$5 million of Federal funds for a purpose not previously authorized, and not included in the Federal budget for fiscal year 1958. Accordingly, after a review of the bill with the Bureau of the Budget in relation to other present and proposed expenditures, we do not recommend the enactment of the bill at this time. If, however, the committee reports the bill favorably, we would recommend that the financing provision of the bill be changed. An authorization to borrow money from the Treasury, coupled with an automatic remission of the obligation to repay, does not appear to be a sound method of providing funds for Government expenditures. We would suggest instead that appropriations be authorized for a separate revolving fund for the purposes of the bill. The Bureau of the Budget has advised us that there is no objection to the submission of this report. Sincerely yours, ALBERT M. COLE, Administrator. Re S. 1633, 85th Congress. Hon. J. W. FULBRIGHT, HOUSING AND HOME FINANCE AGENCY, OFFICE OF THE ADMINISTRATOR, Washington 25, D. C. March 29, 1957. Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: This is in response to your request for my views on S. 1633, a bill to amend section 221 of the National Housing Act in order to further assist in the provision of adequate housing for persons of moderate income, and for other purposes. This bill would broaden the eligibility of persons for whom section 221 housing may be made available. Presently, dwellings eligible for 221 mortgages are only those needed for relocation of families from urban renewal areas and families to be replaced as a result of other governmental action in the area. The bill would make eligible dwellings units to be occupied by (a) persons from urban renewal areas; (b) persons of moderate income, defined as an individual or family whose income is not sufficient to rent new privately financed housing with total expenditures of 20 percent of the noraml stable income of such individual or family; (c) persons whose inability to obtain adequate living accommodations in privately financed housing is attributable to race, creed, or color; (d) elderly persons, defined as single persons or families of which the head or his spouse is 60 years of age or over, and (e) persons having 5 or more dependents. Another section of the bill would limit the maximum interest rate under these mortgage loans to 4 percent instead of the present statutory allowances under section 221 of 5 percent or not in excess of 6 percent if found necessary to meet the mortgage market. The bill would further provide that FNMA would be required to purchase these mortgages under its special assistance functions at par. An authorization of $250 million in special assistance funds for FNMA commitments and purchases of these mortgages would be provided by the bill. The bill also specifies that a housing project containing dwelling units for single person occupancy shall be eligible for section 221 mortgage insurance. Probably the most far-reaching provision of the proposed bill is the proposal to make eligible for section 221 housing persons of moderate income, as defined in the bill. The term "person of moderate income" is defined to include those who cannot "rent new privately financed housing" with housing expenditures of 20 percent of income. This proposal overlooks the manner in which our housing market functions to provide housing for people of moderate incomes. Since our annual housing production generally equals 2 to 3 percent of our stock of existing housing units, it is inevitable that by far the largest part of our population should live in existing dwelling units. Furthermore, with about one-fifth of our population changing their residences each year and with a national housing vacancy of nondilapidated units for sale or rent equal to 2.5 percent of our total housing inventory, there is opportunity to occupy adequate existing housing which is several times as great as the opportunity to rent new privately financed housing. It seems unrealistic, therefore, in terms of the housing market, to set up as a criterion of eligibility for housing under a special assistance program the inability to rent new privately financed housing with expenditure of a given percent of income. The bill would make eligible for special FHA terms and for FNMA special assistance a tremendous segment of the population now served through regular financing channels. Some idea of the magnitude involved may be gained by referring to housing expenditures for owner-occupants, although this is not strictly comparable to the formula in the bill. For example, during the year 1955, the latest year for which the relevant data are available, among persons who purchased 1-family homes under the regular FHA section 203 program, the average percent of income going for housing expenditures was more than 20 percent in all income groups of under $6,000. These income groups constituted 59 percent of all purchasers of new and 55 percent of all purchasers of existing 1-family homes insured with regular section 203 mortgages. Also, more than half of all families who purchased new or existing homes with FHA-insured home loans had incomes between $3,500 and $6,000, the group which we understand the bill is intended to serve. FHA experience indicates that there should be no need for the special FHA or FNMA aids for the great majority of these families. There would also be substantial administrative problems in determining eligibility under the proposed criterion. It would be necessary to make field surveys periodically in a great many communities to determine the rent levels at which new dwellings are available for rent. Any person whose income did not exceed five times the rental of available dwelling units would be eligible for section 221 housing. It would be very time-consuming and costly to conduct such surveys in large metropolitan areas. In many small communities there might not be any new rental housing to serve as a basis for determining eligibility because people traditionally live in single-family owner-occupied dwellings. Another category of individuals and families to be added to those eligible for section 221 housing would be persons 60 years or over. There is already FNMA special assistance available for section 203 mortgages where the mortgagor is 60 years of age or over and for section 207 FHA rental housing mortgages. Furthermore, section 207 rental housing projects designed for the elderly may have insured mortgages equal to 90 percent of replacement costs, instead of 90 percent of value as required for other section 207 projects, to allow for special construction features and special group facilities for the elderly in such projects. The President last year allocated $20 million of the FNMA special assistance funds under his authority to purchase such mortgages. It might also be pointed out that in recent years about 10 percent of the heads of families in low rent public housing units were 65 or more years old. Another category to be made eligible for section 221 assistance under this bill would be persons with 5 or more dependents, or 6-person families. It is doubtful whether houses of adequate size could be provided for many 6-person families with mortgage financing of $9,000 to $10,000 which would constitute the price of the house in most instances under the 100 percent financing provisions proposed by the bill. The combination of large families and low incomes is one which absorbs a large portion of the low rent public housing units. As of 1955, the latest year for which figures are available, 28 percent of the families in low rent public houses had 3 or 4 minor children, that is, they were families of 5 or 6 persons, and another 13 percent had 5 or more minor children constituting, generally, families of 7 or more persons. Another category which would be made eligible for 221 housing are persons whose inability to obtain adequate living accommodations in privately financed housing is attributable to race, creed, or color. It would be almost impossible to determine whether an inability to obtain privately financed housing is due to race, creed, or color, or to income factors or general mortgage market conditions. There is a greater frequency of low incomes among the nonwhite segments of the population than among the white, and a relatively large proportion of the low rent public housing units are occupied by racial minorities who cannot obtain adequate privately financed housing primarily due to economic circumstances. Also, the provision that persons would be eligible for this program where inability to obtain adequate living accommodations in privately financed housing is attributable to race, creed, or color, would place an impossible burden of judgment on the FHA. The provision of the bill which would establish a 4 percent maximum interest rate for section 221 mortgage loans would place the rate of return to investors so far below the competitive market rates for insured mortgage loans of a comparable size and quality that there would be no chance of obtaining private financing for such mortgage loans in the foreseeable future. Furthermore, since advance commitments may be issued under FNMA special assistance programs this provision, in effect would establish a large direct loan program at a less than market interest rate to provide low cost housing. It would defeat the purposes of using FNMA special assistance as a means of establishing the marketability of mortgages for special housing programs. This effect would be abetted by the provision that FNMA would have to purchase such mortgages at par. Since it would be highly undesirable to sell the mortgages at the high discount which would be required for their sale, the chances are that FNMA would have to hold the mortgages until maturity, freezing the Government's investment in this program and forestalling private enterprise participation therein. Finally, the authorization of $250 million for special assistance purchases of mortgages under a greatly expanded section 221 housing program would tend to make for budget deficits and for an inflationary impact upon our economy already operating at a high level. It should also be recognized that with the greatly enlarged categories of eligibles for section 221 housing to be financed with 40 year, no downpayment, 4 percent mortgages, the authorization of $250 million would prove to be completely inadequate, except if considered to be only an initial authorization with which to make a small beginning. Before long, the Government might have to provide billions of dollars of financing to supplant the present financial structure serving a broad segment of the mass market for housing. Such an invasion, instead of supporting and supplementing the vast flow of private funds into residential construction, would attempt in large measure to replace the normal private investment sources. The result would be that before long less housing, rather than more housing, would be available to families of moderate income. This proposal would actually result in special benefits to a limited group of prospective home owners fortunate enough to avail themselves of a below-the-market rate of interest made possible through FNMA special assistance. For the foregoing reasons, we strongly recommend that S. 1633 not be enacted. Sincerely yours, ALBERT M. COLE, Administrator. COMPTROLLER GENERAL OF THE UNITED STATES, Hon. J. W. FULBRIGHT, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: Reference is made to your letters of March 25 and 27, 1957, requesting our comments on S. 1633 and S. 1694, respectively. Both bills relate to the provision of adequate housing for persons of moderate income and others, but differ in the method by which this would be accomplished. Basically, S. 1633 would enlarge the categories of persons for whose benefit housing mortgages could be insured by FHA under section 221 of the National Housing Act. At present section 221 applies only to insurance on housing for families displaced as a result of urban renewal. S. 1633 would extend such insurance to housing for persons of moderate income; persons unable to obtain adequate housing because of race, creed, or color; elderly persons; persons having five or more dependents; and to persons in such additional categories as the Federal Housing Commissioner might prescribe by regulation. The bill would also reduce the maximum permissible interest rate on such insured mortgages to 4 percent, and would require the Federal National Mortgage Association to pay no less than par for these and other mortgages purchased under its special assistance program. By these means, S. 1633 would attempt to stimulate construction by private capital of additional housing for persons in the categories named. S. 1694 embodies an entirely different approach to the problem. This bill would provide for direct mortgage loans by a Government corporation to be created. Capital for the corporation would be obtained by the sale of stock to the Government and by requiring borrowers to purchase stock equal to 5 percent of loans received. Interest chargeable on mortgage loans would be based on the cost of borrowings by the corporation, plus one-half percent. Corporate borrowings from the public would be underwritten by the Government through the right given holders of corporate obligations to exchange them, in case of default, for debentures guaranteed by the United States. In our opinion, it is unlikely that S. 1633 would stimulate any great increase in private capital for housing construction because of the low maximum interest rate of 4 percent provided. Furthermore, the purchase of such mortgages at par by FNMA would result in a loss to that Association unless it could borrow money from the public at less than 32 percent, because of overhead expenses and the one-half percent fee paid as a mortgage service charge. It may be noted that FNMA offered a $250 million issue of 11-month debentures for sale on February 27, 1957, at 4 percent. For these reasons, we do not favor enactment of S. 1633. While we do not favor the creation of additional Government corporations, if the Congress should decide to give favorable consideration to S. 1694, we have the following recommendations on the bill. We urge that section 4 (e) of the bill be eliminated. The corporation to be created would be subject to audit by the General Accounting Office under the Corporation Control Act in any event, and that act would enable us to determine the type of audit best suited to the corporate operations. We are also strongly opposed to finality clauses such as that contained in the proviso of section 4 (e), since such clauses may well preclude an effective audit by us. It would be preferable, we believe, to place a specific monetary maximum on mortgage loans in subsection 7 (b), page 19, of the bill, rather than to leave the maximum discretionary with the Administrator. In addition to the foregoing, we notice the following technical deficiencies in the bill. The last sentence on page 6 dealing with free use of the mails appears to be superfluous. The sentence beginning with line 9, page 19, refers to loans made under section 11 (b), which section is merely a definition. The sentence probably should refer to loans to borrowers of the character described in section 11 (b). Section 11 (h) defines the term "going Federal rate," but that term does not appear elsewhere in the bill. Definition may have been intended of the term "current average rate" as used in line 16, page 10. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Hon. J. W. FULBRIGHT, Chairman, Senate Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR FULBRIGHT: This is in response to your request of March 25 for the views of the Board of Governors on the bill S. 1633 now before the Committee on Banking and Currency. This bill is designed to place five enumerated groups in the population in a position to obtain what amounts to direct financing of house construction and purchase from the Federal Treasury on terms considerably more favorable than are currently available in the private market. Apart from the technical problems involved in the specific approach proposed in this bill, the Board would urge that your committee give special consideration to any legislation which will increase the Treasury's financing problems in the period immediately ahead. The large demands for loanable funds for all purposes and the volume of financing which the Treasury must carry out simply to maintain the huge Federal debt outstanding make it essential that additional borrowing be held to an absolute minimum if we are to avoid further tightening and congestion in the capital markets. A major technical problem would be that future ownership or occupancy of properties built under the proposed program could not be restricted to the enumerated groups without creating grave legal problems about real-estate titles. The result would be likely to be, therefore, that properties would be built in technical compliance with the regulations governing the program, and then sold or rented in the best market without necessarily benefiting the enumerated groups. Evidence that this is happening under the provisions of section 221 of the National Housing Act now in effect is contained in an article in the current issue of the Journal of Homebuilding, published by the National Association of Home Builders. Experience with the special mortgage insurance programs in recent years has not been wholly satisfactory, quite apart from judgments about the objectives sought. These schemes have cost a good deal, not only in money directly, but in respect for the integrity of the Government-aided housing program as a whole. Before going ahead with a further extension of this approach to the subsidization of housing for selected groups, it might be well to study the economic history of properties and projects financed under several of the special programs that have been in effect in the past 15 years. Sincerely yours, WM. MCC. MARTIN, Jr. HOUSING AND HOME FINANCE AGENCY, Re S. 1694, 85th Congress. Hon. J. W. FULBRIGHT, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C.: This is in further reply to your letter of March 27, requesting the views of this Agency concerning S. 1694, a bill relating to the provision of housing for moderate-income families and for elderly persons. The Housing Agency strongly recommends against the enactment of this bill. The bill would establish a National Mortgage Corporation in the Housing Agency with authority to make direct mortgage loans to families of moderate income and to private or public nonprofit corporations (including cooperative ownership housing corporations) which will provide projects to serve families of moderate income and elderly persons. The National Mortgage Corporation would initially be given authority to borrow one-half billion dollars for making such loans. After July 1, 1958, additional amounts of $1 billion could, under certain circumstances, be made available each year for such loans. The National Mortgage Corporation would obtain loan funds by issuing its obligations in the private market, but in the event of default, these obligations would be replaced by debentures fully guaranteed by the United States both as to principal and interest. Capital stock of $100 million would be subscribed by the Treasury, but would gradually be replaced by capital stock issued to corporations which borrow from the National Mortgage Corporation. These corporate borrowers would be required to subscribe to stock in amounts equal to 5 pecent of the mortgage loans which they received, but the stock could be fully paid for over a period of 20 years. Direct loans with maturities of 40 years and with downpayments of 5 percent would be permitted for families of moderate income and for elderly persons. Families of moderate income are defined as those whose incomes preclude them from obtaining "conventionally financed new housing with total monthly expenditures of 20 percent of their normal stable income." This bill would, in effect, commit the Federal Government to underwriting billions of dollars of financing to supplant the present financial structure serving a broad segment of the mass market for housing It is relevant to note that the program contemplates that one-half billion dollars of loan funds could be authorized initially and $1 billion additionally in each year thereafter. It is likely, moreover, that these authorizations would be only a beginning, since there would be a tremendous demand for 40-year mortgage money and under the eligibility criterion (of inability to obtain conventionally financed new housing for which the housing expense should not exceed 20 percent of income) loans would be available to families who now constitute a major part of the mass housing market. The definition of moderate income families overlooks the manner in which our housing market functions to provide housing for people of moderate income. Since our annual housing production generally equals 2 to 3 percent of our stock of existing housing units, it is inevitable that by far the largest part of our population should live in existing units. It seems unrealistic, therefore, in terms of the housing market, to set up as a criterion of eligibility for housing proposed under the bill, the inability to purchase or rent new privately financed housing with expenditure of a given percent of income. The definition would make eligible a large portion of the market which is now served by the Federal Housing Administration and the Veterans' Administration programs for the financing of both new and existing housing. Some |