The ceiling of $7,000 for home mortgages to be insured under section 221 has been proposed on the basis of several considerations.

In the light of past experience under both section 203 and section 8, it appears that new houses with at least two bedrooms can be built to minimum section 203 standards in the cheapest land areas of most of the metropolitan communities in the country within the $7,000 mortgage amount proposed in section 221.

In all communities, urban as well as suburban, the $7,000 ceiling should be effective in assisting rehabilitation or purchase of existing homes adapted to the needs of displaced families.

It should be noted that a higher ceiling than $7,000 would be in danger of raising the housing costs beyond the capacity of many of the displaced families for whom section 221 is expected to provide housing. For those families which can afford higher-priced homes, other provisions of S. 2938 would authorize for both new and existing properties insured mortgages under section 203 up to 95 percent of the first $8,000 of value and 75 percent of value in excess of $8,000.

To encourage private funds for section 221 projects, one of the terms of the insurance contract would provide that if the mortgage is in good standing, the mortgagee would have the option at the end of 20 years to assign the mortgage to FHA and receive in exchange debentures for the unpaid principal balance of the mortgage.

As in the case of section 220, FHA processing of applications and standards of eligibility under section 221 will generally parallel the respective procedures of sections 203 and 207.

Changes in the terms of mortgage insurance under various outstanding FHA programs are provided for in a number of individual sections of title I of S. 2938. Section 101 modifies the property improvement loan insurance program of title I by increasing the general maximum insurable loan from $2,500 to $3,000 and increasing the maximum permissible loan term from 3 to 5 years.

The same section also raises the present $10,000 maximum insurable loan for multifamily structures to $10,000 or $1,500 per unit, whichever is higher, with an accompanying increase in maximum term from 7 to 10 years. All of these changes are intended to make the title I program more effective in financing modernization and improvement of existing residential structures.

The expanded insurance program for multifamily projects is expected to be operated in a conservative fashion principally as a substitute for insured mortgage financing under other programs in those instances where existing indebtedness precludes use of the regular mortgage insurance programs.

Section 104 authorizes a simplified system of maximum mortgage amounts for section 203, raising the limits for 1- and 2-family structures to $20,000 from the present limit of $16,000 which was first established in 1934 and raising the maxima for 3- and 4-family structures to $27,500 and $35,000, respectively, from present limits of $20,500 and $25,000. For both new and existing structures with 1to 4-dwelling units, this section proposes as a single formula that maximum mortgage amounts be limited to 95 percent of the first $8,000 of value plus 75 percent of value in excess of $8,000. This single formula would replace a very complex series of maximum mortgage limitations applicable under the present law to a variety

of types of structure, sizes of units, and construction status of structures. The single formula would also remove the present disadvantage of mortgage terms for existing construction. As between proporties of equal value, there appears to be no sound reason for differing mortgage limits. Perhaps I can best illustrate this point by 1 or 2 examples.

Take a case where 2 houses-1 a newly constructed house and 1 an older house-are both appraised at $8,000. The newly constructed house may be a 2-bedroom house; the older house may be a 3-bedroom house. Under the existing law, the FHA may insure a loan of $7,350 on the newly constructed house, so that a family could purchase it with a downpayment of $650. However, one the older house, even though the appraised value is the same, the FHA could not insure a loan of more than $6,400. The family purchasing the older house would have to make a downpayment of $1,600-$950 more than would be required to purchase a new house with the same value. In such a case, it could well be that the older house with 3 bedrooms would better meet the needs of a particular family than the newly constructed 2-bedroom house, but solely because of the much larger downpayment required, the family might choose to purchase the new 2bedroom house.

Again, take the case of an existing house valued at $6,000 which with the addition of a bedroom and the modernization of the kitchen would be worth $8,000. Since FHA presently could not insure a loan of more than $6,400, or 80 percent, a family purchasing the house and making the additions and improvements would have a cash outlay of $1.600 as compared to $650 for the purchase of a new house of the same value.

The proposed maximum mortgage limits are also intended to provide a more consistent schedule of mortgage amounts. For example, a new home with a value of $11,000 is now eligible for a mortgage of $9,450, or 85.9 percent of value. Another new house of $11,800 would be eligible only for that same maximum mortgage amount, or 80 percent of value, and a house of $12,000 value is eligible for a mortgage of only $9,600, or $150 more mortgage than is available to the first unit worth $1,000 less. More favorabe mortgage terms for existing home mortgages would also be effective in helping to sustain the marketability of new homes and the volume of new construction.

Section 105 proposes a single maximum mortgage term of 30 years for application to all section 203 mortgages, replacing present varying limits ranging from 20 to 30 years.

Section 106 simplifies the maximum interest rate provisions of section 203 and permits the Commissioner to allow in connection with section 203 mortgages, a continuing monthly service charge such as has been applicable under section 8.

Senator IVES. We will have to desist at the present moment. The bell has rung. The afternoon session, as previously announced, will be held at 2:30, in room G-16 in the Capitol, the Interstate and Foreign Commerce Committee room on the gallery floor.

(Whereupon, at 12 o'clock noon the committee recessed to reconvene at 2:30 p. m., the same day.)

AFTERNOON SESSION

Senator BENNETT (presiding). Ladies and gentlemen, let's resume our hearings. Mr. Hollyday, will you tell us where to turn?

Mr. HOLLYDAY. Yes, sir. It is the middle paragraph on page 9 beginning with, "Each of the changes proposed."

Each of the changes proposed in sections 104, 105, and 106 can become effective only upon action of the President in keeping with the terms of these sections and of section 201 of the bill.

Section 112 proposes that the terms of debentures issued under section 203 and section 213 be established at 10 years instead of the present terms of 20 years for section 213 and 3 years after maturity of related mortgage for section 203. This would make the debenture terms consistent for all FHA programs and would improve the availability of funds for insured mortgage financing.

Fun

Section 114 modifies the mutual mortage insurance system in order to increase the strength of the fund as a protection against the contingent possibility of payment of debentures by the Treasury. damentally, the changes proposed would combine the independent resources of the 192 individual active group accounts in the present system into a single reserve system consisting of a general surplus account and a participating reserve account from which dividends would be paid.

Under the present system, only the resources of the general reinsurance account stand between a deficit in liquidation of insurance for a single year's mortgages in a particular group account and a call upon the Treasury for redemption of debentures issued. The present proposal would make all of the resources of the entire system available for redemption of maturing debentures before a call to the Treasury would be necessary.

It should be noted that the risk of loss to FHA is most substantial at all times with respect to the mortgages most recently insured. The declining risk of loss with passing years reflects both the reduction in indebtedness through amortization of the insured mortgages and the accumulation of resources in the insurance system from premiums and interests on investments.

The simultaneous accumulation of resources and decline in required reserves against losses in group accounts under the present system causes the individual group accounts to move rapidly from heavy deficits in reserves to a condition of credit balances in excess of required reserves during a short period in the life of the mortgages between about the 4th and 8th years. Under the present system, these credit balances in older group accounts can in no way be used to support the system's losses with respect to more recent group accounts.

Further aspects of the proposed revision are that management of the system can be accomplished at somewhat lower administrative cost if the group account system is abolished and that dividend distributions can be held to a minimum during the period of accumulation of adequate reserves.

It is perhaps unnecessary to mention that the concept of required reserves for such an insurance system as mortgage insurance must always be based on an assumption that a real-estate depression could start in the immediate future.

In that event, heavy losses would always be expected with respect to recently insured mortgages. The reserve concept does not involve a forecast of a depression at any particular time, but rather is designed to have the system able to endure a depression whenever it may

occur.

To the extent that a real-estate depression is delayed or mitigated, the insurance reserves will prove to be more than adequate and the excess will properly be available for return to the appropriate mortgagors in the form of participating dividends.

Section 115 of S. 2938 modifies the section 207 program of FHA in several respects; first, by extending the program to cover mortgages for rehabilitation of existing structures in blighted areas; second, by making section 207 mortgage insurance available in Guam on the same basis as applies in Alaska; and third, by revising the maximum mortgage amount provisions to remove the present $10,000 ceiling and to allow mortgage amounts as high as $2,400 per room, or $7,500 per unit in projects with less than four rooms per unit, in projects of elevator structures if FHA determines that construction cost levels require such mortgage amounts.

The elevator structure increases are proposed in the light of the higher costs generally inherent in the fireproof or fire-resistant qualities of construction required for these structures and the higher land costs typical of central-city locations where these structures are provided, including slum-clearance sites. It may be noted that these last changes do not alter the basic limitation of thees mortgages to 80 percent of FHA's apraised value.

Section 119 proposes to amend the maximum mortgage limits of the section 213 program in several regards: First, mortgages up to $25 million would be insurable for mortgagors publicly regulated or supervised as to rents, charges, and methods of operation; secondly, increases are provided in maximum mortgage amounts on a per room and per unit basis-to $2,250 per room, or $8,100 per unit for projects averaging less than four rooms per unit, with proportional further increases for veterans' cooperatives; third, additional increases in maximum-mortgage amounts are provided with respect to elevator structures, to $2,700 per room, or $8,400 per unit in projects with less than four rooms per unit, with related further increases for veterans' cooperatives-such further increases to be dependent upon the necessities of higher cost levels; fourth, mortgage limits are based upon appraised values of properties instead of replacement cost, as formerly; and fifth, veterans' preferential mortgage limits are made available only to projects having 65 percent of the membership composed of veterans.

The increases in mortgage amounts bring the section 213 maxima into balance with section 207 maxima after allowance for the differences between the maximum permitted loan to value ratios.

As in the case of section 207, higher mortgage ceilings are proposed for elevator structures. Basing mortgage limits on appraised values instead of replacement costs would increase the protection of the insurance fund and would encourage elimination of any elements of cost which do not contribute to value.

The change in the formula for determining additional mortgage amounts for veterans' benefits is proposed as a means of simplifying

the present complicated formula for determining maximum mortgage amounts for these projects.

Senator BRICKER. For instance

Mr. HOLLYDAY. For instance, in section 213 you have the problem, Senator, of putting the cart before the horse in that ordinarily you build an apartment and then get your tenants together. In the section 213 cooperative, there is quite a bit of a problem of getting organized and agreement over the conception of the project. It takes money in order to do that. The project has to have those funds available. It is a cost that is definitely necessary.

Now, when you go over to a case of value rather than just the total cost, any unnecessary costs, I think, are not going to be included in the value.

Undoubtedly, from the standpoint of the protection of the funds, to have a project based on value is greater protection than to have the mortgage based on its costs.

Senator MAYBANK. Who is going to determine the value?

Mr. HOLLYDAY. Value determined by FHA basically you start off with cost and then

Senator MAYBANK. This is an FHA mortgage. Some fellow owns a lot, for the sake of argument. He thinks it is worth so much. You have an appraisal committee that says it is worth so much. Do you have double check on those appraisals under this?

Mr. HOLLYDAY. Yes, sir. You have to.

Senator MAYBANK. I know that. There have been many mistakes made in the past. Is there any improvement on the evaluation by the recommendation of this group the President appointed and in which I concur on so many things they have said?

Mr. HOLLYDAY. The improvement, Senator, would come by experience and from some of the mistakes that were made in the past, we have evolved what we think is an excellent system of determining what values are. We have trained men who do nothing but that, and study the intricate and almost professional business of evaluation of real estate and land and income.

We learn by experience but we think we have evolved a good system.

Senator MAYBANK. I don't question that. The only reason I asked you that was there has been, in my judgment, over a period of years some mistakes made. Maybe it is natural. I think you will agree, because of your own record.

Mr. HOLLYDAY. I think it is natural.

Senator MAYBANK. It is a very dangerous thing, unless you have the right appraisers.

Mr. HOLLYDAY. Our whole concept is based on

Senator MAYBANK. I can appreciate your concept. I was wondering if there were any further safeguards.

Mr. HOLLYDAY. No, sir; I think there is no other safeguard than a study of what has happened and will happen.

Senator MAYBANK. You can profit, as you suggest, by the mistakes made. I don't have any suggestions. I was just curious to know. Mr. HOLLYDAY. We endeavor to do that as we get practical experience. When we make a mistake we inherit the property and we learn.