partial prepayments or delinquent payments). In the event of prepayment of the mortgage, the lender is responsible for collecting and remitting to the Federal Housing Administration the prepayment premium charge of 1 percent of the original mortgage amount. Under a single premium procedure, the lender would collect a constant monthly payment throughout the life of the loan. Separate records might or might not be maintained, depending on whether the premium loan is to be consolidated with the mortgage debt. In either case, no annual payments would be made to the Federal Housing Administration. In the event of either prepayment of the mortgage or default termination, reconcilement of the borrower's obligation for premium payments with the payment of a proper net premium to the Federal Housing Administration would probably be more complicated than present procedures. If the advance premium payment at time of insurance covered only part of the total premium cost, the lender would be required to receive monthly payments, maintain escrow records, and submit annual premiums to the Federal Housing Administration as under the present procedure until the last few years of the life of the mortgage. In addition, monthly payments would be collected and recorded with respect to the premium loan for the initial advance premium. There would probably be no occasion for a prepayment charge under this premium system, but reconcilement of premium collections to net premiums due to the Federal Housing Administration would still be necessary. Under the proposal for larger premium payments in earlier years and no payments in later years, the lender's procedures would be similar to those currently required. However, collections would end at an earlier date, and no prepayment charge would be appropriate. Each of the premium procedures other than the one currently in effect would involve a number of years in the life of the mortgage during which no premium submission to the Federal Housing Administration is required. During that period, the Federal Housing Administration has no automatic verification of the mortgage holder or of the fact that an unpaid balance remains outstanding. The first of these is important to enforcement of the regulation that mortgages be held by approved mortgagees. The second is essential to determination of the outstanding insurance liability of the agency both for reserve requirement calculations and for insurance authorization control. To meet these needs, the Federal Housing Administration would probably need to require from the lender a reporting, at least annually, of the insured cases held by each institution. If individual case identification is necessary in this reporting, both the initial reporting and the reconcilement of differences in records could become quite burdensome. It might be noted that mortgagee escrow accounts and procedures would continue for the Federal Housing Administration's mortgage cases with respect to borrower payments on taxes and hazard insurance even though mortgage insurance premium collections might cease or be altered under the alternatives discussed. Either single premiums or advance premiums financed by mortgagee loans to the mortgagor would involve extra allocations of funds to mortgage loan purposes or proportionate reductions in the number of mortgage loans financed. During periods of tight money supply it is likely that fewer loans would be made and that part of the fund which might otherwise have financed the Federal Housing Administration insured loans would be allocated to other types of mortgages or to nonmortgage investment. (iii) FHA administrative efficiency: No change is feasible for the method of collection of premiums on outstanding insurance in force. Accordingly, for a period of 30 to 40 years, present collection procedures will be in effect whether or not new procedures may be enacted for future insurance contracts. These procedures involve premium billing expense averaging about 9 cents per case per year for home mortgage cases. Premium collection expense would be less per case if the entire premium were collected at time of insurance. Under any of the other alternative collection methods, collection expenses would not differ materially per case from present procedures. Modest savings might occur by virtue of elimination of the prepayment premium charge in using the premium schedule with increased premiums in early years. Offsetting these possible savings to the Federal Housing Administration would be new expenses for determining by survey methods (1) current holders of insured mortgages during periods when no premiums are collected, and (2) prepayment of mortgages after collection of final premium payments. Substantially greater expenses to the Federal Housing Administration would probably be incurred in closing cases that are paid in full prior to maturity. Premium rebates would be larger and would involve more complex computation formulas which would reflect investment earnings on unearned premiums rebated. Since rebates would not be pro rata but would reflect premium charges which are disproportionate to the level annuity payments made by borrowers, it may be expected that correspondence concerning premium rebates. would entail substantial new administrative expense and attention. (b) Recommendation. Before presenting the recommendation, the conclusions of the analysis might be summarized as follows: 1. Borrower costs are as low or lower under present premium collection methods as under any feasible alternative method for providing equivalent net premium income for the Federal Housing Administration. 2. Borrower payment of monthly insurance premium installments is consistent with other monthly financing charges for interest, taxes, and hazard insurance premium. 3. The Federal Housing Administration receipt of premium income throughout the life of insurance contracts is consistent with the Federal Housing Administration needs for cash resources since debenture procedures delay agency cash needs for a liquidation period after approval of claims for insurance. 4. Lender operating costs are probably no greater, and may well be less, under present premium collection methods than would be the case with alternative premium schedules, taking into account (a) additional reporting responsibilities which would become necessary for purposes of Federal Housing Administration control of insurance authorization, (b) maintenance of reserve requirement analyses, and (c) enforcement of regulatory limitations on holders of Federal Housing Administration-insured mortgages. 5. Lenders, borrowers, and Federal Housing Administration operating personnel understand current collection methods. No benefit from alternative collection methods is in prospect which would compensate for the effort which would be involved in reeducating these participants in the Federal Housing Administration programs to new premium procedures. 6. Public misunderstanding of the Federal Housing Administration premium charges would be increased by any change which would increase the difference between premium expense and premium payments. This would appear to be probable in either single-premium payments or advance payments for a selected number of years. 7. FHA administrative costs would be increased by virtue of dual systems of premium collection if any basic change in collection methods is adopted. No compensating benefit to borrowers, lenders, or the general public is in prospect which would justify this additional expense to the Federal Housing Administration. The above analysis and conclusions suggest that no change be made in present premium collection methods for the Federal Housing Administration mortgage insurance programs. II. FHA-CERTIFIED AGENCY PROGRAM This section of the report covers item No. 2 of the study of mortgage credit recommendation No. 8 which pertains to the present operations of the certified agency program, its possible improvements, and considerations for the future. A. BACKGROUND For more than 26 years the Federal Housing Administration has been helping American families to own their homes by insuring relatively high loan-to-value, long-term mortgages financed by qualified private lending institutions (approved mortgagees) which make application for mortgage insurance to their nearest FHA insuring office. An insuring office is responsible for all FHA operations within its jurisdiction. (The locations of insuring and service offices and their jurisdictions are indicated on the enclosed map.) Applications are received; fees are collected; architectural analysis, land planning, appraisal, and mortgage credit processing are completed; final determination of the acceptability of the proposed insurance risk is made and commitments to insure are issued; properties are inspected during the course of construction; and mortgage insurance contracts are executed by the insuring office. These are its responsibilities under all FHA regular programs. The FHA has been concerned about extending and improving its services to more people and expanding industry participation particularly in areas remote from its insuring and service offices where difficulties of communication have hindered lenders from making full use of the FHA program. This problem was presented to a special industry advisory committee, FHA insuring officials, and representative mortgage lenders in outlying communities. It was the consensus of these groups that special mortgage insurance facilities to serve outling areas was justified and needed. Based upon their recommendation, the program known as the certified agency program (CAP) was developed. |