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SECONDARY MORTGAGE MARKET AND MORTGAGE

CREDIT

THURSDAY, MARCH 5, 1970

U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,
SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 5302, New Senate Office Building, Senator John Sparkman (chairman of the committee), presiding.

Present: Senators Sparkman, Proxmire, Cranston, and Bennett. The CHAIRMAN. Let the committee come to order, please.

Senator PROXMIRE. Mr. Louis Barba, president of the National Association of Home Builders.

Senator Sparkman will be right back.

Will you identify the distinguished gentlemen who are with you for the record, Mr. Barba?

STATEMENT OF LOUIS R. BARBA, PRESIDENT, NATIONAL ASSOCIA

TION OF HOME BUILDERS, ACCOMPANIED BY NATHANIEL H. ROGG, EXECUTIVE VICE PRESIDENT; HERBERT S. COLTON, GENERAL COUNSEL; AND JOSEPH B. MCGRATH, LEGISLATIVE STAFF VICE PRESIDENT

Mr. BARBA. To my left is Dr. Nat Rogg, who is the chief executive officer of the association. To my right is Herb Colton, our general counsel. To the far right is Joe McGrath, who is our legislative staff vice president.

My name is Louis R. Barba and I am a builder from Chatham, N.J. I appear before you today as president of the National Association of Home Builders.

Our association represents a membership of 51,000, affiliated in 481 local and State associations throughout the country. We estimate that our members build about two-thirds of all the homes and apartments constructed by professional builders.

The lack of a stable supply of residential mortgage funds available in amounts adequate to sustain production levels needed to house our citizens has brought this industry to the brink of disaster and is steadily worsening an already serious housing shortage.

During the month of January, housing starts on a seasonally adjusted basis fell to 1,166,000 units. This compares to 1,878,000 in January of 1969. Even worse, building permits issued in January, on a seasonally adjusted annual basis, were at a level of 952,000 units, 23.4 percent below the previous month.

I need not detail at great length the problems facing us today. The members of this committee are well aware of them and have done their best during the past year to provide relief.

FNMA SECONDARY MARKET

One of the proposals now pending before the subcommittee, S. 2958 introduced by the chairman, is one which for years NAHB has urged the Congress to enact. This would provide a secondary market facility for conventional mortgages to backstop that important area of residential credit in the same fashion as FNMA helps the FHA-VA market.

This need has never been more vividly illustrated than during the past year when the FHA-VA mortgage market was enabled to survive solely through the support of the FNMA, while the conventional mortgage market has now virtually disappeared.

FNMA has been supporting the FHA-VA market at a commitment rate of close to $8 billion in recent months and has been purchasing mortgages at a rate close to $6 billion. If it had not been for this massive support, there would have been little or no production of FHA-VA housing. Accordingly, we believe that the time has come to extend this type of support to the conventional mortgage market. We support S. 2958 which would accomplish this

purpose. During the past year and a half that FNMA has been a private corporation, it has been operated at levels far exceeding any of the past. It has done this successfully and demonstrated its ability to obtain the funds needed to support its mortgage purchase operations. We therefore believe that the time has come to give it this greater responsibility.

Under S. 2958, FNMA would be authorized to purchase a mortgage not insured or guaranteed by the Federal Government provided the unpaid principal balance does not exceed 80 percent of the value of the mortgage property. The bill would also permit the purchase of debt-to-value ratio mortgages higher than 80 percent but only where the excess is insured or guaranteed in a manner determined by FNMA to be generally acceptable to other institutional mortgage investors.

One of the important results that should flow from granting this authority to FNMA, in addition to assisting the conventional mortgage market, would be the ultimate standardization of the mortgage instrument and of the various conditions that apply to residential mortgages in the 50 States. This alone would have a beneficial effect. Standardizing the mortgage instrument should itself help improve the conventional loan market over and above whatever help is provided by the assistance of the secondary market facility.

We believe this new authority to FNMA should be expressed in broad legislative language, coupled with congressional direction that FNMA impose such conditions and restrictions on its purchases as may become necessary from time to time in light of the constantly changing credit situation.

within 3 years.

For this reason we do not support the series of restrictive amendments which have been proposed as additions to S. 2958 by FNMA and HUD. Although we are in agreement with the purposes of some of these amendments, as we understand them, we believe that as statutory requirements they would prove too rigid in practice and that their purposes could be better accomplished administratively.

For example, two of these amendments would require sellers to retain a 10 percent participation or, alternatively, to agree to a repurchase or a substitution of mortgages should there be a default

Many mortgage originators may not be in a position to retain an accumulation of such significant participations if they are to continue to operate at any reasonable level. Further, the participation requirement may very well destroy or materially inhibit the marketability of the mortgage. A 3-year requirement to buy back mortgages, in a period of temporary economic difficulty in its operating area, could certainly bankrupt a small mortgage originator who had elected to take this approach.

The necessity for and the feasibility of these requirements, in our opinion, can be better determined by FNMA in its actual operations. We expect that FNMA will approach this new area of activity cautiously and experimentally until it has accumulated some experience in dealing with conventional mortgages. This being the case, we think FNMA should not be put into a statutory straitjacket at the outset.

We fully support the intent of the suggestion to the committee that 90 percent of the mortgages purchased under the new authority be no more than 1 year old. However, here too we believe this objective could better be accomplished by a general congressional directive to FNMA, leaving to FNMA the exact method of accomplishing the goal of the proposal-development of a true secondary mortgage market designed basically to assist in achieving the house production goals of the country.

We object strongly to one of the recommended amendments, that the conventional mortgages sold to FNMA be limited to the FHA mortgage amount ceilings. This is an arbitrary and artificial limit on a conventional secondary mortgage market operation which involves a class of mortgages on which no such limit is otherwise applicable.

For these reasons we urge that S. 2958 be adopted as introduced and that the committee in its report direct FNMA to exercise its regulatory powers to accomplish the purpose of these additional recommendations of HUD.

FHLBB SECONDARY MARKET

S. 3508, also pending before the committee, would set up a further means of providing a secondary market for conventional mortgages, the Federal Mortgage Marketing Corporation under the control of the Federal Home Loan Bank System. This Corporation would be empowered to purchase residential mortgages from any member of a Federal home loan bank. Thus, this bill would create a secondary market facility within the Federal Home Loan Bank System.

We endorse this proposal. The housing needs of this nation are so great that there is clearly room for both of these financial aids for the conventional mortgage market. Furthermore, the mortgage originators with whom FNMĂ would deal under its new authority are generally not part of and are not likely to become a part of the Federal Home Loan Bank System. Conversely, savings and loans are accustomed and would probably prefer to deal with institutions within their own system. S. 3508 is expressly designed for this purpose.

With respect to the limiting amendments which have been suggested by HUD and the Bank Board for S. 3508, our position is the same as I have mentioned with reference to S. 2958. We believe that the creation of a secondary market facility for conventional mortgages within the Federal Home Loan Bank System should be kept as flexible as possible in its basic statutory authority. The controls exercised by the new Corporation should be administrative in nature following general guidelines in the report on this bill.

We do support, however, one of the amendments proposed by Chairman Martin of the Bank Board. He suggests that the new Corporation should be authorized to deal with all institutions insured by FSLIC and FDIC. The authority created by S. 3508 should be as broad as possible, even though we believe it is unlikely there will be many commercial banks using this facility.

There are two other pertinent bills pending before the committee. I would like to comment on each of these briefly.

This first is S. 3412, introduced by the chairman. This bill, termed the Mortgage Credit Act of 1970, would implement several of the recommendations contained in the report of the Commission on Mortgage Interest Rates issued last August.

We agree with and endorse all but one of the provisions contained in S. 3442.

We especially favor the proposed Special Advisory Commission on Housing that the bill would establish. This Commission would be instructed to submit, not later than the 1st of November of each year, an annual report to the President and Congress recommending the number of housing units which should be produced in the ensuing fiscal year. It would also report on the activities which the Federal Government should undertake to assure this production level. This would provide a needed additional source of information for the establishment and evaluation of the annual housing goal by the President.

The one provision which concerns us is contained in section 1 of S. 3142. This would establish, until January 1, 1972, a dual approach to interest rates that could be charged on FHA-VA mortgages. Under one approach, there would be a free interest rate determined by the market but with no discounts allowed. Under the second approach, the Secretary of HUD would set the rate at the level he believed necessary to meet market conditions, leaving the subject of discounts to be worked out between the buyer and the seller of the home.

We do not support this proposal. The first approach, if adopted by a lender, could lead to even higher interest rates. The second approach ignores the fact that a discount, charged at the time a loan is placed, is in fact an element in the cost of that house just as any other cost in its construction.

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Our recommendation, therefore, is that the Congress extend permanently the authority of the Secretary of HUD to set maximum interest rates for FHA-VA mortgages at whatever level is necessary to meet the mortgage market. Together with the extension of authority, the law should also be amended to provide that mortgage discounts are an allowable cost of financing and should be included in the mortgage.

The CHAIRMAN. May I ask a question? I am going to have to leave in just a minute.

Mr. Barba, as I explained to you earlier, I would like to ask a question about that last paragraph. As you say, I enjoyed your statement very much throughout, and I regret that I have to leave. You would give to the Secretary of HUD, that is, you would give him continuous authority to set interest rate ceilings and you say that the law should also be amended to provide that mortgage discounts are an allowable cost to financing and should be included in the mortgage. Would you recommend that we place in the hands of the Secretary the right to determine the extent of discounts, if that is to be considered as part of the interests?

Mr. BARBA. I would not suggest that the Secretary of Housing be given that right to set discounts because, for instance in the past month, we have seen quite a fluctuation in the points. I have forgotten what the FNMA offering was, but they were considerably higher than they were 2 weeks ago.

If the Secretary of Housing were to set those rates, they would become rigid for a longer period, whereas with the market setting the rate, there would be more flexibility.

The CHAIRMAN. I realize the interest rate is set usually for a period of time during which it is rigid, why couldn't the Secretary of HUD determine on a day by day basis, if necessary, what the points should be. They do that in FNMA, do they not?

Mr. Rogg. They do it on an every 2 weeks basis when they hold the auction. This could be handled by some kind of limit on it, by allowing no more than three or four points to be included.

The CHAIRMAN. If you write that into the laws, that would be the number of points. You know, we never have discounts or points, you know that. We discussed that many, many times, and we discussed it in the Commission, you will remember, many times.

It seems to me if we are going to legalize points, when as a matter of fact through the years we have been trying to get rid of them, we ought to set a formula that would prevent what I would consider an unfair allowance of points.

If it is to be recognized as part of the cost of the mortgage just like interest is, then it seems to me someone ought to have the right to determine what the maximum points really should be.

Mr. Rogg. It is part of the house cost, one of the intangibles, just as you pay costs for transportation of materials. It is an actual cost of producing the house rather than a financing charge per se.

The CHAIRMAN. Mr. Barba read this statement and I imagine he probably discussed it with you. The law should also be amended to provide that mortgage discounts are an allowable cost of financing and should be included in the mortgage.

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