The projected average mortgage amount for conventional mortgages was increased to reflect two factors. The first is an increase in the average loan-to-value ratio from 65 percent in 1959-60 to 70 percent in 1969-70. This rise was projected on the assumption that commercial banks, mutual savings banks, and savings and loan associations will increase the proportion of their conventional loans with high loan-to-value ratios under authority of Federal and State. legislation and regulations which became effective in recent years. The trend has been in this direction. The second factor reflected in the higher mortgage amounts is an assumed increase of 1 percent a year in the average price of houses transferred. The assumption of a 1 percent increase in the average prices is not inconsistent with the general assumption of constant prices in a broader sense, which implies a constant price for a house of a given quality. The projected increase reflects, however, an assumption that the mix of traded houses will change in successive years to include an increasing proportion of better quality houses, containing more modern equipment, in successive years.

It is on the basis of the foregoing estimates and assumptions that the gross conventional first mortgage requirements to finance existing home transfers have been estimated (in table 7). The resultant estimate is about $7.3 billion in 1961, with estimated increases leading to a comparable projected estimate of about $9.1 billion in 1970.

The estimated gross first mortgage requirements for FHA and VA existing home financing (in table 7) show a sharper rise, from about $4.5 billion in 1961 to about $6.7 billion in 1970. The sharper rise in the FHA-VA component than in the conventional mortgage requirements component reflects the assumption of a greater proportion of FHA and VA home financing at projected higher levels of home purchase activity. With regard to loan-to-value ratios, the average 90 percent ratio for FHA and VA existing home loans in 1959 is expected to continue through 1961. It has been assumed that the past trend toward higher loan-to-value ratios will continue, however, and the average ratio has been assumed to increase to 91 for 1962-65, to 92 for 1966-67 and to 93 for 1968-70. The projected increases in average amounts of FHA-insured and VA-guaranteed mortgages on existing homes also reflect a 1 percent average price increase, similar to that assumed for conventionally financed existing homes.

There is even less information about average per-unit mortgage amounts for existing multifamily residential properties than for existing owner-occupied properties. Information on New York City transactions compiled from reports of real estate transactions in daily issues of the New York Times during a 1-month period in the fall of 1960, showed an average mortgage amount of $3,300 per unit. It is known from census data, however, that multifamily rental properties in New York City are significantly older, on the average, than in the country as a whole, and presumably have a lower average value. Furthermore, during the decade of the sixties an increasing proportion of multifamily properties transferred will consist of the more modern higher value properties built since World War II. Therefore, an estimated average per-unit mortgage amount of $5,000 has been assumed.11

11 The relatively small per unit mortgage amount for existing multifamily properties, as compared with larger amount for one- and two-family units, reflects the lower per-unit value of multifamily properties and the fact that practically all such existing multifamily property transfers are conventionally financed.

The estimated aggregate annual mortgage amount of about $300 to $400 million involved in existing multifamily property transfers is not too significant in the total mortgage credit requirements estimates. Therefore, while the estimate of $5,000 per unit lacks a satisfactory factual basis to support its reliability, it should not seriously affect the magnitude of total gross mortgage requirements. Since the overall effect would be negligible and there are no benchmark data, there has also been no attempt to vary the estimated average per unit mortgage amount from year to year.

In the projection of existing multifamily mortgage requirements (in table 7) it has been assumed that they will all be financed with conventional mortgages. The Government mortgage insurance programs for multifamily housing are geared to new construction. They have been used only in very negligible volume to finance existing properties heretofore, and, under existing legislation, they probebly will not assume more than token proportions in the aggregate mortgage financing requirements.

Total gross mortage credit requirements

The estimate of total gross first mortgage requirements to finance existing property transfers is about $12.1 billion for 1961 and the comparable annual amounts would rise to a total of about $16.1 billion in 1970 (table 7). The latter amounts plus the estimated first mortgage requirements for new housing give estimated total annual gross first mortgage requirements of $27.8 billion in 1961, increasing to $49.4 billion in 1970.

In addition to first mortgages originated in connection with the purchase of residential properties, a significant amount of first mortgages are originated at other times, either to refinance or renew the outstanding loan or for other purposes, such as home repairs, business investments, and payment of large medical expenses. Based on available published data for loans made by savings and loan associations, it would appear that 20 percent of conventional first mortgages made in a year, equal to 25 percent of the purchase mortgages, are originated otherwise than to finance the purchase of houses. Available data in HHFA annual reports and in VA monthly reports loan guarantee highlights) show that about 5 percent of FHA-insured existing home loans and less than 1 percent of VA-guaranteed home loans in recent years have been for other purposes than to finance purchases. (The weighted average for 1958-59 would be about 4 percent.) Appropriate adjustments to reflect this factor have been made to increase the gross first mortgage requirements. With these adjustments, the estimated annual gross first mortgage requirements are $32.5 billion in 1961, increasing to $56.6 billion in 1970 (table 8, cols. 6 plus 12).

In order to round out the total mortgage requirements an allowance had to be made for second mortgage financing 12 Based on data from the 1956 national housing inventory and the 1950 census of housing, it is believed reasonable to assume that annual second mortgage financing would equal in amount about 4 percent of the conventional first mortgages originated in a year. 13 After adding the allowance for second mortgages, the estimated total annual gross residential requirements are $33.4 billion in 1961, increasing to $58 billion in 1970.

12 No attempt has been made to account for third, fourth, and other junior mortgages. They are believed to be insignificant in terms of total gross mortgage requirements, and there are no adequate data on which to base an estimate.

13 For a more detailed explanation of the basis for this assumption, see the note on col. 7 of table 8.

TABLE 8.-Estimated gross mortgage credit requirements by type of financing

COLUMN EXPLANATIONS

Net mortgage credit requirements

Estimated net mortgage requirements are derived by subtracting repayments from gross mortgage credit requirements. Thus, there is an implicit assumption in this procedure, that all mortgage repayments (or an equivalent amount) will be reinvested in mortgages, and that the net mortgage requirements are an additional amount to be invested if the total gross mortgage credit requirements are to be met. This assumption is necessary, for the time being, in order to get a net mortgage requirement figure which can later be compared with net capital requirements for other segments of the economy. A judgment then can be made, in the light of the estimated gross and net mortgage requirements, competing demands for funds and available savings, as to whether the supply of mortgage funds will be adequate for the projected requirements.

The pattern of mortgage debt repayment in relation to the outstanding debt is not a constant one and there are no data on repayments for a significant proportion of the conventional mortgage debt. In deriving the estimates of net mortgage requirements, repayments as a percentage of outstanding mortgage debt have been projected to show a lower percentage during years of relatively low homebuilding and sales activity and a higher percentage during years of relatively high activity. This is based on the pattern of repayment ratios that have been estimated for at least part of the outstanding mortgage debt for a number of years.14

The projection has been made in two parts, treating the conventional and the FHA-VA components separately, since available data indicate a significant difference in repayment ratios for these two types of mortgage debt, no doubt reflecting differences in average maturity and in frequency of full repayment of outstanding mortgages. The FHA-insured and VA-guaranteed mortgages have significantly longer average maturities, and the chances are that repayments in full upon transfer of existing homes are less frequent than in the case of conventionally financed properties, because of more favorable interest rates and because in many cases the FHA-insured or VA-guaranteed mortgage debt will not have been paid down to the point that refinancing is necessary.

In the projection, the repayment ratio for 1959 is based in part on previously published estimates of the outstanding residential mortgage debt at the beginning of 1959 and at the beginning of 1960, and of the estimated net increase in mortgage debt during 1959. With these published figures and the estimated gross mortgage credit requirements (or loans made during the year) for 1959, the repayment ratio for 1959 was derived. The repayment ratio of 19 percent for the conventional mortgage debt and 10.3 percent for the FHA-VA underwritten mortgage debt are not out of line with estimates of mortgage debt repayment based on available information of portfolio changes. 15 In the projection (table 9) the repayment ratios projected from the 1959 benchmark are reduced at first, in view of the lower level of home sales and mortgage loans estimated for 1960. They are raised back to the 1959 level, however, as soon as the projected gross mortgage credit requirements reach a level equal to that of 1959, early in the decade of the sixties. Thereafter, the repayment ratios are gradually

14 See appendix tables I-J and I-M. 15 See appendix tables I-I and I-M.

TABLE 9.-Projected estimates of annual net increases in residential mortgage debt through 1970

Cols. 1 and 6: Data for the beginning of 1959 and 1960 are previously published HHFA
estimates; for subsequent years (e.g., 1961), the estimated net increases shown in cols. 5
and 10, respectively, for the preceding year (e.g., 1960), are added to the total outstanding
at the beginning of the preceding year (e.g., 1960) to arrive at the total at the beginning of
the current year (e.g., 1961).

Col. 2: Ratio for 1959 is based on previously published estimates of net change in out-
standing mortgage debt and estimates of mortgage loans made during the year, in col. 4
(taken from table 8, col. 7). The derived ratio of 19 percent coincides with a 1959 repay-
ments ratio for conventional mortgage debt estimated independently (see appendix table
I-I). The ratio of 19 percent may appear high in light of available data on repayments of
mortgages held by life insurance companies, mutual savings banks, and savings and loan
associations (see appendix table I-J). It should be noted, however, that commercial
banks and individuals who hold a significant proportion of conventional mortgage debt,
have loans with shorter maturities than other major types of lenders and this would make
for a higher repayment ratio (as indicated in appendix table I-I). The available data on
repayments (in appendix table I-J) illustrate the fluctuations in repayment ratios which
are high during years of high levels of housing transfers and repayments in full (such as
1955), and lower in other years (such as 1957) when the level of homebuilding and home
sales is low. While 1959 was a relatively high activity year, and 1960 a year of somewhat
lower activity, there would be years of increasingly high housing activity under the basic

(given) assumptions of this analysis and the projected repayment ratios reflect this assumption.

Col. 3: Derived as indicated.
Col. 4: From table 8, col. 7.

Col. 5: Derived as indicated.

Col. 7: Ratio for 1959 based on previously published estimates of net change in out-
standing mortgage debt and estimates of gross mortgage loans made during the year
in col. 9 (taken from col. 12 of table 8). The derived ratio of 9.8 percent, based on be-
ginning of the year outstandings is not out of line with a home mortgage retirement ratio
of 8.9 percent found by FHA, based on the average 1959 outstanding balance. VA mort-
gage retirements probably were about the same as for FHA-insured home debt and the
latter 2 would far outweigh the retirements on FHA multifamily debt which had only a
5.3 percent ratio, based on the average 1959 outstandings. Disregarding the immediate
postwar years, FHA data indicate that the repayments ratio tends to rise in years of high
activity and vice versa (appendix table I-M) and this is reflected in the projected repay-
ment ratios.

Col. 8: Derived as indicated.

Col. 9: From table 8, col. 12.

Cols. 10, 11, and 12: Derived as indicated.