We should be building far more housing today than :3 being achieved. We must build even more in the years ahead as our population increases. It would be good for business, good for the country, and good for our poorly housed citizens if techniques and devices could be developed whereby several hundred thousand more housing units could be constructed each year. I think that this can be done only if we undertake in a dramatic way to facilitate the flow of investment funds into housing construction. It is necessary and desirable to do everything possible through both public and private action to achieve such objectives.

The variety of institutions, policies, and procedures introduced and implemented by the Government over the past generation contributed tremendously to the progress we have made in housing. I believe these governmental measures will need to be continued and maybe even strengthened. On the other hand, more can be done through private instruments and channels. I believe that the legislative proposals on which these hearings are based indicate a direction in which positive action can be taken to increase the supply of funds for housing construction and to broaden the market for mortgages.

I have read this bill with considerable interest and, while I would hesitate, without much further study and discussion, to state that it is the perfect instrument for increasing the flow of savings into the mortgage market and for creating an active secondary market for mortgages, it certainly is deserving of the most careful study and serious consideration by your committee and the Congress and the administration.

I, myself, would want to study the subject much more carefully and possibly suggest changes in the proposed bill, because many issues are posed with respect to the relationships between public and private functions and institutions. I am sure that as study continues, even the sponsors of this bill may come forward with new ideas. This does not at all imply that the legislation does not now warrant serious attention. In fact, the need for study and serious discussion makes it all the more necessary for this committee to stimulate such studies and thoughts. I think the very holding of these hearings is helpful and constructive in this respect.

Let me emphasize most importantly of all that in this economy of ours we do have ample savings. What we need is to facilitate the flow of available resources into essential purposes and certainly an increase in the size and quality of our housing is one of the most essential of our purposes. If we can stimulate this flow of resources into housing we will stimulate growth and full employment and we will more nearly bring our standard of living and economic performance in line with our productive capability. Private financial institutions can be helped to expand if the degree of risk is reduced through insurance devices and if greater marketability of debt instruments can be assured. The proposed bill suggests important steps to accomplish these goals.

Thank you very much, Mr. Chairman.

Senator SPARKMAN. Thank you very much for a very clear state

ment.

I interpret that you think of these bills as being more or less additions, or supplements, to existing institutions that we have!

Mr. NATHAN. Yes.

Senator SPARKMAN. And that we need more in order to stimulate, or, rather, perhaps regulate the flow of savings that we have into the field of housing, which is badly needed.

Mr. NATHAN. Stimulation is most important, I think, Senator Sparkman. I really do feel that we need new steps to stimulate more funds for housing. I was a member of the National Commission on Money and Credit, and we studied the whole operation of our monetary and credit system for 3 years. There are divergent points of view among committee members, but one of the things that was fairly universally agreed upon by members of the Commission was the fact that the instruments and institutions to maximize the flow of savings into housing financing were not adequate. I think this does mean what you said, namely the need to supplement and add to the existing provisions so as to stimulate an increase of flow of funds for this purpose. Senator SPARKMAN. Do you have any feeling or any fear, or any reservations with reference to the entry of commercial banks further into the long-term lending field, or into the real estate lending?

Mr. NATHAN. No, I would not. I would, of course, recognize very importantly, Mr. Chairman, that one would have to be very careful in terms of the regulations of credit techniques for the commercial banks to be certain that demand deposit resources are not used for 20-year lending purposes.

But after all, our commercial banks do engage in savings accounts and in time deposits, and I see no reason at all why funds from savings accounts and time deposits and trust funds should not be increasingly flowing for residential purposes.

Senator SPARKMAN. Someone has suggested that the bill be amended to limit commercial bank investments to time deposits.

Testimony from the president of the American Bankers Association, was to the effect that it was assumed that most of the funds would come from pension funds and funds of that type; that naturally they would be looking for a place to be invested on a long-term basis.

Mr. NATHAN. Yes. I think that one of the things we have not recognized fully and clearly in our recent economic development, Mr. Chairman, is the rather rapid rise in long-term savings, savings which need to be used in long-term investment. The increase of funds through the pension technique or pension channel, has been very, very substantial.

I think that there is quite a bit of confusion as to how these funds might best be invested.

Those who are in charge of the pension funds often are much concerned about liquidity. I am not sure they ought to be, because in most pension funds we are faced with a rising reserve, and not any need for prompt liquidity. That doesn't seem to make much difference to the individual who is responsible for managing the funds. He is often concerned lest he might encounter a difficulty in liquidating some of the holdings, just in case there were need for liquidity. These needs, I think, are rather remote.

But I do feel that if there were, for instance, a much better secondary mortgage market-we don't have any today in this country, but many other countries do have if we had a secondary market in mortgages, I think that many, many more pension funds would be invested much heavier in mortgages, particularly insured mortgages.

Senator SPARKMAN. It would give a greater degree of liquidity. Mr. NATHAN. Much greater. And a greater return.

Senator SPARKMAN. And yet a given opportunity for a long-term investment if it is desired.

Mr. NATHAN. That is correct.

Senator SPARKMAN. In fact, I think you know that we have felt for a long time that there was a total inadequacy so far as marketing of home mortgages was concerned to appeal to these pension funds which have been growing tremendously in recent years.

Mr. NATHAN. They just don't have the experience and the managerial capabilities in many instances to go out and accumulate these mortgages.

Senator SPARKMAN. And yet there is no way by which they can buy blocks or participations or debentures.

Mr. NATHAN. Especially the insured. And I think that if we can get insurance coverage in the conventional mortgage, I do believe the flow of funds into the mortgage market would be enhanced. And this would do the country a great deal of good.

Of course there are, as you know, Mr. Chairman, some people in our society who believe that the problem in our economy is inadequate savings, rather than inadequate investment. I don't know how they reach that conclusion, looking at the facts. But, I think they would argue that if you put more money into housing you would have less for investment in industrial expansion and the like.

I think today the existing level of savings and the prospective level of savings with rising national income, which we must have to be relatively fully employed, is going to call for ingenuity on the investment side rather than on the savings side.

That is why what is proposed in this legislation is so terribly important.

Senator SPARKMAN. Thank you very much, Mr. Nathan, for a very fine statement.

The committee stands in recess until 10 o'clock tomorrow morning. (Whereupon, at 12:08 p.m., the subcommittee was recessed, to reconvene at 10 a.m., September 19, 1963.)

SECONDARY MARKET FACILITIES FOR CONVENTIONAL

MORTGAGES

THURSDAY, SEPTEMBER 19, 1963

U.S. SENATE,

SUBCOMMITTEE ON HOUSING OF THE

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The subcommittee met, pursuant to adjournment, at 10:05 a.m., Hon. John J. Sparkman (chairman of the subcommittee) presiding. Present Senators Sparkman and Douglas.

Senator SPARKMAN. Let the committee come to order, please. We think we better get started, because there is no way of knowing when we might be called to the Senate floor.

We continue the hearings this morning on S. 810, S. 811, and S. 2130. The first witnesses represent the United States Savings & Loan League, Mr. W. C. Warman, staff vice president; Mr. Stephen Slipher, legislative director; and Mr. T. Bert King, counsel.

Gentlemen, we are glad to have you with us. We have your statement. You proceed as you see fit.

STATEMENT OF W. C. WARMAN, STAFF VICE PRESIDENT, UNITED STATES SAVINGS & LOAN LEAGUE; ACCOMPANIED BY STEPHEN SLIPHER, LEGISLATIVE DIRECTOR; AND BERT KING, COUNSEL

Mr. WARMAN. Thank you, Senator.

My name is Winfield C. Warman. I am a staff vice president of the United States Savings & Loan League and I appear here today in that capacity on behalf of the United States Savings & Loan League, and accompanied by Stephen Slipher, legislative director of the league; and T. Bert King, counsel for the league.

The league membership consists of over 5,000 savings and loan associations located in every State of the Union and representing approximately 95 percent of the total savings and loan assets in the country. Over the years, the distinguished chairman and members of this subcommittee have shown a sincere interest in the thrift and home financing business and in sound legislation for our institutions. We are very grateful for this.

I appreciate this opportunity to express our views regarding Senate bill No. 811, which would establish a secondary market facility for participations in conventional home mortgage loans. For some time the United States Savings & Loan League and others have given consideration to the problem of establishing a secondary market facility for conventional loans. The conventional loan has always been

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the "workhorse" of the home finance field. In fact, currently about 80 percent of all home mortgage loans in this country are conventionally financed. A secondary market facility for participations in conventional loans would make conventional loans extended by our institutions more liquid. It would also help to balance the flow of funds between capital surplus areas and capital deficit areas and thus tend to narrow the geographical differences in interest rates. Such a facility would also reduce the variability of the flow of mortgage funds by creating a steadier flow of such funds and alleviating abrupt changes in the conventional mortgage market when portfolio adjustment was necessary, and provide a more stable climate for home buyers in which to secure conventional mortgage financing.

Making home mortgage loans is basically a local business. Savings and loan associations are local institutions and are surrounded by certain legal requirements that require them to operate in their local area. Specifically, these are the area limitations contained in Federal laws and many State laws. Savings and loan associations cannot purchase conventional loans beyond their regular lending area. While savings and loan associations restrict their operations to the local lending area, yet there are situations in the country, particularly in the eastern part of the United States, where savings are accumulating faster than the demand for loans, and there are also situations in other parts of the country where the loan demand is greater than the accumulation of savings.

For a number of years the savings and loan business favored legislation to provide a secondary market bill to buy and sell conventional loans. We now favor this present bill which is limited to buying and selling of participations in loans. We believe that participation transactions should be encouraged above outright sale because it makes for greater care in credit analysis, appraising, and loan servicing. The selling institution still has at least a 25-percent interest in the loan, whereas in the outright sale of a loan if anything goes bad it is strictly the new buyer's "problem."

Another reason for shifting our plan to participations is the new savings and loan tax law. The regulations under it have not yet been promulgated, but the legislative history of the bill suggests that there will be definite limitations on the amount of buying and selling of loans which an association may do under the definition of a domestic savings and loan association. We feel confident, again based on the legislative history, that there will be no limitation on the buying and selling of participations, or at least no limitation that would seriously impair the participation loan program.

FSLIC insured institutions were authorized in 1957 to purchase participations in home mortgage loans on property outside the regular lending radius of the purchaser. Under this program, a savings and loan association, say in California, may originate a conventional loan and sell up to 75 percent of that loan to another insured savings and loan association anywhere in the country. As is the case in all new programs, it takes some time for them to become accepted and workable. The participation program has gradually taken hold. The figures available from the Federal Home Loan Bank Board show that from the inception of the participation loan program in 1957 to the end of 1962, inclusive, participation sales and purchases reached