requires, as you know, that before the transition can take place, onethird of the stock must be owned by such individuals or firms, that is realtors, lenders, homebuilders, or others related to the homebuilding industry.

The annual meeting of shareholders will take place on May 21. We have forwarded our findings with respect to the status of the stock ownership to the Secretary of Housing and Urban Development, Secretary Romney. It is our expectation that he will approve that finding and that on May 21 the transition will take place, at which time the Board will go from nine to 15 members, 10 of those members will be elected by shareholders and five will be appointed by the President of the United States.

They in turn will hold an organizational meeting and elect the principal officers of the corporation. The earliest date for the transition, as you know, was set by statute as May 1, 1970, and no later than May 1, 1973.

So the transition, we believe, will take place in the first month. Senator TOWER. Looking beyond May 21 and the realization of the transition, how do you visualize the relationship of FNMA with HUD?

Mr. HUNTER. There will continue to be a close relationship. Under the law, the 1968 act, the Secretary of Housing will continue to approve the amount of FNMA's borrowing limit; that is, the borrowing authority and the commitment authority of the organization. The Secretary will also continue to have the authority to determine that a certain amount of our purchases will be in the area of federally assisted housing in order to meet the national housing purpose, provided, of course, that there must be assured at all times a reasonable rate of return on such investments. This, because with the organization going private, it is necessary in the overall that our mortgage yield must exceed the cost of our borrowings.

Senator TOWER. We are not going to turn you back on a low-income factor.

Mr. HUNTER. Let us note too, that if in the financial interest of the Government the Secretary should determine that he should take some action with respect to the administration of the organization, the power is there. But normally administrative matters are within the control of the shareholders, board of directors, and the officers.

Senator TOWER. He won't be involved in the internal operation? Mr. HUNTER. No. That is the expectation provided by law and we have every reason to believe that is what will take place.

Senator TOWER. Thank you very much, Mr. President. I concur with the view and I think that reflects the feeling of the committee, the intent.

The CHAIRMAN. Senator Proxmire?

Senator PROXMIRE. I notice in your statement that you describe in some detail the accomplishments of FNMA in 1969. For example, you list the following:

Mortgage purchase of $4.2 billion.

Commitments to purchase of $6.5 billion.

The development of the auction system.

The development of the Tandem Plan which permits FNMA to provide funds for the low and moderate income housing programs.

Do you concur in these actions, and do you intend to carry on in a similar fashion?

Mr. HUNTER. Yes, I concur in these actions.

Senator PROXMIRE. Do you intend to carry on in a similar fashion?
Mr. HUNTER. That is my intention.

Senator PROXMIRE. As you know, all of these actions were taken under the leadership of your predecessor, Mr. Raymond Lapin, who was dismissed by President Nixon on December 2. In informing Mr. Lapin of the reasons for his dismissal, the President said:

This action is taken because in my judgment the policies and practices pursued by you in that office are inconsistent with the objectives of applicable law and with the standards expected of officials holding positions of trust and confidence under the laws of the United States.

I frankly do not see how the administration can have it both ways. On the one hand, it dismisses the head of FNMA for carrying out policies not consistent with the law and on the other hand it takes credit for those same policies.

When you were appointed, did the President or anyone else discuss with you the policies which Mr. Lapin was pursuing which were not consistent with the law and which needed to be reversed?

Mr. HUNTER. I was not a party to any discussions which led up to Mr. Lapin's departure. As I stated on other occasions, Mr. Lapin happens to be a personal friend of mine. Over the years, my firm has represented Mortgage Bankers Co. of California, the company which was acquired by Trans-America, and which Mr. Lapin founded. I personally have a great admiration for Mr. Lapin; I admire his com-... petence and his capacity for innovation.

I must say that I consider my courtship with Fannie Mae legitimate. I did not approach the lady until the divorce proceedings had been announced. It was a rather sensitive situation when the former husband was contesting the proceedings, but I must say he now very graciously has withdrawn the suit and announced publicly that he feels I am a fit mate to succeed him.

Senator PROXMIRE. Well, the analogy isn't quite perfect.

This should be enough, it would seem to me here to warrant somebody, if not the President, somebody in the administration counseling you on what they did not want you to do that Mr. Lapin had done. There was no communication at all indicating the policies which they felt were desirable?

Mr. HUNTER. Perhaps it wasn't necessary. My personal observation was that there developed a lack of communication. The reasons for it, I am not aware.

Senator PROXMIRE. He didn't say a lack of communication, he said inconsistent with the objectives of applicable law and standards expected of officials holding positions of trust and confidence. The latter part I suppose would be a lack of communication. But how about the inconsistent with the objectives of the law. What did he do that was inconsistent with the objectives of the law that you think you could do differently?

Mr. HUNTER. I Would prefer not to comment on the matter. Actually, I have not discussed it with members of the Board, I have not discussed it with the President of the United States.

Senator PROXMIRE. I know you are in a difficult position, I don't want to embarass you. But I do think-and other Senators on the

committee have spoken to me about this-I do think we ought to have some understanding of whether any strong disagreement with Mr. Lapin which would result in this kind of language which the President used was sufficient merit to warrant counseling his successor to follow the policies in this case; apparently it was not.

At least you were not given any instructions as a result of the dismissal of Mr. Lapin?

Mr. HUNTER. Well, there was never a bill of particulars issued. Perhaps if the suit had proceeded to trial this would have been a matter that would have come out in the evidence. But I believe that the way things have gone, the fact that the suit has been withdrawn, is in the best interest of all parties concerned.

Senator PROXMIRE. Well, let me ask-Mr. Hunter, under the administration's yet-to-be-announced proposal for an FNMA secondary market for conventional mortgages, how would the Treasury backup be treated? Would FNMA be able to rely upon the Treasury to support its conventional mortgage operations as it now does for its FHAVA operations?

Mr. HUNTER. My understanding is that there would be no change. We now have backup authority in the amount of $24 billion, and that would be available for both operations.

Senator PROXIRE. So you would have the same kind of backup as you have for FHA-VA?

Mr. HUNTER. Yes.

Senator PROXMIRE. As long as the Treasury is the ultimate guarantor, wouldn't it be only fair and proper that the Government have some say about the terms and conditions of the conventional mortgages which FNMA would buy? For example, shouldn't the rate ceilings and provisions limiting points applicable to FHA-VA mortgages apply equally to conventional mortgages purchased by FNMA? Mr. HUNTER. That is not an unreasonable question. I think that is a matter which should be considered.

Senator PROXMIRE. You consider that recognizing the fact that the Government and the tax

Mr. HUNTER. FNMA has been "privatized," but because of its continued close connection with the Federal Government, it must always be considered, let's say, part of a housing team which involves not only private industry but also the Department of Housing and the Treasury. I would think, whether by law or by arrangement, there always has to be a close working relationship.

Senator PROXMIRE. How do you answer the concern that if FNMA were permitted to deal in conventional mortgages it would neglect its responsibilities in the FHA-VA segment of the market?

Mr. HUNTER. Well, I made the statement that we would get into the business of purchasing conventional mortgages but that we could not do it at the expense of what we consider still our primary obligation, to support the VA and FHA market. Our ability to do that would be determined

Senator PROXMIRE. So the top priority would be on what you are doing now?

Mr. HUNTER. I would say so.

Senator PROXMIRE. To the extent it wasn't inconsistent with that support you could get into the others?

Mr. HUNTER. Right, as you well know, our portfolio, dealing strictly with FHA and VA mortgages, is growing at a rather considerable

rate.

Senator PROXMIRE. Does that mean you would go out and borrow money to support the conventional market over and above what you are doing for VA and FHA?

Mr. HUNTER. Right. Our borrowings now exceed $11 billion, and about $4 billion of that is in short-term notes, discount notes, the balance is in debentures. There is no evidence that we have reached the saturation point, but the conventional market is fairly large. It has been running $18 to $20 billion a year and will probably be more than three times that size in 10 years.

Quite naturally, FNMA or any single entity could be only expected to support a portion of that market. Of course, any support at all at the proper time could have an effect on the whole.

Senator PROXMIRE. Would you favor a conventional secondary mortgage operation which would be completely separate from FNMA's FHA-VA operations and which would be financed through separate and distinct obligations without a Treasury backup?

One might very well argue that if FNMA wants to deal in conventional mortgages without Government restrictions, then it should be willing to give up the Treasury backup which it enjoys on its FHAVA operations.

Mr. HUNTER. That could be done. Of course, without the Treasury backup it might not be as effective. If FNMA gets into the conventional market, we would, of course, have to proceed cautiously and we would have to, let's say, experiment or operate on a small scale until we tested the market and tested our procedures.

I think one of the things that must occur before there can be a truly effective secondary market in this field is more uniformity in the loan documentation and in various practices, such as appraisals. That could very well be for the good because I think one of the problems we have in finding lenders for mortgages is that there is such diversity throughout the country.

Just as we brought uniformity into the various codes, for example, the commercial code in this country, there is an opportunity here to bring about more uniformity in mortgage documents.

Senator PROXMIRE. If you proceeded cautiously and carefully then there would not be much of an impact on mortgage rates?

Mr. HUNTER. Not immediately, no.

Senator PROXMIRE. Would you favor a limitation on the value of a conventional mortgage which could be bought by FNMA in order to assure all of the funds would not go for upper income housing? For example, the ceiling might be equal to the ceilings on FHA mortgages. You know, we have had a long experience with this committee in trying to provide legislation that would help everybody in this country but particularly those with lower and moderate incomes.

We find again and again this legislation develops into something that helps exclusively those in the middle and upper income bracket.

Mr. HUNTER. Well, we do recommend at this point that the limitations be equal to those that are now used by FHA on single family.

42-120 0-707

Senator PROXMIRE. Do you see immediate relief to the availability and cost of mortgage credit if a secondary market bill is enacted or is this a long term measure that would take time to have an effect?

Mr. HUNTER. I would say the immediate relief would be quite limited. I do not personally think this is something that any government or quasi-government organization could get into and act, let's say, as an emergency fireman and go all out at the very beginning. There is a lot not known about this and I think caution is the password.

Now, in the longrun, and we are not talking about a number of years, we are talking about a year or two-maybe I should not hold myself to such a short period but let's say within a reasonable length of time, a secondary market activity could have a very, I think, definite and beneficial effect on the conventional mortgage market.

Senator PROXMIRE. This really, then, does nothing to meet the immediate housing crisis, does it? Nothing significant?

Mr. HUNTER. Are you talking about this year?

Senator PROXMIRE. Yes, you said a year or two. The crisis is now. We hope that it will begin to end by 1971, early 1971.

Mr. HUNTER. The crisis is now. I suppose this is the worst time we have ever had in our contemporary history. But then I am looking ahead to the announced national housing goal as enunciated by Congress, some 26 million units in the next 10 years. Now, if that goal is to be met, there have got to be ways and means found of getting more money into the mortgage market and this is one of the things which I think will help to meet that goal.

Senator PROXMIRE. How would you guard against the possibility that mortgage lenders would dump their worst mortgages on FNMA if it dealt in conventional mortgages? Do you believe a program of private mortgage insurance could protect FNMA against heavy losses in this area?

Mr. HUNTER. I have not personally had the opportunity to give consideration to this matter of insurance. I do not think FNMA would want to be put in a position of having to qualify insurers throughout the United States. I believe that is one reason why there has been recommended in the first instance that there be a requirement for participation of 10 percent or an agreement to buy back.

Now, as we learn more about this business, it may be possible to dorp this participation requirement. I know there are a great many people in the home building industry that would like to see this eliminated and there is no reason for it except it is a protection against the kind of thing we are talking about, undue losses to FNMA or any entity purchasing in the conventional market.

Senator PROXMIRE. Participation would be your method rather than insurance?

Mr. HUNTER. Yes.

Senator PROXMIRE. One more question. On page 4, you indicate FNMA is buying mortgages at an annual rate of $7 billion but that the rate may drop back to $6 billion if credit conditions ease. The President's budget for 1971 shows a purchase figure of $5.6 billion for fiscal year 1970 and $4.6 billion for fiscal year 1971 which would average out to about $5 billion for calendar year 1970 versus your estimate of $6 to $7 billion. Whose figures are correct? Yours or the President's?