Senator DOUGLAS. I think this is a matter, Mr. Chairman, that deserves study.

Senator SPARKMAN. You are allowed now-when I say you, I mean commercial banks-to use a certain proportion of your resources for mortgage financing, are you not?

Mr. KIMBREL. From our time deposits related to that, an amount equal to the capital stock and surplus, or 70 percent of your time deposits, whichever is larger.

Senator DOUGLAS. Let me see if I get this. It is either 70 percent of your time deposits or it is the-what is the other?

Mr. KIMBREL. An amount equal to the capital stock and surplus. Senator SPARKMAN. An amount equal to the stock and surplus, whichever is the greatest?

Mr. KIMBREL. Yes.

Senator SPARKMAN. That is what you are allowed to use now. Would there have to be any change in the basic banking laws under this?

Mr. KIMBREL. I contemplate no

Senator SPARK MAN. That would continue as it is now.

Mr. KIMBREL. Yes, sir.

Senator SPARKMAN. Title V does make some changes in banking laws. What are those changes?

Mr. KIMBREL. It provides for the purchase of these shares of stock in the mortgage corporation. I think this is rather similar to your small business investment provision.

Senator DOUGLAS. One final question. I want to make sure of your position. Did I understand you to say that you would be opposed to any restriction upon the use of demand deposits for investment in the mortgage marketing corporations?

Mr. KIMBREL. Senator, I don't see that it would make a great deal of difference if there were such a prohibition. I don't believe that the average bank will be permitted to invest substantially large enough sums to make a significant difference in that bank. So, if in your wisdom it appeared wise to apply that restriction, I can't, at the moment, anticipate any objection.

Senator DOUGLAS. As of this moment you would not object to such a restriction or prohibition?

Mr. KIMBREL. I think there is adequate latitude from the investments from the time deposits that exist in the banks to take care of that. I can anticipate no reason to object.

Senator SPARK MAN. What about these privately chartered, Statechartered mortgage insurance companies? There has been some reference to them in testimony before now. One out in the Midwest, for instance, MGIC—is that the name of it? And someone called my attention to a new one.

Mr. KIMBREL. I believe they call magic-MGIC-Mortgage Guarantee Insurance Corp.

Senator SPARKMAN. Someone called my attention to a new one which had just recently been started in North Carolina.

familiar with it?

Are you

Mr. KIMBREL. Mr. Chairman, I am not familiar with the details of them. I am sure they are doing a good job, and serve a very useful

purpose. Our thought has been that the Federal chartering and supervision would permit a much wider market and would bring about a great deal more uniformity. Obviously it would attract more respect, more stability in the market, and it would be more attractive to the investor. It would also be to the advantage of the firm that would be interested in insuring or trading in the mortgages.

We think that it has some distinct advantages. We think it would be helpful in overcoming the barriers that they would run into in individual State laws and regulations.

Senator SPARKMAN. Have you seen the report from the Treasury Department relating to this bill?

Mr. KIMBREL. I have not.

Senator SPARKMAN. And we have one from the Housing and Home Finance Agency. These reports will be entered in the record along with copies of the bill.

Do you have anything further?

If not, thank you very much. Is there anything from Mr. McCarthy or Mr. Flexner?

Mr. MCCARTHY. I would like to mention one thing to Senator Douglas insofar as the setting of standards, construction standards. I operate in a State which covers an area of a thousand miles from border to border-California. We operate 840-some branches in the area. We set standards throughout the State and many times they may be much stricter than FHA.

There have been subdivisions that we have refused to accept because they didn't meet our standards. So we feel that the same sort of standards could be set by any corporation that wished to operate on a proper basis.

Senator DOUGLAS. On a nationwide basis?

Mr. MCCARTHY. On a nationwide basis; yes, sir. Standards could be set and they would have to adhere to them. It is just merely a spreading of the market.

Senator DOUGLAS. Do you think such powers should be granted or required of the insuring corporation?

Mr. MCCARTHY. I believe that the investing individuals, corporations, and such, in the various insuring corporations, will insist that these standards be set properly before they would invest. Also the joint board does have authority and can either issue a charter or not, contingent upon the standards that are set.

They have the power of issuing the charter. So they could require that this be done before the charter be issued.

Senator DOUGLAS. Is that power explicitly granted in the act? Mr. McCARTHY. It authorizes them to issue the charter. And I would assume that they could make their own decisions as to whether they would or would not issue.

Senator DOUGLAS. Might it not be well to have that fastened down in the act?

Mr. McCARTHY. I think it is always best to have things fastened down, Senator. I would not object.

Senator DOUGLAS. At present it is not in the act?

Mr. McCARTHY. Except as to the general ability to charter, and this I would interpret as being at, at least if I were running or had anything to do with the joint board, or I think any other prudent

businessman, they would insist that these particular items be spelled out specifically.

Senator DOUGLAS. Suppose someone says there is nothing in the act which specifically authorizes you to do this, therefore you are usurping authority. Wouldn't it be desirable if this is public policy to have it specified?

Mr. MCCARTHY. I agreed with you originally to tie things down properly, so that if there is any question I would say tie it down. But I do think you have to give them a certain latitude, and you have to depend upon the judgment and ability. The joint board is set up by the top men, not only in Government but apparently two men from industry or from the financial field who surely, I, in my opinion, would have the capacity to make these decisions. Senator SPARKMAN. Mr. Flexner?

Mr. FLEXNER. The banks today are not short-term lenders, the way they were a few decades ago. Over 40 percent of all the deposits of commercial banks are time deposits, and in many banks this is quite a bit over 50 percent, and it is anticipated that by 1970 about 55 percent of all deposits of all commercial banks will be time deposits. I know that a great many people used to think of commercial banks as short term, and they were always fearful of any kind of venture into long-term maturities. Actually, of course, if commercial banks didn't invest in mortgages, now and in the future, not only would it hurt the housing industry, but I think commercial banking would disappear as a major force in the world of finance, because of the great importance of the mortgage debt.

So that this is one comment I want to make.

The other comment, as to standards, the performance, delinquency of foreclosures in conventional mortgages, as you know, is much better than delinquency in foreclosure experience in FHA mortgages.

It should be borne in mind that when an enterprise is private, and the investors have an obligation to the stockholders, and the management cannot keep its job if it does not perform properly, that management of such a corporation, in order to perpetuate itself will have a great incentive to keep standards high. After all this is a federally supervised, federally chartered institution with large reserves Consequently, management would have to make certain that the standards it sets up, quite apart from any public interest factor, would protect it and make certain that the stockholders get a return so that the corporation continues to exist. This is one of the strong forces in private enterprise, the selfishness of managements to keep existing. And so I think there are already built-in standards in this thing. You don't have to have, in fact it would be a great mistake to have, the joint board set these standards, because this is one of the great difficulties with FHA today. These standards are not tied to the profit principle which is feasible in this type of work, but they are tied to some type of arbitrary thing which many people try to get away from, and consequently FHA cannot make mortgages on the scale they would like to make.

We don't want to do the same thing here. This is why this is a private market organization.

So I would strongly urge not to write rigid standards into the law. This is now implied in the bill, of course, as it has been introduced.

Senator SPARKMAN. May I say with reference to standards-and I am sorry that Senator Douglas is not in here now-it seems to me, as Mr. Kimbrel stated, it is an inherent power of the board, the group that has supervision, to decide on what conditions they will buy mortgages. Certainly that would involve standards. However, that is something that we can talk about when we get to the point of fastening these things down.

Mr. FLEXNER. On the matter of investments, Senator Douglas referred to 95 percent. He was talking about equity debenture when he referred to 95 to 5, or 20 to 1. I am certain the capital for these debentures would not come from the commercial banks. Commercial banks wouldn't be interested in this type obligation. If you look at their assets, they are not buying this type of debenture. There is a good reason for this. If commercial banks have any money to put into mortgages, they will originate these directly because they have a customer relationship to think of. The money for these debentures will come largely from pension funds, very largely from corporate pension funds, union funds, and all others who have perhaps not only the profit motive, but the convenience of investment to think of. Union funds would like to put their money into housing because this would please their members. They can do this well through this device. So actually I think Senator Douglas' fear that this would extend the long-term lending of commercial banks is unwarranted. It would not come, in my opinion, from commercial banks.

Senator SPARKMAN. Mr. Kimbrel?

Mr. KIMBREL. I would like to conclude by speaking both as a country banker and for country bankers in that this is something in which we are particularly interested. It has, shall we say, a selfish interest to us in being able to attract to our capital-scarce area funds that are available in capital-rich areas; it would help to create this stability, this uniformity, it would create an interest in investing in our area. Frankly speaking from that standpoint, we are quite interested in this particular piece of legislation.

Senator SPARKMAN. Very good.

Thank you very much, gentlemen. We appreciate your helpful testimony.

Mr. KIMBREL. Thank you.

Senator SPARKMAN. Mr. Rex Baker, vice chairman of the Legislative Committee, National League of Insured Savings Associations.

We are glad to have you with us. We have your prepared statement. I see you are flanked by two very able assistants whom we know quite well. For the benefit of the record will you identify them?

STATEMENT OF REX G. BAKER, JR., VICE CHAIRMAN, LEGISLATION COMMITTEE, NATIONAL LEAGUE OF INSURED SAVINGS

ASSOCIATIONS

Mr. BAKER. Mr. Chairman, and members of the subcommittee, I welcome this opportunity to present the views of the National League of Insured Savings Associations on the various bills pending before this subcommittee with respect to the establishment of a secondary market for conventional home mortgage loans.

I am Rex G. Baker, Jr., the vice chairman of the National League's Legislation Committee, and the president of the Southwestern Savings Association of Houston, Tex. I am a director of the Federal Home Loan Bank of Little Rock and a member of the Texas Finance Commission.

I am accompanied by William J. Kerwin, assistant executive director of the National League, and William F. McKenna, general counsel of the National League.

As a matter of historical background, the National League of Insured Savings Associations has favored the establishment of a secondary market facility within the Federal Home Loan Bank System for the past 10 years. For the information of the committee, I would like to quote from a policy statement issued by the National League on June 20, 1957, in which the league stated:

The facilities of the Federal Home Loan Bank System should be used to expedite the purchase and sale of mortgages between members, including conventional loans, without geographical limitation. Provisions should be created to provide for warehousing of mortgages out of long-term funds and the creation of a secondary market within the Federal Home Loan Bank System, and any other facility that might aid the home ownership program as approved by the administration.

At the National League's legislative conference in Washington last February, the league once again restated this view on the secondary market.

Over the years, members of the National League have felt strongly the need for a secondary mortgage facility. This would greatly assist the home buying public in that portion of the United States where mortgage funds are scarce. Such a program would facilitate the flow of mortgage funds from areas of surplus supply to areas of chronical shortages of capital for mortgage lending. Those areas consequently have not enjoyed the same economical home ownership opportunities that other sections have experienced.

Unfortunately, over the years other segments of the financial industry of the United States, including the commercial banks, have been unwilling to support the establishment of a secondary market within the Federal Home Loan Bank System. This system provides the greatest source of home financing in the Nation. (See page 526 of Hearings before the Subcommittee on Housing, House Banking and Currency Committee, May 16-27, 1960.)

The members of this subcommittee, I am sure, will recall the problems which occurred during the decade of the 1950's, when there were chronic shortages of home financing. Although the Congress took numerous actions to expand and encourage the development of capital for home financing purposes, the Nation experienced a cyclical pattern in which mortgage funds were plentiful 1 year and in short supply the next. All through this period the Federal Home Loan Bank System rendered invaluable service to the Nation by providing a continuous supplementary source of funds for home mortgage lending. Even so, the capabilities of the Bank System to provide these funds were limited by the ability of the capital markets to absorb the System's consolidated debentures.

As you know, the Federal Home Loan Bank System makes advances available to member institutions from the proceeds of its consolidated debentures, its own capital funds, and deposits of members.