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

In 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 thê 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

necessarily be a major part of our operations, we feel that the techniques that we have been developing for issuing such securities could help blaze a trail for other issuers. These securities offer the prospect of attracting long-term funds from pension funds and other investors which are not now entering the mortgage market. In terms of improvements in mortgage market arrangements, we feel that this is one of the most promising techniques.

Our staff also has been studying the possibility of FNMA maintaining a secondary market in conventional mortgages. Such a program seems feasible, even though there are some hurdles to be overcome before it could be fully activated.

As my earlier remarks indicated, we are heavily involved in FHA and VA financing at the present time, principally because traditional lenders have withdrawn from that market to a very large extent. We would want to assure operations in the FHA and VA market at a level consistent with the needs of that market before proceeding with activation of a conventional loan program. Nevertheless, this is an appropriate time to authorize the expansion into conventionals so that the necessary implementation can proceed with a definite set of objectives in view.

Insofar as S. 2958 is concerned, we fully endorse the objectives of the proposal. It is our understanding that the administration expects to submit a bill which will embody the principles developed by the Department of Housing and Urban Development, the Federal Home Loan Bank Board, and FNMA. Its purpose is identical to that in S. 2958, but it has a different and broader group of technical features. Briefly, the principles in the bill to be introduced are as follows:

1. FNMA could make loans on the security of mortgages, or purchase a participation, not exceeding 90 percent of the unpaid balance, in a conventional loan; or purchase a whole loan if the lender agrees to repurchase the loan or to substitute a loan which is current if there is a default within a 3-year period from date of purchase;

2. The bulk of the mortgages purchased would be less than 1 year old;

3. Establishment of a maximum loan to value ratio would be determined from time to time by FNMA with approval of the Secretary of Housing and Urban Development; and

4. The volume of PNMA's activities in this segment of the mortgage market would be subject to the approval of the Secretary. This approach, at least initially, will offer an avenue for developing additional support for the conventional mortgage market. It will make possible the tapping of the capital market to provide funds for new mortgages rather than providing liquidity for mortgages which have been held in investors' portfolios for some time. The program also envisages the development by FNMA of mortgage documents as nearly standard as possible, given the fact that there are more than 50 separate jurisdictions. We strongly endorse the passage of such a proposal when it comes before you.

There is also before the committee S. 3442. The bill embodies recommendations of the Commission on Mortgage Interest Rates. We endorse the proposal to extend from October 1, 1970, to January 1, 1972, the Secretary's authority to establish interest rates for FHA

mortgages in excess of 6 percent. This extension is necessary and desirable if FHA mortgages are to remain competitive, effective instruments.

The dual rate system proposed in the bill would present no problem to FNMA. This is an experimental authority which would permit loans to be underwritten at whatever rate is agreed on by the lender and the borrower, provided no discounts were involved, as well as the underwriting of mortgages within a maximum rate set by the Secretary. Initially, it might be advisable to consider confining this dual concept to multifamily mortgages, since the developers of rental housing for income should have sufficient sophistication to be aware of the various market conditions. Nevertheless, we think the proposal, even as stated in the bill, deserve a trial.

S. 3503, sponsored by Senator Proxmire and other members of the committee, proposes an extension of credit by the Federal Reserve system through the Federal Home Loan Bank System under which FNMA would not participate. I hesitate to comment on the proposal and would prefer to leave this issue to the Treasury, the Federal Reserve, and the Federal Home Loan Bank Board. Their respective positions would be most directly affected, even though there might also be an indirect effect on FNMA and other agencies, if the Federal Reserve were to sell large amounts of Treasury securities in an already tight credit market.

We have also examined S. 3508. That bill applies to the Federal Home Loan Bank Board and we have no comments except to note that we prefer the proposal for a secondary market which we discussed earlier.

As a concluding comment, I wish to assure you that FNMA's endeavors in the public interest will continue. The road ahead for the mortgage market still is very bumpy, but we will continue to use all our resources to buffer the impact of adverse credit conditions on the mortgage market, to utilize existing but as yet untried techniques, and to develop new proposals which may help alleviate undue pressure on the supply of mortgage funds.

(The attachments to Mr. Hunter's statement follow.)

ATTACHMENT I-PERCENTAGE DECLINES IN VARIOUS TYPES OF HOUSING STARTS DURING POSTWAR HOUSING DOWNTURNS (BY QUARTERS)

The percentage changes are based on the number of units produced in the peak and trough quarters. The monthly levels used in computation of the quarterly data were the seasonally adjusted annual rates of nonfarm starts.

ATTACHMENT II.-ESTIMATED AVERAGE PURCHASE PRICES OF HOMES COVERED BY MORTGAGES

1 Estimated for FNMA and FHA by applying maximum loan to value ratios to average mortgage amounts. FHLBB data are the average of new and existing housing.

Mr. Chairman, that concludes my prepared statement. I will be very happy to try to answer any questions that the members have.

The CHAIRMAN. Thank you for the very fine and encouraging statement. I hope that FNMA will continue its active assistance in providing mortgage money. I want to ask you about your comment with reference to S. 2958. You say that the administration expects to submit a bill which will be similar. When is that bill going to be presented? Is it going to be a single bill or a package of bills?

Mr. HUNTER. Mr. Chairman, I am not prepared to answer that. It may be part of the omnibus bill being prepared by the administration. I would say it would be forthcoming shortly.

The CHAIRMAN. Well, the President, I believe in his statement, referred to it as a package. I didn't know whether it was a mixture of bills or an omnibus bill or what. Is that the same bill to which Chairman Martin referred?

Mr. HUNTER. I believe so. There have been some informal discussions with the representatives of the Home Loan Bank Board, the Department of Housing and people from the Federal National Mortgage Association. The consensus as to principles at this time is as I stated in my remarks.

The CHAIRMAN. Does FNMA have to do anything in the preparation of the language of this bill? I am merely asking because I want to urge that it be expedited as much as possible.

Of course, you heard me make that same statement to Chairman Martin. I believe they said they would burn the midnight oil in order to get it done.

Mr. HUNTER. We are very anxious to see this provision, if it is an omnibus bill, or to see this particular bill before your committee at the earliest possible time. We have offered and we stand ready to give every assistance possible, particularly in view of the fact that FNMA will be involved. The administration's proposal is that both FNMA and the Federal Home Loan Bank System participate in the purchase of conventional mortgages.

The CHAIRMAN. Thank you.

Senator Tower?

Senator TOWER. In view of the statutory date as the first of May of this year, can you tell me when you anticipate the transitional period to end?

Mr. HUNTER. The board of directors of the corporation at its last meeting, on February 24, made a determination that as of January 2, 1970, there was sufficient stock in the hands of the enumerated types of owners, that is realtors, homebuilders and mortgage lenders. The law