Regional President Speech

FROM: RELEASED FOR P.M.1s THE AMERICAN BANKERS ASSOCIATION SATURDAY, DECEMBER 15, 1962 THE NEWS BUREAU George J. Kelly, Director 12 East 36 St., New York l6, N. Y. MU 5-5100 ADDRESS OF M, MONROE KIMBREL President of The American Bankers Association, before the 19th Annual Convention-Exposition of the National Association of Home Builders, McCormick Place Convention-Exposition Hall, Chicago, Saturday Morning, December 15, 1962. Mr. Kimbrel is chairman of the board, First National Bank, Thomson, Georgia. I consider myself fortunate to be president of The American Bankers Association at a time when many of our beliefs and traditions are being questioned. This is a good time to re-examine our values, our objectives, and our methods. It is certain many of the things we have believed and have done in the past are still good and still effective. These should be preserved. Each generation, however, is faced with the problem of change when change becomes the foundation of future progress and effectiveness. This period will give us the opportunity to help preserve those things in banking which are sound and in the public interest and to help change those which have outlived their usefulness. Institutions entrusted with the public's funds must, of necessity, be conservative; but they need not be archaic. In the last few decades, changes have occurred in America which have profoundly affected our values, our objectives, and our way of doing things. American economic development is now in an era where our efforts are directed, to a larger extent than in the past, at raising our living standards. Not many decades ago, a substantial portion of the surplus we produced above our daily consumption was used to build the foundations of industry, agriculture, and commerce. Today, however, much of this surplus is directed at giving our people better shelter, more attractive homes, better cars, and many of the other things that make life more comfortable and enjoyable. This change in our economic life has (More) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OF M. MOKROE KIMBREL 2 had a profound impact on our financial structure. It has made it absolutely necessary for every commercial hank to view its operations from the standpoint of the needs of families and households as well as those of industry and agriculture. Consequently, commercial hanks have increased their efforts in the savings and mortgage fields. This high objective demonstrates enlightened self-interest on the part of hankers because they know a major reason for their existence is their ability to provide service in these areas. In this connection, we believe it imperative that the mortgage market operate effectively, efficiently, and in the public interest. Today's secondary mortgage market leaves much to be desired. The primary mortgage market is also handicapped by some laws which have become outdated and by the existence of state laws which vary so much that they have created a serious obstacle to the free flow of mortgage funds across the nation. The American Bankers Association is resolved to help remove these obstacles to the efficient functioning of the mortgage market. In the past, solutions based on government remedies often have led to government interference with the market mechanism. True, some problems can be solved only with government assistance; but as President Kennedy has said, "The scarlet thread running through the thoughts and actions of people is the delegation of great principles to the all-absorbing leviathan, the State. Every time we try to lift a problem to the government, to the same extent we are sacrificing the liberties of the people." I suggest that in regard to the housing market and the mortgage market, private enterprise can take the initiative in doing an effective job in a larger sphere than is now the case. The F.H.A* has done a splendid job in raising housing and mortgage lending standards since the 1930’s. However, I agree with Congressman Wright Patman, who recently said that "the time has come for private industry to use the experience (More) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OF M. MONROE KIMBREL 3 of the Federal Housing Administration toward the development of private mortgage insurance companies completely free of federal regulation and control." Last June Senator John Sparkman and Congressman Albert Rains, chairmen of the housing subcommittees in Congress, introduced a bill known as the Mortgage Market Facilities Act. This bill evolved from the findings of the 25-member National Mortgage Market Committee, which analyzed a study by Dr. Hobart Carr of New York University and Dr. Kurt Flexner of The American Bankers Association. The American Bankers Association took the initiative in forming this committee, and the A.B.A. has made the passage of legislation achieving the objectives of this bill one of its major legislative aims. Recently, at its annual convention, the National Association of Real Estate Boards endorsed the major outlines of this legislation. The principal aims of the bill are to create a truly national market for conventional mortgages and to make such mortgages an attractive instrument of credit for all types of investors. Perhaps most important of all, it would help eliminate the scarcities in mortgage funds that exist in some parts of the country even though other areas have excess funds. The plan, built on a foundation of private enterprise, is nondiscriminatory in that it is industrywide in concept and operation. It should result in lower financing costs, since the interest rate charged by financial institutions is determined not only by the supply and demand for credit but also by the costs involved in handling such credit. The Mortgage Market Facilities Act, which will be reintroduced in the next Congress, would provide for the federal chartering of private corporations, financed and managed by private enterprise. The role of the government would be limited to chartering such corporations and to supervising their operations-- that is, making sure the laws are obeyed. No subsidies are involved. (More) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OF M. MONROE KIMBREL h One corporation would fully insure conventional mortgages on the basis of preestablished standards and methods of spot checking. The second corporation would buy and sell such mortgages on a national market and would issue debentures backed by such mortgage collateral. This would bring many potential investors into the mortgage market directly and indirectly and would also form a basis for a stronger market. Although the bill sets no limit on the number of corporations, the minimum capitalization requirement of $25-million for an insuring company would severely limit the creation of such institutions. This is necessary if such insured mortgages are to form the basis for a nationwide market. The Mortgage Market Facilities Act is designed to be of use to every sector of the housing and mortgage lending industries. How, you might ask, will it be of use to the nation*s builders? By offering insurance on conventional mortgages, the first type of corporation would enable some lenders to make loans they would otherwise not make either because they want to avoid the red tape involved in F.H.A. or V.A. mortgages, or because they believe that uninsured conventional mortgages with long maturities and relatively low down-payments are too risky. Insurance reduces the risk by spreading it. In other words, the insurance of conventional mortgages by a properly supervised and capitalized firm would broaden the primary mortgage market. The second type of firm would broaden the secondary mortgage market by buying, selling, and holding insured mortgages. The lender whose demand at present exceeds his supply of F.H.A. mortgages may sell these to the Federal National Mortgage Association or through brokers to other lenders with available funds if he can put together a large enough package of acceptable mortgages and if he is content with the price offered. The type of mortgage firm envisaged in the Mortgage Market Facilities Act would make a market for insured conventional mortgages. This would have the effect of Digitized for FRASER http://fraser.stlouisfed.org/ (More) Federal Reserve Bank of St. Louis ADDRESS OF M. MONROE KIMBREL 5 inducing greater flows of home mortgage funds from areas of shortage to areas of surplus. It is obvious that such improvements in the primary and secondary mortgage market would benefit the home builders as well as the lenders and the public at large. The proposed plan would also have obvious benefits for the small lenders and builders. Today mortgages have to be traded in sizable packages, and there are many other qualifications which complicate such trading for the small lender. Under the proposed Mortgage Market Facilities Act smaller lenders would have the same access to the secondary market as large ones. The mortgage marketing firm would deal in small-sized packages as well as larger ones. The American Bankers Association intends to work vigorously toward this improvement of the mortgage market. I sincerely hope that the nation’s home builders through their national association will join in this effort. This objective is both in the public interest and in the interest of the industries which serve the public. In spite of the obvious benefits to be derived from this proposal, it has not gone without criticism. One sector of the mortgage industry wonders if this proposal would lead to a government monopoly and federal regulation in the conventional mortgage market. The fact that several such corporations could be organized by persons of good repute who have adequate capital as prescribed by the Act would indicate that no monopoly element exists in the proposal. It is likely that only a few insurance corporations would be chartered by the joint board. This would be so because to charter a few is simply in the public interest; to charter many would keep the plan from being sound on a nationwide basis. The question of regulation was carefully considered, and it was concluded that since no governmental assistance of any kind is involved, the Federal Government would have no basis for regulating the operations of these corporations. (More) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OE M. MONROE KIMBREL 6 It is one thing to regulate interest rates on assets in which the government assumes the risk, hut quite another to set rates on assets in which the risk is assumed wholly hy private industry. Since the purpose of the plan is to strengthen the conventional mortgage within a framework of private enterprise, we have been told hy the chairmen of the housing subcommittees in both houses of Congress that interest-rate regulation would have no place in this plan. Then, too, it is obvious that most of the present backers of this plan would not support it if it proved to be merely another obstacle to the private market mechanism. I feel certain, however, that Congress intends to go along with the home building and mortgage lending industries in their effort to strengthen the conventional mortgage market. Another charge that is sometimes made is that the spread between the rates on the mortgage debentures and on the mortgages behind them would be insufficient to finance the operations of the mortgage trading company. In the first place, the spread between the rate on mortgages held and the cost of borrowed money is only one of the two principal sources of the income of the marketing firm. The other and more important source of income would be the fees obtained from trading activities. For example, if the annual volume of mortgage trading on an uncommitted basis were to be $l-billion at a charge of 1 per cent, the marketing firm would realize an income of $10-million. Moreover, there will undoubtedly be times when the operations can be financed by the spread between mortgages and bonds. Using as a basis of estimate the cost of operation of FNMA, and assuming that the debentures of the trading corporation would have a rating of Baa, the existing spread would be enough to finance the operations of the company. FNMA helps finance itself by the sale of stock, the purchase of which is required by the users of that agency. This method may be appropriate for a (More) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OF M. MONROE KIMBREL government agency, but in private corporations a fee for transactions is the usual method. At any rate, the spread, plus fees, would give these corporations ample funds with which to operate. Another charge that has been made is that the insurance firms might serve as a dumping ground for poor-risk mortgages. This is simply not true. Appraisal procedures, the adoption of standards, and a system of careful spot checking will serve to eliminate lenders who would misuse the insurance corporation. With the great increase in mortgage demand which is predicted in the latter half of this decade and thereafter, there will be ample demand for insurance of good loans. But the fact that there would be supervision, and the fact that these firms would, be heavily capitalized and well managed would assure that they operate in the public interest and in the interest of the investors. Perhaps the most irresponsible accusation that has been made is that this plan would give the commercial banks special advantages. The record clearly demonstrates that every effort has been made to make this plan industrywide and available equally to every sector of the housing and mortgage industries. This characteristic of the Mortgage Market Facilities Act distinguishes it in a most significant way from other plans which would create conventional mortgage market facilities under the control of a particular industry. In contrast, the Mortgage Market Facilities plan provides that ownership, control, and use would be unrestricted, and the joint board charged with chartering and supervision of these corporations would also be representative in nature. The board would be comprised of a full-time chairman appointed by the President plus the president of the Federal Home Loan Bank Board, the Comptroller of the Currency, the chairman of the Federal Deposit Insurance Corporation, and a representative of the state bank supervisors. (More) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OF M. MONROE KIMBREL In summing up, I would like to make three points. First, the demand for housing and consequently the demand for mortgage funds is expected to increase greatly in the latter half of this decade. In my opinion, the Mortgage Market Facilities Act could be a big factor in meeting this demand. Second, the Act would be beneficial to all elements of the housing and mortgage industries. Third, the Act is in the public interest because it should result in lower financing costs. In short, the Act could go a long way toward assuring us that Americans will continue to be the best housed people in the world. I am indeed happy that a common objective exists for your industry and mine, and I look forward to a close and mutually satisfying relationship between the banks and the nation1s home builders. # Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monroe Kimbrel (1962, December 14). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19621215_monroe_kimbrel

@misc{wtfs_regional_speeche_19621215_monroe_kimbrel,
  author = {Monroe Kimbrel},
  title = {Regional President Speech},
  year = {1962},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19621215_monroe_kimbrel},
  note = {Retrieved via When the Fed Speaks corpus}
}