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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW
Economic Review o f 1969
The Fifth District
Federal Housing Agencies and the
Residential Mortgage Market
State and Local Government Debt




—

ECONOMIC REVIEW OF 1969
THE FIFTH DISTRICT

The primary economic problem in the year just
ended— for the Fifth District as well as for the nation
— was inflation. Fiscal and monetary authorities di­
rected their attention to the control of inflation
throughout the year, but no impact upon the price
level itself was evident from their efforts by year-end.
Few economists doubt, at this time, however, that
restraining policies are working. W hile some dis­
appointment is evident over the failure to retard
significantly the rapid growth of prices, the mo­
mentum which existed in the final demand of con­
sumers, businesses, and government a year ago has
apparently been slowed. Most observers expect the
coming year to reveal the success of the restraint
which has been consistently applied to the economy
throughout 1969.
This description applies not only to the national
economy but also to the Fifth District, where de­
finitive measures of changing economic conditions
come about with a considerably greater time lag than
they do at the national level. Mixed economic indi­
cators are characteristic of periods of change in the
overall level of business activity. They characterize
the current period in the Fifth District. Certain in­
dustries and areas exhibit considerable slowdown,
while the evidence is less conclusive in others.
This article examines the current economic indi­
cators available for the District and for its major
industries. A s is always the case at year-end, much
of the information needed to assess the change which
occurred in the economic climate during the year just
ended is not available. Thus, some of the information
used is necessarily based on estimates for the final
months of 1969. Extensive reference is made to dif­
fusion indices derived from surveys which this Bank
conducts at 3 to 4 week intervals— prior to each
meeting of the Federal Open Market Committee.
The sample size for the survey was approximately
80 during 1969. Questionnaires are sent to business­
men and bankers throughout the Fifth District, rep­
resenting most of the District’s areas and major in­
dustries. The indices presented in the graphs are
constructed so that zero represents a consensus of no

2


change in the series reported; -f- 1 represents the
unanimous report of the survey respondents that the
series reported has increased; and — 1 represents the
unanimous report that the series has declined. Thus,
the graph of the index in the continuum between
— 1 and -f-1, over the course of the year, shows how
survey respondents have evaluated the particular
series that they were asked to report.
General Conditions Chart I show s w hat m ight
be termed an index of optimism. Businessmen and
bankers were asked their assessment of business con­
ditions for the month ahead. A generally declining
trend of optimism is evident through the year in both
groups of respondents, though the decline is some­
what sharper for businessmen. Throughout 1969,
bankers reported that a strong loan demand existed;
some characterized it as insatiable.
Nondeposit
sources of funds were used extensively to cope with
tightening credit conditions, and generally, funds
were available to borrowers who were willing to pay
the price. T o businessmen, however, the decreasing
buoyancy of consumer spending became more evident
as the year progressed. Toward year-end, this fact
combined with sharply increasing inventory levels
— to some extent involuntary— probably contributed
to their relative pessimism concerning business con­
ditions.
Employment H igh em ploym ent and low unem ­
ployment were characteristic of 1969 in the District
as in the nation. Contrary to the national economy,
a higher proportion of manufacturing employees in
the Fifth District are in nondurable goods industries
than in durables. This reflects a heavy dependence in
District states upon textiles, apparel, chemicals, and
food in the manufacturing sector. Am ong durable
manufacturing, furniture, machinery, and primary
and fabricated metals, are important employers. But
in 1968, all durable goods industries in the District
accounted for only 37% of manufacturing employ­
ment, while for the nation they accounted for 59% .
Respondents’ assessments of the progress of employ­
ment in manufacturing is shown in Chart II. Over

the course of the year, the trend of durable manu­
facturing employment was relatively flat, as indicated
by respondents in those industries. A slightly de­
clining trend of employment was reported, however,
in nondurable goods industries.
Seasonally adjusted employment figures for the
District indicate that survey respondents assessed the
situation reasonably accurately.
For the first ten
months of 1969, seasonally adjusted manufacturing
employment declined by about 27,000 persons. All
of the decline was concentrated in the nondurables
category, which dipped from 1,159,300 in January
to 1,132,400 in October. Durable manufacturing em­
ployment, at 677,300 in January, remained at that
level in October.
Chart III shows that respondents’ evaluations of
nonmanufacturing employment have been almost en­
tirely on the positive side during the past year, im­
plying a continued growth in nonmanufacturing em­
ployment. In 1968, nonmanufacturing employment,
including government, represented about 70% of
total nonagricultural employment in the United States
as a whole, and about 72% in the Fifth District.
Seasonally adjusted figures on nonmanufacturing em­
ployment for the first ten months of 1969 again bear
out the survey results. W orkers in nonmanufactur­
ing, including government, increased from 4,512,900
in January to 4,555,000 in October— an increase of
42,000. Services, government, and finance, insurance
and real estate accounted for the largest portions of
the increase, while construction employment declined.

dining unemployment in the District until about
October. Actual figures on total unemployment for
the District are not available, but figures on insured
unemployment under state programs are consistent
with the survey results. On a seasonally adjusted
basis, insured unemployment declined from 73,100
in January to 48,200 in June, and increased to
75,300 in November. For each month of 1969 until
August, the total was below the corresponding month
of 1968, and as a percentage of total covered employ­
ment, was consistently lower than the nation at large,
except in W est Virginia. All available evidence
indicates that there was a somewhat tighter labor
market situation in the District than in the nation
during 1969.
Manufacturing

Charts V through X I I refer to

the manufacturing sector.

The first two of these,

manufacturers’ new orders and backlogs of orders,
might be regarded as leading indicators of activity
in manufacturing industry, since changes in these
series usually portend changes in other series such
as shipments, inventories, and hours worked. Charts
V and V I show manufacturers’ new orders and order
backlogs to be almost entirely on the negative side
throughout the year for nondurable goods, indicating
that the number of respondents reporting declines
outnumbered those reporting increases consistently
during 1969.

Am ong durable goods manufacturers,

a consensus of increasing new orders and order back­
logs is shown for about the first half of the year, after

R espon dents’ view s on unem ­

which the indices moved to the negative side and

ployment, shown in Chart IV , indicate generally de­

followed rather closely those reported by nondurables

Unemployment

C h a rt I

GEN ERAL CON D ITION S




C h a rt II

EM P LO Y M EN T-M A N U FA C TU R IN G

respondents during die latter half of the period.
The other charts pertaining to manufacturing also
present a less ebullient report of performance in 1969
for nondurable goods industries than they do for
durables. This conclusion is indicated, for example,
in the case of shipments, Chart V II, hours worked
per week, Chart IX , and in profit prospects, Chart
X II. In all three of these categories, respondents in
nondurable goods industries turned in less favorable
reports on balance than did their counterparts in the
durable lines. Chart X I I further indicates that 1969
was not expected to be a good profit year in either
category of manufacturing.
Nondurable manufacturing activity in the District
during 1969 was significantly influenced by the
slowed pace of the textile industry, which comprises
a major share of the District’s manufacturing output,
employment, and earnings. The textile industry was
affected by a sharp decline in military procurement
of textile goods which began in late 1968 and con­
tinued through the first half of 1969. Reductions in
residential construction and, lately, cutbacks in auto­

c h a r t ill

EM P LO YM EN T-N O N M A N U FA CTU RIN G


4


C h a rt IV

UNEMPLOYMENT

mobile sales tended to reduce demand for textile
goods. The effect of these factors, along with the
general tapering off of consumer spending, was to
depress textile industry sales and shipments below
1968 levels and to contribute heavily to inventories.
Chart V III shows that manufacturers’ inventories
tended to increase somewhat throughout 1969.
Toward the end of the year, both durable and
nondurable manufacturers consistently reported in­
creases. Respondents’ reports were consistent with
national reports of increasing inventory accumula­
tions in the third and fourth quarters. In the Dis­
trict, as in the nation, durable goods manufacturers
apparently experienced heavier inventory accumula­
tions.
Charts X and X I depict for District manufacturers
what has perhaps been one of the most obvious
economic phenomena of 1969— the tendency of wages
and prices to continue to climb. Throughout the na­
tion, increases in average hourly earnings in durable
goods industries as a whole in 1969 have not been
significantly different from those in nondurable goods

C h a rt V

M ANUFACTURERS' NEW ORDERS

C h a rt VI

M ANUFACTURERS' B A C K LO G S O F ORDERS

resents the construction industry’s problem, not only

dential construction was reported on the decline in
the District almost consistently throughout 1969.
Limited availability of funds, high costs of funds, and
rapidly rising costs of materials and labor involved
in construction have effectively priced out of the
market many potential buyers and builders of new
homes. Commercial and industrial construction, gen­
erally financed outside the mortgage market, fared
somewhat better in the District and pushed ahead
in spite of the higher costs. In the third quarter,
however, it became clear in the District and in the
nation that significant declines were ahead for all
types of construction.
From January through October, for the nation as
a whole, the value of new construction of all types
put in place fluctuated narrowly around a $91 to $92
billion annual rate. During that ten-month period
the value of new residential housing declined, as did
industrial construction. A slight increase in the value
of commercial building kept total new construction
from sagging. The significant increase in construc-

in the Fifth District, but in the nation as well. Resi­

( Continued on page 8)

industries. Am ong industries important to the Fifth
District, increases during 1969 in average hourly
earnings have been slightly better than the increases
for manufacturing industries generally, in both the
durable and nondurable categories, with the exception
of the apparel industry. In the case of prices, Dis­
trict survey respondents reported a somewhat more
pronounced consensus of increased prices in durable
goods lines than in nondurables. In the nation, how­
ever, wholesale price increases in 1969 have not been
significantly different between durable and nondur­
able manufacturers. One category of durable goods
which outstripped all major categories of industrial
commodities in price increases last year, however, is
nonferrous metals. Prices increased about 19% in
1969 in this industry— an important one to the
District.
C o n stru ctio n

T he construction picture reported

by D istrict respondents, Chart X I I I , vividly rep­

C h a rt V III

M ANUFACTURERS' INVENTORIES




C h a rt X

HOURLY W A G ES IN M A N U FACTU RIN G

5

STATE AND LOCAL

STATE AND LOCAL GOVERN M EN T
DEBT OUTSTANDING
FISC A L YEAR END

Since 1950, state and loca l gov ern m en t debt ou tsta n d ­
in g has averaged an a ston ishin g g ro w th rate o f ro u g h ly
11% per year.
T h is trend has reflected the m ou n tin g
pressures on these govern m en ts to p rov id e p u b lic services
and facilities fo r an exp an din g and in crea sin gly u rban ized
population. B eca u se m ost facilities are to o co s tly to be
finan ced fro m cu rrent receipts, the n ecessary fun ds m u st
be b orrow ed .
B on d s sold b y state and loca l g overn m en ts, also called
“ m u n icipals” or “ tax exem p ts,” have interest paym en ts
exem pt fro m F ederal in co m e taxes.

State

—
I— I— i— i— I— i— i— i— I— I— i— I— i— I— I— I— L
1950
Source:

1955
U. S. Departm ent
the Census.

1960
of Com m erce,

1965
Bureau

of

STATE AND LOCAL GOVERN M EN T LONG-TERM
DEBT O UTSTANDING BY TYPE
STATE

LO CA L

Per Cent

O n e o f the m o st striking p ostw a r developm en ts in this
field has been the in crease in nongu aranteed debt as a
per cen t o f total debt ou tstan din g. U n like full faith and
cred it b on d s w h ich are secured b y the total ta x in g and
reven u e-raisin g p o w e r o f the b o rro w in g govern m en t, n on ­
guaranteed o r “ reven u e” b on d s depend, at least in th eory,
o n funds gen era ted b y the fa cility w h ich th ey financed,
such as a toll road o r tunnel. In fact, h ow ever, m an y
n ongu aranteed b on d s are serviced in directly b y general
revenues th rou gh lease and oth er arrangem ents. D espite
the higher b o r r o w in g costs gen era lly a ssociated w ith n o n ­
guaranteed bond s, m an y g overn m en ts resort to their use
to avoid con stitu tion al or statutory restriction s on the
sale o f full faith and cred it ob liga tion s.

100
80

N onguaranteed

40 ~ Full Faith and Credit

20

,

1955
Source:

ORIGIN OF LOCAL GOVERN M EN T DEBT
OU TSTAN DIN G AS A PER CENT OF TOTAL
LOCAL DEBT OUTSTANDING

1960

1965

U. S. Departm ent
the Census.

1I » l i i I I t l I I I

1955
of

Com m erce,

1960

1965

Bureau

of

FISC A L Y EA R END
,.
n
Townships

1952

Counties
Sp ecial Districts
School Districts
Cities

Townships
Counties
Sp ecial Districts

T h e rapid g row th o f the suburbs has resulted in the
proliferation o f b o n d sales b y fin a n cin g units such as
s ch o o l districts and special districts, and a corresp on d in g
relative decrease in city b orro w in g .

School Districts
Cities

20

40
Per Cent

Source:




U.

S.

Bureau

Department

of

of the Census.

Com m erce,

OVERNMENT DEBT

MUNICIPAL BOND SALES, BY PURPOSE
$ BIL_______________________________________________________________________

T h e principal p u rposes fo r w h ich funds have been b o r­
row ed have altered little in the presen t decade. E x c e p ­
tions in clude the surge in industrial aid fin a n cin g to
nearly 10% o f total m u n icipal b on d sales in 1968, and the
m u sh room in g “ o th e r” ca teg ory , w h ich co v e rs b o rro w in g
to finan ce such diverse item s as m unicipal stadium s and
co lle g e dorm itories.
Industrial aid fin a n cin g has been
n egligib le recen tly since C on gress has rem ov ed the tax
exem pt privilege fro m m o st such bonds.

O ther

W ater and Sew er

Schools

1961

..I............... i t
1965

1963

:

Industrial Aid
_____ i
___________ i
___________
1967

Source: The Bond Buyer.

In terest rates on m unicipal b on d s have sk yrock eted in
recen t years. S oa rin g dem ands fo r credit and tigh ten in g
m on eta ry p o licy have caused rates on all capital in stru ­
m ents to rise sharply,

NET CH A N G ES IN STATE AND LOCAL
GOVERN M EN T DEBT O UTSTANDING AND IN
OW NERSHIP BY COM M ERCIAL BANKS
$ Bil.

+ 12
□

State and Local
Governm ent Debt

|

Com m ercial
Bank Holdings

+ 10
+8

+6
+ 4

+2

0
. . . but the m unicipals sector has been particularly a f­
fected b ecause co m m e rcia l banks have virtually w ith ­
draw n fro m the m arket. A fte r a b sorb in g betw een 70 %
and 9 0 % o f new m unicipal issues in the p reced in g tw o
years, banks have b e co m e net sellers in 1969.




-2
J ___i_

1964
Note:

Jane F. Nelson

1965

1966

1967

1968

1st Q .
1969

2nd Q .
1969 p.

Q u arterly d ata a re at season ally adjusted
annual rates.
Source:
Board of G o vernors of the Federal Reserve
System .

ECONOMIC REVIEW OF 1969—
THE FIFTH DISTRICT
(Continued from page 5)

tion costs, however, meant a decline over the year in
the real value of construction put in place. Con­
struction industry spokesmen attribute the 1969 per­
formance to anti-inflationary policy rather than to
any lack of demand in either the residential or nonresidential areas. They apparently do not expect the
construction trough to be reached until the cur­
rently restrictive posture of monetary and fiscal
policy is allowed to ease.
Retail Trade Respondents reported a declining
trend of retail sales during 1969. Survey results in­
dicate that sales, excluding automobiles, tended to
decline early in the year, and went through a period
of relative stability during the late spring and early
summer months. Then the index moved hesitantly
to the negative side in the fall. Automobiles, on the

other hand, while following about the same general
pattern over most of the year, dropped decisively to
the negative side in the fall.
For the nation as a whole, retailers at year-end
were reportedly disappointed with Christmas sales.
A considerable measure of price resistance on the
part of consumers was blamed. As a result of the
failure of consumer buying to be as brisk as business­
men had apparently anticipated, retail store inven­
tories, in both durable and nondurable goods lines
are regarded as excessive. Automobile sales through­
out the nation ran into considerably more difficulty
toward year-end, and major producers cut back pro­
duction to help dealers reduce overloaded inventories,
including some 1969 models.
Retail sales including automobiles, while posting a
slight gain over 1968 in current values, were in real
terms sharply below the previous year’s level due to
the continuing rise in consumer goods prices.

William H. Wallace

C h a rt X III

chart Xl
PRICES RECEIVED IN M AN U FACTU RIN G

CON STRUCTIO N
------------------------------------------

»< w
-A
y y Durables
+ .5
Com m ercial
Industrial

V
N ondurables

Residential

- .5
1

1

1

1

I

1

1

1

1

1

If c t f
P

1

1

1

I

_
_____I____ L
r - 1.0 ____ I____ I_____I_____I____ I_____I____ I_____I_____I____ I_____I____ 1

C h a rt XII

C h a rt X IV

PROFIT PROSPECTS

RETAIL SALES

S ales (Excluding Autom obiles)
Durables

N ondurables

00
o
C
N

O
N
O
00

O
s
>
o
O
s
C
N
-

O
s
o
•o
C
N
C
N


8


O
s
'O
'O
C
N
CO

O
s
S
O
C
O
C
N

O
s
o
C
N
»o

O
s
sO
C
O
O

FEDERAL HOUSING AGENCIES AND THE
RESIDENTIAL MORTGAGE MARKET
For many years the expansion of home ownership
has been a policy goal of the Federal Government.
Because the restrictive impact of rising interest rates
is felt disproportionately by the residential mortgage
market, the Government has undertaken to cushion
this impact through the activities of certain Agencies,
principally, the Federal Home Loan Banks, the Fed­
eral National Mortgage Association, and the Govern­
ment National Mortgage Association.
W ith the
mortgage market and homebuilding industry cur­
rently reeling from the second dose of tight money
in four years, the policies of the Agencies have be­
come of increasing importance. W hile the present
period of credit restraint is, by several measures,
more stringent than the 1966 episode, the effects on
the residential mortgage market thus far have been
more moderate. One reason has been the improved
quality of assistance offered by the Housing Agencies.
W hy the Residential Mortgage Market Needs
Help T h e peculiar vulnerability of the resi­
dential mortgage market to tight money conditions
derives in part from its dependence on an inflow of
individuals’ savings into financial intermediaries.
The principal intermediaries are savings and loan as­
sociations and mutual savings banks which together
supply about 70% of total residential mortgage
credit, followed in order of importance by commercial
banks and life insurance companies. During periods
of rapidly rising interest rates, savers are tempted to
bypass these intermediaries in order to realize higher
rates of return through direct investment in the
money and capital markets. This process is known
as disintermediation.
Rates paid by these inter­
mediaries tend to lag behind a general increase in
market rates because of ceilings established by regu­
latory bodies, and also because such institutions may
have predominately long-term portfolios which pro­
duce only slowly rising income. Thrift institutions
(savings and loans and mutual savings banks) are
particularly exposed to this problem as mortgages
comprise about 75% to 85% of their assets. When
savings inflows stall, thrift institutions are forced to
curtail their investments, thereby directly reducing
the flow

of funds into the residential mortgage

market.
A second factor explaining the vulnerability of the
residential mortgage market is the tendency for
mortgage rates to become relatively less attractive
during periods of tight money compared to those



on other securities, such as corporate bonds. M ort­
gage rates tend to rise more slowly than market rates
due in part to usury laws imposed in certain states,
and to regulated ceilings on Government-backed
mortgages. A s a result, diversified investors such as
life insurance companies tend to switch out of resi­
dential mortgages.
Principal Agencies and Their Programs The
twelve Federal Home Loan Banks constitute a credit
reserve system for member savings and loan associa­
tions. Qualified members are eligible to receive
secured and unsecured advances from the regional
Banks. The Banks are wholly owned by their mem­
bers, but their policies are supervised by the Federal
Home Loan Bank Board in Washington. The Fed­
eral Home Loan Bank System obtains funds for lend­
ing through the sale of capital stock to members, from
members’ deposits, and from the sale of its own ob­
ligations in the money and capital markets.
T h e Federal N ational M ortga ge A ssociation
(know n as Fannie M ae) attem pts to provide in­
creased liquidity to the mortgage market by purchas­
ing Government-backed mortgages in the secondary
market from eligible institutions such as mutual sav­
ings banks, savings and loans, and, most importantly,
mortgage companies.
Many mortgage companies
originate mortgages exclusively for resale to Fannie
Mae. Since September 1968, Fannie Mae has been
wholly privately-owned, although its policies are sub­
ject to Government control. Its investment funds
are obtained from sales of capital stock, commitment
fees, and sales of notes and bonds in the open market.
Prior to the passage of the Housing A ct of 1968,
Fannie Mae had three functions: (a ) the Secondary
Market Operations Function; (b ) the Special A s ­
sistance Function; and ( c ) the Management and
Liquidating Function.
This legislation, however,
provided for the establishment of the Secondary
Market Operations Function as a separate privately
owned corporation retaining the name Fannie Mae.
The remaining two functions became the Govern­
ment National Mortgage Association or Ginnie Mae.
This wholly Government-owned agency provides
mortgage funds for special areas of Government in­
terest, such as housing for the aged, and also
manages a portfolio of mortgages acquired from
various other Government agencies.
The Mortgage Market and Housing Agencies in
1966 Th e net inflow o f funds into savings and
9

loans in 1966 was the lowest in thirteen years; at
mutual savings banks, the net inflow reached a fiveyear low. Net acquisitions of mortgages by savings
institutions declined from $13.1 billion in 1965 to only
$6.6 billion. Net investment by life insurance com ­
panies in 1-4 family mortgages dropped from $1.2
billion to $0.5 billion, initiating a downward trend
still in evidence. For various reasons, the housing
agencies were unable to offset this decline to any
great extent.
Much of the Federal Home Loan Banks’ dif­
ficulty in bolstering the declining fortunes of savings
and loans in 1966 resulted from policies pursued
earlier in the 1960’s both by member associations and
by the Federal Home Loan Bank Board. During
these years savings and loans aggressively increased
their mortgage portfolios, sharply lowering liquidity
levels in the process. Member savings and loans also
borrowed heavily from the Home Loan Banks to
finance portfolio acquisitions, with the result that ad­
vances outstanding totaled $6.0 billion in Decem­
ber 1965, having doubled in four years. In order to
finance these advances the Home Loan Bank System
had borrowed extensively in the capital market. Of
the $5.2 billion of debt outstanding in December 1965,
virtually all was short-term and required refinancing
yearly. In the face of tightening credit and uncertain
capital market conditions, the Home Loan Banks
were unable to tap the market for large sums of new
money in addition to rolling over outstanding debt.
In fact, unprecedented b orrow in g b y Federal
Agencies and sizable sales of participation certificates
contributed to the demoralization of the market in
late summer of 1966. A t this crucial stage, heavy
borrowing coincided with the virtual withdrawal
from the market by large institutional investors, par­
ticularly commercial banks and life insurance com ­
panies. All told, the Home Loan Banks borrowed
only about $1.6 billion of new money in 1966. In
view of these financing difficulties, the Home Loan
Banks adopted a policy during the spring of lending
only to cover savings withdrawals, not for new mort­
gage investments. Moreover, savings and loans were
required by the Home Loan Bank System to draw
down their own liquid assets where possible prior to
applying for advances. Thus, restricted recourse to
the Home Loan Banks coupled with the virtual dis­
appearance of new saving inflows led to the lowest
level of mortgage commitments by savings and loans
in over eight years.
A s mortgage funds dried up in 1966, Fannie Mae's
purchases of Government-backed mortgages rose to
27% of total F H A -V A mortgages issued, compared
Digitized for10
FRASER


M O R TG A G E COM MITMENTS OF ALL S A V IN G S
AND LOANS AND FLUCTUATIONS IN M A JO R
SOURCES OF LENDING CAPITAL
$ Bil.

3 _

----------------- 1
----------------- L
0 C _________ I

to the 3% to 10% level of previous years. A t this
level, Fannie Mae played a significant role in the
willingness of mortgagors to originate Governmentbacked mortgages. Fannie Mae could not have sus­
tained this level, however, had not Congress passed
emergency legislation in September increasing the
Agency’s authorized debt limit from ten to fifteen
times capital and surplus.
Fannie Mae’s financing problems were aggravated
by its method of purchasing mortgages. Prior to May
1968, Fannie Mae announced a series of prices pre­
sumably within the going market range which it
would pay for qualified Government-backed mort­

gages. The Agency stood ready to buy all eligible
mortgages offered at its announced prices, either on
an immediate or a commitment basis. A s credit
tightened and sources of lending capital dried up,
mortgage lenders turned more and more to Fannie
Mae. Attempts by the Agency to reduce the flood
of mortgages offered to it by such methods as stif­
fening qualifications and raising fees and charges
were unsuccessful partly because private mortgage
buyers tended to scale their offering prices slightly
below Fannie Mae’s. A s a result, Fannie Mae’s re­
sources were nearly exhausted by September.
A g e n c y A s s is ta n c e and F in a n c in g in 1969 W h ile
the net inflow of funds into thrift institutions has
been weakening since July, and mortgage commit­
ments have trended steadily lower, the level of com ­
mitments as of September was almost one and twothirds higher than in the fall of 1966. The more
moderate impact of restrictive credit policies on
mortgage funds thus far in 1969, compared to three
years ago, may be attributed to several factors. For
example, regulatory agencies have curtailed com ­
petition among intermediaries. In another instance,
the statutory 6 % ceiling on Government-backed
mortgages has been replaced by an administrative
ceiling, currently at 7^2%. Along the same lines,
several states have raised or abolished interest rate
ceilings established by usury laws. Finally, support
from the Federal Home Loan Banks and Fannie Mae
has been both enlarged and more effective.
Having reduced their debt outstanding by nearly
one half from peak 1966 levels, the Federal Home
Loan Banks were in a much stronger position to
obtain funds for loans to members in 1969. In addi­
tion, the level of outstanding advances to members
was substantially lower than at the start of 1966.
Through October of this year, the Home Loan Banks
raised almost $3 billion of new money for relending
to members. W hile the majority of the new issues
carried one-year maturities, a $201 million five-year
issue was sold in August, the first long-term issue in
a decade. This departure from tradition was in line
with the A gency’s decision in July to extend fiveyear loans to members in addition to the usual oneyear variety. Recently, loan extensions up to ten
years have been authorized. In addition, the Agency
on two occasions has lowered savings and loans’
liquidity requirements to free more funds for mort­
gage loans.
Fannie Mae increased its total mortgage holdings
fairly steadily after 1966 through persistent borrow­
ing in the capital market. Since that year, combined
Fannie Mae-Ginnie Mae purchases have averaged



between 20% and 30% of total F H A -V A loans
made. In August of this year, such purchases leaped
to 49% of the total, with Fannie Mae alone account­
ing for about 42% .
Fannie Mae’s ability to render such assistance on
a continuing basis reflects in part a change in the
method of purchasing mortgages. Under the “ reverse
auction” system adopted May 1968, the Agency an­
nounces weekly the total amount of mortgages it will
commit itself to purchase in 3, 6, or 12-18 months.
Private holders of Government-backed mortgages
then submit “ bids” specifying the amount, price, and
commitment period desired.
Unlike 1966 when
Fannie Mae purchased only new mortgages in an
attempt to staunch the flood of offerings, certain
seasoned offerings are also eligible for resale to
Fannie Mae. The Agency accepts bids starting with
the lowest priced until the preannounced volume of
funds is committed. In this way Fannie Mae can
control its volume of purchases and gear them to
available resources, while market forces set the price.
As the supply of mortgage funds has come under in­
creasing pressure, Fannie Mae has gradually raised
its level of weekly purchase commitments from the
$30-$60 million range prevailing in 1968, to a $140$150 million range.
A t current levels o f activity, the
Federal Housing Agencies undoubtedly provide valu­
able support to the residential mortgage market by
providing channels through which investment funds
may flow into mortgages to augment savings flows.
O f course, the Agencies cannot halt, much less re­
verse, the general shrinkage of credit available to
residential mortgages. Debate relating to Federal
assistance centers on the cost and effectiveness of
providing this assistance. Critics contend that the
rising tide of Agency borrowing is an important
factor in forcing up rates on short- and medium- term
instruments. These high rates increase the attraction
of disintermediation. Thus, funds which might have
gone directly into mortgage institutions go instead
into market instruments, possibly Agency issues,
and may be returned to the mortgage market at
greatly increased cost to the ultimate borrower. In
times of stringent credit conditions, however, it
seems unlikely that the absence of Agency borrowing
would reduce disintermediation appreciably. A s long
as mortgage lenders have no direct access to the
capital market due to the unsuitability of mortgages
as capital market instruments, it seems that the
Housing Agencies fill an important role in being
able to bid for a share of available investment funds.
Jane F. Nelson
C o n c lu sio n

11

MONTHLY REVIEW
FEDERAL RESERVE BANK OF RICHMOND
Table of Contents — 1969
Ja n u a ry

Bank Deposit Structure 1961-67
Stock M arket Indexes
District Time and Savin g s Deposits
The Fifth District—C redit O utstanding to Real Estate M ortgage Lenders

Joseph C . Ram age
M ary Ann C happ ell
Elizabeth W . Angle
Katherine M. C ham bers

February

Forecasts 1969—A s U sual, An U nusual Y e a r
Personal Savin g Rate
Rural Recreation
The Fifth District—Usury Ceilings, M ortgage Funds, and Residential Construction

W illiam E. Cullison
M. G ra ce H askins
S a d a L. C la rk e
W illiam H. W alla ce

March

Regional Interest Rate Differentials
Consum er Credit
Com m ercial Paper Since 1966
The Fifth District— Personal Income

Jim m ie R. Monhollon
W ynnelle W ilson
Ja n e F. Nelson
Katherine M. C ham bers

April

The Federal Debt
Interest on the Federal Debt
Consum er Reactions to Income C hang es
The Fifth District—W hat's Ahead for Agriculture in 1969?

Ja n e F. Nelson
Joseph C. Ram age
W illiam E. Cullison
S a d a L. C la rk e

M ay

The Role of M onetary Policy
Stock Exchange Membership
United States Foreign Assistance
The Fifth District— Banking

A ubrey N. Snellings
M ary Ann C happ ell
Katherine M. C ham bers
W ynnelle W ilson

June

Long-term Em ployment and Recent Unem ploym ent Trends in the United States
Farm Debt Continues to Rise
Federal G rants-in-A id
The Fifth District—Earnings and Expenses of M em ber Banks

W illiam E. Cullison
S a d a L. C la rke
W ynnelle W ilson
C a rla R. G rego ry

July

The Chang ing District Banking Structure
M onetary and Financial V a ria b les
The Export-lm port Bank
The Fifth District— Business Review

A u brey N. Snellings
Elizabeth W . Angle
Ja n e F. Nelson
Susan S. Jester

August

1968 B alan ce of Paym ents in Perspective
Residential M ortgage M arket
Research in a Triang le:
Part I
The Fifth District—C rop Prospects for 1969

Robert D. McTeer, Jr.
Ja n e F. Nelson
C a rla R. G rego ry
S a d a L. C la rk e

Septem ber

The Am erican Textile Industry
State Revenues
Research in a Triangle:
Part II
The Fifth District—Banking Developm ents

W illiam H. W alla ce
Dorothy E. Ferrell
C a rla R. G reg o ry
W ynnelle W ilson

O ctober

The Prime Rate
Local Revenues
A Look a t District D airy Farm ing
The Fifth District—Business Highlights

Joseph C . Ram age
Dorothy E. Ferrell
S a d a L. C larke
Dorothy E. Ferrell and Susan S. Jester

Novem ber

M oney and C redit in the First H alf o f 1969
State Governm ent Expenditures
A Brief Survey o f the Eurobond M arket
The Fifth District— Electric Power Production 1963-1967

W ynnelle W ilson and Jim m ie R. Monhollon
Katherine M. C ham bers
Ja n e F. Nelson
Robert W . Cham berlin

December

Flexible Exchange Rates
Local Governm ent Expenditures
Foreign Purchases of Domestic Securities
The Fifth District—M em ber Bank Borrowing

Robert D. McTeer, Jr.
Katherine M. C ham bers
Katherine M. C ham bers
C a rla R. G re g o ry and W illiam E. Cullison


12


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