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of the collateral and the amount of the loan would provide no assurance of investment liquidity or of capital safety comparable to that inherent in federally underwritten mortgages.

Even conventional loans bearing private insurance can offer no certain guarantee to the lender of liquidity or against loss in case of default and foreclosure. Most contracts of private insurance reserve to the insurer the option of meeting his limited liability by paying either a stated percentage (often 20 per cent) of the outstanding debt or 80 per cent of the total loss ultimately experienced afer the lender has disposed of the property, whichever amount is the lesser. In this connection, nearly two out of every three claims settled by one large private mortgage insurance company during a recent period were based on the 20 percent option. That is, they represented claims involving net losses in excess of one-fifth.

Other serious questions arise as to whether entry by the housing agencies into the conventional mortgage markets might not occur largely at the cost of lessened support available for the Federal housing credit programs. These programs are charged with a special public interest in part because they have helped facilitate mortgage borrowing by low- and middle-income groups under regulations that provide various forms of protection to the home buyer.

FNMA's capacity to support the residential mortgage market ultimately rests on its ability to finance its mortgage acquisitions by borrowing in the market for Federal agency issues. Use of government agencies to raise funds in the market can channel some money to housing away from other users. The total credit available in the economy is, however, limited. Thus, attempts to overload the tasks of the agency markets will increase the rates the agencies must pay. Each additional sum raised will increase the cost mortgage borrowers pay. At the same time, a larger and larger share of the money flowing through the agencies will be attracted from lenders who would otherwise, directly or indirectly, have put their funds into mortgages.

Related to this issue of which portions of the mortgage market should have priority for FNMA support is the question of the efficiency with which aid can be allocated. The various Federal housing credit programs are specifically designed to assist low- and moderate-income consumers. On the average, these households require less financing assistance than do borrowers who rely on conventional mortgages which typically finance more expensive homes. To the degree that FNMA purchased conventional mortgages rather than federally underwritten loans, any given amount of FNMA's funds would support fewer dwellings than would otherwise be the case.

All these considerations aside, it may be argued that enactment of S. 2958 would eventually hasten efforts to standardize the conventional residential mortgage a desirable step in itself. Conventional mortgages do now lack the degree of homogeneity required for active trading in the secondary market. But many measures can and should be taken to standardize the conventional mortgage independently of granting FNMA authority to deal in this type of instrument. Drafting a uniform mortgage code for adoption by the States, for example, need not-and should not-await the creation of a Federal secondary market facility for conventional mortgages. Nor should we delay efforts to bring greater uniformity in the laws governing mortgage investment standards, as noted below.

8. 3503

S. 3503 would authorize advances by the Federal Home Loan Banks to lenders who will use the proceeds to make mortgage loans for families with incomes of $10,000 or less. The Federal Home Loan Banks would obtain funds for this purpose by borrowing from the Federal Reserve System, which would be required to discount the FHLB obligations at a maximum interest rate of 6 per cent. The sum of such borrowing is unspecified except that it would be limited to $3 billion the first year plus $3 billion for each additional year the act is in force.

Thus the bill would authorize a lending program of $3 billion annually outside the budget. The Board believes, however, that whatever subsidies the Congress determines to be necessary and justified in order to aid housing should be included in the budget, so that the Congress may weigh them against other Federal outlays, and then reduce other outlays that have a lower priority, or increase revenues to cover their cost.

This is the approach the Administration proposes to use in increasing flows of funds from the Federal Home Loan Banks to their member institutions for mortgage loans. The Administration would authorize appropriations to cover part of the cost of borrowing by the Federal Home Loan Banks in the market, so that they may make advances at reduced rates to their member institutions. If the rates on advances to members are not reduced, the members might discontinue mortgage lending in order to repay the amounts they have borrowed from the Federal Home Loan Banks. The Board supports this proposal as a more efficient procedure. Congress will, of course, have to consider whether subsidies for middle-income families are needed in addition to, or in place of, this general housing subsidy. But the Board believes that whatever subsidies are authorized should be identified and subjected to the appropriations process.

If, as provided in S. 3503, the Federal Reserve were directed to increase its holdings of Federal Home Loan Bank obligations by up to $3 billion a year, credit markets would have to absorb a corresponding amount of Treasury obligations over and above what would otherwise be marketed. In order to keep control of the reserve base, the Federal Reserve would have to offset its loans on Federal Home Loan Bank obligations with sales of Treasury securities or forgo purchases of Treasury securities it would otherwise have made. Sales of $3 billion additional Treasury obligations in the capital markets would, of course, attract funds away from other uses, including credit that would otherwise finance housing as well as other capital improvements.

Moreover, the Board opposes tapping Federal Reserve credit for special-purpose lending, no matter how worthy, because it could frustrate the objectives of monetary policy. A $3 billion a year program to help middle-income families bay homes could soon lead to proposals for other types of special lending. There are, of course, other purposes-perhaps equally worthy-for which funds are urgently needed. Hearings have just been completed in the House of Representatives on legislation which would authorize use of Federal Reserve credit to rehabilitate urban and rural pockets of poverty. State and local governments generally are having difficulty borrowing for schools and hospitals; they, too, could use 6 per cent loans from the Federal Reserve. To compel the Federal Reserve to meet credit needs of these magnitudes woul ad first to a weakened market position for Treasury securities as the System made offsetting sales of Treasury issues—and ultimately to inflation, as it became impossible in practice to offset the expansion of Federal Reserve credit in that fashion.

S. 3442

S. 3442 would implement certain recommendations of the Commission on Mortgage Interest Rates, as set forth in its report of August 1969. The Board supports the proposed experimental dual-market system of setting contract interest rates on new FHA and VA mortgages, as authorized by Section 1 of the bill. The trial period to last until January 1, 1972—during which contract interest rates could be established either by regulation, as at present, or by the market—will offer the opportunity for determining how far it is appropriate to move toward more flexible rates. Whatever greater flexibility can be achieved, of course, will allow standardized FHA and VA mortgages to compete more readily with conventional mortgages as well as with other capital market instruments. And it will broaden the potential scope of the secondary market for government-underwritten mortgages.

The Board of Governors is also in accord with the principles of Section 2 of S. 3442, which would explore ways and means of reducing and, where possible, standardizing charges for attorneys' fees, property surveys, title insurance, and other settlement costs on FHA and VA mortgages. Appropriate guidelines in this area could help to lessen the costs of transactions and thereby improve the efficiency with which the real estate market operates.

The Special Advisory Commission on Housing authorized by Section 3 of the bill would be required to submit broad recomendations about the next fiscal year's housing output. Federal costs of meeting this goal, needed legislative and administrative actions, and “. the fiscal and monetary policies, both longand short-range, which are necessary to achieve recommended levels of housing production ..."

In this connection, it should be pointed out that the Commission's annual report would have to be submitted well before the Administration's proposed budget has been completed for the next fiscal year; according to the bill, the report should be submitted by November 1. While one purpose of the Commission's report is to help guide prospective fiscal as well as monetary actions, fiscal and monetary policies must take account of the broadest aspects of the economy, with housing being only one though an important one of many competing demands for the nation's resources. There is the danger, therefore, that the Commission's early recommendations may not be consistent with, or attainable within, the general framework of public economic policy as it ultimately evolves.

Incidentally, the limit established by Section 3(d) (2) of the bill on the rate that the Commission could pay for temporary and intermittent services in seeking guidance about its recommendations appears low. A $50-a-day ceiling on consultant fees for individuals would hardly seem likely to strengthen the Commission's hands in obtaining the most qualified sources of advice.

Sections 4 and 5 of S. 3442 would liberalize certain restrictions on the mortgage lending powers of Federal savings and loan associations and national banks, and would permit a Federal savings and loan association to act as a trustee for certain trusts. With respect to mortgages, there is a pressing need to standardize, as far as possible, the authority of all types of financial institutions to invest in these assets.

Section 5 of S. 3442 would liberalize the authority of national banks to make real estate loans. For conventional mortgage loans, the loan-to-value limit would be raised from 80 to 90 percent, and the maximum maturity from 25 to 30 years; for. loans on construction projects, the maximum maturity would be extended from three years to five years. The Board continues to support this change as a means of stimulating increased mortgage lending by banks.

The bill does re-emphasize the need for broad and equitable standards that would be applicable to investment in mortgages by all federally chartered financial institutions. Moving toward greater uniformity in mortgage investment standards at the Federal level would then provide a basis for similar action among the more numerous and heterogeneous State-chartered lenders. Such standardization, in turn, would promote a more effective primary and secondary market for all the different types of lenders that place funds in the mortgage instrument.

Legislation is needed improve the working of the mortgage market. Simi. larly the burden of monetary restraint on the mortgage market should be lightened, and the Board is studying ways and means to accomplish this without impairing the use of monetary policy in achieving national economic objectives. But it should be kept in mind that the problems of the housing industry are not related solely to credit. Rising costs of construction and land have been major impediments.

However efficient the mortgage market becomes, and however successful the Federal Reserve is in achieving a more uniform impact of monetary restraint, another step is needed to ensure that sufficient funds will be available to reach the national housing goals. We must enlarge the total pool of credit. We probably cannot achieve our nation's housing goals merely by enabling housing to attract a larger share of the available pool of capital. It seems to me that the most feasible way to expand the pool of housing credit is to reduce the demands that the Federal Government is making on the private capital markets. This is a major reason that we must examine with caution proposals which increase rather than diminish the total credit demands of the Government and its agencies.

The CHAIRMAN. Mr. Allan Oakley Hunter, president, Federal National Mortgage Association.

STATEMENT OF ALLAN OAKLEY HUNTER, PRESIDENT, FEDERAL

NATIONAL MORTGAGE ASSOCIATION, ACCOMPANIED BY DR. HARRY SCHWARTZ, VICE PRESIDENT AND ECONOMIST

The CHAIRMAN. Mr. Hunter, you are an old customer of this committee and we are glad to see you here again.

Your full statement will be printed in the record. You may proceed as you wish.

Mr. HUNTER. Thank you, Mr. Chairman.

a

It is a pleasure to be here before the committee. This is my first appearance before you as president of the Federal National Mortgage Association.

As you stated, I have been here on previous occasions, both as a private practitioner of the law and as a representative of government. I consider it a privilege to have this opportunity.

The legislative proposals before you are challenging and the problems we face in the mortgage market are severe. Even

though I have had considerable experience with the housing industry,

I do not regard the brief period I have been serving as president of FNMA as qualifying me as an expert in all of the issues we face.

I would like to say I have with me Dr. Harry Schwartz who is vice president and economist for the Federal National Mortgage Association. There may be some questions which I cannot answer which I am sure he can.

I I would like to review briefly FNMA's role in the mortgage markets, particularly during the past year, before discussing the pending legislation.

În previous service as general counsel of HHFA, I can recall a meeting in which we agreed that FNMA could buy $750 million in mortgages during the year. That seemingly huge sum is dwarfed even if we look only at the 1966 experience when FNMA purchased $2.1 billion in mortgages. Last year FNMA far exceeded the 1966 record. We bought $4.2 billion in mortgages, and, more importantly, we supported the market with commitments to purchase mortgages totaling $6.5 billion. In the first 8 weeks of 1970, we have issued commitments totaling $1.5 billion.

Primarily because of FNMA's activity last year, housing starts financed by FHA and VA mortgages showed an increase while total housing starts declined. This is the first time that such a development has occurred. Attachment I (see p. 86) shows the changes in total conventional and FHA and VA housing starts during several postwar periods of housing downturns. It clearly indicates that last year the annual rate of housing starts fell 23 percent from the first quarter to the fourth quarter, while FHA and VA starts rose 18 percent in the same period. In previous declines, FHA and VA financed starts declined as much or more than conventionally financed starts. A further indication of FNMA's role is the fact that in January of this year its mortgage portfolio increased $562 million, which was more than the combined increase of $507 million for all institutional lenders.

We do not believe that this is a matter for self-congratulation, for it reflects the severe pressures on and the distress in the mortage market. Nevertheless, I cite these developments to point up the role which FNMA has played over the years and to the capacity that the corporation has today. Three developments have contributed to the greater impact of FNMA operations last year than in the

past. First, was the adoption in May 1968 of an auction system for issuing commitments for future purchases of mortgages. Prior to that time FNMA's activity had been essentially an over-the-counter purchase operation. The auction system did away with the reliance on an administered price, which sometimes was not consistent with market developments, and substituted a competitive price determined by those who offered bids in the auction. In addition, by extending commit

ments for periods up to 18 months, lenders were assured that there would be a source of money when mortgages were available for delivery. Prior to May 1968, lenders could not always be certain on what terms or prices funds would be available. This uncertainity tended to impede the willingness of lenders to make forward commitments on their own, but protected by the new device they can act with greater certainty.

The second major development was the so-called "privatization" of FNMA. Prior to September 1968, FNMA was a mixed Governmentprivate corporation. When FNMA became private, the corporation's freedom to tap the capital markets was greatly increased. These two elements, the auction and greater access to the capital markets, have given FNMA much more room for maneuver.

Third, cooperative arrangements with the Department of Housing and Urban Development have added to FNMA's activity. Under the provisions of the 1968 act, the Secretary of Housing and Urban Development has authorized certain amounts to be allocated for purchases of mortgages on low and moderate income housing. FNMA developed a pricing plan which offered a preferential price for subsidized multifamily housing and subsequently entered into a program called the Tandem plan with the Government National Mortgage Association to assure that commitments at par for rent supplement and interest subsidy housing would be available at all times. Pursuant to these programs, FNMA made almost $700 million in commitments for mortgages on assisted housing last year. Currently, the amount outstanding is almost a billion dollars out of a total of $1.2 billion in multifamily mortgages. We have also entered into an agreement with GNMA for special purchase procedures on single family section 235 subsidized housing, which permit a special price for this class of mortgage.

Even in our regular activities, our involvement with housing in the lower price ranges is clearly evident from the record. Attachment II shows the estimated average value of homes financed by FNMA and insured by FHA, and the average value of conventionally financed houses for a number of recent years. It is clear from this table that FNMA financed homes have typically had an average value less than the FHA average. It is also clear that the average home financed by FNMA between 1965, when the figure was $11,700, and 1969, when the average was $16,200, has been on the order of 50 percent less than that reported for conventionally financed homes.

The prospective activity of FNMA for 1970 is likely to be substantially larger than in 1969. Currently, we are making commitments at an annual rate approximating $9 billion. This may drop back to a $6 billion level if the improvement in the money and capital markets of recent weeks continues. At the same time we are purchasing mortgages at a rate in excess of $7 billion annually. That, too, may drop back to a $6 billion level should credit conditions ease significantly.

In addition to the foregoing, we believe that FNMA can make other contributions. For more than a year, we have studied the issuance of bond-type, mortgage-backed securities and have been prepared for some time to issue such securities, once regulations have been adopted and market conditions are appropriate. While we do not think that FNMA should be the sole issuer of such securities, or that it should

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