Its terms go far beyond those reasonably necessary to prevent excessive use and, in effect, amount to a complete denial of the facility to the very users for whom it is intended.

In our opinion, it is necessary to amend title III in the following respects if it is to accomplish what we believe to be its intended and proper purpose:

(a) The test of eligibility of a loan for sale to the Association should be its inherent soundness and the determination that loans of the same type and general class will, in the portfolio of the Association, constitute a prudent basis for the sale of its debentures to private investors.

SUGGESTED AMENDMENTS NOS. 1 AND 5-SCHEDULE B

The bill conceives the function of the facility to be to purchase only those mortgages which are, at the time, sought by private institutional mortgage lenders. The soundness of a loan and its marketability at a particular time are not necessarily synonymous. The private market has, in turn, at various times, regarded with disfavor FHA 80-percent loans, FHA 90-percent loans, GI loans, rental housing loans, loans on cooperatives, and loans on minority housing.

Only a short time later, lenders have bid spiritedly for the very type of loans that they originally branded as not acceptable. The concept in this bill would have prevented purchase by the Association of loans of any of these classes, regardless of their inherent soundness and regardless of the fact that these loans could have well-supported debentures issued against them. The profit record of FNMA is vivid proof of this. Dealing in loans which are regarded by some as inferior, FNMA has a delinquency rate that compares favorably with most lending institutions and has paid interest on its borrowings; paid a profit of $91 million to date; accumulated additional surplus and reserves of some $40 million; and is making a profit of about $2% million a month.

The bill limits the Association to buying practically for immediate resale. This would make it merely a mortgage broker and provide no useful function not already served by private companies. It should be permitted to buy for eventual resale at such later time as market conditions become favorable. The Association would then be able to keep itself appropriately liquid while materially assisting to stabilize mortgage conditions, which, in our opinion, it cannot do under our interpretation of the present wording.

(b) We believe the Association should be authorized to buy loans at a reasonable price level, as determined by it from time to time, taking into consideration not only the market price at that time, but also the reasonably foreseeable market for mortgages of the same class, and current yields on-as well as the reasonably foreseeable price trend of-long-term Government bonds and other forms of investment.

SUGGESTED AMENDMENT NO. 5-SCHEDULE B

(c) Funds from private sources, to repay the initial capital provided by the Federal Government, should be accumulated from users of the facility by requiring capital contributions equal to not more than 2 percent of mortgage sales to the Association.

Such capital contributions should be nonrefundable; should be entitled to receive annual cumulative dividends equivalent to the rate of dividend paid to the Treasury upon its stock; should be convertible into stock only after all stock and all obligations of the Association held by the Secretary of the Treasury shall have been fully retired; and such stock should thereafter be entitled to cumulative dividends at a rate not to exceed 5 percent on its par value.

SUGGESTED AMENDMENTS NOS. 3 AND 4-SCHEDULE B

As you can observe, a nonrefundable capital contribution on which dividends are payable as we have suggested, is in effect the same as nonvoting stock. We have gone along on the idea of a capital contribution instead of stock, for two reasons: First, because it is so set up in the bill, and secondly, because we think it makes it a little clearer to identify and understand the plan we propose for the Treasury to receive all the earnings up until such time as the capital contribution certificates mature into stock. However, we would have no objection to using stock instead of convertible certificates having the same terms and conditions. My understanding is that such a proposal is being recommended to this committee by the National Association of Real Estate Boards.

Under the bill as presently written, the Association must buy at or below the market; require a contribution of at least 3 percent; and, in addition, charge a fee for its services. We understand Administrator Cole, in his testimony a few days ago, expressed concern that the 3-percent figure may be too high.

All of these requirements, taken together, would equal as of today a discount of 612 to 7 percent-assuming they buy at a price of 97. This is far in excess of the charges reasonably required to prevent excessive use of the facility. Nor are such amounts needed to produce a reasonable operating surplus or to repay the Treasury over a reasonable time for the capital it provides.

On a $12,000 loan, for example, this formula would result in a cost for permanent mortgage financing of $750 to $850. This equals, and probably exceeds, the extremely high discounts which characterized the mortgage market during last summer's unusual credit stringency. This, we submit, is not a proper formula for a mortgage reserve facility. We believe it should be the purpose of the Federal Government to seek to eliminate charges of this amount rather than to encourage them.

Although the lender will retain the asset represented by the convertible certificate evidencing the capital contribution required by this plan, it will be the builder who pays. In those situations in which resort to this facility will be necessary, because of lack of local mortgage credit, the builder is not likely to be in a bargaining position. strong enough to avoid this.

In our opinion, the restrictive conditions written into this bill result from the unjustified assumption that its operations should be judged by the experience of the Federal National Mortgage Association in recent years. This overlooks the fact that the Federal National Mortgage Association became a problem only after it was forced to provide support to a 4 percent interest rate. We should also be guided rather by the experience of FNMA during the years 1938 to 1945.

44750-54-pt. 1—————47

During that period the Association performed, with notable success, the very function which we are here discussing. It bought loans only in modest volume and balanced its purchases by a sizable amount of sales, reflecting the ebb and flow of the availability of credit.

(d) The Association should eventually operate on private financing. retiring the federally provided initial capital within a reasonable time. However, because of its fundamental importance, it should not be turned over to private operation and control.

SUGGESTED AMENDMENT NO. 6. SCHEDULE B.

Senator MAYBANK. Wasn't the reason a lot of that occurred because of the raising of interest rates by the Treasury?

Mr. HUGHES. Part of it.

Senator MAYBANK. I mean the Government bonds, and the Treasury raising the interest rates. A person would rather go ahead and buy a Government bond, payable on such and such a day, than buy a Federal mortgage; would he not?

Mr. HUGHES. I'm not an expert on that.

Senator MAYBANK. You would agree that that would sort of level out? You can't have one interest rate on housing, guaranteed by the Government; another on bonds, guaranteed by the Government, at variable rates. They will all sort of seek their level; won't they?

Mr. HUGHES. Mortgages have been a little behind the long-term rates lately.

Senator MAYBANK. Lately, yes; but you spoke about last year. Mr. HUGHES. The bill would eventually turn the association over to private control and management. The function of the association is of such fundamental importance to the Nation's credit structure, that in our opinion it must be governmentally operated, although obtaining its funds from private sources. In this respect, it would be generally comparable to the Federal Housing Administration, which is an entirely private fund accumulated by payments made by its users, but is, nevertheless, a Government agency. The combination of private financial interest and governmental supervision tends to give to the operation a happy combination of influences needed in a function of this nature. Moreover, the possibility of transfer to unknown owners will seriously impair marketability of the association's

debentures.

(e) Until such time as the initially provided capital is repaid, the Treasury should be entitled to all earnings of the association. Thereafter, the association should retain its earnings.

SUGGESTED AMENDMENT NO. 2, SCHEDULE B

At this time I would like to try to explain the charts that you have attached to the back there. (See p. 733.)

Now, as I understand this bill, FNMA is divided into 3 parts. One major division is the liquidation of its existing portfolio. The bill provides that it could sell the mortgages in the open market, but presumably it won't sell them into the open market if the sale of those mortgages will disrupt the sale of mortgages generally, or disrupt the mortgage market. It could issue debentures against its existing portfolio to make up its indebtedness to the Government, but presumably

it won't sell debentures against the existing portfolio if the sale of those debentures would disrupt the market.

So, we are in favor of that part of it, as it is written in the bill. The second division would be that part which would support special programs, such as programs for rehabilitation under section 220, and for housing the low-income families under section 221.

But the part I want to discuss is the real secondary mortgage facility itself.

On this chart here is our simple explanation of how FNMA now operates. There is $3,650 million authorized by Congress, and that goes directly into FNMA, and from there to the builder and mortgagee direct. And the builder sells them directly to the mortgage companies, and savings and loan institutions. So, it is a Governmentfinanced, Government-operated institution.

We propose here a plan for a Government-supervised, Governmentfinanced plan, which can convert into a privately financed plan within 10 years.

Now, on this chart here, we are presuming the Government took up the original $70 million that is proposed in the bill, from the capital and surplus of the present FNMA, and that the users of the facility, at the time they sell the mortgages into the bank, will buy 2 percent in stock accumulation certificates. And FNMA will pay 21/2 percent dividends on the capital stock at all times to the Government, and at the same time, 22 percent on the accumulation certificates to the users. We think that is important.

Now, this graph, on page 2, shows that the first year it did $300 million; the second year, $400 million; the third year, $450 million; the fourth year, $450 million; and going down to the ninth year, it drops to $100 million; and the 10th year, $350 million. And it goes to a normal rate.

The fifth year shows the outstanding loans at the end of each year, which would be the approximate amount of the debentures sold in the private market.

So, under those assumptions, at the end of the fifth year, the 2 percent stock accumulation would now amount to $41 million in that fund there, which debentures would be applied against the $70 million originally put up by the Treasury. In the meantime, $32 million would have been paid to the Government on income taxes, and there would still be $18 million in surplus, with $650 million outstanding in debentures.

Now, at the end of 10 years, from the day it was set up, the FNMA users, with 2 percent in stock every time they sell into the facility, have accumulated $83 million. Seventy million dollars of that would be paid over to the Government, to be repaid into capital stock, and there would be $13 million left in surplus. And, in the meantime-it doesn't show it here-the $70 million is drawing 22 percent interest, and would also have paid to the Government $17,500,000.

So, at the end of the 10-year period, you would have a Governmentoperated bank, Central Mortgage Bank, using private capital, which would be really doing the job because it would be buying mortgages that would be needed in certain areas for the low-income families, and of the size and kind that are needed.

(f) The association should be authorized to continue to make advance contracts under the 1-for-1 plan by extending such plan to the mortgages held for liquidation in FNMA's existing portfolio.

SUGGESTED AMENDMENT NO. 7—SCHEDULE B

Under the bill as written, the 1-for-1 plan can be used only with respect to the prospective portfolio to be accumulated in FNMA's hands for at least a year, to form a base for a new 1-for-1 operation. During that time, construction would cease in those many areas which presently depend on 1-for-1 as their sole source for the advance commitments which are essential to home-building. Our suggestion would bridge the gap until the effect of the new legislation could be felt.

Incidentally, I would like to compliment this committee on its wisdom in enacting the 1-for-1 suggestion into law last year. The opertion of that plan has kept home-building from collapse in many areas, while at the same time upgrading FNMA's portfolio and substantially assisting to improve the price of mortgage money. Its lapse at this time would seriously disrupt the mortgage market and housing starts in many areas.

(9) The limitation of debenture-issuing authority to 10 times capital and surplus should be eliminated or, at least, amended to 12 times, pending actual experience.

SUGGESTED AMENDMENT NO. 8-SCHEDULE B

The 10 times limit would provide sufficient funds for reasonably foreseeable needs during the first years of operation. However, at such time as the Treasury is repaid and the entire surplus turned over to it, this limit may temporarily be too restrictive. Our estimates indicate about $83 million private capital at that time, as against $1 billion in debentures. Until such time as the association accumulates additional capital and surplus it will have to curtail operations. As noted, therefore, we suggest eliminating the 10 times limit or, at least, amending it to 12 times, pending actual experience.

(h) The $12,500 limit on eligible loans will continue to discourage construction of 3- and 4-bedroom houses in many areas, although the market requires such larger homes. It should be eliminated.

SUGGESTED AMENDMENT NO. 9-SCHEDULE B

To make these changes, the wording of the bill before you should be amended as is set forth in schedule B at the end of this statement. The CHAIRMAN. This $83 million, is that based upon 3 percent, or 2 percent?

Mr. HUGHES. Two percent.

Mortgage finance is the lifeblood of building. Title III is by far the most important part of this bill. It is vital to our $12 billion industry and to the welfare of the entire economy that the revised FNMA work well, fairly, and soundly. With it and the other suggestions I have made we believe we can do much to solve the Nation's housing problem and, at the same time, expand the industry to a gross volume of approximately $18 billion.