end up this year with a level of new housing starts much higher than even the most optimistic forecasts of last fall.

I am not enough of a demographer or sociologist or expert on family formations and the movement of populations to know whether the factors that were going to generate the big increase in the demand, the need for houses, is occurring perhaps 2 years sooner than expected. But it could be.

This is what makes these hearings especially timely. Are there measures that can be taken within the conventional mortgage market to improve the flow of funds and to give the mortgage pool the kind of status which the Congress, for example, has always wanted for it? Now, this may be a core question. One of the difficulties that I have with Dr. Flexner's proposal is that there is a question, fundamental kind of a question that needs to be answered. And that is: Does this proposal contemplate giving the housing market that kind of special status that the Congress has given it for a number of years?

For example, there has been a lot of discussion about the so-called free rate or flexible rate about the FNMA backup for FHA and VA. The Congress, particularly during the periods of tight money in the 1950's, would generally enact legislation that would help the mortgage market withstand the general movements of prices or general movement of capital in the general money market.

FNMA during the 1950's was an instrument which the Congress turned to for contracyclical purposes.

If the proposal that is worked out for the conventional market contemplates no special status or immunity for the housing market, then that should be understood out front. On the other hand, if it is contemplated that the principal regulator of the flow of funds will be the interest rate, then another question comes to the fore as to whether or not the interest rate in the mortgage field, which is in wide open competition with all other sectors of the money market, can be priced beyond the reach of certain income families.

Tom Coogan, from the home builders, who follows us here has been a very keen student over the years of the level of interest rates in relationship to the potential home buyer's ability to buy.

I remember in the late fifties, when Mr. Coogan used to testify, he had a kind of a sixth sense as to the interest rate level that will start to squeeze people out of the market.

Now, take the rates that Mr. McMurray mentioned-4.85 on the west coast being paid to savers. This requires-or if it does not require, it may be close to it-a 1.35 spread between the interest rate paid and the lending rate. Yet, obviously there are a lot of people buying homes under those rates. How they manage to do it varies. There are many merchandizing techniques in the conventional market.

But I think that, if Government is asked to become a participant in generating a new instrument in the conventional market, then it seems to me that many of the same questions that were raised over the years about FHA and FNMA, the special status of the mortgage pool and home building and its relationship to the general money market, and, finally, the impact on the rate structure in the mortgage market-these are all questions that have to be raised.

Senator SPARKMAN. May I say that Dr. Flexner is scheduled to appear tomorrow morning, and I am sure that his attention will be

called to the questions that you have posed for him, and he will discuss them at the time.

You said something about if the Government was to have any part in this new instrument. My understanding of S. 810 is that the only part the Government would have in it would be regulatory; is that your understanding?

Mr. SEMER. That is right, sir.

Senator SPARK MAN. No participation.

Mr. SEMER. That is right.

Senator SPARKMAN. Senator Douglas? Senator Javits?

Mr. SEMER. There is one minor thing. Of course, they would finance the Board.

Senator SPARKMAN. The what?

Mr. SEMER. Finance the operating expenses of the Board, as I understand it. But that is a detail.

Senator SPARKMAN. Well, the supervision; you are talking of the Board that would have supervision over it?

Mr. SEMER. That is right.

Senator SPARKMAN. Oh, yes; that would be a Government board, with supervision, naturally. But so far as the operations are concerned the Government would have no part in it?

Mr. SEMER. That is right.

Senator SPARKMAN. Senator Douglas.

Senator DOUGLAS. Mr. Semer, you heard the question which I addressed to Chairman McMurray as to whether this might involve a confusion of commercial banking and investment banking in homes. Do you think there was anything to that at all, or was that a fanciful question?

Mr. SEMER. Well, I cannot pretend to be enough of an expert to give you a complete answer, but I think that this is a classic concern and still is one. I think we have to look only to the method of financing shell homes in parts of this country, which instead of tapping the usual mortgage investment sources, turn to instalment credit. And, of course, we would have to trace the sources of funds for the large instalment lenders. And we might find that that was tapping shortterm credit for long-term use for the long-term use of goods.

Now, FNMA sells debentures as part of its operation. And I was discussing this with President Baughman. He can detail this more readily than I can. Commercial banks, for example, are not big investors in the FNMA debenture market. As a matter of fact, the long-term investors are the ones, such as savings banks, savings and loan associations, insurance companies-they are the investment outlet for FNMA's debentures.

Senator DOUGLAS. Well, you will remember that the failure of the Creditanstalt in Austria in the early thirties arose primarily from the fact that the British banks were lending on short terms to the Austrian banks, which in turn were investing long; and that, therefore, when the long-term investments of the Creditinstalt did not pay out and the British banks tried to withdraw their money, they could not do so. There was not liquid securities behind it.

Now, do you think there is any such potential danger when you have bank-created credit used to finance long-term investors and, therefore, there were fluctuations in the demand for long-term investments or failure of mortgages to be repaid that can create trouble?

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Mr. SEMER. Yes, sir; it certainly can.

I think if you take the two big giants in the debenture market, really, the savings and loan associations and the commercial banks; savings and loan assocaitions in many ways are a captive mortgage market. They take the savings of their depositors or shareholders and it is available only for housing up to 80 percent, and then there is a 20 percent

Senator DOUGLAS. This is a specialized type of investment banking. Mr. SEMER. That is correct.

Senator DOUGLAS. Yes. Savings being translated into investments through an intermediary.

Mr. SEMER. Now, there is an analogy between the savings and loan association's savings and long-term investments. There is an analogy of the time deposits of the commercial banks.

Now, one of the burdens of any proposal coming out of the commercial banking system has to undertake is the burden of indicating in advance what the ground rules are going to be or what the patternor what customs might develop within the commercial banking system as to that mix between their time deposit function and their demand deposit function. Because if the commercial banks-and I say this just hypothetically-were to inject short-term credit into the housing market at a time when it was-because of the rate structure advantageous, and then just pull out at some later date, it might breed the kind of chaos that we would not want.

So it seems to me that they have to indicate, in a very tentative way, what the ground rules would be, or what they would hope the ground rules would be as to the relationship of their short-term function and their short-term pool of funds for this long-term investment.

Senator DOUGLAS. Well, this practice would also accentuate the business cycle in housing, because, during the upswing, it would lead to a great flow of investment funds not coming out of savings, and hence contribute to a further increase in prices and in interestfurther increase in prices; and in a period of depression it would work exactly the opposite, would it not?

Mr. SEMER. That is right.

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For example, during the recent months, or the last year or two of relatively easy money, commercial banks seeking investment outlets have been somewhat more interested in the mortgage market. It is too early to tell to what extent they are with the mortgage markets to stay, and at what level-what proportions. With the savings and loan industry, at least you know, that 80 percent of their total potential-which now runs about $100 billion-is a captive of the housing market.

Now, it is a separate question as to whether there should be any captive market for any particular economic activity. But that is the way it is.

I am fearful that at a time when money is relatively easy and the yields attractive in relationship to other investment outlets, commercial banks will be in mortgages in a big way, and then at some later date, if there are alternative investment outlets, they would just leave us completely.

Now, I know that the home builders are especially apprehensive about that kind of in-and-out experience.

In our own operation in Government, in FNMA, we have been using Treasury financing to buy special assistance mortgages-the co-op mortgages, which started in 1950; the urban renewal mortgages, which Congress made possible in 1954; the FHA-insured mortgage for elderly, which the chairman pioneered in the midfifties, and which finally became pretty well worked up in 1959.

Let me give you an example of what happens when money is relatively easy. These were mortgages that were, at the time that Congress enacted the FHA provision, regarded as either undesirable or unlikely to find a private market.

Now, in just the last 22 years, a combination of canceled commitments a canceled commitment is where Stan Baughman makes a commitment that he will take the mortgage when it is originated and he does not get it for some time, does not get it until the final closingthere is a commitment fee paid of 1 percent. And the FNMA Board met and decided that we would give them back three-fourths of that 1 percent if they would find a private investor, which is relatively an easier job in times of easy money.

Now, then we have had outright sales from the portfolio that Mr. Baughman has been getting in the special assistance mortgages.

A combination of these canceled commitments, which runs about $330 million, and direct sales of these special assistance holdingsjust in the last year or two there are some $687 million worth of special assistance mortgages that are not in the Government portfolio.

Now this is quite a phenomenon. We can make available to the committee the kinds of investors that are interested in this paper. Senator SPARKMAN. Why do you not give us a statement on that? Mr. SEMER. All right, fine; we will be glad to. Senator SPARKMAN. It will be very interesting. (The material referred to follows:)

INVESTORS INTERESTED IN SPECIAL ASSISTANCE HOLDINGS OF FNMA AS INDICATED BY COMMITMENT REFUND TRANSACTIONS

The most reliable indication of the types of investors interested in special assistance holdings of FNMA is provided by information obtained through the FNMA commitment refund procedures, as distinguished from direct sales transactions where information as to transferees is frequently affected by agency relationships.

Under the commitment refund procedures, initiated in February 1962, the seller of a mortgage on multifamily housing or a project covering five or more units can receive a refund of three-fourths of the commitment fee paid to FNMA provided it (1) requests cancellation of the contract within the commitment period, which is usually 24 months, (2) agrees to immediate cancellation of the commitment, and (3) has arranged satisfactory private financing.

Since the inauguration of the revised commitment fee procedures, 138 contracts involving $329 million of commitment funds have been canceled, and $2.5 million of commitment fees have been refunded. These figures may be further broken down with respect to the types of mortgages as follows:

The kinds of investors acquiring mortgages covered by terminated contracts, and the contract amounts involved, are shown below:

Some additional comments on the FNMA commitment refund procedure may also be in order. The benefits resulting from this procedure are readily apparent. In the first place, the Government is relieved of the necessity for purchasing mortgages represented by the cancellations thus making those amounts available for other housing programs or for other Government purposes. At the same time, private investors are able to add such amounts to their holdings of longterm Government-backed housing mortgages, thereby improving their investment position and also increasing their stake in the housing economy; and last, but not least, sellers receive a 14 point higher return on their mortgages because they not only save the one-half of 1 percent purchase and marketing fee they would have to pay if the mortgages were sold to FNMA but also get back 75 percent of the 1-percent commitment fee paid to obtain the commitment. Or, stated a little differently, the sponsor, if successful in selling the mortgage privately, will have the protection and assured market afforded by a 2-year firm contract at a cost of only one-fourth of 1 percent of the mortgage amount involved.

It is conceded that the commitment refund procedure is really only effective when there is an abundance of mortgage funds and probably will not be utilized to any great extent at other times. It is, however, a useful, permanent enlargement of FNMA's commitment practices under its special assistance functions, is valuable both to the industry and the Government when market conditions are favorable, and is a good example of the cooperation and practical type of partnership that can exist between private industry and the Government.

Mr. SEMER. I bring in these figures to show the very important factor of the availability of funds; and then over a period of, oh, say 13 years, when you consider the co-op program came in in 1950, the seasoning of mortgages, the movements of rates; so that in just a very short period, 1961 to 1963, you have just five FHA titlesthe co-op, the two urban renewal titles, the elderly, and also the regular rental program, multifamily, special assistance, which used the Treasury money over this period of time. As a matter of fact, the Treasury money for special assistance has been available just since 1954, when the special assistance program was organized to do that job.

And to get out $687 million worth of this paper in this short period of time. And this was not a bargain basement. This was

Senator DOUGLAS. Just one more question I want to ask. How are the commercial banks financing the loans which they now make on home construction? Are they financing these or meeting these of genuine savings or from the creation of bank credit which they then loan out?

Mr. BAUGHMAN. Well, I would presume-I do not know, but I think

Senator SPARKMAN. Would you pull that microphone over, Mr. Baughman?