in Real Estate Financing

The Mortgage Bankers Association of America is dedicated to the continued development of the United States of America through private mortgage investment in real property.

The functions of its members are to create channels through which the savings of the people are made available to those who build and develop the homes, factories, offices, farms and ranches that this country requires, and to safeguard the repayment of these savings for the benefit of both the savers and future borrowers.

The Association considers that the prerequisites to the efficient performance of these functions are a free money market and a system of state and federal law that provides appropriately for the protection of savers and borrowers but that puts no avoidable obstacle in the way of the broadest possible distribution of invested savings to the areas of geographic and economic need.

Notwithstanding these principles, the present body of state and federal law affecting real estate finance is at many points outmoded and badly adapted to the needs of an industrial urban economy. Numerous obstacles prevent or impede the accumulation and flow of funds for the financing of real property. Moreover, federal measures originally designed to induce a wider distribution of mortgage funds have over the years been amended so as in many ways to become restrictive in their effect.

In order to serve the objectives to which it is dedicated, the Association urges action along four main lines:

A. The laws of many of the states need to be revised to reduce the cost and risks of mortgage foreclosure and to encourage a greater inflow of out-of-state mortgage investment.

B. The National Housing Act and other housing legislation, after years of accrued amendments, need to be renovated so as to provide a more efficient and practicable means for insuring mortgages on residential property and for aiding the renewal of urban

areas.

C. The institutional framework within which mortgage investment has historically taken place needs to be broadened so as to permit better access to areas of saving from which real estate financing is now virtually excluded. D. Existing inequities in the federal tax laws, that inhibit the development of a broader institutional framework, need to be removed.

It is the view of the Association that, if the policies set forth in this statement were carried out, the forces of private enterprise would be so well released that the apparent necessity for many forms of positive government intervention would be removed.

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1.

The creation and maintenance of an ample supply of good dwelling structures for sale and rent are vital to the nation's social and economic well-being. An essential instrument for the attainment of these objectives is a sound, efficient, and dependable system of residential mortgage credit, the benefits of which will be available in all parts of the country to families who wish to buy and to those who wish to rent.

The indispensable elements of such a residential mortgage credit system are:

A. A mortgage instrument that provides for complete amortization in regular monthly payments.

B. A means of pooling unusual risks through mortgage insurance.

C. A mortgage interest rate that is responsive to prevailing financial conditions.

D. An institutional framework that will make practicable the access to all areas of private savings, whether by strengthening and broading existing facilities or the creation of new

ones.

The first of these requirements, the fully amortized mortgage, now universally recognized and accepted. The remaining three have been only partially realized.

The Place of Mortgage Insurance

Although the limitations on loan-to-value ratios imposed on their lending institutions by many of the states might be liberalized with safety, sound policy would still dictate that, beyond a point, the exposure of mortgage institutions should be reduced by pooling risks.

The mortgage insurance system of the Federal Housing Administration was designed to accomplish this purpose. At its inception in 1934,

FHA offered a simple formula for spreading risks, available to all types of lending institutions and accessible to all borrowers with good credit standing and an acceptable dwelling property. Though created and operated by government, its support, after it was fully established, was to be provided by the borrowers who used the system; and any accumulation beyond adequate reserves was to be repaid to them. Since the purpose of the insurance was to broaden the market rather than impose restrictions upon it, it was clearly understood that the interest rate was to be a readily marketable

Fate.

FHA has long since attained financial selfsufficiency and today imposes only the most remote liability on the federal treasury. Nevertheless, it has more and more been treated as if it were a direct government operation rather than an instrument for the general advantage of the private residential market from which it derives its sole support.

As a conequence of successive amendments, the original concept of a nondiscriminatory, impersonal market mechanism has been much clouded, to the impairment of FHA's efficient operation and its potential usefulnes. This is true throughout the FHA system. It is especially true of the rental housing operation, where the provisions of law, charter, and regulation have greatly diminished the effectiveness of mortgage insurance in this area.

Nevertheless, the original concept of FHA remains the best basis on which to recreate a sound and practical mortgage insurance system. What is needed is not a new system, nor a supplementary system, but a renovation of a system that, over a generation, has developed operating experience, financial strength, and the confidence of industry and the public generally.

To the end of restoring and revitalizing the original concept of mortgage insurance and eliminating the obstacles, uncertainties, and instability to which its operations have been subjected, the Mortgage Bankers Association of America offers these recommendations:

1. That the Federal Housing Administration be reorganized as a federally chartered mutual insurance corporation administered through a Board of Trustees appointed, with staggered terms, by the President, and officers appointed by the Trustees.

2. That FHA be made accountable for its operations directly to the President and to the Congress.

3. That FHA continue to be required to provide for its administrative expenses and reserves from its income from fees, charges, and premiums, and that it be freed from specific annual fixed budget authorizations and be permitted reasonable flexibility in accommodating its administrative outlays to the varying demands for its services.

4. That mutuality of the mortgage insurance system be retained for mortgages on one- to four-family dwellings; that mutuality be extended to the buyers in cooperative structures; and that information about the benefits of mutuality be more effectively disseminated. 5. That the FHA insurance system be revised to consist of one simplified formula for oneto four-family houses, one for rental housing, and one for cooperative housing, and that FHA be given wide latitude within each formula to meet the broadest possible economic range of demand.

6. That all special forms of mortgage insurance or guarantee be eliminated or be allowed to end without further extension.

7. That FHA be authorized and directed to adjust its mortgage insurance premiums in

accordance with its estimate of the risk assumed in the various types of mortgage insurance transactions, taking into consideration the record of its long experience.

8. That specific dollar limits on the FHA insurance authorization be removed.

9. That FHA underwriting procedures be greatly simplified by placing greater responsibility upon mortgage originators through the wider application of the Certified Agency Plan or another method embodying similar principles.

10. That the statutory and administrative requirements of the insurance of mortgages for rental and cooperative housing be completely overhauled with the view to restricting management only to the extent needed to protect the position of the insurer; and that the requirements and limitations relating to the payment of construction wages, the certification of construction costs, the character of the capital structure, the exercise of managerial judgment, and the setting of rents be substantially reduced or eliminated.

11. That the regulation of interest rates on FHA loans be discontinued.

The accomplishment of these reforms should provide a mortgage insurance system of broad usefulness and great flexibility, readily adaptable to the changes in the demand for housing and in the supply of funds, and capable of meeting the challenge imposed by the rapid growth and changing characteristics of our cities.

The Veterans' Home Loan Guaranty Program The Association is of the view that the considerations that prompted the institution of the home loan guaranty program of the Administrator of Veterans Affairs no longer prevail, and that, in the interest of creating a simple, self-sustaining home mortgage credit system, this special operation should not be maintained. Moreover, the