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Washington, D. C.

The committee met at 10 a. m., Hon. Jesse P. Wolcott (chairman) presiding.

Present: Chairman Wolcott (presiding), Messrs. Talle, Kilburn, McDonough, Betts, D'Ewart, George, Mumma, McVey, Merrill, Oakman, Hiestand, Stringfellow, Spence, Brown, Rains, Multer, Deane, O'Brien, Dollinger, Bolling, Hays and O'Hara.

The CHAIRMAN. The committee will come to order.

We will resume the hearings on H. R. 7839.

We have Mr. Cole and his staff back with us this morning.
Mr. Cole, you may proceed.

Mr. RAINS. May I interrupt, Mr. Chairman, to ask how far along we have gotten? I was not able to be here yesterday.

The CHAIRMAN. I believe we are on page 12, of Mr. Cole's statement. Mr. RAINS. Are you going to complete the statement before interrogation, Mr. Chairman?

The CHAIRMAN. Yesterday we decided to take the statement up by subjects, with questioning after each subject.

Mr. RAINS. Thank you, Mr. Chairman.


Mr. COLE. Mr. Chairman, I am delighted to return this morning on the occasion of a matter of personal interest of the chairman. I want to congratulate the chairman upon arriving at a ripe young age today, and to congratulate the country upon the fact that we have you as chairman of this great committee.

Mr. RAINS. Happy birthday, Mr. Chairman.

The CHAIRMAN. Thank you, gentlemen.

Mr. COLE. I will continue with my statement, Mr. Chairman.

I believe there is a strong consensus as to the necessity for a secondary mortgage credit facility. Yet, despite the agreement as to need, I doubt that there is any other area where there would be greater difficulty in developing a proposal which would be completely satis

factory to all the various groups which have a substantial interest and concern in this matter. In my judgment, however, the provisions of the bill dealing with the secondary mortgage credit facility represent a constructive approach to this difficult problem and would provide a sound and sensible basis for meeting it.


The bill would recharter FNMA the existing Federal secondary credit facility for Government guaranteed or insured home mortgages. It would provide for the capitalization and operation of FNMA under its new charter, and would assign to it three distinct principal functions:

First, secondary market functions;

Second, special assistance operations providing for direct Government assistance for certain types of mortages or for certain periods of time; and

Third, management and liquidating functions with respect to the present mortgage portfolio now held by FNMA.

To carry out these three functions, FNMA would be authorized, subject to the limitations prescribed by the bill, to purchase, service, or sell home mortgages insured by the Federal Housing Commissioner or guaranteed or insured by the Administrator of Veterans' Affairs. No mortgage could be purchased at a price exceeding 100 percent of the unpaid principal amount of the mortgage, and no mortgage could be purchased if the original principal amount thereof exceeded $12,500 for each family dwelling unit.


The bill provides that the secondary market operations of FNMA shall be confined, so far as practicable, to mortgages which are deemed to be of such quality, type, and class as to meet, generally, the purchase standards imposed by private institutional mortgage investors. FNMA's activities must meet two principal objectives. First, to avoid excessive use of its facilities. Second, that its secondary market operations should be wholly self-supporting. In brief, these functions would constitute a true secondary market, with FNMA purchasing only those mortgages which are generally marketable, and otherwise carrying on a business-type operation.

FNMA would be prohibited from purchasing any participations or making advance commitments in connection with its secondary market functions, except that, in the discretion of the board of directors, it could make advance commitments for purchase of an amount of mortgages equal to an amount of mortgages sold to the lender to whom the advance contract would be issued.

The bill provides that FNMA would have nonvoting capital stock. The initial issuance of stock would be subscribed for by the Secretary of the Treasury in an amount equal to the sum of the present capital stock of the existing Federal National Mortgage Association, and its paid-in surplus, surplus reserves, and undistributed earnings as of the close of a cutoff date to be within 60 days following the effective date of the bill. It is estimated this will amount to approximately $70 million. The Secretary of the Treasury would be entitled to receive

cumulative dividends on the capital stock held by him for each fiscal year until it is retired, at rates determined by him at the beginning of each fiscal year, based on the current average interest rate on outstanding marketable Government obligations.

The bill also provides for capital funds from private sources. This private capital would be obtained in connection with the secondary market operations, but not in connection with its special assistance operations, or its management and liquidation functions. In its secondary market operations the FNMA would require each mortgage seller to make payments of nonrefundable capital contributions of not less than 3 percent of the amount of mortgages involved in any purchases or contracts for purchases. Convertible certificates would be issued to each mortgage seller evidencing the capital contributions made by the seller. After all of the outstanding capital stock held by the Secretary of the Treasury is retired, these certificates would be convertible into capital stock of equal par value. These convertible certificates would not bear interest, nor would any dividends be payable to the holders thereof.

After all the stock held by the Secretary of the Treasury is retired, FNMA would be authorized to issue stock directly to mortgage sellers. The board of directors would be given power to declare dividends at a rate not to exceed in any year 5 percent of the par value of the outstanding stock. Such dividends would not be cumulative.

FNMA would also be authorized to impose charges or fees for its services. Earnings would be transferred annually to a general surplus account. Provision would also be made for the establishment of reserves. The capital stock held by the Secretary of the Treasury would be retirable from funds of the capital surplus and the general surplus accounts. Except as to stock held by the Secretary of the Treasury, capital stock would not be retirable if, as a consequence, the amount remaining outstanding would be less than $100 million.

To carry out its secondary market operations, FNMA would be authorized to issue, with the approval of the Secretary of the Treasury, obligations for sale to the investing public. The aggregate amount outstanding at any one time could not exceed ten times the sum of its capital, capital surplus, general surplus, reserves, and undistributed earnings. At the time of issuance, the total of obligations could not exceed the amount of the cash, mortgages, and Government bonds held by FNMA in connection with its secondary market operations. Such obligations would not be guaranteed as to principal or interest by the United States.

The Secretary of the Treasury would be authorized, in his discretion, to purchase the secondary market obligations of the Association, but his holdings could not at any time exceed $500 million plus an amount equal to a total of the reductions in the amount of the existing FNMA portfolio which FNMA would be liquidating or, in any event, $1 billion. This authority of the Secretary of the Treasury would terminate when all of the capital stock held by the Secretary of the Treasury had been retired. This provides for Treasury backup, if necessary. It is believed, however, that FNMA could raise funds required for its secondary market operations by the sale of its obligations to private investors without resort to Treasury borrowings.


As soon as possible after all the capital stock of the Association held by the Secretary of the Treasury has been retired, the Housing Administrator would be required to transmit to the President for submission to Congress recommendations for legislation to transfer the assets and liabilities of the Association in connection with, and the control and management of its secondary market operations, to the private owners of the outstanding capital stock.

In connection with the proposed secondary market functions of the Association, there are two matters which I think merit particular consideration.

First, as I have already indicated, the convertible certificates which are issued by the Association to mortgage sellers on account of the capital contributions made by them do not bear interest, and no dividends would be payable to the holders thereof. It seems to me that consideration should be given to providing discretionary power to the board of directors to permit some return on the moneys paid in by mortgage sellers as capital contributions during the period they hold these convertible certificates, and prior to the time when they are exchanged for capital stock which is entitled to such dividends as the board of directors may declare. I suggest that the board of directors be given discretion to permit a return not exceeding the rate of return on the capital stock held by the Secretary of the Treasury.

Second, the requirement that each mortgage seller must make nonrefundable capital contributions of not less than 3 percent of the principal amount of mortgages sold to FNMA may be so high as to impede the successful carrying out of the contemplated secondary market functions. It would be my hope that the testimony presented to your committee during the course of the hearings would provide the basis for an appropriate determination as to the figure to be established for the nonrefundable contribution to be required of mortgage sellers.


The bill provides that the President, after taking into account conditions in the building industry and the national economy and conditions affecting the home-mortgage investment market, may authorize FNMA to make commitments to purchase, and to purchase such types, classes, or categories of home mortgages as he may determine. The funds required to carry out these special assistance operations would be obtained entirely from Treasury borrowings.


First, FNMA could purchase and make commitments to purchase such home mortgages and participations therein, but the total thereof could not exceed $200 million outstanding at any one time.

Second, FNMA could be authorized to enter into commitments to purchase immediate cash participations in mortgages and to make related deferred participation agreements. The deferred participation agreements could be made only on the basis of its purchasing an immediate cash participation of a fixed 20 percent undivided interest in a mortgage and a related deferred participation agreement to purchase the remaining outstanding interest in such mortgage condi

tional upon the occurrence of a default. The total amount of such immediate cash participations-not including the amount of any related deferred participation agreements or purchases pursuant thereto could not exceed $100 million at any one time. The $100 million relates to immediate purchase of a fixed 20 percent undivided interest in each mortgage, with purchase of the remaining interest in the event of default being excluded from such dollar limitation. Thus, the $100 million authorization would permit such special assistance to cover a total of not exceeding $500 million in mortgages. I have not been able to fully satisfy myself as to the desirability of the provisions of the bill which would require the purchase of a fixed 20 percent undivided interest in each mortgage in connection with a participation agreement to purchase the remaining outstanding interest. For example, if this authority were to be used to provide assistance for mortgages insured under the new FHA section 221 program-and it is intended to be available for that purpose-I can see no reason why a lender who would be willing to make such a loan on the basis of a deferred participation agreement by FNMA to buy the loan if it went into default, would be particularly interested in disposing of 20 percent of such loan at the time of origination, and thus proportionately reduce the return which it could earn on such a relatively small loan.

Under the circumstances, it seems to me that your committee may well wish to give consideration to the desirability of changing this particular provision to make it more flexible and perhaps better suited to meeting conditions as they arise. One way of doing this would be to provide that FNMA may make deferred participation agreements to purchase mortgage loans, conditional upon the occurrence of a default, without any cash participation at the time the loan is made, and to authorize the Association to make immediate cash participations of not exceeding a 20 percent undivided interest in any mortgage to accommodate lenders who might wish to have the Association as an immediate partial participant in the loan.

In such case the appropriate dollar limitations would be $500 million for both participation and commitments.

The provisions of the bill relating to the management and liquidating functions of FNMA would provide a sound basis for the orderly liquidation of the present mortgage portfolio, without disruption of the home mortgage market and with minimum loss to the Treasury. At the same time, it could very substantially reduce the burden required of the Treasury to carry the present portfolio by permitting the substitution, as rapidly as practicable, of private financing for outstanding Treasury borrowings.

To assure maximum private financing to carry the mortgages held in the present portfolio, FNMA would be authorized, with the approval of the Secretary of the Treasury, to issue obligations for sale to the investing public. Such obligations would not be guaranteed as to principal or interest by the United States. The total of such obligations could not exceed the amount of the cash, mortgages, and Government bonds held by FNMA in connection with these management and liquidating functions. The proceeds of any private financing would be paid to the Secretary of the Treasury in reduction of the present outstanding indebtedness of FNMA to the Secretary.

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