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maintain the construction of new houses to the limit of the men and materials available. The emphasis should be on maintaining and furthering the construction program.

3. The Government market should not become a dumping ground for unsound loans which should not have been made and which would not have been made but for the existence of such market.

4. In connection with the above it is noted that under existing laws and procedures it is possible, through unsound lending practices, to make loans which are guaranteed by the Veterans' Administration but which responsible and experienced lenders would not regard as sound mortgage risks.

With consideration given to the above factors the Mortgage Bankers Association recommends as follows:

1. That the Federal National Mortgage Association which is now authorized to purchase loans insured by the Federal Housing Administration under title II and title VI of the National Housing Act, also be authorized to purchase loans insured under title I (class 3) of the National Housing Act, and loans guaranteed by the Veterans' Administration under sections 501 and 505-A of the Serviceman's Readjustment Act.

2. That lenders of all types and classes, approved by FNMA be eligible to sell loans to FNMA whether they be originators or secondary holders of the mortgages involved.

3. That no lender be permitted to sell to FNMA more than 25 percent of the loans made by that lender in any 12-month period and that this limitation be applied to loans by type (FHA 603, FHA 203, FHA 207, FHA 608, FHA title I (class 3), VA 501, VA 505) as well as in total.

4. That no loan be eligible for sale to FNMA until and unless it has been first approved as a reasonable mortgage risk by the Government agency guaranteeing or insuring it.

5. That all loans purchased by FNMA be serviced by the originators of such loans until and unless they are sold by FNMA in which event they shall be serviced as designated by the purchaser of the loans. FNMA should continue to be free to sell any loan without restriction.

6. That loans made prior to the effective date of this program be made eligible for sale to FNMA as well as loans made subsequent thereto.

7. That, in order to assure small institutional lenders of continuing liquidity, the program be set up for a 5-year duration.

8. That the Housing and Home Finance Administrator be given such supervisory or directive authority as may be necessary to assure execution of the program in accordance with the national housing policy; but that in any event, FNMA continue to operate in the purchase and handling of mortgages through the field offices of the RFC.

We have considered such features as have been given limited circulation of a proposed bill which would create a new corporation within the Housing and Home Finance Agency to establish a secondary market for VA and FHA loans. The outline of the proposed bill which we have seen indicates that it is in line with our own principles as listed above to throw safeguards around and to limit such a Government-sponsored market to cases of actual need. With all such safeguards and limitations we are in agreement. We suggest that consideration be given to including in the bill such of our specific proposals above as are not already found in it.

However, it is not yet clear to us why it is necessary to create a new Government corporation to carry on the same work already being accomplished in a highly satisfactory manner by the Federal National Mortgage Associationespecially since it appears as though the life of the RFC will be extended for Some years. It will cost a good deal of money to get such a corporation started and it is inevitable that a considerable time must elapse before such a corporation could get functioning. The main importance of providing this Government-sponsored secondary market at all is to provide it right now. Time is of the essence. If it is considered necessary to further control the operations of Federal National Mortgage Association, that can easily be done, far more easily than to set up totally new machinery.

Assuming, however, that the creation of this new corporation is the only manner in which Congress is willing to establish a secondary market, there is one other specific item which we believe is important to note. It has been suggested that a new corporation might designate the various Federal home loan banks as the corporation's agency offices to buy loans, etc. We believe it would be a serious error for any such corporation which is to be established for the benefit of all

segments of the public to utilize as agents any organizations clearly identified with and closely connected to a particular segment of the lending industry. This is, of course, true of the Federal home loan banks. The appearance of prejudice could hardly be avoided in any such operation.

Title II.-Recommendation

A. Have not changed maximum maturity.
B. Have not changed interest rate.

C. Have not changed basis of appraisal.

D. Comparison of suggested new loan limits as follows:

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Mr. FLETCHER. Are you familiar with the fact that the Senate bill which is coming over, which was passed yesterday, bears that fluctuating interest rate up to one-half of 1 percent-discretionary power? Mr. NEEL. Yes; we are familiar with that. We much prefer Mr. Wolcott's bill, because we think that it is a separate proposition which ought to be considered alone, on its merits, and not tied up with a lot of other miscellaneous details as are continued in the Taft-EllenderWagner bill.

Mr. FLETCHER. In other words, if I understand you correctly, you feel that title VI legislation, which is the bill to which you referred, is emergency legislation, and the other is permanent, long-term housing legislation, and you think they should be considered separately? Mr. NEEL. That is correct, sir; very definitely.

Mr. FLETCHER. In your financing, have you ever used the mortgage bond on large housing projects for financing rather than the singlemortgage plan?

Mr. NEEL. Mr. Fletcher, I am sorry, I cannot answer that question. I have stayed pretty closely to the legal aspects of this situation. I am the attorney for the Mortgage Bankers Association, and not actively in the mortgage business. So I am not qualified to answer that question, sir.

Mr. FLETCHER. You do know that they have made mortgage bonds, which could be broken up into small combinations, one blanket collateral agreement being represented by a number of bonds?

Mr. NEEL. Yes, sir; that has been done, but I am not familiar with the details of it.

Mr. FLETCHER. I ask the question merely because I know that under this Fannie May set-up it is permissible for the Government also to buy those bonds which are represented by a first mortgage on an entire project, such as a large rental housing project. I understand that this provision which is coming over from the Senate side, and which was passed yesterday, if of a nature which does not permit a secondary

market on beneficial interest—that is, say, a bond which is only a part of a larger first mortgage interest-and that is something we must watch out for if we are going to take up that Senate bill, in order that we do not prevent the beneficial interest of a bond, which represents a mortgage on a large housing project. There is that distinction between the Fannie May type of secondary market and the one coming over from the Senate. Are you familiar with that distinction?

Mr. NEEL. I believe that is correct, Mr. Fletcher; and I hope and expect that our association will be given an opportunity to testify before your committee on that Taft-Ellender-Wagner bill, and at that time I would like to have the witness discuss that aspect of it. Mr. FLETCHER. I wish you would prepare some testimony along that line, because it is a very vital distinction, if we are going to keep confidence in the mortgage markets, that we take care of the beneficial interest as well as the single-mortgage loans.

Mr. NEEL. I will be very happy to, sir.

The CHAIRMAN. Are there further questions of Mr. Neel?
(No response.)

The CHAIRMAN. If not, thank you very much, Mr. Neel.
Our next witness is Mr. Weitzel.

Mr. Weitzel is Assistant to the Comptroller General of the United States. I understand Mr. Weitzel has some suggestions to make in connection with the auditing and accounting affecting the Corporation. We are very happy to have you proceed, Mr. Weitzel.


Mr. WEITZEL. Mr. Chairman and members of the committee; we appreciate the opportunity to be here this morning and to make comments from the standpoint of the General Accounting Office relative to the provisions of S. 2287.

I have here with me Mr. Kenyon, the Assistant Director of our Corporation Audits Division in the General Accounting Office in charge of the audits of the Reconstruction Finance Corporation, and also Mr. Westfall, an accountant on the staff of that division.

I would like Mr. Kenyon to present a statement on behalf of the General Accounting Office.

We also have here some suggested new language as to certain limited portions of the bill dealing with the financial and organizational aspects of the Reconstruction Finance Corporation.

If the committee so desires, I will ask Mr. Kenyon to proceed with the statement.

The CHAIRMAN. All right, Mr. Kenyon.

Mr. KENYON. We have prepared our statement in two sections, one dealing with our comments on the suggested new language, and we might refer to the suggested language and then to our comments under section 1 (b), which deals with the payments of dividends into the Treasury. The initial language in S. 2287 stated that the payments were to be made after the end of the fiscal year, and we have suggested merely that a date be placed in, considering that "within 6 months"

would be a reasonable time for RFC to determine the results and make such payment into the Treasury. And we have suggested that language to precede the language reading "Within 6 months after the end of each fiscal year, beginning with the fiscal year," and so forth. It merely specifies a time limit.

That is the only suggestion we have with respect to 1 (b).

Mr. WEITZEL. I might state, Mr. Chairman, that these suggestions are made in the order of the appearance of the sections in the bill and not necessarily in the order of their importance, and they are all destined to implement the recommendations that the Comptroller made, in his first audit report to the Congress, on the Reconstruction Finance Corporation.

Mr. SMITH. May I ask a question, Mr. Chairman.

The CHAIRMAN. Dr. Smith.

Mr. SMITH. Why do you ask for that provision?

Mr. KENYON. Merely to place a time limit, or a date, within which we feel they can reasonably determine the amount of the dividends to the paid under the language of the act.

Mr. SMITH. Have you had any trouble in the absence of that provision?

Mr. KENYON. That is a new provision, I believe. been required to make such payments in the past. clude any question as to time within which they would


They have not This is to premake these pay

The CHAIRMAN. The point you make there is that the language of the Senate bill states as follows:

After the end of each fiscal year, beginning with the fiscal year ended June 30, 1948, the Corporation shall pay over to the Secretary of the Treasury as miscellaneous receipts, a dividend

And so forth.

You felt that that was somewhat indefinite and that it could be at any time within the life of the Corporation after the end of the fiscal year.

Mr. KENYON. That is right, sir.

The CHAIRMAN. Proceed, Mr. Kenyon.

Mr. KENYON. Subsection 1 (d), which we suggest as a new subsection, I would like to read:

(d) Commencing July 1, 1948, the Corporation shall pay to the Secretary of the Treasury interest on (1) its capital stock outstanding, (2) the amount of accumulated net income which the Corporation retains under section 1 (b) of this act, and (3) on the portion of such other funds, arising from liquidating or similar activities and for which it is accountable to the Secretary of the Treasury, which the Corporation utilizes in its lending activities. The Secretary of the Treasury shall determine the interest rate annually in advance; such rate to be calculated to reimburse the Treasury for its cost.

We have the following comments with respect to that suggestion. I shall read from our statement.

It is believed that all Government corporations should be required to pay interest on all the Government's funds invested therein. This is consistent with the President's recommendation in his annual budget message for 1949, and generally consistent with recommendations of the General Accounting Office in connection with proposed charter revisions for other Government corporations.

Further, section 4 (b) (2), as proposed to be amended by S. 2287, provides with a minor exception that all loans made by the Corporation shall bear such interest as to be reasonably calculated to enable the Corporation to operate without a loss. In order to determine realistically whether or not the Corporation is operating without a loss, it is, of course, necessary to the extent practicable to include in the Corporation's accounts all costs which are related to the income produced.

It is believed that there are two main items of costs incurred by the Government with respect to RFC operations which, under present or proposed legislation, the Corporation has not been required to pay. These costs are (1) interest on the Government's capital-other than loans from the United States Treasury-invested in the enterprise, and (2) Government contributions with respect to employee-benefit programs. (The latter category would include contributions made to the civil-service retirement and disability fund and claims paid out of the employees' compensation fund, Bureau of Employees' Compensation, Federal Security Agency. We refer to this later in section 3 (a) for proposed legislation to bring that into effect.)

Section 7 of the existing law authorizes the Corporation to borrow from the United States Treasury and requires it to pay interest on such borrowings.

Section 1 (a), (b), and (c), as proposed to be amended by S. 2287, provide that the capital of the Corporation will be reduced from the present $325,000,000 to $100,000,000, and the present accumulated earnings of some $550,000,000 be reduced to $50,000,000; such reductions to be accomplished by payment into the United States Treasury as miscellaneous receipts.

It will be noted that the Corporation has had the use, in its lending operations, of interest-free capital and surplus aggregating in recent years approximately $875,000,000. Assuming the cost of the money to the United States Treasury to be in the neighborhood of 2 percent per annum, the cost to the Government of carrying its investment in the Corporation would be approximately 1712 million dollars per annum, no part of which was reflected in the Corporation's accounts. While the proposed legislation would reduce the Government's investment in the capital stock and accumulated earnings of the Corporation to $150,000,000, this would still be on an interest-free basis and, at the same rate, the interest cost to the Government on this adjusted investment would amount to approximately $3,000,000 per


Our suggested subsection (d) of section 1 provides that RFC be required to pay interest to the Treasury on the $150,000,000 designated as capital stock and retainable accumulated earnings in sections 1 (a) and (b). This requirement would also be applicable to other funds arising from liquidating activities for which the Corporation is accountable to the Treasury and which it uses in its lending activities. The amounts involved are substantial.

Where Government corporations are financed solely by the United States Treasury, there does not appear to be any purpose served by maintaining distinct classifications of such financing as between capital stock, loans from the Treasury, and so forth. In effect, all represent the Government's investment in the enterprise.

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