Mae's secondary market operations. The secondary market operations do not support any market group, and because the funds Fannie Mae uses are derived solely from the sale of non-Government guaranteed and non-tax-exempt debentures to the public, how could its operations "be diluted and weakened" by purchasing an FHA-insured mortgage of $20,000 instead of $15,000?

Mortgage eligibility

We also recommend that FNMA be required to purchase any FHAinsured or VA-guaranteed loan offered to it for sale. The variation in the price which FNMA will pay for different loans should reflect FNMA's estimate of the loan's desirability as well as the general market. We believe this to be far more effective than the present system of rejecting a loan altogether because of the application of criteria imposed by some private investors for the same type of mortgage.

We believe that this change would materially assist in the acquisition of existing houses by many who are unable to afford new con

struction.

Advance commitments

We endorse the provisions of H. R. 10157 which would authorize FNMA's secondary market operations to include advance commitments.

Price flexibility

Under existing law FNMA is required to establish from time to time prices for mortgages purchased in its secondary market operations "at the market price for the particular class of mortgages involved." This is a rather rigid formula and is responsible for FNMA's depressing the market in many areas during the early part of 1955-a situation which existed until the market declined to the FNMA price level toward the end of the year.

We endorse the proposed amendments in H. R. 9537 which would authorize the association to buy loans "within the range of market prices" instead of "at the market price." Such an amendment would enable FNMA to take into account the reasonably foreseeable market for mortgages as well as yields and foreseeable price trends on other forms of investment. The proposed flexibility would also reduce to a minimum the chances of FNMA depressing the market for FHA and VA loans.

FNMA mortgage discount operations

While we believe that the above recommendations will more materially assist FNMA in fulfilling its statutory objectives, we feel that FNMA will not reach its maximum potential in serving as a backstop to private enterprise in the leveling out of peaks and valleys in the supply of necessary mortgage credit, until its recently adopted mortgage warehousing procedure has been further streamlined.

Just as the Federal Reserve System has provided stability in the field of commercial banking, and the Federal home loan bank system has assisted institutions such as savings and loan associations, savings banks, and insurance companies in discharging their public responsibilities, we feel that a mortgage discount operation in FNMA is essen

tial to insuring a continuous and adequate supply of mortgage financing to meet the housing needs of the American people.

Such an operation could and should be established within the framework of FNMA, in such a way as to preclude competition with private sources of home-mortgage funds, and with the further advantage of accelerating the praiseworthy objective of ultimate private ownership of FNMA.

The present FNMA warehousing arrangement is providing a source of standby commitments and interim financing for a very limited section of the country, the principal activity being confined to four States.

We commend to your favorable consideration a plan whereby FNMA would be empowered to make temporary loans to mortgage lenders on the security of any FHA-insured or VA-guaranteed loan, subject to the following conditions:

1. Only those lenders subscribing to a minimum of $5,000 in FNMA capital stock would be eligible to "warehouse" (or discount) FHA or VA mortgages with FNMA.

2. The maximum dollar amount of warehouse capacity would be restricted to 40 times the dollar amount of capital stock held by the lender.

3. The lender would be required to purchase additional FNMA capital stock to the extent of 1 percent of the principal balance of each mortgage tendered as security for a loan.

4. The maximum amount which any lender might borrow on the security of any mortgage offered would be limited to 95 percent of the unpaid principal balance due on the mortgage.

5. Each borrowing from FNMA would be subject to full recourse, and a lender's failure to refund any borrowing at the expiration of a 9-month term would result in transfer of the security to FNMA.

In other words, we don't want Fannie Mae to be a dumping ground. 6. The interest rate on the borrowing from FNMA would be the rate of interest on the FHA or VA mortgage offered as security.

7. Upon repurchase of a loan, the lender would pay to FNMA the balance due on his borrowing, less any payments on account of principal, plus accumulated interest to the date of payoff.

8. The 1 percent capital stock accompanying each warehouse transaction would be nonrefundable, and this 1 percent capital stock could not be re-used as a base for future transactions.

Here is how the plan would work:

The ABC Mortgage Co., an established lender, is active in the origination of FHA and VA loans in its own area of operation. Suddenly and without warning, its private warehouse facilities are severely curtailed or cut off because of a temporary shortage of funds brought about by abnormal demand or local banking restrictions. ABC is faced with the necessity of either defaulting on its own outstanding commitments to builders and/or buyers, or seeking outside

assistance.

ABC could purchase $5,000 worth of FNMA capital stock and thereby obtain a $200,000 line of credit for the warehousing of FHA and VA loans. ABC closes with its own funds a $10,000 GI mortgage and delivers the title papers and accompanying exhibits to FNMA, together with ABC's check for $100 (1 percent) for purchase of addi

tional capital stock. FNMA would credit the ABC account with $9,500. Within the 9-month warehousing period ABC finds a permanent investor for the GI loan at an aceptable price, obtains the return of the mortgage papers for delivery to the permanent investor upon the execution of a trust receipt. The permanent investor pays ABC for the loan, and ABC discharges its obligation to FNMA by refunding the $9,500 borrowing less any payments previously made on account of principal, with accumulated interest at 42 percent per

annum.

ABC would retain the original $5,000 in capital stock and the $100 in additional capital stock and would have a continuing line of $200,000 in mortgage warehousing credit. ABC could, of course, purchase more than $5,000 in capital stock and thereby increase its line of credit by 40 times the value of each share purchased.

We are confident that his proposal would accomplish the twofold objective of insuring an even flow of home mortgage funds without cost to the taxpayers and providing a medium for the orderly and expeditious transfer of all FNMA stock to private owners in less time than it would take under the present FNMA plan of operations. Military housing

The bill, H. R. 10157, proposes certain amendments to title VIII of the National Housing Act designed to provide family housing for military personnel.

We share with the Congress the desire to bring about the early provision of neded family housing for personnel of the armed services and their families. We agree that adequate family housing is a vital factor of morale, and to the extent that the need is not met the national security is thereby impaired.

While we are sympathetic with the objectives of the title VIII program and the proposed amendments, we must warn against excessive programing of projects which could have serious effect on the realestate economies in many cities which have provided housing to servicemen for many years.

During the past 2 months our association has received numerous communications from several parts of the country deploring the programing of substantial numbers of units in areas already experiencing more than normal rental vacancies. We are particularly concerned that this programing has resulted in FHA's tightening of builders' commitments sharply below the normal building activity for the areas involved.

We ask, therefore, that the title VIII program continue to function as Congress intended, but we feel that the Department of Defense should formulate and apply reasonable criteria as to determination of need.

We have already conferred with the Department of Defense and recommended that local commanders discuss the housing needs of their personnel with local real-estate boards and builders' associations in order that such needs may be met with the minimum adverse impact on the communities affected. Our local boards will be more than willing to make their services available for this purpose.

We are aware that the House has approved an amendment to the military construction bill which would require that the Armed Services Committees of the two Houses approve all title VIII projects.

Perhaps this might prove an appropriate medium for the proper determination of the military's actual housing needs.

This concludes our prepared testimony, and we wish to thank you for the opportunity of appearing before you and presenting our views. The CHAIRMAN. Are there any questions?

Mr. RAINS. I would like to ask a couple of questions, Mr. Chairman, The CHAIRMAN. Mr. Rains.

Mr. RAINS. In the first place, on title VIII housing, it is my information that FHA, who has the final approval, of course, does check with the real-estate authorities and the people who know the housing situation in the various areas where title VIII projects need to be built; is that correct?

Mr. SCOTT. That is true, sir, but despite the fact that FHA might find that there is no need, or that it would have an adverse impact on their other insured loans in that community, the branch of the armed services is permitted to go ahead with its project, the only proviso being that they then must assume the responsibility for the loan, and release FHA from its obligation to underwrite.

Mr. WILLIAMSON. I would like to comment on that, Mr. Rains. It is a debatable question whether FHA actually makes a market analysis, and whether they contact the local people.

In Fayetteville, N. C., the president of the local real-estate board went to the FHA to seek a commitment on two houses that he wanted to build. The commitments were rather low and he asked what had happened and the FHA told him then, confidentially, that they had already approved 2,000 units for Fort Bragg, and that was the first information that the real-estate board had in the Fayetteville area. Yesterday at the hearing in regard to both Fayetteville and Fort Benning, I think it was rather clear to the members of the House Armed Services Committee that there had not been the liaison and the cooperation which I think the Congress intended there should be. Mr. RAINS. Of course, it is a fact that as of yet the Secretary of Defense has not overruled in a single instance the recommendation of the FHA.

Mr. WILLIAMSON. That is right.

Mr. Scorr. I might say this, Mr. Rains, if I may, that in my own area, at a Nike site, the FHA is completely unfamiliar with the fact that the military intends to establish 16 units of Capehart housing there, and has received no communication from anyone. The first they learned of it was in the public press.

Mr. RAINS. Of course I think we are jumping at boogers that are not really there. Before they get that 16 units, they have got to go through the FHA for the mortgage insurance, and they must have to have approval by the Armed Services Committee. I am sure the committees of Congress, the thing they want first, is military housing that is essential to the operation of the Military Establishment, and they certainly don't want any impairment of the already existing housing which is usable and sufficient.

We will try to keep our finger on that.

Now, you have a long and interesting statement, and I appreciate a lot of the references you make to the bill which the subcommittee worked on so long. I can understand your viewpoint even though it may be in disagreement in some instances with the bill.

There is one I absolutely cannot understand, and that is the reference you make to the use of any part of the national service life insurance fund for mortgages for GI loans, in areas of excessive discounts. You seem to base your statement on the idea that the law requires that the Secretary invest in present securities, which is totally in error, because the present law allows the Secretary, if he desires, to invest it in the very kind of mortgages that I am talking about.

Mr. Scorr. But this would require the investment at par, and that is fallacious because these loans in these distressed areas

Mr. RAINS. You are wrong about the statement that it would require the investment at par, because it doesn't provide that. The investments thereon, in each of the mortgages, would not be at par, necessarily. However, I call your attention to this fact, that in those particular areas where these loans would be made, are now areas of direct loans of the Federal Government, straight out of the Treasury. So I couldn't understand why you would support a situation which might necessitate the expanding of the direct lending from the Federal Treasury rather than try to operate on a private enterprise basis.

Mr. SCOTT. We oppose the direct lending program.

Mr. RAINS. We have got to do one or the other for those places where the mortgage money is not available.

Mr. SCOTT. We feel the voluntary home mortgage program is work. ing very well.

Mr. RAINS. It is not working. The subcommittee hearings show there are only $40 million or $50 million, and in great areas, whole counties, in my State, Mr. Brown's State, and so forth, not a single GI loan has been made because they cannot get the money.

So we are faced, as I see it, if we are going to live up to our obligation to those GI's, the same as we live up to it around Washington or New York, of either doing direct lending, which I don't want, or trying to get some additional money into that field.

So I say I am a little bit-I don't quite understand your opposition to that section, because it is actually a private-enterprise_deal, if FNMA is private enterprise. And it is the GI's money. It is his money, not the Government's money.

Mr. SCOTT. But these are trust funds.

Mr. WILLIAMSON. At the same time the Secretary of the Treasury would be required to make an administrative determination that in a certain area the discounts are excessive, and I think that we are just treating the symptom of a problem and not getting at the root of it. I think we are trying to equate the discount with something deplorable that is happening in the money market.

Mr. RAINS. Under the direct lending program, the Government is now required to ascertain that there is no mortgage money available in that area, which is the very same thing as determining excessive discount areas.

Mr. WILLIAMSON. That is true, but because that determination must be made, we still think it is not right. It attaches too much importance to the symptoms resulting from a fixed interest rate.

Mr. RAINS. Well, the disease is there is no money there, therefore the excessive discount. Isn't that the real trouble?