FEDERAL NATIONAL MORTGAGE ASSOCIATION

The Association, operating under the Federal National Mortgage Association Charter Act (12 U.S.C. 1716, et seq.) purchases, manages, and sells residential mortgages which are insured by the Federal Housing Administration or guaranteed by the Veterans Administration; makes short-term bank-type loans that are secured by those types of mortgages; manages and sells certain noninsured or nonguaranteed mortgages that have been or may be acquired from authorized sources; and sells to private investors beneficial interests, or participations, in its own U.S. Treasury-financed mortgages and those of other government agencies or instrumentalities. The Association's functions are carried out through three programs for which separate accountability is required by statute.

tures:

10

Total obligations..

47,730

600,000 600,000

70

Receipts and other offsets (items 11-17)...

-114,090

-642,460 -600,000

71

Obligations affecting expendi

tures..

-66,360

-42,460

90

Expenditures

-66,360

-42,460

Cash transactions:

600,000 600,000 -114,090 -642,460 -600,000

The secondary market operations of the Federal National Mortgage Association were authorized by the Housing Act of 1954 to provide limited liquidity for Government insured and guaranteed mortgages and to improve the distribution of investment capital available for home mortgage financing. This assistance to the secondary market for home mortgages is provided by the purchase and sale of mortgages (including participations therein) insured by the Federal Housing Administration or guaranteed by the Veterans Administration on or after August 2, 1954, that are of such quality, type, and class as meet, generally, the purchase standards imposed by private institutional mortgage investors. Purchases and sales may be made only at such prices and on such terms

as will reasonably prevent excessive use of the Association's facilities and will permit the Association to operate on a fully self-supporting basis.

The Association, under its secondary market operations, was authorized by the National Housing Act, as amended on or after June 30, 1961, to make short-term loans secured by FHA-insured or VA-guaranteed mortgages. Such loans are intended to further home construction by providing a degree of liquidity for mortgage investments and, generally, to provide supplementary assistance to the general secondary market.

The secondary market operations were initially capitalized by the issuance of $92.8 million of Federal National Mortgage Association preferred stock to the Secretary of the Treasury. Subsequently, additional preferred stock subscriptions by the Secretary of the Treasury amounting to $50 million (Public Law 85-10, approved March 27, 1957) and $65 million (Public Law 85-104, approved July 12, 1957) were authorized. Authorized preferred stock has actually been issued only as needed to support the Association's borrowings. At the end of 1964, authorized unissued stock amounted to $49 million. These estimates contemplate that no additional preferred stock will be issued in either 1965 or 1966.

The authorizing statute contemplates that the secondary market operations will ultimately be completely owned and financed by private participants. To that end, the preferred stock will be retired as rapidly as feasible and, in the meantime, the Association will pay dividends on the utilized portion to the Treasury at rates which will not be less than those determined by the Secretary of the Treasury. These estimates contemplate that no preferred stock will be retired in either 1965 or 1966. However, under arrangements entered into between the Secretary of the Treasury and the Federal National Mortgage Association, FNMA will purchase from the Secretary that portion of the Association's outstanding preferred stock which is not deemed to be required in the financing of the secondary market operations and will hold such stock as FNMA treasury stock, subject to subsequent repurchase by the Secretary as may be required for these operations. Under these arrangements, $70.8 million of preferred stock was purchased from the Secretary during 1964 and $38 million in 1965. No such purchases are contemplated in 1966.

Private capitalization for these operations is accumulated pursuant to a statutory requirement which provides that sellers of mortgages to the Association must make payments into capital incident to subscriptions for common stock in an amount equal to not more than 2% nor less than 1% of the unpaid principal amounts of the mortgages involved, as determined from time to time by the Association, taking into consideration conditions in the mortgage market and the general economy. Borrowers from the Association are currently required to make capital contributions in an amount equal to not more than one-half of 1% of the amounts borrowed.

Recommendations for legislation to transfer ownership of the Association to private owners of the capital stock

must be submitted to the Congress as promptly as practicable after all the Treasury-held preferred stock has been retired. Meanwhile, the present interim program, financed by private as well as by Government investment funds, is treated in the budget as a trust enterprise and the financial statements related thereto appear in part 2 of this document.

The Association is authorized to finance its secondary market operations through borrowings from the public on the security of non-guaranteed debentures and shortterm discount notes. Such obligations may not exceed the lesser of: (a) ten times the sum of the capital and surplus applicable to these operations, or (b) the sum of assets, free from any liens or encumbrances, of cash, mortgages, or other security holdings and obligations of the United States or guaranteed thereby, or obligations, participations, or other instruments which are lawful investments for fiduciary, trust, or public funds. The Secretary of the Treasury, so long as the preferred stock is outstanding, is authorized to purchase such obligations in an amount not exceeding $2.25 billion outstanding at any one time.

Budget program.-The secondary market operations, established in 1955, are now fully recognized by the home mortgage market and have reached significant levels. These estimates assume that FNMA's secondary market facilities will continue to be used by lenders to bridge a part of the gap between their need for and the availability of private housing funds.

It is assumed that FNMA's facilities will be used in

increasing amounts in 1965 and 1966. It is estimated that FNMA purchases will increase by $240 million over 1965 to $500 million in 1966. Mortgage sales which amounted to $113 million in 1964 are now estimated at $100 million in 1965 and $195 million in 1966. The excess of mortgage purchases over sales and other liquidations in 1965 and 1966 will result in a net increase of portfolio during those years as compared with a net de

crease in 1964.

In addition to the mortgages which it purchases in the Federal Housing Administration, Commissioner-owned regular manner, the Association also acquires, from the mortgages in exchange at par (100) for FNMA-held FHA debentures. The volume of mortgages so acquired was $126.5 million in 1964, and is estimated to amount to $40 million in 1965 and $80 million in 1966.

Financing. Funds required to finance the secondary market operations during 1965 and 1966 will be obtained from (1) proceeds from the sale of mortgages to the investing public, (2) capital contributions by program participants, (3) sales of debentures and short-term discount notes to private investors, (4) repayments and prepayments of mortgage principal, and (5) earnings. Such interim Treasury borrowings as will be necessary during 1965 and 1966 will be repaid during each of those years.

Operating results.-Operations are reflected in budget expenditures only to the extent of Treasury financing.