More recently, the bank system has moved in the direction of a secondary market facility by the establishment of the so-called participation loan program, under which insured associations may purchase home mortgage loans from other insured institutions in various parts of the United States. While the participation loan program has helped to facilitate the flow of capital funds into housing markets to the extent of approximately $2 billion, the participation loan program cannot replace a true secondary market facility. The program which we would advocate would enable participating member institutions to buy and sell conventional mortgage loans as well as engage in participations.

In the housing programs conducted by the Federal Housing Administration and the Veterans' Administration we have seen how the Federal National Mortgage Association, through its secondary market facilities, has greatly assisted the flow of capital into these programs and, indeed, the Federal National Mortgage Association has helped to smooth out those periods when there have been shortages of either mortgages or mortgage funds in the insured and guaranteed mortgage market. The important point is that when mortgage inventory is depleted, FNMA has provided a source of mortgage loans acquired during periods when the supply of funds from private lenders for such purposes was inadequate.

In the next 5 to 10 years the Nation's demand for conventional home financing is likely to increase substantially. Most economic experts predict that conventional home mortgage loans will play a more important role in the home financing picture in the next few years than did the FHA and the VA in the 15 years following World War II. We conclude, therefore, that there is a need for Congress to explore this question and an obligation to see if some legislation can be adopted in this area. We commend this subcommittee for undertaking to study this problem.

While the national league endorses the concept of a secondary market for conventional mortgage loans, it should be pointed out that the Revenue Act of 1962 contains provisions which could materially reduce the participation of the savings and loan industry in any secondary market program, however important such a program would be to national housing objectives.

According to Report No. 1881 of the Senate Committee on Finance, dated August 16, 1962, the definition of a building and loan association for tax purposes would seem to preclude any extensive participation in secondary market operations by the savings and loan business.

I should like to quote from page 189 of this report, which states as follows:

Subparagraph (B) thereof requires that substantially all the business of the domestic savings association consist of acquiring the savings of the public and investing in loans described in subparagraph (C). Thus, even though such an association otherwise meets the asset requirements imposed by subparagraphs (C), (D), (E), and (F) of paragraph (19), it will nevertheless not qualify as a domestic building and loan association if more than an insubstantial portion of its business consists of, for example, mortgage or insurance brokerage activities.

I might add that the late Senator Kerr of the Senate Committee on Finance and Chairman Mills of the House Committee on Ways and Means have made somewhat the same statement on the floor of

the Senate and the House during debate on the Revenue Act of 1962. Their comments were to the effect that an occasional sale of mortgages would not affect the tax status of the association. If these transactions became a normal mortgage broker business, however, they would not meet the definition requirements for a building and loan association.

As this committee is probably aware, the Internal Revenue Service has not issued regulations implementing the savings and loan provisions of the Revenue Act of 1962. Nevertheless, it is clear from the language quoted above that the purchase and sale of mortgage loans by savings and loan associations cannot be conducted on an extensive basis under the new law.

Many of our objections to S. 810 were enumerated yesterday by Chairman McMurray of the Federal Home Loan Bank Board. In reading S. 810 we feel that this proposed legislation contains many confusing complexities that in practical application will probably not result in a successful secondary mortgage market facility.

S. 810 creates a super joint board whose major purpose is to grant charters for privately owned secondary mortgage companies and mortgage insurance companies.

It is quite evident from the language of S. 810 that the commercial bankers want to have the additional sources of revenue from the mortgage lending market without bearing the long-term credit responsibility.

In order to accomplish this objective they need a facility which can purchase these mortgages when the banks desire to move out of the housing market. In turn, this will require the protection of mortgage insurance to give the mortgage the characteristics of a negotiable security.

Inherently, commercial banks prefer short-term loans due to the nature of their liability on demand deposits. However, through enabling legislation and regulation commercial banks have been venturing forth to a larger degree into the long-term real estate mortgage market. Since most commercial bankers don't segregate their time and savings deposits from their demand deposits, they are reticent to make, in substantial quantities, long-term mortgage investments except in insured mortgages acceptable as negotiable securities by a secondary mortgage facility.

S. 810 would also add additional hidden costs to the borrower in the form of mortgage insurance premiums. Many long-term mortgage investors, including the savings and loan industry, have the vast majority of their funds working in the conventional home loan field. They are knowledgeable through experience and supervision and are in a position to undertake the operation of a secondary mortgage facility within their present Federal Home Loan Bank System without the hidden cost of insurance.

Our league has not taken any position on S. 2130 due to the fact that it has only recently been introduced and action would have to be taken by our legislation committee before recommendations could be made. However, this does not change the fact that FNMA has an exceptionally fine record in providing secondary market facilities for insured and guaranteed loans from the Federal Housing Administration and Veterans' Administration. It is noted from Mr. Semer's

statement yesterday that certain standards would have to be adopted if FNMA were to be called upon under S. 2130 to administer the conventional secondary market facility. We would be concerned that this approach would lead to extensive Government control over free market determination of interest rates, term of the loans, and other mortgage provisions.

Of the three bills pending before this subcommittee, S. 811 comes closest to our concept of how the secondary market facility should be established. It seems that with a reasonable amount of ease, S. 811 could be amended to include Federal Reserve banks, national banks, and State banks, as eligible stockholders of the Home Mortgage Corporation. The Board of Directors of such Corporation could be reconstituted to include representatives of the Federal Home Loan Bank, the Federal Reserve bank, and stockholders in the Corporation. We feel further that the bill should be broadened so as to include not only the purchase of participations in mortgages but also to give the Corporation the power to buy and sell and otherwise deal in the mortgages on housing units.

On behalf of the National League I want to express my appreciation for the opportunity to give our views to the committee.

Senator SPARK MAN. Thank you, Mr. Baker.

It is a very clear statement. I think I could summarize it in this way: You feel that there are many difficulties in S. 810; you are not ready to report on S. 2130; you believe that S. 811 could be amended so as to be quite a satisfactory measure. Is that correct?

Mr. BAKER. That is correct, Mr. Chairman, if provision could be made to include a redefinition of the term "domestic building and loan association" which would permit us to participate in the secondary mortgage program, whatever nature it took.

Senator SPARK MAN. You refer to a limitation on operation of the savings and loan associations caused by the definition in the Internal Revenue Act. I was about to say I assume you could still participate in the secondary market program. But you would lose the right to use the special formula you would otherwise use under the tax laws. I am not sure that is a correct statement. I recall that when the act was up last year, you may remember, I made a statement on the Senate floor, had a colloquy with the chairman of the Finance Committee regarding the same matter. So we are aware of the definition and limitations imposed by it.

Mr. BAKER. One of the reasons for the limited powers indicated in S. 811 was because of this very fact. From a practical standpoint we can't have substantial participation in the program. The drafters of that bill purposely limited its scope to the purchase and sale of participations in mortgages. That is the reason for the narrow structure of S. 810, as I understand it.

Senator SPARKMAN. Is there any comment from either of the gentlemen accompanying you?

Mr. KERWIN. No, thank you, Mr. Chairman.

Senator SPARKMAN. Thank you very much, gentlemen. I appreciate all three of you being here.

Mr. BAKER. Thank you, Mr. Chairman.

Senator SPARKMAN. Mr. David Krooth, member of the Board of Directors, National Housing Conference.

Mr. Krooth, you are another of our oldtimers. We are glad to welcome you back.

STATEMENT OF DAVID L. KROOTH, MEMBER OF THE BOARD OF DIRECTORS, NATIONAL HOUSING CONFERENCE

Mr. KROOTH. Thank you, Senator.

Senator SPARKMAN. We have your statement and your exhibit. You may present it as you see fit.

Mr. KROOTH. On behalf of the National Housing Conference, I wish to express our appreciation of the opportunity to appear before you today on the three bills which are intended to provide secondary market facilities for conventional mortgages.

Before commenting on these three bills, I would like to speak briefly on the need for housing legislation generally.

HOUSING LEGISLATION GENERALLY

Several housing authorizations are approaching exhaustion or expiration so that some action is required this year. You, Mr. Chairman, have introduced bills dealing with a $75 million increase in the authorization of direct loans for the elderly; also the extension of sections 809 and 810 of the National Housing Act concerning military housing for persons in outlying areas. We support these meas

ures.

In addition, it is necessary that early comprehensive action be taken on housing legislation next year if we are to avoid an adverse effect on the volume of housing production, urban renewal, and the general economy.

In this connection I would like to submit for the record the legislative proposals of the National Housing Conference for 1963. These were formulated after extensive meetings and discussions among the public interest groups. We believe that these proposals, now again under our review, may be of help to the committee in its deliberations concerning the formulation of a housing legislative program for the next session.

BILLS TO PROVIDE SECONDARY MARKET FACILITIES FOR CONVENTIONAL

MORTGAGES

The National Housing Conference supports the objective of expanding secondary market facilities for mortgages if it can be done in a manner which would promote the public interest and benefit consumers. Where Federal legislation is requested to assist in providing secondary market facilities for conventional mortgages, it is appropriate that we raise these questions of the public and consumer interests. Certainly the public interest would not be promoted if such a facility would stimulate the production of housing or poor standards, or increase interest rates, or generate high-risk mortgages which would result in defaults and losses.

The establishment of adequate secondary market facilities should include provisions which will assure that the houses conform to sound standards; that the operations stimulate and encourage the lowering rather than the raising of interest rates and financing costs; and that proper techniques are required for appraising properties and accepting mortgages. As we read these bills we have a number of questions as to whether these objectives will be accomplished unless the bills are amended to impose such standards.

(1) The bills do not establish standards similar to those prevailing under FHA which would assure that housing meets proper requirements as to design, materials, land planning, utilities, and other amenities. These standards are necessary for the protection of the homeowner and the community. They are also important to assure that there is sound security for the mortgage.

(2) The bills lack standards concerning the techniques for appraisals of properties or for determining credit acceptability of mortgagors. Under the FHA and VA systems, these are matters where uniform standards are established which provide some protections besides the underlying Federal insurance or guarantees. Similar standards are necessary to qualify mortgages as acceptable for purchase by a secondary market institution.

(3) We question whether S. 810 would encourage lower interest rates. The securities of the mortgage marketing corporations are of a risk character, without Government guarantees, which will not attract low-interest money. Taking into account the cost of servicing mortgages and the cost of the operations of these corporations, we are concerned whether they will tend to attract mortgages of higher risks and higher interest rates. From the point of view of the consumer, it is important to assure that additional secondary market facilities are established in a manner which will facilitate lower financing costs.

(4) While S. 810 provides for Federal chartering of corporations for the insurance and marketing of mortgages, we question the adequacy of its provisions relating to Federal supervision. There is a lack of standards for the determination as to when a charter should be issued, including requirements to show the need for the institutions and their potential for success.

(5) As to S. 811 which would establish a Home Mortgage Corporation, we are impressed by the statement of the Chairman of the Federal Home Loan Bank Board and the questions which he has raised concerning the feasibility and need for this legislation.

(6) As to S. 2130, it is equally lacking in standards concerning the housing and mortgages which would be eligible by purchase by the Federal National Mortgage Association. This bill provides for the acceptance of private mortgage insurance as to the portion of mortgages which exceed 80 percent of appraised value. We raise the question whether there has been sufficient experience with private insurance programs to merit FNMA's purchase of such mortgages.

In the final analysis, mortgages will be readily marketable and collectible only if the underlying security represents a good house in a well-planned neighborhood, at a price which people can afford. We must assure that all necessary measures are taken to keep financing costs at the minimum necessary to attract the capital required for homebuilding.

We know that the committee will be giving further study to these bills and that they may be the subject of additional hearings next year. We urge that the bills be revised to incorporate adequate safeguards and standards which are necessary to assure the soundness of the proposed secondary market operations and to protect the public and consumer interests.

Senator SPARK MAN. Thank you very much, Mr. Krooth. By the way, this document you referred to, "Legislative Proposals for 1963,"