is competition. It's just that we save money by not buying the insurance and setting up our own reserve for losses. Mr. BETTS. The private underwriters can do it; is that right? Mr. BETTS. You might think I was critical. Mr. COLE. I think this is the time to raise this question. It should be raised. Mr. BETTS. I have always been enthusiastic about your agency. I simply throw out these questions because I thought they were important. Mr. COLE. Any corporation doing enough business, having enough property, enough diversified risk, would do the same thing in my opinion. Many of them do. They carry their own reserves instead of buying insurance. I might add that this proposal was recommended by the Comptroller General. Mr. BETTS. That is all I have. Mr. O'HARA. Mr. McVey? Mr. McVEY. Thank you, Mr. Chairman. Mr. Cole, I have been pondering over one question. As you know, on the floor of the House we have a great many Members who are opposed to public housing generally. The votes are pretty evenly divided on that subject in the House of Representatives. I do find much more sentiment in favor of some sort of housing for the aged than I do for public housing generally. Yet when housing for the aged is mixed up with a bill like 10157, one must either vote for the whole bill or vote against housing for the aged. Would you like to comment upon the advisability of having a separate bill for the housing of the aged? Mr. COLE. Well, this would be a matter which the committee would have to decide, and I don't want to undertake to tell the committee how they should consider housing legislation. Quite honestly, we know that certain segments of the bill are controversial and certain segments of the bill are not controversial and just from the point of view of a man who would be interested in having Congress adopt his point of view, naturally some segments of the bill might be separated so that they could be separately considered. On the basis of the besthandling of legislation, I don't know whether the committee could start to segmentize the legislation, Mr. McVey. If you suggest that you segmentize it by making this one section a separate bill, then you have got the question of Fannie May as a separate bill and the question of public housing as a separate bill and the question of FHA as a separate bill. I believe I would ask you not to ask me that question, because I don't think I could usurp the judgment of the committee on it. I suppose another frank statement should be made. We, in the Administration, have asked Mr. Widnall to introduce the legislation which is approved by the Administration, which is one bill, and it seems to me that this is the way the Congress wants to do it and it seems to me that possibly it is the only way we can get it done. I don't know whether that makes sense to you or not. I am talking to you now as an Administrator, and not as an individual who would like to see certain parts of the bill segmentized. Mr. WOLCOTT. Mr. McVey, I suggest you suggest to Mr. Cole he speak as a former member of this committee. 77603-566 Mr. McVEY. That is all, Mr. Chairman. Mr. O'HARA. Mr. Hiestand? Mr. HIESTAND. Mr. Mason, would you mind dictating a statement of your thoughts in response to Mr. Betts' question on insurance that we may all have clearly the attitude? Mr. MASON. I would be very happy to. Thank you very much. (The data requested above follows:) FHA FIRE AND HAZARD LOSS FUND The proposal for a fire and hazard loss fund to be administered by the Federal Housing Administration would be limited in its operations to covering the risks of hazard losses to FHA with respect only to those properties to which the FHA Commissioner holds title. No authority is provided by this proposal which would permit FHA to engage in the business of selling insurance against fire and hazard losses in competition with private interests. Even those properties on which mortgages are held by the Commissioner preparatory to foreclosure by FHA would not be eligible for fire or other hazard insurance protection from this fund, but would necessarily obtain insurance coverage from regular commercial sources. The legislative proposal contemplates FHA self-insurance on its own properties, which is in keeping with the general policy of the Federal Government with respect to Government-owned properties. The purpose of the fund is solely that of enabling a pooling of the hazard risks on all FHA-held properties so that the burdens of a system of self-insurance of these risks can be equitably distributed among all owned properties. In performing this function, the fire and hazard loss fund might perhaps best be visualized as an interfund account through which the burden of hazard losses is equitably distributed to individual acquired property accounts and, through them, to the respective insurance funds. The prime objective of self-insurance on Commissioner-held properties is, of Course, economy and efficiency in the performance of the Commissioner's responibility for management and disposition of properties acquired under the terms of mortgage insurance contracts. During more than 18 years from 1937 to late 1955, FHA paid hazard insurance premiums amounting to $1,698,631.58 under the procedures for using commercial hazard insurance protection with respect to FHA-held properties. Claims paid under these insurance arrangements amounted to only $161,574.27, or 9.5 percent of aggregate premiums paid. During the 5 years and 10 months ending September 30, 1955, FHA hazard premium payments totaled $1.442,000 and losses paid aggregated $111,000-a loss ratio of under 8 per cent. The annual relation of premium payments to claim payments in recent years has been as follows: The agency currently holds title to about 5,000 properties containing about 15,000 units and having book values exceeding $100 million. These properties are located in almost every State and major city in the Nation. The aggregate value of properties held has ranged upward from $60 million for over 3 years. An inventory of properties of this magnitude is ample to warrant selfinsurance, and private owners of scattered and diversified properties in such numbers would, as a rule, operate on a self-insurance basis as a means of minimizing hazard expenses. Because of the constant turnover of properties held by the FHA Commissioner, the maintenance of commercial insurance involves a great amount of short-rate terminations of insurance policies. This procedure not only increases the pro rata cost of insurance coverage for FHA but no doubt involves disproportionately increased operating expenses for the insuring companies. An internal agency operated self-insurance system will permit such conditions to be adjusted with a minimum of inconvenience and administrative expense. While details of operation for the fire and hazard loss fund have not been determined, it is contemplated that charges would be either at a flat rate per crit or at a constant proportion of appropriate commercial premium rates. By the most simplified accounting that will meet the needs of the agency, annual charges will be made by the fund against individual property accounts. In the event of a loss, reimbursement will be from the fund to the individual property account either for restoration of the damage or for providing resources for liquidation of the account. Annual charges would initially be established at perhaps half the level of present premium rates, with subsequent adjustments to be made on the basis of accumulating actuarial experience. At least in the early period of operation, the fund would probably make contracts for reinsurance of the larger risks, probably to cover the amount of individual losses which exceed some specified minimum, such as $50,000 or $100,000 or $500,000. The legislative proposal is worded to permit such reinsurance with private hazard insurance carriers. Mr. HIESTAND. I would appreciate it. That is all, Mr. Chairman. Mr. O'HARA. Are there any further questions? If not, the committee will adjourn until 2 o'clock this afternoon. (Whereupon, at 12:03 p. m., the committee recessed to reconvene at 2 p. m. the same day.) AFTERNOON SESSION (The committee reconvened at 2 p. m., Monday, May 7, 1956, pursuant to recess, the Honorable Paul Brown (acting chairman), presiding.) Members present during the afternoon session: The Honorable Mr. Spence, Mr. Brown, Mr. Rains, Mr. Multer, Mr. O'Hara, Mrs. Sullivan, Mr. Holland, Mr. Wolcott, Mr. Talle, Mr. McDonough, Mr. Widnall, Mr. Betts, Mr. McVey, Mr. Hiestand, and Mr. Nicholson. Mr. BROWN. The committee will come to order. Mr. Cole, you may proceed. Mr. ALBERT M. COLE (Administrator, Housing and Home Finance Agency), Mr. Chairman, Mr. Baughman, president of the Federal National Mortgage Association, is ready to read his statement, subject to the chairman's wish. Mr. BROWN. You may proceed, Mr. Baughman. STATEMENT OF J. STANLEY BAUGHMAN, PRESIDENT, FEDERAL NATIONAL MORTGAGE ASSOCIATION Mr. BAUGHMAN. Mr. Chairman and members of the committee, my name is J. Stanley Baughman. My purpose today is to discuss certain proposed legislation which would affect the Federal National Mortgage Association, of which I am the president. I shall preface my remarks with a short statement concerning the present corporation. As you know, the Federal National Mortgage Association Charter Act, enacted in 1954, rechartered the association. Under its present congressional charter FNMA carries on three wholly separate activities: (1) The secondary market operations, (2) the special assistance functions, and (3) the management and liquidating functions. The independence of each of these three activities from the others is to be stressed. The situation is virtually as though there were three separate corporations. Each of the three has its own assets and liabilities and its own borrowing authority. The FNMA Charter Act imposes separate accountability with respect to each, and neither the management and liquidating functions nor the special assistance functions have any recourse to the corporate capitalization—that is, the capitalization pertains exclusively to the secondary market operations. The special assistance functions and the management and liquidating functions are carried on solely for the account and in behalf of the Government. With respect to the secondary market operations, I think it is important to note that the corporate charter provides the machinery whereby in time they will qualify to become privately owned. Meanwhile there is to be the closest possible analogy of the secondary market operations to a like private-enterprise organization, so that there will be only a minimum of dependence on the Federal Government. For example, the association pays into the Treasury an amount equal to the Federal income taxes to which its secondary market operations would be subject if the association were not exempt from such taxes. H. R. 9537 contains all the changes that we believe are needed and that we recommend with respect to the existing legislation governing the operations of FNMA. H. R. 10157 duplicates to an extent some of the provisions of H. R. 9537. However, H. R. 10157 contains certain additional proposals upon which I shall comment in the course of this statement. Section 201 (a) of H. R. 10157 proposes to make inoperative the provision in the FNMA Charter Act which limits mortgage purchases to mortgages not exceeding $15,000 for each family residence or dwelling unit, with respect to Alaska, Guam, Hawaii, and armed services housing mortgages. It is my information that FNMA's present $15,000 limitation is preventing the financing of needed housing in Alaska, Guam, and Hawaii, because of the high building costs that obtain in those places. It is my opinion that the $15,000 limitation ought to be removed with respect to mortgages on property located in those areas. Also, we would interpose no objection to the removal of the limitation with respect to armed services housing mortgages. The fact that H. R. 10157 does not exempt generally FNMA's purchases under its secondary-market operations from the $15,000 mortgage amount limitation constitutes a shortcoming in the bill, in our opinion. The purposes of the secondary-market operations could be better accomplished if the limitation were removed, leaving the limits applicable to the FHA and the VA to control. For this purpose we strongly recommend section 201 of H. R. 9537 because we believe that the present $15,000 limitation is inconsistent with the overall objective of the FNMA Charter Act that the secondary-market operations be conducted in such a manner as to develop them into an adequate private-enterprise organization. It must be remembered that the primary sources of the funds used in the secondary-market operations are private sources, that is to say, the funds are obtained by the sale to private investors of corporate debentures, not guaranteed by the Government, and from the proceeds of subscriptions to FNMA's common stock. The removal of the limitation as to mortgages purchased under the secondary-market operations would serve to encourage transactions involving greatly needed dwellings having three or more bedrooms for larger families, and also housing constructed in highcost areas. At the present time, the $15,000 limitation precludes the holders of mortgages covering property in high-cost areas which include many of our larger cities-from using FNMA as the source of liquidity which the FNMA Charter Act contemplates. The suggested removal of the $15,000 limitation from the secondarymarket operations would not only give sellers a wider area in which to operate by providing an added outlet for the larger mortgages, but would also enable the Association to acquire a portfolio which would be more diversified in character. The result would be that the possibilities of FNMA's reselling the mortgages would be enhanced and the prospects of interesting private capital in the operations would be improved. The resulting increased rate at which the portfolio could revolve should increase the rate of subscriptions to FNMA's capital stock and hasten the transition from Government operation to private operation. For the reasons stated, we recommend that section 201 of H. R. 9537 be enacted and that section 201 (a) of H. R. 10157 not be enacted. If desired, section 201 of H. R. 9537 could be amended by inserting after "Hawaii," the following: "or mortgages insured under section 803 of this act,”. Next I will comment on section 201 (b) of H. R. 10157 which would change the present stock subscription requirement under the secondary-market operations which now reads not less than 3 per centum of the unpaid principal amount of mortgages. * * or such greater percentage as may from time to time be determined by the Association so that it would read not more than 2 per centum of the unpaid principal amount of mortgages While a 2-percent capital-stock requirement may be reasonable at the present time, I am of the opinion that it may very well be too low for use as an arbitrary maximum over an appreciable period of time. We think that FNMA's Board of Directors should have discretion to operate the secondary-market operations in conformity with the overall objective of the FNMA Charter Act that the secondarymarket operations be conducted so as to develop them within a reasonable time into a private-enterprise organization. Presumably the establishment of a relatively high rate of common-stock subscription was intended and expected to speed the transferring of the secondary-market operations to private ownership. Under some circumstances a reduction in the rate would result in a postponement of the transfer. On the other hand, under different circumstances, a reduction would result in an increase in the total of stock subscriptions and would speed the transfer. The Board of Directors ought to have such discretion as is necessary to vary the stock subscription rate in the light of the circumstances that obtain from time to time. |