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the Life Insurance Association of America, which indicate that the enactment of a bill along the lines of H. R. 7700 would encourage and stimulate private lend-ing institutions to finance sound medical projects. This stimulus would be en-hanced if certain State law limitations on investments by such institutions, mentioned in the correspondence referred to, were relaxed in the case of Government-insured or guaranteed loans.
While your committee is in a better position than this Department to appraise all of the evidence before it on this score, we see no further reason for qualifying our endorsement of the principle of this bill by a reservation on the question of feasibility as a self-sustaining program.
(a) Insurance should be discretionary.—We should like to reiterate the recommendation made in our earlier report, that mortgage insurance in any case should be a matter of discretion rather than a mandatory duty. This would seem to be essential if the program is to be administered with a view to accomplishing its objectives. We therefore, recommend deletion of the phrase "and it shall be his duty” in sections 704 (a), 706 (a).
(6) Program ceiling.–Section 704 (b) of the bill provides that the aggregate amount of principal obligations of all mortgages insured and outstanding at any one time shall not exceed $1 billion, except that, with the approval of the Presi.dent, this ceiling may be increased by another $250 million. In view of the fact that this is an entirely new program involving a relatively untried field, we would urge a more limited obligation ceiling, which could be amended by subsequent legislation if the program were operating successfully. We recommend substituting for the above-mentioned ceiling figures $200 million and $150 million respectively, thus making the aggregate program ceiling $350 million.
(c) Types of facilities.—Careful consideration needs to be given to the type of facilities which may be insured under the program.
In this connection, it is difficult to see any distinction between the facility contemplated by the proposed section 702 (c) (diagnostic or treatment center) and that proposed by section 702 (d) (personal health service center), and it may be advisable to eliminate the one or the other from the bill. Further refinement of the definition of the term used also seems necessary.
The inclusion in the bill (sec. 702 (a) (5)) of “offices for physicians and dentists for the provision of personal health services to ambulatory patients," unless more closely circumscribed than it is in the bill, could lend itself to the use of the mortgage-insurance program for purposes for which it is not needed, such as the financing of so-called medical buildings in which offices are to be rented out to medical practitioners having no relation to one another, or for the equipment of individual doctors' offices in urban communities. At the very least, we believethat the provision for individual offices should be confined to doctors' and dentists' offices or so-called solo clinics in rural shortage areas.
The committee may wish to consider the inclusion of nursing homes as eligible facilities.
(a) Degree of risk borne by lender.—As the bill stands, insurance on a medical facility would cover 100 percent of the principal amount of the mortgage (or 99 percent where the mortgage itself assumes the burden of foreclosure proceedings). We recognize that there is precedent for this in the housing program and, formerly, in the ship mortgage insurance program. We are aware also that other factors, including the lower interest rate on debentures with which insurance is paid, the fact that mortgage insurance does not cover delinquent interest, the doubtful value of the certificate of claim which is received in addition to the debentures, the 1 percent deduction feature where the lender does not effect the foreclosure, and the adverse effect on the lender's prestige, do give the lending institution some incentive to observe due diligence in connection with approval of such loans, the servicing of the mortgage, and otherwise protecting the loan. Underlying this general problem is, of course, the fact that the 100 percent guaranty under the housing insurance program (with certain exceptions) would make that a more liberal program, and that the loan applications under this program would be in competition with housing loans, although this might be counterbalanced by the higher interest rate possible under the program proposed by H. R. 7700.
On the other hand, we are inclined to the view that the specialized nature of medical facilities, and their other unusual characteristics from an investment viewpoint, require particularly close screening of each borrower by the lending institutions and by the agency responsible for the administration of the program. Insofar as the lending institution is concerned, this argues for strengthening the above-mentioned incentives for the exercise of due diligence to the extent feasible without seriously jeopardizing the objective of stimulating the construction of medical facilities. Furthermore, the administration has recently taken the position, in connection with the ship mortgage insurance bill, that Government loan insurance should not, in general, guarantee as much as 100 percent of the loan. We therefore recommend that the insurance proposed by the bill be reduced from 100 percent to some lesser percentage of the face amount of the loan. The Bureau of the Budget, in the light of general administration policy and experience with other programs, recommends in this connection that the maximum insurance per loan be changed to 90 percent. And we further suggest that this reduced percentage be fixed in terms of a ceiling, with discretion in the Secretary to fix lower percentages for some or all facilities, as the risks involved, the need for the type of facility, the mortgage market, and other relevant factors may indicate.
In conjunction with this percentage coinsurance feature, other devices might be considered—such as extending the term of the debentures to be received by the lender upon a default from 10 years to 20 years.
(e) Statutory ceiling on amount of insured mortgage loan.—The proposed section 706 (a) (6) (B) provides that the insured mortgage shall not involve a principal obligation in excess of 90 percent of the estimated value (including the land, proposed physical improvements, etc.) of the project upon completion, nor 100 percent of the estimated cost of the completed physical improvements.
We believe that it should be clearly stated in the legislative history of the bill that this is a ceiling only, and that the administration of the program would not be obliged in any respect to adopt the ceiling as the usual loan-value ratio.
More fundamentally, we question whether a 10 percent equity is of sufficient magnitude to assure sound loans. Particularly in the field of medical facilities, where the soundness of the loan may depend less on the physical project than the quality of the borrower, we believe a lower loan percentage ceiling should be established. We would suggest a ceiling of 80 percent rather than 90 percent.
Another amendment which would seem advisable is a provision requiring immediate repayment of so much of the mortgage loan as exceeds the actual cost, or approved percentage of actual cost, of the completed project.
(f) Interest and premium ceilings.—The bill fixes a premium ceiling of 11/2 percent per annum of the principal obligation of the mortgage outstanding at any time and a ceiling of 6 percent or, if the mortgage market demands it, 672 percent per annum on the interest rate (exclusive of premium charges for insurance) on insured mortgage loans. This would permit a total charge to the mortgagor of as much as 8 percent per annum.
It is questionable whether any statutory ceiling on the interest rate is desirable. On the one hand, any such ceiling would probably have to be higher than currently necessary, in order to leave room for fluctuations in the mortgage market and other special circumstances, and also take account of the coinsurance factor above suggested. On the other hand, any statutory ceiling, though higher than might be called for by the current mortgage market alone, would tend to become the norm in practice. This might be avoided by deleting the statutory ceiling and leaving the matter to administrative discretion. If the committee should, however, decide on a given statutory ceiling, the committee might wish to consider permitting the administering agency to raise this ceiling if the mortgage market, and the need for facilities, should demand it.
In any even, if a statutory interest ceiling is fixed, we believe that the legislative history should emphasize that these provisions do not preclude the administering agency from establishing by administrative action a lower maximum interest rate as a condition of granting mortgage insurance.
We believe that the 142 percent maximum premium rate fixed in the bill should be retained, although experience might prove that a lower rate could be charged. However, since this rate is a ceiling, a statutory guide for fixing the rate within this ceiling so as to make the program self-sustaining seems advisable. Also, different premium rates might in actual administration be set for different risks or for different coinsurance percentages. We therefore suggest that the Committee consider amending page 19, lines 9 and 10, of the bill, along the following lines :
"authorized to fix premium (a) charges for the insurance of mortgages under this title at rates which in his judgment are adequate to cover administrative expenses and reserves for probable losses, but in the case of any mortgage”. (New matter is underscored and matter to be deleted
is in brackets.) It should be understood, however, that, pending the accumulation of experience we would probably feel constrained to charge the 142 percent rate in cases in which maximum insurance is provided.
(g) Individual mortgage loan ceiling.—The proposed section 706 (a) (4) of the bill provides that an insured mortgage shall involve a principal obligation (including such initial charges, appraisal, inspection, and other fees as the administering agency may approve) in an amount “not to exceed $5 million.” In view of our proposal to reduce the program ceiling to $200 million with an additional amount of not more than $150 million upon approval of the President, and in order to promote the purpose of the bill to relieve the shortage of medical facilities throughout the country, we recommend that the individual-loan ceiling be reduced from $5 million to $3 million. Such a ceiling, together with the proposed loan-value-ratio ceiling of 80 percent, should be adequate to take care of most projects which might be considered under this program and at the same time would allow a more equitable distribution of medical facilities throughout the country under the bill.
In addition, we would suggest that the legislative history make clear that whatever figure is fixed in the bill is merely a maximum figure and does not preclude the administering agency from fixing administratively a lower individual-loan ceiling.
(h) Maturity of mortgages.—The bill provides for a maximum maturity of 40 years on insured mortgages. While this is a maximum, and a lower maturity could be used in actual administration, we believe that, in view of the problem of obsolescence of mortgaged facilities and other factors, the statutory maximum should be reduced to 30 years.
(i) Projects completed prior to approval of insurance. The proposed section 704 (c) and (d) (p. 13 of the bill) seems to contemplate that, for a transitional period, a limited amount of insurance be granted with resi:ect to projects completed prior to approval of the application for insurance. This does not appear to be required in order to promote the objectives of the act. We recommend, instead, that insurance be limited to mortgage loans to finance facilities constructed or purchased subsequent to approval for insurance.
(j) Responsibility for administration.-In our report of April 8, 1954, we raised the question whether, in view of the important financial, mortgage, and real-property-law aspects of the proposed program, primary responsibility for administration of the program should be vested in this Department or in some agency already experienced in the mortgage-financing field, with allocation of appropriate responsibility for the health aspects of the program to this Department.
After further consideration of this question, we believe that, having regard to the program objectives of the bill, the desirability of effecting coordination with other programs administered by this Department and with the proposed reinsurance program (H. R. 8356), the considerations in favor of vesting ultimate program responsibility in this Department outweigh those for placing it elsewhere. At the same time, we believe it desirable to utilize to the optimum extent, in connection with the purely fiscal, mortgage, real-property law, and related technical aspects of the proposed program, other agencies and institutions having substantial experience and resources, facilities, and personnel in handling such matters. The proposed section 705 (b) appears to be adequate for that purpose.
There remains the question whether program responsibility should, as proposed in the bill, be vested in the Surgeon General, subject to the Secretary's supervision and direction, or vested directly in the Secretary. As you know, the Secretary has full power, in connection with program functions vested in the Secretary, to delegate to constituent units and the heads of such units the performance of such functions as may be considered appropriate. We believe the Public Health Service should concentrate on the health aspects of the program. We, therefore, suggest that throughout the bill program responsibility be vested in the Secretary rather than the Surgeon General. This change in the bill would not require that the statutory provisions be outside the Public Health Service Act.
(k) Technical amendments.—The bill needs further careful consideration from the point of view of its technical provisions, and staff of this Department would be glad, if the committee so desires, to assist the committee staff and
legislative counsel in working out perfecting amendments. For example, we suggest an amendment which would incorporate in this bill the same provisions as contained in sections 101 (c) and 402 of the reinsurance bill (H. R. 8356). These would authorize the Secretary to “determine the character and necessity of expenditures from the fund and the manner in which such expenditures are incurred, allowed and paid, subject to provisions of law specifically applicable to wholly owned Government corporations,” and would provide for a business budget, for an integral set of accounts, and for annual audits by the General Accounting Office in accordance with the principles and procedures applicable to commercial corporate transactions as provided by section 105 of the Government Control Act.
Another necessary technical amendment which should be mentioned is the deletion of the second proviso to the first sentence of the proposed section 703 (d) (p. 11, lines 10–20). The substance of this proviso was, through apparent inadvertence, taken from section 304 (b) of the Defense Production Act, as amended, which is unrelated to mortgage-loan insurance. It is not to be found either in the mortgage insurance programs administered by the HHFA or in any other Federal loan insurance program, and serves no appropriate function in the present bill.
Also, consideration should be given to the question whether facilities for which grants under the hospital survey and construction program have been made should be eligible for insured loans under the program proposed in the bill, and vice versa.
On the basis of the developments stated at the outset of this letter, and with the further changes recommended herein, we would recommend enactment of H. R, 7700. We believe that the principle of Federal mortgage loan insurance, applied under the bill (modified as proposed herein), would serve to stimulate the construction of much needed medical facilities for the service of the people.
We are advised by the Bureau of the Budget that it perceives no objections to the submission of this report to your committee. Sincerely yours,
NELSON A. ROCKEFELLER,
Acting Secretary. (Whereupon, at 12 noon, the committee was recessed, to be reconvened at 10 a. m., Monday, May 10, 1954.)