I conclude my part of this testimony with the plea that public housing be terminated and that the Nation proceed to an orderly liquidation of existing public housing projects.

Now I will ask the committee to hear Mr. Scott conclude our testimony.

The CHAIRMAN. Mr. Scott may proceed.

Mr. SCOTT. Mr. Chairman and members of the committee: My name is Robert E. Scott of Elizabeth, N. J. I am a real estate broker, builder, and mortgage banker. I appear before this committee in my capacity of vice chairman of the Realtors' Washington Committee, National Association of Real Estate Boards.

This statement on behalf of our association will concern itself with the provisions of H. R. 10157 as well as other legislation pending before the committee relating to the Federal Housing Administration, Federal National Mortgage Association, housing for the elderly, and military family housing. We will cover these in the order named.

Section 203

FEDERAL HOUSING ADMINISTRATION

We have now experienced more than 20 years in the operation of this vital section of the FHA mortgage insurance system. Surely it has by now fully demonstrated its value to the national economy and the principle of home ownership. The Congress almost annually has painstakingly sought to make section 203 perform its mission more effectively, and the recommendations we suggest here would in our opinion continue the program along the broad lines laid down by this committee in the Housing Act of 1954.

At that time, the Administration recommended that the ratios of loan to value and maturities with respect to the section 203 program be made equally applicable to existing homes and new construction. You will recall that although the Congress did not provide for that parity, nevertheless the difference in maturities and load-to-value ratios as between new and existing housing was narrowed considerably. On new construction the maximum loan was increased to 95 percent of the first $9,000 but on existing homes to only 90 percent of the first $9,000, since reduced by credit curbs to 93 percent and 88 percent, respectively.

We now make the plea that the committee further consider the problem raised at that time, and remove the remaining disparity. The great bulk of our housing inventory at any given time is in existing structures. Obviously, most families must look to this inventory as their principal source for housing. No one could seriously contend that the Nation's home-building industry must gear itself to providing new construction for all of our people.

Our division of research has found that the recent tightening of the mortgage market has had its most serious effect on the financing of existing homes. As a result, more and more families have been forced to go into the conventional market for the financing of such housing. This has resulted in a denial, or at least a delay, of home ownership to many of these families because of the larger downpayments, higher interest rates, and shorter maturities which are characteristic of conventional loan financing.

Results of our association's recent Mortgage Market Survey, spring, 1956, show that a prevailing interest rate of 5 percent was reported in 55 percent of the areas surveyed. However, 40 percent of the communities reported a rate of above 5 percent for mortgages on existing homes. This is a considerable increase over that reported in our autumn, 1955, survey.

We strongly recommend that the committee help solve the growing problem of the financing of existing homes by removing the disparity between maximum mortgage insurance obtainable on existing homes and that obtainable on new construction. Later on in this statement we will propose a change in the operations of FNMA which will further assist in the adequate financing of existing homes.

FHA trade-in house program

This important program was made possible by a provision in the Housing Act of 1954 which permitted an FHA loan to be closed in the name of a mortgagor who was not the owner-occupant provided the loan-to-value ratio could not exceed 85 percent of that to which an owner-occupant would have been entitled.

We urge that the committee increase the 85 percent requirement to 90 percent in order to permit greater participation in the trade-in program by builders and real-estate brokers whose utilization of the trade-in device enables many homeowners to purchase another existing or new home as their incomes increase and as the needs of their families dictate.

For example, on an existing home appraised by the FHA at $12,000, the maximum insured mortgage would be $10,300, or a downpayment of $1,700. For a non-owner-occupant mortgagor the maximum insured mortgage would be 85 percent of $10,300 or $8,700, requiring a cash equity of $3,300. Under our proposed amendment the cash equity would be reduced to $2,800, but still $1,100 in excess of that required of an owner-occupant. This proposed change would greatly facilitate the transfer of existing dwellings and enhance the home-buying opportunities of many low- and middle-income families. Section 207

Our recommendations with respect to changes in the FHA multifamily programs are influenced by our concern with the growing need for rental housing, particularly in the large urban communities-a need we regret is not being fully met for several reasons. We were heartened to note from the excellent report of the Subcommittee on Housing of this committee that we are not alone in our analysis of the reasons for the dearth of rental housing.

In the words of the subcommittee report:

The nub of the problem facing most cities and the FHA seems to be the difficulty in attracting risk capital into multifamily rental housing investment.

A partial explanation of this problem may be found in our tax laws, which inhibit the investment of equity capital by spreading its return over a long period of time at a relatively low yield.

The subcommittee went on further to point out that a project requiring a 20-percent equity is not far different from a conventionally financed project and that, moreover

in a conventional project the sponsor is freed of all concern over Government redtape and does not subject himself to Government control of his rent schedule or his dividend rates.

The subcommittee recommended that if the Government is to encourage additional moderate-rent housing under section 207, it would appear desirable to offset the burden of the 207 controls by reducing the amount of long-term equity investment required.

We, therefore, recommend that the FHA 207 program be amended so as to increase the present 80-percent ratio of loan to value to 90 percent, as provided in H. R. 10157.

We endorse the provisions in the bill which extend to the section 207 program the maximum per room loan ceiling now applicable to section 220.

We also urge the committee's approval of the provision in H. R. 9537 and H. R. 10157 which would make cost certification, once approved by FHA, incontestable in the absence of fraud or material misrepresentation.

Basic to this entire problem is the question of providing an interest rate that will attract investment capital and in our opinion the present 44-percent rate is completely unrealistic.

Now, section 220: The same impediments which deter the flow of risk capital into the 207 program are equally applicable to rental housing constructed under the section 220 program in urban renewal areas. Congress recognized this by providing a 90-percent ratio-ofloan-to-value for this program in the 1954 act. The section was further amended in 1955 by basing the loan on replacement cost rather than value.

The second problem is to encourage the new construction of 220 projects at rent levels low enough to permit occupancy by low and moderate income families. We believe that section 220 should be amended to meet this objective. We note that the Rains subcommittee, which held hearings in several cities inquiring into the dearth of activity under this program, discussed several changes which, in our opinion, are well calculated to meet the overall objectives of this section. These changes are as follows:

1. In order to reduce debt-servicing requirements and thereby permit lower rents, the present amortization plan under section 220 should be changed from "accelerating curtail declining annuity" to the "level annuity" amortization plan now applicable to individual housing programs. For example, the use of a 40-year level annuity mortgage would result in a 16-percent reduction in the initial annual debt service on which project rents are based, and would permit a reduction of approximately $10 in the monthly rent per apartment. We understand that the level annuity amortization plan is already permitted on section 213 (cooperative) housing projects.

2. FHA should permit a builder's profit of 10 percent instead of the present 5 to 9 percent, and the profit percentage should apply to the total cost of a project rather than to the construction cost alone.

3. The present antimortgaging out provision to which section 220 is subjected should be amended to require that only the excess of the mortgage over the actual certified costs be remitted to the mortgagee. This is similar to the antimortgaging out provision which

was applicable to Wherry and defense housing prior to 1954. That year, as a result of the 608 investigations, the law was amended to require the remission of the excess of the mortgage over the approved percentage of actual costs.

This proposed amendment would still preclude the possibility of windfalls, but would permit an efficient builder to obtain a mortgage sufficient to cover a larger percentage of his construction costs. In the words of the Rains subcommittee report, this proposal

would seem to have considerable merit as a device for attracting the participation in the section 220 program of the more efficient and experienced builder.

4. The maturity for new construction should be extended to 50 years instead of the present 40 years. We believe that a 50-year maturity is realistic for fireproof buildings built according to FHA minimum standards. Such maturity would reduce section 220 rent levels to meet the incomes of many families who desire rental housing.

5. We also endorse the proopsal in H. R. 10157 that cost certification, once approved by FHA, would be incontestable in the absence of fraud or material misrepresentation. And of course FHA should approve or disapprove within a reasonable time and not leave the builder dangling in midair indefinitely.

Now, with respect to the use of national service life insurance funds to purchase VA-guaranteed loans, H. R. 10157 would authorize the Secretary of the Treasury to invest up to 10 percent of the reserves of the national service life insurance fund by purchasing VA-guaranteed loans in geographic areas where the discounts on such loans are, in the opinion of the Secretary, excessive. Such loans would be purchased at par and could not be resold at less than par.

We urge the committee not to approve this provision of the bill. The reserves in this insurance fund are funds entrusted to the Secretary of the Treasury by law, and we question seriously the use of such trust funds, which represent the premiums paid by World War II veterans, to purchase mortgages at a price in excess of their market value. We also question the desirability of vesting in a governmental official the statutory authority to make an administrative determination that a discount is "excessive."

We recognize and appreciate the objective sought to be accomplished by the authors of this provision. The target is the discount required in many areas of the country in order to obtain FHA and VA financing. Use of the NSLI fund, or any part of it, for this purpose treats only a symptom of the so-called discount problem and avoids the source of the difficulty. The discount is a direct and inevitable result of the fixed interest rates on FHA and VA loans and represents the difference between such fixed interest rates on FHA and VA loans and the market price of mortgage money. The only workable solution in our considered opinion is to provide some flexible formula which would permit these rates to rise or fall in accordance with the disciplines of the market. Such a formula approved by this committee, but rejected by the House in 1954, would in our opinion provide needed flexibility and minimize the effects of such discounts by gearing the interest rates to a constant differential with the yield on Government bonds having a remaining maturity of 15 years or more. While we recognize the obstacles to such a provision in

the light of the action taken by the House in 1954, we nevertheless respectfully submit that some such formula is the only answer to the discounting of FHA and VA loans.

HOUSING FOR ELDERLY PERSONS

On all sides, medical, economic, and sociological, we witness the improved lot of the elderly segment of our population within the framework of our private enterprise system.

We believe that private enterprise with the assistance of the FHA mortgage insurance system, amended as recommended in this statement, is competent to meet adequately the housing needs of all our people, and we strongly oppose enactment of any program which presupposes the complete incapability of private enterprise in this field.

We recommend that the committee reject title III of the bill, H. R. 10157, which would provide for a $250 million direct lending operation by the Housing and Home Finance Agency to provide housing for elderly persons. The bill would provide such direct lending where the borrower is unable to obtain 100 percent 50-year loans, at 32 percent from private sources, a condition which is for all practical purposes a meaningless one. A Government direct-lending operation to meet the housing needs of the elderly is a step backward which is completely unwarranted and we strongly urge the committee to reject it. And I would like to point out at this point that there has never been any adequate survey of the need to house the elderly or to what extent private enterprise is failing to meet such need.

Now, with respect to Fannie Mae secondary market operations: The present 3 percent capital stock subscription, coupled with the prevailing discounts and one-half percent or 1 percent purchase and marketing fee, imposes an unreasonable burden on those doing business with Fannie Mae. We urge approval of the provision in H. R. 10157 which would reduce the stock subscription requirement to "not more than 2 percent," instead of the present "not less than 3 percent." Maximum mortgage limit

We recommend approval of the provision in H. R. 9537, by Mr. Widnall, that there be no maximum limits on FHA-insured and VA-guaranteed mortgages otherwise eligible for purchase by Fannie Mae, except those limits imposed by the insuring or guaranteeing

agency.

Fannie Mae's secondary market operations are conducted in accordance with sound business principles completely void of any Federal subsidy. We fail to note any justification for directing its activity to a limited sector of the FHA or VA market. So long as there is authority for the FHA and VA to insure or guarantee a mortgage in excess of $15,000, there is no basis for limiting Fannie Mae operations to mortgages of this amount or less.

The Housing Subcommittee's report on the Federal National Mortgage Association under date of May 9 opposes removal of the maximum mortgage limit with the reason—

that Fannie Mae's activities should not be diluted and weakened by channeling a measure of its support to the higher income families less in need of assistance. This is a valid reason for a maximum mortgage limit under Fannie Mae's special assistance provisions, but it has no bearing on Fannie

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