As I gather from Mr. McMurray's testimony yesterday, he raised the question of whether there would be sufficient standardization in the mortgages handled by these proposed associations. As I understood it he based his doubts on the fact that while in the case of VA and FHA mortgages, they are held to minimum standards of construction, that there is no such minimum standard of construction in the field of conventional mortgages, and that a national middleman handling mortgages from areas widely distant from home office would have great difficulty in judging whether or not the security behind the mortgage in question was sound.

That is as I remember his criticism. I wonder what comment you would have to make upon that.

Mr. KIMBREL. Senator, it would seem to me that that is largely taken care of in the insurance feature. Obviously I would not anticipate that the insurance firm would insure any mortgage that they did not believe to be meeting certain standards, that they did not believe to be adequately sceured, and did not meet certain specific standards that they would establish as prudent lenders.

I frankly don't see that that would be a problem.

Senator DOUGLAS. So anything in the act which would require the insuring unit or the trading unit to prescribe minimum standards of construction or accommodation

Mr. KIMBREL. I am not sure I followed that last part of your question.

Senator DOUGLAS. You said that in all probability the insuring association and the trading association would provide minimum standards of construction.

Mr. KIMBREL. Yes.

Senator DOUGLAS. I ask you whether there is any provision in the bill itself which would require them to do this?

Mr. KIMBREL. I think only rather extreme examples, that they would be up to 30 years and that would be 90 percent of the appraised value.

Senator DOUGLAS. I mean on standards of construction. Mr. KIMBREL. No, no. are set forth in the bill.

the corporation.

No standards of constructions I believe That would be left to the determination of

Senator DOUGLAS. In the case of VA and FHA, whatever you may think about those organizations, they do provide, do they not, for minimum housing construction standards? Isn't that true?

Mr. KIMBREL. Yes, sir.

Senator DOUGLAS. Another question. As I understand it you have two sets of associations. One is the insuring association; the other will be one or more mortgage trading associations. Is that correct? Mr. KIMBREL. Yes, sir.

Senator DOUGLAS. Will ownership in the insuring association be open to mortgage trading associations?

Mr. KIMBREL. Well, conceivably there would have to be some overlapping of ownership, but not necessarily. It would be open to investment.

Senator DOUGLAS. Do you think that there would be any danger in the possibility of overlapping ownership, where you would have the same group of people-first, will there be the possibility of overlapping ownership? First let's answer that question.

Mr. KIMBREL. Conceivably, yes. I believe as the bill is now written there could be some overlapping ownership.

Senator DOUGLAS. Very good.

Mr. KIMBREL. Such overlapping should not occur to a great extent. Senator DOUGLAS. Do you think this is desirable?

Mr. KIMBREL. Senator, I don't envision that there would be any great problem, because I doubt it would be likely that there would ever be a fully common ownership and common control of the two organizations. I believe the authority that the joint board would exercise could determine that. I don't see any particular likelihood of that being common ownership.

Senator DOUGLAS. Would it not be the desire of the trading association to have the mortgages which it owns insured by the insuring organization?

Mr. KIMBREL. I follow your reasoning all right, and I can understand that that might be attractive to them.

Senator DOUGLAS. Would you suggest amendments to meet this danger?

Mr. KIMBREL. I think reserving that authority to the joint board would be appropriate. I think that they would not permit any questionable overlapping ownership to exist.

Senator DOUGLAS. Is there anything in the act which gives the joint board such power?

Mr. KIMBREL. I think the board has full authority, yes, sir.

Senator DOUGLAS. Would you point that out?

Mr. KIMBREL. I believe at the bottom of page 5 and the top of page 6, spelling out:

And to issue rules governing regulations and performance of its functions.

I think they would be able to issue such regulations or prohibitions. Senator DOUGLAS. This merely refers to the powers to audit, inspect, and examine, and to require such corporations to prepare and file with the joint board such reports as the joint board may specify from time to time, to subpena witnesses, to hold heraings, and to issue rules and regulations governing the performance of its functions.

Now, "it" would seem to refer to the joint board itself, which is the subject matter of title II, and I think that would be a strained interpretation to say that it refers prospectively to the subjects contained in title III, mortgage insurance corporations which begin seven pages later on page 13.

Mr. KIMBREL. Senator, we certainly would have no reservation at all about specifically authorizing the joint board to have this authority. I can see nothing wrong with that, the spelling of it out in the act.

Senator DOUGLAS. It developed that the amount of capital which will be subscribed will be 5 percent of the assets of the trading corporation. I have two questions.

First, where do you expect the 5 percent to come from? And second, where do you expect the 95 percent to come from?

Mr. KIMBREL. Senator, let's see. This 5 percent I believe is specified as reserve. I believe the bill suggests a dollar amount, does it

not?

Senator DOUGLAS. On page 20, speaking of mortgage market incorporations, in plural, subparagraph 3:

Issue with the approval of the joint board and have outstanding bonds, notes, or other obligations up to a maximum of 20 times the sum of its capital, surplus, reserves, and undistributed earnings.

The illustration which has been used, with a capital of $5 million the outstanding bonds, notes, or other obligations could go up to a maximum of $100 million. But those are merely illustrative figures. The question I would ask is where do you expect to get the money for the capital, and where do you expect to get the money behind the bonds, notes, or other obligations.

Mr. KIMBREL. First of all you would expect that the $5 million would be from investors who would be taking the risks, and they would be investing risk capital.

Senator DOUGLAS. These would be corporations or individuals? Mr. KIMBREL. These woud be corporations.

Senator DOUGLAS. These would be corporations?

Mr. KIMBREL. Then

Senator DOUGLAS. Would they be banks?

Mr. KIMBREL. The $5 million?

Senator DOUGLAS. Yes.

Mr. KIMBREL. Presumably they could be up to, I believe the restriction is 5 percent. But

Senator DOUGLAS. Who would these people be?

Mr. KIMBREL. Just the investing public.

Senator DOUGLAS. What I am trying to get at, the American Bankers Association has been working this out very carefully for a period of time. Do you expect that commercial banks would subscribe the capital?

Mr. KIMBREL. Not to any especially large degree, no, sir. We would probably be very minor owners of the corporations.

Senator DOUGLAS. Do you expect individuals or corporations? Just who is it that you are expecting to enter this field?

Mr. KIMBREL. We expect that they would largely be individuals. Senator DOUGLAS. Individuals?

Mr. KIMBREL. Yes.

Senator DOUGLAS. I thought your earlier answer was corporations? Mr. KIMBREL. I am sorry. I thought you had reference to was this the investment in the corporation. I am sorry.

Senator DOUGLAS. That is all right. You expect these will be individuals?

Mr. KIMBREL. Yes, sir.

Senator DOUGLAS. Where will they get the 95 percent from?

Mr. KIMBREL. In the issuance of debentures against the mortgages that are being held for trading purposes, and against their other Senator DOUGLAS. People will have to put up capital.

Mr. KIMBREL. Capital, and surplus, and earnings that would have been accumulated.

Senator DOUGLAS. But when you begin you don't have any earnings. Mr. KIMBREL. Right.

Senator DOUGLAS. You have hopes and prospects, but not earnings. And yet you have to have capital to buy the mortgages with. So the question I want to ask is where do you expect to get the 95 percent, or in the illustration which I have chosen, the $95 million?

Mr. KIMBREL. Obviously that would be until this $5 million that you originally accumulate from the individuals as investors, until you start trading and mortgages start moving, there would be little need for asking for or seeking the additional $95 million.

Senator DOUGLAS. Obviously, you don't intend to merely operate with the capital alone, because here you say

It may issue with the approval of the joint board and have outstanding bonds, notes, or other obligations up to a maximum of 20 times the sum of its capital.

It is obvious that this is going to furnish the major source of your funds. What I am trying to find out is where do you expect to get these funds?

Mr. KIMBREL. This we certainly would go to the market, to the open market, to sell these debentures which are secured by the mortgages that are being traded, the mortgages that are being accumulated, with this additional capital.

Senator DOUGLAS. Would commercial banks be free to lend money to these mortgage marketing corporations?

Mr. KIMBREL. I would certainly not assume any prohibition against commercial banks making loans to them; no, sir.

Senator DOUGLAS. And would these loans be short-time loans or long-time loans?

Mr. KIMBREL. I think if they were actually loans, Senator, by and large they would be short term.

Senator DOUGLAS. Short term?

Mr. KIMBREL. Yes.

Senator DOUGLAS. What you would be doing would be to have banks create credit which would then be placed in long-term mortgages. Isn't this a confusion of commercial banking with investment banking which I had thought the American Bankers Association was always opposed to?

Mr. KIMBREL. I don't think that if they were making a loan to the company, to the mortgage firm, it undoubtedly would be short, relatively short. If they were indeed buying debentures, they could conceivably be quite long.

Senator DOUGLAS. I thought your answer was that you expected these loans to be primarily short-term loans.

Mr. KIMBREL. I am sure I must be confusing you, Senator, because if there were a loan to this company, presumably for a short-term operating period or a relatively short period of adjustment in its own affairs, it might borrow funds temporarily. But for the long period, for its general operation, I don't anticipate that we would be making many loans, that we would be going into the market selling debentures. Senator DOUGLAS. Let's speak of the suppositious $95 million. Where would that come from? Short-time loans by banks or longterm investments by banks?

Mr. KIMBREL. It would generally be long-term investments.

Senator DOUGLAS. And where would the banks get their funds? From their savings deposits?

Mr. KIMBREL. I would think if they invested in the long term; yes. They would certainly be attributed to their savings, allocated to this. Senator DOUGLAS. Do you think that you can insulate the commercial banking features of the commercial banks from the investment feature which are called for by this act?

Mr. KIMBREL. I don't see any conflict in this; no, sir, Senator. I really don't think there is.

Senator DOUGLAS. Do you think we should make any effort to insulate commercial banking from mortgage investment banking?

Mr. KIMBREL. On the contrary, I think that if we are going to provide a free flow, an opportunity in this piece of legislation for all investors, that there should be no prohibition against commercial banks or any other group. Give them the opportunity to go into the mortgage market.

Senator DOUGLAS. There is a big difference, is there not, between savings institutions and the commercial end of commercial banks? In the savings institutions the savings come first, deposited in the bank or building and loan association, and they then lend the money for long term. Investment, in other words, follows savings. The bank performs the function of sweeping up individual savings, so to speak, and placing these savings in larger form. It is true, is it not, that under commercial banking the loan comes first: you loan money business by creating a deposit. Isn't that true? And the reserve which you have to maintain against this deposit is a relatively minor one. So that in commercial banking is it not true that it is the loan which creates the deposit-it is the loan which precedes the deposit, and it is the bank which creates the credit? Isn't that true, in the form of a checking account?

to a

Mr. KIMBREL. Senator, I am afraid you are getting me into the question of which comes first, the chicken or the egg.

Senator DOUGLAS. You are president of the American Bankers Association.

Mr. KIMBREL. I appreciate that. But I believe that this possibility of investing in this operation from the time deposits, from the time money in the commercial banks, would indeed be a germane operation. I believe that it would help the mortgage market to provide some degree of uniformity.

Senator DOUGLAS. Would you favor a provision which would prohibit any use of demand deposits for investment in the mortgage marketing corporations?

Mr. KIMBREL. I believe that under the regulations at the moment banks are pretty well prohibited from using more than 70 percent of their time

Senator DOUGLAS. More than how much?

Mr. KIMBREL. More than 70 percent.

Senator DOUGLAS. Seventy?

Mr. KIMBREL. Seventy

Senator DOUGLAS. That is quite a figure.

Mr. KIMBREL (continuing). Of time deposits into any mortgage lending.

Senator DOUGLAS. That is quite a figure.

Mr. KIMBREL. Well, the aggregate amount relates to your time deposits. Any loan to one borrower would be related to 10 percent of your capital stock and surplus. It would by nature

Senator DOUGLAS. You don't see any danger then that the function of commercial banking and investment banking might be confused under this?

Mr. KIMBREL. No, sir; I do not.

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