exceed 90 percent of the unpaid principal balances of the mortgages deposited with FNMA as security. Such loans would bear interest at a rate established from time to time by FNMA and would be for not more than 12 months. The volume of such operations and all details, within the statutory authority, would be determined by the Board of Directors of the Association with the express statutory precaution that such lending activities should be conducted in such fashion as to prevent excessive use and to be fully self-supporting. Section 107.-Amends section 304 (b) of such act to permit FNMA to borrow 15 times the amount of its capital and surplus. The present limit is 10 times the capital and surplus. Section 108.-Amends section 304 (d) of such act to repeal the existing prohibition against the purchase by FNMA, under its secondary market operations, of participations in mortgages. Section 109.-Amends sections 304 (b) and 309 (c) of such act to authorize FNMA to take into account as a part of its assets the notes which will evidence the loans that are made on the security of mortgages. Section 110.-Amends section 308 of such act to provide for a full-time threeman Board of Directors, and also provide for an Advisory Council. The PresiIdent of FNMA would be one member of the Board and the other two would be appointed by the President with the advice and consent of the Senate. Terms of office would be 6 years, on a staggered basis. Also would establish an Advisory Council to be appointed by FNMA's president after selection by the Board of Directors. Such council would consist of 12 members to serve for terms not exceeding 2 years. Members of the council would fairly represent the homebuilding, mortgage banking, real estate, and general financing interests, and the geographic divisions of the Nation. Section 111.-Amends section 309 (d) of such act to place the authority to appoint employees in the President of the FNMA. Under existing law this authority is in the Housing and Home Finance Administrator in his capacity as Chairman of the Board. Section 112.-Amends section 302 (a) of such act to clarify existing law to show that the Association is a mixed-ownership corporation, and to correct obsolete provisions to the contrary in the Government Corporation Control Act. Title II Section 201.-Designates this title as the "Federal Mortgage Investment Act." Section 202.-Authorizes the Board of Directors of FNMA to charter, and to regulate, examine, and to supervise Federal mortgage investment companies. The Board would be authorized to levy fees and charges for its services, to provide funds for its expenses; to appoint a Secretary of Incorporations to serve as chief administrative officer for this title; and to empower him to carry out such duties as it may determine necessary. Section 203.-Gives the usual general corporate powers to Federal mortgage investment companies chartered under this title. Section 204.-Provides that not less than five natural persons may apply for a charter for a Federal mortgage investment company, and that a minimum capitalization of $1 million be required for each company. Section 205.-Authorizes the Board to issue a certificate of incorporation to an applicant Federal mortgage investment company if it determines the company to be lawfully entitled thereto under this title. No certificate of incorporation shall be issued until at least 25 percent of the company's capital stock has been subscribed to and paid for in cash, Government securities, or first mortgages. Section 206.-Authorizes a chartered Federal mortgage investment company to originate, purchase, service, sell, borrow on, and otherwise deal in mortgages insured by FHA or insured or guaranteed by VA, or (within the limitation provided in sec. 207 that borrowed funds may not be used for that purpose) conventional loans not exceeding 75 percent of value, subject to rules and regulations of the Board. Such companies are also given powers sufficient to carry out their stated purposes, such as to make payments to FNMA; to borrow money; to deal with any property acquired by them; to adopt and use a corporate seal; to adopt, amend, and repeal bylaws; and generally to enter into any transaction and to execute any instruments and do any and all things necessary or incidental to the conduct of their affairs. Section 207.-Authorizes a Federal mortgage investment company to issue its securities up to 20 times its paid-up capital and surplus, in no event to exceed the unpaid principal balances of FHA and VA loans held by it, plus its cash and the value of its investments in obligations of or guaranteed by the United States, or of FNMA. Except with the approval of the Board, a company is forbidden to issue any securities until the full amount of subscriptions to its capital stock are paid in full. Section 208.-Provides that moneys not invested in mortgages or in operating facilities approved by the Board are to be kept in cash or invested in obligations of or guaranteed by the United States, or of FNMA, provided that a minimum reserve shall be accumulated as the Board shall prescribe by regulation. Section 209.-Exempts such companies from State or local taxation, except that their real or personal property is subject to tax as other such property is taxed. Section 210.-Permits voluntary liquidation by any solvent Federal mortgage investment company by a two-thirds vote of its stockholders, subject to regulations of and supervision by the Board. Section 211.-Vests the Board with power to terminate the affairs of any such company found to be violating this title or any rule or regulation promulgated thereunder, or which conducts its business in an unsafe and unbusinesslike manner. If the capital of any such company is substantially impaired and not restored after 30 days' notice, the Board would be required to order liquidation of the company. Section 212.-Authorizes the Board to prescribe rules and regulations for operations of companies under this title; makes each company subject to examination at the direction of the Board; and requires each company to report to the Board as required by it. Section 213.-Provides for certain criminal penalties. Title III Section 301.-Amends section 3 of the Securities Act of 1933 to permit the Securities and Exchange Commission to exempt the securities of Federal mortgage investment companies from the provisions of such act. Section 302.-Amends section 304 of the Trust Indenture Act of 1939 to permit the Securities and Exchange Commission to exempt the securities of Federal mortgage investment companies from the provisions of such act. Section 303.-Amends section 18 of the Investment Company Act of 1940 to exempt the securities of Federal mortgage investment companies from the requirements that (1) securities which represent an indebtedness shall have an asset coverage of at least 300 percent, and (2) dividends (other than stock dividends) may not be declared on common stock if they would reduce asset coverage of such indebtedness below 300 percent, or below 200 percent in the case of dividends on preferred stock. Section 304.-Amends sections 582 and 1242 of the 1954 Internal Revenue Code to provide (1) that a stockholder owning stock in a Federal mortgage investment company properly chartered under the FMIC Act can receive an ordinary loss deduction, rather than a capital loss, in transactions involving stock of the company and (2) that losses of a Federal mortgage investment company on transactions involving sales or exchanges of mortgages will be treated as ordinary rather than capital losses. Section 304 also adds three sections to the Internal Revenue Code as follows: Section 602 enables Federal mortgage investment companies to deduct from gross income additions to a reserve for "losses" relative to losses on the sale, exchange, or total or partial worthlessness of mortgages held by such companies. The maximum amount of such deduction would be 10 percent of the annual taxable income of a company. In computing the maximum 10 percent deduction for any taxable year, the company would calculate its taxable income before deducting any amounts to the loss reserve and before deducting payments to shareholders or debenture holders as provided in section 604. Section 603 would exclude from the gross income of a Federal mortgage investment company the amount of any discount on a purchased or originated mortgage. Section 604 would authorize a Federal mortgage company to deduct from gross income amounts paid to its shareholders or debenture holders provided certain conditions are met: 1. The mortgage investment company must make distribution of amounts from taxable income. Under section 604 the distribution would be made either to holders of stock, debentures, or other obligations of the company. 2. The amount of the distribution must be at least 90 percent of taxable income. The computation of the 90-percent figure is to be made before calculation of amounts placed in the reserve for losses or the distributions allowable under this section. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, May 26, 1960. DEAR MR. CHAIRMAN: This is in response to your request of May 18, 1960, for a report from the Board of Governors on S. 3541, a bill now pending before your commitee to provide additional financial facilities in the Federal National Mortgage Association, to provide for the incorporation of Federal mortgage investment companies, and for other purposes. Title I of S. 3541 would abolish FNMA's present Board of Directors, consisting of five members, one of whom is the Administrator of the Housing and Home Finance Agency, who serves as chairman and appoints the other four members. In its place, the bill would establish a Board of Directors consisting of three men, apointed for staggered 6-year terms by the President of the United States by and with the advice and consent of the Senate. The bill would authorize this Board of Directors to establish 1 or more advisory committees, and a 12-man advisory council. In addition, title I would expand FNMA's secondary market borrowing authority from the present limit of 10 times its capital, surplus, reserves, and undistributed earnings to 15 times. Title I would also expand FNMA's powers by authorizing it to make loans, secured by FHA-insured or VA-guaranteed mortgages, at terms not exceeding 1 year and at an interest rate "consistent with general loan policies established from time to time by the Association's Board of Directors * Such loans could not exceed 90 percent of the unpaid principal balance of the mortgage collateral. The bill provides that the volume of the Association's short-term lending activities, among other things, "should be consistent with the objectives that the lending activities should be conducted on such terms as will resaonably prevent excessive use of the Association's facilities, and that the operations of the Association under this section should be within its income derived from such operations and that such operations should be fully self-supporting." Each borrower would be required to make a nonrefundable capital contribution to FNMA equal to not more than one-half of 1 percent of the amount loaned. This shortterm lending program would become part of FNMA's secondary market function, although it would involve mortgage warehousing, rather than secondary market. activities. At this time, the Board questions the desirability of the changes proposed in title I of the bill relating to short-term warehousing-type loans. If made effective, these changes could result in a marked expansion of FNMA's secondary market operations accompanied by a substantial increase in the sale of its stock as well as in its borrowings from the public, with ultimate recourse to the U.S. Treasury of up to the current limit of $2.25 billion, subject as at present to the approval of the Secretary of the Treasury. Whether or not the consolidation of warehousing and secondary market functions in one agency, as this bill proposes, would create serious potential conflicts with fiscal and monetary policy is a matter that deserves further study. Title II of S. 3541 would provide for the newly constituted FNMA Board of Directors to charter, regulate, examine, and supervise a new type of Federal financial intermediary, which would be known as Federal mortgage investment companies. These companies would be capitalized at not less than $1 million each in the form of cash, Government securities, or first mortgages. They would be authorized to originate, purchase, sell, service, borrow on the security of, and otherwise deal in any FHA-insured or VA-guaranteed mortgage, and in any first mortgage loan (or similar first lien) representing not more than 75 percent of the value of the underlying property. The Federal mortgage investment companies would be authorized to borrow money by issuing obligations in an aggregate amount not exceeding 20 times the amount of their paid-up capital and surplus. The companies would be required to accumulate and maintain minimum reserves as specified by rules and regulations of the FNMA Board of Directors. To the extent that the companies set aside not more than 10 percent of their taxable income in a reserve for losses, a deduction of the same amount would be authorized from their taxable income. In addition, for companies which distributed at least 90 percent of their taxable income in dividends or interest, a deduction of the same amount would be permitted from taxable income. The Board questions the desirability of establishing Federal mortgage investment companies as proposed in title II. These companies would apparently have unlimited exemption from Federal income taxation as long as they set aside 10 percent of their taxable income in a reserve for losses and distributed the remaining 90 percent as dividends or interest, or as long as all taxable income was distributed as dividends or interest. This would place such companies in a highly favored tax position as against other types of competing institutionalized mortgage lenders, whose tax benefits are limited in varying degrees. Moreover, serious problems might airse in the event the Federal mortgage investment companies, in order to honor their obligations, attempted to sell or otherwise dispose of their holdings of conventional loans. Unlike federally underwritten mortgages, these loans might not be highly marketable. In any event, the provision granting an equivalent tax deduction only if at least 90 percent of taxable income were distributed in interest or dividends would appear to discourage a conservative dividend and reserve policy. Special studies by private organizations, especially the University of California at Los Angeles, as well as by public agencies are now underway with regard to the appropriate role and functions of central mortgage facilities in the private secondary mortgage market. A number of other studies are also in process concerning the role of federally chartered and other financial intermediaries in our economy and the problems raised by the large volume of liquid claims resulting from their rapid growth in the postwar period. In the absence of the results of such studies and in the limited time available, the Board has restricted its comments to some aspects of S. 3541 which seem questionable at this time. Sincerely yours, WM. MCC. MARTIN, Jr. [S. 3586, 86th Cong., 2d sess.] Mr. FULBRIGHT (for himself and Mr. SPARKMAN) A BILL To authorize additional funds for public facility loans, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 203 (a) of the Housing Amendments of 1955 is amended by striking out "$100,000,000" and inserting in lieu thereof "$200,000,000". SEC. 2. Section 203 (b) of the Housing Amendments of 1955 is amended by inserting "be" immediately after “may”. S. 3586 DIGEST OF BILL Amends section 203 (a) of the Housing Amendments of 1955 to increase the public facility loan fund from $100 to $200 million. [S. 3595, 86th Cong., 2d sess.] A BILL To increase the borrowing authority of the Housing and Home Finance Agency for public facility loans Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 203 (a) of the Housing Amendments of 1955 is amended by striking out "$100,000,000" and inserting in lieu thereof "$200,000,000". S. 3595 DIGEST OF BILL Amends section 203 (a) of the Housing Amendments of 1955 to increase the public facility loan fund from $100 to $200 million. [H.R. 10213, 86th Cong., 2d sess.] AN ACT To amend the National Housing Act to halt the serious slump in residential construction, to increase both on-site and off-site job opportunities, to help achieve an expanding full employment economy, and to broaden home ownership opportunities for the American people Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Emergency Home Ownership Act". SEC. 2. (a) The Congress hereby finds that the present policy of the Federal Housing Administration, insofar as it limits mortgage insurance under its regular residential housing program to cases involving loans made by corporate mortgages and other commercial lenders, is preventing the effective operation of the program, particularly in the smaller towns and communities of the Nation. It is therefore declared to be the intention of the Congress and the purpose of this section to make mortgage insurance under the Federal Housing Administration's regular residential housing program more readily available in smaller towns and communities by specifically providing that individuals as well as commercial lenders may be approved as mortgagees for purposes of such program. (b) Section 203 (b) of the National Housing Act is amended by adding at the end thereof the following new paragraph: "Nothing in paragraph (1) or any other provision of this section shall be construed as prohibiting or preventing the approval of an individual as mortgagee for purposes of insurance under this section." SEC. 3. The first sentence of section 203 (c) of the National Housing Act is amended by striking out all that precedes the first colon and inserting in lieu thereof the following: "The Commissioner is authorized to fix a premium charge for the insurance of mortgages under this title but in the case of any mortgage such charge shall be not less than an amount equivalent to one-fourth of 1 per centum per annum nor more than an amount equivalent to 1 per centum per annum of the amount of the principal obligation of the mortgage outstanding at any time, without taking into account delinquent payments or prepayments". SEC. 4. (a) Section 301 (a) of the National Housing Act is amended by inserting before the semicolon at the end thereof the following: ", and by aiding in the stabilization of the mortgage market”. (b) Section 304 (a) of such Act is amended by striking out the last three sentences and inserting in lieu thereof the following: "The Association shall, from time to time, establish and publish prices to be paid by it for mortgages purchased by it in its secondary market operations under this section. The volume of the Association's purchases and sales and the establishment of purchase prices, sales prices, and charges or fees in its secondary market operations under this section shall be so conducted as to promote the interests of the national economy by aiding in the stabilization of the mortgage market to the maximum extent consistent with sound operation, and within the reasonable capacity of the Association to sell its obligations to private investors. The Association shall buy at such prices and on such terms as will reasonably prevent excessive use of the Association's facilities and permit the Association to operate within its income derived from such secondary market operations and to be fully self-supporting. Notwithstanding any other provision of this section, advance commitments to purchase mortgages in secondary market operations under this section shall be issued only at prices which are sufficient to facilitate home financing, but which are sufficiently below the price then offered by the Association for immediate purchase to prevent excessive sales to the Association pursuant to such commitments." SEC. 5. Section 302 (b) of the National Housing Act is amended by striking out "and" immediately before "(3)" and by inserting before the period at the end thereof the following: "; (4) during the one-year period beginning on the date |