Mr. James W. Rouse is a very valuable member of the association, and on our board, and who was a member of the advisory committee, and who is given credit for 220, was going to be here this morning to testify on this provision. Unfortunately Mr. Rouse's wife is sick and she is being taken to the hospital this morning, and he will not be here. However, we will have his testimony and will submit it for the record, we have been informed.

In respect to title V, dealing with public housing, we consider the proposed amendments to be of minor significance. If the existing statute is to provide the basis for the continuance of this activity they may offer some mild improvement. We regret that the bill does not go to the heart of the question of whether it should be continued at all, but since it does not we do not consider it appropriate to discuss the question here.

We are submitting for your consideration a memorandum which we have prepared on this subject, with a request that it be included in the record.

That is a memorandum as to a method of financing public housing which we think is better than the one now in use.

Although the Mortgage Bankers Association includes but few savings and loan institutions and, consequently, is not ordinarily concerned with their special problems, we nevertheless fully endorse the provisions of title VI of the bill that give these institutions better protection against arbitrary action by Government officials and make possible their broader coverage of the mortgage market. We can only wish that the same attitude of confidence could be manifested in this legislation to those institutions that more generally deal in insured and guaranteed mortgages.

In concluding my testimony, I ask for greater confidence in these institutions-the insurance companies, the banks, and the mortgage companies that over a 20-year period have made the insured mortgage system a vital feature of the private mortgage lending structure of the country. All but a small fraction of the 3.4 million mortgages financed with FHA mortgages since 1934 have been financed by the institutions I have mentioned. Of the total amount of this activity only 193,200, or 6 percent, have ever found their way into FNMA and this mainly during periods or in respect to programs when interest rates were set below marketable levels.

The mortgage-lending institutions of the country have well demonstrated their desire to work with the Government in improving housing conditions. They have a great record with insured, guaranteed, and conventional loans. They will keep up this record provided their freedom to perform is not arbitrarily hampered. In the main this bill enlarges the area of potential performance. I have endeavored to point out the sections of the bill that do this as well as to indicate those sections that appear to us to be in conflict with this objective. We urge your reconsideration of the conflicting sections to the end that, relying on a strong, free, competitive economy we may look forward to even greater progress in the improvement of the housing conditions of our people in years ahead than has been achieved during the troubled period through which we have passed. That concludes my statement, Mr. Chairman.

The CHAIRMAN. Without objection, the appendixes referred to in Mr. Clarke's statement, and the exhibits also referred to, may be inserted as a part of the record at this point.

(The material referred to is as follows:)

APPENDIX A

PROPOSAL FOR THE CREATION OF A SECONDARY MARKET FOR HOME MORTGAGE LOANS INSURED OR GUARANTEED BY THE FEDERAL GOVERNMENT

I. WHY A SECONDARY MARKET FACILITY IS PROPOSED

A. THE FINANCING REQUIREMENTS OF THE BUILDING INDUSTRY

1. Home building now a mass industry

During the last 20 years, homebuilding has achieved the status of a major industry. The size of its operating units has grown; the proportion of the total supply built by the larger operators has risen; and the practice of building for unknown buyers has become a major factor in the market.

Back of the construction organizations, and in many respects a part of the total industrial operation, are the producers and distributors of building materials and equipment. Like the new building organizations, the manufacturers and suppliers have geared themselves to meet a broad and growing demand. In other words, homebuilding has become a mass production industry.

2. Dependable source of financing essential

As a result of this development, the financing requirements of the homebuilding industry are similar to those of other mass-producing industries: in order to maintain its operating units and improve its operating practices, it requires a dependable and relatively constant source of funds to finance the construction and sale of new housing.

At the same time, the homebuilding industry is peculiarly dependent upon borrowed funds both to carry its own operations and to finance its buyers. Unlike many industries having large amounts of permanently committed capital, homebuilding has little internal resources, while the mass of its buyers must also depend upon large amounts of credit.

Because of the importance of maintaining fluidity in the used-house market (on which new sales will more and more be dependent), a dependable supply of funds for this market is equally important. Because of the conditions described below, the housebuilding industry has less assurance of the kind of financing it requires than do other mass-production industries.

B. SHORTCOMINGS OF THE HOME MORTGAGE MARKET

1. Variability in the flow of mortgage funds

(a) Savings and loan associations provide the nearest thing to a constant source of home-mortgage money. Their investments are almost wholly in home mortgages and they provide annually about a third or more of the total supply of funds for this purpose. This proportion, as well as the absolute amount of mortgage lending, has been increasing during recent years--testimony to the steadiness of this sector of mortgage lending in comparison with the rest. While this circumstance gives, year in and year out, a fairly dependable base of mortgage activity, it still leaves the bulk of the market subject to other influences. Moreover, since most savings and loan institutions do not have sufficient resources to finance the large housebuilding development, this type of operation is generally dependent on other credit sources.

(b) Other institutional mortgage lenders, comprising mainly life insurance companies, mutual savings banks and commercial banks, are mortgage lenders only incidentally to their role as general investing institutions. They vary the amount of their mortgage lending according to the relative advantage to be gained from other types of investment and, consequently, may make fairly abrupt changes in their lending policies. The result is occasional marked increases or decreases in the amount of mortgage loans currently being made by them, or, actually, temporary withdrawals from the market.

Other types of investors (trusts, pension funds, and individuals) are less important and less dependable as mortgage lenders.

(c) Because of these circumstances, the home-mortgage market may find itself temporarily restricted in the supply of funds, for reasons that may be wholly unrelated to the demand for housing.

2. Unevenness of regional distribution of mortgage funds

(a) Surplus and scarcity areas are typical of the home-mortgage market even in times when funds are generally available from the investors discussed above. In the older areas of the country, notably New England, the Middle Atlantic, and part of the Great Lakes regions, the funds available for mortgages often exceed the demand for loans. On the other hand, the South, the Southwest, and the West chronically are importers of mortgage money.

(b) Reasons for the unevenness are many. The main cause is that the savings of the country are created in or drawn into the older, more mature regions, and that the more rapidly growing sections of the country find their local resources insufficient for their needs. Metropolitan areas have greater access to funds than small, nonmetropolitan communities, which lack substantial local institutions and present an especially costly servicing problem. States with onerous foreclosure statutes often have greater difficulty in obtaining mortgage money than States in which foreclosure is simple.

(c) Therefore, even in times when mortgage money is generally available, areas ranging in size from single small communities to whole regions may have insufficient funds to meet local demands. In times when money becomes generally stringent, these areas appear to suffer earlier and more drastically than more favorably situated localities.

3. Unevenness in economic distribution of mortgage funds

Because of low loan-to-value ratios and limitations on payment periods imposed by State law or supervision, most institutional lenders have been unable, under conventional loan practices, to serve the mass market with first mortgage financing. Consequently, where the market has to rely on conventional lending, risky and costly second mortgage financing usually becomes an unavoidable adjunct to the mortgage system.

C. PARTICIPATION OF THE FEDERAL GOVERNMENT IN HOME MORTGAGE FINANCING 1. Characteristics of Government home mortgage activities

(a) Scope.-The Federal Government, under the direction of the Home Loan Bank Board, maintains a reserve credit system (the Federal Home Loan Bank System), mainly for savings and loan associations, and a system of share account insurance (Federal Savings and Loan Insurance Corporation). The Board also charters Federal savings and loan associations.

The Government operates a number of systems of mortgage insurance through the Federal Housing Administration and a special home-loan guaranty and insurance system through the Veterans' Administration. Also through the Veterans' Administration, it provides a system of direct lending for veterans who are unable to obtain private financing within the terms fixed by statute. Through the Federal National Mortgage Association, it has maintained a reserve credit facility of a very limited and specialized character for institutions making FHA and VA loans.

(b) The purposes of these Government agencies are to give stability to mortgage lending activity, to broaden the geographic distribution of mortgage funds, mainly through private financial channels, and to give emphasis to the channeling of funds to the mass housing market.

The extent to which the agencies have achieved their objectives and the shortcomings they have encountered are briefly described below.

2. Accomplishments

(a) Home Loan Bank Board.-The strength and stability to savings and loan associations provided by the home loan banks and the FSLIC have in large measure accounted for the growth of savings and loan institutions. Through use of its chartering power, the Home Loan Bank Board has helped to provide loan sources in some heretofore underserviced areas.

(b) The Federal Housing Administration and the VA Loan Guaranty Service, by creating a standard form of low risk mortgage investment, have increased the geographical and economic ranges of mortgage lending, particularly by lifeinsurance companies and mutual savings banks. They also have augmented

local sources of mortgage funds by encouraging commercial banks to make homemortgage loans. These agencies have gone far toward creating a national market in which insured and guaranteed mortgages may be traded. Largely through the influence exercised by these programs and the Home Loan Bank System, complete and regular amortization has become standard practice, thus making unlikely such a collapse of the mortgage structure as occurred in the early 1930's.

(c) The Federal National Mortgage Association, especially prior to World War II, has been helpful in increasing the flow of funds into underserviced areas and in reducing the impact of temporary disruptions in the home-mortgage market.

3. Shortcomings of the Federal programs

(a) Limited influence on conventional lending.-Aside from the influence exerted through the Home Loan Bank System, none of the Federal programs have had any effect in eliminating deficiencies in the conventional loan area of the market. Instead, they have resulted in the creation of parallel systems of mortgage lending and have developed a national market around these systems.

(b) Limited appeal of Government programs.-Only to a limited extent have savings and loan associations participated in the insured and guaranteed loans programs, the bulk of their operations remaining in conventional loans. Major participation has been on the part of banks and insurance companies. In other words, the the greatest appeal of the Government programs has been to those institutions which characteristically show the most variability in their mortgage lending policies. As a result, the Government programs have been generally more susceptible to fluctuations in the availability of funds than home mortgage lending as a whole.

(c) Aggravation of variability in the flow of funds.-The ordinary tendency of the guaranteed and insured programs to be subject to greater than normal fluctuations has been intensified by the insistence on maintaining maximum interest rates lower than what the market will accept on a par basis.

(d) Inadequate reserve credit facilities.-The original purpose of the Federal National Mortgage Association was to provide a stabilizing force in the market by (1) reaching new investment funds through the sale of its debentures, (2) providing a market for loans in underservice areas, and (3) offering a source of liquidity to institutions carrying on large insured-loan activity. Prior to World War II, the Association served fairly well in meeting these objectives.

Recently, however, the purpose of FNMA has been directed to providing a market for economically dubious loans and to supporting the fixed, submarket interest rates.

D. PROBLEMS TO BE SOLVED

1. Improvements in conventional financing

The conventional loan system could be made a much more flexible and useful instrumentality if State laws regarding foreclosure and investment practices were amended so as to make possible a better geographic and economic distribution of mortgage funds. To the extent that this could be accomplished, the excuse for the Federal programs would be diminished.

The difficulty is that the conventional loan system is in reality 51 systems as created by State and Territorial law, and the task of effecting the desirable improvements is a formidable one. While this task should not be neglected, it seems also desirable, pending such action, to improve the functioning of the insured and guaranteed systems. The principal steps that could be taken to achieve this end are given below.

2. Flexibility in interest rates

The greater part of the difficulties in the distribution of mortgage funds would be eliminated if interest rates on FHA and VA loans could be set in accordance with the relation of the supply to the demand for funds in the market as of the time and place in which the loans were initiated. Such flexibility in rates is essential if the insured and guaranteed systems are to be an integral, dependable feature of the mortgage market, and if we are to maintain a market of nationwide scope.

3. Secondary market facilities

Although it is not possible, so long as submarket interest rates are allowed to persist, to measure the need that might otherwise exist for additional reserve credit facilities, it seems likely that even a completely free interest rate would

not remove all the frictions in the market mechanism. It would still be doubtful that Hawaii and Massachusetts would have equal access to mortgage funds or that the transitory irregularities in mortgage funds would be entirely eliminated. On the strength of this probability, there would still remain a place for a secondary mortgage market facility.

From a practical viewpoint, it would be most feasible to confine the operations of such a facility, at least at the outset, to transactions in Government insured or guaranteed mortgage loans, which offer the minimum of difficulty in ultimate disposal to investing institutions.

If successful experienec should warrant an expansion of the function of the facility to encompass other types of loans, that could be considered at a later occasion. In the meantime a greater degree of stability would be given to a sector of mortgage activity that has been representing annually 26 percent to 36 percent of all home mortgage lending and which now comprises almost 45 percent of all outstanding loans on 1- to 4-family dwellings.

1. Purpose

II. NATURE AND FUNCTION OF A SECONDARY MARKET FACILITY

A. WHAT A SECONDARY FACILITY SHOULD AND SHOULD NOT DO

The purpose of a secondary banking facility for the home-mortgage market would be to provide a reserve source of funds. To this end its purpose would be similar to that of the home loan banks. Its scope in one respect would be narrower in that it would deal only in Government insured or guaranteed loans. On the other hand, the scope might be wider than that of the banks in that it might deal with all types of institutional makers and holders of FHA and VA loans, and be enabled to discount mortgage paper without as well as with recourse and to sell its holdings to other institutions as advantageous opportunities presented themselves. Like the banks, however, its character as a reserve, or last resort, source of funds should be clearly established.

The facility should be enabled to overcome shortages of funds occasioned by adjustments in institutional loan policies and by other transient conditions in the general financial markets. It might also temporarily serve to help make a market in remote or rapidly growing areas where the customary facilities for one reason or another were unable to meet the reasonable requirements for mortgage funds. It should, within specified limits, offer lending institutions a means for obtaining liquidity and, hence, add to the attractiveness of mortgages as an investment.

In short, the purpose of the facility would be to provide a measure of breadth, stability, continuity, and confidence to the market for insured and guaranteed loans which might not otherwise prevail.

2. Limitations

Equally important to the delineation of the purposes of a secondary facility are the limitations that should be imposed on it if it is not to be misdirected from its proper task. The resources of a secondary facility should be used neither to finance a speculative expansion of the housing market nor to bolster a market that is already glutted with oversupply.

A proper functioning of the facility presupposes interest rates that either are free to move with the market or are administratively set in a true relationship to current market conditions. Under no circumstances should the facility be used as a means for supporting interest rates lower than those at which persons of good credit are generally able to borrow money.

The facility should be used with great caution as a means for supporting specialized programs. The readiness of the market to handle most of the financing of World War II defense housing without the intervention of FNMA indicates that special programs can be financed if interest rates and other terms are in line with market conditions.

1. Criteria

B. METHOD OF OPERATION

The organization, the basic powers, and the operational procedures of the facility should all be designed with the view to accomplishing the purposes of the proposed institution within the limitations prescribed for it. This is obviously a difficult achievement. Since there are no fully reliable indicators of economic trends, it cannot be possible to write into legislation any formula that