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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