The subcommittee met, pursuant to notice, at 10:13 a.m., in room 5110, New Senate Office Building, the Honorable E. L. Bartlett (chairman of the subcommittee) presiding. Present: Senator Bartlett. OPENING STATEMENT BY THE CHAIRMAN Senator BARTLETT. The committee will be in order. Today we shall hear testimony on S. 3017, a bill to change the provisions with respect to the maximum rate of interest permitted on loans and mortgages insured under title XI of the Merchant Marine Act, 1936. Title XI now provides that to be eligible for mortgage insurance a ship mortgage may not secure a loan bearing interest at a rate exceeding 5 percent, except when special circumstances justify 6 percent, nor may a construction loan be insured if the rate of interest exceeds 6 percent. This bill would substitute for the 5-percent and 6-percent maximums a provision that the interest rate shall not exceed a rate determined by the Secretary of Commerce to be reasonable, taking into account interest rates prevailing in the private market. It is my understanding that a subcommittee of the House Merchant Marine Committee has held hearings on H.R. 14796, a companion measure to this bill, and has favorably reported that measure to the full committee. As a matter of interest, I would point out that section 18 of S. 2650, the maritime program bill introduced by Senator Magnuson, Senator Brewster, and myself, upon which we will begin hearings next month, is identical to the provisions of this bill. The first witness will be Carl Davis, General Counsel of the Maritime Administration, accompanied by associates whom he will identify for the record. Staff member assigned to this hearing: Stanley H. Barer STATEMENT OF CARL C. DAVIS, GENERAL COUNSEL, MARITIME ADMINISTRATION, DEPARTMENT OF COMMERCE; ACCOMPANIED BY JOHN R. TANKARD, ASSISTANT GENERAL COUNSEL, DIVISION OF MORTGAGE AND MARINE INSURANCE; AND ROY H. YOWELL, CHIEF, DIVISION OF MORTGAGE INSURANCE CONTRACTS, OFFICE OF GOVERNMENT AID Mr. DAVIS. Thank you, Mr. Chairman. I am accompanied by John R. Tankard, assistant general counsel, in the Division of Mortgage and Marine Insurance, and Mr. Roy H. Yowell, chief, division of mortgage insurance contracts, Office of Government Aid. I appreciate the opportunity to appear before you to present the views of the Maritime Administration and the Department of Commerce with respect to S. 3017. Section 1104 (a) (5) of the Merchant Marine Act, 1936, provides that to be eligible for mortgage insurance a ship mortgage must, among other requirements, secure bonds, notes or other obligations bearing interest-exclusive of premium charges for insurance-at a rate not to exceed 5 per centum per annum on the unpaid principal balance or not to exceed 6 per centum per annum on such balance if the Secretary of Commerce finds that in certain areas or under special circumstances the mortgage or loan market demands it. By reference to section 1104(a) (5), section 1104(b) (6) places the same requirement on loans with respect to the maximum interest rate if they are to be eligible for insurance. This refers to loans which are made to finance construction of the ship and which precede the mortgage which is placed on the ship after the ship is completed. The bill would amend section 1104(a) (5) to substitute for the 5 and 6 percent maximums a provision that the intereest rate shall not exceed a rate determined by the Secretary of Commerce to be reasonable, taking into account the range of interest rates prevailing in the private market for similar loans and the risks assumed by the Department of Commerce. Under this language, there could be circumstances under which the rate determined by the Secretary to be reasonable would exceed 6 percent. Since November 1966, the Department has approved interest rates under the terms of the existing law as follows: Mr. DAVIS. Almost steadily upward. That is right, Mr. Chairman. At the present time we have applications for mortgage and loan insurance totaling $314,075,100-of which financing of $35,500,000 has already been arranged-for 70 ships and 691 barges which are to be built by private owners with privately generated funds to upgrade and modernize the American merchant marine. Under existing law, since the market requires a rate of interest higher than 6 percent, the Department cannot insure these loans and mortgages, and the vessels therefore cannot be built. A comparison of the yields of various long-term corporate and Government bonds with title XI bonds over a 10-year period shows the following: (a) Title XI bond interest rates closely approximated the yields of triple-A rated corporate bonds. The spread between said bonds varied from zero to one-fifth of 1 percent, depending on the specific features of the corporate bonds. For example, a triple-A corporate bond with 10-year call protection may yield 6.25 percent whereas a title XI bond may yield about 6.40 percent. (b) Although not of directly comparable characteristics, title XI bond interest rates have ranged from one-quarter to 1 percent more than comparable long-term U.S. Treasury bonds, depending upon currently prevailing market conditions. Based on said review, triple-A corporate bond yields constitute the most accurate and consistent indicator of title XI bond interest rates. In fact, in today's market, a title XI bond would sell to yield a rate not less than a triple-A rated corporate bond. The following is a listing of current quotations of recent triple-A corporate bond, Government bond, and World Bank bond interest rates and yields. To summarize, Mr. Chairman, we have it running from a yield high of 6.68 to a low of 5.44. Senator BARTLETT. The entire table will be placed in the record with your statement. Mr. DAVIS. Thank you. (The table referred to follows:) Mr. DAVIS. In view of the foregoing, it is our opinion that title XI bonds in today's market would have to bear an interest rate of about 6.50 percent, which is comparable to recent triple-A corporate yields, about 1 percent greater than long-term U.S. Treasury bond yields, and about one-fifth of 1 percent greater than World Bank bond yields. We recommend enactment of the bill so that we can continue to have private financing of vessel construction. Thank you, Mr. Chairman. I will be happy to answer any questions. Has this conclusion been approved by the Bureau of the Budget? Mr. DAVIS. It has, Mr. Chairman. Senator BARTLETT. It represents the official administration position? Mr. DAVIS. It does. Senator BARTLETT. Good. Mr. DAVIS. I might say in addition, Mr. Chairman, this is the first bill I have had the pleasure to testify on in some time in which I know of no opposition-unless it is Mr. May's wife back there. I haven't questioned her yet. [Laughter.] Senator BARTLETT. Off the record. (Remarks off the record.) Senator BARTLETT. Mr. Davis, has the Government made moneyMr. DAVIS. Yes, they have. Senator BARTLETT (continuing). On the title XI operations? Mr. DAVIS. Yes, they have, Mr. Chairman. We have made about $18 million. Senator BARTLETT. Over how long a period of time? Mr. DAVIS. Since 1954. Senator BARTLETT. Making more or less in recent years than it did for the few years after 1954? Mr. DAVIS. Oh, it's making more. Senator BARTLETT. Making more? Mr. DAVIS. In fact, it is running now an average of about $4 million a year. I am corrected to add "before administrative expenses." Senator BARTLETT. And they amount to what by way of percentage? Mr. DAVIS. They do not know what the administrative expenses will run. Senator BARTLETT. Please furnish for the record the administrative costs in percentages relating to the revenues to the Government. Mr. DAVIS. Thank you. It will have to be an estimated figure, but we will be happy to do so. (The figures requested follow:) Administrative costs of Title XI mortgage and loan operators (fiscal year 1967) Title XI revenues to U.S. Government: Insurance premiums and fees-- Gain from sale of U.S. securities. Total_ Administrative costs: 1 Payment of interest to Treasury on money borrowed to liqui date defaulted mortgages.. Miscellaneous expenses incident to mortgage default.. Total... Percentage: Administrative costs/revenues__ $2,790, 000 1, 459, 000 37,000 4, 286, 000 172, 000 83,000 255, 000 6 1 Does not include cost for Maritime Administration staff time directly related to title XI mortgage and loan activities. Senator BARTLETT. Is it your opinion, Mr. Davis, that more revenue will accrue to the Government if this bill becomes law? Mr. DAVIS. It certainly is, Mr. Chairman, because it will enable us to cover the additional financing for additional construction, and all that governs additional moneys to the Government. |