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FEDERAL. RESERVE BANK OF DALLAS
FISCAL AGENT O F THE UNITED STATES

Dallas, Texas, December 29,1954

To all Banking Institutions and Others Concerned
in the Eleventh Federal Reserve District:

Enclosed is the text o f a press statement, dated December 30,1954, by
the Federal National Mortgage Association, concerning a forthcoming pub­
lic cash offering o f $500,000,000, or thereabouts, of its Series ML Notes.
Enclosed also is a general prospectus prepared by the Association contain­
ing additional data relating to the offering and providing information
regarding FNMA background and operations, capitalization, borrowing
authority, etc.
As indicated in the press statement, the FNMA offering will be made
by the Treasury Department on January 11, 1955, through the facilities of
the Federal Reserve banks as fiscal agents of the United States. The Treas­
ury’s announcement and subscription forms will be mailed out prior to that
date.
Yours very truly,
WATROUS H. IRONS
President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

F E D E R A L N A T IO N A L M O R T G A G E A S S O C IA T IO N
WASHINGTON 25, D. C.

FNMA-P.R. #102

FOR RELEASE
Thursday, A. M.
December 30, 1954

The Federal National Mortgage Association has entered into an agreement with the Treasury Depart­
ment to handle a public cash offering of $500,000,000, or thereabouts, of its Series ML (Management and
Liquidating) Notes it was announced today by FNM A President J. Stanley Baughman. This is the first
step taken by FNMA, as provided by the Congress, to substitute private financing for borrowings from
the Treasury.
Proceeds of the sale of the Series ML Notes will be used to reduce the indebtedness of the Association
to the U. S. Treasury. According to Mr. Baughman this issue is the only one planned for the present.
The FNMA offering will be made by the Treasury Department on January 11 through the facilities
of the Federal Reserve Banks as fiscal agents of the United States. The channels and procedures to be
followed in marketing the notes are virtually the same as those used by the Treasury Department in
offering public debt securities.
The notes will be short-term with a maturity of approximately three years. The maturity date and
interest rate of the issue will be stated in an announcement of the offering to be made by the Treasury
Department next week. Subscription books for the FNM A offering will be open on January 11, 1955, and
may be closed without notice. Payment is scheduled for January 20.
In his announcement Mr. Baughman said that “ one of the favorable features of this issue is the
arrangement FNMA has made with the Treasury Department that will enable qualified subscribing banks
to obtain credits to their Treasury Tax and Loan Accounts in amounts equal to notes allotted and paid
for, by following the procedure to be prescribed in the forthcoming Treasury circular announcing the
offering. The notes may be pledged as collateral to Treasury Tax and Loan Accounts.”
The FNM A notes are lawful investments'and may be used as security for all fiduciary, trust and public
funds, the investment or deposit of which is under the authority and control of the United States or any
officer or officers thereof. The FNMA Charter Act makes no provision for specific exemption of these notes
from Federal, state, municipal, or local taxation.
Mr. Baughman also declared “ That these notes may be purchased by and held without limit by National
banks since the law exempts obligations of FNMA from restrictions and limitations generally applicable to
investment securities.” The FNMA ML Notes will not be guaranteed by the United States. FNMA has
received assurance from the Treasury Department that it will lend to FNMA any amount that may be
necessary to meet its obligations. In connection with this Mr. Baughman pointed out that ‘ ‘ FNMA has an
excellent earning record over a period of years with a net income of $88,000,000 shown for the past three
(3) fiscal years based on a net profit of $29,000,000 in 1952; $34,000,000 in 1953 and $25,000,000 in 1954.”
(Please refer to attached prospectus for additional data including FNMA background and
operations, capitalization, borrowing authority and financial statement)

F E D E R A L N A T IO N A L M O R T G A G E A S S O C IA T IO N
General Prospectus Concerning

M anagement

and

L iquidating F unctions (M L) N otes
(P ublic Issues)

Principal and interest payable at any Federal Reserve Bank or branch or at
the Office of the Treasurer of the United States. Issued in bearer form
only in denominations of $1,000, $5,000, $10,000, $100,000, and $1,000,000.
Purpose of the issues— Net proceeds of sale of notes will be paid to the Secretary of the
Treasury in reduction of the A ssociation’s indebtedness under the Management and Liquidating
Functions.
The Federal National M ortgage Association— The F N M A is a corporate instrumentality of
the United States. It is authorized to perform the follow ing three separate functions under the
F N M A Charter A ct (approved August 2, 1954): (1) to manage and liquidate the existing mort­
gage portfolio as of the close of October 31, 1954 (the “ Management and Liquidating Functions” ) ;
(2) to perform special assistance functions in the purchase of certain mortgages, as directed by the
President of the United States (the “ Special Assistance Functions” ) ; and (3) to provide supple­
mentary assistance to the secondary market in guaranteed and insured home mortgages (the
“ Secondary Market Operations” ). A detailed description of F N M A ’s operations and of its M L
Notes is contained in the follow ing pages.
Relationship with the Treasury Department— Offerings for public subscription of issues of
F N M A M L Notes will be made from time to time through the facilities of the U. S. Treasury
Department, and the Federal Reserve Banks as fiscal agents of the United States, in the same
manner as offerings of public debt securities. The Treasury will make loans to FN M A , if needed,
to provide for interest payments and repayment of principal at maturity of the M L Notes. The
M L Notes, together with the interest thereon, are not guaranteed by the United States and do
not constitute a debt or obligation of the United States or of any agency or instrumentality thereof
other than the Association. The M L Notes are the obligations of the Association under the
Management and Liquidating Functions provided for by the F N M A Charter Act.
The F N M A will not issue additional M L Notes pursuant to section 306(b) of the Charter A ct
if, at the time of such proposed issuance and as a consequence thereof, the resulting aggregate
amount of its outstanding M L Notes issued pursuant to section 306(b) would exceed eighty per­
cent of the amount of Association’s ownership under the M L separate accountability, free from any
liens or encumbrances, of cash, FHA-insured mortgages, VA-guaranteed mortgages, and bonds or
other obligations of or guaranteed as to principal and interest by the United States.
Outstanding Features of M L Notes— The M L Notes are issued pursuant to section 306(b) of
the FN M A Charter Act. They are lawful investments and may be accepted as security for all
fiduciary, trust, and public funds under the authority and control of the United States or any
officer or officers thereof. National banks may invest in these notes without regard to the statutory
limitations and restrictions generally applicable to investment securities. The notes are eligible
as collateral for Treasury tax and loan accounts.

Tax status— The income derived from the notes does not have any exemption, as such, under
the Internal Revenue Code of 1954. The notes are subject to Federal estate, gift or other excise
taxes. The F N M A Charter A ct does not contain any specific exemption with respect to taxes now
or hereafter imposed on the principal of or interest on the notes by any State, or any of the pos­
sessions of the United States, or by any local taxing authority.
Examination and audit— The F N M A is periodically examined by a regular auditing staff
maintained by the Association. In accordance with the Government Corporation Control Act, the
F N M A is also audited for each fiscal year by the General Accounting Office. Reports of such
audits are made annually to the Congress and are available to the public.
Further information regarding the operations of F N M A may be obtained from the Associa­
tion’s principal office at 811 Verm ont Avenue, N. W ., W ashington, D. C.
B A C K G R O U N D A N D OPERATIO N S PRIO R T O NOVEM BER 1, 1954
The Federal National M ortgage Association, hereinafter referred to as “ F N M A ,” was incor­
porated on February 10, 1938, pursuant to the then title III of the National Housing Act. It is at
the present time a constituent agency of the Housing and Home Finance Agency. The F N M A ’s
principal initial objective was to assist in the establishment of a market for the'purchase and sale
of residential mortgages insured by the Federal Housing Administration. Later, in 1948, F N M A ’s
powers were broadened to enable it to assist in the establishment of an adequate market for the
purchase and sale of residential mortgages guaranteed by the Veterans Administration. Through
the years F N M A has played a significant role in providing aid to meet the financing needs of the
home building econom y through its purchase of Government-insured and -guaranteed mortgages.
From organization through October 31, 1954, F N M A purchased insured and guaranteed mort­
gages aggregating $4,444 million and sold such mortgages totaling $1,542 million, while repay­
ments and other credits amounted to $534 million.
A s of the opening of business on November 1, 1954, the mortgage portfolio of FN M A con­
sisted of 332,173 insured and guaranteed mortgages amounting to $2,368 million, on which the
Association’s average interest return was 4.11 percent per annum. Outstanding commitments to
purchase mortgages aggregated $603 million on that date.
Under the F N M A Charter A ct and as explained below the management and liquidation of the
$2,368 million of insured and guaranteed mortgages and of the $603 million of outstanding com ­
mitments constitute complete and separate functions of FN M A . Separate accountability for these
functions is required by law.
OPERATION S UNDER NEW C H A R T E R
Title II of the H ousing A ct of 1954 (Public Law 560, 83rd Congress, approved August 2,
1954), revised title III of the National H ousing Act and rechartered the FN M A. The revised
title III is given the short title “ Federal National M ortgage Association Charter A ct,” herein­
after referred to as the “ Charter A ct.” It is a fundamental objective of the Charter A ct that the
operations of F N M A shall be financed with private capital to the maximum extent feasible. Here­
tofore operating funds h a v e,been borrowed from the Treasury, except for two series of notes that
were issued in 1938 and 1939.

2

The Charter A ct empowers F N M A to perform three separate functions and imposes separate
accountability: (1) to manage and liquidate the existing mortgage portfolio as o f the close of
October 31, 1954 (the “ Management and Liquidating Functions” ) ; (2) to perform special assist­
ance functions in the purchase of certain mortgages, as directed by the President of the United
States (the “ Special Assistance Functions” ) ; and (3) to provide supplementary assistance to
the secondary market in guaranteed and insured home mortgages (the “ Secondary Market
Operations” ).
The three new operations commenced on N ovember 1, 1954. All of the mortgages on hand as
of the close of October 31, 1954 are being held under the separate accountability of the Manage­
ment and Liquidating Functions. M ortgages acquired under the Special Assistance Functions
are also held under separate accountability, as are mortgages purchased under the Secondary Mar­
ket Operations. A ccordingly, it is to be noted that Federal National M ortgage Association’s
operations are now divided into three parts, each with its own assets and liabilities and separate
borrowing authority. The operations for each of the three functions are complete, separate, and
distinct from the others— as though there were three separate corporations.
C A P IT A L IZA T IO N A N D B O RRO W IN G A U T H O R IT Y
The capital of the Association represented by preferred stock and common stock is related
only to the Secondary Market O perations; it has no connection with the Management and Liqui­
dating Functions or the Special Assistance Functions.
As of the commencement of the Secondary Market Operations on November 1, 1954, there
was issued to the Secretary of the Treasury F N M A preferred stock with a par value of
$92,820,304.97. Mortgage lenders using the facilities of the Association’s Secondary Market Opera­
tions are required by law to subscribe for FN M A common stock to the extent of not less than
3 percent of the unpaid principal amount of mortgages they sell to the Association. T o provide for
the further financing of the Secondary Market Operations the Association is authorized to offer a
specific series of obligations (relating only to the Secondary Market Operations) for sale to private
investors (or, under certain conditions, to the Secretary of the Treasury) in an aggregate amount
outstanding at any one time not in excess of ten times the capital, surplus, and other items of net
worth related to the Secondary Market Operations.
The Association does not plan to offer at this time any obligations relating to the Secondary
Market Operations.
There is no capitalization associated with the Special Assistance Functions or the Manage­
ment and Liquidating Functions. The Special Assistance Functions are financed entirely through
borrowings from the Secretary of the Treasury.
M AN AG EM EN T A N D LIQU IDATING FUNCTIONS UNDER
W H IC H M L NOTES A R E T O BE ISSUED
The Management and Liquidating Functions are financed in tw o w ays: (1) borrow ing from
the Secretary of the Treasury, and (2) the sale of (M L ) obligations to private investors. T o
enable the Association to substitute private financing for Treasury borrowings otherwise required
to carry mortgages held under the Management and Liquidating Functions the Charter Act

3

authorizes the Association to issue for sale to private investors, on approval of the Secretary of
the Treasury, and have outstanding at any one time M L obligations having such maturities and
bearing such rate or rates of interest as may be determined by the Association with the approval
of the Secretary of the Treasury.
The Federal National Mortgage Association will not issue additional M L Notes pursuant to
section 306(b) of the Charter A ct if, at the time of such proposed issuance and as a consequence
thereof, the resulting aggregate amount of its outstanding M L Notes issued pursuant to section
306(b) would exceed eighty percent of the amount of Association’s ownership under the M L
separate accountability, free from any liens or encumbrances, of cash, FHA-insured mortgages,
VA-guaranteed mortgages, and bonds or other obligations of or guaranteed as to principal and
interest by the United States.
It is to be noted also that the Charter A ct specifically authorizes the Association to borrow
from the Secretary of the Treasury in an amount outstanding at any one time sufficient to enable
the Association to carry out the Management and Liquidating Functions. FN M A will exercise
this borrow ing authority, if there be any need therefor, to provide for the timely payment of
interest and repayment of principal at maturity of its ML Notes. T o clarify the applicability of the
Association’s authority to borrow from the Secretary of the Treasury to carry out the Manage­
ment and Liquidating Functions prescribed by section 306 of the Charter A ct there are repro­
duced below the F N M A letter of December 6, 1954 addressed to the Secretary of the Treasury and
his reply dated December 7, 1954:

The Honorable
T he S ecretary of the T reasury
Washington 25, D. C.
R e : F N M A Series M L ( Management and Liquidating) Notes
Section 306(b) of the Federal National Mortgage Association Charter Act
(Title III of the National Housing Act, as amended by Title II of Public
Law 560, 83rd Congress, approved August 2, 1954).

Dear Mr. Secretary:
To facilitate the marketing of Series M L Notes of the Association to be issued to the investing
public pursuant to section 306(b) of the said Charter Act, the Association proposes to warrant to
prospective investors that it will exercise its borrowing authority with the Secretary of the Treasury
under section 306(d) of the Charter Act at any time, if there be need therefor, in order to maintain
timely payments of interest and principal with respect to its obligations to be issued under section
306(b).
The borrowing authority under section 306(d) provides, in substance, that the Association may
issue to the Secretary of the Treasury its obligations in an amount outstanding at any one time
sufficient to enable the Association to carry out its “ Management and Liquidating Functions” under
section 306, and also prescribes that the Secretary of the Treasury is authorized to purchase any
obligations of the Association to be issued under section 306(d ).

4

The Association is of the opinion that its warranty will provide for a proper application of the
borrowing authority of the Association under section 306(d) in view of the following provisions
(summarized in pertinent part) of the Charter A ct:
Subsection (a) of Section 307 provides, with respect to the “ Management and Liquidating
Functions” to be performed by the Association, that the Association “ shall establish and at all times
maintain separate accountability . . ;
Subsection (b ) of Section 306 provides that to assure that private financing will Ire substituted
for Treasury borrowings otherwise required to carry mortgages held by the Association under its
“ Management and Liquidating Functions” , the Association is authorized to issue, with the approval
of the Secretary of the Treasury, and have outstanding at any time “ obligations having such maturities
and bearing such rates of interest as may be determined . . The subsection further prescribes
that the proceeds of sale of any such obligations shall be paid to the Secretary of the Treasury “ in
reduction of the indebtedness of the Association to the Secretary of the Treasury . . ;
Subsection (b) of Section 307 provides that in connection with the aforesaid separate account­
ability of the Association’s “ Management and Liquidating Functions” , there “ shall be no recourse to
the capitalization of the Association . . ;
Subsection (c ) of Section 307 provides that “ All of the benefits and burdens incident to the
administration” of the “ Management and Liquidating Functions” of the Association, after expenses and
the like, “ shall inure solely to the Secretary of the Treasury ..
In the circumstances, the opinion of the Secretary of the Treasury that the timely payment by the
Association of interest on its Series M L Notes, and the repayment of principal at maturity, are proper
functions for which the Association may borrow from the Treasury would be significant to prospective
investors of the Series M L Notes and add substance to the warranty of the Association. Accordingly,
it is assumed the Secretary of the Treasury would be willing to indicate in advance that loans will be
made to the Association under the procedures provided for in subsection (d ) of section 306, if there
be any need therefor, to enable the Association to make timely payment of interest and principal with
respect to its Series M L Notes.
Very truly yours,
(Signed)

J. S. Baughman
President

Mr. J. S. B aughman
President
Federal National Mortgage Association
811 Vermont Avenue, N. W .
Washington 25, D. C.
Dear Mr. Baughman:
You have recently inquired whether the Secretary of the Treasury is of the opinion that the
timely payment of interest on the Association’s Series M L Notes to be issued to the investing public
under subsection (b ) of section 306 of the Federal National Mortgage Association Charter Act, and
the repayment of the principal thereof at maturity, constitute functions of the Association within the

5

meaning of the following provisions of the Charter Act. Subsection (d ) of section 306 provides, in
substance, that the Association may issue to the Secretary of the Treasury its obligations in an amount
outstanding at any one time sufficient to enable the Association to carry out its “ Management and
Liquidating Functions” under section 306, and further prescribes that the Secretary of the Treasury
is authorized to purchase any obligations of the Association to be issued under section 306(d).
I am of the opinion that the timely payment of interest on its outstanding obligations, and the
repayment of principal at maturity are unquestionably functions for which the Association may properly
borrow from the Treasury, Accordingly, the Treasury will make loans to the Association under the
procedures provided for in subsection (d ) of section 306, if there be any need therefor to enable the
Association to carry out its management and liquidating functions, including the timely payment by
the Association of interest and principal with respect to its Series M L Notes.
Very truly yours,
(Signed) G. M. H umphrey
Secretary of the Treasury

B O A R D O F DIRECTORS
The Charter A ct prescribes that the Board of Directors of F N M A shall consist of five per­
sons each of whom must be a Government officer or employee, to be appointed by the Housing
and H om e Finance Administrator. The Chairman of the Board, ex officio, is Albert M. Cole,
H ousing and H om e Finance Administrator. The other members are J. S. Baughman, President of
the Association; R. N. Reid, V ice President and General Counsel of the Association; L. E.
Williams, Assistant Administrator, Housing and Home Finance A g en cy ; and B. T. Fitzpatrick,
General Counsel, Housing and H om e Finance Agency.

FINANCIAL STATEM EN T
It will be observed from the attached statement of condition as of the opening of business
on November 1, 1954, that the assets of F N M A held under separate accountability for the Man­
agement and Liquidating Functions consist almost entirely of mortgages either guaranteed by
the Veterans Administration or insured by the Federal H ousing Administration.
The F N M A is self supporting and receives no direct appropriation from the Government for
the payment of its administrative or other expenses. Net income of the F N M A from organization
through October 31, 1954, amounted to $165 million. Net income for each of the last three fiscal
years has been as fo llo w s :
1952

1953

1954

$29 million

$34 million

$25 million
J. S. Baughman
President
Federal National Mortgage Association

6

FED ER AL N A T IO N A L M O R T G A G E ASSO C IATIO N

Balance Sheet of Management and Liquidating Functions
at Opening of Business November 1, 1954
A SSE TS

Mortgages and related receivables:
Mortgages guaranteed by Veterans’ Administration . . . . . . .
Mortgages insured by Federal H ousing Administration .

$1,615,516,898
752,092,970

Direct mortgage loans transferred from R FC ....................
Accrued interest re ce iv a b le .................................................... . . .
Other receivables arising from m o r tg a g e s ........................

$

Purchase m oney notes of Defense H om es C orp ora tion .......... . . .
L ess: Valuation reserve ........................................................
Assets acquired through foreclosure and claims in process:
Property held pending transfer to—
Veterans’ A dm inistration................................................
Federal H ousing A dm in istration ..................................

..

Property held for s a l e ..............................................................
Claims in process against—
Veterans’ A dm inistration................................................ . . .
Federal H ousing A dm in istration ..................................
Other assets:
Cash ............................................................................................ . . .
Miscellaneous a s s e t s ................................................................
Furniture and equipment, less accumulated depreciation

$2,367,609,868
1,454,015

$

$

9,027,487
427,861

9,455,348

41,175,951
14,410,226

26,765,725

715,933
6,203,246

6,919,179
25,138

$

$

914,836
5,918,259

6,833,095

2,763,080
1,527,942
153,929

4,444,951
$2,423,507,319

L IA B IL IT IE S
Accounts payable and accrued lia b ilitie s....................................
Trust and deposit liabilities:
M ortgagors’ deposits for taxes, insurance, etc.3 ................ . . .
Other trust and deposit lia b ilities..........................................

$
$

6,951,882
2,240,117

1,220,672

9,191,999
$

10,412,671

IN V E S T M E N T O F U N IT E D ST A T E S G O V E R N M E N T
Payables to United States T reasury:
Notes p a y a b le ............................................................................ . . .
Accrued interest p a y a b le ........................................................

$2,397,713,477
15,381,171

2,413,094,648
$2,423,507,319

a Includes only that portion o f such deposits held in the general funds of the Association. In addition,_the
Association is responsible for the payment by servicing institutions of taxes and insurance (out of funds received
from mortgagors and held in escrow for that purpose) in the amount of $32,168,667 at the opening of business on
November 1, 1954.
At the opening of business on November 1, 1954, the Association was committed to purchase V A guaranteed
and F H A insured mortgages aggregating $602,665,819, under contracts previously executed, upon delivery of
eligible mortgages.

7

FEDERAL
NATIONAL MORTGAGE
ASSOCIATION

General Prospectus Concerning

MANAGEMENT AND LIQUIDATING
FUNCTIONS (ML) NOTES
(Public Issues)

December 3 0 , 1 95 4
/

Address o f Principal Office:

811 Vermont Avenue, N. W .
Washington, D . C .


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102