that exist. Where there are no environmental blighting factors that should be eliminated from the neighborhood, and the minimum code standards are acceptable for FHA mortgage insurance purposes, the urban renewal plan would in effect require only a commitment that house-to-house code enforcement will be carried out.

These procedures should open up large areas in most of our cities for the use of section 220 mortgage insurance, in the same sense as intended by section 2(b) of S. 3509. At the same time, it should avoid the weakness of that section, in two ways: (1) The locality would agree to the elimination of blighting influences where such influences exist, and (2) where the local code standards are not sufficient to meet FHA insurance requirements, the locality would be required to conduct a house-to-house campaign to persuade all property owners to meet a satisfactory standard, thus avoiding the sort of minimum improvements which inevitably lead to further deterioration.

Our new policies for nonassisted projects were issued in the revised manual for local public agencies which was published on March 1. We have reduced the requirements for these projects to the point where they take up only 5%1⁄2 small pages in the new manual, and I think it might be helpful if the committee would permit me to place these pages in the record at this point.

It is our conviction that any city with a sound planning program can prepare the necessary plan for a typical nonassisted project very quickly-in 2 or 3 months at most, and a test run of our procedures indicates that our regional offices can process an application for such a project in 60 days. This should make it possible for the cities to move quickly into this urgently needed job of conserving the basically sound older neighborhoods.

The impact of this change will be greatly magnified in the months and years to come, as more and more communities prepare community-wide renewal programs with the assistance provided by the Housing Act of 1959. The community renewal program will identify at one time all of the neighborhoods in a city that are appropriate for the use of section 220 mortgage insurance in nonassisted projects. With this knowledge, a city can move into conservation activities on a broad, communitywide front.

STATEMENT OF JULIAN H. ZIMMERMAN, COMMISSIONER, FEDERAL HOUSING

ADMINISTRATION

Mr. Chairman and members of the subcommittee, it is a pleasure to appear before your committee and give you the views of the Federal Housing Administration with respect to bills affecting FHA's programs which were not included in my testimony before your committee on May 9.

Two bills have been introduced since May 9 which directly affect the FHA's housing loan insurance programs. One is S. 3509, the Housing Amendments of 1960, introduced by Mr. Clark. The other is S. 3512, a bill related primarily to cooperative housing, which was introduced by Mr. Williams of New Jersey. These two bills will be discussed. In accordance with the committee's request,

I will also comment on S. 3502, a bill introduced by Mr. Murray, which would authorize insurance of mortgages covering individually owned units in a multifamily structure. The provisions of S. 3509 relating to FHA will be discussed first.

HOUSING AMENDMENTS OF 1960, S. 3509

General mortgage insurance authorization

Section 2(a) of S. 3509 would increase the FHA general mortgage insurance authorization by $4 billion. As stated in my testimony before your subcommittee on May 9, the best estimates available to us at this time indicate that the present authorization will be sufficient to carry FHA through this year and into next year. However, because it would eliminate many problems, FHA recommends the enactment of S. 3504, introduced by Senator Bush and Senator Capehart, which would remove the present limitation on the aggregate amount of the FHA general mortgage insurance authorization.

As of April 30, 1960, there remained an unused insurance authorization of $4.3 billion. At that time outstanding agreements to insure amounted to $1.2 billion. It is expected, on the basis of past experience, that not more than $400 million of these agreements will result in charges against the insurance authorization.

It is anticipated that FHA applications will rise appreciably, on a seasonally adjusted basis, during the next few months. On the assumption that home mortgage applications will rise by 40 percent between April and September (seasonally adjusted) and remain at that level through December, the unused authorization at the end of this year will be between $500 million and $750 million. This unused authorization could be expected to accommodate commitment processing until the end of February or the middle of March 1961.

This is the most reasonable estimate we can make at present, but I am sure this committee appreciates how difficult it is to predict with any degree of confidence the prospective use of authorization or the probable date of exhaustion of authorization. FHA activity is entirely responsive to the voluntary desires of borrowers, builders, and lenders for the services of FHA programs. They, in turn, respond to general economic and money market conditions as well as to their personal wishes. Since all of these factors are variable and difficult to predict, FHA expectations of authorization use are inevitably subject to a big chance for error. For example, last September, with FHA applications previously approaching an annual rate of 960,000 units, it was estimated that $9 billion of additional authorization would be required for operations through June 30, 1960. The progressive tightening of the money market substantially reduced FHA application volume to an annual rate below 700,000 for the past 5 months and reduced, also, the conversion of agreements to insure. Accordingly, our net use of authorization from October 1 to June 30 is likely to be only $6 billion.

Broadening and Extension of Section 220 Urban Renewal Housing Program

Section 2(b) of S. 3509 would provide that the FHA urban renewal housing program under section 220 would be available to a neighborhood in a community which has an approved workable program for the prevention and elimination of slums and blight, and which is carrying out a code enforcement program in accordance with the workable program. The Housing and Home Finance Administrator must have also determined that the section 220 mortgage insurance program is needed in order for the community to carry out effectively its program for the conservation of neighborhoods and the prevention of deterioration of residential properties.

Language would be added to section 220 of the National Housing Act which would seem to be designed to make it more clear that the mortgage insurance under that section would assist "conservation and prevention of deterioration" of existing dwelling accommodations. The loan to value limits on the amount of a mortgage covering a two- or more-family residence would be increased where it covers property other than new construction.

FHA believes this section in the bill is not necessary. Section 220 already specifically provides that its purpose is to aid in the prevention of the deterioration of residential property. It also states that its purpose is for the elimination of slums and blighted conditions and to assist the rehabilitation and construction of housing. The insertion of the words "conservation and prevention of deterioration" would, therefore, add no new purpose to the law.

As section 220 now provides, it is already adequate for accomplishing the objectives of the proposal in areas where FHA is assured that there is a local program underway that will not increase the insurance risks beyond those already contemplated in section 220. These are areas where the locality has not only a workable program, but, in addition, an urban renewal plan for the specific neighborhood that has been approved by the local governing body. The plan need not involve the use of Federal loans and grants. With such a locally approved urban renewal plan, there will be a general improvement or conservation of the neighborhood and not merely rehabilitation of an individual piece of property. Code enforcement alone is not enough to make certain that a neighborhood will be generally improved to the extent that might be necessary for purposes of adequate property valuations. Generally speaking, unless true value can be found in the entire neighborhood, which inures to the benefit of individual property, the objectives of individual property renewal are largely unattainable.

The Federal Housing Administration and the Urban Renewal Administration have been working together to find ways to coordinate their programs and to accomplish more in the conservation of neighborhoods and the prevention of deterioration. Ways and means are being devised to simplify their operations and to make them more workable. New instructions have been sent to the field

by URA with respect to the urban renewal areas in which the FHA section 220 urban renewal housing program can be used for rehabilitation and conservation. These instructions encourage the planning of urban renewal areas aimed at conservation and the prevention of deterioration with or without Federal loans and grants. FHA is also simplifying its instructions to the field personnel and making every effort to assure that the section 220 mortgage insurance program will be used to the fullest extent possible in such areas. The experience gained daily in the operation of the housing program in coordination with URA will result in progressively more accomplishment through better planning at both Federal and local levels.

FHA believes in the objectives of conservation and the prevention of deterioration of residential properties. Through its title I home improvement loan insurance program and increasingly through the 220 and 221 programs, much is now being accomplished in this direction.

Housing for the elderly-Health, social, and recreational facilities

A new provision would be added to the FHA mortgage insurance program for elderly housing by section 6(b)(1) of S. 3509. Under the new provision such special facilities as the Commissioner determines are necessary to provide ade quately for the health, social, and recreational needs of elderly persons in an elderly housing project would be required to be included in the project.

FHA considers the proposed additional provision unnecessary. Adequate authority already exists under the present law for health, social, and recreational facilities to be included in elderly housing projects. The FHA regulations and standards that have been issued give clear instructions to this effect. Further, the existing law permits the Commissioner to include in a project such commercial facilities as he deems adequate to serve the occupants.

If the provision is intended to require that special facilities must be provided, it could result, in some cases, in foreclosing participation in the elderly housing program by organizations who do not need and do not want the facilities which would be furnished in the projects. For example, one successful project for teachers is so located as not to need any of the facilities contemplated by this provision. Each resident has a valid and outstanding health insurance policy to take care of health needs. Elimination of the provision of health and other special facilities assists in keeping the rents lower in the projects. Under present law the Commissioner has discretion to permit the inclusion of such facilities as are desirable under all circumstances, thus assuring the lowest possible charges to the occupants.

COOPERATIVE HOUSING AMENDMENTS AND OTHER AMENDMENTS, S. 3512

S. 3512 would make a number of amendments in FHA's section 213 mortgage insurance program for cooperative housing. Under FHA's cooperative housing program, mortgage loans made by private lenders are insured covering management-type cooperatives and sales-type cooperatives. The projects may be multifamily projects or consist of single-family homes.

In a management-type cooperative, the mortgagor is a nonprofit corporation formed to build or purchase and operate a cooperative project which is occupied by the members of the cooperative. Individual members do not obtain title to their own dwelling units, but have a share interest in the entire project, an equal voice in its management, and the right to occupy a designated unit. Subject to specific statutory requirements a management-type cooperative may also be formed to purchase an existing structure for operation as a cooperative housing project.

In a sales-type project each individual member is a stockholder of the cooperative corporation undertaking the construction of the housing project. Upon completion of the project, provision is made for the acquisition of title to an individual home by each member and, if desired, the insurance of an individual mortgage on each home.

Mortgages are also insured to provide for the construction of a project by an investor sponsor for sale to a nonprofit cooperative for occupancy by members of the cooperative.

Under section 213 FHA insures cooperative housing mortgages that are liberal in amounts and have long terms. Special assistance is provided by FNMA to cooperative housing. The FHA also assists and guides the formulation of cooperatives and their management and operation.

FHA believes that the liberal assistance already provided both by FHA and FNMA is adequate at this time to encourage and assist cooperative housing. It is opposed to most of the amendments in S. 3512 as being unnecessary and undesirable. These amendments will be discussed separately.

Preference to local public agencies and to qualified consumer cooperatives in sale of acquired properties

Section 1 of S. 3512 would require the Commissioner to give preference to a local public agency or a qualified consumer cooperative in the sale of any multifamily housing project acquired by FHA under any of the FHA multifamily housing programs when a request is received from such an agency or cooperative. FHA opposes any such mandatory requirement. Sound administration and the interest of the Government require that Commissioner-held properties be liquidated without discrimination as advantageously as possible. The proposed requirement would delay the disposition of multifamily properties and interfere with long-established and well-proved policies of disposing of Commissioner-held properties by advertising for bids to obtain the most advantageous price. Although he was not referring to FHA, the Comptroller General in his 1959 annual report stated:

"We believe that generally the sale or lease by competitive bidding results in *** obtaining the highest return for the land."

FHA considers it unwise to be required to give preferential treatment to any group in the disposition of its Commissioner-held properties. Such preference would eliminate entirely or seriously limit the interest of other prospective purchasers. In effect it would spoil the market. Therefore, such a proposal would appear inconsistent with the recommendation of the Comptroller General; also, in my judgment, it would seriously prejudice FHA's liquidation operations. Investor sponsor-sales price to cooperative

The maximum price permitted by the present law at which an investor-sponsor project can be sold to a nonprofit cooperative would be increased, under the provisions of section 2(a) (1) of S. 3512, by permitting project costs after completion of construction to be included in the sales price. Under the proposal, an investor sponsor could sell the project at a price computed as of the day of sale, rather than as of completion of the project, as presently required. The new provision would permit adding to the sales price organizational and legal expenses and overhead expenses incurred up to 2 years after completion of the construction. This could include expenses of organizing the cooperative, and taxes, insurance, and project maintenance expenses. It would take away the incentive of the investor sponsor to sell the project to a cooperative as quickly as possible.

The provision would permit inclusion in the sales price of costs after construction, which are not actually costs of production of a project. They would not be considered a part of the capital cost under established appraisal or accounting practices. The cost to the cooperative would also be increased without any corresponding increase in value of the project.

This provision and other provisions in the bill would tend to eliminate ordinary business risks. FHA does not believe this is necessary or desirable. Exterior land improvements

Under section 2(a)(2) of S. 3512 exterior land improvements would be required to be excluded from the part of a section 213 cooperative housing project attributable to dwelling use for the purpose of determining the amount of the mortgage based upon the per room or family unit limits.

FHA does not object to this provision.

Determination of replacement costs for purposes of mortgage amount

Section 2(a)(3) and 2(a) (4) of S. 3512 would specify items to be included by FHA in the replacement cost of cooperative housing for the purpose of determining mortgage amounts. In addition to items customarily considered in determining replacement costs, the costs would be required to include interest charges, hazard and mortgage insurance premiums, and other costs not only during construction, but also after completion of construction up until the time a sufficient number of the dwelling units in the project are sold and occupied to produce the income required to meet operating expenses and debt service.

FHA is opposed to this provision. It would have the effect of permitting proceeds of the insured mortgage to be used to pay certain operating expenses

of the housing and interest on the mortgage itself. Such use of mortgage proceeds would violate all accepted principles and practices of mortgage lending. Operating expenses and interest after completion of the housing are in no way part of the cost of production of the project. These expenses and charges would not be considered a part of capital costs under either established appraisal or accounting practices. The seriousness of this provision is demonstrated by the fact that the addition of interest, taxes and insurance charges for only 1 year to the capital costs of the project could increase the mortgage amount by as much as 7 or 8 percent. Such an increase would result in substantially larger costs to the members of a cooperative to support the higher debt service requirements. The provision would increase replacement cost estimates in all projects for the purpose of relieving hardships that may occur in only a few instances. The net result would be that the costs of the housing to the occupants would be increased unnecessarily, as would FHA's insurance risks.

This is another provision that would eliminate risks on the part of the sponsors of cooperative housing projects and incentives to make the project successful.

Economic feasibility of investor-sponsored cooperatives

Section 2(a) (5) of S. 3512 would provide that in determining the economic feasibility of a project in the case of an investor sponsor mortgagor building for sale to a nonprofit cooperative for occupancy by its members, the sole test of such feasibility would be the availability of people in the community who need the housing which would be provided and who can afford such housing. This provision is unnecessary and undesirable. Under existing legislation, FHA has latitude to establish such criteria as are determined appropriate relating to the feasibility of proposed cooperative housing projects. To consider only the number of persons available in a community without regard to their wants and desires for cooperative housing could result in the undertaking of cooperative projects which would be destined to failure. It would be a disservice to FHA, the sponsors, and members of the cooperative to fail to take into consideration other relevant and persuasive factors in determining feasibility. Assistant Commissioner for Cooperative Housing

Under section 2(a)(6) of S. 3512 the Commissioner would be required to appoint an Assistant Commissioner for Cooperative Housing in lieu of the Special Assistant for Cooperative Housing.

FHA opposes this provision. The Housing Amendments of 1955 established a Special Assistant for Cooperative Housing. Other special assistants have been appointed within the Agency to function in similar capacities for other programs. Special assistants function well in helping to develop their respective programs, but undesirable administrative problems would arise if an Assistant Commissioner were appointed for the cooperative housing program.

FHA's present organizational and functional pattern places Assistant Commissioners at the head of such basic staff divisions as Operations, Technical Standards, Administration, Programs, Examination and Audit, Mortgages and Properties, and Title I. This organizational structure carries out all of FHA's programs most effectively. There are special assistants to the Commissioner for home mortgages, section 207 multifamily mortgages, elderly housing, nursing homes, urban renewal, cooperative housing, armed services housing, and intergroup relations. They assist both the Commissioner and all Assistant Commissioners in meeting problems arising out of a particular program. The administrative authority and discretion to follow this logical pattern should not, in my judgment, be impaired by an act of Congress.

Eligibility of previously unsuccessful cooperative housing sponsors

Section 2(a) (7) of S. 3512 would remove a provision in section 213 which makes an investor sponsor ineligible for future section 213 mortgage insurance if he obtained an FHA insured mortgage under that section and failed to sell to a cooperative. A provision would be substituted which would place discretion in the Commissioner to refuse to insure a mortgage loan to such a sponsor for such period of time as he shall determine appropriate. The new provision would be made applicable to a mortgagor who has a stockholder who was identified with a mortgagor who failed to sell to a cooperative.

FHA has no objection to this provision.