market as builders and lenders sit back and wait for a more favorable atmosphere, and, similarly, would-be home purchasers would very likely follow the same approach.

Mr. Chairman, Mr. Summer would now like to be permitted to proceed to discuss title III of the bill.

The CHAIRMAN. All right, Mr. Summer.

Mr. SUMMER. Mr. Chairman, my name is Alexander Summer of Newark, N. J., and I have a little real estate and mortgage business in New Jersey.

I had the privilege of serving on the Advisory Committee to President Eisenhower in connection with this entire program. And I would like to file this statement for the record, and comment on it. But there are certain sections I must read because they are technical in nature. The CHAIRMAN. Without objection, it will be printed as written. (The prepared statement of Mr. Summer follows:)

STATEMENT OF ALEXANDER SUMMER, NEWARK, N. J., NATIONAL ASSOCIATION OF REAL ESTATE BOARDS, CONCERNING TITLE III OF S. 2938 (FEDERAL NATIONAL MORTGAGE ASSOCIATION)

Mr. Chairman and members of the committee, my name is Alexander Summer of Newark, N. J. I am a past president of the National Association of Real Estate Boards and a member of the President's Advisory Committee on Housing Policies and Programs. I am president of the Alexander Summer Mortgage Co. and have been active in the fields of real estate, mortgage lending, and home building for over 30 years.

Mr. Chairman, the problem of providing better housing for all Americans and of maintaining the high level of housing construction we have experienced during the past several years has made home construction truly a mass-producing industry. As a major mass-producing industry, the prosperity of which sparkplugs the prosperity of more than half of the durable-goods industries in this country, the home-building industry can no longer afford to consider that shortrange remedies are solutions to its many problems. In the past, particularly with respect to the Government-owned secondary mortgage market facility in FNMA, there has been a predisposition to legislate from crisis to crisis, with the usual antidote for ailments in our mortgage system generally taking the form of an authorization to FNMA to use additional Treasury funds to purchase additional mortgages.

Any consideration for the long-range needs of the housing industry must involve recognition of fluctuations in the mortgage market and the maldistribution of mortgage money that have found many eligible home purchasers unable to avail themselves of the FHA and VA systems. All of you are familiar with the peaks and valleys in the mortgage market and the failure of existing mechanisms to relieve the situation. Our association, along with all the other segments of the industry, has devoted considerable study to this problem, with always the same result: The need for (1) a practical and quick-responding vehicle for adjustment of maximum interest rates and (2) a true secondary mortgage market facility to be operated without unnecessary restrictions and in such a manner that the initial Government capital will be progressively replaced by private capital.

The first recent legislation introduced on this subject was H. R. 6614, by Mr. Stringfellow, a member of the House Banking and Currency Committee. Our association endorsed the principles of that bill and still believes that the secondary market as set forth in that bill presents the framework for an ideal secondary market because of its planned decentralized operations and because it contemplates activity with respect to all types of real-estate mortgages.

However, we recognize that the creation of a secondary mortgage market facility which will truly function as such must be almost an evolutionary process. Confidence in the capital structure, obligations, appraisal standards, etc., of and the machinery for such a facility cannot be created overnight.

We are most anxious that a workable facility be created and begin functioning as soon as possible in order to avoid any further disruption to the mortgage economy. That is why we have adjusted our sights to the framework presented

in title III of this bill, trusting that experience with the FHA and VA mortgage markets will in time, under the study and observation of both Government and private interests, reach out to encompass also conventional mortgage loans. But that is something for future consideration.

In our study of the proposed title III we have noted several features which we consider to be inherent weaknesses. Some of them would tend to restrict FNMA's operations unduly. Although the bill underscores private ownership as an ultimate objective, the formula to bring this about is nebulous and speculative. We are, therefore, suggesting several amendments for the consideration of this committee. I will discuss them in the order in which they appear in the bill.

A. Limitation on mortgage amount.-Section 302 (b) provides that there shall be a $12,500 limit per living unit on the principal obligation of any mortgage offered for sale to the Association. We would offer no objection to the imposition of such a restriction in section 305 of the bill, relating to the special-assistance functions of the Association, which has as its primary objective assistance to lower cost housing. However, we believe that the provision is entirely too restrictive for secondary market operations which should not be conducted solely to benefit the financing of lower-cost housing-particularly when the limit is below that contemplated as the maximum for FHA under other provisions of this bill. The funds used for the purchase of mortgages will have been borrowed from private sources and the operations will be conducted according to business standards. We recommend that the maximum permitted limits be the same as those ordinarily applicable to FHA.

B. Capitalization.-Section 303 of the bill provides that the Secretary of the Treasury would initially hold all the stock of the rechartered Associationapproximately $70 million representing the present capital and surplus. The users of the facility would be required to pay 3 percent of the unpaid principal amount of the mortgages offered for sale to the facility as nonrefundable capital contributions. Subsequently, according to the bill, these capital contributions, represented by "convertible certificates," would be converted into capital stock of the Association, but not until all of the capital stock held by the Treasury had been retired. In view of the fact that the Association will not necessarily operate a par market, as it has in the past, we believe that the 3-percent nonrefundable capital contributions coupled with the market discount on mortgages-particularly those covering properties located in the outlying areas which may be as much as 2 or 3 or more points below par, plus a FNMA service charge would almost certainly deter mortgage lending where it is most needed. think the requirement should be 2 percent.

We

We strongly urge that the bill be amended to provide for two different types of stock. The Treasury should receive preferred stock on which it would be entitled to cumulative dividends as the bill presently provides. The users of the facility should receive common stock on which they would receive dividends when earnings permitted, and even after the Government-held stock has been fully retired the dividends on such common stock may not exceed in the aggregate 5 percent of the par value of such outstanding common stock. These latter limitations are already in the bill. Both types of stock would be nonvoting for reasons which I will subsequently set forth.

The bill provides for the ultimate substitution of private financing for Government financing, and we sincerely believe that this ultimate objective would be better served by providing for the immediate issuance of stock to the users of the facility instead of convertible certificates.

It has been estimated that it will take 8 to 10 or more years to retire all of the Treasury-owned stock. Inasmuch as the capital of the Association would be made up of funds from both the Treasury and private sources, the Association would be a mixed-ownership Government corporation, and it would be appropriate that not only the Government but also private stockholders participate in its ownership. The capital structure itself could not be impaired by the mixedownership status because the bill contains a provision that the stock (other than stock held by the Treasury) may not be retired if, as a consequence, the amount remaining outstanding would be less than $100 million.

Section 303 (b) would give the Association authority to impose charges or fees for its services with the objective that all costs and expenses of its operations should be within its income derived from such operations. That language could reasonably give rise to the inference that the fees and charges were to be

sufficient to cover all the expenses of operation. As the facility will have other sources of income, we believe some restriction should be placed on the amount of fees or charges that may be imposed in order to lessen the impact of the 2-percent capital contribution and the discount which very likely will prevail in the areas which need the services of the Association. We recommend, therefore, that the charges or fees be limited to one-half of 1 percent.

C. Supplanting of Government capital.-Section 303 (g) provides that after all of the capital stock of the Association held by the Treasury has been retired, the Housing and Home Finance Administrator would suggest enabling legislation providing for transfer to the owners of the then outstanding capital stock the assets and liabilities of the Association along with its control and management, in order thereby to make the facility a privately owned, operated, and directed institution.

We believe that the bill should be amended in order that the transfer to private ownership would be self-executing and gradual, although the corporation should retain a measure of Government supervision even after the facility is privately owned. When the Treasury stock has been retired, all of the remaining capital will represent the paid-in subscriptions of private sources. Thus there would already have occurred in fact the complete substitution of private capital funds for Government capital funds. Certainly, there is no fundamental reason why it should be necessary to delay for many years the details of legislation that are of immediate concern to the mortgagees who, after the creation of this facility, would be expected to make capital contributions to support the facility's operations. Self-executing provisions in the bill for such future changes as are appropriate will constitute an additional incentive for immediate private participation and will bring closer to reality the ultimate objective of a privately financed secondary mortgage market facility.

We believe that Government supervision (as distinguished from direction and control) over the facility should be continued. Government supervision-perhaps by the Housing and Home Finance Administrator-along the lines of that exercised by the Federal Reserve System and Farm Credit Administration would underscore the public character of its operations. We recommend, therefore, that subsection (g) of section 303 be deleted from the bill.

D. Market price of mortgages purchased.-Section 304 (a) provides that the Asso ation would purchase mortgages "at or below the market price for the particular class of mortgages involved, as determined by the Association." In this connection I would like to quote the following from the minority report of the Subcommittee on Housing Credit Facilities of the President's Advisory Committee on Housing:

"In my opinion the objectives of such a facility should be not merely the accumulation of maximum profit. It is equally important that it accomplish its only reason for being-the provision of an adequate and stabilized market so that homes may be provided in the volume, in areas, and of the kinds, and at the prices that the market demands.

"*** the facility should be so organized and its Board of Directors instructed by the Congress to operate in such fashion as to avoid becoming a primary mortgage buyer. To accomplish this the Board would necessarily have to conduct the operation of the facility in the light of the market for its debentures and of the current or reasonably forseeable market (after a period of seasoning) for the loans which it buys."

We believe the bill does not reflect any consideration of "the reasonably foreseeable market" and the period during which the mortgage will be "seasoned" while it is held in the facility's portfolio. Obviously, there are times when this consideration may be a proper one in a secondary mortgage market operation. For example, the market price of a GI mortgage covering New Mexico property might be 5 points below par. The existence of such substantial discount might reflect overproduction and justifiably result in temporary termination of mortgage lending. On the other hand, should the officers of the Association conclude that the large discount results from lack of availability of adequate mortgage funds, it could more realistically fulfill the functions of a secondary mortgage if it were not limited to purchasing mortgages "at or below the market price." The facility, therefore, should it conclude that a mortgage covering New Mexico property for which the market price was 95 might be sold to an institutional investor-after a brief period of seasoning-at 97, 98, or perhaps par, should be permitted to consider this factor in determining the price at which it will purchase mortgages.

We also believe it would be unfortunate to retain any provision in the bill indicating that FNMA might buy below the market price. The indication that FNMA might buy below the market could conceivably have the effect of depressing the market. We recommend, therefore, that section 304 (a) be amended so as to permit the Association to purchase mortgages "at or near the market price but not above par."

E. Limit of debentures.-Section 304 (b) provides that the facility may issue its debentures at such rates and on such terms as may be determined by the Association with the approval of the Treasury, in an amount outstanding at any one time not in excess of 10 times the sum of its capital, capital surplus, general surplus, reserves, and undistributed earnings. This is a specific limitation, although the bill then goes on to impose, quite properly, a second specific limitation that the outstanding obligations may not exceed at any one time the aggregate of the unpaid balances due on the mortgages held in its secondary market portfolio plus cash and Government bonds. We feel that the debentures of this Association will be readily marketable, and that the 10-to-1 limitation might very well unduly and unnecessarily restrict the operations of the facility at a time when and in a field where it would be most needed. We recommend, therefore, that the limitations applicable to the secondary market operations of the Association for the issuance of its debentures be at least on a 15-to-1 basis.

F. Board of Directors.-Regarding the composition of the Board of Directors, we propose an amendment which like several others already referred to would tend to bring closer to reality the objective of ultimate substitution of private capital for Government capital. True, we propose making the association a mixed-ownership Government corporation, but it must be borne in mind that private financial participation will commence on the day the association begins business. There is every likelihood that, in a year or two, an appreciable portion of the capital stock of the association will be owned by private individuals and corporations making use of the facility.

We believe, therefore, that the Board of Directors should consist of seven persons to be appointed by the President without restriction initially as to their Government or non-Government status. When half of the Government-held stock has been retired (approximately $35 million) at least three of such members would be replaced by appointment from among stockholders from the mortgage lending, residential real estate or homebuilding industry. When all of the Government-held stock has been retired, then we propose that all of the Directors be appointed by the President from among the stockholders and be broadly representative of the mortgage lending, real estate and homebuilding industries. In this connection we recommend that not more than one Director be appointed from a particular industry. However, with respect to the mortgage lending industry, its various segments such as savings and loan associations, commercial banks, life-insurance companies, etc., should each be considered a separate industry for this purpose.

G. Advisory Council.-We also propose that a subsection (b) be added to section 308, to create an Advisory Council of the Federal National Mortgage Association consisting of 15 members, 3 of whom shall be the President of FNMA as Chairman, the Secretary of the Treasury or his designee, the Chairman of the Board of Governors of the Federal Reserve System or his designee. Twelve members shall be appointed by the Administrator for 3-year staggered terms, such appointments being made from among persons who are experienced in and broadly representative of residential mortgage lending, real estate and homebuilding. We believe such an Advisory Council would prove invaluable, since the members of the council would bring to the association the views not only of their individual segments of this great industry but also those of the Nation geographically. We commend the creation of such a council to your sympathetic consideration.

H. Taxable status of the Association.-We strongly urge that section 309 (c) be amended to avoid double taxation on the earnings of this secondary mortgage market facility. For one thing, the earnings of FNMA will for some years be needed to build up substantial reserves against any losses which might result from depressed market conditions. The importance of creating a really substantial reserve cannot be overemphasized when one considers that the secondary market operations of FNMA may very likely be called upon to provide the necessary mortgage liquidity for section 220 and section 221 loans when their marketability is once established. Also, this double taxation would defer for years the substitution of private capital for Treasury financing. All dividends, interest

received on obligations of the Association, salaries, and per diems, would be taxable to the recipients thereof, and all real estate acquired as a result of its secondary market operations should be subject to local taxation. We sincerely believe that the objectives of this bill, particularly the urban renewal program, would be much better served by avoiding this double taxation and its resultant drain on the basic solidity of the Association. We feel that this approach is a sound and equitable one and certainly consistent with the public-purpose role of the Association.

I. Status of FNMA as a Government corporation.-We recommend that section 302 be amended by providing that the Association shall be deemed to be a mixed-ownership Government corporation within the meaning of that term as used in the Government Corporation Control Act until all Treasury financial participation has been replaced by private capital. As a mixed-ownership corporation during this period, the Federal National Mortgage Association, being organized for business-type operations, would be permitted to make such expenditures of its funds as are necessary to carry on such business-type operations without being subjected to the sort of expenditure restrictions imposed on ordinary Government agencies by appropriations acts, etc.

J. Special assistance functions.-We have one comment to make with respect to the special assistance functions of the Association. We must recognize that both the section 220 and section 221 loans are the loans contemplated by this special assistance function, for it is quite possible that such loans may not, for a time at least, be readily marketable on the private investment market. We know that if the urban renewal program gets underway, as it surely will months after enactment, well over a hundred cities, in our opinion, will endeavor to come within the scope of the bill's operations, as soon as practicable.

We believe that the $200 million limit on outstanding obligations and the $100 million limit on participations are so small as to prevent these sections from accomplishing the objectives contemplated by the act. It is the very heart of the slum-prevention program, and we recommend that the committee give serious consideration to very substantially increasing this authorization in order to provide FNMA with the most effective means for accomplishing the far-reaching objectives of the urban renewal program.

CONCLUSION

Mr. Chairman, it is well nigh impossible to achieve full accord among all groups with respect to the organization and functions of a secondary mortgage market facility. I am confident, however, that this committee, the Congress, and all segments of the real-estate industry, as well as Government housing officials, are anxious to bring about the creation of a truly workable secondary mortgage market facility. The differences are not fundamental, but reflect if anything the recognition by people in our industry of the need for a secondary market facility, and their concern lest the proposed facility prove to be unworkable. If that were to happen, the progress of the home-building industry would be retarded in its growth at a time when the continuance of such progress means so much to the economy of our country. We sincerely believe that the amendments which we are proposing will provide a workable secondary mortgage market facility and will give to our industry the stability, the confidence, and the means for continued accomplishment, thereby bringing closer to reality our common goal of decent, adequate housing for all Americans.

Mr. SUMMER. I should like to comment, in the beginning, that, as you know, the entire housing program and the slum elimination program is subject to the availability of a steady flow of mortgage money. In the past we have legislated from crisis to crisis, and short-range remedies have not always reasonably leveled off the peaks and valleys which are inevitable.

Title III is intended to meet this long-range need for financing. The new FNMA is definitely to be a secondary mortgage facility, and not to be used if primary mortgage money is available. And, of course, to be workable it should recognize fluctuations in availability of funds and maldistribution of mortgage funds, which has been one of our greatest problems.