problems this can involve, and because they will be required to handle and account for direct Federal rent supplement payments, an even more careful review of proposed housing owners will be required. It will be necessary to examine carefully the character, integrity, and motivation of the organization, as well as its continuity, its knowledge or ability to secure the knowledge of housing finance and construction necessary to develop a project, its capacity to provide competent management of the project, as well as its understanding of the extensive and continuing responsibilities it is undertaking in providing housing for low-income families.

FHA's experience with 221 (d) (3) below market projects has demonstrated that good will and good intentions on the part of the housing owner are not enough to assure a successful project. These qualities must be accompanied by experience, know-how, and a willingness and capacity to stick with the project over the long term and to perform the services to the tenants and to the project which are essential.

FHA's role will not be confined simply to a careful review and analysis of the proposed sponsor's eligibility and capacity. FHA will also be expected to counsel and assist well motivated sponsors to prepare themselves to become successful housing owners and to remedy such deficiencies in organization, continuity, representation or capacity which they may have. FHA's job will be not only to see that sponsors not equipped for housing ownership under the rent supplement program are screened out before they have spent unnecessary time and effort on a hopeless venture, but also to see that interested sponsors with a potential for successful low-income housing ownership are given the guidance and assistance necessary to the realization of that success.

Standards for management

Management of rent supplement projects will involve problems of dealing with people not customarily found in housing catering to the general market or even in housing financed under the below market interest rate program (221(d) (3)). The background of many eligible sponsors makes it likely that they will not have the experience to manage this type of project successfully. Many sponsors will need to contract with an experienced management organization capable of dealing effectively with the type of problems likely to arise. FHA will review the qualifications of the management proposed to determine that it had had broad experience in the successful management of housing projects. The management organization must also have the capacity to assist and guide prospective tenants in preparing applications for rent supplements and to assist tenants in the periodic recertification of income.

Income ceilings for eligibility

The law provides that to be eligible for a rent supplement a tenant must have an income below the maximum income which can be established in the area for occupancy of federally aided, low-rent public housing. Maximum income limits for purposes of the rent supplement program will be established for each area by the Office of the Administrator.

Housing market analysis

The proper administration of the rent supplement program and its coordination with other federally assisted housing programs dealing with the same or closely related income groups (low-rent public housing, relocation adjustment payments to displacees from urban renewal areas, the below market interest rate direct loan program for the elderly, FHA's below market interest rate program for low- and moderate-income families) will require firm and consistent information on the availability of standard units of different size in each local housing market and the rents at which they are available. Neither the PHA nor the FHA, in their current market analysis, obtain such refined data based on actual surveys of available units.

To obtain the necessary information, vacancy surveys will be conducted by the Post Office Department under contract with HHFA followed by a selected field check by HHFA staff of vacant units identified by the postal carriers. The postal vacancy surveys and HHFA field surveys will furnish accurate information on the supply of available standard rental units of different size at rents required in the market. It will also be necessary to obtain need and demand information for the specific submarket categories to be served by the program (displacees, elderly, handicapped, low-income occupants of substandard housing, etc.). Of the approximately 200 local housing market areas in

which rent supplement funds will be allocated in the first year, it is anticipated that in about 80 areas there will be recent or current FHA market studies. The Post Office Department will conduct surveys in each of the 200 areas under reimbursement from the Office of the Administrator (payable out of the requested appropriation for "Salaries and expenses," above); further substantial field work should not be required in the 80 areas of recent study to support market need and demand determinations. However, in the other 120 areas, market analyses will have to be conducted by HHFA personnel.

All of these functions will be carried out by the Office of the Administrator, making use of FHA and PHA insofar as possible, through a coordination of scheduling of market analysis work and use of results. On the basis of the income ceilings, estimates of total effective demand and income distribution of eligibles so established, FHA will deal with specific applications from particular sponsors in each area seeking to receive mortgage insurance and rent supplement contracts for the construction of projects under the program.

Other criteria for tenant eligibility

To be eligible for rent supplements an individual or family must have a gross income at or below the income ceilings established by the Office of the Administrator. The applicant must also satisfy one of the following requirements: he must be (a) displaced by governmental action, (b) elderly, (c) physically handicapped, (d) occupying substandard housing, or (e) be a disaster victim in an area designated as a disaster area by the Small Business Administrator after April 1, 1965, whose dwelling has been extensively damaged or destroyed. Tenant application procedures

When applying for rent supplements in a project built under the program, the owner of the project will give the applicant, in addition to the normal lease application, a form supplied by HHFA on which he will apply for rent supplements. The form will provide for a statement of his gross income from all members of the family, his assets, and will require him to show that he meets one of the other criteria for eligibility.

If he claims to be displaced by governmental action, he will be required to so certify and to support his statement with a certificate of displacement secured from the governmental body causing the displacement.

If he claims to be elderly or if he claims his spouse is elderly, he will be required to so certify and to support his statement with a copy of his or her birth certificate or a notarized letter from a close friend or relative certifying to the facts.

If he claims that he or his spouse is physically handicapped, he will be given the definition of physical handicapped set forth in the Housing Act of 1964 and required to certify that he or his spouse meet these conditions and to support his statement with a certificate from his physician or from a local health clinic or other responsible source.

If he claims to be living in substandard housing, he will be given a definition of substandard housing (housing which is dilapidated, or overcrowded; i.e., has an occupancy of more than 1.5 persons per room or the housing unit is occupied by more than one family, or lacks hot and cold piped water inside the structure, or lacks a useable flush toilet inside the structure for the exclusive use of the occupants of the unit, or lacks a usable bath tub or shower for the exclusive use of the occupants of the unit) and will be required to certify which of the specific deficiencies the housing in which he now lives contains. The applicant's claim to live in substandard housing will be verified by an inspection of the unit made either by a local public agency, a local housing agency, local code enforcemnt agency, or, if such inspections are unavailable, by FHA local staff. The housing owner, during the rent-up period for his rent supplement project, will assist applicants for rent supplements to fill out the application and to secure the necessary supporting evidence. The housing owner will turn the completed forms over to the local FHA insuring office.

FHA handling of tenant applications

FHA will review and verify the statements made on the form as to incomes, age, disability, or displacement, and will arrange for the necessary inspections to verify a claim that the applicant lives in substandard housing, or will make the inspections itself, and will certify the applicant's eligibility or eligibility for rent supplements by placing an appropriate statement on the application form.

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The FHA will also calculate and show on the application form the rent supplement payment to which the applicant is entitled, based on a comparison between the required rent for the particular unit and the income of the applicant. Following essentially the same procedure described above, FHA will periodically recertify tenant incomes once every 2 years, except for the elderly, and will make corresponding adjustments of the actual rent supplement payments for which each tenant is eligible. The housing owner will be expected to assist tenants to supply the information necessary for FHA's recertification of incomes and recalculation of approved rent supplement payments.

Maximum and minimum rent supplement payments

Limits will be placed on the amount of rent supplement payments which can be made on behalf of any eligible tenant. The amount of each payment will be the difference between the required market rent of the unit occupied as determined by FHA and 25 percent of the tenant's applicable monthly income. In no case, however, will the rent supplement payment be permitted to be less than 5 percent nor more than 70 percent of the required market rent.

The law provides for a contract with the housing owner to make payments on behalf of qualified tenants for a period not to exceed 40 years. The allocation of rent supplements to the housing owner will be made in three stages.

A preliminary agreement or reservation of rent supplement funds will be made by FHA with the approval of the Office of the Administrator early in the review of his mortgage insurance application. This preliminary reservation will be based on the Housing Administrator's estimates of effective demand in the local market and on the spread of incomes of those constituting the effective demand. Within the framework of this HHFA estimate of total effective demand and income distribution, FHA will perform its project underwriting analysis function, based on the location and other characteristics of the particular project under review and upon FHA's underwriting analysis of the number, types, and incomes of the rent supplement eligibles who may be expected to occupy the project within a reasonable period after his completion.

Sometime between the time an FHA commitment to insure is issued and the initial closing of the mortgage, FHA will enter into a contract with the housing owner for the payment of rent supplement funds in the amount contemplated in the preliminary reservation. This contract will provide a 10-percent contingency allowance to cover approved increases in operating costs of the project which require increases in economic rents and any upward adjustments which may be required in the total rent supplement payments by virtue of decreases in tenant incomes. It is anticipated that, for the most part, required increases in rent supplement payments to specific families will be more than compensated for by the general increases in the incomes of the tenants as a whole, and periodic adjustments of total rent supplement payments generally will be downward.

The rent supplement contract will also provide for an adjustment and recalculation of the total rent supplement payments to the owner after the rentup period is complete and based on the actual occupancy realized. The final adjusted rent supplement contract amount will also contain a 10-percent contingency allowance.

Payment of rent supplement funds to the housing owner

Pursuant to the rent supplement contract, the housing owner will bill the FHA each month after occupancy begins. The housing owner's rent supplement billing will be supported by a listing of the units occupied by rent supplement eligibles and the names of the tenants and the rent supplement payments for which FHA has certified them to be eligible. Each owner's billing will be reviewed and verified by the local FHA insuring office against its record of the tenants it has certified as eligible to occupy the project and the rent supplement amount to which they are entitled. After this review and verification, the FHA insuring office will send the approved bill to the FHA Comptroller in Washington for payment. Thus, each month the housing owner will receive rent supplement payments representing the aggregate of the supplement payments for which tenants actually occupying units in his project have been certified by FHA to be eligible. As turnover of occupancy occurs and as tenants' incomes are reviewed periodically, these changes will automatically be reflected in the rent supplement billings of the housing owner.

Overincome tenants and income distribution of tenants

The program will be administered with the objective of achieving, for each rent supplement project, as wide a spread of incomes as possible. The preliminary reservation of rent supplement funds will be based on as wide a spread of incomes as seems reasonable of achievement. The housing owner will be urged to make every effort, during his renting period, to take in tenants with as wide as possible a range of economic and social characteristics. In addition, every effort will be made to encourage and assist housing owners to take in as tenants individuals and families whose incomes make it possible for them to pay the full economic rent for their units. It is believed that such economic and social diversity will reduce management problems and expenses and also contribute to the social and economic upgrading of tenants of relatively low economic and social achievement.

In administration of the rent supplement program, no effort will be made to interfere with the normal tenant-landlord relationship. Landlords will be free to reject applications from prospective tenants or to accept them, conditioned only on FHA's certification of their eligibility if they require rent supplement payments. Landlords will also be free to evict tenants for violation of lease provisions or for other reasonable causes.

Lease option provisions

The law authorizes rent supplement payments on behalf of selected tenants occupying rental units under a lease with option to purchase. This provision will be used in connection with projects planned for the purpose and with individual units capable of separation from the project operation. Projects suitable for the lease option arrangement will generally consist of townhouse, row-type, semidetached, or detached structures.

Tenants will be selected on the basis of their potential for increasing income and eventual homeownership capability. Prospective tenants will be reviewed by FHA using criteria and procedures paralleling current FHA mortgage credit practice. Selected tenants will occupy their units on a rental basis, paying as their portion of the fair market rent 25 percent of the applicable monthly income. The balance of the fair market rent will come from the rent supplement. The tenant, however, will be permitted to contribute additional sums from his own resources to be placed in an escrow account in his own name by the housing owner.

When the tenant has accumulated the required cash investment for purchase, his income has increased sufficiently to justify ownership, and his other credit characteristics are acceptable, his unit will be eligible for release from the project mortgage. His purchase will be financed in the usual manner, the most probable method being under an FHA section 221(d) (2) insured mortgage.

TYPICAL PROCESSING SEQUENCE

Following is a step-by-step description of the sequence of steps through which an application for a rent supplement project will go.

1. A group seeking to sponsor a nonprofit, limited dividend, or cooperative project using rent supplements approach the local FHA insuring office. (Applications may also come from applicants who already have 221(d)(3) or sec. 231 elderly projects in process in FHA offices, seeking conversion of their applications to rent supplement projects. Under the experimental program applications may come from 221(d) (3) or sec. 231 sponsors with their applications under review, or from owners of existing or proposed projects financed under the direct loan program for housing for the elderly.)

2. Preapplication conferences and negotiations between the sponsor and the FHA will be carried out. This will cover the elegibility and capability of the proposed owning nonprofit or limited dividend corporation. Some time may be spent in counseling with the sponsoring group to establish their motivation, continuity, and capacity. They must be educated on the responsibility they will be undertaking and must be helped in securing professional assistance in planning, developing, and managing their proposed project. They will also need help in securing the services of a reliable "packager" and/or builder. They may also need help in getting better and more knowledgeable representation on their boards of directors, and in getting properly organized to discharge their responsibilities. Preapplication discussions will also cover, in broad outlines, the type of project contemplated, the land on which it is to be located, the number of units,

distribution of unit sizes, type of construction, approximate cost and rents required, and probable market.

When the eligibility and capability of the proposed owner has been established and general feasibility of the project determined, FHA will consult with the Office of the Administrator to recommend a preliminary allocation of rent supplement funds to the project. This preliminary allocation will be based on the Administrator's determination of the income ceiling for rent supplements for the area, on his estimates of the gross effective number for such projects, and on his estimate of the distribution of incomes among the estimated rent supplement eligibles. It will also be based on FHA's own analysis of the probable effective demand for the particular project upon completion.

If all is acceptable, the FHA notifies the sponsor that his proposal is judged to be generally feasible, invites a formal application for mortgage insurance, and informs the sponsor of the amount of rent supplement funds which have been set aside for his project.

3. FHA processes the sponsor's formal application for mortgage insurance, based on plans, specifications, cost estimates, and other exhibits submitted by the sponsor. Processing will be based on the market rate of interest.

4. FHA issues a commitment to insure the project.

5. Between issuance of commitment and initial closing, FHA executes a formal rent supplement contract with the proposed housing owner, with the conditions and terms described above.

6. The mortgage is initially closed (if the sponsor needs insured advances during construction) and construction begins.

7. As construction progresses and units become available for occupancy, the owner advertises his units and begins to rent apartments, seeking to take in a wide range of rent supplement eligibles as well as families who can afford the economic rent. All applicants seeking rent supplements are assisted to fill out the rent supplement application provided by FHA. FHA reviews the rent supplement applications as they are completed and referred to FHA. Those which are approved are returned to the owner with an indication of the amount of rent supplement each is entitled to based on the required economic rent for the unit for which they are applying and their income. The owner begins to rent his units to approved rent supplement applicants and others.

8. The owner begins to bill FHA each month for the rent supplement payments to which he is entitled, based on units actually occupied.

9. The rent-up period is completed. Based on actual rent-up experience, the rent supplement contract with the owner is adjusted and this amount, plus a 10-percent contingency, becomes the permanent rent supplement contract.

10. At the completion of the rent-up period, or normally about 60 days after completion of construction, the mortgage is finally closed by FHA and amortization of the permanent mortgage begins.

11. As apartments become vacant, the owner refers new rent supplement applications to FHA for certification of eligibility.

12. Periodically, FHA reviews incomes of all rent supplement tenants, except for the elderly.

RENT SUPPLEMENT PAYMENTS

The appropriation request for actual payment of rent supplements to project sponsors on behalf of eligible tenants is $900,000 for the fiscal year 1966. Such payments can be made only for units actually occupied by eligible tenants. The estimate is based on the need to pay rent supplements for a total of 18,000 unit months.

While it is expected that rent supplement projects involving maximum payments of $30 million per annum will be actively underway in some stage of processing by the end of the fiscal year, it is anticipated that only a very few new construction projects can be fully worked out, rented up, and in occupancy early enough to require rent supplement payments between now and June 30, 1966. However, section 101 of the 1965 act specifically authorizes, on a limited basis, the conversion to a rent supplement basis of certain projects which are already pretty well along the road to completion and occupancy, or in some cases already completed. These conversions are limited by section 101 (j) to the following classes of projects: