How we woo private funds will depend on how much the government can consolidate and simplify its controls, and how much closer to competition we can bring the housing financial market. The first, and perhaps most important problem is "Who within the Federal structure has the prime responsibility for housing finance and mortgage credit?" WHO HAS THE RESPONSIBILITY FOR CARRYING OUT THESE DECISIONS? The proliferation of responsibility is most confusing. Control and direction is exercised, in varying degrees, by HUD, FNMA, FHLB, the Treasury, and, of course, indirectly by the FRB. In view of the repeated mortgage credit crises which develop, I think it logical to attempt to tighten this system so that it can perform with greater efficiency and effectiveness. I suggest that HUD should be charged with the over-all responsibilities. The Table of Organization states that the Assistant Secretary for Mortgage Credit and Federal Housing Commissioner "shall be the principal advisor to the Secretary with respect to programs involving the private mortgage market." But, that Assistant Secretary has been assigned two jobs; Mortgage Credit and the Commissionership of the FHA. Both tasks are full-time undertakings for the most capable of men. Recommendation: The responsibilities of the Assistant Secretary for Mortgage Credit and the Commissionership of the FHA should be divorced. Recommendation: The Boards which govern the activities of both FNMA and the FHLB should be expanded so that there will be a cross-fertilization of financial thinking as it applies, not only to housing credit, but to the entire economy. These Boards should include representatives of the Treasury (the FNMA Board does at the present time), the FRB and perhaps the Council of Economic Advisors. A representative of the FHLB should sit on the FNMA Board and a representative of FNMA on the FHLB Board. As an aside, the quasi-private structure of FNMA needs some serious study. The present concept attempts to serve two masters, the results of which are that neither is served as well as one would wish. The second problem is (1) to increase the funds available to the deposit thrift institutions (the prime supporters of the housing market), (2) to attract those funds which do not, now, invest in mortgages. In order to increase savings: Recommendation: H.R. 15, the Federal Savings Bank Act, should be passed by the Congress. This would permit mutual savings banks to operate in those states in which the saver is currently served by only the savings and loan associations and the commercial banks. In order to tap the resources of those investors who do not now support the housing market: Recommendation: When market conditions permit, and under the general guidance of the Treasury Department, both FNMA and FHLB should sell long-term debentures. However, in order to provide the issuer with sufficient flexibility, these securities should contain call provisions by which the issuer can redeem the securities at a fixed schedule of prices if it should wish to retire or refinance its obligations. Recommendation: In addition to long-term bonds with call provisions, FNMA should consider the sale of participation certificates (PCs) on the mortgage holdings in its secondary market operations portfolio. Recommendation: In order to strengthen both FNMA and FHLB, I support the concept that the authorization of the Federal Reserve Board to buy agency obligations be made permanent. This is a stand-by technique which can prove valuable and necessary under certain circumstances. Recommendation: Permit the deposit-thrift institutions broader flexibility to attract long-term institutional investment funds. (1) Allow the deposit-thrift institutions to sell participation and/or notes similar to the capital notes issued by commercial banks. (2) Allow tax-exempt funds to make deposits which would be fully insurable by the deposit thrift institutions. Unlike normal deposits, these would have a fixed maturity similar to the certificate of deposit of the commercial banks. Recommendation: Design a security which will attract non-mortgage oriented savings and will favor moderate-to-low income rental housing. This security can be a mortgage bond; trusteed for investor protection; serialized to absorb amortization; issued in amounts normally used for trading in public markets ($1,000) and with both fixed maturity and fixed coupon. MORTGAGE MARKETABILITY One of the major problems confronting many investors with respect to purchasing large blocks of government-insured or guaranteed mortgages is the lack of marketability. There is no truly effective market for FHA-insured or VA-guaranteed paper. Only FNMA can, at the present time, create and maintain an on-going market for insured and guaranteed mortgages. If FNMA maintained such a market, the end result would be to make insured loans more responsive to interest rate changes and money market conditions. In addition, this would also provide investing institutions with the possibility of marketability for their mortgage portfolios. Over-all, it should have the beneficial end result of bringing more investors into the mortgage market and, thereby, reducing rates. Recommendation: Congress should request FNMA and other interested governmental departments and agencies (Federal Reserve Board and the Treasury Department) to study the advisability of re-designing FNMA secondary market operations in order to create a more orderly market than that which now exists for government-insured mortgages. THE DISCOUNT AND THE FIXED INTEREST RATE The fixed rate (coupon) on both FHA and VA mortgages has been the subject of controversy for many years. The fixed coupon is another fact of rigidity which discourages private capital from flowing into the mortgage market. Accordingly, further consideration of this problem by Congress is warranted. Recommendation: I suggest that the Congress consider a floating formula rate for FHA and VA mortgages which would be directly linked to direct obligations of the United States Government. This rate would be set by the market and not by Administrative action, thereby freeing it from possible political implications. I suggest that Congress request a serious study of this proposal. Senator MONDALE. Thank you, Mr. Heimann. Before I start the questioning, if any of the panelists here would like to make some comments or would like to criticize some of the testimony of the other panelists, feel free to do so. Do you have any comments you would like to make? Mr. HEIMANN. I have a topical comment. Today's New York Times headlines read, "Bond Rates Rise. Bell System in Illinois Pays 6.043 percent; Most Since 1921." This is a higher rate than that which prevailed during August-September 1966. Dr. ROGG. It is a triple-A bond; isn't it? Mr. HEIMANN. It is a triple-A bond. In my opinion, it is a remarkably attractive long-term, fixed-income investment. Mr. JACKSON. Mr. Chairman, in answer to Mr. Heimann, in his statement he made a proposal of paying FHA interest that is attached to some formula based on the yields of Government bond certificates. Because the spreads do vary historically from narrow to wide, wouldn't this in turn create problems rather than solve problems? Mr. HEIMANN. If I may, Mr. Chairman, I think we have to go back to what we are really attempting to do in the long run. The ideal is to be rid of the obligatory fixed coupons of FHA-VÄ mortgages. I know that many feel that is the sensible course, and, as a matter of fact, I do. However, I think it might be politically unacceptable, impractical at the present time. Therefore, since that seems to be the case, I am trying to find a way to ameliorate some of the problems that exist with the fixed statutory coupon limitation and the resultant discounts which so concern the Congress. The deep discount affects most directly the people that the entire law was designed to help in the first instance. The concept of a floating rate does not do away with discounts. What it does do away with is the magnitude of the discount. If the coupon rate could float on a formula which is attuned to Government obligations, there will still be discounts. But I suggest that the practical application of this concept will do away with the deep discount problem. This also assumes a realistic maximum coupon limitation. Mr. WEINER. Mr. Chairman, I would just like to add a comment to Mr. Heimann's well-accepted points, and that is, it seems to me that this is an opportunity for the Congress to carry out the request of Mr. Patman's committee when he suggests that the policy of the Housing Department should be to minimize discounts at all times. If this policy were in fact literally accepted, then the Housing and Urban Development Department would be required to establish the contract rate at marketable levels so that discounts will, in fact, be amortized. As Mr. Viner pointed out, the discount required now in the marketplace is 6 or 7 points. So, in carrying out this mandate, it would be essential to accompany it with the permission of the Secretary at times like this to exceed the so-called maximum of 6 percent on the contract rate. Not to do so would obviously make it impossible to carry out the mandate of minimizing discounts. Mr. VINER. Mr. Chairman, there is too much concern, in my opinion, from the members on this side of the table about what is politically feasible. I would much prefer to see a floating rate or a formula of some sort that would at least let FHA approach the ability to compete than to leave the present 6-percent limit in effect. But once we have breached that 6 percent, which is not protecting the public today, but is keeping it from getting the higher ratio mortgages that FHA and VA can provide, why not let the market do what it will do. This is to respond or whatever the supply and demand are for funds for mortgages, which will be competitive with other investments. I think we should let the market fluctuate in response to supply and demand instead of having it do so in some formula pattern that will never be completely accurate? This is the way to minimize discounts. This is the way to make the market function quickly and automatically. And I feel that the most important point is one that Mr. Heimann does subscribe to, and that is to get rid of the 6-percent limit altogether, well-intentioned though it might have been. And I think if we get below 6 percent, we should let the rate go free. There is no need for FHA to tell us what rate we should charge. The discount is going to set the interest rate, the marketplace is going to set it. So why not just free it altogether and not worry here in the industry about what is politically possible for you gentlemen to do. I think we should say what we really think, and I think most of you who have been searching for formulas are doing so instead of saying what we really think. Senator MONDALE. Any other comments? Mr. JACKSON. Mr. Chairman, I might add that this question is very pertinent to the existing house market for which my association feels great sympathy, because I think under the present system, as we saw in 1966, many owners of existing dwellings that were forced or needed to sell that property has found that much of their equity had effectively evaporated due to the cost under the present system of paying relatively high discounts under the limited interest rate available to the purchaser. In fact, I might add, that many people in our industry find it exceedingly difficult to go to a prospective home seller and explain to him why he should effectively pay a relatively high cost out of his equity in order to finance the property for the new purchaser. This has been very dramatically illustrated by FHA's charts, I believe, on page 42 of the report that was submitted by HUD of the sharp decline in existing house applications that they received during 1966, much more dramatic than even the new-house applications of proposed construction. Mr. LILLER. I would like to bring to the attention of the Chair that I previously subscribed to the removal of the controlled interest rate, but I observed today, too, that FHA's 6-percent rate is set basically to assist the low- and moderate-income individual to become a homeowner, but if you look at the statistics, I think you find that the average income of the FHA-insured borrower is in excess of $9,000 a year. I think that persons in that salary range could allocate a little more of his money to a higher interest rate if he wants the home. So this controlled rate is not really benefiting the extremely low income group as much as we might think. Senator MONDALE. The fundamental theme of this hearing is the development of a secondary conventional mortgage market. As I understand it, the homebuilders are suggesting that FNMA be authorized to buy and sell conventional mortgages as well as FHA and VA mortgages, and this view is also expounded by the American Bankers Association which has been urging a broader secondary market for many years. The representatives of the real estate boards, on the other hand, suggest a reconstituted FNMA, divorced from so-called welfare and subsidy-oriented housing programs. It would function as an independent corporate instrumentality of the United States. This viewpoint is expressed in S. 1493. The ABA testimony on page 147 of the compendium says that it is studying the home builders' and the real estate boards' proposal "in hope of developing with them, and others, bills of mutual acceptance." Now, we have all three of the groups represented here today. Could you this afternoon agree on a central proposal? Also what are you doing to try to get together and develop a single position? Dr. ROGG. Well, we have been meeting with them. Senator MONDALE. Do you feel you are limited by antitrust? Senator MONDALE. I am sure there are none. Dr. ROGG. But we are meeting, and we have reached no agreement between what we are proposing and what the private bankers are proposing for secondary market. They are afraid while we are doing something for FNMA we will somehow disrupt the development of the private secondary market and proposals of the type ABA has been proposing. But FNMA hasn't been in the conventional market, it isn't now and it hasn't been interested over the past 10 years, so we don't think that is a basic problem. There are basic problems in developing this thing, and I think the secret is we have got to quit trying to kill elephants with fly swatters. You have got major problems about doing something toward directing national resources into areas that you might think of proper concern. And I think it is going to require more than any single simple solution to it. We in the Home Builders do feel there is a whole variety of amendments that can be advanced. We don't think we ought to look for a panacea. We don't think there is any need to take our proposal as an alternative; we'd like to put them all together. Is that responsive to your questions? Senator MONDALE. It is. I would like to hear some other comments on this. Mr. WEINER. Let me amplify what Dr. Rogg just said. The proposal by the American Bankers Association, for a completely private institution federally chartered, which is, I think, the basic essence of the proposal, we do not find in conflict with our proposal. We think there is room for both and no need for looking for amalgamation of the two. On the other hand, the proposal of the National Association of Real Estate Boards, and our proposals, which are identical with the exception of where FNMA should be lodged in terms of its relationship in the market, is one which I think lends itself to the suggestion advanced here by Mr. Heimann. We already have a fantastic proliferation of agencies and groups which are dealing with the problem and to take it out of HUD and set up a completely independent agency, as advocated by NAREB, is not going to answer the problem. We think the problems lie in making HUD more effective in dealing with the financial and mortgage credit problems. To separate the functions as Mr. Heimann outlined in our bill, S. 1492, I think, lends itself toward that kind of a consideration, plus the increase and expansion of the board of FNMA to make it more representative and interlocking with the other agencies that function more effectively. I think that the National Real Estate Boards and ourselves need certainly to talk a little bit more about coming in with a unified proposal on that score, but I certainly think that we would support the ABA proposal as an additional method by which some additional solutions may be found. Senator MONDALE. Any other comments? Mr. JACKSON. Mr. Chairman, I think it important to recognize that one of the reasons behind the National Association of Real Estate Boards' proposal for an independent FNMA is its recognition that despite the implications in its original charter as a private conceptand Mr. Heimann points out in his paper that the private stockholders do own $22 million worth of its stock-is the fact that as it is presently operated it's primarily an instrument of administration policy in many areas, including social policy about housing and things of that sort. Senator MONDALE. I find something rather unrealistic in that observation. What do you expect it to be? Wasn't FNMA set up with |