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White House - 11/10/37

IMMEDIATE MEASOBES TO STIMULATE HOOSING CONSTHTCTION

1* Reduction of Financing Cost
2* Reduction of Domi-Payment on Small Houses
5. Encouragement of Rental-Housing Construction
4« Bicouragement of Limited-Dividend Housing Companies
5m Stimulation of Large-Scale Private Financing
6*

Concentration of FHA on New Construction

7. Implementation of the Program

IMMEDIATE MEASURES TO STIMULATE HOUSING CONSTRUCTION

Although the severe slump in construction since April
is serious in itself and indicative of trouble ahead, the great
lag of construction behind all other major industries each year
since 19S3 is far more serious and far more significant*

It is

the most deep-rooted retarding factor in national income, budget
balancing, and full employment of labor. It still remains to be
dealt with in a decisive way.
Since housing is both economically and socially the
most important branch of the construction industry, and also the
most depressed area of industrial production and employment, the
purpose of the program here outlined is to give a vigorous impetus
to the private financing and construction of housing*
The program is designed especially to encourage and
facilitate large-scale operations in housing both for sale and
for rent—that is, building by companies or groups of companies
large enough (1) to effect economies in buying and construction
and (2) to afford continuity of employment through sustained production and the accumulation of an Inventory of housing in advance




-2of the customary buying and rental seasons* The devices suggested
are modifications and extensions of existing measures adopted under
the present Administration and already demonstrated, within their
present limits, to be effective*
The proposed extensions and enlargements are predicated,
however, on the assumption that their effectiveness in producing
a much larger volume of housing will depend measurably upcm understandings which the President may reach with representatives of
the building-trades unions, the construction industry, and corporations employing large numbers of workers. Suggestions as to nature
of the understandings to be had are included in this outline of
the program.
The existing legislation most readily adapted to an early
enlargement of the private financing and construction of housing
for sale or rent to families of moderate income is the National
Housing Act, by which the Federal Housing Administration was
established*

This legislation was enacted in 1954 through the

efforts of the President's Committee on Housing, under the chairmanship of Mr. Frank C. Walker*
The special advantages of the financial mechanism provided for in the National Housing Act, and in State legislation
enacted supplementary thereto, are mainly as follows:




-5!•

It is applicable to all types of lending institutions

that make construction loans and mortgage loans*
2» It enables these institutions to make high-percentage
loans on a single mortgage at a low rate of interest, and to extend
these loans on a monthly-amortization basis for a period up to 20 years*
Z. The use of the high-percentage single mortgage (as in
the British experience) meets the practical need of the borrower
without resorting to second-mortgage financing on the one hand or
to government lending on the other•
The system of financing provided for in the National Housing
Act is made possible by the operaticm of a mutual mortgage insurance
fund* This fund is derived in part from a nucleus originally provided by Congress in 1954 and in part from the payment of mortgageinsurance premiums by the borrowers* The mortgage-insurance system
is designed to be self-sustaining, and the premiums charged are
reliably estimated to be wholly adequate to that purpose.
The decisive factor in the widespread acceptance of the
FHA mechanism, however, is the ultimate governmental guaranty of
the unpaid balance of loans that may default* This guaranty becomes
operative only in the event that the recoveries from the sale of
foreclosed properties would fall so far short of satisfying losses
as to wipe out the entire insurance fund*




Even if a situation should arise, therefore, whereby the
ultimate guaranty would have to be availed of, the extent of any
loss by the Federal Government would be extremely small* In
comparison with the volume of new housing and employment obtainable
through the FHA mechanism, the cost would even under the most
unfavorable conditions be inconsequential.
The following changes in the operations of the Federal
Housing Administraticm are suggested as the measures most likely
to lead private enterprise and private capital to enter the
housing field on a much larger scale*
1* Reduction of Financing Cost
The cost of financing is one of the most important
elements in the long-term cost of housing* The rate at which
financing can be had is therefore one of the determining elements
in the undertaking of building operations, especially since a
lowering of the long-term cost of financing has the practical
effect of offsetting other elements of building cost that may be
relatively high.
The present cost of mortgage financing under the FHA is
6 l/4 per cent* This is the maximum cost, but it is actual cost
in the great bulk of transactions* The cost is made up of an
interest rate of 5 per cent, a service charge of 1/2 of 1 per cent,




-5and a mortgage-insurance premium of 3/4 of 1 per cent* To reduce
this financing cost, the following changes are suggested as immediately
practicable:
(a) Eliminate the service charge of 1/2 of 1 per cent,
thus bringing the maximum actual interest cost to 5 per cent net*
(b) Modify the basis of the annual mortgage-insurance
premium from a fixed percentage of the original face amount of the
mortgage to a percentage of the diminishing balance from year to year,
and make the premium rate dependent on the ratio of loan to properly
value instead of having the same premium rate apply to all mortgages
regardless of the loan-to-value ratio#
(c) Waive the charge for mortgage insurance in the case of
newly-constructed houses on which mortgages are insured prior to July 1,
1939, and on which the valuation does not exceed $6,060* Make a similar
waiver in the case of newly-constructed apartments where the amount of
the mortgage does not exceed $1,000 per room*
a» Reduction of Down-Payment on Small Houses
The determining factors for most families in buying a house
are, first, the amount of the down-payment required and, second, the
monthly payment required• The first is by far the more important
because of the slow rate of saving even for families that have a
steady income and a reputation for meeting their obligations promptly*




-6Under the FHA the doim-payment required is 20 per cent
and the maximum mortgage permitted is 80 per cent. The experience
of Great Britain, where daring the recent years of extraordinary
building activity the prevailing down-payment has become 10 per
coat and the prevailing mortgage 90 per cent, shows that this has
been the most important factor of all in making large-scale operation practicable and in bringing home-pwnership within reach of
the great mass of moderate-income families.
The following change is therefore suggested: Reduce the
down-payment required by the FHA to 10 per cent in the case of newlyconstructed houses on which the valuation does not exceed |6,000,
and authorize the FHA to insure 90 per cent mortgages on such houses.
5. Encouragement of Rental-Housing Construction
The majority of families in communities with a population
of 2,500 or more are not home-owners. In the larger cities, the
proportion of rented dwellings runs from 60 to nearly 80 per cent
of the total. Rental housing is therefore the major part of the
urban housing market, and the construction of houses and apartments
for rent is an essential and important part of any comprehensive
program of building activity.
The present operation of the FHA with respect to new construction is for the most part related to houses built for sale*
The following changes are suggested to stimulate the building of
rental housing:




-7(a) Authorize the Insurance of mortgages on newlyconstructed apartment buildings on the same basis as for singlefamily houses, but provide that the mortgage shall not in any case
exceed #200,000 and shall not exceed f1,000 per room*
(b) Authorize the insurance of a blanket mortgage up to
#200,000 on newly-constructed groups of houses built to rent* Provide for the release of the individual properties without impairment
of the insurance on the remainder* In the same manner provide for
continuation of the mortgage insurance on the individual properties
released*
(c) Authorize the insurance of a blanket mortgage up to
#200,000 on groups of houses built to rent with an option to purchase.
Provide for releases and continuation of insurance in the same manner
as in (b) above*
(d) Provide that the iBmrlrnnm rate of interest on mortgages
insured on apartments or groups of houses shall not exceed 5 per cent*
4* ikicouragement of Limited-Dividend Housing Companies
Under the provisions of the National Housing Act applicable
to the insurance of mortgages up to #10,000,000 on limited-dividend
projects, some #50,000,000 of rental housing has thus far been built
or is in various stages of construction or financing* The mortgages
range from approximately #200,000 to #1,750,000, and the projects
comprise variously from about 50 to 500 family units* The rate of
interest on these large mortgages has not in any case thus far
exceeded 4j per cent*




-8The character and success of the properties already completed and in operation make it evident that the limited-dividend
mechanism is susceptible of much more extensive development in the
building of large-scale housing properties that give the owners a
fair return on a moderate scale of rentals*
The phrasing of the limited-dividend provisions of the
act, however, is ambiguous* Particular difficulty is encountered
because the phrase "persons of low income" is used in connection
with properties from which an economic rent must be derived* The
following changes are suggested by way of clarification and explicit definition:
(a) Eliminate the phrase "persons of low income."
(b) Limit the mortgage insurance to #1,200 per room*
In practice the mortgages have averaged less than $1,000 per room,
but the higher figure is suggested to cover exceptional cases in
the few large cities where higher land costs and higher costs of
fireproof and elevator construction have to be met*
(c) Limit the mortgage insurance to 80 per cent of the
estimated value of the project when completed*
(d) Provide that the maxiimim rate of interest on mortgages insured on limited-dividend projects shall not exceed 5
per cent*
(e) Provide that mortgages may be insured on groups of
houses built for sale by limited-dividend companies*




-9-

(f) Authorise ¥Ek debentures to be issued, in event
of default by limited-dividend companies upon assignment of the
mortgage instead of requiring the mortgagee or bondholders to
wait for formal foreclosure proceedings* This will greatly simplify
and accelerate the financing of large projects and at the same time
enable the FHA to act more promptly to protect its own interest in
the defaulted mortgage*
5* Stimulation of Large—Scftle Private Financing
The mortgages on large-scale housing projects built by
limited-dividend companies are for the most part too large for the
ordinary lending institution to handle as single pieces of financing*
If bonds or debentures were issued against the large-scale mortgages
insured by the FHA, however, thqy would have a ready and widespread
market among both institutional and individual investors.
The National Housing Act provides for the chartering of
national mortgage associations with authority to issue debentures
against mortgages insured by the FHA, but restricts the associations
to the purchase and sale of mortgages originated by other institutions* The associations themselves are given no authority to
originate loans* Because of this and other hampering restrictions,
no national mortgage association has yet been organized* The following changes are suggested to make the provision for national mortgage associations effectives




-10(a) Authorize the associations to mate loans to limiteddividend companies or public-housing agencies on mortgages insured
by the 5HA*
(b) Authorize the associations to issue debentures to
the extent of BO times their capital and surplus against the security
of 90 per cent of their holdings of mortgages insured by the FHA,
government obligations, and cash* The present provision for debentures
to the extent of 12 times capital and surplus does not afford an adequate basis of earnings*
(c) Providethrough funds advanced by the RFC or otherwise
for the immediate organization by the FHA of a national mortgage
association with a capital of #25,000,000. This would make available,
through the sale of debentures, approximately #500,000,000 of private
funds to finance private construction*
(d) Provide that the #2,000,000,000 of mortgage insurance
which the M A is authorized to issue shall apply to the amount of
insurance outstanding at any time instead of constituting a flat limitation as at present, and eliminate the provision Toy which the contingent governmental guaranty will expire on July 1, 1939* The
removal of these two limitations w i H (1) assure national mortgage
associations a continuous field of operation which the present form
of the act does not mate possible and (2) remove the doubt as to




-n-

whether the contingent guaranty will be extended from time to time.
These changes do not increase the amount of the contingent guaranty
provided in the existing legislation.
6. Concentration of 1HA on Hew Construction
The- #2,000,000,000 of mortgage insurance which the IHA
is authorized to issue is apportioned equally between newlyconstructed housing and older housing• In order to restrict to
new construction the high-percentage financing which the act makes
possible for mortgage-lending institutions generally, provision
might be made that after a given date—say April 1, 19S8—mortgages
will be insured by the M A only in cases where the application for
insurance is submitted prior to the beginning of construction.
7. Implementation of the Program
Some of the measures outlined in the preceding paragraphs
involve amendments to the National Housing Act; others involve
simply changes in existing regulations. Considered in relation to
existing provisions of the National Housing Act, the Federal
Reserve Act, the Federal Home Loan Bank Act, and enabling legislation already enacted in the great majority of the States, the
adoption of these measures would for the first time provide all
the financial mechanisms essential to a comprehensive housing
program.




-12-

It is a big program that the measures contemplate
a program designed to arrest the interest of private enterprise
and private capital in a big way. By such means as those outlined, large and continuous operations in housing, which are not
feasible under our present limited methods of financing, are
decisively pat on a practical basis*
Only lay large and continuous operations can reductions
in the cost of housing be effected through economies in labor,
materials, and overhead, as irell as in financings And only by
such economies can modern housing be built at a price that the
mass of the people can afford to pay.
If the measures suggested are adopted, therefore, the
way would be paved for the President to call into conference
representatives of the construction industry, the building-material
industries, and the building-trades workers, and arrive at understandings based on volume of production and continuity of employment ratherthan on high profit margins and high hourly w&geg.
There would be some basis on which mutual concessions might well
be made to the advantage of all parties at interest, for housing
constraction could become more nearly a year-round occupation•
This prospect would be heightened if the President were
first to call into conference a few representative industrialists,
such as General ¥ood of Sears-Roebuck & Co., who are alert to the




-13-

housing problem of their employees and actively seeking means
to prevent recent increases in wages from being largely or wholly
absorbed, as they are at present, by increases in rents* There
are several large corporations which have indicated that thqy
would sponsor the construction of moderately-priced housing for
purchase or rent by their employees, provided that the evils of
the ft company town11 could be avoided. The program outlined here
would enable these corporations to undertake precisely the kind
of sponsorship they have in mind*
Thus the point of leverage would be provided for housing
construction of a more or less "wholesale" character, and stimulating examples of the possibilities of large operation be afforded
in various industrial communities*
The extent to which large operations ware undertaken in
the near future would depend mainly upon whether the President
were able to effect something in the nature of a "gentlemen* s
agreement" on the part of building labor and building-material
manufacturers* On the part of labor* the unions might be asked
to permit their members to contract for monthly employment at a
wage 10 per cent below the hourly and weekly wage* or contract
for 40 weeks of employment at a 20 per cent reduction* The
unions might also be asked to protect home builders and buyers




against costly delays arising from jurisdictional disputes, and
to make more liberal terms with respect to the number of apprentices and thetferms of admission to the unions.




On the part of building-material manufacturers, price
reductions might be asked on orders in various stated quantities,
and a more efficient and more economical arrangement sought with
respect to the various middle-men now ^protected" on orders emanating from their communities regardless of either the source of the
orders or their size* An understanding might also be reached with
the manufacturers in regard to the profit margin on various building materials* During the past year some of these margins have
been extraordinarily high*
The successful outcome of these conferences* and the immediate initiation of such a building program as would then be
possible, would give a vigorous stimulus to business generally and
to further increases in the national income* and supply the answer
to the question of whether there is any way to assure a much larger
volume of industrial production and employment in 1938 than is now
in prospect*

FACTORY EMPLOYMENT, HOURS, AND EARNINGS
PER CENT OF
1923-25 AVERAGE

PER CE*IT OF
I923-25«AVERAGE

105

105

100

100

95

95
NU USER OF EMPLC YEES

90

90

85

85

80

80

75

75
WEEKLY PAYROLLS

70

/

70

V

65

65

60

60

CENTS PER HOUR

CENTS PER H6UR

64

64

J

60

AVEF AGE HOURLY E ARNINGS

60

/

*•—"^—i

56

56
HOURS PER WEEK

HOURS PER WEEK

AVE RAGE HOURS P :R WEEK

40

*S\

40

37*

37i

35

35

32?

32i




1934

1935

1936

1937

INDUSTRIAL PRODUCTION
F R INDEX, BASED ON PHY8ICAL VOLUME. ADJUSTED FOR SEASONAL VARIATION, 1923-25 * 100
-i MONTHLY V~

PER CENT

20

1921




1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1933

1936

1937

WHOLESALE PRICES
STAPLE COMMODITIES- MOODY'S DAILY INDEX
DEC. 31,1931 « 100

PER CENT

PER CENT

240

240

220

220

200

200

180

180

160

160

140

TT

F. ' M. ' A. ' M.

J.

J.

A

S.

0.

N. 0.

J.

F.

M.

A.

M.

J.

J.

A. S.

0.

i_^J 140

N. 0

ALL COMMODITIES-B.L.S. WEEKLY INDEX
1926•100

100

100

75

75

70




J.

A. x S.

0.

N. D.

J.

F.

M.

A,

M.

J.

J.

A.

S.

0.

N. 0

70

DOMESTIC CORPORATION SECURITY ISSUES

MILLIONS
OF
DOLLARS

MILLIONS
OF
DOLLARS

Quarterly, 1919-1937

4000
3500
3000

4000
1

>

3500

523 REFUNDINC
232 N EW CAPITA L

3000

i

2500

2500

j

2000

2000

1500

1500

1000
500




0

1000

—EH?

iL
Hi

500

II mm

1919

1921

Z&& ^ ^
1923

1925

£ B

1927

SOURCE:COMMERCIAL AND FINANCIAL CHRONICLE

! i

1929

> K I So

1931

gqocoa

1933

1935

1937

0

THOUSANDS OF
DWELLING UNITS

NEW NON-FARM DWELLING UNITS BUILT
! 1

IOOO




THOUSANDS OF

omuNGUNrrs
1000

4

900
800
700
600
500

1920

1922

1924

1926

1928

1930

1932

1934

1936

1938

DEPOSITS AT BANKS IN UNITED STATES
BILLIONS ()F DOLLARS

(

JUNE 3 0 THROUGH 1928, CALL DATES THEREAFTER)

BILLIONS Of " DOLL

60

60
Total Deposits

s
>

50
/

50

/

r

40

40

Tirrie D gposi ts

30

30

^ — •

20

— ——

^

si

u-

20

mmmm**l

--

******

Demc3nd [)eposits

10

10

0
1920

1922

1924

1926

NOTE ALL FIGURES EXCLUDE INTERBANK DEPOSITS




1928

1930

1932

1934

1936