View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For release on delivery

Statement of
William McChesney Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System

before the
Subcommittee on Housing
of the
Senate Committee on Banking and Currency

May 13, 1958

The "bills you have asked me to testify about today cover quite
a bit of territory.

They all deal with activities of the Federal Govern¬

ment relating to real estate, mortgage finance, or urban renewal programs.
All of these activities, in their general aspects, are of interest to the
Federal Reserve, since they make up part of the institutional framework
of our economic system within which monetary policy must be formulated
and carried out.
For the most part, however, the bills you have before you are
either technical in the sense that they would make changes in authority
or procedures that are thought desirable to facilitate carrying out
policies already laid down, or make only incidental changes in established

I shall not comment on the bills that appear to be strictly

technical, for I am not in a position to judge the desirability or suit¬
ability of the proposed amendments.
Several of the bills appear to make somewhat more than incidental
changes in existing policy.

One of these is S. 3064 which would make mort¬

gages on 2-, 3-, and 4—unit residences eligible for insurance under sec¬
tion 221 of the National Housing Act. Another is S. 3398 which would permit
the Federal National Mortgage Association to regard preferred stock dividends
paid to the Treasury as deductible expenses in computing the amount to be
paid in lieu of corporate income tax under the Secondary Market Operation.
Three of the bills would extend the purposes for which educational insti¬
tutions might borrow from the Federal Government: S. 3281 would make con¬
struction of science buildings eligible; S. 3351, construction of science
buildings and libraries; and S. 3713, construction of any buildings

necessary or appropriate for instruction or administration.

Perhaps S. 3484-

is also in this group; it permits, and may require, the Secretary of Defense
to acquire certain housing situated adjacent to military installations.
S. 3399 is the most voluminous of the bills before you. Like
the bills I have just mentioned, it would make a good many technical
changes in existing law and some relatively minor changes in policy.


would also make a few changes in policy that might be considered to be
major. Among these last are the provisions in sections 305 and 509. As
I understand it, the effect of these provisions would be to set up new
Federal programs of guaranteeing loans—in the first case to guarantee
certain loans for urban renewal projects by having the Government stand
ready to make refunding loans, and in the second case to guarantee payment
of principal and interest on bonds issued by private educational insti¬
Consideration of all these measures raises the question whether
the laws relating to the Federal Governments activities in real estate,
mortgage finance, housing, and urban renewal need to be so written as to
require amendment so frequently as they have in recent years, or in as
great detail as appears in S. 3399-

It is possible that more general

legislation, flexibly administered, might be more effective, not only
in implementing established policy, but also in providing a framework
within which the desirability of changes in policy could be judged.
Of all the bills under discussion today, S. 2791 appears to go

in writing new public policy.

Under this bill, a Home Loan

Guarantee Corporation would be established with authority to guarantee,
within certain limits, first mortgages on homes designed for singlefamily occupancy.

-3We believe that the public interest might be better served if
the Federal Government worked toward a single program of insurance of
home mortgages--not several programs. To avoid the kind of policy con¬
flicts that are inherent in the duplication of administering bodies
operating in the same field, we think that all programs for insurance
of home mortgages should be lodged with the Federal Housing Administration
rather than with a potentially competitive agency.
The fact that, under the proposed program, only the top 20 per
cent of a mortgage is insured rather than the full mortgage, as in the
case of the present FHA programs, would not necessarily mean an appreciably
smaller risk exposure to the insurer.

Short of disaster of the sort that

we went through in the 1930's, the bulk of defaulted loans is likely to
show losses of less than 20 per cent.

In other words, except in an extreme

situation, there should be little difference in risk between the two pro¬
grams, hence little difference between the premiums required to make them

Of course, if the standards for the acceptance of risks

were markedly lower under the proposed program, the premiums required for
successful operation would be correspondingly higher.
Another aspect of this comparison should be noted.

The co¬

insurance element of the proposed program would increasingly limit the
Governments liability as the severity of trouble increased.
policy requires the reverse.

Sound public

Of course, a day-to-day reminder to lenders,

by way of some sort of co-insurance feature, that unsound lending is costly
is likely to have a good effect on lending practices, and thus minimize
the chances of serious trouble. At the same time, however, if serious

-4trouble should come despite the use of sound lending practices, complete
insurance would be much more helpful than partial insurance in keeping
the trouble within manageable limits.
The bill as drafted raises other questions, also.

Contrary to

the Federal policy of some years' standing, the Home Loan Guarantee
Corporation would be authorized to borrow by issuing obligations with
exemptions from Federal, State and local taxes. The Board believes that
as a matter of public policy tax exemption favoring particular types of
obligations is undesirable.

It appears also that the guarantee issued

by the Corporation would be available only to mortgagees that had been
examined and audited by the Corporation; it should be realized that many
financial institutions prominent in mortgage financing, including both
banks and insurance companies, are already subject to examination by
other supervisory authorities, and might well be reluctant to submit to
such additional examinations. While there is much to be said for re-empha¬
sizing the principle of co-insurance in Federal mortgage programs the
Board feels that, in view of these shortcomings, enactment of S. 2791
would be undesirable.