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F o r r e l e a s e on d e l i v e r y E x p e c t e d at 9:30 A . M . E D T S e p t e m b e r 2 2 , 1983 Statement by Preston Martin V i c e C h a irraan, B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e before the S u b c o m m i t t e e on H o u s i n g and U r b a n A f f a i r s U n i t e d States Senate S e p t e m b e r 2 2 , 1983 System M r . C h a i r m a n and M e m b e r s of the C o m m i t t e e , I a p p r e c i a t e o p p o r t u n i t y to p r e s e n t my p e r s o n a l v i e w s on the g e n e r a l 1821 and 1 8 2 2 , b i l l s that are d e s i g n e d m o r t g a g e m a r k e t of this n a t i o n . thrust of to w i d e n and d e e p e n the The C o m m i t t e e k n o w s involvement public policy spanning in h o u s i n g Senate secondary the i m p o r t a n c e e n h a n c i n g the g r o w t h of this a l r e a d y e n o r m o u s source of f u n d i n g Fundamental the of for h o u s i n g . finance h a s b e e n , on b a l a n c e , a s u c c e s s f u l five d e c a d e s or m o r e . I b e l i e v e an i m p o r t a n t aspect of that s u c c e s s h a s b e e n h e a v y r e l i a n c e on p r i v a t e i n s t i t u t i o n s and m a r k e t processes. P e r m i t me to a d m i t my pride in my own i n v o l v e m e n t H o m e L o a n Bank S y s t e m ' s e x p a n s i o n of its c r e d i t f a c i l i t i e s in the F e d e r a l in the 1970s as w e l l as the part I p l a y e d in the founding and initial o p e r a t i n g p o l i c i e s the F e d e r a l H o m e L o a n M o r t g a g e C o r p o r a t i o n , w i t h C h a i r m a n T h o m a s T h e v e r y s u c c e s s of p u b l i c p o l i c y launched. financing provides i n i t i a t i v e s c a n and s h o u l d now be T h i r t e e n y e a r s ago my a s s o c i a t e s and I came b e f o r e this to a d v o c a t e the e s t a b l i s h m e n t of a s e c o n d a r y m a r k e t mortgage Bomar. in the u t i l i z a t i o n of m a r k e t ' p r o c e s s e s to f u r t h e r h o m e o w n e r s h i p and r e s i d e n t i a l the p l a t f o r m from w h i c h p r i v a t e m a r k e t loans. facility for Committee conventional O u r p l e a t h e n to C h a i r m a n S p a r k m a n , S e n a t o r P r o x m i r e o t h e r s was to o b t a i n a u t h o r i t y of to d e m o n s t r a t e the f e a s i b i l i t y of the and conventional m o r t g a g e b a c k e d s e c u r i t y , but we p r e d i c t e d at that time that the p r i v a t e m a r k e t e v e n t u a l l y c o u l d and w o u l d take over the f u n c t i o n . h a s now a r r i v e d time r e c o g n i z i n g for that t r a n s f e r to be s t i m u l a t e d , w h i l e at the same the o u t s t a n d i n g a c c o m p l i s h m e n t s of both F a n n i e M a e and F r e d d i e M a c , and their p r e s e n t s t r o n g these organizations leadership. The a b i l i t y of b o t h of to f i n a n c e at r a t e s not far from c o m p a r a b l e Treasury securities exemplifies attained I b e l i e v e the time in the c a p i t a l m a r k e t s . maturity the s i z e , p r e s e n c e and p o s i t i o n they h a v e I am c o n f i d e n t that both w o u l d c o n t i n u e to c o m p e t e e f f e c t i v e l y w i t h s t r o n g e r p r i v a t e organizations rivals. -2T h e c o n v e n t i o n a l m o r t g a g e b a c k e d s e c u r i t y has p r o v e n its w o r t h the credit m a r k e t s , e v e n d u r i n g the m o s t recent r e c e s s i o n that saw d e p r e s s e d h o u s i n g c o n d i t i o n s and falling h o u s e p r i c e s in some severely submarkets. M o r t g a g e pools of h i g h q u a l i t y have b e e n found r e p e a t e d l y and r e c e n t l y be safe i n v e s t m e n t s , and the s e c u r i t i e s have and o t h e r a r r a n g e m e n t s seems to p r o t e c t involved credit risk investors and m a i n t a i n cash in to insurance flow. It to me that the r e c o r d s u p p o r t s the o b j e c t i v e s and thrust of the legislation which is the s u b j e c t of this hearing. T h e g r o w t h of s e c o n d a r y m o r t g a g e m a r k e t a c t i v i t y , of c o u r s e , has b e e n very s u b s t a n t i a l since the late 1 9 6 0 s . secondary market channels e x t e n t that some thrift F u r t h e r m o r e , the need for is likely to i n c r e a s e in the f u t u r e , to the i n s t i t u t i o n s u t i l i z e the e x p a n d e d asset r e c e n t l y p r o v i d e d to them by law and r e g u l a t i o n . powers To b e t t e r m a t c h d u r a t i o n and i n t e r e s t rate s e n s i t i v i t y of assets w i t h the l i a b i l i t i e s , some t h r i f t s and o t h e r m o r t g a g e o r i g i n a t o r s m a y m o v e m o r e and m o r e m o r t g a g e s investors through the s e c o n d a r y m a r k e t s . Of c o u r s e , a n o t h e r constructive o p t i o n o p e n to them in this regard w o u l d be to p r o m o t e and invest variable-rate mortgage secondary market vehicles investors into m o r t g a g e in more instruments. P a s s - t h r o u g h s e c u r i t i e s are r e l a t i v e l y new and effective that a t t r a c t a w i d e v a r i e t y of c a p i t a l instruments. market Since the early 1 9 7 0 s , the thrust of p u b l i c p o l i c y has b e e n to e n c o u r a g e d e v e l o p m e n t and g r o w t h of m a r k e t s for s e c u r i t i e s g u a r a n t e e d by federal a g e n c i e s and f e d e r a l l y enterprises. sponsored By the m i d d l e of this y e a r , p a s s - t h r o u g h s g u a r a n t e e d by the G o v e r n m e n t N a t i o n a l M o r t g a g e A s s o c i a t i o n , the Federal H o m e L o a n M o r t g a g e C o r p o r a t i o n , or the F e d e r a l N a t i o n a l M o r t g a g e totaled $211 bi11 i o n — e q u i v a l e n t debt o u t s t a n d i n g . to Association to a sixth of all r e s i d e n t i a l mortgage G N M A s e c u r i t i e s , issued e x c l u s i v e l y a g a i n s t oools of -3federally insured or g u a r a n t e e d m o r t g a g e s , a c c o u n t all federally g u a r a n t e e d for t w o - t h i r d s pass-throughs outstanding. But the v o l u m e of FHLMC and FNMA s e c u r i t i e s , issued p r i m a r i l y a g a i n s t pools of l o a n s , has b e e n e x p a n d i n g v e r y rapidly since those e n t i t i e s h a v e h e l p e d financial adjustment of late 1 9 8 1 . conventional The m a n a g e m e n t s to fill a m o r t g a g e credit gap d u r i n g a c r i t i c a l period. By c o n t r a s t , d e v e l o p m e n t of m a r k e t s pass-through s e c u r i t i e s — t h a t for fully p r i v a t e is, s e c u r i t i e s w i t h o u t issued a g a i n s t p o o l s of c o n v e n t i o n a l federal mortgage sponsorship l o a n s — h a s been quite modest. W h i l e a fair n u m b e r of b a n k s , thrift i n s t i t u t i o n s , m o r t g a g e companies, i n s u r a n c e c o m p a n i e s and s o - c a l l e d c o n d u i t o r g a n i z a t i o n s have issued p r i v a t e p a s s - t h r o u g h s , a v a i l a b l e e s t i m a t e s s u g g e s t that the total outstanding is less than $10 amount billion. In my j u d g m e n t , it w o u l d be sound p u b l i c p o l i c y to c h a n g e laws and r e g u l a t i o n s , w h e r e a p p r o p r i a t e , to e n c o u r a g e a b r o a d e n i n g the s e c o n d a r y m o r t g a g e m a r k e t the p r i v a t e s e c t o r . through m o r e e x t e n s i v e i n v o l v e m e n t to the F e d e r a l R e s e r v e i d e n t i f i e d a h o s t of legal and r e g u l a t o r y impediments of the p r i v a t e m o r t g a g e s e c u r i t i e s m a r k e t s of in its 1982 r e p o r t . p r o p o s a l s a t t e m p t to c r y s t a l i z e H o u s i n g C o m m i s s i o n As vou legislative recommendations e n c o u r a g e m e n t of p r i v a t e s e c u r i t i e s as w e l l as to f o r m a l i z e the p r o p o s a l that grew out of the C o m m i s s i o n ' s for "TIMs" work. As you a l s o noted w h e n i n t r o d u c i n g this l e g i s l a t i o n , a c o m p r e - look at both p r i v a t e and p u b l i c s e c o n d a r y m a r k e t It is o b v i o u s Board, to d e v e l o p m e n t noted w h e n i n t r o d u c i n g S . 1 8 2 1 and S . 1 8 2 2 , c o m p o n e n t s of these is in o r d e r . of The P r e s i d e n t ' s C o m m i s s i o n o n H o u s i n g , on w h i c h I served as a m e m b e r b e f o r e b e i n g a p p o i n t e d hensive of that federal p o l i c y toward e n t e r p r i s e s , FNMA and F H L M C , w i l l help d e t e r m i n e institutions the two sponsored the c o m p e t i t i v e position -4o f private mortgage-related securities a nd in the n a t i o n ' s c a p i t a l m a r k e t s . favor of i m p r o v i n g in the c o n v e n t i o n a l m o r t g a g e As a g e n e r a l p r i n c i p l e , t am fully the e f f i c i e n c y of p r i v a t e r e l i a n c e on the g o v e r n m e n t ' s p r e s e n c e f i n a n c i a l m a r k e t s and As these h e a r i n g h a v e a m p l y difficult questions concerning I will concentrate legitimate demonstrated, i n e v i t a b l y arise in this the b a l a n c e of my remarks on two d e v e l o p m e n t of the p r i v a t e s e c u r i t i e s m a r k e t s - t h e m a j o r topics. to b o l s t e r focus of the Second, possible government policy federally sponsored secondary mortgage market enterprises. a r e a , my c o m m e n t s and context. F i r s t , the types of legal and r e g u l a t o r y a d j u s t m e n t s a p p r o p r i a t e lation you have introduced. reducing the p r o p e r b a l a n c e of p u b l i c p o l i c y t r a d e o f f s of c o m p e t i n g o b j e c t i v e s in in the c r e d i t s y s t e m , as long as these o b j e c t i v e s can be a c h i e v e d w i t h o u t s e r i o u s l y c o m p r o m i s i n g o t h e r s o c i a l and e c o n o m i c g o a l s . market toward In the legisthe latter n e c e s s a r i l y w i l l be b r o a d and s u g g e s t i v e since no s p e c i f i c legislative proposals are Private Mortgage-related extant. Securities L a w s and r e g u l a t i o n s that h a v e u n f a i r l y d i s a d v a n t a g e d c o m p e t i t i v e p o s i t i o n of p r i v a t e m o r t g a g e s e c u r i t i e s in o u r the financial m a r k e t s do not c o n s t i t u t e good p u b l i c p o l i c y , and s h o u l d be m o d i f i e d . In this r e g a r d , I'm t a l k i n g a b o u t i n a d v e r t e n t , or u n i n t e n d e d , c o n s t r a i n t s and obstacles for the issuer of p r i v a t e s e c u r i t i e s . „e d e t e r m i n e d that there h a v e b e e n a n u m b e r of such c o n s t r a i n t s , c a u s e d by state or f e d e r a l laws or r e g u l a t i o n s w r i t t e n related securities were a significant market of At the H o u s i n g Commission, sometimes long b e f o r e f a c t o r , or a r i s i n g mortgage- because i n a d e q u a t e u n d e r s t a n d i n g by l a w m a k e r s or r e g u l a t o r s of the nature of mortgage securities. -5S o m e of these c o n s t r a i n t s r e c e n t l y h a v e b e e n a l l e v i a t e d by regulatory c h a n g e s at the federal dations. l e v e l , in line w i t h H o u s i n g C o m m i s s i o n For e x a m p l e , the S E C has tailored some of its r e g i s t r a t i o n m e n t s to the s p e c i a l c h a r a c t e r i s t i c s of both the p r i v a t e m o r t g a g e s e c u r i t i e s and the i s s u e r s of these types of s e c u r i t i e s . R e s e r v e B o a r d , we h a v e a m e n d e d R e g u l a t i o n T — w h i c h securities—to s p e c i f y that p r i v a t e m o r t g a g e - b a c k e d for such c r e d i t . At the F e d e r a l governs margin credit s e c u r i t i e s are in m a r g i n a c c o u n t s to fit to a c c o m m o d a t e p r o p e r l y p r i v a t e m o r t g a g e I am r e f e r r i n g to such things as the r e m o v a l of s t a t u t o r y i n v e s t m e n t in m o r t g a g e - r e l a t e d institutions, leaving special technical securities. limitations s e c u r i t i e s by f e d e r a l l y c h a r t e r e d it up to the r e g u l a t o r s as w e l l as factors r e l a t i n g The to s p e c i f y financial limits to the d i v e r s i t y of u n d e r l y i n g m o r t g a g e pools. treats m o r t g a g e pass- t h r o u g h s e c u r i t i e s as o b l i g a t i o n s of the issuer or s p o n s o r r a t h e r as s h a r e s in p o o l s of loans c o n s t i t u t i n g The c u r r e n t treatment is a good e x a m p l e of law that does C a u t i o n s h o u l d be e x e r c i s e d w h e n e v e r regulations, designed that need to be to p r o t e c t s a v e r s , i n v e s t o r s or f i n a n c i a l market. types and considered f e d e r a l or state are a m e n d e d , or p r e e m p t e d , in o r d e r to a c c o m m o d a t e particular the to law and r e g u l a t i o n I h a v e b e e n d i s c u s s i n g m a y i n v o l v e some t r a d e o f f s of p o l i c y o b j e c t i v e s not securities. Some c o m p o n e n t s of T i t l e I of S . 1 8 2 1 o b v i o u s l y go b e y o n d carefully. than the o b l i g a t i o n s of m o r t g a g e r e c o g n i z e the true nature of m o r t g a g e p a s s - t h r o u g h of t e c h n i c a l a d j u s t m e n t on investment law for n a t i o n a l b a n k s , in e f f e c t , c u r r e n t l y borrowers. eligible instruments. S o m e c o m p o n e n t s of T i t l e I of S.1821 also c o n s t i t u t e amendments designed carrying We a l s o h a v e t a i l o r e d the R e g u l a t i o n T c r i t e r i o n c o n c e r n i n g m a r k e t a b i l i t y of s e c u r i t i e s f e a t u r e s of the m o r t g a g e require- pass-through e x t e n d e d by b r o k e r s and d e a l e r s for the p u r p o s e of p u r c h a s i n g or collateral recommen- laws or institutions, the d e v e l o p m e n t of a -6It a p p e a r s that investor p r o t e c t i o n c o n c e i v a b l y could be c o m p r o m i s e d , for e x a m p l e , if the SEC r e g i s t r a t i o n e x e m p t i o n available to financial institutions federal regulators were extended of today's m o r t g a g e b a n k i n g b a s i c a l l y are u n r e g u l a t e d s u o e r v i s e d and e x a m i n e d by state or to any H U D - a p p r o v e d m o r t g a g e e . industry is not in q u e s t i o n . h a t e to see isolated p r o b l e m s private mortgage securities not a p a r t i c u l a r l y for m o r t g a g e s " p o o l e d . " that w o u l d involve s e c u r i t i e s , subject preemption for all investment within investor p r o t e c t i o n as w e l l as the As I u n d e r s t a n d i n s t i t u t i o n s , life insurance the t e r m , " i n v e s t m e n t g r a d e " strict s t a n d a r d , and c o m m o n l y is i n t e r p r e t e d top four c a t e g o r i e s used by the n a t i o n a l l y r e c o g n i z e d d o w n to BBB u n d e r S t a n d a r d and P o o r ' s d e s i g n a t i o n s . rating to cover the top two c a t e g o r i e s , and M o s t public the offerings it m a y be q u e s t i o n a b l e p u b l i c p o l i c y the states to treat all i n v e s t m e n t g r a d e is firms—extending of p r i v a t e m o r t g a g e p a s s - t h r o u g h s e c u r i t i e s , in f a c t , h a v e b e e n rated or a g e n c y bankers I would to r e v e r s a l by the states in s t a t e - c h a r t e r e d d e p o s i t o r y funds. federal laws and r e g u l a t i o n s further q u e s t i o n s about c o m p a n i e s and p e n s i o n But m o r t g a g e market. of s t a t e b l u e - s k y and l e g a 1 - i n v e s t m e n t i n t e r e s t s of savers integrity in the future u n d e r m i n e d e v e l o p m e n t of the T h e p r o v i s i o n of S.1821 two y e a r s , r a i s e s The i n s t i t u t i o n s , and c o n s i d e r a t i o n should be g i v e n to w a y s to set and m o n i t o r q u a l i t y s t a n d a r d s grade mortgage-related currently issues as if they w e r e in to r e q u i r e Treasury securities. O n a s u b j e c t c l o s e r to the F e d e r a l R e s e r v e , I w o u l d like to raise some q u e s t i o n s a b o u t the p r o v i s i o n that w o u l d grant a u t h o r i t y n a t i o n a l b a n k s to u n d e r w r i t e and deal in p r i v a t e m o r t g a g e - r e l a t e d The F e d e r a l R e s e r v e has b e e n c o n c e r n e d that u n d e r w r i t i n g p r i v a t e particularly corporate b o n d s , could and p o s s i b l y could for securities. securities, involve u n u s u a l e l e m e n t s of risk for banks lead to c o n f l i c t s of interest in the p r o v i s i o n of c r e d i t . -7T h o u g h e q u i v a l e n t r i s k s p r e s u m a b l y w o u l d not arise in the p a s s - t h r o u g h markets—banks a l r e a d y h a v e the a u t h o r i t y to u n d e r w r i t e by G N M A , F N M A and F H L M C — i t in this l e g i s l a t i v e issues is an area that should r e c e i v e some securities guaranteed consideration process. C o n c e r n i n g S . 1 8 2 2 , a bill that w o u l d e s t a b l i s h a new type of mortgage i n v e s t m e n t trust u n d e r the tax c o d e , I can s u p p o r t the e f f o r t to c r e a t e m o r e r e t a i n the f l o w - t h r o u g h flexible trust d e v i c e s that w o u l d federal income tax features c r i t i c a l to p a s s - through securities m a r k e t s . T h e H o u s i n g C o m m i s s i o n had d i s c u s s e d need for new types of trust d e v i c e s s e c u r i t i e s , as a l t e r n a t i v e s the for issuers of m o r t g a g e - r e l a t e d to the s o - c a l l e d " g r a n t o r trust" used for v i r t u a l l y all p a s s - t h r o u g h issues. o b j e c t i v e s of the e f f o r t to e s t a b l i s h permit enthusiastically currently As I see it, the m a j o r new trust d e v i c e s s h o u l d be to issuance of d i f f e r e n t c l a s s e s of s e c u r i t i e s a g a i n s t a m o r t g a g e p o o l and to a l l o w some d e g r e e of m a n a g e m e n t of a s s e t s and c a s h flows by the t r u s t e e . Such f e a t u r e s could be used to t a i l o r m a t u r i t y and c a s h - f l o w p r e f e r e n c e s of d i f f e r e n t issues to the types of i n v e s t o r s c o u l d result in m o r e a d v a n t a g e o u s p r i c i n g of pool s e c u r i t i e s — t h u s to lower m o r t g a g e r a t e s for c o n s u m e r s . e x a m p l e , w o u l d h a v e the o p p o r t u n i t y Thrift to m a r k e t the longer t e r m c l a s s e s into a b e t t e r m a t u r i t y in S . 1 8 2 2 . O n e thing m i s s i n g e i t h e r to q u a l i t y s t a n d a r d s sidered in that b i l l , h o w e v e r , is for the " T I M " s e c u r i t i e s or to of the t r u s t e e s or m a n a g e r s of T I M s . of balance. I am not p r e p a r e d at this time to t e s t i f y on the m a n y aspects leading i n s t i t u t i o n i s s u e r s , for and r e t a i n the s h o r t e r term s e c u r i t i e s , a i d i n g their a d j u s t m e n t l i a b i l i t i e s and a s s e t s and technical reference supervision At the H o u s i n g C o m m i s s i o n , we con- the need for m i n i m u m q u a l i t y c r i t e r i a for new types of m o r t g a g e trust v e h i c l e s , in o r d e r to p r o m o t e s t a n d a r d i z a t i o n in the p r i v a t e securities m a r k e t and to o b t a i n f a v o r a b l e t r e a t m e n t of s e c u r i t i e s by the D e p a r t m e n t L a b o r (for p r i v a t e p e n s i o n f u n d s ) and p o s s i b l y by state r e g u l a t o r s fiduciaries under their j u r i s d i c t i o n ) . new types of m o r t g a g e investment I am c o n c e r n e d of (for that c r e a t i o n of t r u s t s , that a p p a r e n t l y could take a v a r i e t y of forms ( c o r p o r a t e or o t h e r w i s e ) u n d e r S . 1 8 2 2 , and that w o u l d p e r m i t t r u s t e e s to a c t i v e l y m a n a g e the funds e n t r u s t e d to them by individual i n v e s t o r s , w o u l d c r e a t e leeway for bad r e i n v e s t m e n t d e c i s i o n s or e v e n a b u s i v e p r a c t i c e s by t r u s t e e s or m a n a g e r s . for Such e v e n t s , of c o u r s e , could h e a v i l y d a m a g e all e l e m e n t s of the p r i v a t e m o r t g a g e p a s s - t h r o u g h securities market. It's d i f f i c u l t to s p e c i f y , at this t i m e , the type of structure within which TIMs ideally s h o u l d o p e r a t e . supervisory One p o s s i b i l i t y would be to r e q u i r e that T I M s be s u b j e c t to the types of c o n t r o l s e s t a b l i s h e d mutual funds r e g i s t e r e d u n d e r entities with flow-through the I n v e s t m e n t C o m p a n y Act o f 1940 expertise in h o u s i n g the s u p e r v i s o r y federal a g e n c i e s w i t h considerable process. Agencies The federally sponsored secondary market enterprises important secondary market functions quite well, introducing o v e r a d e c a d e a g o , such c h a n n e l s w e r e v i r t u a l l y k n o w , I was directly facility involved p a t h b r e a k i n g w o r k by h e l p i n g i n s t r u m e n t and by m o v i n g to s t a n d a r d i z e conventional investors. A little n o n e x i s t e n t a n d , as you in the e s t a b l i s h m e n t for c o n v e n t i o n a l m o r t g a g e s . certainly new types of i n s t r u m e n t s and d e v e l o p i n g c h a n n e l s b e t w e e n m o r t g a g e b o r r o w e r s and a w i d e range of c a p i t a l m a r k e t market Code. f i n a n c e , such as the F e d e r a l H o m e L o a n Bank B o a r d , in Federally Sponsored Credit have performed other tax t r e a t m e n t under the I n t e r n a l R e v e n u e A n o t h e r p o s s i b i l i t y w o u l d be to involve for of FHLMC as a s e c o n d a r y Both F N M A and F H L M C have done the c o n v e n t i o n a l h o m e large a m o u n t s of p a s s - t h r o u g h securities mortgage issued -9a g a i n s t p o o l s of such loans into a c a p i t a l m a r k e t u n a c c u s t o m e d conventional to pass-throughs. W e h a v e now r e a c h e d a p o i n t w h e r e c o n v e n t i o n a l m o r t g a g e m e n t s are s t a n d a r d i z e d are a familiar instrument private mortgage insurance nationally, where mortgage pass-through insurance in n a t i o n a l securities f i n a n c i a l m a r k e t s , and w h e r e the i n d u s t r y is c a p a b l e of p r o v i d i n g m o r t g a g e n e c e s s a r y to s e c u r e h i g h r a t i n g s for a large v o l u m e of pass-throughs. pool conventional S h o u l d w e , t h e r e f o r e , c o n c l u d e that the f e d e r a l l y secondary market agencies have completed whatever docu- sponsored their job? Is it time to r e m o v e legal and r e g u l a t o r y e l e m e n t s h a v e b e e n i m p e d i n g d e v e l o p m e n t the p r i v a t e m a r k e t — t h e intent of S . 1 8 2 1 and S . 1 8 2 2 — a n d at the same of time s e v e r the f e d e r a l c o n n e c t i o n s of F N M A and FHLMC? As a g e n e r a l p r i n c i p l e , it seems o b v i o u s to m e that the use of f e d e r a l e n t e r p r i s e s t a t u s , and the s p e c i a l a d v a n t a g e s s t a t u s , should be r e s e r v e d for those a c t i v i t i e s p e r f o r m e d a d e q u a t e l y by the p r i v a t e s e c t o r . that go w i t h that are n o t , or c a n n o t It m a y be p o s s i b l e p r i v a t e s e c t o r to d e v e l o p a large and e f f i c i e n t m a r k e t for securities this for the mortgage-related that w o u l d p r o v i d e m o r t g a g e b o r r o w e r s ready a c c e s s to funds the broad c a p i t a l m a r k e t s t r u c t u r e at c o m p e t i t i v e p r i c e s — y o u r p r o p o s a l s are a i m e d in this d i r e c t i o n . But as a former issuer of p r i v a t e ties w i l l be a b l e to c o m p e t e s u c c e s s f u l l y , head to h e a d , w i t h placements introduced To d a t e , p r i v a t e s e c u r i t i e s h a v e b e e n s u c c e s s f u l in the m a r k e t s p a c e left by F N M A and F H L M C . t a i l o r e d to i n d i v i d u a l Most enterprises. mainly issues h a v e b e e n p r i v a t e i n v e s t o r s or p u b l i c o f f e r i n g s issued a g a i n s t p o o l s of loans l a r g e r t h a n those that can be p u r c h a s e d by federally sponsored securi- federally g u a r a n t e e d i n s t r u m e n t s , e v e n if the l e g i s l a t i v e p a c k a g e y o u h a v e law. in legislative m o r t g a g e - b a c k e d s e c u r i t i e s , it is not c l e a r to m e that fully p r i v a t e should become be, the Although it is p o s s i b l e to a r g u e for a p h a s e - d o w n of the federal c o n n e c t i o n s of F N M A and F H L M C — i n c o n c e r t w i t h d e v e l o p m e n t of v i a b l e private sector a l t e r n a t i v e s — i t spon- should also be r e c o g n i z e d that the f e d e r a l l y sored e n t e r p r i s e s c a n p r o v i d e some public b e n e f i t s by p r i v a t e a l t e r n a t i v e s . that c a n n o t be p r o v i d e d In p a r t i c u l a r , these e n t e r p r i s e s are in a p o s i t i o n to funnel the b e n e f i t s of their federal c o n n e c t i o n s to m o r t g a g e borrowers. T h u s , one p o l i c y o p t i o n is to e n s u r e that the b e n e f i t s a c c r u e to b o r r o w e r s most in need of a i d , as i d e n t i f i e d through the p o l i t i c a l p r o c e s s . This a p p r o a c h w o u l d s e e k to target the m o r t g a g e s e c u r i t i e s p r o g r a m s of FNMA and F H L M C , in terms of c r i t e r i a such as m a x i m u m If C o n g r e s s d e c i d e s sponsored enterprises loan size or b o r r o w e r that p r i v a t i z a t i o n of one or both of the is the a p p r o p r i a t e p o l i c y o b j e c t i v e over the t e r m , some t r a n s i t i o n p r o b l e m s w i l l h a v e to be f a c e d . For one through s e c u r i t i e s w o u l d h a v e to be p r o t e c t e d . Corporation currently difficult is in a h e a l t h y pass- A n d , of c o u r s e , it w o u l d be u n w i s e to sever f e d e r a l c o n n e c t i o n s u n l e s s the s p o n s o r e d function e f f e c t i v e l y on their o w n . enterprises The F e d e r a l H o m e L o a n financial condition. t r a n s i t i o n issues w o u l d be raised w i t h the F e d e r a l Mortgage But m o r e National M o r t g a g e A s s o c i a t i o n b e c a u s e of its large p o r t f o l i o of m o r t g a g e s i n t e r e s t rates b e l o w c u r r e n t m a r k e t As a final p o i n t , I w o u l d housing like to remind the s u b c o m m i t t e e in any future f i n a n c i n g o c c a s i o n e d by the h u g e s t r u c t u r a l that are on the h o r i z o n . having levels. finance is likely to be the first c a s u a l t y o u t " of p r i v a t e long thing, the r i g h t s of h o l d e r s of o u t s t a n d i n g s t o c k , d e b t , and g u a r a n t e e d could income. "crowding federal It w o u l d be u n f o r t u n a t e , i n d e e d , if this w e r e c o m p o u n d e d by i n e f f i c i e n t m a r k e t m e c h a n i s m s . As p o i n t e d out that deficits problem in the R e p o r t of the P r e s i d e n t ' s C o m m i s s i o n on H o u s i n g ( p . 1 1 6 ) , " S i n c e the m i d - 1 9 6 0 the a b i l i t y of the h o u s i n g f i n a n c e s y s t e m to m e e t the needs of b o r r o w e r s h a s d e t e r i o r a t e d m a r k e d l y on s e v e r a l o c c a s i o n s , and this s y s t e m is in a s e r i o u s s t a t e of d i s r e p a i r . T h e v o l u m e of r e s i d e n t i a l lending naturally reflects changes the s e n s i t i v i t y of d e m a n d currently mortgage in f i n a n c i a l m a r k e t c o n d i t i o n s for m o r t g a g e c r e d i t to c h a n g e s because in i n t e r e s t rates is h i g h r e l a t i v e to i n t e r e s t rate s e n s i t i v i t y in other m a j o r s e c t o r s of the economy. H o w e v e r , the i n c r e a s i n g l y w i d e swings in r e s i d e n t i a l m o r t g a g e h o u s i n g c o n s t r u c t i o n a c t i v i t y a l s o are t r a c e a b l e to s t r u c t u r a l in the h o u s i n g f i n a n c e and shortcomings system." n ' i t V AT « T«».«. !' Board of Governors of the Federal Reserve System Washington, D.C. 20551 Official Business Penalty for Private Use, $300 Pottage and Fees Paid Board of Govt moft at the Fwkril Rmrvi System First Class
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