will assure that the appropriate action will be taken at a crucial time. Much must be left to judgment, as is true with the operation of the Federal Reserve System; and the best that legislation can do is to delineate as clearly as possible the areas in which judgment will be exercised, and to provide an administrative framework which will enable knowledgeable and competent men to exercise their judgment free of passing political pressures.

2. General policies

To assure the last resort character of its operations and to prevent its misuse for speculative purposes, the facility should deal only with the makers and holders of FHA and VA mortgages and never with mortgagors; and it should ordinarily impose a penalty on those who deal with it.

While the principle of buying cheap and selling dear should be maintained, even this need not be invariably adhered to at all times. Flexibility and maneuverability should be the keynotes of policy. In order that rigidity of practice be not mistaken for sensitive and responsible administration, the widest range of judgment should be permitted and encouraged in establishing discount rates and other conditions in connection with its transactions and in determining extent and location of its activities.

3. Organization

To avoid exposure to such pressures as made FNMA a prime instrument of inflation during the late 1940's, the facility should be organized as an independent corporate entity with a governing board with staggered terms of office. No official of either FHA or VA should be a member of the board, nor should these operating agencies otherwise be in a position to dominate the policies of the facility.

Al

It would, of course, be desirable that the facility be privately financed. though at the beginning it might be necessary to employ Government capital, as was the case with both the land-bank and home-loan-bank systems, provision should be made for its replacement from earnings or from private subscription at the earliest time practicable.

All users of the facility should be required to have a capital interest in it. A compulsory membership arrangement, like that of the Federal Reserve System, would hardly be practicable, because of the difficulty in determining the basis for membership in an institution of this kind. Subscription on the basis of a relationship to assets of the participating institution, as is the case with both Federal Reserve and home-loan-bank systems, does not appear feasible because of the great variety in the character of the capital structure of institutions making FHA and VA loans. A method of subscription on the basis of the extent to which the facility is availed of, as is followed in the land-bank system, is considered to be the method most adaptable, namely a subscription to stock in ratio to the amount of loans sold to the facility, such stock to be retirable as the loans were paid off or sold by the facility. Additional operating capital should be obtained by the issuance of debentures to the public at a ratio not in excess of 10 to 15 times the capital and surplus of the facility.

Because of the influence that mortgage lending has on the whole credit structure of the country, it is important that a close relationship prevail between the secondary market facility and the central monetary authority. Although this relationship does not have to go so far as to involve administrative supervision of the facility, the discount rate and other broad policies should be determined only after receiving the advice of the Federal Reserve Board.

Consideration has been given to the possibility of making the facility an adjunct operation of the Home Loan Bank Board instead of giving it independent administrative status. Here the problem is the domination of the Home Loan Bank Board and system by a single group of mortgage-lending institutions, the savings and loan associations, whose reserve, liquidity, and stabilization problems differ in many respects from those of other mortgage lenders. It is conceivable, however, that, if the nature of the Board were broadened to correspond to that of the Farm Credit Administration (which administers such diverse operations as the land-bank system and the intermediate credit banks), and administrative union of the hom-loan-bank system and the proposed secondary facility might be feasible, and the possibility should not be excluded from consideration. In any case, the importance of a close relationship to central credit and monetary policy should be maintained.

III. PROPOSED LEGISLATION

A. EXPLANATION

The following outline is designed to present the features of the legislation necessary to bring a secondary mortgage market facility into being and to assure the attainment of the objectives stated in the previous sections of this report.

B. OUTLINE OF LEGISLATION

1. Title.-An act to establish a secondary mortgage market facility.

2. Statement of purpose.-To create a more equable distribution of mortgage funds throughout the Nation and to reduce the variations in the amount of funds that from time to time and from place to place are available for residential mortgage loans insured by the Federal Housing Administration or guaranteed or insured by the Veterans' Administration.

(Comment: The limited purpose enunciated above follows the reasoning and recommendations in the previous discussion. It envisages an institution created to deal with identifiable problems and avoids embarking upon any vast experimental operation. It would be possible for Congress to broaden the scope of the activities of the Fund as improvements were made in State legislation and as experience evidenced capacity to deal safely on a broader basis.)

3. Corporate structure.-There shall be established in the District of Columbia a corporation, known as the Federal Mortgage Fund, which shall have succession until dissolved by Congress.

The Fund shall have a Board of Directors consisting of three members appointed by the President with the advice and consent of the Senate, with compensation fixed at $15,000 per year, the Chairman of the Board to be designated by the President and to serve as chief executive officer of the Fund. Terms of the Directors shall be for 6 years, except that, at the outset, the terms shall be for 2, 4, and 6 years. The Directors shall appoint all officers and employees of the Fund, who shall serve at the pleasure of the Directors.

The Fund shall be an independent agency and shall make reports annually to the President and the Congress covering its operations and administrative policies. The Dirctors, however, shall receive the advice of the Board of Governors of the Federal Reserve System before issuing debentures or establishing buying and selling prices on mortgages acquired by the Fund and interest rates on loans made by it.

(Comment: The concept is one of an institution that is ultimately financed wholly with private funds and which involves no obligation on the part of the Government other than that already involved in the mortgage insurance and guaranty operations. At the same time, the institution is to be free from domination by any of the various interests in the construction or mortgage finance industries or by the governmental agencies operating the insuring and guaranteeing programs. The corporate form and administrative arrangements provided for in the legislative outline are designed to accomplish these purposes.)

4. Advisory Council.-In the exercise of its functions, the Directors may utilize the advice of an Advisory Council consisting of 12 members, broadly representative of the geographic regions of the Nation and of the business interests related to residential mortgage lending, to be appointed by the President for terms of 1 year, and to meet at the call of the Board not less than 3 times each year. Council members shall be compensated for time actually spent on Council business and for necessary expenses in attending meetings, according to the customary allowances for such compensation.

(Comment: The object of the proposed Council is to assure representation of industry in the policymaking process.)

5. Paid-in capital.-The Fund shall have an initial capital of $50 million which shall be transferred from the capital and surplus accounts of the Federal National Mortgage Association and shall be in the form of a loan to the capital account of the Fund. The amount of this loan, with interest at the average yield on outstanding Government obligations as determined at the time of transfer, shall be repaid out of the earnings of the Fund, within a period not to exceed 10 years unless otherwise directed by Congress. No dividends should be paid to stockholders until the Federal capital has been retired.

For the privilege of doing business with the Fund, institutions eligible to deal with the Fund shall subscribe to nonvoting stock in the Fund an amount as determined from time to time by the Board of Directors but not less than 2 percent nor

more than 4 percent of the face amount of any loan made by the Fund or of the outstanding principal amount of FHA or VA mortgage loans sold to the Fund. Such stock shall be redeemable with the liquidation of the loans sold to the Fund. Earnings in excess of required reserves and estimated requirements for administrative expenses for the succeeding year shall annnally be paid into the capital account in replacement of the Treasury investment.

(Comment: The capital setup provides a simple method for accumulating private funds from those who use the facilities of the Fund and for the gradual replacement of Government by private capital.)

6. Eligibility.-The Fund shall be authorized to conduct loan or purchase transactions with any mortgagee approved by the Federal Housing Administration for making insured mortgage loans and with any corporation, trust, or other institutional borrower having succession that is regularly engaged in the business of making loans guaranteed by the Veterans' Administration and is approved by the Directors of the Fund. The Fund shall have the right to refuse for cause to transact business with any otherwise eligible institution.

(Comment: The eligibility requirements are designed to assure that those doing business with the Fund are competent and responsible lenders capable of servicing mortgage loans. In principle these provisions are similar to those now governing FNMA operations.)

7. Powers.-The Fund shall have power to adopt and use a corporate seal; make contracts; sue and be sued; establish branches as may be deemed appropriate by the Directors; conduct business in any State, Territory, or possession of the United States including the District of Columbia; issue debentures as hereinafter provided; buy, sell, and lend on the security of FHA and VA mortgage loans and otherwise invest its funds as hereinafter provided; enter into and terminate contracts for servicing mortgages in its portfolio; foreclose defaulted mortgages, or purchase title in lieu of foreclosure or accept title for release of the mortgage obligation; deal with, renovate, sell for cash or credit, rent, or otherwise dispose of any property acquired through foreclosure proceedings; and do all other things necessary or incidental to the proper conduct of its affairs. (Comment: The requisite powers of the Fund are set forth but, at the same time, a broad range of discretion is left to its Board of Directors in establishing operating policies and procedures.)

8. Obligations.-The Fund shall be authorized to issue and to have outstanding at any one time notes, bonds, debentures and other obligations in an aggregate amount not to exceed 12 times the amount of its paid-in capital and in no case in excess of the outstanding principal amount of the mortgages, cash, and other assets held by it. The payment of principal and interest on such obligations shall be secured by a pledge of all assets and earnings of the Fund but shall not be otherwise guaranteed. The obligations shall be legal investments for any national bank or Federal savings and loan association and shall be eligible for purchase by the Federal Reserve banks on conditions to be established by the Board of Governors of the Federal Reserve System.

(Comment: The ratio of debentures to capital is such as to promise ready acceptance in the financial market.)

9. Investment of funds.-The funds of the fund shall be invested in (a) mortgage loans insured by the Federal Housing Administration or guaranteed or insured by the Veterans' Administration which have been acquired from eligible institutions under conditions of eligibility as may be determined from time to time by the fund; (b) loans made to eligible institutions on the security of such mortgage loans; (c) Government obligations; or (d) cash.

(Comment: The limitations on investment are in line with the limited purpose for which the facility is established.)

10. Reserves. An amount equivalent to not less than 10 percent of net earnings shall be accumulated annually as a reserve until the reserve equals 50 percent of its paid-in capital. The reserve shall be invested in United States Government obligations or held in cash and shall not be subject to any claim upon the fund or be drawn for any purpose except to meet interest and principal payments on the fund's obligations in amounts in excess of its earnings.

(Comment: Although none of the previous legislation respecting national mortgage associations has contained a reserve requirement, on the theory that the insurance and guarantees on its investments would provide adequate protection, it is felt that both the soundness of the operation and the acceptability of the debentures would be improved if additional protection in the form of reserves were provided for.)

11. Discounts, premiums, rate of interest.-In connection with its purchase and loan transactions, the fund shall from time to time establish the rate of discount, if any, at which it will buy mortgage loans, the amount of premium or discount, if any, at which it will sell mortgage loans, and the rate of interest and other conditions on which it will lend its funds on the security of mortgage loans.

(Comment: It is assumed that the agencies issuing and guaranteeing mortgages will follow a policy in respect to interest rates that will assure a reasonably close relationship to market conditions. The freedom allowed the fund in establishing discounts and premiums is intended to give strength to a flexible interest rate policy.)

12. Liquidation of Government mortgage holdings.-The Federal National Mortgage Association shall be terminated and all its assets shall be transferred in trust to the fund for management and liquidation. All assets of the RFC mortgage company shall be transferred in trust to and managed and liquidated by the fund. All mortgage loans acquired by the Veterans' Administration under its direct lending program shall be transferred in trust to be managed and liquidated by the fund. All receipts from these trust accounts in excess of all servicing costs, all losses, and a management fee equivalent to one-twelfth of 1 percent per annum of the outstanding amount of the mortgages in the trust accounts, shall be paid to the general fund of the Treasury except that, as to mortgage loans transferred from the Veterans' Administration, the net receipts shall be paid to the account of the Veterans' Administration. No assets of the trust accounts may be sold at less than par except with the concurrence or at the direction of the Secretary of the Treasury.

(Comment: The reasons for giving these liquidating functions to the fund are to provide greater economy of administration, and to assure a more orderly market for the mortgages held by governmental agencies and the new facility.) 13. Taxation provisions.-Franchise, capital, reserves, investments, and other property (other than real property) held by the fund and earnings of the fund shall not be taxable by the United States or any State, Territory, or possession of the United States, or political subdivision thereof. The income from obligations issued by the fund shall be fully taxable in the hands of the holders of such obligations.

(Comment: The tax status of the fund is in general conformity with that previously proposed for national mortgage associations.)

14. Federal depository.-The fund shall be authorized to receive deposits of public money and to serve as a financial agent of the Government of the United States.

APPENDIX B

FINANCING PUBLIC HOUSING

A MEMORANDUM SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION OF AMERICA

The present plan of subsidizing public housing by making annual contributions sufficint to meet any deficits in the principal and interest payments on the tax-exempt bonds issued by local authorities is unlike any other Federal subsidy operation and has a number of serious objections.

1. It puts on the market a security which at once is tax-exempt and federally guaranteed, an anomaly in itself. For years the Treasury has sought to restrict the area of tax-exempt securities, yet in this case it permits an expansion of the area with Treasury endorsement. Yet the gain, ratewise, is small. The last issue of the guaranteed public housing authority 36-to-40-year bonds carried an average yield of 2.34 percent, at the same time as the average yield on highgrade municipals was 2.37.

2. The scheme provides a subsidy for those who buy the bonds as well as for those who live in the houses; and the probability is that the subsidy to the bond buyers through tax exemption is greater than that to public-housing tenants. It is doubtful that, from the Treasury's point of view, a more costly way of financing a welfare program could be devised.

3. The financing operations of the local authorities in themselves create difficulties for the Treasury's own financing operations. There is little choice in the timing of the public authority issues. Since the funds are required to replace temporary financing (also tax exempt in most cases) used to pay the development cost of projects previously authorized and built under contractual authority

granted by the statute, the issuance of the permanent financing cannot be long deferred after construction is completed. The timing of such financing may be precisely wrong in respect to that of necessary Treasury financing, as it notably was in the spring of 1953. As things now stand, if no additional public housing were put under construction than presently authorized, approximately $500 million of tax-exempt guaranteed securities must be issued each year for the next 3 years.

4. The provision of subsidies through annual contributions puts upon the Federal budget an item of expenditure over which neither the Bureau of the Budget nor the Congress can have any control. The subsidies represent a 40-year contractual obligation, the total annual amount of which accumulates rapidly with the expansion of the program. During fiscal 1953 the amount of subsidy actually paid was $25.9 million. During fiscal 1954, the amount will be $43.3 million. From June 1954 on, with no further expansion of the program, the average annual contribution will be $79.7 million. If even the current relatively low rate of expansion were continued, the amount would soon be equivalent to what would be paid out in capital grants for an equivalent program. But, while the capital grant could be varied from year to year according to budgetary considerations or the state of the economy, the annual contributions, once contracted for, are a fixed charge which cannot be varied on the initiative of the Government. A serious element of budget rigidity is thus created.

Actually, the whole plan is a subtle means of disguising the full cost of the program. The actual cost of additional public housing is concealed, because the Congress is asked to authorize not the cost but simply the carrying charges on the cost. The actual cost of the annual contribution is also concealed because a substantial amount of the cost is hidden in an incalculable loss of revenue through tax exemption.

The straightforward way of handling public housing financing would be through capital grants, which is the way in which all other subsidies for construction operations are handled.

Consideration should be given to placing this program on the same basis as that now provided for subsidies for urban redevelopment-an outright Federal grant representing two-thirds of the total required expenditure, to be paralleled with a local payment of the other one-third. If this were accomplished, the Federal outlay would still be proportionately very generous, but it would be one that would restore to the Congress much closer control and would prevent the accumulation of future trouble in terms of fixed and invariable obligations.

STATEMENT ON TITLE IV OF THE HOUSING ACT OF 1954, BY JAMES W. ROUSE, BALTIMORE, MD., ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION OF AMERICA

Mr. Chairman and members of the committee, I am grateful for the opportunity to appear before your committee and to testify to the enthusiastic support of the Mortgage Bankers Association of America for the slum clearance and urban renewal provisions of the Housing Act of 1954. Mr. W. A. Clarke, president of MBA has testified on the other sections of the bill. My comments are limited to title IV.

The MBA has supported the redevelopment program of the Housing Act of 1949 from its inception and is in full accord with the principles on which that program is based. We are encouraged by the operation of the program to date and are anxious to see our cities take advantage of the experience which has been developed in the past few years and move ahead on a broad front against slums and blight.

We can wipe out slums in American cities. We can build the vast sprawling squalid stretches of our cities into fine, clean neighborhoods where people will want to live and raise families. We can stop the spread of blight into our middle-aged residential areas.

We can do these things if we will lift our sights from piecemeal thrusts at our worst slum pockets to a well-planned, carefully organized total campaign against slums along the whole front from the first signs of blight to the last states of urban rot.

Title IV of the Housing Act of 1954 is designed for such a campaign. If and when it is enacted into law it will unfold an enormous potential for effective action in towns and cities throughout the country.