view of the legislative history on the matter. It, therefore, "recommends that the Banking and Currency Committee, in coordination with the Committee on Veterans' Affairs, consider the drafting of legislation which will specifically authorize and direct the agencies concerned to put an end to the evil of excessive discounts on FHA-insured and VA-guaranteed loans."

Past experience has shown the extreme difficulty of administering and enforcing the regulation of discounts. High discounts generally have not been a problem with respect to FHA-insured loans. They have been noticeable in the past, however, with respect to VA-guaranteed loans. It became common knowledge during the tight money situation of 1953 that the VA regulation of discounts, in accordance with the Housing Act of 1950, was being circumvented through mortgage repurchase agreements involving a discount cost for the builder. When administrative action was taken in May 1953 to prohibit such circumvention, a 2-month hiatus of funds for GI loans set in, followed by congressional legislative action which repealed the authority to regulate discounts where secondary mortgage market transactions are involved. The following year, the authority to regulate against any discounts paid by the builder was repealed entirely. In view of the unfortunate experience in attempting to regulate discounts in the past, we do not favor another attempt to employ similar methods of regulation. (5) Timing of credit curbs on FHA and VA loans (pp. 6-7 of report)

The subcommittee believes that there is much to the argument that, "had the July 30 controls been applied 6 months earlier, when the imminent shortage of mortgage funds was discernible, the disparity between an overstimulated consumer and builder demand and the supply of mortgage funds would have been greatly minimized if not entirely avoided, * * *.

We cannot agree that the economic and financial conditions which developed during 1955 were discernible 6 months prior to July 30. The housing credit controls were not instituted earlier in 1955 because housing credit policies, which are coordinated with general economic policies and overall economic conditions, did not call for a restriction upon homebuilding activities early in the year. There were still many resources in the economy which were not fully employed. Thus, during the first quarter the number of unemployed was between 3 and 3.4 million. It was not until the third quarter that it became evident that practically full employment was being reached as unemployment was reduced to below 2.5 million. Also, it was not discernible during the first few months of the year that consumer credit would expand as rapidly as it subsequently did, and it was not foreseeable at the beginning of the year that savings inflows to lending institutions would fall off as they did late in the second quarter and during the third quarter of the year. On the other hand, contrary to expectations, plant and equipment expenditures rose during the year and corporate security issues in 1955 were above 1954. Consequently, unforeseeable economic and financial conditions which contributed significantly to the tightness of credit and materials did not become discernible until the third quarter.

(6) Pension funds (p. 14 of report)

The subcommittee plans to conduct a future study of the obstacles which prevent the flow of pension fund money into FHA and VA mortgages. The subcommittee believes that such a flow could solve the "mortgage-supply problem." The Housing Agency believes such a study to be desirable.

(7) Removal of credit curbs on FHA and VA loans (pp. 15–16 of report)

The subcommittee believes that removal of the July 30 FHA and VA credit curbs would help stave off "too severe a decline in building activities." It thinks that "the same reasoning which justifies a maturity relaxation applies with equal force to a relaxation in the downpayment controls. Accordingly, the subcommittee urges the administering agencies to remove the downpayment restrictions imposed July 30, 1955."

While the seasonally adjusted annual rate of nonfarm private housing starts has tapered off slightly during the first quarter of this year, there has been by no means a "severe decline." Moreover, recent FHA applications and VA appraisal requests for new homes, which are indicative of FHA and VA starts in the near future, give no reason to expect a severe decline despite the retention of moderate downpayment regulations.

It was pointed out in the report (p. 6) that testimony before the committee showed an almost unanimous opinion that the maturity regulation was by far the more vigorous control and that virtually all witnesses believe that this factor

would bar far more families from the market than a 2 percent increase in the required downpayment. Thus, by lifting the maturity restriction, the more significant restriction upon effective demand was removed, while the unsettling effects of no downpayment loans in a relatively tight mortgage market have been avoided.

B. FHA'S MULTIFAMILY HOUSING PROGRAMS UNDER SECTIONS 213 AND 207

1. Cooperative housing under section 213

(1) Need for adequate staff (pp. 27 and 18 of report)

The subcommittee report states that the appointment of a Special Assistant for Cooperative Housing as provided in the Housing Amendments of 1955 was made after some delay. Also, that "nothing has been done so far to furnish the adequate staff which Congress contemplated." The report further "strongly urges the FHA Commissioner to take necessary steps to provide the necessary staff assistance."

The facts are that FHA has moved diligently in this respect. The Housing amendments of 1955 became law on August 11, 1955, and within a period of about 2 months, by October 17, a Special Assistant for Cooperative Housing, fully sympathetic with the purposes of such section, was appointed. Some of the time was needed to settle a technical, legal question with respect to civil service laws, and some of the time was taken up in the recruiting of a qualified candidate. With respect to staff, the FHA Commissioner has asked for funds to staff the Cooperative Housing Section in a supplemental appropriation request. Although this request was denied in the House of Representatives, another request was presented and is now pending in the Senate. The staff of the Cooperative Housing Section is not one full-time professional staff man in addition to the Special Assistant, as the subcommittee report indicates, but a total of 5 full-time men and 2 secretaries.

(2) Identity-of-interest (pp. 18-20 of report)

The subcommittee report correctly states that where an identity of interest exists between the builder and a cooperative, that is, where the builder has an interest in a cooperative or has supplied financial aid, FHA requires the contract between the builder and the cooperative to be on a cost-plus basis, and further requires cost certification from the builder as well as the cooperative mortgagor corporation. The report recognizes that FHA must retain some safeguards against the abuse of cooperators by a dominant and perhaps unscrupulous builder-sponsor, but states that it believes that this objective can be achieved without making the rules so restrictive that no builder-sponsor will participate. The report also recommends, where cost certification is required, that consideration be given to prescribing some reasonable cutoff date beyond which certified costs would be incontestable.

It will be noted that the FHA procedure with respect to cost certification where there is an identity of interest applies also to other multifamily housing projects. An identity of interest is deemed to exist when, in the judgment of the FHA Commissioner, the mortgagor, its officers, directors, or stockholders have an interest financial or otherwise in the builder, contractor or any subcontractor. In such cases, the customary arms-length relationship of contractor to sponsor does not prevail. Consequently, FHA does not rely upon certification of a lump-sum contract between the builder and the cooperative, but requires the builder to certify his actual costs of construction and permits the builder a builder's fee in an amount which is reasonable in accordance with customary practices in the

area.

With respect to the recommendation of the subcommittee for the establishment of a cutoff date after which time the certified costs would be incontestable, the agency has proposed in its legislation an amendment designed to do just that. (3) The time-lag problem (p. 20 of report)

The subcommittee report refers to difficulties encountered in initiating projects arising from the FHA requirement that the cooperative must have achieved 100 percent membership before the builder can start construction. The report makes two recommendations in this respect: (a) It recommends to the FHA Commissioner that he give consideration to restoring the 90-percent membership rule which was in effect prior to 1954; and (b) it recommends to the Banking and Currency Committee that careful consideration be given to permitting a builder

to start a project under section 207, and to sell it during or after construction to a cooperative which would convert the financing to section 213.

With respect to a reduction in the required 100-percent membership, the FHA is considering amending their administrative regulations to permit some reduction in this percentage. The situation which this requrement seeks to avoid, of course, is that, if a project is built and is not adequately occupied, the aggregate of the monthly charges paid by members of the cooperatives living in the project may not be adequate to meet expenses. In such cases, additional assessments on these members would be necessary and this may, if it becomes serious, jeopardize the investments of the cooperators. Naturally, the builder wishes to move ahead faster, but the FHA must also consider the interests of the cooperative members. With respect to permitting a project to be started as a section 207 rental housing project and then converted to a section 213 cooperative, the FHA has reviewed the merits of this proposal which was first considered several years ago. The Housing Agency would not object to legislation permitting a builder to construct a housing project with mortgage insurance under section 207 and to sell it within a limited period of time to a management-type cooperative which would receive mortgage insurance under section 213. Under such a procedure, the initial mortgage obtained by the builder would be subject to the economic soundness test of section 207 and he would receive the same terms (80 or 90 percent of value) as other section 207 mortgagors. Thus, if the project were not successfully sold to a cooperative it would be administered under the rental housing procedures and standards of FHA, and would have no advantage over other rental housing projects financed under the regular FHA rental housing program. However, if the project were sold to a cooperative, the more liberal section 213 terms would be The Housing Agency made available at that time to the cooperative owners. would oppose any legislation which placed the builder in an advantageous position as compared with other owners of section 207 projects if he failed to sell the project to a cooperative.

(4) FNMA assistance (pp. 20-22 of report)

The subcommittee "disagrees completely" with FNMA's policy of a 2-percent discount, a 1-percent commitment fee, and a one-half of 1 percent purchase fee for cooperative housing mortgages purchased by it under its special assistance operation. The FNMA has testified recently before the Rains Subcommittee that such discount is necessary if the FNMA is to supplement, rather than supplant, It will be noted that private financing has been the private mortgage market. obtained for about nine-tenths of the cooperative housing mortgages insured under section 213 prior to the end of 1955, with FNMA accounting for the remaining one-tenth of the volume. It is reasonable to expect private financing to become available again in volume under more favorable mortgage market conditions which are beginning to develop. In the meantime, limited FNMA purchases are advocated.

The subcommittee also took exception to the FNMA's legal interpretation that the $5 million of advance commitments for cooperative mortgage in any one State was not to revolve in the same manner as the $50 million total. This involves a technical question of legal interpretation. The Housing Agency will call this question to the attention of the Congress and ask the Congress to clarify the law. (5) Processing fees (p. 22 of report)

The subcommittee questioned the amount of the FHA processing fees of eighttenths of 1 percent, or $80 on a $10,000 mortgage for a sales type cooperative, in comparison with a single-family home under section 203 where the charge is $45 but $25 is refunded when the mortgage is insured, leaving a net charge of $20. The processing fee for a sales type cooperative is the same as for a management type cooperative and is greater than under section 203 because the processing starts out as a project which is more costly to process. However, FHA is reviewing its costs and giving consideration to a possible revision of its administrative regulations in this respect.

2. Section 207 rental housing program

(1) Section 207 equity requirement (p. 23 of report)

The subcommittee was impressed by testimony to the effect that the 20-percent equity requirement is not far different from conventional financing where the builder's required equity investment may be "perhaps as low as 30 percent." "The subcommittee recommends that the Banking and Currency Committee

consider legislation which would permit the FHA Commissioner to insure a loan up to 90 percent instead of the present 80 percent of value."

Even a 30-percent equity requirement requires 50 percent more investment equity than the FHA section 207 requirement. Furthermore, the equity requirement is only one of several variables in financing and cannot be considered by itself. The lower interest rate and much longer maturity obtainable with FHA financing than with conventional financing makes for lower annual debt service and puts the investor in a better cash earnings position. This is particularly advantageous under the 1955 change of FHA regulations permitting an investor to withdraw up to 70 percent of his equity investment as rapidly as earnings generate the cash for such redemption of investment. We believe, therefore, that the 80-percent insured mortgage has distinct advantages over conventional financing. It is a basic policy matter for Congress to determine, however, whether a mortgage equal to 90 percent of value should be permitted under section 207.

(2) Cost certification cutoff date (p. 24 of report)

The subcommittee suggests "a cutoff date beyond which cost certification would be incontestable." The Administration's housing bill provides for incontestability of the cost certification, except for fraud or misrepresentation, upon approval of the mortgagor's certification by the FHA Commissioner.

(3) Mortgage amount limitations under section 207 (p. 24 of report)

The subcommittee compares the present statutory per room and per unit mortgage amount limitations under sections 220 and 207 which are as follows:

A more important disparity according to the subcommittee is the lack of authority under section 207 to raise the per room limitations by $1,000 as the FHA may do under section 220. The subcommittee "sees no reason why the same loan maxima permitted for section 220 projects cannot be accorded as well to section 207 projects" and it recommends "that the Banking and Currency adopt legislation designed to achieve this result."

With respect to the differences in the basic mortgage amount limitations under section 207 and section 220, they are merely an arithmetic result of applying the 80-percent and 90-percent ratios. The amounts in section 207 should be changed if the 80-percent ratio is changed, but not otherwise.

There is authority to raise mortgage amounts by $1,000 per room under section 220 but not under section 207 because the programs have different purposes reflected both in the language and in the practical applicability of the law. Thus section 207 (b) (2) of the National Housing Act states that "The insurance of mortgages under this section is intended to facilitate particularly the production of rental accommodations at reasonable rents, of design and size suitable for family living" * "in which every effort has been made to

achieve moderate rental charges." [Emphasis added.] In contrast, section 220 (a) states "The purpose of this section is to aid in the elimination of slums and bliighted conditions * **" and nowhere in this section is there any congressional intent that section 220 should be limited to housing at moderate rent. Practically, section 207 housing has been built in outlying area garden-type projects where relatively moderate land costs permitted moderate rentals for units designed for families with children as specified in the law. Section 220 projects, on the other hand, by the very nature of their purpose are located in central city areas and land costs, even after a write down through a Federal-local subsidy, are so high that in many instances more than moderate rentals are necessary in order to make it feasible to redevelop the area. For these reasons authority for higher mortgages may be needed under section 220 but not under section 207. After all, per room costs of from $3,250 to $3,700 could only result in very high rent housing, falling into the luxury class. However, the Housing Agency has no objection to permitting some differential in section 207 mortgage amounts for high cost areas.

ANALYSIS OF REPORT NO. 3, 84TH CONGRESS, OF HOUSING SUBCOMMITTEE OF HOUSE COMMITTEE ON BANKING AND CURRENCY

MILITARY HOUSING

(1) Extension of Capehart military housing legislation (pp. 3-5 of Rains subcommittee report)

The subcommittee recommended an extension of the Capehart military housing program for at least a 3-year period. The Department of Defense is recommending that the legislation be made permanent. The Housing Agency agrees that a long period is necessary for carrying out so large a program in an orderly manner. At the request of the Department of Defense, the Housing Agency has included in the proposed housing amendments of 1956 a provision extending the legislation indefinitely.

(2) Extension of Capehart military housing program to Panama Canal Zone and to Guantanamo Bay in Cuba (pp. 6–10 of report)

The subcommittee recommends extending the program to the Panama Canal Zone and to Guantanamo Bay, Cuba, if the Department of Defense can assure the Congress that certain technical legal problems can be met. The FHA points out that we have no offices in those areas and that our operations there will necessarily be less efficient and more expensive, so that it may be more appropriate for the military services to use appropriated funds. However, if the Congress wants us to operate in a new area despite the increased expense, the Housing Agency would not object to legislation at least so far as the Panama Canal Zone is concerned. The Department of Defense has already made a similar recommendation with respect to the Panama Canal Zone. The Housing Agency has no information concerning possible legal obstacles to operating in Cuba. (3) Increase in average mortgage limitation in Capehart military housing program (pp. 11-12 of report)

The subcommittee recommended that the mortgage limitation under the program be increased from a $13,500 per unit average in any one project to $16,500. The Department of Defense has made a substantially similar proposal.

(4) Waiver of FHA's Insurance Premium in Capehart Military Housing Program-(p. 13 of report)

The subcommittee recommended an amendment which would either eliminate the FHA insurance premium in the program or at least permit the FHA to waive the premium. The present arrangement between the FHA and the Department of Defense, under which a one-fourth of 1 percent premium is charged, is subject to review by the Secretary of Defense and the Federal Housing Commissioner every 3 years. The Housing Agency believes that this procedure should be retained since it will allow flexibility until sufficient experience is gained in establishing potential loss ratios for the program. (5) Housing for lower rank enlisted personnel—(p. 13 of report)

The subcommittee recommended that consideration be given to providing housing for lower rank enlisted personnel who have dependents and who are stationed in remote communities. The Housing Agency has no comment on this recommendation since it is a matter primarily within the jurisdiction of the Department of Defense.

(6) Basis for determinnig need for additional Capchart housing units-(pp. 13-14 of report)

The subcommittee stated: "It has come to the subcommittee's attention that a number of projects are being reduced from the amount certified to by the service secretaries, or completely eliminated by the FHA in a somewhat arbitrary fashion. This has tended to force the military departments to accept the number of units approved by FHA in order to obtain urgently needed housing without prolonged administrative delays. It is the feeling of the subcommittee that the fact that this program is essentially and fundamentally a military one designed to meet a most critical need affecting directly the security of this Nation need reemphasis; and that the possible effect of such program on other FHA programs shall not be a controlling factor in the determination of the military requirements for housing."

The Housing Agency believes it should be noted (a) that the FHA has been given a responsibility in this matter by the Congress; (b) that the Housing