to get at is what increase there has been, and what we might expect in the near future.

Mr. GOODLOE. Well, what we might expect is difficult to say. The figures I gave would show that there has been a very substantial increase each month for the last 3 months, roughly. Now, how much of that is influenced by the action of the Senate, in the Senate bill, in providing for the dissolution of the Federal National Mortgage Association, which might result in a lot of that paper coming to us at this time, or applicants coming forward for commitments, who might not otherwise, I do not know.

In addition, there has been-whether it is permanent or temporary, of course, we do not know-some tendency on the part of insurance companies, particularly, to stop taking the 4-percent paper. They must have some other outlet for their money which gives them a better yield than do these long-term mortgages on a 4-percent basis. The CHAIRMAN. Would an adjustment in the interest rate on 603 paper affect your Federal National Mortgage Association activities? Mr. GOODLOE. It would affect them only, I believe, to the extent of making that paper more attractive to the life insurance companies and other substantial investors in long-term real-estate mortgages and to the extent, of course, that they might take the paper, it would lessen the amount of that paper which would come to the Federal National Mortgage Association.

At one time the insurance companies, you will recall, paid a premium for that type of paper. During that period when there was a good market for it, none of the paper came to the Federal National Martgage Association. I am assuming that would be the case again if that were to occur.

The CHAIRMAN. What is the ordinary secondary market?

Mr. GOODLOE. I am not sure I understand your question, sir. The CHAIRMAN. What I am getting at is this: The insurance companies are a large secondary market. What other investors other than insurance companies have, in normal times, and before we set up governmental agencies to take this paper, taken the paper and, therefore, set up a secondary market?

Mr. GOODLOE. Well, some of the banks, saving banks, investment trusts, insurance companies-institutional investors, I would say, constitute the big market for long-term real-estate mortgages.

The CHAIRMAN. A part of this paper is in the secondary market over and above what the Reconstruction Finance Corporation holds, either directly or through the Federal National Mortgage Association? Mr. GOODLOE. That is correct.

The CHAIRMAN. Your activity, then, is along this line: You, as a secondary market, buy this paper. Then you sell it to the investors as the market can absorb it?

Mr. GOODLOE. That is correct.

The CHAIRMAN. You do not hold any more than you have to?
Mr. GOODLOE. That is correct.

The CHAIRMAN. So ultimately the secondary market would lie in the investment agencies which you mentioned?

Mr. GOODLOE. That is correct.

The CHAIRMAN. That is where it always was before we set up "Fannie May" or otherwise instructed Reconstruction Finance Corporation to buy directly.

Mr. GOODLOE. I suppose so, yes, sir.

The CHAIRMAN. Is there any other secondary market that you know of, in the Government? What about the Federal home loan banks? They are really a discount agency, are they not?

Mr. GOODLOE. I think that is correct, sir. I am not too familiar with their operations. However, I believe they deal only with their members, which are largely the building and loan associations.

Mr. BROWN. Did you sustain any losses on your secondary market operations?

Mr. GOODLOE. Not on the Federal Housing Administration mortgages. As a matter of fact, on the Federal Housing Administration insured operations, we have had a very profitable operation from the standpoint of the Reconstruction Finance Corporation. You will recall that for a limited period, ending June 30 a year ago, we likewise, through the RFC Mortgage Company, made a secondary market for the so-called GI home mortgages-home mortgages guaranteed by the Veterans' Administration under the GI bill of rights.

Mr. BROWN. Under this bill, the Federal National Mortgage Association would be out the window. It would not operate any more if this bill is passed?

Mr. GOODLOE. That is correct.

Mr. BROWN. I do not want to embarrass you, but would you like to state whether or not that section should remain in the bill?

Mr. GOODLOE. I would think the first thing, of course, to be decided-and that would have to be decided by this committee and the Congress is whether it is desirable to continue secondary market operations, and, if so, on what basis. After that decision is made, then, the decision would have to be made as to which agency should handle it. Our experience, as I said, with the Federal Housing Administration insured mortgages has been very satisfactory, and to date we have had a profit. We have not had anything like enough experience yet with the limited amount of GI mortgages which we have purchased to know how that is going to work out.

Mr. RILEY. Mr. Chairman, with regard to the secondary market, I do not believe the Federal home loan banks create a secondary market. They loan on the collateral provided, and only loan up to a percentage of the value of that paper. So it is not a secondary market. This is the only agency that I know of which provides a secondary market.

The CHAIRMAN. When we, last year, discontinued your authority to buy mortgages without recourse. we had in mind certain abuses which were growing up, whereby a builder would buy into a mortgage association, perhaps establish his own mortgage association, along with other builders or members of his own family. The mortgage association would take his mortgage and then sell it to the Reconstruction Finance Corporation. So that, in effect, and in fact, the Reconstruction Finance Corporation was the primary market and the builder's only interest was to get his primary money to cover his operations. Also, by building up a large portfolio of these loans, he maintained his mortgage association with the service charges.

I notice that in the Jacksonville agency, there seems to be more activity than anywhere else. You have there at the beginning of the month, $6,618,000 in mortgages, and the next highest is the Denver

office, with $488,000. Information has come to us that that activity in the Jacksonville office is incident to the financing of the Puerto Rican project, for which they made an application to the Reconstruction Finance Corporation for a direct loan, and were turned down. Are they now using this method of financing the Puerto Rican project after being denied a direct loan by the Reconstruction Finance Corporation?

Mr. GOODLOE. The Jacksonville office does serve, in addition to the State of Florida, Puerto Rico, and a very substantial amount of the mortgage business that is shown on that statement through Jacksonville, is from Puerto Rico. I believe those are all 603 mortgages in Puerto Rico.

The CHAIRMAN. As a matter of comparison, this activity of Jacksonville, Fla., is $6,618,000, and the total for all your offices is $8,400,000. Three-quarters of your entire activity is through your Jacksonville office.

Mr. GOODLOE. A substantial portion of that, I believe, is in Puerto Rico.

The CHAIRMAN. Without passing, of course, upon the merits of the Puerto Rican loan, do you think possibly that they have taken advantage of this situation to bypass the Reconstruction Finance Corporation, after Reconstruction Finance Corporation has denied them a direct loan? Do you think this is a similar abuse to that which we corrected by taking the Reconstruction Finance Corporation out of the market last year?

Mr. GOODLOE. It is possible that that could happen. In any situation of that sort, if the seller gets the tentative approval of the Federal Housing Administration to insure the permanent mortgage under section 603, and then comes to the Federal National Mortgage Association with that and get a commitment good for 1 year on the basis I outlined earlier, then, by getting some bank to make a temporary loan to finance the construction, he would be in a position where he could get the permanent mortgage and sell it to the Government, refunding the temporary loan out of the proceeds of the permanent loan. You could thus have a situation such as you have described. I am assuming, however, that all of those Puerto Rican mortgages mentioned have met all of the requirements of the Federal Housing Administration, and that when the houses are completed, there will be the permanent, fully insured Federal Housing Administration mortgage.

The CHAIRMAN. Mr. Goodloe, the other day we left in abeyance, I believe, the question of your capital reserves. If I remember correctly, it was with the thought that you might be able to give us a figure which might give us a reasonable assurance that you would be able to operate in the black. I think your statement was that under the Senate bill, which reduces your capital to $100,000,000 and your reserves to $50,000,000, that you would perhaps find it difficult to operate in the black. Have you any suggestion with respect to that?

Mr. GOODLOE. Well, as I said the other day, there are a good many services which we undertake to perform which are not productive of income. To illustrate, there are many cases in which a good deal of time is spent with an applicant in order to work out a program. Then, if that looks like a program that a bank ought to finance, we frequently go to considerable lengths to see that the bank will make

it. And, of course, if the bank makes it, whatever has been our expense in helping the applicant is not recoverable from the transaction since RFC has no income-producing loan.

In a great many cases, also, loans are worked out-some of them on a fairly complicated basis-and then, several months after the loan has been approved, the loan is refunded or refinanced by a private bank before we have ever made any disbursement, and in many cases before we have disbursed any substantial amount. My only idea in stressing this question of capital and surplus was that if the Congress desires us to continue that sort of service and I personally feel that is highly desirable-it probably would likewise be desirable to have enough capital and surplus so that we would have sufficient income to break even and operate in the black. The Senate bill reduced the capital from 325 million dollars to 100 million, and the surplus from about 550 million to 50 million dollars. Together with the other restrictions imposed in that bill, or which are in the committee report with respect to it, and from the further fact that the vast majority of our loans are small loans, and, therefore, are more expensive to make, service, handle, and administer, I would think that with the amount of capital and surplus left us by the Senate bill, it would be very difficult to maintain enough income to meet expenses.

The CHAIRMAN. Do you make any recommendation?

Mr. GOODLOE. I have discussed the matter with my associates, Mr. Chairman, and it would be a "guesstimate" no matter how you look at it.

The CHAIRMAN. Perhaps you are not in a position to give us what you consider might be an estimate for the record. We probably will not be able to do anything on the bill in executive session this morning

Mr. GOODLOE. Well, if I were to make a suggestion, it would be that you split the difference.

The CHAIRMAN. What would that be?

Mr. GOODLOE. Well, the total of what the Senate bill allows would take about $700,000,000. If, instead of taking $700,000,000, it took $300,000,000 or $350,000,000, I think that would leave us in such a position that we could make it.

The CHAIRMAN. Let us say $350,000,000. How should that be divided between capital and surplus?

Mr. GOODLOE. I know there is quite a little thought abroad that Government corporations do not need or perhaps should not have capital at all. My own feeling is that they should. We are subject to lawsuits, as you know, and there ought to be some capital there.

Now, it is true that capital all came out of the Treasury and was Treasury money. The surplus, however, never came out of the Treasury. That was an accumulation of earnings over and above interest paid on money and expenses with respect to our peacetime operations over a period of 15 years. The net effect on the Corporation, of course, would be precisely the same whether you reduced the capital or reduced the surplus, assuming you are reducing them the same amount.

I should think there would be more justification for letting us keep the surplus. But that would be entirely up to the committee.

The CHAIRMAN. That would mean, if I understand your recommendation, that, without being too specific as to figures, we should change the Senate language, and keep the cut which they suggest in

capital, from $325,000,000 to a hundred million dollars, and increase the surplus from $50,000,000 to $400,000,000?

Mr. GOODLOE. It could be done that way, or it could be done by reducing the capital some and increasing the surplus.

The CHAIRMAN. It does not make much difference how it is done, but you think that we should be more liberal on the side of your surplus? Mr. GOODLOE. Yes. I would think the committee might be interested in encouraging us a little more to continue to have some earnings and to maintain a surplus, if we were allowed to keep some of it. As you know, the provision of the Senate bill means nothing more or less than that we would have to borrow six or seven hundred million dollars and pay interest on it in order to pay this liquidating dividend into the Treasury. That is the net effect of it.

The CHAIRMAN. Now, as to the question of your loan authority, cutting you from $2,000,000,000 to $1,000,000,000. Do you wish to make any specific recommendations with respect to that?

Mr. GOODLOE. I think some cut in the $2,000,000,000 figure is warranted or justified.

The CHAIRMAN. If we continued "Fannie May," or if we dissolved "Fannie May" and merged its activities with the Reconstruction Finance Corporation, as we have the other subsidiaries; if weput a limit on your mortgage operations of, say $500,000,000, increased your total borrowing power from $1,000,000,000 to $1,500,000,000, how would that be, as an example of what might be done?

Mr. GOODLOE. Well, I am inclined to think that would be just about right.

The CHAIRMAN. Of course, in addition to restoring some part of the surplus?

Mr. GOODLOE. Yes; I think that would be all right, sir.

The CHAIRMAN. Five hundred million dollars would give you what you would consider to be an adequate amount with which to operate in the mortgage field, based upon your experience through "Fannie May"?

Mr. GOODLOE. I think that is correct. As a matter of fact, that is exactly the figure we were thinking about with reference to any increase in the over-all limitation, and I believe that would be entirely adequate in the mortgage field, if you want to put a limit on it. Î believe that would be an adequate and satisfactory limitation.

The CHAIRMAN. Is there anything else which you would like to call to our attention?

Mr. GOODLOE. Only one other thing. Annually, for several years there has been carried in our appropriation bill a limitation on the amount that we may have outstanding at any one time, in the socalled public agency construction loans. The present limitation is $125,000,000, which does not leave us much leeway, because that is a cumulative figure and not a progressive one. That includes all the public agency loans we have ever made which are now outstanding. They must come under that limitation.

The CHAIRMAN. Is that State and municipal and so forth?

Mr. GOODLOE. Yes. In that connection, during the recent hearings it was suggested, I believe, that that limitation probably ought not to be in the appropriation bill; that such limitation as there should