Dr. JONES. Certainly, for the purpose of originating loans to conventional homeowners, this would not be possible to the mortgage banker. But I believe the broader aspect of this thing, the significant point is if you want a liquid mortgage instrument that is competitive, you have to create a classification system so that people can trade in it. You do not do this by hanging further restrictions and limitations on the mortgages. If FNMA is going to create a marketable instrument because she is willing to stand by and make a market for them, they have to be instruments that she can, in turn, resell. With the administration's proposal, it would not be possible. Senator BENNETT. Thank you. You heard the discussion earlier in which Senator Proxmire and I had a parallel discussion of S. 3503 and I appreciate your contribution to this discussion which points out that if the Federal Reserve System is required to take this $3 billion out of the existing market, that then it would have to sell Treasury and this would increase the problem that Treasury has in financing the debt and would undoubtedly drive up the interest rate on Treasury obligations. Dr. JONES. Yes. Senator BENNETT. It seems to me to be one of these ideas that has some practical problems that may not have been thought through to the end. Well, I appreciate your patience. I understand that you would, in general, oppose the passage of S. 3503 in its present form? Dr. JONES. Yes, sir. Senator BENNETT. Thank you very much. The committee will stand in recess until 9:30 tomorrow morning when the full committee meets to consider the appointment of Mr. Willis as member and Chairman of the Federal Deposit Insurance Corporation. Then at 10 we will meet again as this subcommittee to continue with our list of witnesses. Thank you. (Whereupon, at 12:30 p.m. the hearing was recessed, to reconvene at 9:30 a.m. Thursday, March 5, 1970.) (The full prepared statement of Mr. Jones and his answers to the questions of Senator Proxmire follow :) STATEMENT OF OLIVER H. JONES, EXECUTIVE VICE PRESIDENT MORTGAGE BANKERS ASSOCIATION OF AMERICA Mr. Chairman and members of the Subcommittee on Housing and Urban Affairs, I appreciate having this opportunity to testify on legislation before this Committee on behalf of the Mortgage Bankers Association of America (MBA). As you know, mortgage bankers originate all types of real estate loans. They have been the principal catalysts in the FHA and VA programs, including the special-purpose programs created by Congress to house the urban poor, the elderly, and those in need of nursing care. Mortgage bankers originate mortgage loans not as investors, but as manufacturers whose product is a mortgage loan and whose market is the financial institution that purchases mortgage loans for its investment portfolio. The price of their product is determined by the availability of savings in the local market and their ability to draw savings from distant markets. They serve the nation's home buyers by drawing savings from areas where they are least needed to invest in home mortgages in areas where 42-120-70——15 they are most needed. Clearly, mortgage bankers have nothing to gain from high interest rates and everything to gain from stable growth in the flow of savings into mortgage credit on a nationwide basis. For this reason, MBA's current policy statement, which is being prepared for the printer and which will soon be mailed to you, recommends that the Congress : "Initiate immediately a comprehensive study of the nation's financial structure as a whole-to determine: (a) The capacity of the system to allocate financial resources and meet long-term demands for credit; (b) The effectiveness of the Federal Reserve System's operating tools; (c) The feasibility of fostering single-purpose institutions vs. the evolution of all-purpose financial institutions; (d) The advisability of maintaining ceilings on savings deposits at financial institutions; and (e) The means of reducing the disproportionate impact of monetary restraint on various sectors of the economy." We understand that such a study is now being planned by the Presidential Commission on Financial Structure and Regulation. We urge that its participants be charged with the task of finding ways to reduce the frequency and minimize the selective impact of extremes of monetary policy. The current housing crisis is now upon us. The impact of the crisis was softened by Congressional action in 1968 that permitted the Federal National Mortgage Association to commit to purchase nearly $8 billion of FHA and VA mortgages and by the pursuit of more aggressive policies by the Federal Home Loan Bank System. The current crisis will not respond to emergency legislation in time to be useful before prevailing monetary policies have taken hold and a relaxation becomes feasible. Now is the time to create legislation that will keep the housing industry from being the principal victim of tight credit policies in the future. We are pleased, therefore, that the legislation before this Committee is designed to improve the operating apparatus by providing the tools needed for the mortgage market to meet the nation's demands in all phases of the credit cycle. MORTGAGE CREDIT ACT OF 1970 (S. 3442) Proposed Dual System of Regulating FHA-VA Interest Rate Ceilings As you know, the Mortgage Bankers Association of America has long urged Congress to adopt the proposition that the home buyer would be best served by freeing FHA and VA interest rates from all statutory and administrative ceilings. We continue to believe that this is the only workable solution. Testifying before the full Committee on September 29, 1969, our President at that time, Lon Worth Crow, Jr., stated: We do not, however, oppose the dual system recommended by the Commission. If the statutory ceiling is removed and the Secretary of HUD is somehow required to maintain the ceiling sufficiently close to the market to minimize discounts, the dual system may be a reasonable means of testing the feasibility of a free market system. We are concerned, however, that the test will fail if the prevailing inflation is not reversed early in the prescribed three-year period. We are concerned that the no-discount provision places an albatross around the market's ability to test the concept of a free market and a truly free rate. Theoretically, a free rate with no discount in the primary market should be feasible. The discount system has been imposed on the market system for too long a period to assume that it can be removed entirely without further wrenching an already strained market. Experience has shown that any Secretary of the Department of Housing and Urban Development finds it difficult to "maintain the ceiling sufficiently close to the market to minimize discounts." The free market will not be tested, because neither prong of the dual system provides for a market-determined yield. At the same time, the choice available will generate administrative problems and confusion on the part of the borrowing public. The brunt of public resentment will be borne by the loan originator and, in turn, by Congress. If Congress desires to maintain some control over these interest rates, we strongly urge that the dual system be replaced in this bill by a proposal that ties, by formula, the interest rate ceiling to an established market interest rate series. We have opposed similar proposals in the past because no interest rate series will accurately reflect changing demand and supply conditions in the home mortgage market. We feel, however, that the long-record of administered ceilings proves that an impersonally maintained ceiling would be more effective than the present arrangement, or the dual system. The Canadian Government took this step and was so successful in attracting funds that they have now moved to a completely free rate. Our staff is currently examining well-known interest rate series and, if desired, we can make a specific recommendation at a later date. As an alternative to tying the ceiling to a known series, the Committee might consider using a new series based upon actual mortgage transactions. Aspects of this alternative are as follows: 1. Establish a monthly series of mortgage yields collected and published by FHA and VA and based on actual mortgage loans. 2. Use the series established in one above to maintain the ceiling on FHA and VA mortgages by establishing a review every three months at which time the ceiling would be raised if the discount exceeded 4 points and lowered if the discount fell below 2 points. The change would be automatically and impersonally determined. 3. As recommended by the Commission on Mortgage Interest Rates, permit the discount to be paid by seller, buyer, lender, or real estate broker, or in any combination of these as negotiated by the parties involved. These suggestions as well as the dual system deal only with the interest rate at the time the mortgage is originated. After that date, if interest rates fall the borrower can refinance, but if interest rates rise the lender is locked into a lowyielding investment. This process increases the vulnerability of thrift institutions to rising interest rates, as their capacity to retain and attract savings is limited by the yield on the mortgages they already hold. Here, again, the Canadian Government has adopted a plan worth examining. It is a variable interest rate mortgage on a five-year interval, i.e. every five years the lender has the opportunity to review the loan and, if interest rates have risen, to increase the rate on the mortgage. The borrower has a limited time period during which he can refinance with another lender. Of course, if interest rates fall the borrower would, in any event, refinance the loan. Settlement Costs Periodically, settlement or closing costs come under the spotlight of criticism arising from the wide variations in local practices, many of which are prescribed by State law. The issues involved are often confused with advance payments of insurnace, taxes, and special assessments, which are also part of the closing costs. The Department of Housing and Urban Development issued one study on closing costs over a year ago, but no actions followed. We understand that they are contracting with a university to look into this matter again. The National Conference of Commissioners on Uniform State Laws is developing a Uniform Real Estate Financing Code, which we anticipate will deal with this subject. We agree with the need for a careful study of this area, but strongly urge the Committee to avoid empowering individuals to set "reasonable" settlement costs before the facts are in hand. Without the facts, "reasonable" becomes a subjective judgment that is open to wide margins of error. If limits are unrealistic, they are apt to reduce the services and protection provided borrowers. If they ignore State law, they would risk cutting some States off from outside capital, particularly for FHA and VA mortgages. Long-distance lenders must protect the savings of their depositors and policyholders, a fact also prescribed by law; they will, therefore, shy away from lending in any State where a cloud has been placed over the mortgage instrument or any part of the lending process. Special Advisory Commission on Housing The annual housing report to Congress cannot become an effective planning instrument, if it is based solely on the findings of the Department with little or no assisance from individauls who are actively engaged in the market. This is the thread from which the fabric of unattainable promises is woven. From time to time, Secretary Romney has called industry representatives together to discuss industry problems. This is a welcome procedure, but the study of annual targets should be formalized as proposed in this legislation. We commend, therefore, the Committee's active support of the proposal to create a Special Advisory Committee on Housing. Broadening the Nationwide Secondary Market Several proposals in S. 3442 will break down barriers that have hampered the development of an efficient, nationwide secondary market for home mortgages. Although these proposals are not directly related to mortgage banking, we support their objectives and the specific recommendations. Permitting greater flexibility in establisihng the maximum home loan that savings and loan associations may originate will increase the probability that borrowers seeking to purchase housing in the higher price ranges will find funds available, thereby contributing to their mobility, and place more used housing in the market for lower-income families. Permitting savings and loan associations to accept Keogh-type deposits for individual retirement plans will bring more savings into institutions largely devoted to investing in home loans. Widening the primary lending area of savings and loan associations, particularly along market area lines, will broaden their markets and the number of persons they can serve-in relation to the economic structure of the markets instead of the accident of geography. We note that the existing statute provides for mortgage lending by savings and loan associations in any Standard Statistical Metropolitan Area, up to 5 percent of their assets. This was a major step towards creating a nationwide secondary market for conventional home loans that should be extended and not reduced. It is not clear that this authority is retained by the changes in S. 3442. In the final analysis, the borrower will be served best when he is not limited to one or a few local lenders, but can deal with financial institutions that can lend anywhere in the nation. The proposal to permit national banks to make and hold conventional home mortgages equal to 90 percent of value is also a commendable step forward in reducing the differences in lending authorities among the various types of financial institutions-differences that tend to compartmentalize rather than unify the mortgage market. FNMA AUTHORITY TO PURCHASE CONVENTIONAL MORTGAGES (S. 2958) At the National Mortgage Banking Conference held in Chicago in late February, the Board of Governors of the Mortgage Bankers Association of America adopted the following policy, recommending support of this legislation : Permit FNMA to deal on conventional home loans under appropriate safeguards that assure the marketability of conventional home loans purchased by FNMA. We feel that FNMA can be the catalyst needed to develop a conventional mortgage instrument that can be resold in the secondary market. This would provide conventional home mortgages with the liquidity that is needed to make them attractive investments to financial institutions. In this role, FNMA can provide the motivation to solve the problems of wide variations in appraisals, credit reports, property standards, State laws, and other lending restrictions on financial institutions. The "appropriate safeguards" that we believe are vital to the success of this program are already in the basic FNMA statute as well as this legislation, i.e., the mortgages purchased by FNMA must be generally acceptable to private investors must be marketable. We urge the Congress to emphasize this point in the legislation and with those responsible for promulgating regulations for this program. Restrictive limitations, such as requirements for participation in the mortgage by the seller or prolonged recourse to the seller greatly reduce marketability. They are not only unworkable for mortgage bankers who originate 85 percent of the loans sold to FNMA and more than one-half of all FHA and VA loans, such restrictions would hamstring FNMA's ability to do the job wisely assigned to it by Congress. To stabilize the market for home mortgages, FNMA must be prepared to increase its purchases during periods of credit stringency and to increase its sales during periods of credit ease. In periods like 1969, if this legislation becomes law, large volumes of conventional home loans would be sold to FNMA, appropriately relieving pressure on the homebuilding and home mortgage markets. If these mortgages are not marketable, they will become lodged in FNMA's portfolio indefinitely. FNMA would be unable to sell them in periods when credit ease threatened temporary overbuilding. As a result, it would face any subsequent period of credit restraint with a large ratio of debt to net worth and a greatly limited capacity to support the mortgage market. Moreover, if FNMA fails to generate a marketable instrument, the corollary impact of this legislation in contributing to a more efficient private market will be lost. As a caveat to this discussion of FNMA's purchasing conventional loans, we would hasten to stress the importance of assuring that the conventional lending operations of FNMA will not modify FNMA's primary responsibility, which is to devote its resources to the support of the FHA-VA market. Language to this effect in the preamble to the bill would be most desirable. MIDDLE INCOME MORTGAGE CREDIT ACT (S. 3503) We are most sympathetic with the objective of the proposed Middle Income Mortgage Credit Act. This portion of the demand for housing is drastically curtailed when monetary restraint reduces the supply of credit and increases the cost of the remaining supply. When this happens, middle income families must postpone fulfillment of their housing needs, the nation's housing supply falls behind the people's needs, and the demand for the services performed by mortgage bankers declines. Investors can turn to more attractive outlets for their funds, but mortgage bankers find their market sharply reduced. Although we are in agreement with its objective and have obvious self-interest in its achievement, we seriously doubt that the objective can be accomplished by this legislation. If we understand the mechanics of the proposed legislation correctly, the Federal Home Loan Bank Board would be authorized, during periods of credit stringency, to issue $3 billion of certificates annually. These certificates would be limited to a 6 percent interest rate. Under the assumption that credit is tight, the certificates could not be sold in the private market. Therefore, the bill provides that the Federal Reserve System would be required to purchase the certificates. The required addition of $3 billion of Federal Reserve credit to the financial system would provide a basis for an increase of roughly $18 billion in the money supply. The $3 billion purchase is 2 to 3 times the outstanding amount of Federal Reserve Bank loans to commercial banks at any time during 1969. The Federal Reserve could not permit an expansion of this magnitude to take place under the assumption of credit restraint. Accordingly, it would be forced to sell $3 billion in Treasury issues, thereby driving the interest rate on Treasury issues higher and encouraging further withdrawals of funds from thrift institutions. When the circle is closed, we would find that the general taxpayer had paid for a massive subsidy to middle-income families. If the Federal Reserve did not react in this fashion, the general public would still foot the bill in the form of the pernicious tax of inflation. Moreover, the required spread between the 6 percent to 64 percent the FHLB Board may charge savings and loan associations and the 62 percent they may charge home borrowers is inadequate to cover the cost of originating and servicing mortgages. Accordingly, savings and loan associations are not likely to be attracted to this source of funds. If the spread is widened to the point where such loans are attractive, it would then become impossible to determine whether the $3 billion was a net addition to the supply of mortgage credit or a means of reducing the savings and loan associations' cost of borrowing from the Federal Home Loan Banks. Mr. Chairman, that concludes our testimony, I want to thank you again for the opportunity to appear before this Committee. MORTGAGE BANKERS ASSOCIATION OF AMERICA, Hon. WILLIAM PROXMIRE, DEAR SENATOR PROXMIRE: The following responds to the written questions received from your office following our testimony before the Subcommittee on Housing and Urban Affairs on March 4, 1970. 1. On page 12, you indicate a spread of 4% would not be enough to cover the cost of originating and servicing mortgages. How much would be enough, in your view? A cost study conducted by this Association in 1967 showed conclusively that the average mortgage banking firm loses a substantial amount of money when originating mortgage loans. The adjusted gross origination expense per single |