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11 supplemental budget requests, and even these have not served to meet the fluctuating needs of our insurance activity. As a result, in my opinion, the services to the public have been impaired and analysis of insurance risk has at times been necessarily limited. If these conditions continue they could lead to excessive losses and the impairment of our insurance funds.

The proposal now before you has been worked out in cooperation with the Corporation Audits Division of the General Accounting Office and follows generllly a plan now in operation in other Government agencies of business type. I am submitting for the use of the committee a memorandum describing in more detail the need for and effect of this amendment.

Section 121 is in the nature of a technical amendment reflecting changes made by Reorganization Plan No. 3 of 1947.

I am convinced that the enactment of the amendments to the National Housing Act proposed in this bill will provide further effective means for private industry to produce an adequate amount of quality-built housing for the mass market, composed of the moderate and lower-income groups. In my opinion, this is a highly desirable objective, and I, therefore, endorse the provisions of title I of H. R. 5631.

(The further statement of Commissioner Richards on flexibility in the Federal Housing Administration budget is as follows:)

FLEXIBILITY IN THE FHA BUDGET

Section 18 of the proposed bill to amend the National Housing Act would designate certain expenditures of FHA as nonadministrative in order to provide a necessary degree of flexibility in budget operations.

The enactment of this amendment is recommended on its merits and as a logical move following the placing of the FHA under the Government Corporation Control Act. Section 102 of that act specifically provides for "a business-type budget, or plan of operations, with due allowance given to the need for flexibility, including provision for emergencies and contingencies, in order that the Corporation may properly carry out its activities as authorized by law." [Italics supplied.]

The House committee report on the bill stated that the reason for this language on flexibility was to enable corporations and corporate-type enterprises to adjust their operations to the ebb and flow of economic conditions. The report went on to say that "No purpose is served by restrictive limitations which would hinder a corporation in carrying out its statutory program or which might result in the submission of frequent amendments to the annual budget program."

The lack of flexibility in the case of FHA has led to exactly the difficulties which the committee sought to avoid. In 7 of the last 10 fiscal years, Congress has approved a total of 11 supplemental budget authorizations, exclusive of deficiencies for statutory pay increases.

The budget programs of FHA are necessarily based upon estimates of work load to be handled during the budget year. These estimates are generally prepared from 12 to 18 months in advance and represent at the time a consensus with respect to such variable factors as public demand for housing, the volume of refinancing of existing homes, and a variety of economic and social trends such as population shifts, availability of building materials, labor supply, construction costs, etc.

Another significant factor affecting work load estimates is the frequent legislative changes that have characterized the FHA insurance programs. Under some titles of the National Housing Act the FHA program is limited by fixed expiration dates and under others a dollar volume limitation is imposed. In preparing budget estimates, of course, the extension or modification of legislation cannot be anticipated. In addition, there are substantive changes in the type of insurance activity. Since the National Housing Act was approved in 1934 there have been 28 legislative enactments which have brought about material changes

in the work load of FHA, with the result that FHA has seldom if ever had the opportunity of executing a budget under conditions comparable to those assumed in its preparation and approval.

These conditions have led to almost constant revisions of budget programs. Even discounting the administrative burden involved in the development and justification of so many estimates, the complexities of the supplemental budget process have seriously interfered with FHA operations. In several instances, in the closing days of a session of Congress, new substantive legislation has modified the FHA program and no time remained for an authorization to be processed to provide funds for FHA to administer it. In other cases, with Congress not in session, FHA has found itself faced with the exceptional volume of applications that occurs when one feature of the insurance program is about to expire or reaches its maximum dollar volume limitation.

When this situation occurs, the alternatives are (a) to refuse to accept additional applications; (b) to continue to accept applications and process them within limits of staff and funds available; or (c) to accept applications and to do a hasty processing and inspection job. Each of the three courses of action is undesirable for the fairly obvious reasons of not serving the public adequately, of hampering new construction activity, or of taking risks which may lead to possible unnecessary insurance losses in the future. Faced with this dilemma, FHA has sought to do the best possible job under the circumstances, with personnel performing a considerable amount of overtime work.

Although, as indicated above, the FHA has received 11 supplemental authorizations, exclusive of deficiencies for pay act increases, in 7 of the last 10 fiscal years, they have not served adequately to meet the needs of the insurance program. It has proved impossible in the past, under present budgetary procedure, to obtain an amendment of the budget program promptly under the development of need.

The principle of flexibility as it would apply under section 18 of the proposed legislation is to identify as nonadministrative expenses following generally accepted accounting practices, those costs of operation which are primarily involved in the processing of insurance applications and in liquidation and property management operations. Because these activities, together with certain auditing functions, fluctuate directly with the volume of business and are the most unpredictable workload factors, they are classified as nonadministrative expenses. Those items of expense for personal services and other obligations which do not vary with the insurance workload would continue to be classified as administrative expenses and subject to usual budgetary procedures and control.

The following summary showing the proposed allocation of costs illustrates the effect of section 18 on the FHA budget program for fiscal 1949 and that proposed Jor fiscal 1950:

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The Corporation Audits Division of the General Accounting Office has not only endorsed this proposal and participated in the development of the proposed allocation of costs but has also indicated that enactment of section 18 is a sound step in the direction of adapting good corporate practices to the business-type Government activities.

Most other Government corporations and corporate-type enterprises are permitted by their basic enabling statutes to divide their normal expenditures between administrative and nonadministrative in order to achieve the degree of flexibility necessary to their operations. As will be noted in the table below, 59 percent of the combined expenses of all wholly owned Government corporations and enterprises for the fiscal year 1950 are classified as nonadministrative. They constitute direct operating expenses which cannot be estimated within narrow limits because they will fluctuate unpredictably as workloads are affected by factors beyond the control of the activities involved.

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The most difficult problem in drafting the proposed section was to arrive at
the soundest and most workable definition of nonadministrative expenses. It is
clear that the concept of general overhead cannot readily be defined precisely in
statutory language. In fact, an attempt by any of the various possible methods
to define exactly what should be treated as administrative and what as non-
administrative expense would necessitate an unduly long, involved, and technical
provision and would be out of place in legislation.

In place of such a detailed provision, the approach adopted was designed to
accomplish two things-

1. To include by description the most important categories of functions
which should be treated as nonadministrative: i. e., expenses in connection
with examination and insurance of loans and investments and with the acqui-
sition, handling and disposition of property acquired as a result of insurance
defaults.

2. To set forth as a statutory standard that the miscellaneous costs not
falling clearly within one of the categories described shall be treated on the
basis of good corporate accounting practice those properly classified as
overhead being treated as administrative costs, and those properly classified
as operating being treated as nonadministrative costs.

This approach provides for the necessary exercise of judgment in the segregation
of overhead and operating costs in the detailed operations of the agency. At the
same time, it provides appropriate checks upon the exercise of such judgment, in
that the process is subject to the supervision of the General Accounting Office at
two points: First, through the authority of the Comptroller General to prescribe
accounting systems; second, through periodic audit by the Corporation Audits
Division.

The application of the principle of flexibility to FHA budget operations as
proposed in section 18, far from representing a departure from precedents, would
in fact serve to correct the exceptional handicap under which FHA has been work-
ing, to place FHA on a comparable basis with other business-type enterprises of
the Government, and to permit the administration to meet the demands of a
fluctuating workload and of unusual situations created by substantive changes in
the insurance program.

Mr. TALLE. Mr. Chairman, may I ask my question now?
The CHAIRMAN. Have you finished your statement, Mr. Richards?
Mr. RICHARDS. I have, Mr. Chairman.

The CHAIRMAN. What has been the history of the FHA with regard to its income and its losses?

Mr. RICHARDS. As I recall, since 1939 the FHA has received more income each year than its expense has been. In the fiscal year just ended the income from fees and premiums approximated 71%1⁄2 million dollars and the expense amounted to slightly under 231⁄2 million dollars; so there was approximately a 48-million-dollar reserve created, in addition to paying all operating expenses.

The CHAIRMAN. You are authorized to require an insurance premium of from one-half to 1% percent, are you not?

Mr. RICHARDS. The mortgage insurance premium rate is on the basis of one-half of 1 percent, and our application fees are at the rate of $20 per case on individual applications, or $3 per $1,000 or mortgage amount requested on rental projects.

The CHAIRMAN. Mr. Talle.

Mr. TALLE. Thank you, Mr. Chairman.

I initially made reference to page 10 of the bill, line 6, where the figures $16,000 appears. Do you, Mr. Foley, in any part of your statement, discuss a $16,000 mortgage limit on four-family units as provided in the original act?

Mr. FOLEY. Not in the statement which I have just presented, which is all that I have here on title I, Congressman. You probably have in mind whether or not that is now a sufficient ceiling for four-family units. Is that the purpose of your qusetion?

Mr. TALLE. That is the point I had in mind. Then I wanted to ask whether you have considered increasing the dollar amount of the mortgage in excess of $16,000 where more than two units are built.

Mr. FOLEY. We have some studies under way right at this time, with the possibility of our suggesting some action or deciding whether some action should be suggested to this committee before the completion of its consideration of this bill.

Mr. TALLE. I wanted to ask these questions because they were questions put to me and I was unable, of course, to answer them. Thank you.

Mr. BUCHANAN. Mr. Chairman, a question of Mr. Richards.
The CHAIRMAN. Mr. Buchanan.

Mr. BUCHANAN. Mr. Richards, on page 4 of your statement you say:

During 1948 and for this year to date almost one-third of the privately financed dwelling units started, as reported by the Bureau of Labor Statistics, were under FHA commitments.

How does that compare with 1947?

Mr. RICHARDS. For 1947 it was 27 percent, and about 32 percent in 1948.

Mr. BUCHANAN. How about 1946?

Mr. RICHARDS. We can get that for you in just a moment, Mr. Buchanan.

Mr. BUCHANAN. And it is increasing in 1949?

Mr. RICHARDS. Yes, sir.

Mr. SMITH. Mr. Foley, are you recommending the passage of H. R. 5631 as written?

Mr. FOLEY. Not all parts of it, sir. I stated in the early part of my statement-possibly you were not here at the time-the relationship of the various sections to the program of the President, and certain parts of it are not in accord with the program. There are others in which we are recommending a change and others in which we are recommending further study.

Mr. SMITH. Are you recommending section 603, on page 90 of the bill?

Mr. FOLEY. That is the section to which your previous question was addressed, I believe.

Mr. SMITH. Yes.

Mr. FOLEY. We are registering no objection and believe that, generally, the objective is a worthy one.

Mr. SMITH. Have you had any conversations with any of the officers of the Lustron Corp. in connection with this section?

Mr. FOLEY. I have not.

Mr. SMITH. Are you familiar with the present situation with respect to Lustron Corp.?

Mr. FOLEY. Only generally.

Mr. SMITH. You do not know specifically as to what its operations consist of?

Mr. FOLEY. I know in general what its operations are, but

Mr. SMITH. Under this act Lustron could apply for an additional loan; is that correct?

Mr. FOLEY. I believe so, or any other prefabricator.

Mr. SMITH. Do you wish the committee to understand that you know about Lustron only in a general way, but that you are recommending that the loan authority of the Reconstruction Finance Corporation to prefabricated housing corporations be increased from $50,000,000 to $100,000,000?

Mr. FOLEY. I again wish to point out that it is not an enactment with special reference to Lustron Corp. From our point of view, as the Housing Agency, it is with respect to that general field of plant fabrication.

Mr. SMITH. But Lustron would come into consideration, would it not?

Mr. FOLEY. It probably would, if its proposals meet the requirements of the law and the regulations of the appropriate agency, which is not my agency.

Mr. SMITH. I did not hear you.

Mr. FOLEY. I said they probably would if they met the provisions of the law and the regulations written by the appropriate agency, which is not my agency. I have no control over that.

Mr. SMITH. Who asked for this additional $50,000,000?

Mr. FOLEY. I am afraid I cannot answer that question, sir.

Mr. SMITH. But you are recommending that it be approved?

Mr. FOLEY. Our position has been one of no objection and generally

in sympathy with the objectives sought to be served by this, or, if the committee can devise some other means

Mr. SMITH. Who wrote this provision into the bill?

Mr. FOLEY. I do not know.

Mr. SMITH. Who wrote the bill itself?

Mr. FOLEY. The bill is the product of many minds, I believe, sir. But I would not be able to answer your question as to who wrote that particular section.

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