by HOLC, and the statute providing for such capital subscription required that FSLIC pay to HOLC an annual dividend at a rate equal to the interest rate on the bonds issued by HOLC to provide the funds for the subscription. The bonds so issued bore an interest rate of 3 percent, so that this has determined the amount of the annual dividend to HOLC to date. However, these 3-percent bonds have been refunded, with the result that the cost to HOLC on its capital subscription to FSLIC is now less than the amount the statute requires FSLIC to pay in dividends to HOLC. Subsection (a) of this section would correct this situation by providing that henceforth such dividends shall be in line with the current cost to HOLC on its borrowings.

The purpose of subsection (b) is to strengthen the insurance protection afforded by FSLIC by authorizing (but not requiring) the Treasury to purchase FSLIC's debentures. In this way, there is better assurance that FSLIC will at all times be able to meet its insurance obligations without undue difficulty. The subsection limits the aggregate amount of debentures that the Treasury might thus purchase to three times FSLIC's capital stock, reserves, and surplus.

Section 507

Federal Housing Administration Operations

This section, together with the remaining sections in title V, is designed to effect improvements in FHA operations with respect to all three of its present insurance programs, including home modernization and improvement loans, home mortgage loans, and rental housing mortgage loans.

Section 507 itself extends and expands FHA's title I modernization and improvement-insurance program by authorizing it (1) to insure loans under this program with maturities of up to 5 years, as compared with a present limitation of 3 years, and (2), in the case of multifamily houses and institutional properties, to insure loans of up to $10,000 in amount (as compared with a generally applicable $2,500 maximum) and 7 years in maturity. At the same time, there would be eliminated from the title: (1) The present time limitation as to insuring activities under the title (July 1, 1947), and (2) the title's special war-housing provisions (insurance of loans of up to $5,000 in amount and 7 years in maturity for home modernization and improvement which would assist the war effort).

Section 508

The purpose of subsection (a) is to encourage home ownership by authorizing a maximum maturity of 25 years with respect to home mortgages on new construction generally, instead of limiting such maturity to newly constructed, singlefamily, owner-occupied, homes costing $6,000 or under.

Because of the problems created by higher construction costs in various areas, subsection (b) authorizes FHA, with respect to any of its home mortgage-insurance programs, and subject always to the test of economic soundness, to increase the maximum amounts otherwise prescribed for such mortgages by the amounts (which may in no event exceed $1,000) necessary to compensate for such higher costs.

Section 509

Subsections (a) and (b) of this section permit a pro rata refund of insurance premium where the mortgage is paid off within a premium year. Under the present statute, such refund may be made only if a new mortgage on the same property is accepted for insurance at the time of the payment of the one previously insured. The purpose of subsection (c) is to make possible necessary protection to those undertaking home ownership and other mortgagors by authorizing FHA to permit or require provisions in any mortgage insured by it, with respect to the deferment of monthly mortgage payments in cases where the mortgagor, because of unemployment, economic conditions, or misfortune beyond his control is unable to meet such payments. Under this authorization, the maturity of the mortgage could be extended, as a result of such deferments, for a period not exceeding 3 years in the aggregate.

Section 510

This section is designed to protect those veterans and their dependents who have been unable to keep up their mortgage payments during the period of mili. tary service. It authorizes the FHA to consent to the modification and extension of the maturity of any such mortgage, so long as the extended maturity

within which the mortgage is to be amortized does not exceed the unexpired term of the mortgage plus à period equal to the period of military service.

Section 511

This section reinstates an expired authorization to FHA to include certain foreclosure costs among the insurance benefits in the case of mortgages covering homes of $6,000 or under. The purpose of this reinstatement is to insure continued participation by lending institutions in the financing of low-cost homes on the most favorable terms possible to the moderate-income home owner.

Section 512

Subsection (a) would perfect the provision in the National Housing Act which makes participation in FHA's rental housing program possible in the case of Federal or local public intrumentalities, or limited dividend corporations restricted by State law as to rents, rate of return, and methods of operation. It would do so by also including State regulated redevelopment and other housing corporations in this list of eligible mortgagors, and by providing as an alternative to the present requirement calling for controls by State law itself, regulation by the State banking or insurance departments.

Subsection (b) would in effect reinstate FHA's section 210 program which was stopped in 1939 and under which FHA was authorized to insure mortgages of up to $200,000 in amount on housing projects or developments constructed for either rental or sale purposes. The basic differences between the plan of operations under section 210 and under FHA's section 207 program were (1) the concentration of section 210 on the small-sized project or development; and (2) the statutory requirements present in the case of section 207 projects, but absent in the case of section 210 housing, calling for the formation of special, limited dividend, corporations and for FHA controls over management and operations.

Subsection (b) would reinstate the section 210 program by appropriate amendment to section 207 rather than by a reenactment of the old section 210 itself. It does so by making inapplicable to section 207 mortgages not exceeding $250,000 in amount (as compared with the previous $200,000 limitation in section 210), the statutory requirements calling for the formation of special corporations and for FHA controls over management and operations.

Section 513

This section provides for three basic improvements in section 207 rental housing operations:

1. It perfects the present provisions with respect to the amount of project cost that may be covered by the mortgage loan. Two basic limitations provided in the present statute are: (i) That the loan may not exceed 80 percent of project value and (ii) that it may in no event exceed the cost of the completed physical improvements. However, in defining "costs" for the purpose of determining the portion thereof that may be covered by the mortgage loan, certain items such as taxes, financing charges, utilities, and other expenses are excluded. In order to facilitate the evident intent of the act to permit the insurance of a true 80-percent loan, and on the basis of experience under FHA's title VI war housing program, this section would amend the statutory definition of project value and costs so as to include certain of the presently excluded cost items.

2. It authorizes insurance of mortgages up to $50,000,000 in amount (as compared with the general limitation of $5,000,000) if the housing project is undertaken by a Federal, State, or municipal instrumentality, or a limited dividend, redevelopment, or housing corporation restricted by Federal or State law or regulations of State banking or insurance departments as to rents, charges, capital structure, rate of return, or methods of operation. It would also make inapplicable to these projects the statutory limitation that the mortgage loan may not exceed the cost of the completed physical improvements; that is, land costs may be included so long as the total amount of mortgage loan does not exceed 80 percent of project cost. These amendments would make possible assistance under the FHA insurance program to large rental housing projects contemplated under State urban redevelopment laws.

3. It would substitute, with respect to the size of the mortgage, a maximum limitation of $1,500 per room (or $1,800 where cost levels so require) for the present limitation of $1,350, and in this way permit greater flexibility.

Section 514

This section would permit FHA to charge a maximum fee of 1 percent (of the mortgage loan) to cover appraisal and inspection costs on rental housing projects, as compared with the present maximum of one-half of 1 percent. This would enable the FHA to recover its actual cost of processing in certain cases where the application for insurance is withdrawn before the loan is insured.

Section 515

This section, together with section 606, eliminates the present statutory requirement that where FHA takes over a rental housing project as a result of default of the mortgagor and, through its efforts, ultimately realizes a profit on the transaction, such profit must be turned over to the mortgagor. It is not believed that the defaulting mortgagor corporation is entitled to such a gratuity but that such profit, if any, should accrue to the insurance fund to offset losses incurred in other

cases.

TITLE VI. HOME OWNERSHIP AND RENTAL HOUSING FOR FAMILIES OF LOWER INCOME

This title recognizes that there are income groups which can and should be served by private enterprise rather than by public housing endeavor, but whom private enterprise would not be able to serve under existing programs even when strengthened by the provisions of title V. It, therefore, provides, in the case of both home ownership and rental housing, for a supplementing of the existing systems of FHA mortgage insurance with special aids for families of lower income who require more favorable terms than such existing systems offer. Thus, it would effectively complement title V in appreciably broadening the area which private enterprise can serve.

Section 601

It

This section points out specifically that title VI is not designed to supplant or alter any of the existing systems of mortgage insurance under FHA, but only to supplement them with special systems for families of lower income who require more favorable terms than can be offered under FHA's existing programs. further states that, as basic policy underlying the title, it is contemplated that the liberalized forms of consumer credit provided shall be combined with all proper incentives to cost reduction through adoption of appropriate new materials, techniques, and methods, and through increased efficiency in production and elimination of unnecessary restrictive practices.

Section 602

This section, together with section 603, provides the supplemental system of mortgage insurance for individual family homes. It authorizes, where necessary in order to assist lower income families who could not be served under the existing FHA program, a combination of a 95-percent loan, 30-year maturity, and a maximum 4 percent interest rate. (Present maxima are a 90-percent loan, 25-year maturity, and 5 percent interest rate.) This supplemental program would be limited to mortgages not exceeding $5,000 in amount, or a lesser amount when the FHA finds that for any section of the country or at any time a lower cost dwelling for families of lower income is feasible without sacrifice of sound standards of construction, design, and livability. In order to stimulate building activity in this low cost home field, the section authorizes firm mortgage insurance commitments to builders of such housing in amounts up to 85 percent of appraised value as compared with the generally applicable limitation of 80 percent. This would enable them to build more houses at once with the same amount of personal capital, reduce their marketing risks, and effect other economies reducing housing costs.

Section 603

The purpose of this section is to provide increased insurance benefits to mortgagees in case of default in order to encourage participation by home financing institutions in this supplemental program. Under the provisions of the section, the mortgagee would receive reimbursement not only for unpaid principal as under the present law, but also for two-thirds (or $75, if that proves to be a greater amount) of the foreclosure costs incurred by it, thus substantially reducing the possibility loss that the mortgagee assumes under the existing FHA home

mortgage insurance program. This section also makes these benefits available for the supplemental program on rental and mutual ownership housing provided in sections 604 and 605.

Section 604

This section, together with section 605, sets forth the special supplemental program needed for large-scale housing projects for families of lower income. The program involves, subject always to the condition of economic soundness, a combination of a 90-percent loan, 40-year maturity, and maximum interest rate of 4 percent. Also, in order to encourage and make possible home ownership for those families of lower income who could undertake such ownership only under some plan such as mutual ownership housing, the section makes this liberalized combination of mortgage terms available for projects undertaken by nonprofit mutual ownership housing corporations.

Section 605

The purpose of this section is to provide increased insurance benefits to mortgagee lending institutions in order to encourage their participation in the rental housing and mutual ownership program provided in section 604, and also in the existing FHA rental housing program under present provisions of the National Housing Act. It therefore supplements the insurance benefits provided in section 603. It provides that if the mortgagee on any rental housing (or mutual ownership) project elects to assign the mortgage itself to FHA, instead of foreclosing and transferring the project, there shall be deducted from the insurance benefits only 1 percent of unpaid principal as compared with the 2 percent required under existing statutory provisions.

Section 606

This is simply a technical amendment necessary to accomplish the purposes of section 515.

TITLE VII. YIELD INSURANCE FOR RENTAL HOUSING

This title recognizes that, while the encouragement of home ownership is a fundamental objective in our national housing policy, nevertheless there is a large segment of our population which, because of income, mobility, custom, or local conditions, requires or prefers rental housing. The section also recognizes that up until now the provision of such housing, particularly for families of moderate income, has been inadequate and that such inadequacy has in very large part resulted from a reluctance or inability under present aids on the part of institutional investors to make direct investments in such housing.

The title, therefore, provides for a special program of yield insurance, to be administered by FHA, designed to encourage direct investment in rental housing for families of moderate income by guaranteeing to those making such an investment to the extent of 100 percent of project cost, a minimum return (exclusive of amortization) of 24 percent per annum on outstanding investment until such time as only 15 percent of the original capital investment remains unamortized. As in the case of FHA's existing insurance programs, a self-sustaining program made possible by appropriate premium charges, is contemplated.

Section 701

This section places the proposed yield insurance program under the jurisdiction of FHA, and as a title VII to the National Housing Act, which title would consist of 13 sections, Nos. 701 through 713, and provide as follows:

The proposed section 701 provides the general authority to FHA to insure (and to make commitments to insure) a minimum annual return to the investor, consisting of (1) 2 percent of the original capital investment (as amortization on each investment), plus (2) a 24-percent yield on the portion of the investment still unamortized as of the particular year involved. Such insurance may be

1 It is to be noted that the insurance is only of a yield on the capital investment itself. The insurance does not cover against the improbable situation of deficits in expenses of operation (i. e., the amount, if any, by which operating expenses in any year exceed the revenues of that year). Should the gross revenues in any year actually be less than the aggregate operating expenses, then the actual return to the investor (exclusive of the 2-percent amortization return) in effect would be an amount equal to the difference between (1) 234 percent of the outstanding investment, and (2) the deficit in operating expenses for the year. However, section 703 provides that in any such year the insurance premium shall be waived to the extent of such operating deficit, and section 705 provides that in any subsequent year in which there are excess earnings such excess may be applied to make up such operating deficit (to the extent it has not been previously made up).

provided only for the period during which more than 15 percent of the original capital investment in the project remains unamortized (or, in effect, for not more than 421⁄2 years).

The proposed section 702 sets forth as the basic requirements for eligibility for yield insurance (1) that there be a need for the project in the locality to serve families of moderate income at the rentals proposed, which need is not adequately being met by private enterprise without yield insurance; (2) that the project be economically sound and afford reasonable assurance of stability and economy, both in construction and operation; and (3, that the dwellings be properly designed and available for families of moderate income at rentals within their capacity to pay.

Subsection (b) of this section provides the usual clause as to incontestability with respect to any insurance contract undertaken by FHA under this title.

The proposed section 703 fixes the premiums and fees that may be charged in connection with the yield insurance program. It authorizes first an annual premium charge of not more than one-half of 1 percent of the investment outstanding for the particular year for which the premium charge is payable. It authorizes also reasonable fees (but not in excess of one-half of 1 percent of the estimated capital investment) for FHA examination and inspection of the project during construction.

The proposed section 704, which relates to the rents that may be charged for the dwellings in the project, requires approval of the rent schedule by FHA. The yield insurance plan provided under this title does not make the 24 percent minimum yield guaranteed by FHA also the maximum the investor is permitted to derive on his investment. This is specifically recognized by the provisions of this section which provide for FHA approval of rent schedules so set up as to allow the investor a yield of 34 percent on outstanding investment. At the same time, however, FHA must also find that the rentals provided in the schedule are no higher than necessary to meet the needs of the families of the incomes proposed to be served.

The proposed section 705 provides that in those years, if any, in which the project vields revenues more than sufficient to provide a 34-percent yield on outstanding investment for that year, one-half of such additional earnings may be retained by the investor as a further return on his investment, but only to the extent that this does not result in a return for that year of more than 4 percent on outstanding investment. For the purposes of the insurance contract, the balance would be regarded as being applied to accelerating the amortization of the capital investment, one effect of which would be to reduce the life of the insurance contract. The section provides, however, that in the event the project has had operating deficits in preceding years (which deficits are not covered by the insurance under this title), the excess earnings are to be applied, first, to the reimbursement of such deficits, and, second, to the payment of any premium charges previouslTM. waived because of such deficits.

The proposed section 706 provides for the submission of annual financial and operating statements to FHA for its approval. The FHA is authorized to make such submission and approval a condition precedent to the payment of claims for insurance benefits.

The proposed section 707 provides for cash payment of properly proved claims for insurance benefits.

It

The proposed section 708 is designed for the situation where a project continues to operate at a loss for a substantial period, thus requiring special action. provides that if the aggregate of the amounts paid as insurance benefits to the investor should ever equal or exceed 15 percent of the original capital investment, FHA is to have the right to take over the project against issuance to the investor of debentures having a value equal to 90 percent of the portion of the capital investment still unamortized. Conveyance to FHA at the option of the investor is authorized if the aggregate of the operating deficits (to the extent they are not made good) should ever equal 5 percent of the original capital investment. In either case the debentures issued would bear interest at not to exceed 2 percent. per annum, have a maximum maturity of 40 years, be fully guaranteed by the United States, and have the same tax-exemption privileges as debentures issued by FHA under its mortgage-insurance programs.

The section also sets forth the necessary provisions for the temporary management and disposition of any projects taken over by FHA under this section.

The proposed section 709 vests in the investor the right to terminate the written contract at any time upon written notice of FHA, and it vests in FHA the authority to prescribe the conditions under which it has the option to terminate