I tell you frankly that we feel badly over the fact that we must appear in the role of complaining witnesses, on some occasions. But let me give you an illustration of how unfair some of the operators of these FHA properties can be. A bill was introduced in Congress a year ago, specifically naming one of these projects in a great southern city, proposing that that project be singled out for special approval of transient rentals. We opposed giving any one project rights and privileges which were denied to other comparable establishments. Thereafter, the owner of that project visited us, and told us that we were extremely unfair in preventing him from providing a service which he claims is badly needed in his city.

We made extensive inquiry, in his behalf, and subsequently gave him the names of 3 or 4 insurance companies, and mortgage companies, which were in position to refinance his property, if he saw fit to do so. We told him that if the FHA mortgages were paid off, we would thereafter have no single objection to his operating the property in any way he saw fit. But if he investigated this possibility at all, he must have discovered that the interest rates involved would be substantially greater, and a more rapid amortization program required. In any event, the project has never been refinanced, and the bill is still pending before the 84th Congress.

We honestly feel that congressional intent is clear, and that, by and large, the FHA regulations are adequate. There is little reason for anyone to mistake the attitude of legislative and executive departments of our Federal Government, which have definitely circumscribed any diversion of these permanent housing facilities into transient occupancy. Let me quickly refresh your member as to what has transpired heretofore, in the form of guideposts and boundaries of rental practices.

I would like to just use a sentence or two to describe each of these exhibits, and then have them placed in the record to supplement my verbal statement.

Mr. Chairman, may I have your permission to file these exhibits? Mr. BROWN. That may be inserted in the record.

(The exhibits follow:)

EXHIBIT I

MODEL FORM OF CERTIFICATE OF INCORPORATION1 FOr Use Under SECTION 608

all being of full legal age, do, under and by virtue of the general laws of the State of Maryland, authorizing the formation of corporations, associate ourselves with the intention of forming a corporation.

Second. That the name of the corporation is

Third. The purpose for which the corporation is formed and the business and objects to be carried on and promoted by it are as follows:

1 Based on Maryland form of charter. Should be drawn so as to conform to laws of Jurisdiction in which filed.

(a) To create a private corporation to provide housing for rent or sale, and to acquire any real estate or interest or rights therein or appurtenant thereto and any and all personal property in connection therewith.

(b) To improve and operate, and to sell, convey, assign, mortgage, or lease any real estate and any personal property.

(c) To borrow money and issue evidences of indebtedness in furtherance of any or all of the objects of its business; to secure the same by mortgage, deed of trust, pledge, or other lien.

(d) To apply for and obtain or cause to be obtained from the Federal Housing Commissioner (hereinafter called the Commissioner) a contract or contracts of mortgage insurance pursuant to the provisions of the National Housing Act, as amended, covering bonds, notes, and other evidences of indebtedness issued by this corporation and any indenture of mortgage or deed of trust securing the same. So long as any property of this corporation is encumbered by a mortgage or deed of trust insured by the Commissioner it shall engage in no business other than the construction and operation of a rental housing project or projects.

(e) To enter into, perform, and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of any one or more of the purposes of the corporation.

Fourth. The post office address of the place at which the principal office of the corporation in this State will be located is The resident agent of the corporation is whose post office address is Fifth. The corporation shall have three directors, and

and

-

shall act as such until the first annual meeting or until their successors are duly chosen and qualified. Sixth. The total amount of the authorized capital stock of the corporation is shares of which 100 shares having a par value of $1 per share shall be designated “preferred stock”3 and shares shall be designated "common stock," which shares of capital stock shall have the preferences and restrictions as follows:

(a) The holders of the preferred stock shall be entitled to receive, when and as declared by the board of directors, noncumulative dividends at the rate of 5 cents per share per annum, before any sum or sums shall be set apart for or applied to the purchase or redemption of the preferred stock and before any dividends or other distribution shall be declared, set apart, paid, or made in respect of the common stock.

(b) The net earnings of the corporation, after providing therefrom dividends on preferred stock and all reserves hereinafter required, may be applied each year in payment of dividends to stockholders.

(c) The preferred stock at any time outstanding may be redeemed by the corporation at par and dividends declared thereon, but unpaid to the date of such redemption: Provided, however, That such stock shall be so redeemed, upon, but in no event before, the termination of any contract of mortgage insurance covering any indebtedness of the corporation without obligation upon the Commissioner to issue debentures as a result of such termination. Preferred stock so redeemed shall be retired and canceled.

(d) Anything to the contrary herein notwithstanding, no dividends shall be paid upon any of the capital stock of the corporation (except with the consent of the holders of a majority of the shares of each class of stock than outstanding) until all amortization payments due under the mortgage insured by the Commissioner have been paid, and until a reserve fund for replacements is first established and maintained by the allocation to such reserve fund in a separate account with the mortgagee (or in the case of a deed of trust with the beneficiary) or in a safe and responsible depository designated by the mortgagee commencing on the date of the first payment toward amortization of the principal of the mortgage insured by the Commissioner unless a later date is approved in writing by the holders of the preferred stock, of an amount equal to

and a like amount monthly thereafter. Such fund whether in the form of a cash

Any convenient odd number of directors may be provided.

This stock must be registered in the name of Federal Housing Administration; it must be par stock: the value and number of shares (not less than 5) may vary from that designated herein, but the consideration paid for it will always be $100. The certificate should contain a statement of the rights, privileges, and restrictions pertaining to this stock. Dividends shall be at the rate of 5 percent per annum.

The "common stock" may be par or no par, be divided into one or more classes, provide for such preferences as are deemed appropriate, and may be designated otherwise.

deposit or invested in obligations of, or fully guaranteed as to principal and interest by the United States of America shall at all times be under the control of the mortgagee. Disbursements from such funds, whether for the purpose of effecting replacements of structural elements, furnishings, and mechanical equipment of the project or for any other purpose, may be made only after receiving the consent in writing of the holders of the preferred stock.

(e) In the event of any default by the corporation, as hereinafter defined, and during the period of such default, the holders of the preferred stock, voting as a class, shall be entitled to remove all existing directors of the corporation, and to elect new directors in their stead: Provided, however, That one of said directors shall be the owner or holder of one or more shares of common stock. When such default or defaults shall have been cured, the right to elect directors shall again vest in the holders of the common stock.

(f) Except as otherwise provided by law or as set forth elsewhere in this certificate of incorporation, all voting rights of the stockholders shall be vested exclusively in the holders of the common stock.

(g) In case of any liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, and after payment of all debts of the corporation (including payment in full of any mortgage insured by the Commissioner) and after redemption of the preferred stock, the net assets of the corporation shall be distributed among the holders of the common stock, share and share alike.

Seventh. The corporation shall not without prior approval of the holders of a majority of the shares of preferred stock, given either in writing or by vote at a meeting of the preferred stockholders called for that purpose (a) assign, transfer, dispose of, or encumber any real or personal property, including rents, except as specifically permitted by the terms of the mortgage; (b) remodel, reconstruct, demolish, or subtract from the premises constituting the project and subject to such mortgage; (c) permit the occupancy of any of the dwelling accommodations of the corporation except at or below the rents fixed by the schedule of rentals provided hereinafter; (d) require as a condition to the occupancy or leasing of any unit in the project the purchase of any corporation stock either from the corporation or any stockholder or the payments of any consideration other than the reasonable rental provided for in the schedule of rentals to be filed with and approved by the holders of the preferred stock as provided hereinafter; (e) consolidate or merge the corporation into or with any other corporation; go into voluntary liquidation; carry into effect any plan of reorganization of the corporation redeem, cancel or purchase any of its shares of preferred or common or other stock of any class, or effect any changes whatsoever in its capital stock; alter or amend the certificate of incorporation or fail to establish and maintain reserves as set forth in this certificate of incorporation; (f) require as a condition to the occupancy or leasing of any unit in the project the payment to or deposit with the corporation, or any person or persons, of any amount other than the payment of the first month's rent plus a security deposit in an amount not in excess of 1 month's rent to guarantee the performance of the covenants of the lease: (g) execute or file for record any instrument which imposes a restriction upon the sale, leasing or occupancy of the project or any part thereof on the basis of race, color or creed.

Eighth. (a) The happening of any of the following events shall constitute a default within the meaning of that word as used in this certificate: (1) The failure of the corporation to have dismissed within 30 days after commencement, any receivership, bankruptcy, or other form of liquidation instituted by or against the corporation; (2) the failure of the corporation to pay the principal, interest, or any other payment due on any note, bond, or other obligation executed by it, as called for by the terms of such instrument: (3) the failure of the corporation to establish and maintain the reserve fund for replacements provided for in article sixth, section (d) hereof or the use of such fund except as permitted in said section; (4) the failure of the corporation, continuing for a period of 15 days, to perform any of the covenants, conditions, or provisions required by it to be performed by this certificate, the bylaws of the corporation, the mortgage, or any contract to which the corporation and the Commissioner shall be parties, or fail to carry out in full the terms of any agreement whereby the loan covered by the insured mortgage is to be advanced or the project is to be constructed and operated.

(b) In the event the mortgagor is in default under the terms of this certificate of incorporation or has failed to perform the covenants required by it to be performed under the terms of this certificate or by any mortgage insured by the

Commissioner, the Commissioner may require the corporation to furnish at the expense of the corporation a complete audit of its books of account duly certified by a certified public accountant.

(c) Upon any default by the corporation, the president or the secretary, or either of them, as may be required by law, shall, at the request in writing of the holders of record of a majority of shares of the preferred stock, addressed to him at the office of the corporation hereinabove designated and stating the purpose of the meeting, forthwith call a special meeting to take place within 10 days after such call, of the preferred stockholders for the purpose of the removal of existing directors and the election of new directors. If such officers shall fail to issue a call for such meeting within 3 days after the receipt of such request, then the holders of a majority of the shares of the preferred stock may do so by giving notice as provided by law, or, if not so provided, then by giving 10 days' notice of the time, place, and object of the meeting by advertisement inserted in any newspaper published in the county or city in which the principal office of the corporation is situated. When such default shall have been cured, the president or the secretary, or either of them, as may be required by law, shall, at the written request of the holders of a majority of the outstanding shares of the common stock of the corporation, call, in the manner provided by law, a special meeting of the common stockholders of the corporation at which the then existing directors may be removed and new directors elected in the usual manner. Such officer shall give notice as provided by law, or, if not so provided, he shall give 10 days' notice of the time, place, and object of such meeting as above provided.

Ninth. The following provisions are hereby adopted for the conduct of the affairs of the corporation and in regulation of the powers of the corporation, the directors, and stockholders:

(a) (1) Dwelling accommodations of the corporation shall be rented at a maximum average rental per room per month fixed by the board of directors of the corporation and approved by the holders of the preferred stock. A schedule of rentals for the reasonable rental value of each apartment based upon the average as so determined shall be filed with the holders of the preferred stock, prior to leasing or offering for lease of any of the dwelling accommodations of the project, and when approved by them, shall thereafter be maintained except as provided in article seventh hereof. Dwelling accommodations of the corporation shall not be rented for a period in excess of 3 years nor shall the property be rented as an entirety without prior written approval of the preferred stockholder. Store accommodations shall be rented at a rental to be fixed by the directors with the prior written approval of the holders of the preferred stock. (2) The corporation shall have the right to charge to and receive from any tenant such amounts as from time to time may be mutually agreed upon between tenant and the corporation with the written approval of the holders of a majority of the share of preferred stock, for any facilities and/or services which may be furnished by the corporation to such tenant upon his request, over and above the facilities and services to which such tenant may be entitled by virtue of his lease, including, among other things, telephone operator and switchboard services, electric current, gas, air cooling and conditioning and other additional or extraordinary facilities or services which may be furnished by the corporation in connection with the operation of such housing facilities.

(b) The corporation shall maintain its accommodations and the grounds and equipment appurtenant thereto in good and substantial repair and condition: Provided. That in the event all or any of the buildings covered by the mortgage shall be destroyed or damage by fire or other casualty, the money deriving from any insurance on the property shall be applied in accordance with the terms of the insured mortgage on the premises.

(c) The corporation, its property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall be subject to examination and inspection at any reasonable time by the Commissioner or his duly authorized agents; the corporation shall keep full and complete records of all corporate meetings of directors and stockholders and shall also keep copies of all written contracts or other instruments which affect it or any of its property, all or any of which may be subject to inspection and examination by the Commissioner or his duly authorized agents.

(d) The books and accounts of the corporation shall be kept in accordance with the uniform system of accounting prescribed by the holders of the preferred stock. (e) The corporation shall furnish the Commissioner within 60 days following the end of each fiscal year a complete annual financial report.

(f) At the request of the Commissioner, or of the holder of a majority of shares of the preferred stock, his or their agents, employees, or attorneys, the corporation shall give specific answers to questions upon which information is desired from time to time relative to the income, assets, liabilities, contracts, operation, and condition of the property and the status of the insured mortgage and any other information with respect to the corporation of its property which may be requested.

Tenth. The duration of the corporation shall be perpetual.

To be approximately evecuted, acknowledged, and filed with the proper authorities of the State where incorporated.

EXHIBIT II

FEDERAL HOUSING ADMINISTRATION,
Washington, D. C., August 10, 1951.

Section 608, Rental Housing, Letter No. 210.
Section 207, RH-136.

Title VIII, Military Housing, Letter No. 14.
To: Directors of all field offices.

Subject: Establishment of maximum rents and charges in projects operating under sections 207, 608, and title VIII.

This letter is for the purpose of clarifying procedures and coordinating policies with respect to the approval of rent schedules in rental projects involving mortgages insured under sections 207, 608, or title VIII, in which ceiling rents are subject to control by the Commissioner.

Prior to occupancy of a project the director of the field office with jurisdiction is authorized and required to approve the initial rent schedule or revisions thereof as hereinafter provided. Subsequent to first occupancy any increase in a rent schedule requires the concurrence of this office.

In establishing a rent schedule with respect to a particular project it is necessary that the director consider the section of the act under which the mortgage is insured and the amorization rate required by the terms of the insured mortgage. In section 608 and title VIII cases net return, calculated as hereinafter provided, shall not exceed 61⁄2 percent. In section 207 cases such net return shall not exceed 7 percent, or 71⁄2 percent in those section 207 cases in which the terms of the mortgage require amortization by level principal payments at the rate of 22 percent per annum.

The director may approve a rent schedule which at 93 percent occupancy (on the basis of FHA estimates as revealed by the applicable form 2264W or 2264) will yield the appropriate net return on the actual estimated replacement cost of the residential portion of the project (including garages and land) plus required working capital. If the project contains commercial property, the net return thus established will be calculated after elimination from the estimated operating cost, taxes, and replacement reserve requirements, that portion of those expenses attributable to the commercial portion of the project. This elimination will be pro rata on the basis of the ratio of the cost of the commercial portion of the project to the residential portion. In the discretion of the director, such approval may be granted even though in underwriting processing, lesser rents have been determined as appropriate for the purpose of establishing maximum insurable mortgage amount.

Rents for commercial space are subject to approval but it is not necessary that a ceiling be established on rents for commercial space. The director must determine, however, that the rents proposed for such space are sufficiently in accord with those anticipated in processing to represent an economically sound rent for such space.

In the event that during the course of construction there has been an increase in replacement cost over the estimated replacement cost as revealed in the applicable form 2264W or 2264, or if subsequent to preparation of such form it has been determined that an increase in the estimate of operating cost or taxes is justified, such increase or increases may be considered by the director in establishing the rent schedule but may be considered only in the event of substantiation thereof by relevant, pertinent, and convincing evidence satisfactory to the director, concurred in by the Chief Underwriter, and on file in the Washington docket. With respect to projects involving mortgages insured under title VIII the director must, in addition to making the determinations heretofore required, also