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Office Correspondence
Governor Eccles
FEDERAL RESERVE
BOARD
Date
Subject:
January 7, 1956
1S36 Housing Program
om
The attached summary follows point by point the sequence
of the longer memorandum, but is confined to matters that would
require changes in either legislation or regulation«
As you know, the program looks toward a very much larger
volume of construction than is practicable under existing measures,
without, however, involving any fundamental changes in these measures « Nevertheless, a good many details are involved in giving
full effect to the larger program.
My experience in dealing with the Senate and House committees on the Housing Bill would lead me to believe that more time
is saved than lost by spelling out in a bill exactly what is wanted.
You will recall that the brevity attempted by the President in the
Housing Bill as originally introduced got us into serious misunderstandings and protracted discussions in the course of the hearings
on the bill.
Copies of this summary have been sent to the same persons
who received the original.
Preliminary and confidential
January 6, 1936 (JMD)
SUMMff OF SUGGESTIONS FOR 1 9 5 6 HOUSING PROGRftji
Title I of National Housing Act
1. (a) Extend Title I from April 1, 1956, to July 1, 1957.
(b) Reduce insurance fund from #200,000,000 to $100,000,000.
(c) Confine insurance strictly to loans for improvements to
real estate•
2* (a) Reduce authorized maximum interest rate £rom discount
basis of 5 per cent on annual initial debit to 4 per cent*
5» (a) Provide for insurance of loans up to 10 years, and in
amounts from #1,500 to |10,000, for structural changes
to residential property.
(b) Fix authorized maximum interest on such loans at 6 per
cent per annum.
4. (a) Establish insurance fund of $100,000,000 as revolving
fund up to July 1, 1957, to insure construction loans on
one-family and two-family dwellings where such loans do
not exceed #4,500 per dwelling unit*
(b) Limit insurance liability to 20 per cent of total amount
of such loans held by any approved mortgagee•
-z (c) Require these construction loans to be accompanied by tentative commitment for mortgage loans under Title II•
(d) Fix maximum service charge on such construction loans at
2 per cent flat and maximum interest at 5 per cent per
annum*
Title II of National Housing Act
5. (a) Revise regulation governing maximum interest on Title II
loans either by eliminating service charge of -J of 1 per cent
per annum or by fixing maximum interest at 4§ per cent per
annum, plus service charge of \ of 1 per cent per annum*
6* (a) Increase volume of loans on new construction insurable
tinder Title II from $1,000,000,000 to |5,000,000,000.
(b) Provide that debentures issued in exchange for defaulted
mortgages shall be fully guaranteed by Government as to
principal and interest, without limiting such guaranty,
as at present, to mortgages insured prior to July 1, 1937•
7« (a) Amend eligibility requirements for mortgage insurance to
require that mortgagor of property covered by insured
mortgage shall have made down payment of 20 per cent of
purchase price in cash or its equivalent; orf
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(b) If mortgage is for refunding purposes, limit amount to
aggregate mortgage indebtedness, including second and
subsequent liens, as of July 1, 1935, provided such amount
does not exceed 80 per cent of appraised value.
(c) Provide that amount of insurance on any mortgage shall not
in any event exceed appraised value of improvements exclusive of appraised value of land.
8* (a) Authorize insurance up to 25 years, and up to 90 per cent
of appraised value of property, where amount of loan does
not exceed #4,500*
(b) Require on such loans down payment of 10 per cent in cash
or its equivalent*
(c) Require on such loans that payment of an additional 10
per cent shall be fully guaranteed ty operative builder
or building contractor, or else guaranteed in several
parts mutually agreed upon by such builder or contractor
and two or more building-material manufacturers, such
guaranty to continue until mortgage has been reduced to
75 per cent of purchase price of property*
(d) Authorize national banks and Federal savings and loan
associations to make, purchase, and sell loans so insured
and guaranteed, and national mortgage associations to purchase and sell loans so insured and guaranteed*
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9.
(a) Provide for Government to absorb cost of insurance, including retroactively that already in effect, where amount
of mortgage does not exceed #4,500 and where mortgage is
insured prior to July 1, 1937•
10. (a) NOTE: Some suggestion has been made that insurance of
mortgages on property constructed prior to passage of
Housing Act be discontinued• Author of this memorandum,
however, recommends that no change be made in existing
provisions governing insurance of such mortgages*
11. (a) Discontinue government-financed advertising and salespromotion campaigns.
(b) Use part of savings thus effected to strengthen administrative personnel in charge of Title II and to provide closer
inspection of properties on which mortgages are insured.
12. (a) Do away with present compulsory requirement of separate
appraisal by Federal Housing Administration in case of
each application for insurance.
(b) Make requirement of such separate appraisal, unless demanded by mortgagee, optional with Administrator.
(c) Replace system of local-office appraisers with system
of central-office or regional-office examiners to spotcheck appraisals by approved mortgagees.
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(d) Provide that mortgagees found to be abusing approval
status, or to be lax or incompetent in making appraisals, shall be subject to having approved status
revoked, temporarily or permanently as Administrator
may determine*
NOTE: Above suggestions regarding appraisal system
could not be given effect until some time subsequent
to adoption of suggestions in preceding paragraph regarding discontinuance of advertising and salespromotion activities and strengthening of Title II
administration•
13. (a) Provide for Government to absorb cost of insurance,
including retroactively that already in effect, on
mortgages insured under Section 207 ("Low-Cost Housing
Insurance) prior to July 1, 1937•
NOTE: Suggestion has also been made that Government
grant interest subsidy of 1 per cent per annum to
sponsors of projects for which financing commitments
are made prior to July 1, 1937.
(b) Change heading of Section 207 from "Low-Cost Housing
Insurance11 to "Insurance of Mortgages on Large-Scale
Housing," and make corresponding changes in text to
eliminate "low-cost housing property and projects"
and "housing for persons of low incomes."
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(c) Allocate #10,000,000 as insurance fund to provide for
complete segregation of risks under Section 207 from
those under Section 202•
(d) Provide that $1,000,000,000 of #5,000,000,000 of insurance authorized for mortgages on new construction
may be used to insure mortgages on projects under
Section 207•
(e) Provide that mortgages insured under Section 207 may
include construction and trust mortgages.
(f) Provide that mortgages under Section 207 may cover
projects for sale as well as projects for rent.
(g) Provide that mortgage insurance on multiple-family
dwellings under Section 207 shall not exceed an
average of $1,200 per room.
(h) Provide that mortgage insurance on single-family
dwellings under Section 207 shall not exceed #4,500
per unit*
(i) Provide that mortgages to be insured under Section 207
shall be for not less than #100,000*
(j) Provide that debentures in exchange for defaulted mortgages under Section 207 shall be issued upon assignment
of mortgage to Administrator instead of, as now pro-
- 7 vided, upon delivery of title after foreclosure,
(k) Provide that issuance of such debentures for unpaid
principal of mortgage under Section 207 shall be in full
satisfaction of insurance claim.
(1) Provide that debentures issued in exchange for mortgages
insured under Section 207 prior to July 1, 1937, shall
have same exemption from taxes as bonds of Home Owners1
Loan Corporation.
Proposed New Title or Section of National
Housing Act
(a) Provide for insuring any lending institution against aggregate losses up to 20 per cent of loans made on slumclearance and neighborhood-rehabilitation projects.
(b) Allocate for this purpose revolving fund of $200,000,000
from housing funds available to President, or appropriate
#200,000,000 to establish such revolving fund.
(c) Authorize insurance of loans up to 12 years, in amounts
from $100,000 to $1,000,000, with interest not in excess
of 5 per cent per annum, and with principal payable in 20
equal semi-annual installments beginning midway in third
year or earlier.
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(d) Provide that interest and sinking fund shall be first
charge after taxes on all rental or other income•
(e) Provide that no lending institution shall be entitled
to benefits of insurance to extent it may hold lien
on property included in insured project or to extent
it may be creditor of ajiy owner or owners of such
property*
(f) Provide that Government shall grant interest subsicfy
of 1 per cent per annum on slum-clearance and neighborhoodrehabilitation projects for which financing commitments
are made prior to July 1, 1937•
Title III of National Housing Act
15• (a) Authorize Federal Housing Administrator to purchase pre-
ferred stock up to 90 per cent of capital of national
mortgage associations organized prior to July 1, 1957•
(b) Provide that such subscription shall be contingent upon
prior subscription of not less than $1,000,000 of capital
stock by financial institutions having state or federal
supervision, or investment dealers registered with
Securities and Exchange Commission.
(c) Provide that Administrator shall not subscribe to capital
of more than one association in each Federal Reserve district
— 9—
and shall not subscribe to more than #20,000,000 of
capital in any one association*
(d) Provide that dividend on preferred stock purchased ty
Administrator shall not exceed 4 per cent per annum,
but that such dividend shall be cumulative•
(e) Allocate to Administrator for use in purchasing preferred stock of national mortgage associations
#100,000,000 of housing funds available to the President, or appropriate #100,000,000 to establish fund to
be used for this purpose•
(f) Make provision whereby preferred stock purchased by
Administrator may be retired at any time after one year
from date of such purchase and replaced by ordinary
capital stock privately subscribed, such private subscriptions not to be limited, however, to institutional
investors and investment dealers•
(g) Increase amount of debentures mortgage associations may
have outstanding from 12 times par value of outstanding
capital stock to 25 times par value of such stock, or
else remove altogether limitation on outstanding debentures
in relation to capital•
(h) Provide that banks may underwrite or deal in debentures
of national mortgage associations in same manner as in
direct or guaranteed obligations of Government*
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(i) Provide that debentures issued by national mortgage associations prior to July 1, 19S7 shall have same tax exemption
as bonds of Home Owners1 Loan Corporation.
(j) Provide that not more than 10 per cent of aggregate outstanding capital stock of any mortgage association may be
am&di by any one financial institution or investment house*
(K) Authorize national banks and Federal savings and loan
associations to invest in capital stock of national mortgage associations*
(1) Repeal amendment reducing minimum capital requirement of
national mortgage associations to $2,000,000 and restore
original requirement of not less than $5,000,000*
Home Owners1 Loan Act and Federal Home Loan
Bank Act
16* (a) Extend to July 1, 1957 authority of Secretary of Treasury
to subscribe for income shares of building and loan associations, but provide that such subscription shall be made only
when it appears that proceeds thereof are to be used for
loans on new residential construction*
(b) Extend from July 1, 1956 to July 1, 1957 authority of
Federal Home Loan banks to make advances to members in
order to enable such members to finance home repairs,
improvements, and alterations under provision of national
Housing Act*
-n (c) Reduce discount rate of Federal Home Loan banks for advances to members to 2g per cent, or establish differential
discount rate of J of 1 per cent as between loans secured
by insured mortgages and loans secured by uninsured mortgages •
(d) NOTE: Suggestion has been made that eligibility requirements for membership in Federal Home Loan Bank System be
re-examined and possibly amended.
Federal Reserve Act and National Banking Act
17• (a) Establish differential of \ of 1 per cent in rate of interest
to be charged the Federal reserve banks on advances to member
banks, according as notes, bonds, or mortgages having more
than 5 years to run to maturity and given as security for
such advances, «re amortized or unamortized by approximately
equal periodic curtailments or sinking-fund payments*
(b) NOTE: Suggestion has also been made that Comptroller of the
Currency and Board of Governors of the Federal Reserve System
limit member-bank investments in bonds and notes to securities
having not more than 5 years to run to maturity, unless such
securities are parts of issues having serial maturities or
sinking-fund provisions providing for retirement of issue ty
approximately equal periodic payments.
@FedFRASER