demonstrates that it does not have sufficient resources or credit available from other sources to finance an adequate but modest house. This policy automatically eliminates competition between the Farmers Home Administration and loans insured by the Federal Housing Administration. The Farmers Home Administration also answered our inquiry about the fre quent charge that it unfairly competes with private credit sources in rural areas. It gave somewhat the same answer as above regarding FHA competition. Hon. JOHN J. SPARKMAN, HOUSING AND HOME FINANCE AGENCY, OFFICE OF THE ADMINISTRATOR, Washington, D.C., December 30, 1964. DEAR MR. SPARKMAN: I sincerely regret the delay in replying to your letter of October 2 concerning governmental assistance for housing in outlying areas and small communities. You inquired about any plans which the Agency may have to extend the insurance program of the Federal Housing Administration to small towns and rural areas, and, if not, whether the Agency would object to Farmers Home Administration having authority to insure home loans in such areas. I have met with Secretary Freeman to examine various ways in which our respective programs could be made to operate more effectively in the areas in which you expressed concern. This subject is presently under consideration by the Administration, but no decision has been reached as yet. I will undertake to inform you at the earliest time possible. You also requested a report on the coverage provided by the Federal Housing Administration to rural areas and small towns. Federal Housing Administration statistics on home mortgages insured are accumulated by county, so that it is not possible to identify volume by size of community. Information is available. however, on the volume insured in those counties lying outside the boundaries of standard metropolitan statistical areas. As you know, the latter includes counties having communities up to but not exceeding 50,000 population. The table enclosed shows the combined volume of mortgages insured on new and existing homes inside and outside SMSA's for 1960, 1961, 1962, and 1963. In 1963, 23.3 percent of the total number and 21.7 percent of the total dollar amount of home mortgages insured were outside SMSA's. The percentages for 1963 were slightly higher than in 1960-62. It will be noted that the section 203 (i) volume has declined sharply during the years shown. The Housing Act of 1964 increased the authorized mortgage limits under section 203 (i) from $9,000 to $11,000, and this may expand activity under this section, but probably the larger number of cases will continue to be insured under section 203 (b). Statistics on purchases of FHA-insured and VA-guaranteed home mortgages under the FNMA secondary market also shed some additional light on the question you raised. Of the purchases of more than 400,000 mortgages made between 1954 and August 31, 1964, the following numbers and percentages of the total were on homes located in population groups under 20,000: FNMA secondary market statistics also show that the percentage of total purchases of FHA-insured and VA-guaranteed mortgages on homes in places of less than 10,000 population has been increasing since 1960 as follows: 1960 1961. 1962 1963 12.0 11.6 12.9 17.4 The Federal Housing Administration feels that certain administrative and procedural changes will enable it to operate more effectively in small communities and outlying areas. These have to do with a further simplification of its application forms, and modifications of construction and mortgage credit standards to allow for certain conditions in small towns. These changes have been drafted and are under review at present. Further, the Agency recognizes the reluctance and limitations of lenders in. small communities to participate in its mortgage insurance programs, and it is attempting to find ways to overcome this reluctance. We are also encouraging more mortgage lenders to come into such areas. We are developing a kit of tools to facilitate the origination of FHA-insured mortgage loans in small towns. Particularly helpful in these efforts will be the increased flexibility in the use of fee appraisers permitted by the 1964 Appropriation Act. Commissioner Brownstein and I are optimistic about our ability to assist in this area. Sincerely yours, ROBERT C. WEAVER, Administrator. Hon. JOHN SPARKMAN, DEPARTMENT OF AGRICULTURE, Chairman, Subcommittee on Housing, Committee on Banking and Currency, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: We appreciate receiving your letter of October 2 requesting our comments on the rural housing direct-loan program of the Farmers Home Administration and on potential programs for extending more housing credit to rural areas. Our comments on the specific questions you asked in the fifth paragraph of your letter are as follows: "Do you make loans to owners of land in farm areas only, or in any rural area of the United States?" When title V of the Housing Act of 1949 was enacted, rural housing loans were available only to owners of farms to enable them to construct, improve, repair, or replace dwellings and other farm service buildings on their farms for themselves or their tenants, sharecroppers, and laborers. After the Housing Act of 1961 amended title V of the Housing Act of 1949 to give us authority to also make rural housing loans to families who own a building site in a rural area, the demand for loars has increased sharply. During the past 2 fiscal years, about 74 percent of the rural housing loans made were on nonfarm tracts. This broader authority has helped narrow the housing gap, but the amount of funds available has kept the program from realizing its potential effectiveness. "What about houses in small towns or in rural suburbs of large cities?" For the purpose of our rural housing program, we follow the general guides established by the Bureau of the Census to identify rural areas. The term. "rural areas" as used in connection with our housing loan program includes farms, open country, and small towns and villages with less than 2,500 persons that are not part of, or associated with, an urban area. Rural housing loans are not made in established communities or subdivision developments near an urban area. Although other lenders usually are more active in areas near larger towns than in rural areas, we have received numerous reports of housing credit shortages in and near towns with more than 2,500 population. "What is the division of responsibility between your Agency and the Federal Housing Administration?" Since the rural housing loan program started in 1949, the Farmers Home Administration has endeavored to diligently adhere to the statutory requirement of making loans only to families who do not have sufficient resources or credit available from other sources to finance an adequate but modest house or essential farm service buildings. This policy automatically eliminates any competition between the Farmers Home Administration and loans insured by the Federal Housing Administration. "Are you competitive with private lending sources?" Rural housing loans are not competitive with any sources of credit, including private sources. These loans, like other loans made by the Farmers Home Administration, supplement other sources of credit. If an applicant is able to secure the necessary housing credit from any other lender, including private and cooperative credit sources, upon terms and conditions which he reasonably could be expected to fulfill, he is not eligible for a rural housing loan. We have repeatedly emphasized with our field staff the importance of maintaining a noncompetitive position. Before any loan is approved, the County supervisor is required to document in the files the inability of the applicant to obtain eredit from other sources. In keeping with the policy of supplementing other sources of credit, the loan contract includes the provision, which is required by law, that at any time the borrower may be able to obtain a loan from other sources, he will, at the Government's request, apply for and accept such a loan in sufficient amount to repay the Government. We require a continuous review of outstanding loans and referral of those to other credit sources who appear to qualify. This requirement is basic to maintaining the role of the Farmers Home Administration of continuing to provide credit only to those families who are unable to obtain financing from other sources, either initially or at any time during the period of the loan. Our experience has been that frequently lenders, who will not make a loan to a family to construct a house, become interested in the house after it is built, the site is landscaped, and the loan has become seasoned. That borrowers do refinance their rural housing loans is demonstrated by the fact that, as of December 31, 1963, 5,932 of the 16,248 borrowers who had satisfied their accounts did so by obtaining credit from other lenders to refinance their rural housing loans. "What areas if any do you feel are not adequately being covered with mortgage credit from any source-Government or private?" Housing credit gaps exist on farms, in the open country, and in small rural towns. Serious housing credit shortages also have been observed in some towns with more than 2,500 population, which are too large to qualify for the rural housing loan program. The situation is particularly serious for the families in the lower income levels. These families are unable to participate in conventional or insured loans at prevailing rates and terms. The scattered location of homes in rural areas does not attract volume builders who have been an important influence in building housing in and near to urban areas. The scattered location also tends to increase servicing costs of lenders. The limited capacity of rural banks to extend long-term credit and a shortage of long-term mortgage money from other sources in rural areas have contributed to the problem. Furthermore, lenders frequently have been somewhat wary of house values in rural areas and consequently have required higher downpayments, higher interest rates, and shorter repayment periods than for loans in cities. CONDITION OF RURAL HOUSING Historically, rural housing has been inferior to city housing. This was still true in 1960. Although only 30 percent of the population was living on farms and in small rural communities, there were about as many families living in dilapidated homes in rural areas as in the cities. In 1960 there were about 14.7 million occupied houses on farms, and in small towns and villages. Almost 3 million families lived in homes that needed major repairs. More than a million families were living in houses that were in such a ramshackle condition that they endangered the health and safety of the families. One out of three homes in rural areas did not have complete bath facilities. One out of five did not even have water piped into the house. Three out of five were without central heat and about one out of ten rural families used water from springs, creeks, stock ponds, lakes, and irrigation ditches. The following tables, compiled from the 1960 U.S. Census of Housing reports, illustrates the relatively inferior condition of rural housing. THE HOUSING CREDIT GAP IN RURAL AREAS Information regarding the nature and extent of the housing credit gap recently became available as a result of five studies by agricultural experiment stations, the Economic Research Service of the U.S. Department of Agriculture, and an independent agency. These studies, which document the existence of extensive housing credit gap in rural areas, included areas of Alabama, Colorado, Georgia, Mississippi, Missouri, Montana, North Carolina, and South Carolina. They show that families on farms, in the open country, and in small towns do not have housing credit as readily available to them as families in larger towns and cities. The repayment terms are less favorable, the interest rates are higher, and the loan value ratios are lower. The spread between appraised value and current value prices of rural homes frequently required a downpayment so large that rural families with limited resources could not utilize conventional loans. The high downpayments prevented rural residents from obtaining home loans that could have been economically justified by their repayment ability. The Missouri study, which was published in April 1964, concluded “(1) that rural areas have access to relatively few sources of home mortgage financing, (2) that amounts and terms of housing credit are less favorable in rural areas than in large towns and cities, and (3) that rural facilities for tapping the credit resources of larger institutions in the larger places are inadequate." In our judgment, the continuing housing credit gap in rural areas is largely a reflection of a lack of sufficient funds rather than a gap in legislative authority. The rural housing loan program is an effective approach to the problem, but its capacity to help families has been greatly restricted because of lack of funds. During the 1964 fiscal year, for example, 14,400 loans totaling about $130.5 million were made. This is an average of less than three per county. We recognize the need for developing a means of financing a rural housing loan program of reasonable dimensions without increasing the demand on the Federal budget. For this reason, we have explored various methods of financing most of our housing program through insured loans. FEDERAL HOUSING CREDIT PROGRAMS IN RURAL AREAS The experience of the rural housing loan program demonstrates that many rural families who are shunned by other lenders are good credit risks. As of December 31, 1963, 94 percent of the borrowers had paid in full the installments due as of that date. Their payments averaged 105 percent of the cumulative amounts due. Losses have been negligible. As of December 31, 1963, total possible losses on all liquidations were about $100,000 or less than two-one hundredths of 1 percent of the cumulative amount that had been loaned since the program started in 1950. The Housing and Home Finance Agency for many years has had authority to insure housing loans in rural as well as urban areas. The Agency's Federal Housing Administration 203 (i) program and the voluntary home mortgage credit program are specifically designed to help families in small towns and remote areas finance their homes. The volume of activity under these programs has been relatively small. In our judgment, this is due primarily to two reasons; namely: 1. Applicants have difficulty finding lenders willing to make and service Federal Housing Administration insured loans and, 2. The organizational structure of the Federal Housing Administration is adapted largely to urban home financing. The rural housing program of the Farmers Home Administration also has been relatively small in relation to the need but for a different reason; namely, insufficient loan funds. We recommend that our present authorizations be augmented with a workable insured loan program and our staff reinforced to carry the additional workload to enable the Farmers Home Administration to meet the housing credit needs of a reasonable number of the millions of families on our farms and in small country towns who today are living in substandard homes. The effectiveness of the insured loan approach to lending in rural areas has been successfully demonstrated by the existing insured loan program of the Farmers Home Administration in connection with our other real estate loan programs. The fact that the Farmers Home Administration is an agency dedicated to and experienced in helping rural families who are unable to obtain credit from other sources also is an important consideration. These families usually need competent and readily available advice and assistance in budgeting, planning, and building their homes. The experienced staff of the Farmers Home Administration is in a position to give this kind of assistance through its 1,500 local offices. Keeping the cost of the houses within the debt-paying ability of families is especially important for those in the lower income groups. By working closely with families in helping them select a plan for a house that is modest in size, design, and cost, and providing credit at reasonable rates and terms, the Farmers Home Administration has helped thousands of families to become homeowners who otherwise would not be able to achieve this goal. For the Federal Housing Administration to extend this kind of service to rural areas, the agency 46-121 0-65--53 would need to expand its staff and, in doing so, would duplicate in part a housing credit service to rural families that is being effectively administered by the Farmers Home Administration. If you would like additional information, we shall be glad to be of further assistance. Sincerely yours, FLOYD F. HIGBEE, (Whereupon, at 2 p.m. the subcommittee adjourned.) (Following is a list of the bills pending before the Housing Subcommittee, the bills and the reports of the various agencies.) BILLS PENDING BEFORE HOUSING SUBCOMMITTEE S. 506 (Sparkman): Permit certain local expenditures as title I grants-in-aid for Jasper, Ala. S. 519 (Young, Ohio): Direct HHFA to carry out demonstration and research projects to determine economic feasibility of providing mass transportation to elderly during nonrush hour periods at reduced fares. S. 644 (Sparkman): Authorize the chartering of secondary mortgage market facilities for conventional mortgage loans. S. 712 (Scott): Prohibit use of products originating in Communist-controlled countries by HHFA or VA agencies. S. 786 (Sparkman, by request): Amend section 221(d) (3) to provide housing for low-income families. S. 946 (Williams): Permit certain local expenditures as title I grants-in-aid for New Brunswick, N.J. S. 1182 (Tower): Authorize purchase by tenants of public housing units. S. 1183 (Tower): Require reimbursements of title I funds by locality out of increased tax revenues. S. 1202 (Sparkman): Establish a secondary market facility for participation in conventional mortgage loans for members of the Federal home loan bank system. S. 1354 (Sparkman, by request): Administration omnibus bill. S. 1532 (Case): Encourage planning and the programing, on a coordinated basis, of land-use projects in the development of metropolitan areas, and to require, after a reasonable preparatory period, the approval, by the HHFA, of a workable program as a condition for granting Federal assistance in the financing of certain projects. S. 1549 (replace S. 787) (Sparkman, by request): Empower the FNMA to deal in conventional mortgages in the secondary mortgage market. S. 1577 (Williams): Authorize funds for the development of open space uses of land. S. 1617 (Tower): Provide for a temporary moratorium on payments on FHA and VA mortgages for those unemployed as a result of closing of a Federal installation. S. 1618 (Tower): Authorize FHA and VA to acquire housing owned by servicemen near a closed Federal installation. S. 1720 (Javits): Establish a new program of middle-income housing through the use of Federal guarantees of bonds issued by local housing agencies. |