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1958 when sales totaled $465,568,000. In each of the other full years of the secondary market operations, sales have not been above about $5 million. (The 1960 total will be about $42 million.)

These figures also reflect the policies pursued to protect the financial stability of the FNMA operation. For this purpose, FNMA generally will sell any group of mortgages bearing different interest rates as a package at a single price (at the weighted average price computed on the basis of established national prices and the amount of the mortgages involved) to give the purchaser a yield of about 5% percent based on the approximate average remaining term of each of the interest rate groups and prepayment in 12 years. It is contemplated that on a national basis such sales will not result in a net loss to the Association. This policy can be pursued in consonance with the policy of avoiding an undue drain of investment funds from the mortgage market, since investors buy significant amount of mortgages from FNMA only when there is an abundant supply of mortgage money. At such times, private secondary market prices of mortgages generally rise. FNMA then can sell its mortgages without loss at prices which produce yields no higher than current market yields. The question of an independent board to establish purchase and marketing policies

The significance of the FNMA operations for various policy considerations can be appreciated by taking note of the magnitude of these operations. After about 6 years of operation, the secondary market portfolio amounts to roughly $3 billion. Total purchases have been more than $3.5 billion over this period. In a single year (1957) purchases were over $1 billion, and in another year (1958) sales were over $465 million.

There is no question that the policies governing the FNMA secondary market operations are highly significant for the housing policies of the Federal Government and for the stability of the homebuilding and mortgage financing industries.

The magnitude of the operations also indicates that the governing policies can have an important impact upon the implementation of general monetary, economic, and Treasury financing policies of the Government. The impact of general monetary policies upon housing can be offset or supplemented to a greater or lesser degree, depending upon FNMA purchase policies. This, in turn, will affect policies designed to provide stable economic growth. Finally, because the level of FNMA operations affects interest rates on other Government securities, Treasury financing operations are affected.

The obvious need for coordination of FNMA policies with Federal Government housing policies is effected by having the Housing and Home Finance Administrator serve as Chairman of the FNMA Board of Directors and vesting in him the authority to appoint the other four members of the Board. In addition to supervision and coordination of HHFA programs, the Administrator is in a position to have knowledge of the effects of FNMA policies upon home finance programs not under HHFA. The Federal Home Loan Bank Board and the Veterans' Administration are represented on the National Housing Council and on the Voluntary Home Mortgage Credit Program National Committee, both under the chairmanship of the Administrator.

Coordination with the general economic, monetary, and Treasury financing policies of the Government is effected by having as members of the FNMA Board of Directors, the Chairman of the Council of Economic Advisers and the Under Secretary of the Treasury. Another channel of liaison with other Government financial agencies is achieved through meetings of the Advisory Board on Economic Growth and Stability (of the Council of Economic Advisers) that are attended by the Housing and Home Finance Administrator and the President of FNMA. Representatives of the Federal Reserve Board and of the Federal Home Loan Bank Board generally attend these meetings. In its issuance of debentures, FNMA maintains a close liaison with the Treasury, so that there is coordination between FNMA and Treasury financing operations in the market.

Thus, through the composition of the FNMA Board of Directors and the formal as well as informal consultations of the Housing and Home Finance Administrator and the President of FNMA with other Federal Government officials, a high degree of coordination between FNMA policies and other relevant Federal Government policies is achieved.

In formulating the purchase and marketing policies there should be cognizance of the potential effects upon the homebuilding and mortgage finance industries. For a proper consideration of the potential effects upon the housing industries, the industry viewpoint should be heard. This can be accomplished through meetings with an industry advisory committee, such as FNMA has had for over a year. Industry viewpoints should not be represented with more than advisory power with regard to FNMA purchase and marketing policies. As long as the present statutory policy direction for FNMA is retained, the FNMA policies have to be geared to the broad public interest objectives of the legislation, and coordinated with the Federal Government's housing, economic, and financial policies.

In summary, the record indicates that the FNMA secondary market operation has fulfilled effectively the function designed for it by existing legislation. This has been accomplished under a Board of Directors appointed by the Housing and Home Finance Administrator. Consequently, there would seem to be little gain in creating a new FNMA purchase and marketing policy board to implement the objectives of the FNMA legislation.

66225-61-10

TABLE 31.-Federal National Mortgage Association secondary market operations; 1-4-family FHA and VA mortgages in portfolio at June 30, 1960, by State location

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APPENDIX

APPENDIX TABLE I-A.-Private nonfarm housing starts, 1949-59

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1 Since the number of conventionally financed starts is derived as a residual, after subtraction of units started under FHA and VA inspection, it also includes a large part of the "all cash" purchases. The number of units started under FHA and VA programs sold on an "all cash" basis is believed to be relatively small, since the FHA and VA programs are in the middle-price, middle-income brackets where "all cash" sales are apt to be much less frequent than for generally higher priced, conventionally financed new homes sold to higher income people.

Sources: Bureau of Labor Statistics, Bureau of the Census, "old series" of housing starts issued prior to May 1960; FHA, VA, and HHFA, on division of housing starts by type of aid.

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APPENDIX TABLE I-B.-House price relationships-single-family homes

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1 Based on assumption of same difference between average and median sales price
(shown in cols. 1 and 2) as between average and median FHA estimates of property value
in 1956. The price and estimated property value distributions generally are quite similar.
2 FHA, VA new home average price was calculated as a weighted average of the average
new home price for FHA and for VA in transactions in which FHA and VA loans closed
in 1959.

3 Derived by weighting FHA, VA, and total private starts by their average 1956 pur-
chase prices, shown on lines 2, 7, and 15 of col. 1, and solving for average price of conven-
tionally financed plus all-cash sales.

4 Federal Reserve Board had estimated over 2,000,000 existing home sales in 1956. On
this basis, conventionally financed plus all-cash sales were about 1,670,000 or 2.8 times the
number of conventional new home sales. On this basis and using average prices for new,
and for new and existing combined (cols. 1 and 3), the figure of $9,600 was derived.
5 The average was estimated at $300 above the median (in col. 4), an amount within
range of the differences between median and averages of prices for FHA new and existing
homes in 1956.

61956 median raised $455 above median for 1955-56 combined. This is in line with rise
for comparable periods in average prices of existing homes prices of $350 to $400 and in
average prices of new homes of $500 to $700 under FHA and VA programs. A greater
proportion of conventional than FHA or VA transactions are for existing homes.

? An increase of 10 percent over the comparable new home purchase price of 1956 was

assumed. The primary basis was an increase of 10 percent from 1956 to 1959 in the aver-
age construction cost of private 1-family nonfarm units started. In light of the latter
figure, it is also reasonable to have a somewhat greater percent increase in the average
price of new conventionally financed units than the 7- and 9-percent increases shown
under FHA and VA programs.

8 Represents about a 7-percent rise over 1956. This compares with rises of 2 percent
for FHA-financed existing home purchases, and 5 percent for VA-financed existing home
purchases which had an appreciably lower average price than the FHA-financed pur-
chases. The conventionally financed purchases had the lowest average price in 1956
and might be expected to show a relatively greater rise in a market of rising values.

Estimated on basis of average construction cost for all 1-family units plus 20 percent
for land and profit; then derived by allowing for total sales price of FHA and VA and
dividing remainder by number of conventional starts. However, this would leave an
average construction cost of only about $6,580 per private multifamily unit.

10 Average of 2 preceding figures in col. 1 that were discussed in footnotes 7 and 8.
Furthermore, the $18,600 figure is in line with an average conventional new home pur-
chase price of $18,990 in 1959 in 11 northern New York State cities where costs and prices
generally are above the national average.

11 It was assumed that the average price was above the median by the same amount as for FHA-financed purchases in 1956.

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