importance of the question and may I again refer to Mr. Thornton, please, sir?

Mr. THORNTON. The protection of the insurance funds which FHA operates includes not only the value of the investments in the funds at the moment, which now exceeds $300 million in the combination of our several insurance funds-I believe there are 8 altogether-but in addition, includes the value of any properties which we take back at the time that we issue debentures. As a matter of fact, of course, the properties constitute the primary security.

Senator DOUGLAS. Suppose you had a general shrinkage of values which, of course, we hope we will not have, then you couldn't protect propery A by selling property B, etc., so your reserve, as I understand it, in liquid cash is approximately 12 percent of the amount which you guarantee.

Mr. THORNTON. Close to 2 percent.

Senator DOUGLAS. That is right.

Mr. THORNTON. We have $17 billion insured.
Senator DOUGLAS. Two percent.

Mr. THORNTON. We have set up through our actuarial studies assumptions of the losses which might be sustained in the event of a depression, and a serious amount of property acquisitions by the FHA. At the present time, if we were to start a depression tomorrow and it would approximate the seriousness of the depression we had in the thirties, and assuming that we were correct in all of our guesses as to the costs of operating the property, etc., it is our best estimate that the FHA title II program might result in losses of about $120 million to the Treasury at the present time. It is because we cannot accumulate reserves as fast as we want to that one of the provisions of this legislation will alter the management of the title II insurance fund so that we can speed up the accumulation of reserves faster than is possible now.

The CHAIRMAN. What is your total reserve at the moment?

Mr. THORNTON. A little over $300 million. That is in all of our various funds.

The CHAIRMAN. You figure if we got into a depression as severe as the 1930 depression with only a $300 million reserve it would only cost you an additional $120 million?

Mr. THORNTON. For the title II program, under section 203. The other programs we have not been able to study with as much care, but probably another hundred million dollars would be the outside limit of losses under all of the rest of the programs combined.

The CHAIRMAN. All the others combined would be $220 million. Mr. THORNTON. Something in that neighborhood.

The CHAIRMAN. In addition to your reserve fund?

Mr. THORNTON. That is right.

The CHAIRMAN. Your reserve fund, of course, is in Government bonds.

Mr. THORNTON. Most of it.

Senator LEHMAN. What has your experience been with regard to repossessions?

Mr. THORNTON. Generally speaking, thus far the losses of the various insurance funds have been very, very small; under section 203 our average losses has been about $500 per case for those on which we have acquired properties. Under section 603, if my recollection is

right, our average loss has been about $200 per property, and under 608, where we have insured multifamily projects we have had no loss at all for the properties that have been disposed of. Of course, we can't determine losses until after we dispose of the property, so that for those properties that we still have on hand we don't yet know what our losses will be.

The CHAIRMAN. You talk about this $220 million possible loss, plus your $300 million reserve. Just how do you arrive at that? Is that on the basis that you are going to be able to resell every repossession you might have?

Mr. THORNTON. Yes. We have made conservative assumptions as to how long we would have to manage properties before we would come to a favorable time for disposing of the properties; the expenses that we would have in managing them and rehabilitating them; and also the income that we would obtain from the properties during the time that we are operating them; and then we made assumptions of being able to dispose of the properties for the most part in the neighborhood of 60 percent-60 percent to two-thirds of the value which was placed on the properties at the time of the insurance of the mortgage.

The CHAIRMAN. That is $200 million on what, about $21 billion? Senator BENNETT. It is $520 million.

The CHAIRMAN. With the reserves.

Senator BENNETT. Yes: a loss of $520 million.

Mr. THORNTON. Yes.

The CHAIRMAN. That $220 million loss plus the $300 million reserve would be $520 million?

Mr. THORNTON. Yes. Mr. Hollyday notes this takes into account the fact that in acquiring the properties, the FHA issues debentures rather than cash so we have a period of time while those debentures are outstanding for managing the property and liquidating the FHA interest in the property, in order to have some cash on hand for paying off the debentures when they come due. We have a time period of from 10 to 20 years for managing those properties under present law. Senator DOUGLAS. Gentlemen, as I hear these figures of reserves of only about 2 percent as contrasted to amounts that are shown, I am reminded of Kipling's poem about Tommy Atkins; when he spoke of "The thin red line of 'eroes when the drums begin to roll." I think you have got a very thin red line with which to protect a tremendous superstructure.

The CHAIRMAN. Do you think we ought to increase the percentage of reserve?

Mr. THORNTON. We are proposing an amendment

Senator DOUGLAS. Stop, look, and listen.

Mr. COLE. I would like FHA to comment on that. They have a com

ment.

Mr. THORNTON. We have proposed in the present legislation a change in the management of the mutual mortgage insurance system which will permit us to refrain from adding any more funds for the distribution of dividends until we have built up our reserves to the point where we feel that the Treasury is fully protected against possible loss.

Senator DOUGLAS. I think that is a very good step and I want to commend you all for taking it.

Mr. THORNTON. It is, of course, an extension of what was started last year in the previous legislation.

Mr. COLE. There are some very important aspects bearing upon the necessity for an adequate insurance authorization which I want to emphasize. To be an effective aid in housing and home financing, the FHA requires a considerable degree of flexibility in its operations. It should not be in the position of having to close down insurance operations because of the exhaustion of its insurance authorization. There is always a high degree of uncertainty over the volume of applications which will be submitted by home builders and mortgagees. For this reason, it is impossible to forecast with precise accuracy the dollar amount of insurance authorization which will be required in a given period of time, because the volume can vary substantially and rapidly with changing conditions. I understand there have been 8 or 10 occasions during recent years when the exhaustion of an insurance authorization has required that insuring operations under one or more of the active programs either be suspended, or placed under direct daily control of the Washington office. This is a very expensive process-both from the standpoint of the FHA, and from the standpoint of the builders and the lenders who rely upon the FHA. The FHA is intended to be a stabilizing influence on home building, but when its operations are cut off entirely by reason of insuflicient insurance authorization it seriously disrupts the home-building and homefinancing industry.

No one recognizes and appreciates more fully than I do the rightand the desirability-of the Congress to control the insurance liability to be underwritten by the FHA. I earnestly recommend to your committee that the FHA be granted sufficient authorization to carry out its operations without interruption until the Congress has adequate opportunity and time to again review the situation and to provide for such additional insurance authorization as it deems desirable until the next succeeding period of congressional review and action. According to Commissioner Hollyday's best estimate, the $2 billion provided for in this bill would be sufficient, with a reasonable margin of safety, to permit FHA to continue its operations without interruption until June 30 next year. I strongly urge your committee to provide sufficient insurance authorization to accomplish that purpose.

There is a very real need for some adjustment and simplification of the various provisions of the National Housing Act governing the determination of the maximum amounts of mortgage loans which may be insured by the FHA. This is particularly true with respect to the FHA section 203 program relating to the insurance of mortgages on 1- to 4-family homes. Also, since FHA or VA insured or guaranteed home-mortgage loans represent a large segment of the home-mortgage market and therefore exert a strong influence on the level of construction activity, it is vitally important to permit the terms of such Government guaranteed or insured home mortgage credit to be fully responsive to changing economic conditions. The bill seeks to meet both of these important problems.

For example, in connection with the section 203 program on 1- to 4-family homes, the bill would provide that the maximum amount of a mortgage which may be insured by FHA could not exceed the sum of 95 percent of the first $8,000 of value and 75 percent of the value in excess of $8,000, and in no event to exceed $20,000 for a 1- or

2-family residence, $27,500 for a 3-family residence, or $35,000 in the case of a 4-family residence. These statutory maximum dollar amounts would compare with the present ceilings of $16,000 for a 1- or 2-family home; $20,500 for a 3-family home; and $25,000 for a 4-family home. We have prepared for the use of your committee a table showing the existing and proposed maximum loan amounts permitted in the case of 1- to 4-family homes.

Senator DOUGLAS. Do you have that table?

Mr. COLE. Yes, sir. I think the clerk has it.

I want to emphasize that these, as well as the similar adjustments in the maximum amounts for other FHA programs, would represent the statutory maxima which would not automatically go into effect. upon the enactment of the bill.

The authority to establish the actual terms under which the FHA would operate would be vested in the President. It is contemplated that, if the Congress enacts these proposals, the President would, when he approves the legislation, put into effect a new scale of maximum mortgage loan amounts employing the new simplified formula, but establishing the amounts below the various maxima permitted by the bill.

The CHAIRMAN. I think maybe we ought to place this in the record at this point. Will someone hand the reporter a copy? Mr. COLE. Yes. We will see that he gets it.

(The table referred to follows:)

Proposed and current schedules for maximum mortgage amounts for 1- to 4family home mortgages insured under FHA sec. 203

Proposed and current schedules for maximum mortgage amounts for 1- to 4family home mortgages insured under FHA sec. 203-Continued

B. 3- AND 4-FAMILY HOME MORTGAGES (NEW AND EXISTING HOMES)

1 Proposed terms for 1- and 2-family new and existing: Not to exceed 95 percent of $8,000 value and 75 percent of value in excess of $8,000 and not to exceed a mortgage of $20,000.

2 Current terms for 1-family new under sec. 203 (b) (2) (D): Not to exceed 95 percent of value and not to exceed a mortgage of $6,650, plus $950 per room for 3d and 4th bedrooms.

3 Current terms for 1-family new under sec. 203 (b) (2) (C): Not to exceed 95 percent o $7,000 value and 70 percent of value in excess of $7,000, and not to exceed a mortgage of $9,450.

4 Current terms for 1- and 2-family new and existing under sec. 203 (b) (2) (A): Not to exceed 80 percent of value, and not to exceed a mortgage of $16,000 per structure.

Per structure.

Minimum of 3 bedrooms per family unit.

7 Minimum of 4 bedrooms per family unit, or minimum of 3 bedrooms per family unit in geographic area where Commisioner finds cost levels so require.

Minimum of 4 bedrooms per family unit in geographic area where Commissioner finds cost levels so require.

Proposed soc. 203 (b) (2): Not to exceed 95 percent of $8,000 of appraised value and 75 percent of such value in excess of $8,000, and not to exceed a mortgage amount of $27,500 for a 3-family structure, or $35,000 on a 4-family structure.

10 Current sec. 203 (b) (2) (A): Not to exceed 80 percent of appraised value, and not to exceed a mortgage of $20,500 for a 3-family structure, or $25,000 for a 4-family structure.

11 Mortgages on 3- and 4-family structures of less than $10,000 value are eligible for insurance on the basis of the above formulas but have been omitted from these schedules in order to conserve space.

Senator DOUGLAS. Before you proceed on the question of interest rates, Mr. Cole, I wonder if you would be willing to summarize the main differences between the proposed and current schedules on maximum mortgage amounts, as shown in the statement. This table is