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sure for public housing. In this connection I want to make it perfectly clear that we recognize, however, that until such alternate means of providing adequate housing for low-income families can be established on a practical and effective basis, federally assisted low-rent public housing provides the only present means that most cities have for rehousing the lowest-income families and, as the President indicated in his special housing message, it is an integral and very necessary part of the administration's overall housing program. Finally, as a further aid in financing needed home additions or improvements, the bill would authorize FHA insurance of advances to a mortgagor made pursuant to provisions in an open end FHA insured home mortgage. Open-end mortgages are mortgages which provide that the outstanding balance can be increased in order to advance additional loan funds to a mortgagor for improvement, alteration, or repair of the home covered by the mortgage without the necessity of executing a new mortgage. This would eliminate the expenses of title search and recordings. Also, it would permit the homeowner to borrow for the improvements at the low rate of interest prescribed in the mortgage and generally for a longer term than otherwise available. The authority to insure open end mortgages would apply only to insured mortgages covering dwellings for four families or less.
I regard this authorization as an important forward step. However, I want to add a word of caution. The mere enactment of such a provision will not automatically make it operate effectively. A great deal of work and study, both within an without the Government, must be done to assure that this provision does operate effectively and that housing consumers have an opportunity to obtain its full advantages. So far as the Housing and Home Finance Agency is concerned, I want to say that all of us will do everything possible to see that what is required of us to accomplish this will be done. I realize also that there are some real problems to be overcome, particularly, I expect, in connection with the lien laws of the various States. If the Congress enacts this provision of the bill it is my intention to request an appropriation sufficient to permit us to undertake a thorough examination of such problems and the development of model State legislation designed to eliminate such obstacles to the effective operation of the open end mortgage provisions as are identified in the course of such examination.
The bill would consolidate into a single authorization all existing mortgage insurance authorizations with respect to all FHA programs, except the home modernization and improvement program under section 2 of title I. This would greatly simplify operations under the present several separate insurance authorizations, and esablish at all times the amount of the current mortgage insurance authority for all programs. The bill provides that the total authorization shall not exceed the estimated amount of insurance in force and commitments outstanding as of July 1, 1954, plus $12 billion, except that with the approval of the President such total authorization could be increased by amounts up to a total of not to exceed $500 million.
There are some very important aspects bearing upon the necessity for an adequate insurance authorization which I want to emphasize. To be an effective aid in housing and home financing, the FHA requires a considerable degree of flexibility in its operations. It should not be in the position of having to close down insurance operations because of the exhaustion of its insurance authorization. There is always a high degree of uncertainty over the volume of applications which will be submitted by home builders and mortgagees. For this reason it is impossible to forecast with precise accuracy the dollar amount of insurance authorization which will be required in a given period of time, because the volume can vary substantially and rapidly with changing conditions.
I understand there have been eight or ten occasions during recent years when the exhaustion of an insurance authorization has required that insuring operations under one or more of the active programs either be suspended or placed under direct daily control of the Washington office. This is a very expensive process-both from the standpoint of the FHA and from the standpoint of the builders and the lenders who rely upon the FHA. The FHA is intended to be a stabilizing influence on homebuilding, but when its operations are cut off entirely by reason of insufficient insurance authorization it seriously disrupts the home-building and home-financing industry.
No one recognizes and appreciates more fully than I do the right, and the desirability, of the Congress to control the insurance liability to be underwritten by the FHA. I earnestly recommend to your committee that the FHA be granted sufficient authorization to carry out its operations without interruption until the Congress has adequate opportunity and time to again review the situation and to provide for such additional insurance authorization as it deems desirable until the next succeeding period of congressional review and action. According to Commissioner Hollyday's best estimate, the $2 billion provided for in this bill would be sufficient, with a reasonable margin of safety, to permit FHA to continue its operations without interruption until June 30 next year. I strongly urge your committee to provide sufficient insurance authorization to accomplish that purpose.
MORTGAGE LOAN AMOUNTS
There is a very real need for some adjustment and simplification of the various provisions of the National Housing Act governing the determination of the maximum amounts of mortgage loans which may be insured by the FHA. This is particularly true with respect to the FHA section 203 program relating to the insurance of mortgages on 1- to 4-family homes. Also since FHA or VA insured or guaranteed home mortgage loans represent a large segment of the home mortgage market and, therefore, exert a strong influence on the level of construction activity, it is vitally important to permit the terms of such Government-guaranteed or insured home mortgage credit to be fully responsive to changing economic conditions. The bill seeks to meet both of these important problems.
For example, in connection with the section 203 program on 1- to 4-family homes, the bill would provide that the maximum amount of a mortgage which may be insured by FHA could not exceed the sum of 95 percent of the first $8,000 of value and 75 percent of the
value in excess of $8,000, and in no event to exceed $20,000 for a 1or 2-family residence, $27,500 for a 3-family residence, or $35,000 in the case of a 4-family residence. These statutory maximum dollar amounts would compare with the present ceilings of $16,000 for a 1- or 2-family home; $20,500 for a 3-family home, and $25,000 for a 4-family home. We have prepared for the use of your committee a table showing the existing and proposed maximum loan amounts permitted in the case of 1- to 4-family homes.
The CHAIRMAN. Without objection, the table will be inserted in the record.
(The document is as follows:)
PROPOSED AND CURRENT SCHEDULES FOR MAXIMUM MORTGAGE AMOUNTS FOR 1- To 4-FAMILY HOME MORTGAGES INSURED UNDER FHA SEC. 203
1-family new, sec.
1-family new, sec.
1- and 2-family, new and existing, sec. 203 (b) (2) (A)4 (all mortgagors except operative builders)
Loan- Maxi- LoanLoan. value value value insured ratio insured ratio insured ratio insured ratio mortgages (percent) mortgage (percent) mortgage (percent) mortgage (percent)
1 Proposed terms for 1- and 2-family new and existing: Not to exceed 95 percent of $8,000 value and 75 percent of value in excess of $8,000, and not to exceed a mortgage of $20,000.
* Current terms for 1-family new under sec. 203 (b) (2) (D): Not to exceed 95 percent of value and not to exceed a mortgage of $6,650, plus $950 per room for 3d and 4th bedrooms.
3 Current terms for 1-family new under sec. 203 (b) (2) (C): Not to exceed 95 percent of $7,000 value and 70 percent of value in excess of $7,000, and not to exceed a mortgage of $9,450.
Current terms for 1- and 2-family new and existing under sec. 203 (b) (2) (A): Not to exceed 80 percent
of value, and not to exceed a mortgage of $16,000 per structure.
5 Per structure.
• Minimum of 3 bedrooms per family unit.
7 Minimum of 4 bedrooms per family unit, or minimum of 3 bedrooms per famly unit in geographic area where Commissioner finds cost levels so require.
8 Minimum of 4 bedrooms per family unit in geographic area where Commissioner finds cost levels so require.
B. 3- and 4-family mortgages (new and existing homes)
Administration appraised value (per structure)
Loan Loan Loan value value value value insured ratio insured ratio insured ratio insured ratio mortgage (percent) mortgage (percent) mortgage (percent) mortgage (percent)
1 Proposed sec. 203 (b) (2): Not to exceed 95 percent of $8,000 of appraised value and 75 percent of such value in excess of $8,000, and not to exceed a mortgage amount of $27,500 for a 3-family structure, or $35,000 on a 4-family structure."
2 Current sec. 203 (b) (2) (A): Not to exceed 80 percent of appraised value, and not to exceed a mortgage of $20,500 for a 3-family structure, or $25,000 for a 4-family structure.
3 Mortgages on 3- and 4-family structures of less than $10,000 value are eligible for insurance on the basis of the above formulas but have been omitted from these schedules in order to conserve space.
Mr. COLE. I want to emphasize that these, as well as the similar adjustments in the maximum amounts for other FHA programs, would represent the statutory maxima which would not automatically go into effect upon the enactment of the bill. The authority to establish the actual terms under which the FHA would operate would be vested in the President. It is contemplated that, if the Congress enacts these proposals, the President would, when he approves the legislation, put into effect a new scale of maximum mortgage loan amounts employing the new simplified formula, but establishing the amounts below the various maxima permitted by the bill.
The bill would also place in the President authority to establish the maximum rates of interest on home mortgage loans insured or guaranteed by the Federal Housing Administration or Veterans' Administration. The bill provides that such maximum interest rates would be established by the President from time to time on the basis of reviews to be made at his request by appropriate officials of the Federal Government. Such reviews would be required to cover conditions affecting the mortgage investment market, and to take into consideration conditions in the building industry and the national economy generally. The maximum interest rate could in no event be established at a rate exceeding the average market yield on marketable Government bonds having a remaining maturity of 15 years or longer, plus 22 percent.
I want to call particular attention to the fact that this latter provision is not a formula which requires the interest rate to be set at two and a half points above the average yield. It is a "ceiling limitation" permitting, within that limitation, the essential flexibility required for appropriate adjustment of the interest rate to changing economic conditions.
This provision for administering interest rates is in substantial conformity with the recommendations of the President's Advisory Committee. I should like also to emphasize that the committee was of the opinion that no change was needed at this time in present maximum interest rates. I agree with this position and would not recommend any change in interest rates under present market conditions.
If agreeable with the committee, I should like to suggest that Mr. Hollyday now present his statement. Mr. Hollyday brings to the position of FHA Commissioner an enviable record of successful mortgage banking experience. He has also done an outstanding job of pioneering in the field of rehabilitation and neighborhood conservation-a field in which the pending bill would give important new responsibilities to the FHA.
The CHAIRMAN. Mr. Hollyday, you may proceed with your statement as suggested.
STATEMENT OF GUY T. 0. HOLLYDAY, COMMISSIONER, FEDERAL HOUSING ADMINISTRATION
Mr. HOLLYDAY. Mr. Chairman and members of the committee, it is a privilege to appear today to discuss with you the portions of H. R. 7839 which pertain to FHA operations. The bill proposes two new FHA mortgage insurance programs. It also makes a number of modifications in existing programs, consolidates existing insurance programs in several instances and terminates some programs which either are inactive or are no longer justified. It also includes several technical amendments to refine, clarify or simplify existing programs. All of the provisions are designed to enable FHA to serve the Nation more effectively in raising housing standards and conditions or to enable FHA to perform its functions more efficiently.