being recommended by the administration in order to help fill part of the relocation need and liberalizations are being recommended in FHA's section 221 legislation in order to help fill another part of the need. Still another part of the need can be filled by turnover in existing public housing. Local expenditures designed to help families find decent new or existing relocation housing and local expenditures to give followup assistance to families which relocate themselves are both approvable as part of title I gross project costs. The Housing Agency recognizes that the relocation job, particularly in the case of minority groups, requires the very best efforts of Federal and local officials.

(3) Small business relocation A (pp. 8–9 of report)

The subcommittee states that small businesses displaced by urban renewal projects receive no financial aid in connection with moving expenses and often have difficulty in obtaining credit needed to resume business in another location. The subcommittee plans "to explore possible remedies" for this problem.

The Housing Agency welcomes such a study. We have opposed legislation which would, as a condition to Federal urban renewal aid, require the local community to make certain that each small business is satisfactorily relocated. To determine that a displaced family has moved into a decent home involves the application of fairly definite standards. However, it is too complicated a matter for a city to decide that the many complex factors which enter into the satisfactory relocation of a business have each successfully been dealt with. Different types and sizes of business concerns each have different requirements as to location. Our objection to one legislative proposal, however, does not mean that we oppose seeking some feasible means of helping displaced small businesses to relocate.

(4) FHA-Delays in section 220 (pp. 9-11 of report)

The subcommittee report states that slowness in the 220 program resulted from a "negative attitude" by Government officials; "burdensome red tape"; and an "overly cautious and timid" attitude. The report states that "it is our hope that this report, by highlighting the administrative problems and by suggesting and recommending more workable policies, can help restore a more positive and courageous philosophy."

The report also makes reference to such matters as "the time consuming activities which are a prerequisite" to putting a slum clearance project and an FHA section 220 project together. The only practical way to evaluate the subcommittee's conclusions is by examining each of the specific problems to which the report refers and by evaluating the recommendations made by the subcommittee for dealing with each specific problem. The report lists and discusses the following specific problems: (a) equity investment, (b) profit allowance, (c) land cost, (d) over and above money, (e) loan maturity, (f) amortization plan, (g) cost certification, and (h) rehabilitation aspect of section 220. Each of these items is discussed below.

(5) The problem of equity investment in rental housing and of “over and above” money (pp. 12-13 and 15-16 of report)

The subcommittee states that "there is no disagreement on the evils of windfalls of the 608 variety. But it is another thing entirely when one considers realistically the problem of attracting private sponsors into the building of multifamily rental housing, whether in urban renewal areas or not." The subcommittee thereby raises a question as to whether the FHA is requiring too much equity investment in rental housing under section 220.

The fact is that the FHA mortgage may equal 90 percent of the cost, and that the cost contains an allowance for builder's profit which may vary from 5 to 10 percent of construction costs (exclusive of land). Since the builder's profit is not actually an out-of-pocket cost, the cash equity put up by the builder where the allowance for the profit is between 6 and 7 percent could come out to only about 5 percent. Secondly, in order to permit the redeveloper to recover his capital investment in a reasonable period of time, the FHA permits the sponsor corporation to borrow funds on a nonnegotiable note up to 70 percent of the difference between mortgage proceeds and total project costs, including working capital. This makes possible a substantial reduction in the nonborrowed cash investment. Since the nonborrowed cash investment may (as a result of these two combined factors) prove to be very small, the policy is extremely liberal and is made possible only by the protection afforded through cost certification. The subcommittee does not make any suggestion specific or general) for further liberalization of the FHA policy on equity investment.

16) The problem of a proper profit allowance (pp. 13-15 of report)

The subcommittee correctly states: "It is obvious***that the amount allowed for builder's profit can be crucial. If the profit allowance is set at a very low figure, the actual cash investment by the builder is greatly increased." The subcommittee does not conclude that the Housing Agency's position on this matter is unduly conservative. Instead, the report states that "there is considerable evidence that" the FHA has taken an overly conservative position. The report concedes that "it is difficult for the subcommittee to recommend a specific profit-margin figure which would be attractive enough to stimulate sponsor incentive and yet not be unduly liberal," but adds: "The weight of the testimony heard by the subcommittee indicates that the FHA's policy toward profit allowance is overly conservative." The subcommittee also states (without expressly concurring in the conclusion) that "it seems to be generally considered in the building trade that a 10-percent profit allowance would be proper." The result of these and similar statements is simply to raise a question concerning the Housing Agency's policy. Thus, "the subcommittee recognizes that the Congress cannot properly legislate a fixed-profit factor. It recognizes also that the proper profit allowance is necessarily a controversial subject as between the sponsor who understandably is interested in the highest allowance possible and the FHA with its administrative responsibilities." Accordingly, the subcommittee "strongly urges the FHA to reexamine its policy in this field to make certain that its policies are realistic and reasonable."

The facts are as follows: The FHA will generally allow the sponsor who acts as his own general contractor a builder's profit of not less than 5 percent nor more than 10 percent, depending on the custom in the locality governing arms-length construction contracts with respect to projects of similar size and involving similar construction. As the subcommittee notes, the upper 10-percent limit was suggested by the Senate Banking and Currency Committee in connection with the 1954 legislation. As the subcommittee also notes, the choice of an actual percentage tends to become a matter for controversy between a sponsor who is interested in obtaining the highest allowance possible and the FHA with its administrative responsibiilties. No one has ever suggested a better test than the one applied by the FHA, which merely follows the custom of builders and general contractors in the community. It is obvious that a general contractor bidding on a very large project will accept a smaller profit allowance than one bidding on a small project where the contractor's overhead is greater in relationship to the size of the job.

The subcommittee makes one specific recommendation. It states that the percentage allowance for builder's profit should be applied to a base consisting not only of the total construction cost but the total project cost, including even land. The subcommittee correctly points out that "this method would raise the allowance for builder's profit and correspondingly reduce the cash equity investment required of the bulider." Thus, if a 10-percent builder's profit were applied to construction cost plus architect's fee, plus cost of land, plus project overhead, the profit allowance would be much larger.

The only reason why the Congress permitted any allowance at all for a builder's profit was so as not to discriminate against a sponsor who acts as his own general contractor. When a sponsor retains a separate company to act as general contractor, that separate company will actually collect a percentage of its costs as its profit. When the sponsor acts as his own general contractor, the Congress intended that he receive a similar allowance. The construction costs which the general contractor, were there one, would have been responsible for are the only ones which can properly form the base for the general contractor's profit allowance when he prepares his bid. It is, therefore, completely illogical, in the light of this legislative history, to apply the builder's profit to such items as architect's fees, land, project overhead, and real property taxes during construction, all of which are paid for by the sponsor and not the general contractor. The subcommittee is correct in stating that an item such as landscaping costs should (when the sponsor does the landscaping himself) be included in the base to which the builder's profit allowance is applied. This the FHA does do. Similarly, overhead items (such as on-the-job supervision) that building contractors pay for do enter into FHA cost allowances and the 5- to 10-percent profit allowance is applied to these items of cost.

(7) Land cost (p. 15 of report)

The report, under this heading, does not discuss the merits of any Housing Agency policy. Reference is merely made to an isolated case where it appeared

to subcommittee staff that contradictory information was supplied to the subcommittee by FHA staff members. FHA states that the contradiction was only apparent and not real. The partciular case is not important. However, the subcommittee report concludes that the FHA has too many specialists and not enough officials who understand the section 220 program as a whole. Naturally, as a new and complex program is first developed, rank and file employees cannot hope to have the same familiarity with the program as the few top officials who are still in the process of making or reexamining policy decisions. However informational materials and training programs are both being utilized to familiarize employees with new policies and programs.

(8) Maximum mortgage maturity (pp. 16-17 of report); FHA liberalized rules on this and other matters should apply to all applicants (p. 25 of report) The subcommittee stated that the maximum maturity permitted by the FHA for section 220 mortgages is slightly under 40 years. The subcommittee then recited arguments which had been presented to it that a 50-year maturity was not unrealistic for tall, fireproof buildings built according to FHA minimum standards. The subcommittee did not concur in these arguments but rather stated "that this is not an easy problem from the point of view of the FHA". The subcommittee stated that "too long a maturity might restrict principal repayments in the earlier years to too low a level with a consequent possible threat to the solvency of the project." In conclusion, the subcommittee stated that it "hesitates therefore to recommend unequivocally that FHA permit a maturity in excess of 39 years and 5 months, but it strongly urges the FHA to restudy the problem carefully."

The subcommittee's statement of the problem is concurred in by the Housing Agency. Its statement of fact, however, while generally correct, is mistaken in one respect. On April 18, 1955, the FHA publicly announced that “in special cases consideration will be given to a longer term provided such an arrangement is absolutely necessary to permit the financing of a worthy project."

On page 25 of the subcommittee report, the subcommittee states that it has learned of several liberalizing changes by FHA to facilitate individual cases. The nature of the changes is not stated. The subcommittee admonishes the FHA by stating that "such a practice if continued could develop favoritism. The subcommittee hopes that this word of warning will cause the administering officials to desist from this practice and to disseminate policy changes to all by regulatory amendment, or, where appropriate, by a general field letter to all mortgagees and others interested in the program." This position would give the Housing Agency no freedom to work out liberalizations on the basis of experience in processing early pilot projects. The Housing Agency feels that FHA policy is justified because all the pilot negotiations are difficult; are pioneering; and are being carried out openly. The decisions are each being closely studied by top Agency officials, congressional committees, and nationwide associations of local redevelopment officials and of industry groups concerned. We do agree that policies once established should be published, and the April 18, 1955, public announcement was one of the steps in this direction.

(9) Amortization plan (p. 17 of report)

The subcommittee discussed the relative merits of a more liberal level-annuity amortization plan as against the regular FHA declining-annuity plan. The subcommittee's presentation parallels its discussion of "maximum loan maturity." (Smaller initial mortgage repayments are easier, but the risk of later default is greater.) Here again the subcommittee's discussion appears to us to be valid, but it has overlooked the public announcement by FHA on April 18, 1955. The announcement stated that while level-annuity payments are generally looked upon by FHA as being undesirable for multifamily housing financing, in special cases consideration will be given to level-annuity payments provided such arrangement is absolutely necessary to permit the financing of a worthy project. (10) Cost certification (pp. 17–19 of report)

The subcommittee makes two recommendations with respect to cost certification. One recommendation is "that the Banking and Currency Committee consider the possibility of amending the language of section 227 to include a provision which would limit FHA's post audit of certified costs to a restricted period and which would bestow immunity to the review of such costs after the review period has expired." A similar proposal was perfected by this Agency and submitted to the Bureau of the Budget early in January. It has been approved by

the Bureau as a part of the proposed housing amendments of 1956. Under our proposal, a cost certification approved by the FHA would be considered final and uncontestable except where there has been fraud or misrepresentation on the part of the mortgagor. Another perfecting amendment which we have proposed with respect to the cost certification would make it clear that certain general overhead items approved by the FHA could be included in the cost of a project for cost certification purposes.

Secondly, the subcommittee, without giving the proposal its unqualified endorsement, recommended to the full Banking and Currency Committee that it give consideration to modifying the cost certification provision by limiting the FHA mortgage to 100 percent of actual cost or value rather than to 80 or 90 percent, as the case may be. This would constitute a considerable liberalization in that it would permit a builder to "mortgage out," although he could not take any cash proceeds out of the mortgage except to the extent of the builder's profit allowance. Such a liberalization is a matter of basic policy for the Congress to consider, and would, of course, be administered faithfully by the Agency if enacted into law. It should be made clear to the Congress, however, that under this proposal the Government-insured mortgage could exceed the builder's out-of-pocket cash investment to the extent of the builder's profit allowance in those cases where the builder acts as his own general contractor. This factor is mentioned without any intention of implying that there is anything wrong with granting a proper allowance for builder's profit, but only in order to point out that, under the proposal, the mortgage could exceed the cash investment.

(11) The rehabilitation aspect of section 220 (p. 19 of report)

The subcommittee referred to criticism which had been presented to it "to the effect that FHA's property and neighborhood standards are overly restrictive and unrealistic as they apply to existing housing." However, the subcommittee stated that it has not covered this subject sufficiently as yet.

The subcommittee also stated that the FHA title I home improvement program is too limited for major renovation or rehabilitation because of limitations on loan size and on maximum permissible maturity and because of interest costs. This Agency has recommended legislation, which we developed during 1955, to liberalize title I of the National Housing Act.

(12) General conclusion with respect to the subcommittee report on section 220 As summarized above under item (4) of this analysis, the subcommittee report is critical of the "negative" and "timid" attitude of the Housing Agency with respect to section 220. However, in the item-by-item discussions of specific policies (see items (5) through (11) above), the subcommittee itself makes no important specific recommendations and generally withholds its own express endorsement from criticism by others of Housing Agency policies. One concrete proposal which it apparently approves is that the builder's profit allowance be applied to total project costs rather than only to construction costs. As explained above, if the Housing Agency were to adopt this proposal, it would be acting directly contrary to the intent of the House and Senate Committees on Banking and Currency when they approved the cost certification provision of the National Housing Act.

(13) Section 221——Minimum equity retirement (pp. 20–21 of report)

The subcommittee recommended "that the Banking and Currency Committee give serious consideration to an amendment to section 221 which would enable an urban-renewal family to obtain a loan for the full amount of the purchase price in other words, with no equity payment." However, the subcommittee stated "that some cash payment is generally considered desirable," and therefore recommended that closing costs be paid in cash. The Housing Agency is in substantial agreement with this proposal. Our proposed housing amendments of 1956 would permit a $200 cash downpayment, which amount could cover closing costs. This would be in lieu of the present 5-percent downpayment requirement. Legislation along these lines was first recommended by the administration in January 1954.

(14) Section 221-Maximum loan ceiling (pp. 22-23 of report)

The subcommittee "recommends to the Banking and Currency Committee that legislation be drafted giving discretion to the FHA Commissioner to raise the maximum loan under section 221 by an additional $1,000 to $8,600 ($9,600 in

high-cost areas)." The subcommittee stated that it "is reluctant to recommend an increase of greater magnitude since it believes that the primary objective of section 221 of providing homes for lower income families must always be kept in view."

The Housing Agency is in agreement with both motivations expressed by the subcommittee. In our proposed housing amendments of 1956, the $7,600 mortgage limit would be increased to $8,000. In the case of high-cost areas, however, where family incomes are relatively higher, the $8,600 limit would be increased to $10,000. While there is a difference in detail between our proposal and the subcommittee proposal, there is basic accord on policy, and we have no strong feelings concerning the exact amounts to be prescribed. Housing Agency proposals along these lines were made early in January 1956.

(15) Section 221–Permissible loan maturity (pp. 22–23 of report)

The subcommittee recommended that the loan maturity for a multifamily rental housing project under section 221 should be raised from 30 to 40 years. It also recommended a similar increase to 40 years in the case of sales housing under section 221 with authority in the FHA to prescribe a shorter maturity for those families which could afford the higher monthly payments made necessary by a shorter loan maturity. The Housing Agency is in substantial accord with these recommendations. Under our proposed legislation, the maximum maturity for all section 221 mortgages would be 40 years. We would, of course, recommend to all borrowers that they save interest charges by borrowing for the shorter period if they can afford the larger monthly payments. However, we do not believe it administratively feasible to withhold the more liberal terms on the basis of a means test, as proposed by the subcommittee. Housing Agency proposals for 40-year maturities under section 221 were first made in January 1954 and were renewed early in January 1956.

(16) FNMA assistance to section 221 (p. 23 of report)

The subcommittee referred to the FNMA 2 percent discount, 1 percent commitment fee, and one-half of 1 percent purchase fee and stated that these 32 points are "indefensible" when applied to special-assistance mortgages under section 221. The FNMA has stated that some such discount is necessary if the FNMA is to supplement, rather than supplant, the private mortgage market. Since the subcommittee recommendation is that the discount be either eliminated or else narrowed, the difference between the subcommittee and the FNMA is basically a matter of degree.

(17) Increase of Federal urban renewal grants from two-thirds to perhaps fourfifths (pp. 23-24 of report)

The subcommittee stated that it was sympathetic to the renewal problems which cities face as a result of higher costs and of Federal and State competition for available tax revenues. The subcommittee therefore intends to give further attention to a proposal that the Federal title I grant be increased from two-thirds to perhaps four-fifths of net project cost.

The Housing Agency is also sympathetic to the problems of cities resulting from rising costs and the limitations (both economic and legal) on municipal tax sources. However, the present Federal law on local grants for title I is already liberal since the local grants may consist of the provision of services and public facilities and need not be paid in cash. Moreover, the bigger the Federal share of the cost, the stronger becomes the pressure to exert Federal control and supervision over local activities. We believe that the present formula in the law represents a satisfactory balancing of the factors involved. (18) Proposed increases in URA loan and grant authorization (p. 24 of report) The subcommittee recommended that present loan and grant authorizations for urban renewal should each be increased from $1 billion to $2 billion. This Agency will, of course, recommend an increase in title I authorizations whenever such an increase is needed. It is not needed yet.

(19) Limit on cost of any one URA project (p. 24 of report)

The subcommittee reviewed a recommendation that the law should limit the cost of any one slum clearance job to $21 million. The subcommittee stated that this would make it impossible for needed major projects to proceed. The Agency is in accord with this conclusion.