Traditionally, tenant-occupied dwelling units have represented a larger portion of the nonfarm housing supply than owner-occupied units. During the war period the percentage of tenantoccupied units decreased rapidly as owners of rented single-family dwellings offered them for sale in order to take advantage of rising prices. Increased home purchases reflected both the rise in incomes and the sustained housing shortage which obliged many families in need of housing to buy homes, even at inflated prices and beyond their means. Even so, in November 1945, tenantoccupied units still comprised 49 percent of all occupied nonfarm dwelling units as compared to 59 percent in 1940.

New rental housing projects owned and operated to produce an income for the owner frequently have been financed by a mortgage or mortgages totaling 50 percent or more of the appraised value. Usually, when a new property is so financed, the expenses amount to a high proportion of the receipts from the property.

A substantial part of the total annual operating and financial expenditures for a project with a large indebtedness is made up of fixed debt service, that is, of payments of interest and principal on the mortgage. In addition, operating expenses are incurred whether or not the building is fully occupied, if the building is to be maintained in a condition so that vacancies may be immediately occupied. Under such conditions, few of the items of expense may be decreased as vacancy increases. Thus, the operating expenses of rental housing projects do not decline in proportion to a drop in receipts.

With a narrow margin of income over fixed debt service and other expenses which are largely inflexible, a small decrease in receipts will lead to financial difficulties unless appropriate reserves have been established.

FHA Insurance Operations

The Federal Housing Administration has had, since its inception, the authority to insure mort

gages on moderate rental multifamily housing projects under section 207 of the National Housing Act. Section 608 provided similar authority for war and veterans' housing programs. The Federal Housing Administration is also authorized to insure mortgages on one- to four-family structures under sections 203 and 603. Operations under these two sections have resulted in the insurance of loans on a sizable volume of new rental units. In the paragraphs which follow, however, the discussion is limited to multifamily rental projects. By the end of 1946, the Federal Housing AdminTable 107.-Rental housing: Mortgages on projects insured by FHA under the National Housing Act, number of projects, number of units, and amount of insured mortgages written, by year, 1935-46

new

istration had insured mortgages under section 207 on 359 projects containing 37,964 new units, and under section 608 on 511 projects containing 38,419 new units. These data, together with the data for each year of operation under these two sections, are shown in table 107. Section 207 operations cover a period from 1935 through 1946 and include the figures on section 210 projects.1 The data on section 608 operations are for the period 1942 through 1946. Section 608 was operating on the basis of the war housing program until May 22, 1946, when the amendments to this section setting up the Veterans' Emergency Housing Program became law. With the amendments enacted in 1946, the maximum mortgage per room was raised and the appraisal value concept was replaced with the estimated necessary current cost formula.

Insurance in Force-Type of Mortgagee

Table 108 shows the total amount of Federal Housing Administration insurance written by type of mortgagee, and insurance terminated

1 Sec. 210 of the National Housing Act provided for the insurance of mortazes on properties with not less than ten units where the loan was in excess of $16,000 but not in excess of $200,000. Sec. 210 also permitted the release under certain conditions of part of the mortgaged premises from the lien of the mortgage, thereby enabling parts of the projects to be sold. Sec. 210 was erected in February 1938 and repealed in June 1939.

through the end of 1946 for sections 207 and 608 insurance operations. The amount of insurance in force, as of December 31, 1946, is also shown. The insurance written as presented in this table differs from the data shown in table 107. In this table the figures on over 20 projects are included as originally insured and then included again when they were reinsured by the Federal Housing Administration after termination.

Terminations of insured mortgages on multifamily projects have been heavy. Out of the total face amount of all mortgages insured under section 207 through the end of 1946 almost 63 percent had been terminated, so that only 37 percent of the total amount insured remained in force at that time. Of the face amount of mortgage loans insured under section 608, the bulk of which were on war housing multifamily rental projects, only 4 percent of the insurance written had been terminated by the end of 1946.

Life-insurance companies made mortgage loans for over 60 percent of the dollar amount of total loans insured through 1946 under section 207, and were mortgagees for 57 percent of the loans insured under section 608. Savings banks held the second largest amount of mortgage loans in

1 Mortgages insured under Section 210 are included.

Source: Annual report of Federal Housing Administration, 1946.

sured under these sections of the National Housing Act. Together, the life insurance and savings banks made over 70 percent of the face amount of loans insured under both sections 207 and 608.

Data are not available on the financing of new multifamily rental housing projects other than those on which the Federal Housing Administration has insured mortgages. Under the war housing program, a large proportion of the multifamily projects constructed were financed with insured mortgages, but prior to that time, the bulk of the new rental housing constructed was without the benefit of Federal Housing Administration insurance.

A development which merits attention is the recent policy of certain life-insurance companies and mutual savings banks of making direct investments in rental housing projects. Under this practice, the institutions build the projects, and own and operate them. This is in contrast to the traditional method of making a mortgage on a project which is owned by others. While the volume of units involved in such projects has been small in relation to the national volume of construction, the individual projects built or contemplated are quite large and have attracted national attention.

The information available on interest rates on real estate mortgages is presented in this chapter. The rate of interest on mortgages is important because in the financing of a home or an apartment house, the amount of interest paid constitutes a substantial part of the monthly payment required on the mortgage. In addition to interest, the monthly payment may, and usually does, include amortization of the principal of the loan, and in many cases an amount for real-estate taxes and hazard insurance premium.

Table 109 shows annual average interest rates on new first mortgages made on properties located in four of New York City's boroughs-Manhattan, Brooklyn, the Bronx, and Queens. These weighted averages are based on all new mortgages of $10,000 or more, exclusive of purchase money mortgages. All types of property, residential, commercial, and industrial-are included. The data, compiled by the Mortgage Conference of New York, reveal a significant decline in the average interest rate from 4.38 percent in 1940 to 4 percent in 1946. It is recognized that interest rates in New York City are probably lower than in other parts of the country, and therefore not representative of the national level of interest rates. However, the changes from year to year may be indicative of the national trend. No published data are available showing interest rates for mortgages on residential properties on a national basis and over a period of years. Change in Financing Practices

Caution is urged in drawing conclusions from comparisons of long-term interest rates because methods of financing have changed radically during the past 25 years. During the 1920's, one of the common methods of financing the purchase of real estate was to use second and often third mortgages in addition to a short-term unamortized first mortgage. Renewal fees and other charges in addition to the high interest rates on the junior mortgages served to increase the cost of financing

home purchases. In recent years, the prevailing practice has been to use only a long-term, highratio-of-loan-to-valuation first mortgage. This mortgage generally provides for complete amortization within the term of the loan. Therefore, it must be pointed out that it would be misleading to compare the interest rates on mortgages given in the accompanying table with those for first mortgages made in the 1920's. To obtain a realistic measure of the decline in financing costs, one should compare the total cost to finance the purchase of a home in these two periods.

Comparison of Interest Rates

The level of interest rates on mortgages may be compared with the yield on alternative forms of long-term investments, such as bonds of the United States Government. It should be noted, however, that the interest income from a Govern

1 Weighted average interest rates on new first-mortgage investments of $10,000 or more for boroughs of Manhattan, Brooklyn, Bronx, and Queens, of New York City. Includes mortgages on residential, commercial and industrial properties, but does not include purchase-money mortgages. Source: Mortgage Conferences of New York.

2 Averages of rates charged customers on new commercial and industrial loans by banks in principal cities, averages for 19 cities are weighted averages. Source: Board of Governors of the Federal Reserve System.

3 Averages of yields on all outstanding issues due or callable in 15 years or more. Source: U. S. Treasury Department.

4 An unweighted arithmetic average of yields to maturity of 16 high-grade bonds. Source: Standard and Poor's Corporation.

An unweighted arithmetic average of the yields for individual bonds, based on closing prices of 40 issues. Source: Moody's Investors Service. n. a. Not available.

ment bond is net while the interest income on a mortgage is gross. From the gross interest income on a mortgage should be deducted the cost of originating the loan and servicing it throughout its life, an allowance for averaging losses arising through foreclosure, and overhead expenses. Unfortunately, adequate information is not available for estimating the amount of these deductions from the gross rate. In the long run, however, the net return on mortgage investments made by financial institutions cannot fall too close to the yield offered by the Federal Government on its bonds, and still provide an incentive for investment in mortgages. Table 109 shows that the average yield on long-term, taxable bonds of the United States Government was 2.19 percent during 1946.

Table 109 also shows average interest rates on short-term commercial loans, and bond yields on high-grade municipal (tax exempt) and highgrade industrial bonds. All series showed declines since 1940 of as much as, or more than, interest rates on new real estate mortgages.

Table 110 shows that, according to the Census of Housing of 1940, the average interest rate on all existing first mortgages on owner-occupied onefamily nonfarm properties in the United States was 5.55 percent. The average rate of interest varied with the different geographic divisions of the country. The West South Central Division was highest with 5.97 percent, and the New England Division was lowest with 5.38 percent.

Table 110.-Mortgage interest rates: Average interest rates on first mortgages on single-family nonfarm owner-occupied properties, by geographic division, 1940

IV of the Census of Housing of 1940. These data were obtained by field enumerators of the Bureau of the Census at the time the population census was taken in 1940. To secure the mortgage data, enumerators interviewed all owner-occupants of one- to four-family nonfarm properties. No mortgage data were collected on rented homes or on properties containing more than four-family units. It should be noted that the mortgages included in the averages shown in this table cover all mortgages outstanding, regardless of when made, whereas the mortgage interest data included in table 109 cover only mortgages made during the years specified.

Influence of Federal Agencies

One of the chief factors operating to reduce the geographic differential in mortgage interest rates has been the mortgage operations of Federal agencies. The Home Owners' Loan Corporation refinanced mortgage loans at a 5 percent interest rate during the period 1933 to 1936, but in September 1939, the interest rate on all loans of the Home Owners' Loan Corporation was reduced to 4.5 percent. The maximum interest rate of 5 percent established in 1934 for mortgages insured by the Federal Housing Administration was reduced to 4.5 percent in 1939. In addition, there was a charge of 0.5 percent for mortgage insurance premium. In 1946, the maximum rate for section 603 loans was reduced to 4 Table 111.-Interest rates: First mortgages on singlefamily nonfarm owner-occupied properties, 1940

Geographic division

United States..

Divisions:

New England.
Middle Atlantic.

East North Central.

West North Central.

South Atlantic.

East South Central.

West South Central.

Mountain.

Pacific..

Average interest

rate

663, 964

17.3

19.9

4.6 percent to 4.9 percent.

Source: Sixteenth Census of the United States: 1940, Housing, Vol. IV, Pt. I.

Data on the average interest rate as defined above are also available for individual urban places, for metropolitan districts and for States, from the Bureau of the Census publication, part

7.5 percent.

8.0 percent or more. Not reporting interest rate.