Section 5, Common and Preferred Stock This section authorizes FHLMC to issue voting common stock, nonvoting common stock and preferred stock without governmental oversight. In contrast, FNMA may not issue stock without the prior approval of the Secretary of Housing and Urban Development, and fully private entities are subject to state corporation laws and SEC regulation. Subsection 5(a)(2) permits FHLMC to prohibit (for a period of five years) any individual or group from owning more than 25 percent of FHLMC's voting common stock, a power that is not given to private corporations. Subsection 5(b) provides that preferred shareholders have the right to elect members of the board of directors under the terms specified for their particular class of preferred stock in case a preferred stock dividend is not timely paid.

Section 6, Mortgage Operations - Subsection 6 (a) (1) authorizes FHLMC to purchase, lend on the security of and otherwise deal in mortgages owned by or acquired from any of certain enumerated financial institutions in addition to any organization which, in the regular course of its business, finances mortgages. Subsection 6 (a) (2) specifies the limitations applicable to FHLMC's purchase of residential mortgages that have a loan-tovalue ratio in excess of 80 percent. (These limitations are virtually identical to the conventional mortgage purchase limitations applicable to FNMA which are contained in subsection 302(b)(2) of its Charter Act. 5/) This subsection also precludes FHLMC from purchasing mortgages more than a year old unless the seller is currently engaged in mortgage lending activities or the seller is one of certain enumerated entities. FNMA is subject to a comparable limitation in subsection 302(b)(2) of its Charter Act. However, the list of entities from which FNMA may purchase such mortgages is not as extensive as the list of entities from which FHLMC could purchase such mortgages. example, FHLMC would have the authority to purchase loans older than one year from the Federal Home Loan Banks and Federal Reserve Banks, whereas FNMA does not have such authority. 6/

For

5/ Because these statutory limitations apply to residential Toans in the case of FHLMC, subsection 6(a)(1) provides in part that FHLMC may purchase a mortgage in excess of the 80 percent ratio if the excess is FHA-guaranteed or VA-insured. Subsection 302(b) (1) of its Charter Act gives FNMA authority to purchase FHA/VA mortgages.

6/ FHLMC has chosen to delete two restrictions on its mortgage purchasing authority which currently appear in 12 U.S.C. $1454 (a)(2). They are (1) the dollar amount limitations on the principal amount of mortgages purchased by FHLMC and (2) the

Subsection 6(b) would authorize eligible sellers and servicers to perform any transactions referred to in section 6, notwithstanding any other law. This subsection therefore would preempt any federal or state law which either limits or prohibits entities that are eligible sellers or servicers from entering into any of the mortgage purchase and sale transactions authorized by section 6. Such preemption of conflicting federal or state law without a clear purpose for doing so is unprecedented. Section 7, Obligations and Securities - Subsection 7(a)(1) authorizes FHLMC to issue debt instruments, including debt securities convertible into stock, and to issue mortgage-backed securities guaranteed by GNMA. Subsection 7(a)(2) empowers FHLMC to establish restrictions on the creation of its indebtedness and liens on its property. In addition, the subsection accords FHLMC the authority to rank its borrowings in order of priority in the event of its liquidation. In contrast, FNMA is subject to certain external restrictions in issuing its debt instruments. Specifically, the FNMA Charter Act requires the approval of the Secretaries of the Treasury and HUD for FNMA's issuance of its obligations. (The Secretary of HUD has delegated the authority to approve the issuance of FNMA debt instruments to the Secretary of the Treasury.) In addition, subsections 304 (b) and 304 (e) of the FNMA Charter Act specify, respectively, a maximum debt to capital ratio for FNMA's general obligations and a maximum ratio (2 to 1) of subordinated obligations to capital, capital surplus and undistributed earnings. Finally, the Charter Act does not accord FNMA the authority to predetermine the rank of its borrowings (except for subordinated obligations).

Under subsection 7(b)(1), the FHLBB may require the Federal Home Loan Banks ("FHLBs") to purchase FHLMC's obligations at a yield determined by the FHLBB. The only limitation on this authority is that the FHLBS may not be required to purchase any FHLMC obligation if such purchase would increase their aggregate holdings of such obligations to an amount above $200 million. If this borrowing authority is used, subsection 7(b)(2) provides that additional FHLMC directors may be appointed by the FHLBB so that the FHLBB members, together with the newly-appointed

prohibition from issuing commitments to purchase certain participation interests in mortgages prior to origination of the underlying mortgages. These provisions currently appear in section 302(b)(2) of FNMA's Charter Act.

directors, are a majority of FHLMC's board. The additional directors have tenure during the time that the FHLBS hold any of FHLMC's obligations purchased pursuant to subsection 7(b)(1). Subsection 7 (c) (1) enables FHLMC to guarantee mortgage-backed securities issued by eligible sellers. FHLMC is required to collect a fee for its guaranty and must make payments of principal and interest when due if the issuer is unable to make such payments. Subsection 7 (c) (2) provides that, if the issuer defaults, the mortgages backing the securities become the absolute property of FHLMC subject only to the unsatisfied rights of the holders of the securities. Subsection 7(c)(3) provides that state, local or Federal law (except Federal law expressly enacted in limitation thereof) may not preclude or limit FHLMC's rights vis-a-vis the issuer. If such protection

is appropriate for FHLMC as the guarantor of mortgage-backed securities, it is appropriate for all others who guarantee investors in pools of mortgages. It is not appropriate to single out FHLMC for such treatment.

Subsection 7(d) (1) continues the authority for persons or organizations created by state or federal law to purchase and invest in FHLMC obligations and mortgages sold by FHLMC as if they were obligations issued or guaranteed by the United States. (Subsection 7(d) (1) also extends such authority to obligations issued or guaranteed by FHLMC.) Under the existing FHLMC charter, this authority would have expired on June 30, 1985, unless extended by a federal statute. In 1979, FNMA Opposed FHLMC's proposal to amend its charter to accord its securities the same treatment as securities guaranteed by the United States since FNMA did not (and does not) have a similar provision in its Charter Act. FNMA, however, withdrew its objection because of the addition of the termination of such treatment as of June 30, 1985. It was thought that this would permit FHLMC to enjoy legal investment status for its securities while working with the various state legislatures to obtain state statutes which would achieve the same result. The proposed legislation would give FHLMC, via federal law, status that FNMA has achieved under numerous state statutes.

Subsection 7 (d)(2), however, provides that the authority granted by subsection 7(d)(1) may be restricted by subsequently enacted state legislation which names FHLMC and prohibits or limits the power of state-chartered institutions to invest in FHLMC's securities. Subsection 7(d)(3) specifies that any mortgage or security issued or guaranteed by FHLMC is to be deemed a "government security" pursuant to section 2 (a) (16) of the Investment Company Act of 1940. Subsection 7 (d) (4) provides that securities sold by FHLMC are lawful investments and may be accepted as security for all fiduciary, trust and public funds under the authority and control of the United States.

Section 8, User Stock, User Debt and Fees Pursuant to subsection 8(a), FHLMC may require eligible sellers to purchase voting common stock, preferred stock or obligations issued by FHLMC in an amount of up to 2 percent of the unpaid principal amount of the mortgages sold to or guaranteed by FHLMC. Pursuant to subsection 8(b), FHLMC may require eligible servicers to own voting common stock, preferred stock or obligations issued by FHLMC in amounts of up to 2 percent of the aggregate outstanding principal balance of all mortgages that they service that are owned or guaranteed by FHLMC. Although the FNMA Charter Act, within certain limitations and subject to the approval of the Secretary of HUD, permits FNMA to require its sellers and servicers to purchase and/or own FNMA stock, it does not authorize FNMA to require its sellers and servicers to purchase and/or own its debt obligations. FNMA is unaware of any corporation that has the power to require those who purchase its products or services to also purchase its debt obligations, and believes that without this authorizing legislation such a requirement would violate antitrust laws.

Subsection 8 (c) specifies that FHLMC may impose charges or fees in connection with its purchase or guaranty of mortgages. The imposition of such charges may differentiate among sellers or servicers according to bases determined by FHLMC to be necessary to carry out the purposes of the legislation. Subsection 8 (d) specifies that the requirements, charges or fees imposed by FHLMC may vary depending on the following factors: type or class of mortgage purchased, type or class of security guaranteed, magnitude of risk assumed by FHLMC, or other factors reasonably related to FHLMC's operations. Subsection 8(e) requires FHLMC to issue, pursuant to procedures established by the board, FHLMC stock or obligations to eligible sellers or servicers in exchange for their capital contributions. Subsection 8(f) authorizes sellers and servicers to purchase FHLMC user stock or obligations, notwithstanding any other provision of law.

Section 9, Miscellaneous Provisions - Subsection 9(a) immunizes FHLMC's rights regarding mortgages from impairment by mortgage moratoria laws and similar administrative actions which become effective after FHLMC has acquired such mortgages. In addition, the subsection immunizes FHLMC's mortgage and securities activities from the prohibitions of the antitrust laws. (Subsection 4(e) (14) extends this antitrust immunity to subsidiaries created by FHLMC.) The FNMA Charter Act does not accord FNMA immunity from either mortgage moratoria laws or antitrust statutes. Such immunity is certainly inconsistent with "private" status. Subsection 9(b) provides that, until the end of the year in which legislation becomes effective, FHLMC is subject to audit by the General Accounting Office ("GAO"). The Comptroller

General is required to submit a report on the audit to Congress. Subsection 9 (c) states that, effective after the calendar year in which the legislation becomes effective, FHLMC will be audited by independent certified public accountants. A report of such audit must be furnished to GAO.

Section 10, Protection of Name - Section 10 makes unlawful the use by individuals or organizations of FHLMC's name or portion thereof, with certain exceptions. FHLMC may recover actual damages in addition to specified punitive damages for violations of section 10. Section 10 is very similar to section 309(e) of FNMA's Charter Act.

Section 11, Taxation of Corporation - Section 11 provides for the taxation of FHLMC and its subsidiaries in accordance with the Federal Home Loan Mortgage Corporation Taxation Act. No such bill has been introduced as of June 3, 1982. It would appear appropriate that the effectiveness of any statute providing for the recapitalization of FHLMC be conditioned upon the passage of such Taxation Act.

Section 12 provides

Section 12, Territorial Applicability that the legislation is to be applicable to the states, District of Columbia, Puerto Rico and U.S. territories and possessions, notwithstanding any other law.

Section 13, SEC Exemption - Section 13 provides that, subject to approval by the Secretary of the Treasury, FHLMC's securities shall be deemed to be exempt securities under the federal securities laws to the same extent as federal government securities. Section 14, Effective Date Section 14 specifies that the effective date of the legislation is the date of enactment, with the exception of three specified provisions which are to take effect when determined by the FHLBB (but no later than 180 days following the date of enactment).

Section 15, Savings Provision Section 15 is designed to prohibit any cause of action or suit by or against FHLMC, as currently established, from abating by reason of enactment of the legislation.

Section 16, Transitional Provisions Subsection 16 (a) provides that on the effective date of the legislation, the outstanding nonvoting FHLMC stock is to be exchanged for FHLMC voting common stock. Subsection 16(b) specifies the manner in which the FHLMC voting common stock is to be distributed to the members of the FHLBS. Subsection 16(c) allows FHLMC to restrict, until April 1, 1985, the ability of the members of the FHLBS to transfer ownership of the FHLMC stock acquired from the FHLBS pursuant to subsection 16(b).