and loan associations were raised nearly 1.1 percentage point, mutual savings bank rates by close to 7/10 of a point, rates of life insurance companies were up 1.4 points, and mortgage company rates rose 9/10 of a point.

In conclusion, may I say we are quite proud of the record of the commercial banking industry in the housing field. But we can and must do better, and we will. When the fetters of inflation are eased, we will have a far greater opportunity to expand our services and provide resources to home builders and home buyers. In the meantime, as I have indicated earlier, we have organized a task force whose objective is an immediate and substantial flow of funds into the mortgage markets.

Senator PROXMIRE. Our next witness is Mr. William Osborn, chairman of the legislative subcommittee on a secondary market for conventional mortgages, National League of Insured Savings Associations.

STATEMENT OF WILLIAM G. OSBORN, CHAIRMAN, LEGISLATIVE SUBCOMMITTEE ON A SECONDARY MARKET FOR CONVENTIONAL LOANS, NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS; ACCOMPANIED BY WILLIAM F. MCKENNA, GENERAL COUNSEL, NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS

Mr. OSBORN. Mr. Chairman and members of the subcommittee, my name is William G. Osborn. I am chairman of the legislative subcommittee on a secondary market for conventional mortgages, a subcommittee of the legislation committee of the National League of Insured Savings Associations. I am also the president of Germania Savings and Loan Association in Alton, Ill. I am privileged to present the following testimony on behalf of the National League.

It is my understanding that this hearing now includes not only S. 2958 and S. 3442, but also S. 3503 and S. 3508. In view of time limitations I will not go into any greater detail as to the contents of these bills than is necessary to an exposition of the comments I wish to make.

S. 2958 would authorize FNMA to conduct a secondary market in conventional mortgages as well as in those insured by the Federal Housing Administration or guaranteed by the Veterans' Administration. The conventional mortgages so traded would have a loan-tovalue limitation of 80 percent at the time of purchase unless the excess over 80 percent is guaranteed or insured by an institution deemed by FNMA to be generally acceptable to other institutional mortgage investors.

The National League has no objection to the establishment of a secondary market for conventional mortagages in FNMA as long as a similar facility is made available through the Federal Home Loan Bank System.

S. 3508, the Federal Mortgage Marketing Corporation Act, would create such a secondary market in the Federal Home Loan Bank System for residential mortgages by establishing a corporation directed by the Federal Home Loan Bank Board and initially capitalized by the Federal home loan banks. Because the Federal Home Loan Bank System itself presently operates completely from funds supplied by the savings and loan industry rather than with Federal Gov

ernment funds, we see no need to require purchase of its stock by those who make use of its facilities. This proposal in S. 3508 seems to be patterned after FNMA, where the purpose was to substitute private funds for the Government funds used to supply initial FNMA capital. Since S. 3508 proposes to make no change in management control of the new corporation by the Federal Home Loan Bank Board in any event, it seems unnecessary to repay the capital to be supplied by the Federal home loan banks.

I would like to refer briefly to some items that deserve consideration with reference to the operation of a secondary market in real estate mortgages.

Certainly at the present time of housing shortage the market should be confined to residential mortgages. The definition of that term should be broadly defined as it is in S. 3508, encompassing any structure designed for nontransient residential use. Trading should be confined to first lien mortgages of that type that are in good standing, but it should not be restricted to new mortgages.

The existence of many seasoned mortgages in good standing in savings and loan association portfolios provides a source for converting noncash assets into cash in a secondary market, thus providing additional liquid capital savings and loan associations can use to invest in financing housing.

While more standardization of the contents of mortgages would undoubtedly ease their handling in a secondary market, development of an organized market for conventional mortgages should not be delayed. Use of a few central secondary market facilities should tend to encourage more standardization of mortgage terms and conditions. The facility should be afforded an opportunity for flexibility in operation. FNMA has enjoyed that opportunity and has been able to introduce new operational techniques to adapt to changes in market conditions.

S. 3508's idea of segregating the funds used in the secondary market proposed for the Federal Home Loan Bank System through the device of creating a separate corporation appeals to us.

This device tends to isolate the System's secondary market operations from the rest of its operations. It should serve to minimize the effect of the System's secondary market activities upon the System's other dealings with public markets, as in its borrowing operations.

As to eligibility to make use of a secondary market in the Federal Home Loan Bank System, we believe that at the start this should be confined to institutions that are members of the System. Experience will indicate the advisability of enlarging upon this class of eligible

users.

The National League has long advocated the development of a secondary mortgage market within the Federal Home Loan Bank System. We hope that this session of Congress will enact legislation to achieve that result.

Coming to S. 3442, the Mortgage Credit Act of 1970, a National League representative testified in considerable detail last October 1 before the Senate Committee on Banking and Currency on the recommendations of the Commission on Mortgage Interest Rates that form the basis for the provisions in S. 3442. Since that testimony is

recorded in printed hearings, I will briefly sum up the views of the National League regarding the provisions in S. 3442.

We favor the 2-year trial period for a dual system of interest rates on FHA-VA mortgages as proposed in section 1. However, we ask the subcommittee to consider the effects of this dual system in States where conventional mortgages are subject to usury laws but FHA-VA mortgages are exempt. It would appear offhand that in such States the dual system would tend to attract investment in FHAVA mortgages at the expense of conventional mortgages.

We oppose creation of yet another advisory group on housing as proposed in section 3. For reasons we presented in our earlier testimony we feel that the Special Advisory Commission on Housing there proposed would overlap similar assignments already conferred by the Congress on the President and the National Advisory Commission on Low Income Housing in the Housing and Urban Development Act of 1968. Paying expenses of the proposed commission would not, in our opinion, be the best use that could be made of the Federal revenue it would require.

Secton 4(a) would delete the $40,000 limit on the mortgage amount of a single-family home eligible for financing under normal lending powers of Federal savings and loan associations. We agree with this provision because inflationary rises in price have made that limit inadequate in several of the higher cost areas in the United States.

Rather than leave with the Federal Home Loan Bank Board the task of substituting a different limit, as S. 3442 would do, we would prefer allowing this to be a decision of management personnel of savings and loan associations.

The discipline exerted on such loans in the secondary market will serve as a practical limit on the number of above $40,000 loans that will be made by individual savings and loan associations.

Section 4(a)(2) would carry into execution another long-standing plank in the National League's legislative platform by enabling Federal savings and loan associations to act as trustee for certain pension, stock bonus or profit-sharing plans and for certain organizations having more than self-employed persons in them under the Keogh Act retirement program.

We encourage the subcommittee to assure that the provision reported favorably by it will clearly authorize Federal savings and loan associations to act of trustee or custodian for individual selfemployed persons under a Keogh Act retirement program.

Section 4(b) (1) would extend the permissible primary lending area for any Federal savings and loan association to a statewide area in the State where its home office is located. The provision would empower the Federal Home Loan Bank Board to withhold the use of that extended area by Federal associations in a State where Statechartered associations are not permitted to use it.

The National League would prefer that the statute be written so that Federal associations' authority in this respect would follow the authorty permitted to State-chartered associations in any given State rather than leave it to the Board to determine that a Federal association might have statewide lending powers in a State where State-chartered savings and loan associations do not.

Section 5 deals wtih more liberal powers for national banks in the field of real estate lending. It has not been the policy of the National League to involve itself in legislative proposals affecting commercial banks.

I personally would have no objection to increasing the improved real estate lending authority of national banks to a 90 percent loanto-value limit and a 30-year maturity and of treating construction loans for industrial or commercial buildings having maturities as long as 60 months as ordinary commercial loans instead of loans secured by real estate.

I would hope that the Congress will adopt a similar favorable attitude toward the request of the savings and loan industry for liberalization of the loan and investment powers of savings and loan associations.

This brings me to S. 3503, the fourth bill to be considered in this hearing. It would empower the Federal Home Loan Bank System to obtain funds through the Federal Reserve discount window at a discount not exceeding 6 percent per annum and lend them to Federal home loan bank members and certain nonmembers at interest rates between 6 and 614 percent per annum, as determined by the Federal Home Loan Bank Board.

Any institution borrowing such funds could use them only to enable any family having an annual income not over $10,000 to purchase a dwelling or membership in a housing cooperative appraised at no more than $25,000. While presumably this is intended to provide housing for the families so helped, I see no provision restricting them to purchases of homes for their own occupancy. The institution could not make such a loan at an effective interest rate exceeding 612 percent per

annum.

Our principal reaction to the bill is that the permissible spread between cost of funds to the lending institution and the interest rate it could charge is so unrealistically low as to offer very little incentive for an institution to make use of the funds. This is especially true because changing modes of operation in the savings and loan industry tend to increase costs of operation.

The development of the practice of using a variety of savings plans in the past few years has increased the operating expense of associations. While comparatively large associations having multimillion-dollar assets might find it possible to make some use of these funds as a community service, smaller associations would find it impractical to operate on so low a spread. The subcommittee may wish to consider whether S. 3503 in its present form would accomplish its intended purpose.

This concludes our comments on the proposed legislation presently being considered in this hearing. I appreciate the opportunity of bringing to you the views of the National League on the proposals. Thank you.

Senator PROXMIRE. Thank you very much, Mr. Osborn. This is another very good statement. We appreciate your views. In your opposition to S. 3503, you primarily concern yourself with the spread.

It is a small spread and Senator Bennett has made that point in the hearings. I am certainly not tied to the notion of one-half or less.

I have a table here indicating what your spread has been. What spread would be necessary, in your view, to get some action?

Mr. OSBORN. Well, we did not necessarily oppose this legislation. We are in favor of any legislation which will serve the public and bring more funds into housing that we so desperately need. We feel it is difficult in legislation to set a fixed fee or profit in an organization such as our national economy which changes and varies to

Senator PROXMIRE. Supposing we didn't have any upper limit. In other words, they were allowed to use the discount window to get the funds, would you then approve the legislation?

Mr. OSBORN. Yes, sir.

Senator PROXMIRE. In other words, how would you feel about it? Do you feel enthusiastic that you can do the job in a substantial way? Mr. OSBORN. We feel we would like to have the opportunity to use the Federal discount window to advance housing and lending to the home owners of the United States. We would feel that the legislation should permit a flexible rate of return to the lenders to be sufficient inducement to get them into the program if we adopt the program.

Senator PROXMIRE. The staff tells me in their view the limits would be absolutely essential. You would have to have some kind of a limit. If this were the case can you give us any help as to your practical view?

Mr. OSBORN. Well, in past experience in participation lending, the lenders have arbitrated rates for servicing that vary anywhere from a quarter of a percent to a half percent to three quraters of a percent. This occurs after the lender has already received a profit spread of from one-half to three-quarters of 1 percent on the loan.

Normally, in the past years, in the whole concept of the savings and loan business, we used to consider a spread of 2 percent between what we would pay for the money to the investor and what we would loan it at to the borrower in order to be assured of meeting our reserve requirements and increased expenses. So it would seem we would be thinking of a rate some place between one-half of a percent to 2 percent, depending upon what our problems are at the time in the economy.

Senator PROXMIRE. Well, this of course is an emergency measure and marginal measure. I notice the average spread is a little over 1 percent and the mutual banks are one-third percent.

Mr. MCKENNA. That is not a desirable or optimum spread; that is under credit crunch conditions.

Senator PROXMIRE. Well, that is what we have now and that is when this would be in use.

Mr. MCKENNA. It is a long story which we won't review, but the inflationary problem resulting in driving up the cost of attracting funds has naturally decreased the spread between the cost of money to the institutions and the yield on its investment. As you are well aware, the usury law sets the top limits at which funds can be loaned.

So the point I am trying to make is that you are right, the spread has been squeezed downward. In earlier days a 2 percent spread was considered to be a more acceptable one than the one now being received, commonly. That 2-percent spread has not been received for quite a while now.