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Section 303 (b) would give the Association authority to impose charges or fees for its services with the objective that all costs and expenses of its operations should be within its income derived from such operations. That language could reasonably give rise to the inference that the fees and charges were to be sufficient to cover all the expenses of operation. As the facility will have other sources of income, we believe some retriction should be placed on the amount of fees or charges that may be imposed in order to lessen the impact of the 2-percent capital contribution and the discount which very likely will prevail in the areas which need the services of the Association.

We recommend, therefore, that the charges or fees be limited to one-half of 1 percent.

This means that a mortgagee selling his portfolio to this Association would be compelled to buy 2 percent of stock and pay a fee of one-half of 1 percent, which totals 22 percent, and, in addition, would be faced with whatever discounts may be affecting that type of mortgage at that time.

Section 303 (g) provides that after all of the capital stock of the Association held by the Treasury has been retired, the Housing and Home Finance Administrator would suggest enabling legislation providing for transfer to the owners of the then outstanding capital stock the assets and liabilities of the Association along with its control and management, in order thereby to make the facility a privately owned, operated, and directed institution.

We believe that the bill should be amended in order that the transfer to private ownership would be self-executing and gradual, although the corporation should retain a measure of Government supervision even after the facility is privately owned. When the Treasury stock has been retired, all of the remaining capital will represent the paid-in subscriptions of private sources. Thus there would already have occurred, in fact, the complete substitution of private capital funds for Government capital funds. Certainly, there is no fundamental reason why it should be necessary to delay for many years the details of legislation that are of immediate concern to the mortgagees who, after the creation of this facility, would be expected to make capital contributions to support the facility's operations. Selfexecuting provisions in the bill for such future changes as are appropriate will constitute an additional incentive for immediate private participation and will bring closer to reality the ultimate objective of a privately financed secondary mortgage market facility.

We believe that Government supervision, as distinguished from direction and control, over the facility should be continued. Government supervision-perhaps by the Housing and Home Finance Administrator-along the lines of that exercised by the Federal Reserve System and Farm Credit Administration, would underscore the public character of its operations. We recommend, therefore, that subsection (g) of section 303 be deleted from the bill.

As to the market price of mortgages purchased, section 304 (a) provides that the Association would purchase mortgages "at or below the market price for the particular class of mortgages involved, as determined by the Association." In this connection I would like to quote the following from the minority report of the subcommittee on housing credit facilities of the President's Advisory Committee on Housing:

In my opinion the objectives of such a facility should be not merely the accumulation of maximum profit. It is equally important that it accomplish its only reason for being-the provision of an adequate and stabilized market so that homes may be provided in the volume, in areas, and of the kinds, and at the prices that the market demands. The facility should be so organized and its board of directors instructed by the Congress to operate in such fashion as to avoid becoming a primary mortgage buyer. To accomplish this the Board would necessarily have to conduct the operation of the facility in the light of the market for its debentures and of the current or reasonably foreseeable market (after a period of seasoning) for the loans which it buys.

And when we say homes, we include rental facilities. We do not believe that idea is reflected in the bill.

We believe the bill does not reflect any consideration of the reasonably foreseeable market and the period during which the mortgage will be seasoned while it is held in the facility's portfolio. Obviously, there are times when this consideration may be a proper one in a secondary mortgage market operation. For example, the market price of a GI mortgage covering New Mexico property might be five points below par. The existence of such substantial discount might reflect overproduction and justifiably result in temporary termination of mortgage lending.

If that is the reason the Association should not buy that mortgage. On the other hand, should the officers of the Association conclude that the large discount results from lack of availability of adequate mortgage funds, it could more realistically fulfill the functions of a secondary market if it were not limited to purchasing mortgages at or below the market price. The facility, therefore, should it conclude that a mortgage covering New Mexico property for which the market price was 95 might be sold to an institutional investor-after a brief period of seasoning-at 97, 98, or perhaps par, should be permitted to consider this factor in determining the price at which it will purchase mortgages.

It is true that it may not increase. But that after all is the function of a secondary mortgage facility.

We also believe it would be unfortunate to retain any provision in the bill indicating that FNMA might buy below the market price. The indication that FNMA might buy below the market could conceivably have the effect of depressing the market. We recommend, therefore, that section 304 (a) be amended so as to permit the Association to purchase mortgages at or near the market price but not above par.

This would still not prohibit the Association from buying under the market price, but it certainly would not have the psychological effect of broadcasting to the entire economy that it is prepared to buy below the market price. At or near the market price, but not above par, would accomplish everything it is intended to accomplish, without the psychological distraction.

As to limit of debentures. Section 304 (b) provides that the facility may issue its debentures at such rates and on such terms as may be determined by the Association with the approval of the Treasury, in an amount outstanding at any one time not in excess of 10 times the sum of its capital, capital surplus, general surplus, reserves, and undistributed earnings. This is a specific limitation, although the bill then goes on to impose, quite properly, a second specific limitation that the outstanding obligations may not exceed at any one time the

aggregate of the unpaid balance due to the mortgages held in its secondary market portfolio plus cash and Government bonds. We feel that the debentures of this Association will be readily marketable, and that the 10 to 1 limitation might very well unduly and unnecessarily restrict the operations of the facility at a time when and in a field where it would be most needed.

Gentlemen, we must realize, and I quote from General Nelson, in charge of the redevelopment program of the New York Life Insurance Co., Mr. Nelson said that all the life insurance companies combined in this country do not have enough money to finance the rehabilitation and rebuilding of the slums of America, and up to this point we are talking about the same sources of mortgage money that we have always talked about, namely, the mortgage companies, the banks, the savings and loans, and the life-insurance companies, primarily, and probably

some trusts.

But the idea of offering debentures to the public is to obtain, if possible, a new source of mortgage money.

If the removal of the slums, and the study of that will indicate the vast job that is necessary, a job that Government at both Federal and local level could never afford to do, if it indicates the need for private capital and lending, and if we are to make any inroads into the clearing of our slums, we need lots of mortgage money and, therefore, we recommend that the debentures be sold on the basis of at least 15 to 1, rather than 10 to 1. We need new money. If this program is not to But if it is, we need new money. We recommend, therefore, that the limitations applicable to the secondary market operations of the Association for the issuance of its debentures be at least on a 15 to 1 basis.

be enacted, all right.

As to the board of directors. Regarding the composition of the board of directors, we propose an amendment which like several others already referred to would tend to bring closer to reality the objective of ultimate substitution of private capital for Government capital. True, we propose making the Association a mixed-ownership Government corporation, but it must be borne in mind that private financial participation will commence on the day the Association begins business. There is every likelihood that, in a year or two, an appreciable portion of the capital stock of the Association will be owned by private individuals and corporations making use of the facility.

We believe, therefore, that the Board of Directors should consist of 7 persons to be appointed by the President without restriction initially as to their Government or non-Government status. When half of the Government-held stock has been retired, approximately $35 million, at least 3 of such members would be replaced by appointment from among stockholders from the mortgage lending, residential real estate, or home-building industry. When all of the Government-held stock has been retired, then we propose that all of the Directors be appointed by the President from among the stockholders and be broadly representative of the mortgage lending, real estate, and home building industries.

In this connection we recommend that not more than one Director be appointed from a particular industry. However, with respect to the mortgage-lending industry, its various segments such as savings

and loan associations, commercial banks, life-insurance companies, and so forth, should each be considered a separate industry for this purpose.

Gentlemen, I cannot overemphasize the importance of this. Because it is entirely possible that a certain segment of the lending industry would have the capital to buy such a huge segment of stock that it would dominate the facility and have a selfish reason for limiting its activities, so that it would not represent or accomplish the purpose for which it is trully intended.

And I think it is of the utmost importance that this particular paragraph receive your serious consideration.

As to the Advisory Council, we also propose that a subsection (b) be added to section 308, to create an Advisory Council of the Federal National Mortgage Association consisting of 15 members, 3 of whom shall be the president of FNMA as Chairman, the Secretary of the Treasury, or his designee, the Chairman of the Board of Governors of the Federal Reserve System, or his designee. Twelve members shall be appointed by the Administrator for 3-year staggered terms, such appointments being made from among persons who are experienced in and broadly representative of residential mortgage lending, real estate, and home building. We believe such an Advisory Council would prove invaluable, since the members of the Council would bring to the Association the views not only of their individual segments of this great industry, but also those of the Nation geographically. We commend the creation of such a Council to your sympathetic consideration.

I sincerely believe, having sat around the table with labor union leaders, with life-insurance people, with bankers, with veterans' representatives, that I have a better understanding of their viewpoints, and they may have a better understanding of ours. And sitting 9 weeks on the President's Advisory Committee has been a great education, in understanding it, and I believe such an Advisory Council, while it has no official authority to act, would prove invaluable in making this function work in a practical manner.

Taxable status of the Association: We strongly urge that section 309 (c) be amended to avoid double taxation on the earnings of this secondary mortgage market facility. For one thing, the earnings of FNMA will for some years be needed to build up substantial reserves against any losses which might result from depressed market conditions.

Up to now we have had only a rising market, since FHA was created. The importance of creating a really substantial reserve cannot be overemphasized when one considers that the secondary market operations of FNMA may very likely be called upon to provide the necessary mortgage liquidity for section 220 and section 221 loans when their marketability is once established. Also, this double taxation would defer for years the substitution of private capital for Treasury financing. All dividends, interest received on obligations of the Association, salaries and per diems, would be taxable to the recipients thereof, and all real estate acquired as a result of its secondary market operations should be subject to local taxation.

We feel that every dollar that comes out of this facility into corporate or private hands should be taxable, but I cannot sufficiently em


phasize the need of building up tremendous reserves for the entire program. And I think a hundred million dollars, as time goes on, will not be adequate, and I recommend, certainly, a study of this whole picture, and double taxation would definitely deter that.

It is more than double taxation. If, for instance, a mortgage company, which is a corporation, buys stock in the facility in order to sell some of its portfolio, if there were double taxation they would pay on the Association profit and then, when it, as a corporation, receives a dividend, a portion must be paid in taxes for a number of years, and · then when it is distributed to the stockholders of this mortgage-lending company they again would pay full taxes on the dividends.

We sincerely believe that the objectives of this bill, particularly the urban-renewal program, would be much better served by avoiding this double taxation and its resultant drain on the basic solidity of the Association. We feel that this approach is a sound and equitable one, and certainly consistent with the public-purpose role of the Association.

That is the key to it. This has a public purpose. Any individual corporation should pay taxes, but the Association should use all the reserves and capital it can in building up solidity and a sounder organization.

Status of FNMA as a Government corporation. We recommend that section 302 be amended by providing that the Association shall be deemed to be a mixed-ownership Government corporation within the meaning of that term as used in the Government Corporation Control Act until all Treasury financial participation has been replaced by private capital. As a mixed-ownership corporation during this period, the Federal National Mortgage Association, being organized for business-type operations, would be permitted to make such expenditures of its funds as are necessary to carry on such business-type operations without being subjected to the sort of expenditure restrictions imposed on ordinary Government agencies by appropriations acts, etc. Special Assistance Functions: We have one comment to make with respect to the special assistance functions of the Association. We must recognize that both the section 220 and section 221 loans are the loans contemplated by this special assistance function, for it is quite possible that such loans may not, for a time at least, be readily marketable on the private investment market. We know that if the urban renewal program gets under way, as it surely will after enactment, well over a hundred cities, in our opinion, will endeavor to come within the scope of the bill's operations as soon as possible.

We believe that the $200 million limit on outstanding obligations and the $100 million limit on participations are so small as to prevent these sections from accomplishing the objectives contemplated by the act. It is the very heart of the slum-prevention program, and we recommend that the committee give serious consideration to very substantially increasing this authorization in order to provide FNMA with the most effective means of accomplishing the far-reaching objectives of the urban-renewal program.

Mr. Chairman, it is well nigh impossible to achieve full accord among all groups with respect to the organization and functions of a secondary mortgage market facility.

There are many groups that fear its competition. I believe it is so designed that it will not represent true competition, but merely be a

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