Fourth, the availability of credit does not necessarily result in its use. Home mortgage funds follow a seasonal as well as a cyclical pattern and often reductions in interest rates or ease of terms are not the controlling factors in the demand for credit.

Fifth, the Board makes specific long-term credit available when a demand exists for it but such longer term credit will only be utilized at a price advantageous to the member. In 1958 a demand for $290 million of 5-year credit was met, which member associations could borrow up to a total of 5 percent of share capital, in addition to borrowings available from their normal line of credit. Approximately one-half of the amount borrowed was used to shift to the additional 5 percent special line of credit in order to free regular credit lines. Further, approximately $38 million of this credit has now been retired by borrowing members. There is a clear indication here that no continuing demand exists for long-term credit except under favorable interest rates.

On the basis of the above factors the Board does not feel that any liberalization of limitations on credit or extension of borrowing authority would have the effect of adding substantial mortgage funds to the market.

The Board's regulatory limitations on outside borrowings continue to serve a definite purpose in protecting savings and loan associations from lenders not geared to the specific requirements of credit by these institutions.

The Federal Home Loan Bank System is able to provide all credit necessary to meet the demands of its member institutions under existing and foreseeable conditions, and is able to contract when such credit is no longer required. We do not believe that there exists the need for any changes in the present credit policies of the System with respect to long-term borrowings by members.

2. Legislative proposals which may be necessary to permit such long-term borrowings

In view of the comments expressed above no legislative proposals are considered necessary.

3. The desirability of establishing a secondary market for conventional loans within the Federal Home Loan Bank System

After careful study, the Federal Home Loan Bank Board is of the opinion that at the present time a need does not exist for a secondary market for conventional loans within the Federal Home Loan Bank System. It is conceivable, however, that there may be a future need for a secondary market operation under economic and social conditions different from those prevailing currently, and for that reason we have prepared a draft of legislation which we believe would be feasible.

Under item 1, above, we stated that the Federal Home Loan Bank System is able to provide all credit necessary to meet the demands of its member institutions under existing and foreseeable conditions. Further, we believe the steps that the Board has taken in the past 4 years to increase the flow of home mortgage funds from areas of surplus to areas of scarcity have been very effective.

As you know, title IV of the National Housing Act provides that each savings and loan association which applies for insurance by the

Federal Savings and Loan Insurance Corporation shall file with its application an agreement that during the period the insurance is in force it will not make any loans beyond 50 miles from its principal office except with the approval of, and pursuant to regulations of, the Corporation, with the exception that any applicant which, prior to the date of enactment of the act, has been permitted to make loans beyond such 50-mile limit may continue to make loans in the territory in which it was operating on that date.

In March 1957, the Board amended the pertinent regulations so as to permit any insured institution, subject to a limit of 20 percent of its assets, to purchase participations in loans on homes for not more than four families located beyond 50 miles from its principal office and outside the territory aforesaid, provided all participants were insured institutions and provided that the property was located within 50 miles of the principal office of another insured institution acting as seller and retaining at least a 50-percent participation.

This regulation, with later amendments including an exemption from the percentage limitation of certain mortgages having the benefit of insurance or guarantee and a liberalization of the percentage limitation to 30 percent, is still in effect. There follows a brief summary of the sales of participation loans since the inception of the program:

TABLE 1.-Sales of participation loans since the inception of the program

In addition, and as has been stated previously, the Board makes specific long-term credit available when a demand exists for it such as in April 1958 when 5-year credit totaling $290 million was provided to members.

4. Legislative proposals which may be required to inaugurate such a secondary market

The proposed legislation attached is provided only as a drafting service to the committee and does not carry the recommendation of the Board for its enactment at this time.

The Bureau of the Budget, on January 13, 1961, informally advised that there is no objection to the submission of this report.

Sincerely,

Attachment.

ALBERT J. ROBERTSON, Chairman.

ANALYSIS OF DRAFT DATED DECEMBER 29, 1960, FOR A BILL TO CREATE A FEDERAL MORTGAGE MARKETING CORPORATION, AND FOR OTHER PURPOSES

SECTION 1. SHORT TITLE

Section 1 gives the short title, "Federal Mortgage Marketing Corporation Act."

SECTION 2. DEFINITIONS

Section 2 contains definitions of terms used in the measure.

SECTION 3. FEDERAL MORTGAGE MARKETING CORPORATION

Subsection (a) of section 3 would create the Federal Mortgage Marketing Corporation, to be under the direction of a board of directors composed of the members of the Federal Home Loan Bank Board, the Chairman of which would be the Chairman of said Board of Directors. It would also provide for an annul report, to be included in the annual report to Congress of the Federal Home Loan Bank Board.

Subsection (b) would set forth powers of the Corporation and confer on it authority to incur expenditures and employ personnel without regard to other laws, the restrictions of which might be incompatible with effective conduct of the business-type operation which the Corporation would conduct.

Subsection (c) provides for investment of funds of the Corporation, which are not to be construed as Government funds or appropriated moneys, in obligations of or fully guaranteed by the United States, and provides for depositaries, custodians, and fiscal or other agents of the Corporation. It also provides that, when designated by the Secretary of the Treasury, the Corporation shall be a depositary of public money and may be employed as fiscal or other agent of the United States.

Subsection (d) provides for exemptions from Federal, State, and local taxation of the Corporation and its obligations and securities, except that real property of the Corporation is to be subject to State and local taxation as other real property. However, by reason of the provision that nothing in the section shall affect the Public Debt Act of 1941, as amended, the interest, dividends, and other income from obligations and other securities of the Corporation would be subject to Federal income tax in accordance eith the provisions of that act. Subsection (e) would place in the Corporation clear authority to bring suit in Federal courts and to remove to such courts judical proceedings involving it, and would prohibit the issuance of any attachment or execution against the Corporation or its property before final judgment.

SECTION 4. CAPITAL STOCK

Section 4 would provide for the issuance and retirement of capital stock of the Corporation. Preferred stock could be issued only to the Federal home loan banks, which could be required to subscribe and pay therefor up to $50 million, which could be increased by such additional amounts, not exceeding an additional $50 million, as the Board of Directors might determine to be needed. Common stock could be

issued only in accordance with section 5. Preferred stock would be entitled to cumulative preferred dividends of 2 percent per annum on the oustanding amounts paid in therefor, and it is provided that no dividends shall be declared on common stock in any semiannual period beginning January 1 or July 1 in excess of a total of 1 percent of the par value thereof (that is, at a rate exceeding 2 percent per annum) unless all preferred stock not subject to an outstanding call for retirement is accorded a pro rata participation to the extent of the excess. Stock could be retired as set forth in the section, but no common stock could be retired at any time when there was outstanding any preferred stock which had not been called for retirement. No call for the retirement of any stock could be made, and no stock could be retired without call, if the total of the stock not called for retirement and of the reserves and surplus of the Corporation would, immediately after such action, be less than $50 million.

Subscriptions by the respective Federal home loan banks to preferred stock would be allocated on the basis of the ratio of the outstanding amounts paid in on capital stock of said banks at the end of the calendar month ending next prior to the date of enactment of the act.

SECTION 5.- MORTGAGE OPERATIONS

Subsection (a) of section 5 would authorize the Corporation to purchase, and make agreements and commitments to purchase, residential mortgages from any member of a Federal home loan bank, or to sell or dispose of any mortgage or any interest therein. Partial interests in mortgages could not be purchased thereunder. Purchases could be made with or without recourse or provisions as to repurchase or resale or as to guarantee, substitution, or replacement. Sales or other dispositions could be made only without recourse on the Corporation and without obligation on the Corporation as to repurchase or as to guarantee substitution, or replacement.

Subsection (b) would provide that any such purchase, or agreement or commitment to purchase, shall require the selling Federal home loan bank member to purchase from the Corporation common stock of the Corporation equal to not less than 2 percent of the unpaid principal of the mortgage or mortgages purchased. The Corporation would not be compelled to require stock purchase if all of the stock of the Corporation had been retired or called for retirement.

Subsection (c) would confer legal authority to purchase, hold, and deal with or dispose of such stock on any Federal savings and loan association and on any Federal home loan bank member as to which Congress has power to confer such authority. In anticipation that some State-chartered members of the Federal home loan banks may not have, under their State laws, authority to purchase such stock, the subsection provides that the Corporation is authorized to accept deposits of cash or agreements to make such deposits, in lieu of any purchase or agreement to purchase stock which would otherwise be required, if the member represents to the Corporation, or the Corporation is of the opinion, that such member does not have legal authority to make such purchase of stock or agreement to purchase stock. Cash deposits, like purchases of stock, would be required to be in an amount equal to 2 percent of the unpaid principal of the mortgage or mortgages involved. The subsection contains provisions

as to the terms of such deposits and as to their retirement before maturity.

SECTION 6. BORROWINGS AND OBLIGATIONS

Section 6 would authorize the Corporation to borrow, to give security, and to issue obligations up to 10 times the capital stock, reserves, and surplus of the Corporation. It provides that the Corporation shall not issue obligations by sale to the public except with the prior approval of the Secretary of the Treasury. It further provides that an obligation or security of the Corporation shall be valid and binding notwithstanding that a person or persons purporting to have executed or attested the same may have died, become under disability, or ceased to hold office or employment before the issuance thereof.

SECTION 7. ELIGIBILITY OF OBLIGATIONS AS INVESTMENTS AND SECURITY

Section 7 would define classes of fiduciary, trust, and public or other funds for which obligations of the Corporation would be eligible as investments or security. It contains two exceptions, (1) that it shall not authorize the investment of funds of any Federal Reserve Bank therein, and (2) that it shall not authorize any national bank, in the exercise of any power vested in it pursuant to section 11(k) of the Federal Reserve Act, as amended, to invest in contravention of any regulation of the Board of Governors of the Federal Reserve System issued thereunder. The first exception has been included because said Board of Governors, in connection with a similar provision heretofore proposed with respect to obligations of the Federal home loan banks, objected to the inclusion therein of any investment authority on the part of the Federal Reserve banks. The second exception has been included because of a suggestion made by the Treasury Department in connection with the same proposal as to which the Board of Governors made its objection.

SECTION 8. SECURITIES AND BLUE-SKY LAWS

Section 8 would exempt stock or obligations of the Corporation from laws relating to securities, securities exchanges, investment companies, or investment advisers, or to indentures or agreements, or proxies or powers, with respect to securities. Its object is to assure that Federal or State laws in the field of securities regulation would not be applicable with respect to the operations of the Corporation, which would be under the direction of a board of Federal officials possessing ample powers of supervision.

SECTION 9. RIGHTS AND REMEDIES OF THE CORPORATION

Section 9 is designed to assure that the rights and remedies of the Corporation with respect to mortgages or other property acquired by it could not be impaired by restrictive laws (such as moratorium laws), or administrative or other action of that nature, taking effect after the Corporation acquired the mortgage or other subject of such rights and remedies. It is also designed to give the Corporation the