permitting the substitution, as rapidly as practicable, of private financing for outstanding Treasury borrowings.

To assure maximum private financing to carry the mortgages held in the present portfolio, FNMA would be authorized, with the approval of the Secretary of the Treasury, to issue obligations for sale to the investing public. Such obligations would not be guaranteed as to principal or interest by the United States. The total of such obligations could not exceed the amount of the cash, mortgages, and Government bonds held by FNMA in connection with these management and liquidating functions.

The proceeds of any private financing would be paid to the Secretary of the Treasury in reduction of the present outstanding indebtedness of FNMA to the Secretary. FNMA would also be authorized to issue its obligations to the Secretary of the Treasury in sufficient amount to carry out its functions in this connection.

However, the maximum amount of obligations which could be issued to Treasury could never increase beyond the limit of $3,350,000,000 to accommodate the present portfolio and outstanding commitments for which authority already exists. Provision is also made for the progressive reduction of this maximum amount by the amount of cash realizations from the liquidation of the portfolio, with the objective that the entire amount shall be eliminated as promptly as practicable. I know most of the members of the committee know and appreciate the very excellent job which Mr. Stanley Baughman has done since he has been president of FNMA. Mr. Baughman is here with me and, together, we will try to answer any questions you may have.

Mr. Baughman is here with me and will try to answer further questions.

Senator BENNETT. This third provision looks to the day when FNMA will have completely withdrawn from the secondary mortgage market. It will have liquidated its first portfolio. The second vision sets up the special assistance functions and the third provision sets up the management and liquidation function.

pro

Mr. COLE. Yes. The third provision is a frank recognition of the fact that there are certain provisions which do have and must have Government support.

May I add one more thing in connection with that. I envision that FNMA, in supporting such a program as 221, may be a testing ground, an assistance to the lenders of the country to test the soundness of the 221 program, and it is not without, let's say it is not a vain hope that the 221 program can be proven to investors, and lenders, to show to them that it is a workable program, and therefore, barring emergencies that the Senator mentioned, that we can reduce again the Government-supported programs. That may be a fond hope. I don't know. Senator BUSH. May I ask a question after you? Senator SPARKMAN. Go ahead.

Senator BUSH. I am interested in this financing process. Do you visualize that you would issue debentures secured by these mortgages? Mr. COLE. They would be secured by the mortgages.

Senator BUSH. What margin of collateral do you have in mind as desirable or necessary?

Mr. COLE. That is the reason that there was a limitation on the amount of issuance. I would like to have Mr. Baugman comment on that.

Mr. BAUGHMAN. You are speaking of the liquidating program, the last program?

Senator BUSH. I am speaking of the program that the Commissioner just finished reading about and speaking about, the issuance of bonds shouldn't exceed $3,350,000,000, and it said that, "The total of such obligations should not exceed the amount of cash mortgages and Government bonds held by FNMA," but obviously you wouldn't be likely to do that. You would probably do something less than that. In other words, it might be 90 percent of that.

Mr. BAUGHMAN. That is true.

Senator BUSH. I wonder what your thinking is about that.

Mr. BAUGHMAN. We figured somewhere between 80 and 90 percent. We would always have the Treasury in the picture to some

extent.

Senator BUSH. You would always have a margin so to speak?
Mr. BAUGHMAN. That is right.

Senator BUSH. Against the loan in the value of the mortgages in cash and government bonds. You wouldn't have the Treasury in the picture.

Mr. BAHGHMAN. Yes. We owe the Treasury money for our entire portfolio. We do owe the Treasury all the money. They have put up all the money.

Senator BUSH. I understand, but you wouldn't have the Treasury in the picture as a guarantor?

Mr. BAUGHMAN. No.

Senator BUSH. It is simply the safety of this loan would depend upon the quality of those mortgages?

Mr. BAUGHMAN. That is correct.

Senator BUSH. And presumably, whatever else you had in the way of Government bonds.

Mr. BAUGHMAN. Yes. I want to say to clear up the portfolio and value of mortgages: Our experience over the 16 years we have been operating, we have operated practically without any losses at all, and have made about $140 million, so there is no question about the value of mortgages.

Senator BUSH. Of course, I always think at the same time doing that, you accumulated a portfolio of $22 billion, which is one of the reasons you haven't lost any money.

Senator BENNETT. And it has been in a rising market, generally. Senator BUSH. Yes.

What do you visualize, if you were going to issue some of these notes today, that they would bring? What would you be able to sell them at, so to speak-at what yield basis?

Mr. BAUGHMAN. We have talked to the Secretary of the Treasury, and with other people, and we feel that we shouldn't have to pay in excess of 211⁄2 percent. We think somewhere between 2 and 212.

Senator BUSH. What would be the term of such a loan?

Mr. BAUGHMAN. We thought we would hold them all down to less than 5 years. We felt we would get money a little cheaper on that basis. Senator BUSH. These are long-term mortgages that are backing up this loan?

Mr. BAUGHMAN. They are long term. It may be we would want to sell some of the mortgages in the meantime. It may be the policy of the Board they should do that. On the other hand, we are continually

liquidating all the time as repayments and other credits come through. Senator BUSH. In other words, you would try to hold the rate down by selling short-term paper. That is really what it comes to.

Mr. BAUGHMAN. Yes. I feel it gives us flexibility of operation so as to meet our requirements and to meet any contingency that the Board may ask us to accomplish.

Senator BUSH. You think the rate would be in the neighborhood of 2 percent if you were doing it today?

Mr. BAUGHMAN. Slightly above 2 percent.

Senator BUSH. 2 or 24. Where would the market be for that paper? Mr. BAUGHMAN. Commercial banks, pension funds, and maybe some of the insurance companies.

Senator BUSH. That is low for them.

Mr. BAUGHMAN. Yes. It is a little low; but the money market seems to be pretty good right now.

Senator BUSH. Yes. It is.

One more question, and I am through. How much would you be doing if you were going to do this today? Have you thought about that?

Mr. BAUGHMAN. Yes; we have. We think we will have to approach the thing with a degree of caution.

Senator BUSH. Feel it out?

Mr. BAUGHMAN. Yes. We have made some inquiries, and it is a new thing and we have to sell it. It is good, and we thought maybe $100 million, or something like that.

Senator BUSH. Thank you.

Senator BENNETT. Senator Sparkman.

Senator SPARKMAN. Talking about the short term, isn't it true that the average mortgage, regardless of the term it is written for, retires in about 8 years, or somethink like that?

Mr. BAUGHMAN. I think the history on that has been-the FHA history at least has been-somewhere in the neighborhood of 8 or 9 years. The veterans' mortgages run a little longer than that. The veterans' mortgages were for a longer term. The 30-year mortgage may run longer. Whether it will have that effect or not, we don't

know.

Senator SPARKMAN. Back on these debentures or notes that you will sell, I am just curious to ask why is it that an insurance company would buy a 2 or 24 percent 5-year note rather than a 42 percent mortgage?

Mr. BAUGHMAN. Well, from an investment standpoint, I will answer it as best I can. I don't know what is in their minds, of course, but they are not very anxious to get tied up into long-term paper, particularly when market conditions change, and, of course, they have changed in the last 2 or 3 years. I think that they would very gladly put part of the funds in short-term paper rather than long-term. Mr. COLE. May I comment, too?

Senator SPARKMAN. Yes. In connection with that, may I ask this: A few years ago we passed-I think while you were a member of the House Banking and Currency Committee-we passed that title, Yield Insurance, that offered to pay 234 percent. I don't think you ever did anything with it.

Mr. COLE. I will comment on both.

44750-54-pt. 1-11

First, it isn't because an insurance company considers a mortgage, long-term mortgage, a bad risk or a bad loan. They like them. They invest in them. They invest millions and millions and millions of dollars in long-term mortgages, but they also have the requirement of a portfolio which is a well rounded portfolio, and some of their requirements, then——

Senator SPARKMAN. Are more liquid

Mr. COLE. More liquid, less servicing problems involved, so it is a full pattern of investment which the insurance company is attempting to achieve, and this, we think, would be attractive to a part of the insurance companies' portfolios. It is not that we think the mortgages are a bad investment.

Now, on the yield insurance, FHA has advised us that they have no interest in it, for some reasons. I do not understand that myself. I know personally of a few companies, a few people, that have shown some interest, but any real interest which we thought at the time would develop has not occurred. There may be some reasons for it. There may be reasons which I am not familiar with, but the only answer we have today is that it just hasn't taken the investors' interest. Senator SPARKMAN. Now, let me ask you something, Senator Maybank referred to a while ago, to some of your title IX problems: Are there delinquencies in title IX?

Mr. COLE. Are there some delinquencies in title IX?
Senator SPARKMAN. Are there some?

Mr. COLE. Some, perhaps.

Senator SPARKMAN. And does FNMA hold those mortgages?

Mr. BAUGHMAN. We do have some delinquencies in title IX. I just tallied this. Of course, in some areas, there are some very good reasons for them. They have withdrawn the military establishment, some places the industry hasn't come in there as heavily as they expected, but our proportion-we have this in number of units-2,435 units have been delinquent, and that includes foreclosures, too, out of 44,405 which we have purchased, so the percentage isn't too great. Senator SPARKMAN. That represents your holdings? Mr. BAUGHMAN. That is right.

Senator SPARKMAN. Do you know what the private holders-how many of them are delinquent?

Mr. COLE. FNMA holds a great proportion of title IX.

Senator SPARKMAN. Most of them?

Mr. COLE. About 89 percent.

Mr. BAUGHMAN. FNMA's participation in the defense program. Senator SPARKMAN. What was that, 2,400 out of 44,000?

Mr. BAUGHMAN. Yes.

Senator SPARKMAN. What percentage would that be?
Senator BENNETT. About 5. A little less than 6.

Senator SPARKMAN. Between 5 and 6.

Mr. COLE. Senator, before you proceed, may I add this one comment, and suggestion: This has to do with a more flexible operation of the purchasing mortgages under the secondary market operations. I feel that the present provisions of the bill relating to the establishment of the purchase prices are perhaps too rigid and that the Board of Directors should be allowed a little more flexibility. For that pur

pose, I suggest that on page 52 of the bill at line 16, the period be changed to a comma, and that the following language be inserted:

But consideration may be given to the reasonably foreseeable market (after a period of seasoning) for mortgagees of the same general class. Senator BENNETT. Without time to study the actual language involved in section 304, it is a little hard to comment on it.

Mr. COLE. Yes. We are simply making it as a suggestion.
Senator BENNETT. Does that complete your testimony?
Mr. COLE. No.

Senator SPARKMAN. I wonder if it wouldn't be well, Mr. Chairman, if you would put a table in showing us that title IX housing situation, some kind of a statement. Would you do that at the point where I asked those questions?

Mr. COLE. Senator, that completes our testimony as of today. The following testimony is on urban renewal, slum clearance, and the public works program.

Senator BENNETT. That is scheduled for Friday.

Mr. COLE. Yes.

Senator BENNETT. You are not scheduled to return tomorrow? Mr. COLE. No.

Senator BENNETT. Do you have any more questions?

Senator SPARKMAN. No more questions. I would like to say I think they are making a very fine presentation, the manner in which they are doing it.

Senator BENNETT. We appreciate that.

Tomorrow we will meet at 10 o'clock in our own room, and we will hear the Veterans' Administration, the Department of Defense, the Civil Defense Administration, the Office of Defense Mobilization, and the Farm Home Administration, in that order.

We will meet at 10 o'clock to hear the Veterans' Administration in room 301 in the Senate Office Building. We will now recess.

(Whereupon, at 4: 20 p. m., the committee recessed, to reconvene at 10 a. m., Thursday, March 11, 1954, in room 301, Senate Office Building.)