The Housing Act of 1959, as amended (12 U.S.C. 1701q et seq.), authorizes direct long-term loans at low interest rates to assist in financing new construction and rehabilitation, alteration, conversion, or improvement of existing structures to provide rental housing and related facilities for the elderly or the handicapped. Loans may be made to private nonprofit corporate sponsors, cooperatives, and those public bodies and agencies not receiving Federal financial assistance exclusively for public housing. The program is intended to provide housing for those elderly or handicapped persons and families whose incomes are too high for public housing but not sufficient to meet the cost of private rental housing, and to improve the ability of the handicapped to live more independently.

Loans may be made for the total development cost and may run for as long as 50 years. Interest rates are based on a statutory formula and are limited to the higher of either 2.75% or 0.25% above the average rate on all interest bearing obligations forming part of the Federal debt. The 1965 rate is 3.75%.

Budget program.-Net loan reservations are estimated at $65 million for the current year. Legislative proposals to provide more effective methods of meeting the needs for housing of the elderly or handicapped in the middleand lower-middle-income segments of the population will make new loan reservations under this direct-loan program unnecessary in the budget year.

Financing. The program is financed by a revolving fund which is initially supported by direct appropriations. Appropriations of $350 million have been authorized, of which $275 million has been appropriated. No further appropriation is proposed for this account. The following table shows the relationship of this program to available funds (in thousands of dollars):

Revenue.. Expense

1964 actual 1965 estimate 1966 estimate 405 51,516 13,725 100,000 25,000 19 527 388 3,680

427

1,782

17,932

100,812 -49,296

51,516

17,932

Balance available, end.................... Operating results.-Estimated retained earnings at the close of the budget year are $3.3 million and in addition the cumulative allowance for losses is $1.5 million. This favorable result stems largely from the fact that the program has been financed by appropriations rather than borrowings from the Treasury, which require payment of interest on capital. If interest income continues to cover operating costs and prospective program losses, dividends will be paid to the Treasury in lieu of interest on capital.

Revenue, Expense, and Retained Earnings (in thousands of dollars)

Net gain or loss for the year. Retain d earnings or deficit, start of the year.......

Retained earnings or deficit, end of year.

78,725 -65,000

13,725

Identification code 25-05-4115-0-3-551

Analysis of Government Equity (in thousands of dollars)

196,447 176,082 513 615 51,888 98,466 248,848 275,163

9

Program by activities:

Payment to "Salaries and expenses" Office of the Administrator (costs obligations)..

100.000 225

Financing:
Limitation...

Proposed increase in limitation due to civilian pay increases.......

250,000 275,000 -1,160 152

248,840 275,152

1 The changes in this item are reflected in the program and financing schedule. Object Classification (in thousands of dollars)

1964 actual

1965 1966 estimate estimate

45,646 63,580 85.733 98,710 80,097 133,371 90,952 29,516 23.116 51,888 98,466 150,080

248,840 275,152 278,307

47,133 885 48,018

12

1964 actual

250,000 275,000 25,000

885

885

127,303 938 150,080

278,321

LIMITATION ON ADMINISTRATIVE AND NONADMINISTRATIVE EXPENSES, OFFICE OF THE ADMINISTRATOR, HOUSING FOR THE ELDERLY

OR HANDICAPPED

Not to exceed [$915,000] $1,000,000 of funds in the revolving fund established pursuant to section 202 of the Housing Act of 1959, as amended (12 U.S.C. 1701q et seq.), shall be available for administrative and nonadministrative expenses, but this amount shall be exclusive of payment for services and facilities of the Federal National Mortgage Association, the Federal Reserve banks or any member thereof, the Federal home-loan banks and any insured bank within the meaning of the Federal Deposit Insurance Corporation Act, as amended (12 U.S.C. 1811-1831). (Independent Offices Appropriation Act, 1965.)

Program and Financing (in thousands of dollars)

15

275,000 3,307

278,307

1965 1966 estimate estimate

69,628 65,643 950 1,000 70,578 66,643

23.5 Payments to "Salaries and expenses" Office of the Administrator..

93.0 Administrative expenses included in fund as a whole...

Total obligations.........-

Identification code 25-05-4111-0-3-551

Financing:

21.47 Unobligated balance available, start of year: Authorization to spend public debt receipts.

90

24.47 Unobligated balance available, end of year: Authorization to spend public debt receipts.-

New obligational authority.

1964 actual

INVESTMENT IN FLOOD INDEMNITY OPERATIONS

Program and Financing (in thousands of dollars)

Relation of obligations to expenditures: Expenditures...

885

-885

1964 actual

1965 1966 estimate estimate

950 1,000 -950 -1,000

500,000

1965 1966 estimate estimate

-500,000-500,000-500,000

500,000 500,000

The Administrator is authorized to borrow up to $500 million, plus such additional amounts as the President shall approve, from the Secretary of the Treasury in the furtherance of the programs enacted in the Federal Flood Insurance Act of 1956. No borrowings have been made and none are proposed.

FEDERAL NATIONAL MORTGAGE ASSOCIATION

The Association, operating under the Federal National Mortgage Association Charter Act (12 U.S.C. 1716, et seq.) purchases, manages, and sells residential mortgages are by Housing

or guaranteed by the Veterans Administration; makes short-term bank-type loans that are secured by those types of mortgages; manages and sells certain noninsured or nonguaranteed mortgages that have been or may be acquired from authorized sources; and sells to private investors beneficial interests, or participations, in its own U.S. Treasury-financed mortgages and those of other government agencies or instrumentalities. The Association's functions are carried out through three programs for which separate accountability is required by statute.

The secondary market operations of the Federal National Mortgage Association were authorized by the Housing Act of 1954 to provide limited liquidity for Government insured and guaranteed mortgages and to improve the distribution of investment capital available for home mortgage financing. This assistance to the secondary market for home mortgages is provided by the purchase and sale of mortgages (including participations therein) insured by the Federal Housing Administration or guaranteed by the Veterans Administration on or after August 2, 1954, that are of such quality, type, and class as meet, generally, the purchase standards imposed by private institutional mortgage investors. Purchases and sales may be made only at such prices and on such terms

as will reasonably prevent excessive use of the Association's facilities and will permit the Association to operate on a fully self-supporting basis.

The Association, under its secondary market operations, was authorized by the National Housing Act, as amended on or after June 30, 1961, to make short-term loans secured by FHA-insured or VA-guaranteed mortgages. Such loans are intended to further home construction by providing a degree of liquidity for mortgage investments and, generally, to provide supplementary assistance to the general secondary market.

The secondary market operations were initially capitalized by the issuance of $92.8 million of Federal National Mortgage Association preferred stock to the Secretary of the Treasury. Subsequently, additional preferred stock subscriptions by the Secretary of the Treasury amounting to $50 million (Public Law 85-10, approved March 27, 1957) and $65 million (Public Law 85-104, approved July 12, 1957) were authorized. Authorized preferred stock has actually been issued only as needed to support the Association's borrowings. At the end of 1964, authorized unissued stock amounted to $49 million. These estimates contemplate that no additional preferred stock will be issued in either 1965 or 1966.

The authorizing statute contemplates that the secondary market operations will ultimately be completely owned and financed by private participants. To that end, the preferred stock will be retired as rapidly as feasible and, in the meantime, the Association will pay dividends on the utilized portion to the Treasury at rates which will not be less than those determined by the Secretary of the Treasury. These estimates contemplate that no preferred stock will be retired in either 1965 or 1966. However, under arrangements entered into between the Secretary of the Treasury and the Federal National Mortgage Association, FNMA will purchase from the Secretary that portion of the Association's outstanding preferred stock which is not deemed to be required in the financing of the secondary market operations and will hold such stock as FNMA treasury stock, subject to subsequent repurchase by the Secretary as may be required for these operations. Under these arrangements, $70.8 million of preferred stock was purchased from the Secretary during 1964 and $38 million in 1965. No such purchases are contemplated in 1966.

Private capitalization for these operations is accumulated pursuant to a statutory requirement which provides that sellers of mortgages to the Association must make payments into capital incident to subscriptions for common stock in an amount equal to not more than 2% nor less than 1% of the unpaid principal amounts of the mortgages involved, as determined from time to time by the Association, taking into consideration conditions in the mortgage market and the general economy. Borrowers from the Association are currently required to make capital contributions in an amount equal to not more than one-half of 1% of the amounts borrowed.

Recommendations for legislation to transfer ownership of the Association to private owners of the capital stock

must be submitted to the Congress as promptly as practicable after all the Treasury-held preferred stock has been retired. Meanwhile, the present interim program, financed by private as well as by Government investment funds, is treated in the budget as a trust enterprise and the financial statements related thereto appear in part 2 of this document.

The Association is authorized to finance its secondary market operations through borrowings from the public on the security of non-guaranteed debentures and shortterm discount notes. Such obligations may not exceed the lesser of: (a) ten times the sum of the capital and surplus applicable to these operations, or (b) the sum of assets, free from any liens or encumbrances, of cash, mortgages, or other security holdings and obligations of the United States or guaranteed thereby, or obligations, participations, or other instruments which are lawful investments for fiduciary, trust, or public funds. The Secretary of the Treasury, so long as the preferred stock is outstanding, is authorized to purchase such obligations in an amount not exceeding $2.25 billion outstanding at any one time.