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August 11, 1948.

Board of Governors

Subject: The New Housing Act

From: G. Howland Chase and Ramsay Wood

The housing bill, signed by the President yesterday,
(H«R« 6959) contains many of the provisions of the Taft-ELlenderWagner bill* The major difference between the Act, as passed, and
the T-Er¥ bill is that the provisions for the continuation of the
public low-rent housing program and the proposed new provision for
aid in shm clearance are omitted*
The Act liberalizes the provisions for insurance of
(l) mortgages on rental properties, (2) mortgages on one~to fourfamily houses, (3) loans for repair and modernization* It also
adds a new pr9gram of insurance of yield on investment in rental
properties. The Act authorizes the Housing and Home Finance
Agency to engage in research on building codes and materials, and
permits an increase in the interest rate on GI mortgage loans from
4 to 4 1/2 P^r cent, and liberalizes the Act of August 1, 1948 which
reconstituted the Federal National Mortgage Association*
Mortgages for Rental Housing
The authority to insure mortgages for the construction of
rental housing under Title VI of the National Housing Act is extended
to March 31, 1949* and #300,000,000 of insurance authorization is
added* Mortgages under this provision may not exceed 90 VeT cent of
FHAfs estimate of construction cost as of December 31, 1947 • The
provision formerly was that the mortgage could not exceed 90 per cent
of "necessary current cost*11 The mortgage may not exceed $8,100 per
unit, compared with $1,800 per room formerly* The mortgagors under
this extension must agree not to discriminate against families with
The Act liberalizes the rental housing provisions of Title
II in various ways:
(a) It authorizes the insurance of rental housing mortgages
of up to $50,000,000 if the mortgagor is a state or
local government or a corporation supervised by a state
banking or insurance department* The maximim mortgage
insurable to other types of mortgagor remains $5*000,000,
(b) It permits utilities and other site improvements, ishich
were formerly excluded, to be included in the valuation
(c) It changes the maximum, mortgage limit from $1,350 per
room to $8,100 per unit, except that in some cases the
maxLimm limit may be$L,800 per room*


-2(d) It permits mortgages for 90 per cent of the value
of the completed project in the case of dwellings
built for n families of lower income11 or, in the
case of projects built by cooperative associations
consisting primarily of veterans, for 95 per cent
of construction cost as of December 31 > 1947• These
mortgages may run for 40 years and bear interest of
not more than 4 per cent*
(e) It authorizes the Federal National Mortgage Association
to purchase FHA-insured mortgages on any rental project*
Mortgages on 1-to 4-Family Houses
The insurance of mortgages for the construction of houses
raider the emergency provision of Title VI is discontinued* However,
the Act liberalizes the terms on which mortgages on houses built under
Title II may be insured, so that to some extent Title II takes over
the kind of financing formerly encouraged under Title VI. Under the
new Title II provisions —
(a) Any mortgage for the construction of a new house (up
to the maximum, $16,000) may run for 25 yea:rs* (The
maximum terra was fomerly 20 years for houses valued
at more than $6,0Q0»)
(b) Any mortgage to construct a house valued at not more
than |7,000 (fonaerly $6,000) may be for 90 per cent
of the value, and for houses valued at not more than
|ll,000 (formerly $10,000) mortgages may be for $6,300
plus 80 per cent of the value between $7*000 and $11,000*
(The percentage figures are not changed*)
(c) A mortgage given by a builder to finance the construction
of houses may be insured if it does not exceed $6,000 or
85 per cent of the value. A purchaser may obtain a $5
per cent mortgage on a new house valued at not more than
$6,316* These mortgages may run for 30 years and may
bear interest at not more than 4 per cent, or in the
discretion of the Administrator not more than 5 per cent*
The Act also amends Title I so that
(d) Mortgages for the construction of small houses (which
are not subject to inspection by FHA) may be insured up
to $4,500 (the limit was $3,000) and an additional
$35,000,000 of insurance authorization is made available
under Title I, thus making possible an additional
$350,000,000 of insured lending beyond the present


-3Yield Insurance
The Act institutes a program of yield insurance (adding a
new Title VII to the National Housing Act)* FHA may undertake to
pay the investor not exceeding 2 3/4 per cent, plus amortization
of 2 per cent per anmsn on rental housing for "families of moderate
income" if this amount is not earned. (Since the payment is thus
limited, a large operating loss may reduce the net return to zero
or less). Rent schedules must be approved by the Administrator.
The Administrator is authorized to take over BUJ project on which
he has paid a total of 15 per cent of the original investment, and
the investor is permitted to require the Administrator to take over
any project which has shown a loss of 5 per cent of the original
investment. Ihen the project is turned over, the investor receives
debentures bearing not more than 2 3/4 Pe** cent interest, "which are
exempt from State taxes*
The Act liberalises provisions for insurance of loans to
house prefabricators and manufacturers by providing for the insurance
of discounts of short-tena credit extended by prefabricators to
their customers.
The Act seeks to encourage "large-scale modernized site
construction" by providing for the insurance of mortgages not
exceeding 80 per cent of the total value or $6,000 for each singlefamily dwelling in the project, to be amortized during such term as
the Administrator shall prescribe. Preference in occxpancy is given
to veterans.
The Act also adds authority for the insurance of loans
up to |10,000 "with maturities -up to 7 years, for the repair, modernization or conversion of houses to accommodate two or more families.
The Act amends the Act of August 1 reconstituting the
Federal National Mortgage Association by permitting the Association
to purchase not more than 50 per cent of the FHA and GI loans made
by a lender after April 30, 194& (the figure was 25 per cent).