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Statement of
Sherman J. Maisel
Board of Governors of the Federal Reserve System
before the
Subcommittee on Housing and Urban Affairs
of the
Committee on Banking and Currency
of the
United States Senate
June 12, 1967

Mr. Chairman:
On behalf of the Board of Governors of the Federal Reserve
System, let me express our appreciation for the excellent compendium
your Committee has prepared in the Study of Mortgage Credit. As the
largest single user of credit, the mortgage market is the subject of
continuing analysis by the Federal Reserve, and its efficient functioning
is a matter of deep concern to us.

Your volume makes an extremely

useful contribution to knowledge in this field.

It shows a wide area

of agreement regarding the basic problems of the mortgage market, as
well as the reasons they exist.

It also indicates a rather broad

consensus as to the lines along which future progress appears possible.
Because time is limited, let me summarize briefly under
four headings the areas in which the Board believes progress may
be made in easing the difficulties of the housing market.


suggestions are primarily evolutionary, recognizing that the nature
of the product and the structure of the market will nevertheless
continue to make housing somewhat more vulnerable in periods of
excess demand for credit than most other types of spending.
they hold promise of significant gains.


Improvement in the areas

discussed can help the mortgage market come closer toward obtaining
the credit it requires to meet our national housing goals.



Most important is the more active use of a flexible fiscal

Because of its particular structure, the mortgage market

has severe difficulties when the demand for credit substantially
exceeds the amount that can be supplied at non-inflationary

The type of fiscal policy adopted both in the short

and long run plays a major role along with other government
policies in determining whether the total savings of the
economy in comparison to the demand for credit are adequate
to provide financing at rates house purchasers can afford.

An improvement in the relationship between the mortgage market
and the general capital market, as well as in the marketability
of mortgages, is highly desirable.

Some possible steps along

this line, which should be examined more completely, include:

Removal of geographic and other legal impediments
to the efficient distribution of mortgage credit.


Providing greater flexibility in the setting of the
maximum contract interest rates on FHA-insured and
VA-guaranteed mortgages.


Creation within FNMA of a true trading operation in
mortgages under its secondary market functions.


FHA guarantee of marketable bonds backed by portfolios
of FHA-VA mortgages.


Issuance by FNMA of participation certificates based
on the mortgages held under their secondary market


Each of these steps is a possible method of attracting additional
investors such as individuals, pension funds, small insurance
companies, and commercial banks into the residential mortgage
market as well as of lessening the burden of credit restraint
on this market.

These potential investors need a simpler,

less complicated, more marketable, and safer investment instrument
than is now found in the typical mortgage.

A broader spectrum

of available investors should not only lower interest costs,
but also make it easier for mortgages to compete for available

The experience of the past decade indicates that more consideration
ought to be given to portfolio management by thrift institutions.
Improvements appear possible on both the asset and liability sides.
We have suggested the possibility of:

The adoption of a wider variety of liability instruments
by more thrift institutions. Longer term certificates
and special time accounts paying higher rates, but with
a larger penalty on withdrawal, were very useful this
past year.


The use of more flexible liquidity or secondary reserve


The introduction of more investment options should be
carefully analyzed as should the federal chartering
of mutual savings banks.


The Federal Home Loan Bank System should consider the
use of longer term bonds based on similar length advances,
as well as the possibility of furnishing more flexible
short-term credit.


There are major risks when institutions borrow most of their
money in the short-term market and lend long.

The dangers of

these policies increase when investment funds are attracted
from other markets since such funds flow among outlets primarily
on a basis of relative returns alone.

A structure of differing

rates on varied types and maturities of liabilities can reduce
the average cost of funds while helping to insure their availa­
bility in times of need.

Similarly a variety of assets can

increase flexibility.

More thought is required of the logic and procedures to be used
when public measures are adopted in an attempt to ease directly
the impact of tightening general credit conditions on the availa­
bility or price of residential mortgage credit.

Care must be

taken to insure that such measures do not have undesired results
opposite to those intended through increasing prices and infla­
tionary pressures.

Furthermore, we believe that the extent and

form of the subsidy element involved in such proposals should be
carefully considered and revealed.

Many schemes which involve

subsidized credit may work to penalize those most in need of
housing while subsidizing those with more than adequate funds to
cover their own requirements.



Mr. Chairman, I am very pleased to be here this afternoon.
I welcome any questions either on the paper submitted by the Board of
Governors or in my individual capacity on any of the many interesting
questions raised by your compendium.