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plans in 3 weeks,” he does all preliminary sketches himself. He makes an effort to relate siting to contour, to obtain enough interior wall space to take furniture, to provide ample closet space, some ventilation in bedrooms, etc. His claim to distinction is the really brilliant way he can execute these minimum requirements of apartment planning within a very rigid cost limit-a limit set by the sponsor's intention of realizing a maximum cash take out of the deal. Here is a rough idea of the builder's possible cash take:
He may save up to 312 percent of the 5 percent architectural fee allowed by FHA.
He may get a 3 percent premium from the mortgagee. (In New York the premium has ranged as high as 4 percent. Over the country as a whole, a 142 percent premium is commonplace, and, with the advent of New York and Massachusetts savings bank money in the national market last summer, competition for 608 loans became even keener.)
He may build faster than FHA's allowable schedule of 12–18 months. (Some builders finish in 5 to 6 months, not only making a tremendous saving in labor but realizing six extra months of rent.)
Most importantly he tries to turn an honest penny by cutting construction costs below the estimates made by FHA in sett loan value. (Savings up to 8 percent on subcontracting and materials shopping are possible. Moreover, since up to 18 months may. elapse between FHA processing of the application and building completion, the builder will profit from any general drop in construction costslike the 10 percent drop over the last year.)
“Why shouldn't the more efficient builder make a greater profit?” ask many defenders of the FHA status quo. So far this has sounded fine to Congress, as it does to any casual observer. But in this case the profit isn't the customary percentage taken by enterprisers for their own management time or their own risk capital—but, through all these devices, up to 12 percent cash actually taken out of a long-term mortgage loan backed up by the taxpayer's credit. It is in addition to the 5 percent builder's fee which FHA allows in making its estimates of allowable construction costs.
Even if the builder isn't smart enough to make money by undercutting the building costs allowed by his FHA loan contract, two more ways to a quick cash profit are still open to him. These are by inflating the value of his land and by eventual sale of his inflated or fictitious equity after the job is built (although few buyers have as yet appeared in the market).
FHA allows current market value, not actual purchase price of land, in valuing 608 projects, but limits the amount that land may count in the deal to 10 percent. In cases where the builder has made a favorable land buy, he may profit accordingly. But even surer ways of making money out of land are available. Mere FHA approval of a 608 plan will jack up land value overnight. There is considerable speculation in FHA commitments and several heads of FHA district offices have admitted it, while arguing that they have no power to prevent sale of commitments. Speculation in FHA commitments works like this: A speculator buys a piece of land, then secures FHA approval of a plan designed (more or less) for the site. The FHA stamp of approval enables him to sell the deal at five or six times what he paid for the land.
Another way the builder can realize immediate cash profits out of land after loan commitment is to sell it and then build on a leasehold. There are plenty of prudent investors ready to hand the builder this extra cash profit by buying land at many times its precommittal value. From the land buyer's point of view, it is a sterling investment. Both Federal mortgage insurance and the value of the building itself stand between any default on the lease and if the development is burdened by lease payments based on a precarious inflation of land value, nobody can lose but the Government.
Whether these fascinating pieces of financial legerdemain are the legitimate rewards of ingenuity may, perhaps, be argued. But their net effect is scarcely debatable: to reduce the long-term value of the rental buildings covered by the taxpayer's guaranty.
Because the whole 608 program is insulated from the normal forces of a competitive market by Government insurance, neither the builder nor the lender need have the slightest concern with whether the apartments being put up so fast today will be vacant tomorrow. Just what this means to building quality can be seen by contrasting 608 sharpshooting with the program of a legitimate equity
investor in rental housing like the New York Life Insurance Co. New York Life's chief concern is to build as much long-term livability value in its developments as it possibly can under current construction costs. This and this alone can be expected to hold tenants and rent levels as the years go by.
Just how thin a 608 equity can get is demonstrated by cases where commitments have been issued to so-called owning corporations who lack even the resources to post the required FHA examination fee (0.3 percent). The owning corporation then peddles the commitment to a builder on this basis: the builder posts the necessary cash, takes over the mortgage fund, builds the building, pockets the difference between the loan and the cost, and turns the completed property back to the promoting group, which sometimes also shares in the builder's profits.
Those who feel that the day of the "great default,” will not be forever delayed by the current shortage of rental space point out that the 608 formula demands a continuous inflation. Future earnings for many a 608 project are calculated on the basis of (1) inflated rents; (2) an inflated mortgage; (3) reduced construction standards. This inflation of equity rests upon the assumption that every item of cost and income will remain constant for the life of the project, that is, sustained high building costs, constant operating costs, 7 percent vacancy (10 percent used to be considered normal by apartment operators in the immedate prewar years). Even where 608 equities are real rather than fictitious they amount, of course, to 10 percent as compared with the 30 percent equity customary in the conventionally financed apartment house.
If there is no reason for the equity owner to try to hold onto it in bad times, what about the loan stake in 608 projects? Or, in other words, what may the Government eventually get for its money? FHA-insured loans typically amount to eight to eight and a half times the gross rent role at high rents. This compares with the customary appraisal of existing first-class properties at six to seven times the rent role at federally controlled rents. It should be noted that this is a comparison of loan value on a 608 and market value on what many investors now call a legitimate house.
Inflation may very well continue to rescue 608 projects by making up for whatever may be missing in equity and loan values. But any reverse of this process is likely to be disastrous. The whole FHA risk-bearing formula, which has flourished in a period of rising real estate values, has yet to meet the decisive test of a serious value decline. Cynics point out that a special HOLC for apartment buildings will not, however, be necessary, since the mechanism for mortgage collapse is already set up: the Federal National Mortgage Association, now buying whatever 608 loans lenders want to sell and even stepping in as direct lenders where private lenders will not venture.
The two most vulnerable points in FHA's rental stake are the large number of high-rent ($95 to $130 a month) apartments and the high proportion of efficiency units which it has permitted to get a start. FHA has made belated attempts to stop both high-rent and efficiency building. By now, practically all local insuring offices have cut their rent ceilings from 10 to 20 percent (ceilings vary according to building location). Typical current rent ceilings on a two-bedroom apartment are: Washington, $65 (the local office is so convinced that the area is overbuilt that it is actually processing nothing but applications for Negro housing); Los Angeles, $80; Detroit, $75; Atlanta, $65. Last summer the New York FHA office found a rental lag as high as 4 months in buildings in outlying sections and stopped processing rents higher than $110 for a two-bedroom apartment. By October, this ceiling was discovered to be still too high and rents were again cut (to $88 for the comparable two-bedroom apartment). But these belated rent cuts will make little difference in the rent levels of 608 projects built throughout 1950, because commitments run so far ahead of actual building. For example, when New York set a November 1 deadline for its most recent rent crack-down, it already had applications on file for 3,100 units, all of which will have to be processed at the old ceiling of about $25 per room.
The big 608 building boom was set off in 1948 when FHA made an important shift in its formula for computing loan limits. Previously the loan limit had been $1,800 per room and builders had argued that it simply was not possible to meet FHA minimum requirements at that price. When FHA changed the loan limit to $8,100 per apartment unit, applications zoomed. The shift meant that the builder could stretch the loan limit by putting in plenty of one and one-halfor two-room efficiency units. This started the building of elevator apartments in high-priced locations. In the first 11 months of 1947 only 2.6 percent of 608 applications had covered elevator apartments; by 1949, elevator apartments accounted for 24 percent. Examination of commitments issued during the first 6 months of 1949 shows that roughly half of them were for units of three and onehalf rooms or less (a three and one-half-room count: living room, bedroom, kitchen, dining alcove)--a size inadequate for a family with even one child. By last November, most local FHA offices had stopped accepting plans including anything less than one-bedroom units and were refusing to pass any large number of these.
When FHA began to plug the 608 rental program late in 1946, it hoped to meet the accumulated shortage of rental housing and give veterans some alternative to buying a house in a peak cost period. FHA said it was especially eager to increase rental supply in smaller communities and offered quicker processing for small projects. How far these latter aims were met can be gaged by the fact that roughly half of all 608 commitments so far issued are clustered in the environs of the cities of New York, Washington, and Baltimore. At the end of 1948, over 56 percent of dwelling units were in projects of 100 units or more (16 percent of these were in projects of 300 units or more).
Of all the parties involved in a 608 deal, the FHA is the only one with a real financial stake in the long-term value of the properties. FHA's principal mechanism for getting long-term value is a document called Minimum Property Requirements for Multifamily Dwellings and the countless decisions made by hundreds of overworked, underpaid FHA employees in relating the blueprints before them to ihe standards set by this bible and to the unpredictable future of the rental market. Neither the minimum standards themselves nor the de. sign philosophy which sets them are adequate protection for the unparalleled risk involved in this $2,000,000,000 worth of Government-backed loans.
One trouble with officially set minimum standards of any sort is that they tend to become maximums. Many architects say that the average FHA official is more enthusiastic than the builder himself in holding plans to the required minimums. One architect recalls that he persuaded the sponsor to adopt larger room sizes and other amenities not required by FHA in the interest of longterm rentability, only to have the sponsor told by the FHA examiner: "You're crazy to build anything this big."
Many architects argue that FHA minimum standards are already substandard. Its minimum 150 square foot living room is 10 square feet less than the minimum living room acceptable to the New York City Housing Authority for a family of four. Its master bedroom minimum of 100 square feet compares with a master bedroom of 125 square feet in New York public housing. Useful size of the living room is generally further reduced by the fact that it is used as a passage to reach other rooms. FHA uses the interesting phrase "semiprivacy” to lend special approval to those plans where this passage is accomplished at one end of the living room rather than diagonally across it. Corner ventilation (two windows at right angles as distinguished from through ventilation) is a minimum requirement for all bedroms, but even this is usually waived in the case of small apartments.
AGREEMENT NOT TO COMPETE
There is no way of knowing how many other exceptions have been made to the already low 608 minimums. In each local insurance office, the chief underwriter has the right to waive minimum standards if local need for housing is severe.
Although they are certainly not intended to do so, FHA minimums actually serve as a general agreement to restrain competition. Because the buildings are protected from the normal hazards of future rentability by Government insurance, nobody needs to build any bigger rooms than anybody else.
One member of the New York chapter AIA housing committee which has just began an investigation of 608 design standards says: “Minimum standards on mechanical work are not being adequately met. FHA requires that mechanical work be designed by a registered engineer, but builders who don't want to pay an engineer's fee frequently turn to engineers employed as salesmen by equipment manufacturers. With the minimum examination of mechanical work permitted by FHA, this subterfuge often succeeds. These men can't give much time to each individual job; they often are obliged to use rule-of-the-thumb methods. We were once able to reduce the cost of a mechanical installation by one-half over the plans presented by the manufacturer who designed the job." This same architect, a member of one of the few top-rank architectural firms which have had a chance to do 608 work, also recalls that on one big recent job, the mechanical subcontractor called up to inquire if the plans would show the size of the boilers, size of piping, where the valves were going, and so forth. He was unaccustomed to getting such detailed plans on 608 work and said that he was obliged to increase his bid where he had to supply mechanical information.
It was not always so. When FHA appeared in the house-building business in the depressed year of 1934, its planning and construction standards were actually regarded as a great light in the wilderness at the mercy of jerry-builders and flyby-nighters. In the area of the moderate and low cost single-family house, this was, during FHA's early years, pretty close to the facts. In the area of rental housing, FHA's effect was more limited since, until the advent of 608 in 1942, it had insured only about $144,000,000 worth of loans covering 37,964 units. Even so, it can be credited with popularizing the livable two- and three-story garden apartment, a building type which appeared before the depression and held its rent levels remarkably well in the real-estate disaster which followed.
But as the agency and its standards aged, its initial crusading fervor was buried under an impregnable conservatism. Meanwhile, the house-building industry itself, as a result of war expansion and of an accumulated technological advance, finally passed across the threshhold of the industrial revolution. As FHA acquired a large interest in existing residential real-estate values, it became increasingly fearful of any threat to those values—either through the introduction of new construction techniques or new planning principles. Moreover, FHA's specialty was the single-family house, and its standards for the apartment building were in many cases simply adapted from standards considered adequate for the detached dwelling. When the 608 rental program suddenly boomed to enormous proportions in 1948, FHA was dealing with a building type with which it had had little previous experience and to which its whole point of view was maladapted.
One of the most fascinating aspects of FHA's underwriting position in today's rental building is its strange mixture of financial radicalism on the one hand and design conservatism on the other. That is, FHA shows an optimism in going along with nonexistent equities and inflated loans that would make a conservative banker blanch. But it is far more conservative than the average banker in its refusal to take a chance on any new architectural solutions for the problem of rental building.
FHA's well-known hostility to the great body of new building techniques loosely labeled as “modern design” is probably the surest way to expose the already dubious value of its insured projects to severe competition from new rental building in the future. The quickest way to demonstrate this is to examine what many architects call FHA's court fetish.
If there is one area in which modern designers excel, it is undoubtedly in their ability to extract the maximum use from whatever inside and outdoors space is allotted by the financial exigencies of the building problem. That is, by freeing both the site plan and the building plan from the requirements of traditional symmetry, they are able to provide more space for the requirements of family living.
But FHA seems irrevocably wed to the court plan. That is, apartment buildings must be twisted around a court—sometimes only 50 feet wide even if this means siting against the grade. (“Once they had us moving half the hillside around,” one architect says.) Orientation to sun, to prevailing winds, to viewall this is likely to be overlooked in favor of a pretty court plan. While the court plan may mean slightly less total building perimeter, it also means an irregular interior, where the tendency is to squeeze rooms into not fully usable corners.
In defense of the court plan, it must be said that where projects are built on barren flats or close to the building line in heavily developed areas, perhaps the best that can be done is to create a little landscaping and turn the view inside. But architects who have engaged in near mortal combat with FHA on the matter say that the court is required even where all semblance of reason has disappeared-in cases where the contour is rolling and the view magnificent.
Another example of an obsolete point of view is FHA's requirement that the kitchen must be closed off from the living area by a door. This blanket attitude completely neglects the fact that modern ventilating devices take care of kitchen
odors, that families with small children are not likely to shut the door between the kitchen and other living areas, that a cheaper and better solution might be to baffle off the kitchen from view.
Most modern architects who have encountered FHA processing agree that the most disheartening aspect of the situation is official insistence on routine planning with which they are familiar and a complete unwillingness to try anything new. With both FHA and the sponsor lined up solidly against any departure from exactly what was done yesterday, the architect is helpless. If he wants to keep his 608 clients, he soon learns not to start any arguments with FHA processors. Some local FHA offices actually go so far as to suggest that the architect simply make use of FHA's stock site or building plans, which it is happy to take off the shelf.
Part of FHA's resolute conservatism is no doubt related to what it has time to review. There is often simply not time for examiners to study new designs or new systems. If it continues to occupy its preeminent place in the Nation's house building, FHA greatly needs more and more competent assistants—a reviewing staff not prejudiced against independent architectural initiative.
Another factor that has conspired to hold 608 planning firmly to the familiar ways of yesterday is the builder's rush to get his plans in before some deadline or other has expired. Title VI has been extended by Congress in a series of indecisive stops and starts; various changes in administrative regulations urge builders to get their applications in before something new turns up. Builders thus want their architects to do a quick and minimum job (for a minimum fee). One very practical thing FHA could do to counteract this would be to adopt a progressive attitude on planning, then give commitment priority or other preferential treatment to applications where an excellent planning job has been done.
When the fabulous section 608 expires next March 31, Congress will be under great pressure to renew it. But this time Housing and Home Finance Administrator Raymond Foley will not be among those bringing pressure to bear. Foley has never been really happy about the continued postwar extension of various parts of the emergency title VI, a special insuring fund set up to cover the extra risks of war housing and kept separate from FHA's regular insuring fund. He will probably recommend that Congress allow 608 to lapse, but give a little more appeal to the old 207 rental program. Thus 207 loans might be authorized up to 90 percent for low-rent apartments (grading down to 80 percent in inverse ratio to rents), but the appraisal base changed from 608's “costs not higher than those of December 1947” back to title II's "reasonable long-term value.” This is about what happened on the single-house program last year. Foley and FHA Commissioner Franklin Richards have both said recently that costs have adjusted themselves to the point where there is virtually no difference between the long-term valuation and replacement cost yardsticks.
This would undoubtedly be a step in the right direction, and would probably put FHA-insured rental buildings on a somewhat sounder financial footing. But it would not cure the basic flaw in the FHA formula for getting apartments built: the fact that there is every incentive for the builder to undercut the longterm value of the property and a complete lack of incentive for him to do anything else.
Part of the trouble with the quality of current rental building is that FHA has not fully recognized nor discharged its responsibility for representing the public interest. Congress shares some of FHA's confusion. “After all,” some Congressmen say, “the Government isn't lending the money, is it?” But the difference between making a loan on an apartment building and insuring that loan is not so great as FHA appears optimistically to believe. Actually complete control of the building operation has passed from the private lender to FHA. Even the most cautious private lenders now exercise their prudence simply by rejecting whatever FHA-insured loans seem to them unusually precarious. On what FHA-insured loans they make, their participation in the building operation is limited to rubber-stamping the plans and specifications that have been through FHA processing.
FHA can argue that its regular inspections of the building job are more effective than lender supervision in the old days. It can point to its requirement that the owner make regular payments into a replacement reserve, so that when repairs or new equipment are necessary there will be money to provide them.