Relevant to this last point, FNMA is often characterized as a huge savings and loan association. Like savings and loan associations, FNMA has been a major provider of funds. for housing. Since 1969, FNMA has purchased 6.8 percent of all one-to-four family mortgage loans originated. support of housing has been even greater during the recession years of 1970, 1974, 1980 and 1981-82. In those times of high interest rates and reduced mortgage credit availability, FNMA has supplied nearly one out of every ten mortgage dollars borrowed in America.

However, FNMA's ability to provide this needed support to homebuyers has been seriously jeopardized by its extreme sensitivity to interest rate changes caused by the maturity mismatch of the mortgages owned and the money borrowed to purchase the mortgages. FNMA's mismatch of very longterm mortgage assets funded with short- and intermediateterm liabilities produced unprecedentedly large losses during the high interest rate period of 1981-1982. To avoid repeating this experience, the corporation is attaching the highest priority to reducing its sensitivity to interest rates.

FNMA's primary strategy for dealing with this mismatch has been to initiate a "self help" program to emphasize fee income -- including the guarantee fees on its mortgagebacked security -- and to aggressively build a portfolio of "matched" adjustable rate mortgages. The rationale behind this strategy is that the volatile nature of FNMA's "mismatched" portfolio earnings can be partly offset by a significant flow of earnings that is not rate sensitive. This steady flow of "matched" earnings and fees will lower the perceived riskiness of the company, allowing it to borrow less expensively in the credit markets, post more competitive rates to home loan sellers, and expand its commitment to the housing market.

The process of matching assets to liabilities takes much time, however. One of the important methods to be used to speed the process along is to encourage the payoff of low-yielding fixed-rate mortgages having 10 to 20 years remaining until the time of final payments. Offering discounts for prepayment does in fact encourage mortgagors to pay off their mortgage loans, as does accelerating the payment of the mortgage principal.

Although S. 1147 would defer the discount gain from prepayment to a later date, it has the compensating effect of encouraging the elimination of interest payment deductions which serve to reduce the amount of taxes paid each year by mortgagors.

The following combination of factors speak well for the merits of S. 1147: elimination of possible financial hardship to taxpayers surprised by an extraordinarily large tax bill for the receipt of income; gain to the U. S. Treasury; and, assistance to troubled and important housing finance

institutions.

Mr. Chairman, we hope you and the committee agree with us that, on the merits, S. 1147 is highly desirable legislation. We encourage the committee to report the bill to the Senate for floor action at the earliest opportunity.

Very truly yours,

Linda & Gallaghe

LPG/mdk