INSURANCE OF CONVENTIONAL LOANS Our association has had under study the bill, H. R. 10637, introduced by the chairman, which sets forth a plan for the coinsurance of the top or risk portion of a conventional loan. This plan was initially proposed by the United States Savings & Loan League, although the bill represents some improvement over the original draft of this plan. The National Association of Real Estate Boards endorses the principle of higher ratio loans permitting the expansion of homeownership which is the objective of this bill, but we suggest several amendments we feel essential to the accomplishment of this objective. Our association views the plan as one calculated to widen homeownership opportunities, particularly in areas served by portfolio lenders, who, up to now, at least, have not participated to any appreciable degree in the FHA program. To the extent that the plan would permit lower downpayment financing by portfolio lenders and we believe that it will-the bill deserves the sympathetic consideration of all groups interested in widening homeownership opportunities. The amendments we propose are as follows: (1) The maximum loan amount should be increased from the $20,000 provided in the bill to $30,000, as recommended for FHA in the bill, H. R. 11173. (2) The percentage of insurance should be increased from the top 20 percent provided in the bill to the top 30 percent. Insuring 90 percent of the top 20 percent of a mortgage under the bill would involve about a 74-percent exposure, which is too high for many lending institutions, and would preclude their participation in the plan. However, insuring 90 percent of the top 30 percent of the loan reduces the exposure to about 66 percent, which would permit participation by State-chartered lending institutions limited by law to 6623percent loans, and would be more nearly in line with general lending practices in many areas of the country. (3) We do not believe that the obligations of the proposed corporation should be tax-exempt, as provided by section 9 of H. R. 10637. We deal here with a corporation which has the authority to guarantee the risk portion of loans made without any control over interest rates, except State usury laws. Hence, we believe that the yield on the corporation's obligations may be high enough to preclude the necessity for tax exemption. Tax exemption can be justified only in those extreme cases where a program would be unable to function without it. We do not believe that this is the case with respect to the proposed corporation. (4) Probably the most important amendment is that relating to the participation of lenders other than members of the Federal Home Loan Bank System. We are not oblivious to the controversy which has centered around the point among the various segments of the home finance industry. We offer this as a possible solution. Authorize the original capitalization of $50 million, or some lesser figure determined by the Congress, to be subscribed by the 11 district Federal home-loan banks whose stock is owned by member savings and loan associations. This initial capitalization will be represented by preferred stock with cumulative dividends on stock held by the district home-loan banks, and such stock would be retired as the common stock increases beyond a certain predetermined level. The users of the proposed home loan guarantee plan, whether they be members of the Federal Home Loan Bank System or other supervised or nonsupervised lenders, would participate in the capitalization on an equal basis; that is, they would subscribe to the capital common stock in an amount equal to a certain percentage-perhaps one-half of 1 percent to 1 percent-of the loan to be insured. Such stock purchase requirement could be reduced when the original $50 million in preferred stock is retired. Early retirement of the preferred stock with cumulative dividends would be an ample quid pro quo for the temporary use of the savings and loan money in capitalizing the Home Loan Guarantee Corpora tion. We believe that this would be more equitable than to require, as provided in H. R. 10637, other mortgage-lending institutions to subscribe to the common stock in an amount equivalent to one-seventh of 1 percent of the loans owned and serviced. Mr. Chairman, this concludes my portion of the testimony and I will be very glad to submit to questions. Mr. RAINS. It is a very interesting statement. Let's proceed with Mr. Gill, and then we shall have questioning. Mr. Gill. STATEMENT OF WALTER J. GILL, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS Mr. GILL. Thank you. Mr. Chairman and members of the subcommittee, my name is Walter J. Gill, of Newark, N. J., and I am engaged in the real estate and mortgage banking field as executive vice president of the Alexander Summer Mortgage Co., an approved mortgagee of the Federal Housing Administration, and have had more than 24 years of varied real estate experience. I shall testify on behalf of the National Association of Real Estate Boards in regard to rental housing. The construction of an adequate volume of rental housing in the moderate rent levels, particularly in the large urban areas, has become one of the major problems confronting the industry as well as the expanding American population. The fantastic growth of suburbia in the 12 years since the close of World War II has brought us from a country of 40 percent homeowners to approximately 60 percent. This is indeed commendable, and we are a much stronger Nation because of our emphasis on homeownership. However, the growth of our suburbs should not detract from increased attention being directed to the urban area, particularly the "central city" and the peripheral belt around the "central city." The Federal Government has a tremendous stake in urban renewal and this subcommittee has labored and will continue to labor with this problem for many years to come. Families and individuals who, either by preference or circumstances, occupy rental housing, have found choice relatively limited in most cities during recent years. Because the volume of new construction has been low, the inventory of rental housing is little changed in number from 1950. The census conducted in April of that year showed 19.7 million renter-occupied dwelling units. Reports from the updated inventory of 1956 indicated renter-occupancy to be about 20 million. While some 9 million dwelling units were being added to the owneroccupied category between 1950 and 1956, the rental component of the market was doing little more than holding its own. If we count all units of the multifamily type built since World War II, the total is only a little over a million. We would refer you, Mr. Chairman, to schedule A, which we would like to file for the record. Mr. RAINS. It may be included in the record. (The document referred to is as follows:) Mr. GILL. An effective rental housing program is necessary to meet the increased demands of the urban community as more and more American families turn toward the "central city"-a logical byproduct of the national urban renewal effort. What is the rental housing need in the United States today? While it is difficult to be specific in estimating need, we are aware of certain trends which underscore the growing need for more rental housing. I have already referred to the urban renewal programs which are focusing attention on the "central city" as living areas not complicated by the transportation problems of ever-lengthening commuting. There are other factors. (1) An increasing number of single individual households. Many of these persons prefer apartments to a rooming house type of shelter but are unable to find moderate rental quarters. (2) The increase in number of persons in the upper middle-age and elderly category. Many couples, with their families grown, prefer apartment life. The convenience to facilities is important to them. The growth of pension plans and the sharp rise in recipients permit more and more older people to maintain their own households. (3) The current income of families and individuals is at a level which permits a sizable economic rent to be paid by those preferring the privacy of apartment life but not wishing to be homeowners. In 1957, one-fourth of the families and single consumers in the Nation had personal incomes between $4,000 and $6,000. However, an even higher 27 percent received incomes between $6,000 and $10,000, while 11 percent had incomes of $10,000 or more. The average family income was $6,130. I am attaching as part of this statement-schedule B-a breakdown of the record of FHA multifamily project applications from January 1, 1947, through May 31, 1958. While I have included all the programs, some, such as the military housing program, are too specialized in their purpose to lend themselves to the analysis we make here. Others have expired and one, the section 213 (sales-type) cooperative, is essentially a homeownership program. Mr. Chairman, I will not refer to the statement other than by casual comment, because it would be entirely too long, so I would like to have that included in the record, if I may. Mr. RAINS. Schedule B may be included. SCHEDULE B "Project" applications filed with FHA nationally, January 1947 through May 1958 1 of this total, 40,486 were filed in 1st 6 months of 1954 (only 4,267 in last 6 months). Source: Federal Housing Administration. Mr. GILL. In referring to that schedule, you will note the great contribution made by the section 608 program. There were 548,463 units covered by applications until the program was terminated in 1950, which, incidentally, is half the production in the period covered. Note, also, the sharp decline in the sections 207 and 213 (management) projects from August 1954 on, which coincided with the incep tion of cost certification. Thus we can see the FHA multifamily programs until 1954 made a tremendous contribution to the production of rental housing. The year 1954, of course, brings to mind the investigation conducted into irregularities in the operation of the section 608 program. However, 4 years have passed since the Congress in the Housing Act of 1954 moved to prevent any possible recurrence of irregularities which the expired section 608 program may have produced. We respectfully suggest that a critical analysis of the preventive measures then taken might reveal that the medicine came close to killing the patient. The section 207 rental housing program became the victim of the reaction against section 608, a program which had expired long before disclosures were made. Section 207 was, and is, an entirely different type of vehicle and not susceptible to the practices exposed by the 1954 investigation. In our opinion, the greatest single factor contributing to the decline in applications for rental housing since 1954 was the unnecessarily tight "anti-mortgaging out" provision which the Congress wrote into law that year. This provision required the mortgagor to remit for reduction of the mortgage any excess of the mortgage over the "approved percentage" of the actual certified costs. Thus in attempting to prevent windfalls the Congress went a step further and created an inequity. As a result, a less efficient builder may obtain a higher mortgage than a more efficient builder. Let me give you an example. Let us assume that an experienced builder and a nonbuilder both acquire continguous parcels of land, identical in size. They have an architect design identical buildings for each, following which both file with FHA for mortgage insurance under section 207. FHA, having found values of $1 million on each, issues commitments to insure mortgages on the maximum allowable amounts of $900,000 each. Following completion of the construction, Mr. Experienced Builder files the required cost certification. Because of his ingenuity and know-how, he is able to show that the entire costs were only $900,000. At this point, FHA would be forced to reduce his mortgage to $810,000 because section 227 provides that no mortgage may be "in excess of such approved percentage of actual cost." Mr. Nonbuilder, on the other hand, who had used a building contractor to erect his project, was probably able to certify his actual cost at $1 million, as estimated by FHA. Therefore, his mortgage would remain undisturbed in the original amount of $900,000. Thus the experienced builder, upon whom we must depend for a sustained volume of rental housing construction, has been placed in a position less favored than that of a novice. We, therefore, endorse the principle enunciated in section 109 of S. 4035, but strongly urge that its provisions be broadened to include FHA multifamily sections and not be confined solely to sections 220 and 221 as the bill contemplates. Under section 227 at the present time the mortgagor remits for reduction of the mortgage the excess of the mortgage proceeds over 90 percent of the actual certified costs, and the latter is defined as including builder's profit. Under our proposal, actual cost would be redefined to exclude builder's profit and the mortgagor would remit only the excess of the mortgage over such actual costs. I would like to add parenthetically that, in my judgment, it would be only a very remote possibility that there would be any remission, |