HOUSING AND HOME FINANCE AGENCY, Hon. JOHN SPARKMAN, Chairman, Subcommittee on Housing, Committee on Banking and Currency, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: In accordance with your letter of April 18, 1960, and my acknowledgement of April 29, 1960, I am pleased to submit the enclosed report on recommendation No. 8 requested by your subcommittee for delivery not later than January 1, 1961. This report deals with the questions raised on mortgage insurance premiums, the certified agency program, and the desirability of permitting greater budget flexibility. The other report on recommendation No. 7, also requested by your subcommittee, and dealing with mortgage financing for the decade of the sixties, is in the final stages of completion and will be submitted within the next few weeks. I would like to take this opportunity to express my sincere appreciation for the cooperation we have received from you and the members of your subcommittee. It has been a pleasure to work with you in our endeavors to improve the living conditions of our people. Sincerely yours, Enclosure. NORMAN P. MASON, Administrator. INSURANCE OPERATIONS PREFATORY NOTE In recommendation No. 8 of the "Study of Mortgage Credit," a report of the Subcommittee on Housing to the Senate Banking and Currency Committee under Senate Resolution 221, 86th Congress, 2d session, the subcommittee requested of the Administrator of the Housing and Home Finance Agency reports on three matters bearing on the operations of Federal Housing Administration's insurance programs. There follows herewith the report of the Administrator of the Housing and Home Finance Agency on the three requests, which read as follows: 1. An analysis of the present rate of, method of collection, and mutuality of the FHA insurance premium; and recommendations concerning the desirability of reducing the rate, changing the method of collection, and eliminating or extending mutuality; such recommendations to be made in the light of the necessity to serve the needs of borrowers who may represent greater risks than borrowers who now receive benefits of FHA programs. 2. An analysis of the present program by which the actions of certified agents are accepted in lieu of normal FHA processing, and recommendations regarding the extent to which this activity might be expanded without jeopardizing high standards of appraisal and construction. 3. Recommendations regarding the desirability of amending existing law to permit the Federal Housing Administration to staff its field offices at levels consistent with variations in field office activity and by the use of funds derived from fee and premium income (p. 74). For the convenience of the subcommittee's study of this report, it is organized in three parts in accordance with the recommendation, as follows: I. FHA Insurance Premium, Mutuality, and Method of Collection, II. FHA Certified Agency Program, and III. FHA Staffing and Budget. I. FHA INSURANCE PREMIUM, MUTUALITY, AND METHOD OF COLLECTION In order to provide the subcommittee with as complete a report on the matter of the Federal Housing Administration's insurance premium charge as is possible within the available time, this report concerns itself with all premium charges under all the insurance programs the Federal Housing Administration administers. As of September 14, 1960, the date on which the most recent amendment to the National Housing Act was approved, the Federal Housing Administration administered insurance programs under 19 different sections of the act which authorized insurance to be written and under 9 different sections under which authority to write insurance has expired or terminated. Insurance written under each of the programs is assigned to a particular fund. This report discusses premiums for each program within the framework of the insurance fund. This first part of the report which concerns itself with the insurance premium charges for the insurance offered under FHA's various programs is organized in three sections as follows: Insurance premium (fund): Analysis. Recommendation. Mutuality: Introduction. Analysis. Recommendation. Method of collection: Introduction. Recommendation. Introduction A. INSURANCE PREMIUM CHARGES When the latest amendment to the National Housing Act was approved last September, the Federal Housing Administration had passed its 26th anniversary. Created by the National Housing Act, approved June 27, 1934, the Federal Housing Administration undertook to write insurance under three different sections of the original statute: property improvement loans under section 2, mortgages on residential home properties under section 203, and mortgages on residential rental properties under section 207. In the more than quarter century since the original statute, there have been a total of 66 public laws enacted amending the National Housing Act. Two observations, pertinent to the matter of insurance premiums under consideration, might be made about these amendments. The vehicle of insurance was extended to serve a variety of special purpose residential needs in addition to the regular residential needs under the original programs. Moreover, under both the regular and special purpose programs, the terms of financing, prescribed by the statute and implemented by regulations, have been considerably liberalized. By and large, both developments have resulted in an extension of coverage which, in insurance, means taking on additional risks. Since February 3, 1938, the mortgage insurance premium rate under both the regular and special purpose programs has, with one exception, remained unchanged at one-half of 1 percent of the annual balance of the mortgage outstanding. Despite these contrasting situations-greater risks on the one hand, same premium rate on the other-the Federal Housing Administration has made every effort to keep its programs on a self-sustaining basis; in other words, to keep from imposing a financial burden on the U.S. Treasury, and, therefore, on the Nation's taxpayers. In this effort the Federal Housing Administration has thus far succeeded. In order to succeed in this achievement, the fiscal operations of the various insurance programs have been under continuous review. As evidence of the kind of fiscal responsibility which the Federal Housing Administration has discharged, it should be recognized that the risks which the Federal Housing Administration were authorized to underwrite were not conventional insurance risks-the kind private carriers are engaged in insuring. Consequently, there was little or no basis for establishing the two prerequisites for a sound insurance operation: premium rates and reserves. Within the Federal Housing Administration, actuarial-economic techniques were developed, which are adaptations of standard techniques used by actuaries in life insurance practice for the computation of a premium rate and for making a valuation of the reserve liabilities of an insurance fund. The Federal Housing Administration believes that both actuarial-economic techniques are unique in insurance practice and has made them available to the public not only for the assistance it might provide but also for critical review. The technique of computing a premium was presented in an article in one of the leading professional journals.' technique of making valuations of reserve liabilities of mortgage insurance funds was first presented in the annual report to the Congress by the Federal Housing Administration covering insuring operations during the calendar year 1954. The Both premiums and reserves are based on identical assumptions on foreclosures, insurance losses, administrative expenses, prepayments, to mention only a few among the various items of income, loss, and expense that go into these computations. An opportunity for objective critical review of these assumptions as well as the technique of reserve valuation presented itself in a study made by independent experts and financed by the national associations of several major classes of mortgage lenders. The study is entitled "The Mutual Mortgage Insurance Fund: A Study of the Adequacy of Its Reserves and Resources," Columbia University Press, New York, 1956. Its authors are Profs. Ernest M. Fisher and Chester 1 Mortimer Kaplan and Sanuel A. Miller, "Government Insurance and Economic Risk," International Review for Social Sciences, Kyklos, vol. VIII, 1955, Fasc. 3, pp. 252-276. |