AMERICAN SAVINGS AND LOAN LEAGUE, INC. WASHINGTON, D. C. 20008 (202) 628-5624 April 19, 1982 Mr. Philip R. Brinkerhoff President Federal Home Loan Mortgage Corporation 1776 G Street, NW Washington, DC 20013 Dear Mr. Brinkerhoff: On behalf of our member associations and as Executive Vice President of the American Savings and Loan League, Inc., I endorse and fully support the Bill to recapitalize the Federal Home Loan Mortgage Corporation (FHLMC), H.R. 4787 and S. 1805. The benefits of the measure to the savings and loan industry cannot be overemphasized, and the impact would be even more substantial to the small and minority sector of the thrift industry. What the entire industry needs today is liquidity, relative access to capital markets, and a strong mortgage corporation to support a larger share of the mortgage loan industry than in the past. Under the recapitalization bill, the ability of the FHLMC to infuse capital into the mortgage market will be greatly enhanced. The measure will help create a deeper secondary market and will afford minority savings and loans the opportunity of selling low-yield mortgages faster, making funds available for newer, more lucrative lending endeavors. The FHLMC will most likely be able to double its present activity enabling approximately 600,000 additional families to purchase homes each year. At a time when the housing and the thrift industries are going through some of the worst times in their entire histories, the Mortgage Corporation's recapitalization program could not be more timely. The Bill, by itself, will not extricate the thrift industry from its current crisis, but it will provide additional liquidity to mortgage lenders. Savings and loans will be able to make more loans and thus improve their net worths without direct government subsidy. I see as outgrowths of this FHLMC recapitalization measure: 1) a more efficient financing delivery system and 2) a healthier thrift industry. In view of the above considerations the American Savings and Loan League, Inc. joins in lending its support to the FHLMC Recapitalization bill. The American Savings and Loan League, Inc. (ASLL), is a national trade organization of savings and loan associations in the United States which are owned and or managed by Blacks, Hispanics, Asian-Americans and other minority groups. The ASLL seeks to promote thrift and home ownership among minority groups. Minority savings and loan associations represent an important source of home financing in central city areas. The League was formed 34 years ago and represents 76 minority associations all of which actively engage in the mortgage market for residential housing. The League gives its full endorsement an urges Congress to pass the FHLMC recapitalization measure as soon as possible. Sincerely, Theresa L. Water Theresa L. Watson Chairman GONZALEZ. Thank you very much, Mr. Brinkerhoff. I congratulate you on the work you have done. We have had meetings several months ago and we are grateful and the staffs have correlated very well, and I wish to express our appreciation for them. And I think you have done an admirable job in presenting the fruits of your constant consultations with the interests directly involved, as you will bring out in your statement. On page 9 of your statement, you categorically state that the evolving realities of inflation are such that lending institutions, whether thrifts or commercial banks, will never again finance on a broad base long-term market loans. This is exactly what the picture was in the 1920's. It is ironic that we are in the same boat with respect to home production, home purchase, and home availability that we were in the 1920's. At that time it took Government, let's face it, and I know how reluctantly the interests are to want to admit it-savings and loans institutions became possible only because of the Government. So today, you know, it is natural, they want to have it both waysthey want Government support, but they do not want any conditions on this support. And what I am saying is, for instance, in your charts, the range of time you have there does not show the picture, for instance, between 1940 and 1960. By the time I came to the Congress-and incidentally I raised my voice then-better than 50 percent of the financing was done through FHA. That is what housed America. The biggest miracle in any country has been the housing in America. We have been facing a rearguard action here for 1 year. We have got to give precedence right now to the ongoing bill before us on the Housing and Urban Development Act of 1982. This year is a year of truth for the Congress. It cannot duck. We have got to make basic decisions as to whether or not the edifice upon which you are proposing to restructure the Corporation will still be present. If we do not save it, we might as well forget about FNMA, FHLMC, everything else. So this is the reason as to these hearings. But I think we should not overlook the fact that when we entered into the 1960's, FHA's role in the market began to drop. By 1965, the conventional mortgage participation had risen while FHA had been reduced by 63 percent. I raised the questions then. But things do not become an issue until we have almost a panic. That is the tragedy. But I do think that the record ought to show the level of participation in comparison to what your charts show for the period 1970 to 1981. I think the "$64,000 question" comes over on page 26, the bottom paragraph, where your statement says: The investment representatives on the task force stress it will not be possible to attract private investors to the Corporation if the Corporation's operating flexibility and greater independence from Government control were not assured. This was the key question in our discussions, and it is the one question I would ask now, and I would like unanimous consent if I do not get an opportunity later to submit about two or three other questions for the record in time for you to reply. Obviously the restructuring would add to some of the powers that FHLMC now possesses which could be interpreted as benefits for the Corporation; that is, certain powers that a person receives or an entity receives are to a certain extent benefits. But, it seems to me and I could be wrong and this is the reason I was asking the question-my interpretation thus far, and let me qualify my competence by saying I have not had a full chance to analyze the new version paragraph by paragraph. But as I see it, there would be little or no subjection to regulation by the Federal Government. Now why should we in the Congress, in view of our complicated predicament with the Federal Reserve, grant these powers or benefits that are related to have an entity of a Federal agency, without any kind of Federal oversight to correspond with that power and that responsibility? In other words, accountability. I have been very, very concerned and very consistently expressed that concern about what I consider to be the usurpation through the interpretation of the Federal Reserve Act of 1918 of the Federal Reserve Board because of that, because of the statement that you so eloquently describe, made by the investment advisor interests. But a problem is that it is difficult to convey that we are not here we compliment you on your desire to protect and enhance FHLMC, but the Congress is not here for the convenience of FHLMC. It is not here for the convenience of the mortgage lenders, it is not here for the convenience of S. & L.'s, although they think So. We are here for the convenience of the greatest interest of the greatest number of the public. We cannot overlook that. What I want to know is, am I wrong in my interpretation that in your version there is little accountability to the Congress to the Federal Government? Mr. BRINKERHOFF. I believe you are wrong in this sense: the major control, if you will, that the Congress has over the Mortgage Corporation is contained in the fact that the Corporation's article of incorporation, if you will, is a statute. The Congress can change that statute whenever it wishes to do so. It has the ultimate control of the Corporation. Congress will not lose that under this new charter. Moreover, a critical element is that we have very carefully worked through the definition of what is the scope of our business in this new charter. This definition directs the Corporation in its new environment under this charter exclusively to the area of residential mortgage financing. In other words, it is not within the power of the new Board of Directors, private members, or public members-that is, the Federal Home Loan Bank Board membersto authorize the Corporation to do anything other than direct its efforts to residential housing finance issues in this country. I think that is the greatest control that the Congress has over the Corporation. In addition, under the new structure the members of the Federal Home Loan Bank Board would sit as members of the Board for perpetuity. They are obviously our current Board of Directors. I think that issue of what is the power of the Corporation legally is the strongest possible direction that this Congress can give to the Corporation in terms of the way it does business. We will not have the power under our new statute to finance oil tankers or go into other businesses. We can only put our efforts into an area in which you have so ably provided leadership over the years, providing housing money for the people in this country. Chairman GONZALEZ. My time has expired, thank you very much. [The following additional questions were submitted to Mr. Brinkerhoff by Chairman Gonzalez:] Question 1. Section 9(a) of your bill would exempt the corporation from the antitrust laws with respect to securities activities. No other corporation has the power to require those who do business with it to buy stock and debt obligations without any governmental oversight and is given exemption from all the anti-trust laws of the land? Answer. No corporation, including the rechartered Mortgage Corporation, would have the powers which are described in the question. Under it's original charter, currently in effect, FHLMC has all of the immunities and priorities of the United States, including immunity from the anti-trust laws. Section 9(a) of the revised charter proposal forwarded to your staff in late March reduces the corporation's immunities to the area of anti-trust law and mortgage moratoria law. As a congressionally chartered entity, FHLMC can be imbued with those powers which Congress feels are necessary and appropriate for FHLMC to carry out its business. Those business purposes are quite clearly limited to areas involving residential mortgage finance. The anti-trust law are intended to prevent anti-competitive activity by business entities which have a wider range of program options than the corporation will have. We assume that Congress intends that we maintain a reasonably high level of activity, and that that activity be directed exclusively at the secondary residential mortgage market. The necessity to maintain a significant presence in that one market may well result in charges of anti-competitive behavior due to our enormous share of the market, our need to maintain market presence even when it is not always profitable in the short term to do so, or our need to consult with potential competitors in the development of mortgage programs, loan documentation and underwriting standards which are vital to the development and maintenance of a truly nationwide secondary market. If the corporation curtails its activity in order to avoid costly anti-trust litigation, the secondary market and housing finance will suffer. Thus, some degree of anti-trust immunity is critical for the corporation to operate effectively within our statutory scope throughout a foreseeable range of market conditions. Question 2. Section 7(a) of your bill would permit FHLMC to issue debt obligations without limitation and without government oversight. FNMA, on the other hand, is subject to debt-to-equity limitations prescribed by the Secretary of HUD, and its obligations must be approved by the Secretary of the Treasury. It is also extraordinary that this bill would permit FHLMC to require users of its facilities to buy stock and debt obligations and yet have no governmental oversight restriction on the issuance of stock or debt obligations. Why should FHLMC enjoy these special privileges? Answer. As I mentioned in response to your earlier question, the absence of regulatory oversight of FHLMC is an outgrowth of the different capacity of each organization to draw funds from the government. FNMA retains a line of credit to the Treasury in the amount of $2.25 billion, while the revised FHLMC charter proposal calls for an emergency line of credit to the Federal Home Loan Bank System in the amount of only $200 million. It seems to us that the government's greater financial stake in the FNMA operation warrants this higher level of government oversight. However, the rechartered FHLMC would not be without government oversight. Because of our charter, we would be subject to congressional oversight. Even after the transition to private status has been completed in 1985, three out of nine Board of Director members will be members of the Federal Home Loan Bank Board and therefore appointed by the President. This is the same proportion of presidentially appointed board members as presently exists at FNMA. Furthermore, our presidentially appointed members are the same individuals who serve on the Federal Home Loan Bank Board and are not, as is the case with FNMA's board, intended in any way to be representatives of the industry. Furthermore, our revised charter proposal calls for at least one of the FHLBB members to sit on any finance or executive committee of the board which might be formed. Thus, in some respects, the government will continue to have a significant level of oversight concerning FHLMC's activities. As to the need for our charter to prescribe a debt to equity limitation, we have concluded that any necessary ratios will be set by the capital markets, and will be reflected in the yields obtained on our securities. But by not having a ratio in our charter, we will have the flexibility to react within the market as circumstances dictate. Furthermore, we have concluded that stricter equity limitations in our charter will not necessarily protect the corporation from adverse financial developments in the future. For example, FNMA's current financial difficulties arose in an environment in which these statutory limitations existed. Within a clearly set-out scope of business purpose, we believe that the corporation should be free to react to market developments and not be limited by a restriction which neither protects the corporation from adverse financial developments, nor protects the holders of our securities in any meaningful fashion. Question 3. Section 5(a)(2) of your bill provides that the corporation prohibit anyone from acquiring more than 25 percent of the shares of the common stock of the corporation for a period of five years. Why is this provision necessary? Answer. Although there is no direct analogy for this provision in our existing charter, you will recall that our current charter provides for our stock to be owned only by the Federal Home Loan Banks. Thus, Congress has in effect, prevented a takeover of the existing Mortgage Corporation. The novelty of this provision is not that it prevents a takeover but, rather that it would permit a takeover after an initial transition period. We believe that the transitional period is necessary because, during the early years of the new corporation, the voting common stock is likely to be concentrated among a percentage of our users, namely the savings and loan industry. This concentration makes the corporation susceptible to domination by a small group, a factor which could make our equity securities less attractive in the capital markets. Without some meaningful protection against concentration of ownership, particularly in the early years, the market for the corporation's common stock, and thus, the corporation's ability to raise equity capital, could be adversely affected. Such adverse effect would dimish our ability to efficiently fulfill our congressional purpose. Chairman GONZALEZ. I recognize Mr. Wylie. I, too, want to congratulate you, Mr. Brinkerhoff, for a very impressive statement. It is very obvious that you have done a lot of work and thinking on this proposal. I would congratulate you for that and for your efforts to try to resolve some of the problems we now face. The basic thrust of your proposal is to recapitalize and privatize FHLMC, of course. Why is it necessary that the Federal Home Loan Mortgage Corporation retain agency status after it has become private? Mr. BRINKERHOFF. The answer to that is the pace at which the Mortgage Corporation moves toward the private sector. As Chairman Gonzalez points out, I think accurately so, the Mortgage Corporation was not created for the convenience of its staff or created for the convenience of specific sectors of the economy, or for the investment community. It was created as a public policy tool to provide housing for people in this country. What we have tried to do in our proposed statute is carefully balance those private issues that are necessary in our structure, such as an expanded board of directors that provides representation to the new shareholder, with sufficient remaining Federal ties to enable the Corporation to attract funds in the capital markets at reasonable rates which will translate into reasonable mortgage rates for home buyers. That is our interest. Our interest is in making sure that we can provide our services to home buyers in this country at the lowest possible cost. That is why those Federal ties are necessary. We believe if all of those ties |