Section 206 of the bill provides that the charters of corporations organized under the bill shall be forfeited if the corporations violate or fail to comply with any provision of the bill or of any regulations prescribed thereunder. In such event, the Joint Board is required to take possession and title to the corporation's assets for purpose of liquidation. The provisions would seem to limit the authority of the Joint Board by precluding any action other than complete liquidation and distribution of remaining assets to stockholders. Under certain circumstances it is conceivable that the Joint Board might find it desirable to authorize continuation of a corporation's activities under a reorganized corporation. Section 302 (a)(2) provides for the establishment of an insurance premium which is adequate to maintain at all times unimpaired capital, surplus, and undivided profits in an aggregate amount, upon the basis of market value, of not less than 5 percent of the unpaid principal amounts of all outstanding insurance contracts. Data are not available as to whether 5 percent of the outstanding insurance contracts would represent adequate reserves in case of a declining market. Accordingly, the committee may wish to obtain an actuarial opinion as to the adequacy of the proposed reserves. Further, since the "unimpaired capital, surplus, and undivided profits" are not generally determined upon the basis of market value, we suggest that the phrase "upon the basis of market value" in line 15, page 14, be deleted and that a sentence be inserted in line 21 following the words "Joint Board." as follows: "In computing the 5 per centum limitation the 'unimpaired capital, surplus, and undivided profits' shall be adjusted to reflect the market value of the investments." Section 302(a) (2) provides also that all funds not invested in obligations of or guaranteed by the United States or in other obligations or securities approved by the Joint Board "*** shall be safely invested with due regard to the purpose of the corporation." We believe that the word "safely" requires definition in order to be meaningful. Accordingly, we suggest that the bill be amended to define the types of other obligations or securities that may be purchased as investments by the Joint Board. Section 302(b) states that the mortgage or other instrument securing a loan shall be in an amount not exceeding $30,000 and shall be on a one- to fourfamily residential property. We believe clarification is needed as to whether the $30,000 limitation is on the original amount of the loan or on the unpaid principal balance outstanding at the time application is made for insurance. Also, the $30,000 limitation would apply regardless of whether the mortgage or loan is for a one-, two-, three- or four-family residential property. The National Housing Act, approved June 27, 1934, chapter 647, 48 Stat. 1246, as amended, 12 U.S.C. 1701, authorizes insurance by the Federal Housing Administration on one to four-family units and provides for different limitations based on the number of family units to be insured. For example, the maximum amounts of insurance available to occupant mortgagors on loans pursuant to section 203 (b) of the National Housing Act, as amended, 12 U.S.C. 1709(b) (2), is as follows: 1-family units.. 2- or 3-family units.. 4-family units___ $25,000 27, 500 35, 000 The committee may wish to establish separate limitations based on the number of family units to be insured, to reflect the increased value of residential property which generally results when additional family units are constructed. We suggest the following editorial changes: On page 15, line 2, the word "amortized" should be "amortizable". On page 25, line 6, the code reference "(16 U.S.C. 1431 (h))" should be “(12 U.S.C. 1431 (h))". On page 26, line 2, "Mortgage Market Facilities Act of 1939," should be "Mortgage Market Facilities Act of 1963,". Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. Hon. A. WILLIS ROBERTSON, COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: Reference is made to your letter of February 20, 1963, requesting our comments on S. 811 which is entitled "A bill to enable Federal home loan banks to implement their services to their member institutions by establishing a secondary marketing facility for participations in conventional home mortgage loans." If enacted, it would be cited as the "Home Mortgage Corporation Act." Section 3(a) of the bill would create a new corporation within the Federal Home Loan Bank System which would be called the Home Mortgage Corporation. We believe that several provisions of the bill give rise to some question whether the proposed corporation is intended to be a Government corporation or a private corporation and we recommend, therefore, that the bill be clarified in that respect. For example, while financing of the corporation under section 4 of the bill apparently would not require Government funds, thus indicating an intent to create a corporation financed entirely with private funds, we note that section 9(a) of the bill would amend section 201 of the Government Corporation Control Act, approved December 6, 1945, 59 Stat. 600, as amended, 31 U.S.C. 856, by adding the proposed corporation to the list of Government corporations classified under that act as mixed-ownership corporations. Assuming then that the proposed Home Mortgage Corporation would be a private corporation, we do not understand the purpose of having it included in section 201 of the Government Corporation Control Act. We believe also that paragraphs 6 and 7 of section 5 of the bill which authorize the corporation to utilize the services and personnel of Federal agencies on a reimbursable basis and to use the U.S. mails in the same manner as the executive departments of the Government, give to the proposed corporation privileges not accorded other private corporations chartered by the Congress. Also, we do not understand the purpose of paragraph 8 of section 5 as we are not aware of any provisions of the Government Corporation Control Act relating to determining the necessity for and the character and amount of obligations and expenditures. It is noted that the bill contains no provision for independent and periodic audits of the proposed corporation. Consequently, we suggest that a provision be included in the bill requiring annual audits in accordance with generally accepted auditing standards by either (1) the Federal Home Loan Bank Board on a reimbursable basis or (2) independent certified public accountants or independent licensed public accountants, certified or licensed by a regulatory authority of a State or other political subdivision of the United States. The bill is silent as to the Federal, State, or local taxes which the proposed Home Mortgage Corporation may be required to pay. Section 13 of the Federal Home Loan Bank Act, approved July 22, 1932, chapter 522, 47 Stat. 735, as amended by section 8 of the act of May 28, 1935, chapter 150, 49 Stat. 295, 12 U.S.C. 1433, provides in specific terms the extent to which the Federal Home Loan Banks may be subject to Federal, State, or local taxes. Similar provisions relating to the Federal National Mortgage Association, which performs functions similar to those to be performed by the proposed Home Mortgage Corporation, are set forth in section 309 (c) of the Federal National Mortgage Association Charter Act, approved August 2, 1954, chapter 649, 68 Stat. 621, 12 U.S.C. 1723a (c). While the proposed Home Mortgage Corporation apparently would be subject to taxation on the same basis as any private corporation, you may wish to consider whether a specific provision concerning the tax status of the proposed corporation should be inserted in the bill. Section 6 of the bill grants the proposed corporation authority to issue notes, bonds, debentures, or other obligations. While the United States apparently would no guarantee those obligations, you may wish to consider requiring the corporation to state specifically on all obligations issued that the obligations are not obligations of the United States and are not guaranteed by the United States. Such a requirement presently is applicable to the consolidated obligations issued by the Federal Home Loan Banks (see 12 U.S.C. 1435). Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. COMPTROLLER General of THE UNITED STATES, B-149270 Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR Mr. CHAIRMAN: Reference is made to your letter of September 12, 1963, requesting our comments on S. 2130 which would authorize the Federal National Mortgage Association to deal in conventional mortgages and provide otherwise for its further development as a secondary market facility. Enactment of the bill would not directly affect the functions of the General Accounting Office and since the purpose thereof appears to be a policy matter for the Congress to consider, we offer no comments concerning the merits of the bill. However, the Congress may wish to give consideration to the following aspects of the bill. The bill would revise section 302(b) of the Federal National Mortgage Association Charter Act to authorize the association, under its secondary market operations to purchase, lend on the security of, and otherwise deal in certain conventional (uninsured) mortgages which do not exceed 80 percent of the appraised value of the security, and in similar mortgages when the loan-to-value ratio exceeds 80 percent if the excess is covered by suitable mortgage insurance. The bill, however, is silent as to who shall make the required appraisal, whether it be the association's appraisal of the property value, or a value certified to by the seller. Congress may wish to consider including provisions in the bill which will require that such appraisals be made under the control and direction of the association. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: You have requested the views of this Corporation on S. 810, a bill to authorize the chartering of organizations to insure conventional mortgage loans, to authorize the creation of secondary market organizations for conventional and other mortgage loans, to authorize the issuance of debentures upon the security of insured or guaranteed mortgages, and to create a joint supervisory board to charter and examine such organizations, and for other purposes. The legislation proposed by S. 810 is known as the "Mortgage Market Facilities Act of 1963," the purpose of which is to make additional facilities available to increase the market for conventional and insured mortgages as a means of improving the housing conditions of the American people. The creation of a stronger secondary market for conventional and other mortgage loans would be desirable from the standpoint of increasing the liquidity of mortgage investment as well as increasing the funds available in the mortgage market. However, there are several aspects of S. 810 which, in our opinion, cause it to fall short of its stated purpose. The insurance of mortgage loans under the provisions of the bill would not be effected by a Government agency such as the Federal Housing Agency or the Veterans' Administration, but rather by relatively small private insurance companies to be chartered by the Joint Supervisory Board for Mortgage Insurance and Marketing Corporations. Private corporations that engaged in the mortgage insurance business prior to the 1930's found it exceedingly difficult to meet their obligations in times of economic distress and virtually all of them failed in the course of the great depression. The experience gained from the demonstrated weaknesses in these corporations was taken into consideration when the legislation which established the Federal Housing Administration was drafted in 1934. The system of mutual mortgage insurance created by the Federal Housing Administration has proved to be a stabilizing influence in the mortgage market. In our opinion, however, the provisions of S. 810 are not a desirable supplement to the Federal legislation in the field of housing finance. To illustrate, section 303 (a) of the bill provides that a mortgage insurance corporation shall pay in cash, without delay, the insurance claims on defaulted loans. Such payment would be 100 percent of unpaid principal, interest, and foreclosure costs after a default of not less than 91 days. This requirement would necessitate major emphasis on liquidity in the insuring corporation's asset structure. Unlike the insurance provided by the Federal Housing Administration, it would allow the insurer no flexibility to meet sudden large requirements. In contrast with the provisions of S. 810, the Federal Housing Commissioner is authorized on behalf of the Mutual Mortgage Insurance Fund of the Federal Housing Administration to issue debentures in payment of insurance claims and thereby fund defaulted mortgages with obligations of longer maturity. Thus, the insurer is able to meet sudden large demands without precipitating a liquidity crisis. Furthermore, this arrangement permits the insurer to extend the maturity of obligations beyond the original terms and thereby take full advantage of any cyclical improvement which might take place in the real estate market. Section 302(a) of the proposed legislation requires an insuring corporation to maintain capital, surplus, and undivided profits in an aggregate amount, based on market value, of not less than 5 percent of the unpaid principal amounts of all outstanding mortgage insurance contracts. Introduction of "market value" as a criterion for appraising assets would have an unstabilizing effect on the reported capital funds of the insuring corporations which could make it difficult to maintain the required 5 percent relationship of capital to outstanding mortgage insurance contracts. These firms would invest at least 50 percent of their capital in U.S. Government bonds, and the remainder in other fixed income securities consistent with the purpose of mortgage insurance corporations. Thus, the market values of the assets would depend not only on changes in quality of individual credits, but also on changes in money rates in the open market. For example, money rates in a free market seldom move sidewise for any length of time; the trend is typically upward or downward, and increases or decreases of 1 percentage point on longer term rates over a 5-year period are not uncommon. Such a change would bring about a fluctuation of 15 percent or more in the market value of a portfolio composed of items with an average maturity of 10 or 20 years even though the credit quality of individual issues remained the same. This would occur because the interest income on the outstanding obligations is fixed by contract and the only possible adjustment to a new level of interest rates is by means of an increase or decrease in the market value of the obligations. Thus, if the aggregate amount of a mortgage insurance corporation's capital, surplus, and undivided profits, based on market value, were to dip below the required 5 percent of outstanding mortgage insurance, the corporation would have no choice but to dispose of a part of its outstanding insurance contracts in an amount sufficient to bring the capital ratio up to the required 5 percent. It is suggested that if the capital of a mortgage insurance corporation were computed at book value rather than market value, the problem of maintaining an adequate capital account in relationship to total outstanding mortgage insurance would be diminished. Another objectionable feature of the proposed legislation is the type of business likely to be attracted to the proposed mortgage insurancec ompanies. Almost without exception, the loans would be marginal in character because it is now relatively easy to obtain conventional loans on new properties of up to 90 percent without paying for mortgage insurance. Only borrowers desiring even larger loans or those not qualified for Federal Housing Administration or Veterans' Administration programs--for example, individuals who do not meet the earning power test-would have any financial reasons for insuring their conventional loans. Unless a mortgagor has no other alternative he is unlikely to pay any insurance premium which would primarily benefit the mortgagee. Finally, it is our opinion that the Chairman of the Federal Deposit Insurance Corporation should not serve as an ex officio director of the Joint Board since his responsibilities as Chairman of the Federal Deposit Insurance Corporation require his full attention. Furthermore, it is conceivable that areas of serious conflict might arise between his position as a supervisor of banks and as a supervisor of mortgage insurance and marketing corporations. We have been advised by the Bureau of the Budget that it has no objection from the standpoint of the administration's program to the submission of this letter. Sincerely yours, JESSE P. WOLCOTT, Director. Hon. A. WILLIS ROBERTSON, FEDERAL DEPOSIT INSURANCE CORPORATION, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: You have requested the views of this Corporation on S. 811, a bill to enable Federal home loan banks to implement their services to their member institutions by establishing a secondary marketing facility for participations in conventional home mortgage loans. The creation of a stronger secondary market for conventional home mortgage loans would be desirable from the standpoint of increasing the liquidity of mortgage investment as well as increasing the funds available in the mortgage market. However, in the opinion of this Corporation, the legislation proposed by S. 811 is too restrictive in that it would restrict participation in conventional home mortgage loans by the proposed Home Mortgage Corporation to those loans originated by members of a Federal home loan bank. We believe that S. 811 should be considered along with the provisions of S. 810 which would create marketing facilities designed to increase the market for conventional and other mortgage loans regardless of the origin of such loans. There would appear to be little, if any, need for the legislation proposed by S. 811 if S. 810 should be enacted into law. It is the view of this Corporation that the legislation proposed by S. 810 would far better serve the existing need for a stronger secondary market for conventional and other mortgage loans than would the more restrictive provisions of S. 811. With respect to the technical aspects of S. 811, this Corporation would deem it more appropriate for your committee to be guided by the views of the Home Loan Bank Board, since the operation of the proposed Home Mortgage Corporation would primarily affect financial institutions within the jurisdiction of that Board. We have been advised by the Bureau of the Budget that it has no objection from the standpoint of the administration's program to the submission of this letter. Sincerely yours, JESSE P. WOLCOTT, Director. FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. A. WILLIS ROBERTSON, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: You have requested the views of this Corporation on S. 2130, a bill to empower the Federal National Mortgage Association to deal in conventional mortgages and to provide otherwise for its further development as a secondary market facility. The creation of a stronger secondary market for conventional home mortgage loans would be desirable from the standpoint of increasing the liquidity of mortgage investment as well as increasing the funds available in the mortgage market. However, in view of the limited time which has been available to study S. 2130, this Corporation is not prepared, at this time, to offer any final comment thereon. It is suggested that the legislation proposed by S. 2130 be considered together with S. 810 and S. 811, which bills have been previously introduced on the subject of secondary market facilities, and that further comprehensive study be made of the necessity for supplemental Federal legislation in the field of home mortgage financing. We have been advised by the Bureau of the Budget that it has no objection from the standpoint of the administration's program to the submission of this letter. Sincerely yours, JESSE P. WOLCOTT, Director. |