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December 4* 1354.
Boat JtaM* A* lloffett*
FederalLHousing M l i
Dear lfr« Voff«ttl
l a view of the active part th&t 1 took la help**
lag to develop the psrogra* that led to the adoption of
4b& Hational Housing lot* I Imve naturally followed the
progree* of ifa® federal Stoualng Adndnlstration ulth
iat#3?#0t^ aix4 I of ocw^s #har# i t e dMlre of
and yomr atsooiatea that i t s operati<>a* shall
wholly
I t i s for these r^aioaa that I an #©i«iii3g to you
a semormndtii that exprasaes with great frmilcn^ss
on t t e rtgttlatioxui raotntly IM-WKI to govern t h i
of Tltl* II* t a» BWM ^ou will ftolly r e a l i s t that t b t
e r i t i c i s « i mud suggestions eon&ai&ed in the mmm&m&vm are
offmrwl in a s p i r i t of the utmost friimAlim»B$ and only
with a $##!r# to t#® th# ua# of .the inmxnA Bmrtimd
mortgage encotaraged wit Ma thfc nldeat ptraetlcabld iimitf #
At the Bmm %im I want you t o Jcnov that 1
fully realisie the postlMlity that-1 nay ha¥# liisrtad or
mi#nnQ^r#tood mm of the regulatlona to vh&h exotptloni
taken In the Tuemora^id^om* I kaow also that there must
M&tertl that hmm aoae up in thi© praetioal adftialitra^
of the fkmsing Act-that thotse of ®& who worked oat the
some months ^..go could mot nave foraetm* KeTc-rtiial e s t I shall appreoi«te I t i f you will give the aatt*r*
mfmTTmL t o In this oeKoraAdufe sons oonaldteratlcai^ aad then
l e t me discuaa t^ero nith you at your
With kind peoreonal regaspda and good wi&besf I a®
JMJ>A«
December 4 f 1954.
Hon# fhaaaa Jefferson Coolidge*
The Undersecretary, •
Tre&miry Department*
Bashipgton, D# C«
.Dear Jeff I
I am Muofing to jou a copy of a memorandum
that I htve gant today to Mr« Moffett on the
tioaa raeeatly isaued by the federal Housing
iatration, with regard to th# inauranee of mortgag0#«
regulations, it deems to me # mrs far
too restriotive and will severely limit the benefits
of Titles II and III.
ask you to reg&ro thia memorandum
personal anu confidential, and 1 would appreciate
an expression of your iriews on the criticisms and
suggestions that it contains*
sincerely*
December 4 f 1934
Hoxu Herman Ollphant* General Counae;. 9
"Ttm^wmj BspartTOnt*
Kaehlogton, 0* C«
Dear Barmant
I a» aanclJUig to you a copy of a
that I baT© mut today to llrt loffttt on the
tions raoeatly issued by the Federal Houaing
with regurd to the inauramoe of
these regulations, it seems to me, are far
too reatrlctive andi will seYerely limit the
of Tltlea II and III.
I will aak you to regard this namoraiKitw aa
peraaoal &na oonfidaatialf and 1 would appreeia-to
an #xpr@#aion of your Ti©w® on thra criticisms and
that it contains*
Xoura
December
Dr# Jacob Vine?*
Assistant to the Secretary*
Treasury Ospartmeiat*
Washington* D* C#
Dear Qr« Vi&ers
I am sending to you a copy ox a neaor«&tiu&
that X have, pent today to &r* Hoffett on the rsgmla^
tlons recently isauad by the Federal Housing Adult*iatration* with regard to the insurance of aortgages*
*Ehes0 regulations-^ it aeems to »e f arc far
too reatriotive i m will eeverely limittee"benefits
of ftl#s II a m
1 will ask you to regard this isamoraiidim aa
personal and confidential* and I woaid appreciate
an exjureasiou of your iriawa on the criticlsacd and
that it ooataina*
Sours slri
December 4,
Hoiu Preston Delano, General Manager,
Home Ownnr®* I*cmn Corporation,
Sew fast Office Building,
Vashlctgton, ,D# C*
Bear Efcestont
I urn sending .to you a copy of a
that I have sent today to Sir* Moffett onfeere,
tio&Q- recently issued by the Federal Housing
with regard to the iasurance of
regulations, it seem to ma ? are far
too reati^ictlTa and will severely liait the benefits
of Titles II and
I will ask you to regard this
am confidential* and 1 would appreciate
of your iriew# on the c r i t i c i s m and
gestlona that i t contains*
sincerely,
December 4 f 1954«
Hotu ftoeford Q# fugw©llf Under Secretary*
Department of
^ D. C«
Bear Hext
1 an sending to you a copy of a
that I have sent today to Ur t Itoffett on the
tioiis reeeatly issuad by the Federal liousiog
istration^ with regard to the insurance of mortgages*
Theee regulations, it seems to m$ are far
too rea'trietive and will severely limit the benefita
of titles II and I1I #
I will a3k you to regard this ^eaiorandun as
and confideatiaX^ & ^ I would appreciate an
of your views on the criticisms nod
geationa that it contains*
tours sincerelyf
December 4 f 1934*
* Harry X#*. Hopkins*
Federal Emergency Kelief Administrationf
1764 New York Avenue,
Washington* hm C*
Dear Barry?
I am Qordizig to you a copy of a
that I h&Ye eent today to Mr* Hoffett on the
tlona recently lfieued by the Federal Houaii^
iatratloaf with regard to the Insurance of w
These reguletlon8f It seems to me, are far
too restrictive and will aeverely H a l t the benefits
of Titles II and III.
I will ask you to reg^td thia itaiaorii&diiii as
per8Q&al and confidential^ and 1 would apprseiat®
an expreaaion of youi* iriew^ oa th© crlblcirae and
that i t containe*
sincerely*
December 4 f 19349
Sohm,
g
How* Ownwa 1 X*oan
Washington« D* C,
Drar Mr*
Ion taUl a* -that you would Hlc# t® s#t a
co -y of the memoranda tmit X liad in mind sending
t o Sr« Mcrtfttt 011 t h t r#gulatioiai go^waiiit t h t
of acKftgi^M undtr th» Hatloaal Housing
juit prepared this- ^^^ran4t« f and
X m sending It to l£r« loffett todajt I an sending
#f it to jrouj! but ilth the yequeat that you
it as utrintly pereooaX mid
Vhezi you imT# had am opportunity to
tbt mm®mw£mt
1 ^Ish that you would let me
your views 0m the criticisms and suggestions mad©
thereine
JMD/Um
Deee&ber S* 1954,
Mr* Winfield f« Riefler, Icsam-oisie
Rational £n®rgeney Oo*uaoilf
Department of C0j»#ree Building ^
Washington* D# C*
Wins
I aa $ ending to you a copy of a
thai I seat yesterday to Mr* Moffett on th#
tiona ree#ntly lasued "lagr the federal Housing
latratioa# with regard to the inatoranc* of
regulations^ it seasi to m®$ art far
too restrletlire md will a@T®r#ly limit the benefits
of Titles II s M lilt
I will -aak you to regard thAa Bia^oranitm at
personal mid eonfid®iitial| .mud I would appireolate
an mpreaalosa of jo\ar views on the eritleiftfti and
stiggestlons that i t oontains*
lours s
December 5. 1934«
Bout Xkmald JEU Blehb«rg| Ewcutiire Director #
Stetlooai Skwrgexuqr Gouneil*
OomftTOial Ilatlonal Bank
Washington* X>» C*
Dear l r
I aa Mndlng to you % oo.py of m
t t e t 1 t#nt y#8twd«/ to Itr* loff#tt mt thB
tioas r<M#ntl9r lisia#tl by the ftdwai fibusing
with regard to thci iitE«»ai^# of mortgages*
Thaae r#gulation^| i t s#e»s to m## are far
too r ^ i t r i e t i w <arid will aaT@r#ly limit the btruif i t t
of f i t l t s I I m& lit,
1 will aak you to f»tgar4 tMa mmm&n&m as
ani$ coafidential^ ^md 1 ^ould appreciate
l
of yowr vi#w§ oa the sritieit®* and
that i t contalne*
fours
B, 1954#
* 1« AvarelX
of Cow^e# Building^
Hr»
1 a® tending t o you a eopy of a
tb*t I a#nt yeatcKrday to &** Xoffett on tht
tioaa r#©#ntly itstiad by %b© Ftd«r*X Boutln
9 with regard t o the irtatiraiMMi of
i t a i w t o ae t ar@ far
too 2»®atri0t,iir# nut will scrrtrelgr H a l t tbe benefit0
of T I U M I I
ami
• I will ask you to regard tfala
personal and eoafid#ntial| md I would
an txprtssioa of jom* wimw» on the §3*lti0i8»§
that i t oontalno*
Xoura
h WM.
th% Arank 0*
1000 Broadway*
tf#w Xork f
I,
1 an a#»Aiiig to ycwi. a e®py of
that I s#&t yeateriti^ to lit* Moffttt <m t h t
tions i^s#ntl^ l i s ^t ^ by ttui ?*dtral Hougiag
1 strait Iont iiith reg *rd to the insurance of
I t g##iis to ^ ^ ara far
too -resiidatiira and will atT^ra-ly limit the
of Titles I I and
I will a#; you to regard thisand aomfiiieatial^ aad 1 would appreoint#
«9Qxre«ai((m of jom Tiewt on the critloiMui and
that i t contains#
"tourn
FEDERAL HOUSING ADMINISTRATION
WASHINGTON
December 1 1 , 1334
JAMES A. MOFFETT
ADMINISTRATOR
Honorable Marriner B. Eccles,
Federal Reserve Bo.^rd,
?feshingfcon, D. C*
l
fy dear Mr, Eecless
Thank you very much for your letter of
December fourth enclosing memorandum in which 70x1.
ezzj)rer^ your views on the regulations issued to
govern the operation of Title II of the National
Housing Act* This: hog just come to ny attention
on r(ty return to Wer.hin^ton this coming* I hr.ve
been out of the city for a m>e!fc*
In due course I Trill pr~prre r reply end
vrill andoEvor to r.ns^rer the questions iThich you
"hnvo raised ir. your letter#
Yovtr eor^ent in this re|T-*i.rd is grectly
appreciated•
{Sincerely yemrz,
Federal Hou5?inj Admir^n. str^tor*
FEDERAL RESERVE BOARD
WASHINGTON
OFFICE OF GOVERNOR
December 5, 1934•
Hon. Donald R. Richberg, Executive Director,
National Emergency Council,
Commercial National Bank Building,
Washington, D«, C.
Dear Mr. Richberg:
I am sending to you a copy of a memorandum
that I sent yesterday to Mr. Moffett on the regulations recently issued by the Federal Housing Administration, with regard to the insurance of mortgages.
These regulations, it seems to me, are far
too restrictive and will severely limit the benefits
of Titles II and
I will ask you to regard this memorandum as
personal and confidential, and I would appreciate
an expression of your views on the criticisms and
suggestions that it contains.
Yours
Form No. 1*31
f\ff
/"*
Xo
Governor Eccles
1
Utfice Correspondence
From J» M. Daiger
FEDERAL RESERVE
BOWD
&**.
Subject: ^e Memorandum on FHA Regulations for Title II.
As I tinder stand it, you are planning to use this memorandum, for the time being at least, among only a few persons.
My recollection is that you have mentioned particularly Mr.
Moffett, Secretary Morgenthau, Secretary Ickes, Mr. Fahey, and
Mr. Hopkins.
It occurs to me that it might also be desirable to include Mr. Ardrey and Mr. Ijtifcfler in the original list} Mr.
Ardrey because he is the deputy in charge of Titles II and III,
and Mr. Biefler because he is largely responsible for these
Titles and is acting as a consultant to Mr. Moffett and Mr.
Ardrey.
In view of the interest that the members of the Federal
Reserve Board have shown in the particular application of the
National Housing Act, they would probably be interested in a
memorandum that reflects your views on the mortgage-insurance
regulations. I believe that Mr. Morrill and Dr. Goldenweiser,
and perhaps also Mr. Paulger and Mr. Smead, would be interested
for the same reason^.
If for any reason you decide later to enlarge the official
group first mentioned above, the names that occur to me are
Secretary Perkins, Mr. Richberg, Under-Secretary Coolidge, and
Mr. W. AverelVEarriman.
v
Two persons whose views in this matter would have a strong
influence on Mr. Moffett and Mr. Ardrey are Mr. Charles A. Miller
and Mr. Lewis H. Brown. I am quite certain that Mr. Miller would
concur fully in the objections and suggestions made in the memorandum, though he might be reluctant to press them on Mr. Moffett
and Mr. Ardrey unless they consulted him. Mr. Brown, on the other
hand, has thus far, I believe, carried more weight with Mr. Moffett than any other person has. I doubt that he would be reluctant
to make his views known.
MEMORAIJDTMJON REGULATIONS GOVERNING
INSURANCE OF HOME MORTGAGES BY FEDERAL HOUSING ADMINISTRATION
The subject of this memorandum is the draft, "Regulations of the Federal Housing Administration Covering Operations under Title II of the National
Housing Act,11 dated November 1, 1934, as issued by the Federal Housing Administrator*
The memorandum discusses these regulations primarily from a finan-
cial point of view, and, on the basis of objections cited from this point
of view, reaches the conclusion that the regulations in their present form
seriously jeopardize the success of the program that they are intended to
advance•
Twofold Purpose of Housing Act
From the point of view of Administration policy, the National Housing
Act is to be regarded as having a twofold purpose:
1. To supplement the home-mortgage relief measure
known as the Home Owners1 Los.n Act with a permanent measure recognizing, as the President has
expressed it, "that the broad interests of the
Nation require that special safeguards should
be thrown around home ownership as a guaranty of
social and economic stability."
2. To supplement other emergency measures besides the
Home Owners1 Loan Act, especially those having to
do with unemployment relief and public works, with
a permanent measure designed to reorganize and reopen the mortgage market in such a manner as to insure a continuous flow of private capital into residential construction.
z.
Questions Raised by Proposed Regulations
The
questions that we now have to consider are the following:
1* Whether the regulations covering Title II are in accord
with the twofold purpose of the Housing Act as summarized
above•
2. Whether they are in accord with the statutory provisions
of Title II.
5. Whether they are calculated to facilitate the operation
of the title or are, on the contrary, liable to prove
unduly restrictive*
The last of these considerations is the crux of the matter, for it
goes directly to a related urgent question—namely, whether Titles II and
III can now be relied on to (a) relax the pressure on the Home Owners1
Loan Corporation, (b) reopen the mortgage market to a free flow of private
capital, and (c) give a vigorous fillip to what is still the most depressed
of the countryfs major industries.
Low-Cost Financing is Essence of Title II
The essence of Title II of the Housing Act, especially when considered
in conjunction with Title III, is that it makes a drastic reduction in the
cost of urban home-mortgage financing economically justifiable and practicable. A deliberate departure is made from practices hitherto prevalent in
such financing, and a new system of home buying and mortgage investing is
established. This new system is especially designed to eliminate—
Interest rates substantially higher than those generally prevailing for long-term financing;
Commissions and service charges that only circumvent usisry
lawsj
Second mortgage financing and its exorbitant costs;
Concealment in real estate selling-prices of the prohibitive
3.
costs of financial promotion;
Excessive renewal fees on mortgages fictitiously written for
a three-year or five-year term, but without any provision
for payment by the borrower, and with the expectation of
refinancing at maturity.
To lift this insupportable burden from the home owner, and to free
the mortgage market from the consequent hazards, was the main concern of
the Presidents Committee on Housing in formulating the measures now incorporated for the most part in Title II. Title II accomplishes this dual
purpose, furthermore, by means that result in a prime investment for private capital—an investment that is still further enhanced by the distributive mechanism provided for in Title III.
Annual Service Charges—An FHA Innovation
In the light of the facts just related, it is difficult to account
for the schedule of interest rates, annual service charges, and mortgage
insurance premiums set out in paragraph 4 of Article V of the proposed regulations. To begin with, the authoriz ation of an annual service charge for
twenty years, applicable to the great majority of mortgages eligible to insurance under Title II, is a distinct innovation on the part of the Federal
Housing Administration. No such charge was ever contemplated by the Presidents committee or its advisers, nor by the witnesses who appeared before
the Senate and House committees. Nor is it contemplated in the wording of
the statute. Moreover, the making of an annual service charge on mortgage
loans has no counterpart in the policies and methods ordinarily pursued by
lending agencies.
4.
The annual service charge, therefore, can be regarded only as a
device to increase the authorised rate of interest without saying frankly
that this is what is being done* Such a subterfuge is bound to provoke
popular and political resentment when its implications are generally realized.
More particularly, it places the Federal Housing Administration in the untenable position of condoning, and actually imitating, a kind of practice that
the National Housing Act was designed especially to discourage and defeat*
High Interest Rates Permitted
In order to arrive at the actual rates of interest that lenders are
permitted to charge on mortgages insured by FHA, the annual service charges
must be added to the so-called maximum rates of interest authorized in the
schedule* These actual rates are thus found to vary, lfdepending upon the
nature of the mortgage indebtedness,11 as follows:
Class 1»
5% on mortgages to finance bona fide
sale or resale, without change of lender»
of property constructed befoye June 27,
1934*
Class 2.
5f$ on mortgages to finance purchase of
property constructed after June 27, 1934.
Class 3.
&|$ on refunding of present mortgage,
without change of borrower or lender* on
property constructed before June 27, 1934*
Class 4*
6% on refunding of present mortgage, with
change of lender• on property constructed
before June 27, 1934.
The regulations do not explain these variations in interest rates,
nor are the reasons apparent in the classifications themselves. On the contrary, a good deal of unreason is evidenced in the schedule. In the case of
Class 2 and Class 4 loans, for example—and these will be the most numerous
classes—the rates include an annual service charge of ^ of 1 per cent; yet
the lender is under no annual expense in respect of these that he is not also
under in the case of Class 1 and Class 5 loans, which carry no service charges•
Class S loans involve less work for the lender at the outset, and no more afterward, than Class 1 loansj yet the former carries an additional interest charge
of \ of 1 per cent per annum over the latter•
It is therefore evident that what the President's committee and Congress intended to be the general or uniform rate of interest on all loans under
Title II—5 per cent—is now made applicable only to the class of transactions
that will be least numerous, namely, Class 1« The great bulk of transactions
will be those in which 5§ and 6 per cent respectively m i l be the actual rate
of interest, though the sta tute plainly looks toward a rate "not to exceed 5
per centum per annum on the amount of the principal obligation outstanding
at any time."
As a precaution against contingencies in which mortgage funds might
not be attracted to particular localities because of exceptional conditions
existing there, separate provision was made whereby the Administrator might
establish, "in certain areas or under special circumstances," a rate not to
exceed 6 per cent* But no one supposed that this emergency provision would
be invoked until the need for it was indicated after the 5 per cent rate had
been put to the test of practical experience.
Suggestion in re Interest Rates and Annual Service Charges
To remedy the inequitable arrangement of interest rates and annual
service charges authorized in the regulations, the four classifications dis-
6.
cussed above might be abolished and a rate not to exceed 5 per cent be made
applicable to all mortgages accepted for insurance* The further suggestion
is here offered that the annual service charges not only be dropped from the
present schedule, but that FHi add a new regulation strictly prohibiting
t!
service charges" or any other device the purpose of which is to make the
true rate of interest exceed 5 per cent*
Another suggestion is that FHA make general or specific provision
for mortgage insurance covering two important classes of transactions f or
which no provision is made in the present schedule* One is the sale or resale, with change of lender, of property constructed before June 27, 1934*
The other is the placing of a mortgage on unencumbered property, whether constructed before or after June 27, 1954* There appears to be no reason why
these classes of transactions, when otherwise eligible, should not have the
full benefits of mortgage insurance.
Insurance Premums Not Related to Risks
The same schedule that contains the authorized interest rates and
annual service charges contains also the premiums to be charged for mortgage insurance* The relevant statutory provisions in this matter are, briefly, theset
!• That the premium charge "be determined in
accordance with the risk involved," but in
no case be less than § of 1 per cent, nor
more than 1 per cent, of the original face
value of the mortgage*
2* That mortgages accepted for insurance "be so
classified into groups that the mortgages in
any group shall involve substantially the
same risk characteristics and have similar
maturity dates*"
7.
The premiums prescribed in the regulations, however, are determined,
not according to risk characteristics, but according to whether or not there
is a "change of borrower." If there ijs a change of borrower "without change
in lender11—that is, if the home owner parts with his home—the premium to
be paid by the new owner is only § of 1 per cent. But if the home owner
holds on to his home, refunding his mortgage either through the present
lender or through a new lender, then FH& charges him double the premium
that it would charge a new buyer of the same property• Manifestly, there is
no way to reconcile this with any accepted principle of insurance or with
the statute. Furthermore, the result is again, as in the case of interest
and service charges, an arbitrary arrangement that subjects the great bulk
of transactions to the highest rates.
Since risk is plainly the criterion prescribed in the statute, the
insurance premiums might reasonably be expected to vary among loans within
each of the four classifications established by the Administrator. Thus,
for example, mortgages maturing 20 years hence might carry an FH& insurance
charge of | of 1 per cent if the ratio of original principal to valuation
were not in excess of 60 per cent, 3/4 of 1 per cent if the ratio were more
than 60 per cent but not in excess of 70 per cent, and 1 per cent if the
ratio were in excess of 70 per cent. Such a method of determining the
premiums (the figures used here are illustrative only) would be simple and
equitable, and would conform fully to the statutory requirements.
Reason for "Initial Service Charge" Not Clear
Besides the annual service charges applicable to Class 2 and Class
8*
4 loans, provision is made in the regulations and in the mortgagor's application form for an "initial service charge" applicable to all loans. This is
another dubious item that would be subject to valid criticism, as inconsistent
with some of the essential purposes of the Act, unless it were clearly defined
as covering only actual out-of-pocket expenditures ordinarily paid by the
mortgagor. What expenditures would come under the heading of "initial service charge," however, is not clear. Provision is made elsewhere in the regulation or in the application form for such items as title search, abstract,
attorney's opinion, certificate of title or policy of title insurance, appraisal fees, legal costs of preparing papers, recording or filing fees or
charges, charge of Federal Housing Administration for appraisal, etc.
Two Appraisals and Two Appraisal Fees Required
The provision for a "charge of Federal Housing Administration for appraisal," in addition to "appraisal fees" charged by the lending agency,
carries two important implications:
1. That the borrower is to be subjected to a double
cost for appraisal.
2.
That the Federal Housing Administrator is not to
rely mainly on appraisals made by approved instittitions or agencies.
This is another questionable departure from the method of operation
envisaged by the President's committee and strongly urged by some of its
most competent advisers. In fact, one of the two principal reasons for providing in the Act that mortgagees be "approved by the Administrator as responsible" was to avoid the necessity of setting up another large and widespread
staff of governmental appraisers*. A reasonable reliance was to be placed on
9.
responsible and experienced mortgage-lending institutions rather than a presumption of suspicion and distrust*
^t was intended and expected, in this
connection, that uniform standards of appraisal would be established and enforced*
The appraisals would of course be reviewed by the Federal Housing
Administration in the light of its prescribed standards, but for this a
relatively small staff would suffice, whereas only a very large staff could
make a thoroughgoing separate appraisal*
This is a point of fundamental importance if the principle of uniform
standards of real estate appraisal is to be widely accepted and the operation
of Title II facilitated*
The ability of any given institution or agency to
make appraisals can be readily determined by a competent staff of appraisal
reviewers*
Any approved mortgagee that showed a lack of capacity to make
appraisals in accordance with the prescribed standards, or that exhibited a
persistent tendency to make excessive appraisals, would presumably be subject
to the withdrawal of the Administrator's approval, as provided in paragraph
4 of Article III of the regulations*
In fact, the making of unreliable
appraisals and the failure to service mortgages properly appear to be the
only important reasons that the Administrator might have to invoke the
penalty here referred to*
Questions Regarding Taxes» Fire Insurance! Etc*
In addition to the items already recited as hampering to the borrower—
initial service charge, excessive interest rates, unwarranted annual service
charges, inequitable premiums for mortgage insuraioce, dual fees for appraisals
—still another set of items is questionable from the borrowerfs point of
10.
view. They are set out in paragraph 7 of .article V of the regulations,
which requires that the mortgage provide for equal monthly payments to
"amortize the estimated amount of all taxes, special assessments, if any, and
fire and other casualty insurance premiums . • . within a period ending one
month prior to their final due dates." The mortgagee is required to hold
these payments in trust, but the regulations make no provision for the FHA
to hold the mortgagor safe against any failure of the trust. Furthermore,
the effect of having these payments begin a year in advance is to increase
the true rate of interest paid by the mortgagor.
Undue Kestrictions as to "Eligible Mortgagors"
A final and extremely serious objection remains to be observed from
the point of view of the home-owner borrower, and one that might be irksome
to the mortgage lender as well.
It is to be found in the interpretation
that the FH& has put on the statutory provision requiring "periodic payments by the mortgagor not in excess of his capacity to pay as determined
by the Administrator."
The purpose of this provision in the Act was to
discourage the unamortised short-term mortgage, and to require the mortgagee
to look to the character and credit of the mortgagor as well as to the real
estate collateral.
The administrative regulations governing "eligible mortgagors" sre
four in number and may be summarised as follows:
1. That the mortgaged premises be "free and clear of all
liens" other than the insured mortgage, and that the
mortgagor shall not have "any other unpaid obligation
contracted in connection with the mortgaged premises."
2.
That the periodic payments shall "bear proper relation
to his present and anticipated income and expenses."
3. That the mortgagor "must have a general credit standing
satisfactory to the Administration" (should read "Administrator").
4*
That the property owned by the mortgagor "may be located in
in urban community whose housing standards meet the requirements for insurance under this Title of mortgages on
property located therein."
In addition, the regulations are supplemented by the form to be
filled out in triplicate by the mortgagor, giving, as Exhibit A, a detailed
personal history, and, as Exhibit B, "Personal financial Statements—Combined
statements of both mortgagors, including contributions by other members of
the family*" The latter exhibit is one of exhaustive and intimate detail,
and beyond the capacity of a person of ordinary education and intelligence
to supply without extreme personal difficulty or professional assistance.
The regulation requiring that the property be free and clear of all
liens other than the insured mortgage is simple and reasonable, and meets
in part one of the essential purposes that the Presidents committee had in
view, though to meet this purpose fully the regulation should provide that
the mortgage insurance terminate if the mortgagor places any additional lien
on the property*
The further requirement, however, that the mortgagor shall not have
outstanding "any other unpaid obligation contracted in connection with the
mortgaged premises," is unduly restrictive*
If literally interpreted it
would exclude current accounts for even minor repairs and improvements—
items that any mortgagor otherwise eligible would easily be able to pay,
and that would in fact enhance, however slightly, the value of the mortgaged
property. A still further effect of this requirement would be to exclude
12 •
from the benefits of Title II any home owner who had responded to the appeals
of FHA to rehabilitate or modernize his property in the manner provided by
Title I*
Likewise, of course, lending agencies would be prohibited from re-
funding, on the insured, amortized basis of Title II, any mortgages secured
by homes improved on the insured, amortised basis of Title I. There seems
to be no practical reason why this privilege should be denied to the mortgagor and the mortgagee if the former is fully capable of meeting his obligations tinder both titles.
The simple statutory provision, "not in excess of his reasonable
ability to pay," relating to periodic payments required of the mortgagor,
<night easily be complied with by the methods ordinarily used by concerns that
extend credit to their customers. The very phraseology of the statute suggests the feasibility of relying in this matter on the judgment and certification of the lending agency; for the agency will already have been approved
by the Administrator as responsible, will be obliged to service the mortgage
(i. e., collect the required periodic payments), and will suffer whatever inconvenience and diminution of income may result in the event of default, foreclosure, and the necessity of accepting FHA debentures in satisfaction of the
mortgage debt.
The clear and simple language of the statute becomes, in the regulations "a proper relation to his present and anticipated income and expenses."
This is both vague and variable in meaning, and enormously different in
practical application from nnot in excess of his reasonable ability to pay."
The same objections apply to the regulation requiring that the mortgagor
"must have a general credit standing satisfactory to the Administration."
15.
Here again the experience and judgment of an approved mortgagee might well
be relied on*
As for the "personal history" and "personal financial statements,"
they suggest unwarranted meddlesomeness and red tape, and will most certainly provoke resentment and resistance once they are circulated among home
owners, lending agencies, the press, and business men interested in the
success of the housing program* The practical course in respect of these
exhibits, it would seem, is to require them only (a) where the Administrator
has become doubtful of the responsibility of the approved mortgage^ or (b)
where the Administrator has some doubt of the mortgagor's "reasonable ability
to pay" notwithstanding that a responsible approved mortgagee has offered
the mortgage for insurance*
The requirement that a property, "if otherwise acceptable to the
Administrator, may (sic) be located in an urban community whose housing standards meet the requirements for insurance under this Title of mortgages on
property located therein," would only add to the mental confusion and moral
bewilderment of borrowers and lenders where Article VI of the regulations
is concerned* There is nothing either elsewhere in the regulations or in
the text of the Act to suggest what the requirement means or why it was included*
Undue Limitation on Number of Eligible Mortgagees
The only limitation that the Housing Act puts on the Administrator
in approving mortgagees is the simple provision that they be "responsible
and able to service the mortgage properly*" Article III of the Administrator^
14U
regulations, however, denies the benefits of Title II to large numbers of
mortgage-lending agencies that are rated by Federal and/or State supervisory authorities as responsible and able to service mortgages properly,
but that cannot meet the following additional requirements imposed by
the Federal Housing Administrator:
!• That they be located in a town or city with a
population of not less than 6,000.
2. That they have a paid-in capital of not less
than #100,000.
3. That their principal activity in the mortgage
field consists in lending their own funds.
These limitations are extremely drastic. They rule out perhaps a
substantial majority of all mortgage-lending institutions in the country,
including a very large proportion of Federal Reserve member banks and nonmember state banks, all savix^gsbanks and insurance companies of the mutual
type (since they have no capital stock), and all concerns that deal in and
service mortgages to a larger extent than they lend their own funds. A
"note" appended to Article III of the regulations indicates that the Administrator did not intend to rule out as many lending agencies as are in
fact ruled out by a strict interpretation of the three regulations referred
to abovej but this is characteristic of the ambiguities that cause the
draft as a whole to be lacking in clarity, simplicity, and precision.
A further objection to be observed with regard to the limitations
imposed by Article III of the regulations is that the requirements as to
capital and/or population prohibit the refunding of mortgages by thousands
of sound and experienced agencies that now hold them, thus subjecting these
15.
agencies to utterly unfair competition as the home mortgages in their
portfolios mature* Meanwhile, also, unless mortgagors can obtain a release
of mortgages held by the agencies thus discriminated against hy the FHA,
the mortgagors likewise will be denied the benefits of Title II, at least
pending the maturity of their mortgages.
The obvious remedy for all these defects of Article III, it would
seem, is to make eligible as approved mortgagees all mortgage-lending agencies
that axe chartered, that have succession, and that are subject to supervision
by the governmental agency, State or Federal, from which their charter powers
are derived. For lending agencies that are not subject to governmental supervision, but that otherwise qualify as responsible and able to service mortgages properly, a requirement as to paid-in capital or, in the case of mutual
institutions, as to unimpaired surplus, might be established* In this event,
a minim-urn of $25,000 rather than #100,000 would seem to be adequate, except in particular instances where the circumstances were exceptional*
Effect of Regulations on Capital Market
The financial community has been encouraged to look to the operation
of Titles II and III of the Housing Act to rescue the mortgage market from
its demoralized and deflationary state of the past several years, and to give
it a new impetus and direction. This accomplished, the stabilizing of real
estate values and the revival of residential construction might logically
be expected to follow, with a further substantial improvement in business
generally as activity and employment in construction brought a corresponding
increase in the national income.
Already, however, a delay of several months has occurred in getting
±6.
the operation of Titles II and III under way, and even no?/ they are only
nominally operative under regulations that are expressly stated to be incomplete .
The effect on many mortgage-lending agencies is necessarily one
of disappointment and discouragement.
It is scarcely an occasion for sur-
prise, therefore, if they are found to be impatient and critical*
Nor is it
to be supposed that they will be greatly reassured if they find Titles II
and III to be encompassed in complicated administrative machinery and hampering restrictions.
But the effect of the delay and uncertainty on lending agencies is,
unfortunately, more than subjective.
There is still a pressure for liquida-
tion in the mortgage market, as is evidenced, to cite only one example, by
the volume of applications for HOLC loans that might well be directed to private agencies, and accepted by them, if the advantages of Titles II and III
of the Housing Act were now actually available.
Because of the continued ap-
prehensive attitude of mortgage investors, many home owners who might qualify
for mortgage insurance under Title I I , and thus offer their mortgagees a
prime investment, are still under severe pressure for full payment or substantial curtailment of matured or maturing mortgages, with foreclosure and
loss of their homes, and in numerous instances a deficiency judgment in addition, as the sole alternative.
The politico-economic danger of permitting
such a condition to run on until Congress and a majority of the state legislatures sre in session next year is all too obvious.
Even more serious are
the demoralising social and financial risks meanwhile to the families concerned.
What the Situation Now Calls Far
The urgent need, then, is for the prompt operation and vigorous
17.
promotion of Titles II and III, under such regulations for Title II as will—
(a) induce the largest practicable number of home owners
to seek a refunding of their mortgages by this new
means, and—
(b) induce state legislatures to repeal mortgage-moratorium
laws wherever they now exist and to refrain from enacting such laws where they do not now exist j —
and under such regulations for both Title II and Title III as will
(c) induce the largest practicable number of lending agencies
to give an immediate preference to the new type of insured amortized mortgage, a n d —
(d) induce banking and investment leaders in the larger
financial centers to take immediate steps to organise
national mortgage associations and/or mortgage-trust
companies, utilizing the combined facilities of the
Federal Housing Administration and the Reconstruction
Finance Corporation*
A Concluding Observation on Mortgage Interest Rates
In conclusion, it is to be emphasized that an interest rate in excess
of 5 per cent, on either home mortgages or mortgages on low-cost housing
projects—insured, amortized, and otherwise safeguarded from the outset under
the terms of Title II, and with the Federal Government guaranteeing full recovery of principal and 3 per cent interest on any part of such mortgage as
may default—is unwarranted and unnecessary in the present and prospective
state of the capital market• As a matter of fact, 5 per cerrb is the ra,te
generally prevailing on mortgages already held or being currently made by
many institutional lendersj and this notwithstanding that the loans made by
them at 5 per cent or less lack the special safeguards provided under Titles
II and III of the Housing Act*
The higher rates actually or nominally prevailing in many communities,
18.
sometimes running to 8 or 9 per cent, or even more, have not been due to
any correspondingly larger cost of servicing mortgages, or even to any
greater risk of loss through default*
They have been due in the main to
a deficiency of local savings for mortgage investment, in contrast to
the lower rates in communities where a great abundance of such funds was
seeking an outlet • In the latter connection, it is to be remarked that
the congestion of mortgage money has often resulted in acceptance of both
a low rate of interest and inferior security—notably in the case of mortgages on slum dwellings and other obsolete property.
Title II eliminates any need, real or imaginary, for high rates of
interest to compensate for potential depletion of principal. As for high
rates occasioned by an insufficiency of local savings, Title III is expressly designed to syphon mortgage money from communities where there is
a surplus to communities where there is a deficiency• This is in fact the
fundamental principle underlying the provision for national mortgage associations, and also the means by which they will give the home-mortgage market
a liquidity that it has never before possessed.
December 4, 1934.
@FedFRASER