It is a question of how much you can cut down on the hay you are feeding the cow and still have the critter survive.

Senator PROXMIRE. Well, what would you suggest in trying to adopt a bill that would work and be practical?

Mr. MCKENNA. I would say the market sets the new rates on this. It seems to me the market itself is dictating what the interest rates are these days. So I see no particular reason why you have to do it by

statute.

Senator PROXMIRE. We are goving you a below-market rate of 6 percent. You have a situation where the demand for the mortgage is so great, you would be probably better off than you are now if you could get 8-percent money.

Mr. MCKENNA. It is a question of deciding whether you are going to push a subsidy into this program and if you do, you want control over it. This unfortunately is always the case, if the Government gives money, it has to have control over the money it gives.

It does seem to me, however, the question is whether you are going to subsidize the purchaser of the home, which is what you are trying to work out here, I realize, and prevent any undue windfall going to the institutions that get the benefit of the lower rate.

It appears to me that to the extent you can, you would tie the limitation only to the specific funds you advance and then it is a question of whether the industry will or will not use them. You can offer them, but you can't make lenders use them under this bill.

Senator PROXMIRE. I think you expressed the problem very well. Mr. MCKENNA. If the savings and loan associations should make a little more money than they are now, the Tax Reform Act of 1969 isn't going to leave an undue amount of it with them anyway.

Senator PROXMIRE. Well, we are not concerned about that. We are concerned with getting mortgages into the hands of middle-income people that they can afford.

Mr. OSBORN. Well, I would think you would have to set your rate somewhere in the area of one-half to 2 percent in order to attract people to do it. Anything you do less than that would decrease the incentive. It is an individual decision by the manager of the individual association, Senator. I would like to say one of the problems with a new program of this kind which would be hitting the savings and loan business in trying to determine the rate of profit or return that we would need would involve the cost of complying with new regulations.

In other words, how much paper work would be required to process a loan of this kind, how long would it take to do it, would it be a 3-month period of time or 2-month period of time. All of these are costs with which we have been confronted with additional Federal legislation. This is why it is difficult to determine.

If we knew how much it was going to cost us, how much work it was going to be and how easy it would be to get the money, it would be easier for us to put a price on it at which we would be willing to do it.

Senator PROXMIRE. Do you favor a direct lending program, the kind Mrs. Sullivan has proposed in the House?

Mr. OSBORN. No, sir.

Senator PROXMIRE. Would that be better than this?

Mr. OSBORN. No, sir.

Senator PROXMIRE. Well, we want action here.

Mr. MCKENNA. We just concluded a 3-day legislative conference and one of the actions was the adoption of a resolution indicating that our members much prefer working through the existing systems throughout the country in attempting to solve the housing shortage rather than to do it by direct appropriations out of the Treasury.

I think that is a fairly understandable position for a trade group. So the answer is yes, we prefer the approach taken in S. 3503 over direct Federal loans and Mr. Osborn has the resolution to back it up, to the effect that we would much prefer to work through the associations rather than outside.

Senator PROXMIRE. I hope you give more thought to this in going over your remarks than just saying it should be more like 1 or 2 percent. We know you are not in business for your health. Some people questioned the need for a new corporation set up under S. 3508. They say the existing law is broad enough so that the Home Loan Bank should make all advances needed to provide additional credit to members of savings and loans.

Do you have any reaction to that?

Mr. OSBORN. My reaction in dealing with Federal home loan banks on the various Government programs, through participation and through a turn-key program and the other assisted progams has been that the Federal Home Loan Bank Board has been reluctant to set up its facilities, although they have been considering it in various. districts.

They seem to feel a need for a special corporation to segregate its funds in order to participate in the secondary mortgage market. This is from my personal experience with various bank board members and in dealing with our own bank district in Chicago.

Mr. MCKENNA. I think our testimony alluded to that point. This would create a watertight compartment that would keep the secondary operations away from the rest of the operation of the bank. That particular facet is helpful in setting up a corporation for that purpose. Senator BENNETT. You don't want the same outfit chartering, inspecting you, and providing you with advances and also operating the secondary mortgage market facility. From the other point of view you get questionable administration. It insures you, charters you, turns around and supplies you with money and it inspects you or audits. you and of course it is going to audit to preserve its own record. I think you have to have that kind of a situation.

Mr. MCKENNA. I think you are so far down that road already, Senator, this is a question of trying to obtain an additional facility in the form of a secondary market and the form and type of organization is something that should be considered.

I think it would be helpful to have a corporate form to work it out. Senator BENNETT. Why do you feel the secondary market facility should be limited to savings and loans? Is this a carryover from the old feeling between savings and loans and commercial banks?

Mr. OSBORN. Senator Bennett, basically we felt that if the Federal home loan bank system was to initiate a corporation for the secondary

market and confine it to savings and loan associations that are already members of the system, this would eliminate some of the problems in determining capital, such as we suggested, not asking the participants

Senator BENNETT. This would force us to set up another secondary market for people whom you kept outside of yours.

Mr. OSBORN. We are in favor of FNMA having a secondary market. Senator BENNETT. I have one other question. Senator Proxmire raised the question I would have raised with regard to the spread. I have been in business so I know there is such a thing as overhead. There is such a thing as the cost of doing business.

Now, can you give us any idea of the cost of doing business between what you pay your savers now and what you charge for mortgages? You said 2 percent was the old standard pattern, is that just an idea or does that really represent something that will cover the cost of doing business?

Mr. OSBORN. We believe the record will show the decline in spread

Senator BENNETT. I agree that the present rate is marginal and declining. If this spread decline continues a lot of savings and loans are going to have to close up because they can't cover their overhead at these rates.

Now, can you give us an idea of the percentage that represents the cost of performing this service?

Mr. OSBORN. Based upon the information that we have in our own individual organization, which is an $86 million institution, we would find a 1-percent spread a profitable spread at the present time for the administration of loans such as Senator Proxmire's bill prescribes. But this is as of today. What the spread will be 6 months from now may be different.

Senator BENNETT. That assumes this is a little separate part of your business and that you are carrying on your regular business. Would you tell us what you feel is your cost of doing business in your normal operation?

How much money do you have to have, normally? Because I have been in business long enough to know if you separate all of these things out and don't charge the full overhead against them all, pretty soon you are out of business when there is insufficient income to meet the additional expenses.

Mr. OSBORN. That is right. The volume of business has put a lot of good businessmen out of business.

Senator BENNETT. Can you give me any figure that represents an appraisal or estimate of the cost of doing business in a normal savings and loan association of your style?

Mr. OSBORN. Our cost of operation right now is about 1.2 percent of assets, overall.

Mr. MCKENNA. There have been studies of cost of operations and some of them are broken down by size. There are some studies. Maybe we can provide them for the record (see p. 294).

Senator PROXMIRE. Thank you, gentlemen. You have been most helpful.

(The full prepared statement of Mr. Osborn and additional material follows:)

STATEMENT OF WILLIAM G. OSBORN, CHAIRMAN, LEGISLATIVE SUBCOMMITTEE ON A SECONDARY MARKET FOR CONVENTIONAL MORTGAGES, NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS

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, Illinois. 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-to-value 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 mortgages 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 government 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 lieu 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 the 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 FHAVA 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 FHA-VA mortgages at the expenses 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.

Section 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 subsituting 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 it 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 as 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 State-chartered 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 authority 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 with 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 commerical banks. I personally would have no objection to increasing the improved real estate lending authority of national banks to a 90 percent loan-to-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.