortgage marketing corporation, as defined 2 in the Mortgage Market Facilities Act of 1939." 3 4 SECURITIES ACT OF 1933 SEC. 505. Section 3 (a) of the Securities Act of 1933, as 5 amended (15 U.S.C. 77c), is amended by 6 7 8 9 10 11 12 13 14 343 15 (1) striking out the period at the end of paragraph (11) and inserting in lieu thereof a semicolon; and (2) adding at the end thereof a new paragraph as follows: "(12) Any security issued by a mortgage insurance corporation or by a mortgage marketing corporation, as these organizations are defined in the Mortgage Market Facilities Act of 1963." INVESTMENT COMPANY ACT OF 1940 SEC. 506. Section 3 (c) of the Investment Company 16 Act of 1940, as amended (15 U.S.C. 80a-3), is amended by 17 adding at the end thereof a new paragraph as follows: 18 19 20 "(16) Any mortgage insurance corporation or mortgage marketing corporation as defined in the Mortgage Market Facilities Act of 1963." GENERAL COUNSEL OF THE Department of COMMERCE, Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Department on S. 810, a bill 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. S. 810 would create and authorize appropriations for a new Federal agency, a joint board to charter and supervise privately organized and financed corporations. The corporations would insure and market conventional home mortgages. The result would be to set up a private mortgage insurance and mortgage marketing system analogous to the Federal Housing Administration insurance program and the Federal National Mortgage Association. Mortgage insurance corporations would be authorized to insure not less than 100 percent of the unpaid principal and interest on any loan secured by a mortgage on a one- to fourfamily residential property or on a one-family unit of multifamily cooperative apartments. Loans under the program could range up to 30 years duration and up to 90 percent of the appraised value or the sales price whichever is less, so long as the loan is not more than $30,000. Mortgage marketing corporations would be authorized to buy, sell, service, and participate in mortgages on oneto four-family residential properties insured by a mortgage insurance corporation established under this bill, or insured or guaranteed by an agency of the United States. The purpose of this bill is to strengthen the secondary market for conventionally financed mortgages in order that lenders can more easily sell the mortgages they originate to long-term institutional investors, such as life insurance companies and pension funds. It is intended that the bill will stimulate private housing development and stabilize output and employment in the housing supply industry by assuring an even flow of mortgage funds. The Department of Commerce opposes enactment of S. 810. There appears to be no present need for this legislation since there is no lack of mortgage funds. Mortgage originating institutions wishing to dispose of portions of their conventional uninsured mortgage portfolio find no difficulty in selling such mortgages at reasonable and customary discounts. Enactment of the bill might raise the cost of conventional financing, already higher than when done on FHA or VA terms, and harm the secondary mortgage market. Under the bill, mortgages would be insured to make them more attractive to large institutions. Nearly all the mortgages insured in this way will bear high financing charges. Because of the relatively high financing costs to the borrower, and other factors, custodians of large institutional investment funds are likely to be wary of these instruments and will probably tend to select only the best of the privately insured conventional mortgage loans offered under this program. The danger is that the insurance provision is likely to be applied or to be demanded on the weakest types of conventional mortgages now being written and that it will be the least desirable mortgage instruments which will be passed on to investors through the marketing institutions set up by the bill. The large institutional investors at whom this proposal is aimed, having the requisite experience and investment knowledge, can select the sound mortgage instruments. After the large institutions have had their pick, the remaining insured conventional mortgages available for distribution to smaller financial organizations and to private investors are likely to be tagged with an inferior label, as high risk propositions, not up to FHA property standards. If this should happen, it will certainly not help in achieving the goal of securing faster turnover of capital by making a larger supply of funds available to real estate development firms, to builders, and to the ultimate consumer: the individual home buyer. There appears to be little reason to hope, therefore, that this legislation would have a significant effect on housing starts or employment in the housing construction industry. We have been advised by the Bureau of the Budget that there would be no objection to the submission of this report from the standpoint of the administration's program. DEAR MR. CHAIRMAN: Reference is made to your letter of February 20, 1963, requesting our comments on S. 810, which, if enacted, would be cited as the "Mortgage Market Facilities Act of 1963." The bill would create a Joint Supervisory Board to charter and examine organizations for the purpose of providing insurance and secondary market facilities for conventional and other mortgage loans. We have no first hand information concerning the desirability of the proposed legislation and since its enactment would not directly affect the functions of the General Accounting Office we have no comments with respect to the merits of the bill. However, if the bill is to receive favorable consideration, there are several matters concerning the bill which we wish to bring to the attention of your committee. The privately financed mortgage insurance corporations and mortgage marketing corporations that would be established under sections 301 and 401 of the bill would have functions quite similar to those already being performed by two constituent agencies of the Housing and Home Finance Agency-the Federal Housing Administration and the Federal National Mortgage Association. For example, both the mortgage marketing corporations and the Federal National Mortgage Association, a mixed-ownership Government corporation, would have authority to purchase, sell, and service mortgages on one- to four-family residential properties insured or guaranteed by an agency of the United States. Section 202 (a) of the bill provides for the appointment of a Joint Board Chairman who, unlike the four other members of the Board, would not be permitted to engage in any other business, vocation, or employment. However, the bill does not provide for the position of an executive officer to whom the employees of the Board would be responsible for administrative activities such as audits examinations, and personnel management. We can envision operational difficulties if, in the absence of a principal executive officer, day-to-day administrative problems would have to be resolved by the five-member Board. Since the Chairman is the only Board member who would be required to devote his full time to the Board's activities and since other Board members may not always be readily available to make administrative decisions, the committee may wish to designate the Board Chairman as the principal executive officer responsible for all administrative activities. Section 203(b) of the bill would empower the Chairman of the Joint Board "*** to select. appoint. or employ and to fix the compensation of such officers, attorneys, and agents and to vest them with such powers and duties as he may determine to be necessary for the performance of the duties of the Joint Board ***." We have no special information or knowledge as to why employees of the Joint Board should be exempt from the civil service laws and the Classification Act of 1949. However, where employees are not subject to civil service laws and the Classification Act of 1949. as amended, we have generally favored a provision that they should not be paid salaries at rates in excess of rates pavable under the act for positions of equivalent difficulty and responsibility. As an example of such provision, see section 161 (d) of the Atomic Energy Act of 1946. chapter 724, as added by the Atomic Energy Act of 1954, approved August 30. 1954, chapter 1073, 68 Stat. 948, 42 U.S.C. 2201(d). Section 205 of the bill states that: "The expenses of carrving out the provisions of this act shall be borne out of appropriations to the Joint Board." Apparently. this sentence is intended to provide authority for the making of appropriations by the Congress. If so, we suggest that the language be made more specific by adding on line 17. page 7. after the word "Board," the words "which appropriations are hereby authorized." Section 206 of the bill provides that the charters of corporations organized under the bill shall be forfeited if the corporations violate or fail to comply with any provision of the bill or of any regulations prescribed thereunder. In such event, the Joint Board is required to take possession and title to the corpo ration's assets for purpose of liquidation. The provisions would seem to limit the authority of the Joint Board by precluding any action other than complete liquidation and distribution of remaining assets to stockholders. Under certain circumstances it is conceivable that the Joint Board might find it desirable to authorize continuation of a corporation's activities under a reorganized corporation. Section 302 (a) (2) provides for the establishment of an insurance premium which is adequate to maintain at all times unimpaired capital, surplus, and undivided profits in an aggregate amount, upon the basis of market value, of not less than 5 percent of the unpaid principal amounts of all outstanding insurance contracts. Data are not available as to whether 5 percent of the outstanding insurance contracts would represent adequate reserves in case of a declining market. Accordingly, the committee may wish to obtain an actuarial opinion as to the adequacy of the proposed reserves. Further, since the "unimpaired capital, surplus, and undivided profits" are not generally determined upon the basis of market value, we suggest that the phrase "upon the basis of market value" in line 15, page 14, be deleted and that a sentence be inserted in line 21 following the words "Joint Board." as follows: "In computing the 5 per centum limitation the 'unimpaired capital, surplus, and undivided profits' shall be adjusted to reflect the market value of the investments." Section 302 (a)(2) provides also that all funds not invested in obligations of or guaranteed by the United States or in other obligations or securities approved by the Joint Board "*** shall be safely invested with due regard to the purpose of the corporation." We believe that the word "safely" requires definition in order to be meaningful. Accordingly, we suggest that the bill be amended to define the types of other obligations or securities that may be purchased as investments by the Joint Board. Section 302 (b) states that the mortgage or other instrument securing a loan shall be in an amount not exceeding $30,000 and shall be on a one- to fourfamily residential property. We believe clarification is needed as to whether the $30,000 limitation is on the original amount of the loan or on the unpaid principal balance outstanding at the time application is made for insurance. Also, the $30,000 limitation would apply regardless of whether the mortgage or loan is for a one-, two-, three-, or four-family residential property. The National Housing Act, approved June 27, 1934, chapter 647, 48 Stat. 1246, as amended, 12 U.S.C. 1701, authorizes insurance by the Federal Housing Administration on one- to four-family units and provides for different limitations based on the number of family units to be insured. For example, the maximum amounts of insurance available to occupant mortgagors on loans pursuant to section 203 (b) of the National Housing Act, as amended, 12 U.S.C. 1709 (b) (2), is as follows: 1-family units.. 2- or 3-family units---. 4-family units____ $25,000 27, 500 35, 000 The committee may wish to establish separate limitations based on the number of family units to be insured, to reflect the increased value of residential property which generally results when additional family units are constructed. We suggest the following editorial changes: On page 15, line 2, the word "amortized" should be "amortizable". On page 25, line 6, the code reference "(16 U.S.C. 1431 (h))" should be "(12 U.S.C. 1431 (h))". On page 26, line 2, "Mortgage Market Facilities Act of 1939," should be "Mortgage Market Facilities Act of 1963,". Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: You have requested the views of this Corporation on S. 810, a bill to authorize the chartering of organizations to insure conventional |