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1 (b) Section 305 (h) of such Act is amended by striking 2 out “clause (2) of section 302 (b)” and inserting in lieu 3 thereof "clause (2) of the proviso to the first sentence of

4 section 302 (b) (1)”.

DIGEST OF S. 2958

Authorize the Federal National Mortgage Association to purchase, service, sell, lend on the security of, or otherwise deal in conventional mortgages.

Provides that, with respect to these conventional mortgages, the Association would not be allowed to purchase or lend on the security of any such mortgage unless its outstanding principal balance did not exceed 80 percent of the value of the mortgaged property, or unless that portion of the unpaid balance in excess of 80 percent was guaranteed or insured by an institution, and under a contract, determined to be generally acceptable to other institutional mortgage investors.

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM,

November 13, 1969.
Hon. JOHN SPARKMAN,
Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN : This is in response to your request of October 29, 1969, asking for the Board's views of S. 2958, a bill to authorize the Federal National Mortgage Association to purchase, service, sell, lend on the security of, or otherwise deal in conventional mortgages, and for other purposes.

Although FNMA as a Government-sponsored corporation has recently shifted from mixed to wholly private ownership, it is still in a transitional stage so far as its relation with the Department of Housing and Urban Development is concerned. Thus far, FNMA's activities have been confined to dealing in mortgages which conform to standard policies as expressed in the underwriting of mainly FHA- and VA-mortgages. The nature of its operations could in time be altered appreciably if the amendments proposed in S. 2958 were incorporated in the Federal National Mortgage Association Charter Act as presently constituted.

Appropriate further improvements in the secondary as well as the primary mortgage market would, the Board feels, clearly be in the public interest. However, significant technical, as well as policy, questions would arise at this time were FNMA permitted to deal in conventional mortgages, though presumably only on residential properties. Perhaps the principal problem is that conventional mortgages generally lack the marketability of Government-underwritten loans, which are based on uniform minimum standards relating to safety of principal, collateral, loan terms and origination practices. There is a serious risk, therefore, that even though FNMA might be able to pool or otherwise participate its conventional loan holdings, FNMA would in time accumulate a portfolio which would be comparatively illiquid and which might come to displace its holdings of Government-underwritten mortgages. Moreover, the additional accumulation would have to be financed through even larger issues of agency paper in the credit market; this would exert further upward pressures on market interest rates and would be disadvantageous to flows of funds to the depository institutions which are also active mortgage investors.

Based on these considerations, there is reason to question whether attempts to provide special support to conventional mortgages by FNMA would serve a useful public purpose at this time. Thus far, the size of FNMA's contribution to the mortgage market, even though based strictly on purchases of Governmentunderwritten mortgages, has been notable. Quirkest results in helping to alleviate prosent mortgage-market conditions would most likely be obtained by reliance on existing institutional arrangements, and particularly by permitting contract interest rates on Government-underwritten mortgages to move more flexibly so that these instruments—which are already well adapted to secondary market trading-could compete more readily with conventional mortgage loans in the primary market. Sincerely yours,

(Signed) Wm. McC. Martin, Jr.,

WM. McC. MARTIN, Jr.

THE SECRETARY OF HOUSING AND URBAN DEVELOPMENT,

Washington, D.C., March 17, 1970. Subject: S. 2958. Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: This is in further reply to your request for the views of this Department on s. 2958 a bill which would authorize the Federal National Mortgage Association to purchase and deal in conventional mortgages if the outstanding principal balance does not exceed 80% of the value of the mortgaged property or if the balance above 80% is guaranteed in a manner acceptable to FNMA.

There is a real need for a facility along the lines proposed in this bill. While we support the objective of S. 2958, there are practical problems involved which cause us to have serious reservations about the specific method of FNMA support being proposed. Very shortly, the Administration will be forwarding its 1970 housing legislation which will include bills to authorize secondary market facilities for conventional mortgages in both the Federal Home Loan Bank System and the FNMA. The legislation will attempt to deal with the many practical problems we see in this area.

One of the problems involved is to devise assurances that the mortgages purchased are economically sound and of a type that will be acceptable to the market for purposes of resale. At the present time, FNMA primarily relies on FHA and VA mortgage insurance and guarantees for this assurance. Indeed, other national lenders also rely to a great extent on such governmental protection when they originate or purchase a volume of sales housing mortgages at a distance from their home base. Another major problem concerns the assurance that funds will not be diverted from the low and moderate income segments of the entire housing market, whether conventionally financed or government assisted.

To deal with these problems, our proposed legislation will require, for at least an initial experimental period, that the lending institution selling the mortgage agree to share a certain percent of any loss incurred or else agree to repurchase the mortgage if, within three years of purchase, the mortgage is found defective or in default. Commitments to purchase mortgages prior to origination would only be authorized where there is an agreement to repurchase. Thus, there will be continued inducement to originate only mortgages of a quality which the institution would consider acceptable for mortgages retained in its own portfolio. Also, only 10 percent of the conventional mortgages purchased by FNMA would be permitted to be more than one year old, thus assuring that the bulk of the purchases will go into additions to housing funds. In order to avoid the diversion of scarce credit resources from low and moderate income housing production, our legislation will also provide for maximum mortgage amounts identical to those authorized for FHA insured mortgages.

While we favor the objectives of S. 2958 we recommend, in lieu of this bill, that there be enacted legislation incorporating the various safeguards outlined above. A legislative proposal containing those safeguards will be forthcoming from the Administration very shortly. Sincerely,

GEORGE ROMNEY.

THE GENERAL COUNSEL OF THE TREASURY,

Washington, D.C., December 4, 1969. Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN : Reference is made to your request for the views of this Department on S. 2958, “To authorize the Federal National Mortgage Association to purchase conventional mortgages, and for other purposes.”

The bill would authorize the Federal National Mortgage Association to deal in conventional mortgages. The bill would also have the effect of authorizing FNMA to deal in any mortgage which is insured or guaranteed by an agency of the Federal Government.

The explanatory material inserted in the Congressional Record by the sponsor of the bill states that the conventional mortgage market has been suffering in re

cent months because of the severe tightness of mortgage money and the lack of any real national secondary market, and that the establishment of a sound secondary market will serve to provide a much needed stability in times of tight credit such as in 1966 and the present.

As Under Secretary Volcker indicated in his testimony before the Subcommittee on Financial Institutions of your Committee on September 10, 1969, a number of specific steps have been taken this year to increase the flow of funds to both conventional and Federally guaranteed mortgages. In direct support of the conventional mortgage market, the Federal home loan banks have very substantially increased the volume of their advances to member institutions. In support of Federally guaranteed mortgages, FNMA has been making new commitments at a record rate equal to about three-fourths of the entire volume of FHA and VA mortgage organizations.

These and other measures which have been taken are intended to provide strong support for the flow of mortgage credit, and thus help to cushion the effects of tight money on home building. However, the basic problem is one of excessive total demands for credit, and the fundamental corrective must be to restore the economy to a noninflationary growth pattern as promptly as possible through fiscal and monetary policies. Thus, inflationary expectations will be reduced, interest rates will decline, and the flow of mortgage funds through normal institutional lenders will be restored.

The increased support already being provided to the mortgage market, which has been financed by means of a record volume of FNMA and home loan bank borrowings, has added substantially to pressures on market rates of interest. As individual investors become increasingly aware of the high returns available on Federal agency and other securities, and shift their funds from savings institutions, the resulting disintermediation will undermine further the position of normal suppliers of mortgage credit.

The Department believes that FNMA support should continue to be reserved for those segments of the housing market for which the Congress has already established priority through Federal guarantees and subsidies, especially in light of the increased need for FNMA support of low income housing, e.g., through the new mortgage purchase program in tandem with the Government National Mortgage Association.

In view of the foregoing, the Department would be opposed to the enactment of the bill.

The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Committee. Sincerely yours,

PAUL W. EGGERS,

General Counsel.

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FEBRUARY 25, 1970
Mr. PROXMIRE (for himself, Mr. HARRIS, Mr. Hart, Mr. HARTKE, Mr. HOLLINGS,

Mr. Hughes, Mr. KENNEDY, Mr. McGee, Mr. McGOVERN, Mr. MCINTYRE,
Mr. MAGNUSON, Mr. MONDALE, Mr. Moss, Mr. NELSON, Mr. PELL, Mr. RAN-
DOLPH, and Mr. WILLIAMS of New Jersey) introduced the following bill;
which was read twice and referred to the Committee on Banking and
Currency

A BILL
To reduce mortgage interest rates charged middle income

families, and for other purposes.
1 Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,

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SHORT TITLE

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SECTION 1. This Act may be cited as the “Middle In

5 come Mortgage Credit Act”.

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FINDINGS AND PURPOSE

7

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SEC. 2. The Congress finds that,

(1) periodic episodes of monetary stringency and high interest rates make it extremely difficult for families

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of middle income to obtain mortgage credit at rates

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which they can afford to pay;

II

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