We try, under risk rating, not to insure any loans which will get us out of the insurance business and into the real estate business, but time and experience will tell how good our valuations and our assumptions are. We can and do make possible loans that investors would not make without the Government guaranty. Certainly, we believe the larger loans that we propose to insure, with the system that we now use, are not going to involve the Government in the real estate business, and yet I think they would not be invested in without the insurance which the FHA gives to the investor. Mr. WIDNALL. That is all, Mr. Chairman. Thank you. The CHAIRMAN. Are there any further questions on this phase of the bill? I understand that Mr. Cole, Mr. Hollyday, Mr. Fitzpatrick and the rest of the staff will be with us again tomorrow morning for the continuation of this study. Mr. COLE. May I ask this question, Mr. Chairman. We are through with the FHA presentation. I am now ready to begin with the secondary mortgage facilities. Is that your understanding? The CHAIRMAN. That is our understanding, of course subject to the fact that when we get through with each of these subjects separately, we may take up the whole thing again. Mr. COLE. Very well. The CHAIRMAN. The committee will stand in recess until tomorrow morning at 10 o'clock. (Whereupon, at 12: 25 p. m., the committee adjourned until 10 a. m., Wednesday, March 3, 1954.) HOUSING ACT OF 1954 WEDNESDAY, MARCH 3, 1954 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, 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. 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. STATEMENT OF HON. ALBERT W. COLE, HOUSING AND HOME FINANCE ADMINISTRATOR, ACCOMPANIED BY STANLEY BAUGHMAN, PRESIDENT OF FNMA; AND B. T. FITZPATRICK, DEPUTY ADMINISTRATOR AND GENERAL COUNSEL; AND JAMES W. FOLLIN, DIRECTOR, DIVISION OF SLUM CLEARANCE AND URBAN REDEVELOPMENT, HOUSING AND HOME FINANCE AGENCY Mr. COLE. Mr. Chairman, I am delighted to return this morning on the occasion of a matter of personal interest of the chairman. Ï 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. PRINCIPAL FUNCTIONS 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. SECONDARY MARKET FUNCTIONS 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 cutstanding 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. 44022-54 |