erty, whichever is less. If advances are to be insured during construction, 2 percent of the original principal amount of the mortgage will be required as working capital. This fund must be deposited with the mortgagee.

The interest rate during construction currently may be as high as the established FHA maximum interest rate at the time of construction (54 percent). Upon final endorsement of the lean, the interest rate will be as low as the average current yield on all marketable obligations of the U.S. Treasury (presently 3% percent per annum). FHA has waived payment of the mortgage insurance premium of one-half percent for projects financed with this below market interest rate mortgage.

To provide financing at this below-market interest rate for section 221(d) (3) projects, the Federal National Mortgage Association is authorized to purchase the insured mortgages under the FNMA special assistance program.

FHA supervision over rent, carrying charges and occupancy requirements will be maintained until the insured mortgage is paid in full. To prevent early refinancing and release from FHA supervision, full or partial prepayment of the insured mortgage is prohibited without the approval of the FHA Commissioner, except that limited dividend corporations may pay off the mortgage in full after 20 years from the date of final endorsement for insurance without such approval. Occupancy is limited to families of low and moderate income and maximum income limits for admission are established for various size families in each locality. Occupancy preference is given to displaced families.

SIZE OF PROGRAM

Table 1 below shows that the New York State limited-profit program had reserved or committed through August 1963 almost $497 million in mortgage funds for 64 projects. One-half of these projects involving almost $108 million are being financed by State loan funds (SLF), while the other half of the projects involving almost $389 million are being financed by the State housing finance agency (HFA).

Table 1 also shows that through August 1963, commitments to insure mortgages under the section 221 (d) (3) below market interest rate program had been issued by the Federal Housing Administration (FHA) amounting to $166 million on 104 projects. Some $20 million in commitments have been issued for 19 projects in FHA's zone I of operations, which includes New York State. In addition, the FHA had in process, as of August 31, 1963, applications for section 221 (d) (3)· insurance for 65 projects containing 11,474 units involving a total mortgage amount of $142 million.

TABLE 1.-New York State limited-profit program and sec. 221(d) (3) below market interest rate program, cumulative volume through Aug. 31, 1963

1 10 of the 32 State loan funds projects are elevator projects, and all of the 32 of the Housing Finance Agency are elevator projects.

2 Includes New York State. Data for New York City projects not readily available.

The figures presented in table 1 are cumulative figures for the various programs since their inception. It will be noted that the data for the section 221(d) (3) program reflect a shorter time period of operations. This program was authorized by the Housing Act of 1961 (effective date, June 30, 1961), whereas the State loan fund program (Mitchell-Lama) dates back to 1955 and the housing finance agency program back to 1960.

The 64 limited-profit projects contain 30,893 units-SLF projects with 5,758 and HFA projects with 25,135. The 64 projects are composed of 54 elevator, 8 walkups (2 and 3 story), and two 1-story structures. All of the HFA projects are located in New York City and are composed of elevator structures.

The 104 section 221(d) (3) projects contain about 15,000 units. The majority of units are in walkups and one-family structures, in contrast to the predominately elevator-type projects under the limited-profit program.

The limited-profit program projects average slightly less than 500 rental units per project, while the section 221(d) (3) projects average slightly less than 150 units per project.

PER ROOM AND PER UNIT COSTS

The average cost per rental room of the 64 projects in the limited-profit program is $3,911; SLF projects, $3,782; and HFA projects, $3,938. Based on cases for which data were available, the average replacement cost per room of the projects in the section 221(d) (3) program is $2,101 for walkups and $3,074 for elevator structures. Walkups in the FHA zone I average $2,283 per room. It should be noted that these are comparisons of predominately different types of construtcion in different locations, consequently the comparisons should be qualified accordingly. As indicated previously, most of the State limited profit projects are elevator-type projects, which are a high cost type of construction, and many of them are located in New York City, which is a high cost area. On the other hand, the FHA section 221(d) (3) projects are mostly nonelevator projects and located throughout the country.

The average project cost per unit was $18,189 for the 64 limited-profit projects (table 2); SLF projects, $16,400; and HFA projects, $18,598. The section 221(d) (3) projects had an average replacement cost per unit of $10,915 for the walkups, aand $15,807 for the elevator structures. The walkups in zone I had an average cost of $11,965 per unit.

TABLE 2.-Average costs and average monthly rental per room and per unit for limited-profit and sec. 221(d) (3) program projects

2 Rentals shown generally cover ranges, refrigerators, heating, water, laundry facilities, janitor services, grounds maintenance, and, to a lesser degree, air conditioning, gas, electricity, and parking. 3 Not available.

In addition to having higher average per room and per unit costs, the limitedprofit projects also cost more to live in than the section 221(d) (3) projects. The average monthly rental per room (excluding utilities) for the limited-profit rental projects was $28.03; SLF projects, $25.52; and HFA projects, $28.81. The average monthly rental for the section 221(d) (3) rental projects was $16.08

for walkups and $20.27 for elevator structures, including utilities in part. (See note at bottom of table 2 for utilities included in the sec. 221(d)(3) rentals.) In FHA zone I the average monthly rental was $19.24 per room for walkups. The average monthly rental per unit (excluding utilities) for the rental projects in the limited-profit program was $129.85; SLF projects, $98.98; and HFA projects (all elevator structures), $141.48. The average monthly rental per unit for the section 221(d)(3) rental walkup projects was $82.39, and for the elevator projects $116.05, including utilities in part. In FHA zone I, the average monthly per unit rental for walkup rental projects was $100.84.

INCOME LIMITS

Family income for initial occupancy of the limited-profit program projects in New York State by statute cannot exceed six times the annual rent or carrying charge for a family of three or less, and seven times for a family of four or more. Deductions from total family income are allowable up to $1,200 for a secondary adult family wage earner, and the full-time college student. An administrative income limit of $10,000 has been placed on maximum net annual incomes for occupancy in New York City and Westchester County limited-profit projects, and a lesser amount upstate, depending upon the project. However, persons over the administratively established $10,000 income limit, but within the statutory rentincome ratios, can be considered for project occupancy under extenuating circumstances.

The maximum income limits for ocupany of section 221 (d) (3) projects are set by FHA for each locality according to family size ranging from two to seven or more persons. In the New York standard metropolitan statistical area the maximum income limits established are $6,450 for a family of two, $7,600 for three and four, $8,750 for five and six, and $9,900 for a family of seven or more persons.

FINANCING

The Federal National Mortgage Association is authorized to purchase mortgages insured under the section 221 (d) (3) program under its special assistance program. The current interest rate of the mortgages is 3.375 percent. The FHA has waived payment of the mortgage insurance premium for projects with this below market interest rate. The funds for FNMA special assistance functions are borrowed by FNMA from the Treasury at the cost of the money to the Treasury. The income from the Treasury obligations is taxable.

The part of the limited-profit program under State loan funds is financed by the State through the issuance of its general obligation bonds. Funds for financing the limited-profit program of the housing finance agency are obtained by the issuance of agency bonds. These bonds are not guaranteed by the State, and are tax exempt. The statutory maximum term of the bonds is 50 years. The details for the three issues of these bonds which have been marketed to date are indicated below.

TABLE 3.-Bond issues of New York State Housing Finance Agency

The interest rate charged on the mortgages made to the participating housing companies would not be less than the interest rate on the bonds. In addition to the interest rate on the mortgages, the companies are assessed a fee which at present is one-half of 1 percent of the mortgage amount under the housing finance agency program and $1.20 per room per year under the State loan fund program.

(The prepared statement of Mr. Semer follows:)

STATEMENT OF MILTON P. SEMER, GENERAL COUNSEL, HOUSING AND HOME FINANCE AGENCY

Mr. Chairman and members of the committee, I appreciate the opportunity of appearing before you today to present the views of the Housing Agency on S. 810, which would authorize the organization, under Federal law, of corporations to insure and to trade in conventional mortgages; S. 811, which would authorize a secondary mortgage facility within the Home Loan Bank System to deal in participations in conventional mortgages; and S. 2130, which would empower the Federal National Mortgage Association to deal in conventional mortgages.

While there are substantial differences in the details of these three bills, they are all similar in two respects

(1) Each of these bills seeks to provide a secondary market facility for conventional mortgage loans, and

(2) Each of these bills proposes a larger role for the Federal Government in the conventional mortgage market.

Your subcommittee, Mr. Chairman, has given special attention to the need for additional means of stimulating a larger and more stable flow of savings into the residential mortgage market. In 1960 you found that for the years 1961-70, approximately $160 billion of new funds would be required to finance the construction of an estimated 16 million nonfarm units.

These hearings are especially timely. New housing starts this year have far exceeded the most optimistic forecasts made at the beginning of the year. Possibly the increased demands of the 1960's may be upon us sooner than we had expected.

According to some current forecasts, there is a chance that the 1963 total will exceed 12 million units.

We in the Housing Agency are pleased that the major financial institutions are giving serious consideration to proposals to increase the amount of mortgage funds available for housing.

We are sympathetic to proposals to make the conventional mortgage a more uniform and marketable instrument of credit, to alleviate the uneven flow of mortgage funds as between geographic sections of the country, and to provide new sources of capital for mortgage funds for the housing industry.

All of these objectives must be met if we are to meet the demand of the 1960's in the housing field.

I would like now to deal more fully with each of these three proposals.

S. 810

S. 810 would provide for (1) the organization, under Federal law, of corporations to insure and trade in conventional mortgages; and (2) the establishment in the Federal Government of a "Joint Supervisory Board for Mortgage Insurance and Marketing Corporations" to charter and regulate such corporations. Mortgage insurance corporations chartered by the Joint Board would be authorized to (1) insure not less than 100 percent of unpaid principal and interest of eligible loans secured by mortgages on one- to four-family residential properties; and (2) establish an adequate insurance premium which, with allocated initial capital, would at all times provide for unimpaired capital and surplus aggregating, upon the basis of market value, not less than 5 percent of the unpaid principal amounts of outstanding insurance contracts. The loans to be insured by the chartered insurance corporations could have a maximum maturity of 30 years; would have to be completely amortized over the loan term ; have a loan-to-value ratio not exceeding 90 percent of the appraised value or of the sales price, whichever is lower; a loan amount not in excess of $30,000; and be secured by an owner-occupied one- to four-family property. The payment of insurance claims would be in cash.

Mortgage marketing corporations chartered by the Joint Board would be authorized to purchase, sell, and service mortgages on one- to four-family residential properties that are insured by a mortgage insurance corporation chartered by the Joint Board or insured or guaranteed by an agency of the United States; and to issue with the approval of the Joint Board and have outstanding obligations aggregating up to a maximum of 20 times the sum of their capital and surplus.

The mortgage insurance and mortgage marketing corporations would be subject to State taxes to the same extent as State-chartered corporations.

The mortgage marketing corporations chartered by the Joint Board would issue (with the approval of the Joint Board) securities to obtain capital with which to carry on their operations. Since mortgages on one- to four-family properties would constitute the primary security for (and provide almost all of the income needed to pay the interest on) these obligations of the mortgage marketing corporations, it is reasonable to conclude that these obligations will be sold in the same general capital markets which presently provide funds for FNMA debentures and the securities of the Federal Home Loan Bank Board.

The obligations of the mortgage marketing corporations, however, would not have any Treasury backup, nor are they established or recognized as comparatively risk-free securities in the capital markets in which they would have to compete with FNMA debentures and Federal Home Loan Bank Board securities. Moreover, the mortgage marketing corporations could issue obligations equal to 20 times the sum of capital surplus reserves and undistributed earnings, as contrasted to the more conservative borrowing ratio of 10-to-1 to which FNMA is limited for its secondary market obligations. It is obvious, therefore, that the mortgage marketing corporations would have to pay substantially higher interest rates on their obligations than does FNMA and the Federal Home Loan Bank Board in order to obtain funds.

It is by no means certain that the existence of the obligations of the mortgage marketing corporations would add any funds to the total supply of investment capital available for financing of housing. The availability of obligations of the mortgage marketing corporations bearing an interest rate high enough to stimulate investor interest might draw from sources which would otherwise invest in similar obligations of the FNMA and the Federal home loan banks. The result of this proposal might simply be, therefore, that a proportion of the funds otherwise available for financing sales or rental housing through the facilities of these existing agencies would flow through this new competitive channel, raising the structure of interest rates on FNMA debentures and Federal Home Loan Bank Board securities in the process.

Considering the cost of underwriting the debentures, or other obligations issued by these mortgage marketing corporations, the rate of return necessary to sell the obligations, the cost of servicing mortgages which may be acquired, the need for return on the equity capital invested in these corporations, and the cost of insurance premiums established by the mortgage insurance corporations, it seems clear that the mortgage marketing corporations would be forced to deal in mortgages which bear a higher interest rate than do conventional loans presently being made by lenders for their own portfolio investment. The practical problem faced by the mortgage-marketing corporations with respect to the yields they must obtain to carry on successful operations might force them to become instruments for the making of high-interest-rate, high-risk mortgages.

These considerations also cause us to question the assumption that unimpaired capital and surplus equal to only 5 percent of outstanding insurance contracts held by the mortgage insurance corporations would be adequate to meet insurance claims in cash payments during any period of significant decline in real estate values. Although the mortgage insurance corporations would not insure loans having a loan-to-appraised-value ratio exceeding 90 percent, the required reserve would be inadequate to meet a decline of real estate values exceeding 15 to 20 percent. Unlike the FHA, which can pay claims in longterm debentures and needs reserves to pay only interest on such debentures, the mortgage insurance corporations, which would be chartered under this bill, would have to meet all losses on insured mortgages in cash. Furthermore, any individual mortgage insurance corporation under this bill would have far fewer opportunities for diversification of its total risk than does the FHA.

S. 810 does not appear to contemplate establishment of minimum property standards comparable to standards achieved under the FHA program as a protection to homeowners and lenders. In addition, the conventional mortgages acquired by mortgage marketing corporations would not have the benefit of uniform credit and property underwriting standards characteristic of FHA-insured and VA-guaranteed mortgages. These standards, as well as the Treasury backup, have been a major factor in the acceptance of FHA-insured and VAguaranteed mortgages throughout the country.

For these reasons we cannot recommend enactment of S. 810.