TABLE 32.-Selected participation shares per $1,000 of original face amount of mortgage payable from the mutual mortgage insurance fund to eligible mortgagors with insurance contracts terminating between July 1, 1960, and Dec. 31, 1960

TABLE 33.-Participations declared and number of participants among mortgagors in the mutual mortgage insurance fund

Table 32 shows selected participation shares for eligible mortgagors paying off their mortgages during the 6-month period ending December 31, 1960. Participation shares may in no event exceed the aggregate scheduled annual premiums of the mortgagor to the year of termination of the insurance.

As of December 31, 1959, the participating reserve account had $148,595,327 available for distribution to eligible mortgagors as participation payments. Since January 1, 1944, when participation payments were first made, a total of $107,275,670 has been distributed to 892,212 mortgagors. In the aggregate, these amounts equal 31 percent of total Federal Housing Administration premium collections. through the end of 1959 under this home mortgage insurance program. The average dividend was approximately $120.

Table 33 shows the total amount of participation payments made in recent semiannual periods and the number of participating mortgagors who received such dividend payments..

(b) Recommendation. The significance of these semiannual distributions can perhaps be better appreciated in terms of the reserve position of the fund. In an earlier paragraph it was pointed out that the total amount paid to eligible mortgagors as dividends amounted on June 30, 1960, to $107.3 million. If this amount had not been paid out, it would have remained with the insurance reserves of the fund. On June 30, 1960, the insurance reserves of the fund were $558.3 million. To this amount, the $107.3 million plus an estimated $33 million in interest earned on this amount would have been added. Insurance reserves at the midyear would have thus amounted to approximately $698 million. Reserve requirements would have remained at the same figure of $585 million. Thus, there would have. been an excess in insurance reserves of about $113 million over reserve requirements.

If there had been no mutuality provisions, as this excess in insurance reserves began growing and reaching significant levels, it would have been incumbent on the Federal Housing Administration to invite the attention of the Congress and recommend some fiscally sound and equitable proposal for dealing with the matter. It is very likely that authority to operate the fund on a mutual basis would have been sought. The alternative to this would have been to transfer the excess to the U.S. Treasury. This course would suggest that the fund had been operated at a profit and these profits would accrue to the benefit of the Treasury. It would be difficult, if not impossible, to establish that this was the intent of the Congress in the case of the mutual mortgage insurance fund or the other insurance funds administered by the Federal Housing Administration.

The Congress authorized mutuality for the mutual mortgage insurance fund as a device for distributing excess premium charges on a fiscally sound and equitable basis. It was authorized at a time when it could not be established for certain if there would be any excess premium charges. The first dividends were in fact not paid until about 10 years after the mutuality was authorized.

In the period since 1944 when dividends were first paid, mutuality for the mutual mortgage insurance fund has worked well. Its cost of administration has not been excessive. It has achieved what the Congress intended for it to achieve and, that is, to make this fund self-supporting out of the charges paid by the borrower and to return the excess charges to the borrower on an equitable basis. The continuation of mutuality for the mutual mortgage insurance fund is recommended.

Before proceeding to a consideration of mutuality for the other funds, it should be pointed out that the retention of mutuality and a premium reduction for the mutual mortgage insurance fund are not incompatible. If it should be possible at some time in the future to recommend a reduction in the premium charge under section 203, its effect on dividend payments will be taken into consideration. It is likely that the scale of dividends would be reduced, but mutuality would still continue to provide a device for siphoning off excess charges for the benefit of the payers.

The fact that the Congress did not authorize mutuality for the other insurance funds should not be interpreted as an indication that these funds were intended to operate at a profit for the benefit of the Treasury. It may rather be an indication of the special circumstances of the insurance operation and the prospect that some of the operations might not be self-supporting. When there were indications that its first special purpose programs under the war housing insurance fund would turn out favorably, the Congress did not lay claim to the surplus or authorize mutuality. It enacted section 219 in order that the resources of the war housing insurance fund might be available in assisting other funds where the insurance experience is less fortunate. For the funds encompassed by section 219, the prior consideration is to make them self-supporting.

For the present, mutuality for the other mortgage funds of the Federal Housing Administration is not recommended since the resources available in each fund except the war housing insurance fund are significantly less than currently estimated reserve requirements. As was pointed out in earlier parts of this report, mutuality in some

form may be appropriate within the foreseeable future with respect to section 8 and the cooperative housing program.

The only remaining fund for consideration of mutuality is the title I insurance fund. The characteristics of operations under this fund are different from those under the other funds. The significantly shorter terms of the loans insured make it possible to adjust the premium rates to the levels required for their operation to be self-supporting. Mutuality is not recommended for this fund.

Introduction

C. METHOD OF COLLECTION

In all mortgage insurance programs, the Federal Housing Adminisistration provides for monthly payments of insurance premiums by mortgagors to mortgagees, with annual transmissions by the mortgagee to the Federal Housing Administration. In the title I property improvement loan insurance program, premiums are paid in advance by the lender. For loans with terms of 3 years or less the entire premium is paid at time of insurance. For loans with longer terms, premiums for 3 years are paid in advance and additional annual premiums are paid on the anniversaries of the insurance report until all premiums due have been paid.

With respect to home mortgages insured prior to August 5, 1957, and to all project mortgages, premiums are collected at the beginning of the contract year. For these transactions, therefore, the first year's premium constitutes a prepaid expense at time of closing. Beginning with mortgages insured on August 5, 1957, premiums on current insurance of home mortgages are collected at the end of the policy year, rather than at the beginning of the year. By this means, previous requirements for cash at time of closing have been reduced by the amount of the first year's premium.

(a) Analysis. Suggestions have been made on various past occasions for changes in the method of collection of mortgage insurance premiums. One suggestion proposes a single premium to be collected at time of insurance. While this premium could be paid in cash by the mortgagor, the proposal usually contemplates an advance of the entire premium by the mortgagee with repayment by the mortgagor over the life of the mortgage. Another suggestion proposes advance payment of premiums for an unspecified number of early years, with annual payments thereafter until the final premium payment several years before maturity of the loan. This initial lump sum payment might be either a cash payment by the borrower or an unsecured loan by the lender. A third suggestion contemplates increased premium charges in the early life of the mortgage and reduced charges at later dates.

From the point of view of adequacy of premium income for the insurance programs involved, either annual premiums or a lump sum premium can be computed so as to yield to the Federal Housing Administration's mortgage insurance funds whatever premium income may be deemed necessary for sound operation of the particular insur

program. Following standard procedures for discounting premium charges to a present value amount, depending on the discount rate used and the effective earnings from Federal Housing Administration investments, identical resources can be made available to the insurance fund through any premium procedure selected.

Since the Federal Housing Administration issues debentures in exchange for properties transferred to the agency, rather than paying claims in cash, the Federal Housing Administration is able to operate its insurance funds with far smaller cash resources prior to receipt of claims than would be necessary for a program involving cash payment of claims. Accordingly, because of the delay in the timing of cash requirements under the debenture issue technique used in mortgage insurance programs, the Federal Housing Administration would have available, when required, essentially the same resources for redemption of debentures, regardless of whether the mortgage insurance premiums be collected by annual premium payments covering either part or all of the life of the mortgage or by a discounted lump sum premium at date of insurance.

TABLE 34.-Comparative current cost to home mortgagor under present method of FHA mortgage insurance premium collection with 2 alternative methods for premium collection for a $10,000, 25-year, 5 percent mortgage in the event the mortgage is held to maturity

1 Based on one-half of 1 percent of average outstanding balance of mortgage during year. 2 Based on single premium of $586.11 which represents the present value of annual schedule premiums under the present method shown in col. (1) discounted at 3 percent per annum and amortized in equal monthly installments at 534 percent interest per annum.

3 Based on single premium of $586.11 as in footnote 2. Annual scheduled premiums are based on average outstanding obligation during year and payable for 15 years only. If these annual scheduled premiums are discounted at 3 percent per annum, their sum is equal to $586.11.

TABLE 35.-Comparative cost to home mortgagor under present method of FHA mortgage insurance premium collection with 2 alternative methods of premium collection for a $10,000, 25-year 5-percent mortgage in the event of prepayment prior to maturity

1 Represents 1 percent of the face amount of the mortgage or the sum of the future scheduled mortgage insurance premiums at the time of prepayment, whichever is the lesser.

2 Represents the single premium of $586.11 less the unearned annual premiums under the present method with interest accumulated at 3 percent per annum and less the prepayment charge.

Represents the outstanding balance of the single premium loan due the lender at the time of prepayment. 4 Represents the advance annual premium less the unearned annual premiums under the present method with interest accumulated at 3 percent per annum and less the prepayment charge.

Since net premium collections would depend on the premium rate rather than on the method of collection, the discussion of collection method is based on an assumption of identical net income to the insurance fund under each collection method considered. Discussion of the method of collection, on this basis, might best deal with (1) cost to the borrower; (2) convenience of the lender; and (3) administrative efficiency for the Federal Housing Administration.

(i) Cost to borrower: If advance premium payments at time of insurance are financed by loan from the mortgagee to the mortgagor, the eventual expense to the borrower will be greater than under the present system of annual premium payments. This generalization applies whether the period covered by the advance premiums is the entire life of the mortgage or only a few years.

The explanation of the extra expense is that the lump sum premium would be computed by discounting present premiums to a present value, using a Federal Housing Administration investment earning rate (perhaps 3 percent) as the discount rate. The mortgagor's repayment of the premium loan, however, would involve a higher interest rate, probably the mortgage rate, which is currently 5%