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FROM:

MR. DAIGER'S OFFICE

TO:

8/16/57
Hare is a set of three papers that I had
mimeographed on Saturday, at Hancock1 s request,
ai*d nailed under his frank to all the member*
of the House Banking and Currency Committee*
I revised considerably, for purposes that
will be evident to you, the 2-page explanatory
memorandum, which is the top item* I would
particularly suggest that you read this in its
revised form.
You will notice that a new amendment has
been added at the top of page 2 of the item
headed "Amendments Proposed by Mr« Hancock of
North Carolina** this makes clear as a matter
of law what has been true all along as a matter
of practice—namely, the limitation of mortgage
insurance on limited-dividend projects to %

Attachments^
Original to Shoreham Hotel
Copy to Office




Memorandum Explaining Why Inclusion in Wagner-Steagall Bill
of_Amendments to National Housing Act is Needed
to Stimulate Private Financing and Construction of Rental Housing

In view of the importance of encouraging the private
financing and construction of rental housing for families of
moderate income, simultaneously with the program of public housing
contemplated in the Wagner-Steagall bill, it is suggested that the
attached amendments to the National Housing Act be included in the
bill.
The first amendments are to Sections 201 and 203 respectively and extend the principle of mutiial mortgage insurance to the
very familiar and important type of small walk-up apartment properties. Except for dwellings accommodating not more than four
families, and covered by mortgages not in excess of $16,000, these
properties are now excluded from mutual mortgage insurance under
Section 203. On the other hand, they are not practicable for insurance under Section 207, the limited-dividend housing section, because
of its restrictive provisions. A great impetus to sound residential
construction all over the country would be given by the adoption of
these amendments.
An equally great impetus to sound rental projects would be
given by the other amendments. These relate to the financing by
private capital of mortgages insured under Section 207 on liniteddividend housing projects, such as the Colonial Village, Buckingham,
and Falkland developments in the suburbs of Washington. Operations
under this section of the National Housing Act have been seriously
delayed and impeded by the unsatisfactory language of this section
and Sections 301 and 302.
The language of Section 207 as it now stands has net legal
objections and led to a divergence of opinion among counsel of lending institutions. In the first place, the question has been raised
whether separate units of a limited-dividend project can be sold off
without voiding that part of the mortgage insurance applicable to
the remainder. Likev/ise, the term "persons of low income11 as used
in this section has been found difficult of interpretation, because
it is not susceptible of exact definition.
The third of the proposed amendments removes any doubt that
separate units of limited-dividend housing projects may be sold off
without impairing the mortgage insurance on the remainder* It also
eliminates the disputed term "persons of low income" and substitutes




- 2
for it a precise limitation of $1,300 per room, including "both land
and improvements, on the amount of any mortgage that may " e insured
b
under this section. Another change made by the third amendment makes
it clear that mortgages on limited-dividend housing projects may not
be insured in an amount in excess of 80$ of their estimated value.
The fourth and fifth of the proposed amendments, which are
to Sections 301 and 302, are intended to facilitate the financing of
these limited-dividend projects, which involve mortgages that have
thus far ranged from approximately $250,000 to $1,750,000. The amendment to Section 301 permits the national mortgage associations provided for in the Act to make loans on limited-dividend projects, if
the loans are secured by mortgages insured under Section 207. As the
associations would have no authority to make any other type of mortgage loan, they would not, in making these large loans on limitoddividend projects under Section 207, ba competing with building and
loan associations, banks, etc., in the making of loans on singlefamily dwellings or multi-family dwellings insured under Section 203.
The amendment to Section 302 increases the ratio of debentures
which a national mortgage association may issue from 12 times its capital
stock to 20 times. This amendment is necessary because of the small
spread between the interest paid and income received on which a national
mortgage association must operate. In no instance to date has an insured
mortgage loan on a limited-dividend project carried an interest rate in
excess of 4g per cent. The associations that would hold a large amount
-of these mortgages in their portfolios will have to sell their debentures
at a very narrow spread and it is therefore necessary to allow them a
reasonably large turnover of businass if they are to be permitted to
cover their expanses and make a fair profit. As the associations can
issue debentures only ago.inst insured mortgages, Government securities,
and cash, the increase in the ratio of debentures to capital which is
provided for in the amendment is neither excessive nor unsound. On the
contrary, the quality of these three limited classes of assets behind
the debentures, in addition to the capital of the associations, assures
investors in the debentures all the protection that is required.
No additional State enabling legislation, nor Federal lagislation applicable to national banks, is now required to permit the
national mortgage associations to enjoy a wide market for their debentures
among commercial and savings banks, trust companies, building and loan
associations, life insurance companies, and other financial institutions.
The debentures also furnish a desirable investment for individual investors, endowment funds, and individual trusts. Without these associations the principal outlet for large loans on limited-dividend projects
is the large insurance companies, which necessarily limits the market for
them. With ono or more of these associations in active operation, however, the debentures would be readily salable to all types of investors
and a larger supply of moderate-priced rental housing thereby assured.



AMENDMENTS PROPOSED BY MR. HANCOCK OF NORTH CAROLINA
Section 201 (a) of Title II of the National Housing Act is
amended by striking out the words "not more than four" and inserting
in lieu thereof the words "one or more".
Section 203 (b) subsection (2) of Title II of the National
Housing Act is amended by striking out the word "executed" end the
period at the end of said subsection and inserting in lieu thereof
the following,

"insured, or cover a multi-family dwelling and involve

a principal obligation in excess of $16,000 but not in excess of
$200,000 and not to exceed 80 per centum of the appraised value of
the property as of the date the mortgage is insured:
such

Provided, that

part thereof as may be attributable to dwelling use shall not

exceed $1,000 per room; and provided further, that the application
for insurance in respect of such mortgage shall be submitted prior
to the beginning of the construction of such multi-family duelling."
The first sentence of Section 207 of Title II of the
Uational Housing Act is amended by striking out the words "persons
of low income" and inserting in lieu thereof the words "rent or sale",
and by inserting after the word "rents," the words "conditions of sale,"
The second sentence of said section is amended by striking out the
period after the figures "203" and inserting in lieu thereof a comma
and adding the following:

"and such part thereof as may be attribut-

able to dwelling use shall not exceed $1,300 per room."

The third

sentence of said section is amended by striking out the period at the
end of said sentence and inserting in lieu thereof a colon and



2.

adding the following:

"and provided further, that the principal

obligation of a mortgage made " y a private limited dividend corporb
ation shall not exceed 80 per centum of the amount which the
Administrator estimates will " e the fair value of the property or
b
project when completed."
Section 301 (a) of Title III of the National Housing Act
is amended " y striking out the semicolon after the word "purchased"
b
in said section and inserting in lieu thereof a comma and adding the
following:

"and to make loans and advances upon real estate secured

" y mortgages and other first liens which are insured under section
b
207 of this Act and to purchase and sell such mortgages or partial
interests therein;1!.
Section 302 of Title III of the National Housing Act as
amended, is further amended by striking out the word "twelve" in
the first sentence of said section and inserting in lieu thereof
the word "twenty".




Language Stricken Out and New Language
of Sections of National Hoi - s n Act
.ig
as Modified " y Proposed Amendments
b

Section 201 (a), Subsection 2 of Section 205 (b), and Section 207
of Title II, and Sections 301 (a) and 302 of Title III of the
National Housing Act will read as follows after being amended
in accordance with proposed amendments:
(the amendments are shown " y lining out language stricken
b
from the present Act and underscoring new language)
Section 201. As used in this title—
(a) The term "mortgage" means a first mortgage on real esta.te in fee
simple or on a leasehold (l) under a lease for not less than ninety-nine
years which is renewable, or (2) under a lease having a period of not
less than fifty years to run from the date the mortgage was executed,
upon which there is located a dwelling for not more-than four- one or more
families which is used in whole or in part for residential purposes,
irrespective of whether such dwelling has a party wall or is otherwise
physically connected with another dwelling; and the term "first mortgage"
means such classes of first liens as are commonly given to secure
advances on, or the unpaid purchase price of, real estate tinder the laws
of the State in which the real estate is located, together vrith the credit instruments, if any, secured thereby.
Section 203 (b) (2)
initial

Involve a principal obligation (including such

service charges and appraisal and other fees as the Adminis-

trator shall approve) in an amount not to exceed $16,000, and not to




- 2exceed 80 per centum of the appraised value of the property as of the
date the mortgage is Sxee-ated insured; or cover a multi-family dwelling
and involve a principal obligation in. excess of $16,000 "but not in. excess
oJL $200,000 and not to exceed 80 per centum of the appraised value of
the property as of the date the mortgage is insured:

Provided, that

such part thereof as_ may "be attributable to dwelling use shall not
exceed $1,000 per room; and provided further, that the application for
insurance in. respect of such mortgage shall b_e submitted prior to the
"beginning of. the construction of such multi-family dwelling.
Section 207.

The Administrator may also insure first mortgages,

other than mortgages defined in section 201 (a) of this title, covering property held "by Federal or State instrumentalities, private limited
dividend corporations, or municipal corporate instrumentalities of one
or more States, formed for the purpose of providing housing for persons
ef-lew-ineeme rent or sale which are regulated or restricted "by law or
"by the Administrator as to rents, charges, capital structure, rate of
return, or methods of operation-* tp_ such extent and in such manner as
the Administrator shall determine.

Such mortgages shall contain terms,

conditions, and provisions satisfactory to the Administrator "but need
not conform to the eligibility requirements of section 203 T

_ _ and such
j

part thereof as may be attributable to dwelling use shall not exceed
$1,300 per room.

Subject to the right of the Administrator to impose

a premium charge in excess of, or less than, the amount specified for
mortgages defined in section 201 (a), the provisions of sections 204
and 205 shall be applicable to mortgages insured under this section:
Provided, That the insurance with respect to any low-cost housing property



— 3 —
or project shall not exceed $10,000,OOOT | and provided further, that
_
the -principal obligation of a mortgage made by_ a private limited dividend
corporation shall not exceed 80 per centum of the amount which the Administrator estimates will be the fair value of the property or project
when completed.
Section 301 (a)

The Administrator is further authorized and em-

powered to provide for the establishment of national mortgage associations as hereinafter provided, which shall be authorized, subject to
rules and regulations to be prescribed "by the Administrator, (l) to
purchase and sell first mortgages and such other first liens as are
commonly given to secure advances on real estate held in fee simple
or under a lease for not less than ninety-nine years, under the laws
of the State in which the real estate is located, together with the
credit instruments, if any, secured thereby, such mortgages not to
exceed 80 per centum of the appraised value of the property as of the
date the mortgage is purchasedf 4_ and to make loans and advances upon
real estafre secured by mortgages and other first liens which are insured
under section 207 of this Act and to purchase and sell such mortgages or
•partial interests therein; and (2) to borrow money for such purposes
through the issuance of notes, bonds, debentures, or other such obligations
as hereinafter provided.
Section 302.

Each national mortgage association is authorized to

issue and have outstanding at any time notes, bonds, debentures, or other
such obligations in an aggregate amount not to exceed (l) twelve twenty
times the aggregate par value of its outstanding capital stock, and in
no event to exceed (2) the current face value of mortgages held by it



-4end insured under the provisions of title II of this Act, plus the
amount of its cash on hand and on deposit and the amount of its investments in "bonds or obligations of., or guaranteed as to principal
and interest by, the United States. No national mortgage association
shall borrow money except through the issuance of such notes, bonds,
debentures, or other obligations, except with the approval of the
Administrator and under such rules and regulations as he shall prescribe.