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A review by the Federal Reserve Bank of Chicago Business Conditions March 1972 Contents Credit rise boosts consumption 2 FHA mortgage insurance and subsidies 8 Federal Reserve Bank of Chicago Credit rise boosts consumption 2 If total outstanding instalment credit were evenly distributed among the nation’s 63 million households, the average family would owe more than $1,700 in this form. Because almost half of the families are be lieved to have no instalment debt, the aver age indebtedness of those families that do have such obligations probably is more than $3,000. When total consumer debt outstand ing in 1971 is considered—instalment debt plus noninstalment debt—the sum is almost half as large as the home mortgage debt of all U. S. families. Instalment credit extended to consumers totaled almost $118 billion in 1971. This is a record, and equal to 18 percent of the total amount of money spent on consumer goods and services in the United States last year. Repayments of instalment credit were more than $109 billion, also a record. Out standing instalment credit rose by $8.4 bil lion during the year, less than the increase in 1968, but sharply higher than the $3.0 billion rise in 1970. The General Motors strike that reduced the supply of new cars was a major factor holding down instalment credit growth that year. Instalment credit outstanding totaled about $110 billion at the end of 1971. If one were to add to this the $28 billion outstand ing in noninstalment credit—primarily sin gle-payment loans, retail charge accounts, oil company credit, nonbank credit card accounts (food and lodging), and “service” credit (mainly public utilities)—total con sumer debt would equal $138 billion at the end of 1971. The ability and willingness of consumers to incur and service instalment credit play a large role in the expansion of the general economy, especially for purchases of big ticket items, such as autos and household Extensions of instalment credit increased sharply in 1971 billion dollars Note: Quarterly data at seasonally adjusted annual rates. Business Conditions, March 1972 durables. Continued rapid growth in con sumer instalment credit will be necessary in 1972 if substantial improvement in busi ness activity is to be achieved. Early indi cations suggest consumer borrowing is con tinuing at a high level. Uses of in sta lm en t credit At the end of 1971, instalment credit out standing equaled 14.5 percent of fourthquarter disposable personal income (after tax income) on an annual rate basis. This ratio was near the average for the 1965-71 period. From World War II to 1965, instal ment credit had increased more rapidly than income. In 1955, the ratio of outstanding instalment credit to disposable income was 10 percent; in 1950, less than 7 percent. The long-term growth pattern of instal ment credit reflects the general availability of such loans from banks and other lenders, a willingness of consumers to incur debt to Growth in auto loans has lagged total instalment credit billion dollars Note: Outstandings at year-end. Figures in bars repre sent percent. increase spending, and a rising number of families. Year-to-year fluctuations in out standing instalment credit usually have been associated with changes in consumer de mand for durable goods, especially autos. Of total instalment credit outstanding at the end of 1971, as tabulated and published by the Federal Reserve Board staff, 35 per cent was classified as auto paper, 30 percent as “other consumer goods” paper, 31 per cent as “personal loans,” and 4 percent as home repair and modernization loans. Auto loans, with $38.3 billion outstanding at the end of 1971, have comprised the larg est category of instalment credit ever since World War II. At least 60 percent of all new cars, and about 50 percent of all used cars, are purchased on instalment contracts. In addition, a substantial portion of other car purchases probably involve credit. Although auto loans continue to make up the largest category of instalment credit, their share of the total has declined grad ually since the mid-1950s. In 1955, auto loans accounted for more than 46 percent of all instalment credit, whereas in 1971 they represented 35 percent. In 1958, 1961, and 1970, auto credit outstanding declined in absolute terms because of reduced sales. For the past decade, the amount of the typical new car auto loan has been almost as large as the dealer’s cost. Total “credit extended” is even larger because finance charges are added to the amount of the loan, as in other instalment contracts. Typical maturities on new car auto loans have been 36 months for many years. Twenty years ago the typical maturity was 24 months. In late 1971, about 85 percent of all purchased paper and 70 percent of all direct loans held by commercial banks carried initial maturities of more than 30 months (usually 36 months). In scattered instances, loans 3 Federal Reserve Bank of Chicago with maturities of 42 months or more have been reported. Other consumer goods loans (instalment contracts for goods other than autos), amounting to $32.5 billion at the end of 1971, have been increasing in recent years as a proportion of the total. Accounting for 26 percent of all instalment credit in 1965, this group accounted for 30 percent in 1971. “Other consumer goods paper” tradition ally has involved loans to purchase house hold durable goods. Since the late 1960s, there has been a rapid increase in mobile home and bank credit card loans, also in cluded in this category. Personal loans outstanding totaled $34.4 billion at the end of 1971. Personal loans have increased in relative importance in most years since World War II, rising from 19 percent of total instalment credit in 1950, to 25 percent in 1960, to more than 31 per cent currently. While many of these loans are used to purchase autos or other con sumer durables, a large percentage are used for medical expenses, education, debt con solidation, and other purposes. Home repair and modernization loans outstanding were $4.4 billion at the end of 1971. These loans have increased almost every year since World War II, but out standings have declined to 4 percent of the total instalment credit from more than 7 percent in 1960. Doubtless many personal loans are used for home improvements. Lenders of in sta lm en t credit 4 The great bulk of instalment credit is extended by commercial banks, finance companies, credit unions, and retailers. A large share of the loans originated by auto dealers and other retailers are sold to banks or finance companies. Some large retailers have their own finance company subsidiaries Extensions of instalment credit on personal loans and “other goods” now exceed auto paper billion dollars Note: Quarterly data at seasonally adjusted annual rates. which carry customer paper. Savings and loan associations, a negligible factor in in stalment credit until recently, have been empowered to finance mobile homes and doubtless will increase their share of this market substantially in the future. In any discussion of consumer credit it is important to recall that credit outstanding on retail 30-day charge accounts, oil cards, food and lodging cards, and service credit is included in the data on noninstalment credit. Commercial banks held 42 percent of the outstanding instalment credit at the end of 1971, and accounted for 49 percent of the increase during the year. The share held by banks has increased gradually, but irregu larly, since the mid-1950s, when they held 37 percent of outstandings. In the late 1950s, commercial banks passed finance companies Business Conditions, March 1972 as the largest holders of instalment credit, mainly because of their vigorous expansion in the auto credit field. Of the $46 billion of instalment credit held by commercial banks at year-end, 47 percent was in auto loans. This ratio has declined steadily since 1965, when it was 55 percent. In the tight credit period of 1969, some commercial banks stopped purchases of auto paper and made only selected direct loans to their own customers. Purchased paper declined from 65 percent of auto paper held by banks in 1965 to 60 percent at the end of 1971. With the rise in bank liquidity in 1971 and continued sluggish de mand for business loans, some banks re sumed their purchases of dealer auto paper. The second largest type of instalment credit extended by banks is personal loans. This category, at $11.6 billion in 1971, has increased gradually relative to the total, and now accounts for 25 percent of bank Banks and credit unions have a growing share of instalment credit billion dollars 120 100 80 15 11 60 40 20 0 n er I960 retailers and others 13 ----credit unions 29 finance companies 42 commercial banks 34 -9 36 39 16 40 1966 1971 Note: Outstandings at year-end. Figures in bars rep resent percent. holdings of instalment credit. Within this category are bank check credit plans of various sorts with total outstandings of $1.3 billion at year-end. “Other consumer goods” credit held by banks at the end of 1971 totaled $9.8 billion. The bulk of this consisted of mobile home loans ($4.4 billion) and bank credit card loans ($3.5 billion). Because of the growth of these newer types of instalment credit, this category of loans now accounts for more than 21 percent of bank holdings, after rising steadily from 14 percent in 1965. Bank holdings of home improvement loans have continued to creep up in dollar amount, while declining continuously as a proportion of outstandings. From 14 per cent of bank instalment loans in 1950, home improvement loans have declined to 6 per cent of the total today. Finance companies holding consumer paper are of three major types: (1) “In dependent” sales finance companies that “floor-plan” dealers and purchase customer retail paper. (Although called “indepen dent” to differentiate them from the “cap tives,” these companies may be controlled by financial holding companies.) (2) “Cap tive” sales finance companies that are sub sidiaries of auto manufacturers, appliance manufacturers, and large retailers. (3) Con sumer or “personal” finance companies that mainly make personal loans, sometimes called “small loan” companies. Frequently, finance companies engage in both consumer finance and sales finance activities. Separate data are not available for instal ment credit holdings of the various types of finance companies. But some of the largest sales finance companies announced within the past two years that they were withdraw ing from the field of auto credit, their main business historically. This gap has been 5 Federal Reserve Bank of Chicago filled mainly by the banks, the captive fi nance companies, and credit unions. Taken as a group, finance companies held $32 billion in instalment loans at year-end. Of this total, $10 billion were in auto loans, $7 billion in other consumer goods paper, and $15 billion in personal loans. Finance companies held 53 percent of outstanding auto loans in 1955. This share has dropped to less than 27 percent currently, mainly holdings of the captives. Credit unions held $14 billion in instal ment loans at the end of 1971. Their share of the total has increased steadily for more than two decades—from 4 percent in 1950 to 9 percent in 1960, and to 13 percent cur rently. They accounted for 20 percent of the rise in outstandings in 1971. More than one-third of credit union in stalment loans are auto loans. Most of the rest of their loan portfolio consisted of per sonal loans with no purpose stated. Because most credit unions are sponsored by private employers for the benefit of their employ ees, they are less likely to take title to autos or other goods. They often require the same type of wage assignments that are used to some degree by most lenders to secure loans to consumers. Retailers held $15.5 billion in instalment loans at the end of 1971, about 14 percent of total outstandings. The retailers’ share was larger in the 1950s, but has not changed significantly in recent years. Auto dealers hold less than 1 percent of auto credit. The bulk of instalment credit held by retailers is held by sellers of general merchandise, furniture, and appliances. Often their in stalment loans are in the form of revolving credit plan charge accounts. The recen t cred it su rg e 6 Instalment credit outstanding, seasonally adjusted, rose about $1 billion in September, and set a record monthly increase. After a moderate decline in the rate of increase in October, another record was set in No vember, when outstanding credit rose $1.3 billion. For the three months SeptemberNovember, instalment credit rose $3.2 bil lion, seasonally adjusted, half again as much as in the June-August period. The surge in instalment credit in late 1971 was associated with record sales of new cars —more than 11 million on an annual rate basis—that followed the price freeze and the President’s recommendation that the auto excise be eliminated. But auto credit ac counted for only 40 percent of the rise in total instalment credit in the final third of 1971. Consumers were also borrowing sub stantial sums to buy household durables and mobile homes and for other purposes. Slow er growth in auto credit in December was partially offset by a larger increase for other consumer goods. Instalment credit is below past peaks relative to after-tax income percent of disposable income Business Conditions, March 1972 Despite spectacular growth in instalment credit since last August, total instalment debt is not high by historical standards rela tive to consumer income. Outstandings at year-end were 14.5 percent of fourth-quarter disposable income. This ratio was equaled or exceeded for comparable periods in each of the years 1965 through 1969. Fourth-quarter repayments of instalment credit, on an annual rate basis, were 14.6 percent of disposable income, less than a year earlier and less than in several pre vious years. Fourth-quarter extensions of instalment credit were 16.3 percent of dis posable income, up sharply from a year earlier, but less than in the same period of 1968. In a similar comparison for auto credit, both extensions and repayments have been at higher rates relative to disposable income in a number of years starting in the mid-1950s. In short, the rate of instalment credit use in late 1971 was quite strong, particularly when compared with the auto strike period, but was not especially high in a broader perspective. In stalm en t cred it in 1972 Financial institutions and retailers are prepared to expand instalment credit in 1972 to the extent that creditworthy con sumers wish to exploit their potential to borrow. A number of lenders have reduced rates on various classes of instalment loans in their desire to compete actively for con sumer loans. Many families remain cautious concern ing the outlook for the security of their jobs and income, and are reluctant to incur ad ditional debt. In most years since World War II, the rate of personal savings has de clined when use of instalment credit in creased. This is because personal savings are a residual obtained by subtracting spending from disposable income. More ex tensive use of instalment credit increases spending, but it does not directly increase income. In 1971, however, despite the faster rise in instalment credit, the saving rate was 8.1 percent, the highest since 1946 and well above the long-term average of about 6 percent. The savings rate did decline in the fourth quarter, when instalment credit growth was rapid, but only to 7.8 percent. The bulk of the increase in consumer sav ings in 1971 was in the form of bank de posits and other liquid assets. Incomes have continued to increase at about 8 percent annually. Many families that would like to purchase new homes, autos, and other dur able goods are holding back awaiting clari fication of the economic future. Many of those who decide to increase spending in 1972 will rely, in part, on instalment credit. 7 Federal Reserve Bank of Chicago FHA mortgage insurance and subsidies The Federal Housing Administration (FHA) has helped to finance the purchase of more than 10 million homes and the construction of more than 1.6 million apartment units since the agency was authorized by the Na tional Housing Act of 1934. During the last two decades, a long series of amendments to the original act have greatly broadened the scope of FHA operations. Today, mort gages are insured, and rental and mortgage payments are subsidized, under 16 sections of the National Housing Act. These pro grams may be simplified and consolidated if pending legislation is enacted. FHA programs are now classified offici ally into two broad categories—unsubsidized and subsidized. Under subsidized programs, in addition to insuring mortgages, the fed eral government assumes a portion of re quired monthly payments. First introduced in 1961, subsidized programs have grown rapidly since 1966. They accounted for about two-thirds of all FHA insurance writ ten on new construction in 1970 and 1971. Unsubsidized programs, however, accounted for 90 percent of insurance written on exist ing properties. FHA p ro g ram s in ou tline 8 FHA insurance is provided for loans on homes and apartments that meet stipulated requirements regarding qualifications of the borrower and the nature of the property. The maximum amount of a loan is deter mined by the value of the property, as indi cated by an FHA appraisal, minus a re quired downpayment. In addition, the borrower must pay an insurance premium amounting to one-half of one percent of the outstanding value of the loan. Because of insurance against loss on loan principle in the event of foreclosure, lenders that make FHA loans are willing to offer lower downpayments and longer maturities on these loans than on conventional mortgages. Housing starts in 1971 broke record set in 1950 million units Business Conditions, March 1972 The maximum interest rate on new FHA loans is set by the Secretary of Housing and Urban Development (HUD). This rate is changed periodically to maintain it at a level competitive with rates on alternative investments. The current FHA rate of 7 percent was set in February 1971. The con tract rate on conventional mortgages aver aged around 60 basis points above the FHA rate during 1971. Sometimes there is a serious lag in adjust ing the FHA rate to market rates. During periods of “tight money,” when the spread between the FHA rate and market rates widens substantially, loanable funds are di verted to conventional mortgages or to other investments. Lenders may compensate for this spread by charging “points” ; that is they may purchase FHA loans at a dis count. But sellers of new houses may have to absorb the discount by lowering their profit margins, which they can do only to a limited extent. Moreover, many lenders are reluctant to make loans at deep discounts, believing this an unsound practice. Of the total amount of FHA loans out standing at the end of 1970, 23 percent were held by mutual savings banks, 20 percent by federal credit agencies, including the Federal National Mortgage Association (FNMA), 19 percent by insurance companies, 15 per cent by commercial banks, and 14 percent by savings and loan associations. In 1970, approximately 70 percent of all FHA home mortgages and 55 percent of all FHA rental project mortgages were originated by mort gage companies, who sell these obligations to investors. In the years 1939-41, FHA programs ac counted for almost 30 percent of total housing starts in the United States. During the Second World War, when civilian con struction was severely restricted by material Subsidized housing now accounts for more than half of FHA mortgages on new construction thousand units allocations, the proportion of FHA starts rose sharply, reaching a peak of 76 percent in 1943. Immediately following the war, conventional housing starts increased rap idly, and many veterans were able to qualify for mortgages under the new Veterans Ad ministration (VA) loan guarantee program. The result was a sharp decline in FHA ac tivity. In 1946, FHA starts accounted for less than 7 percent of the total. Since the late 1940s, FHA-financed hous ing starts have fluctuated between 12 and 30 percent of the total. In 1949, FHA starts represented about 24 percent of total starts. The proportion declined steadily to about 14 percent in 1957. In 1958, influenced by a reduction of almost 30 basis points in the spread between the FHA ceiling rate and conventional mortgage rates, the propor tion of FHA starts rose to over 21 percent of the total. Starting in 1959, however, the proportion again began to decline and bot tomed out at 12 percent in 1964. Since 1965, FHA starts have experienced a resurgence, primarily because of the growth in FHA Federal Reserve Bank of Chicago subsidy programs. In 1970, FHA starts ac counted for over 28 percent of total starts. In 1971, when a record 2.1 million housing units were started, the proportion was about 25 percent of the total. . . . and average maturities are longer than on conventional mortgages number of years The 203 p ro gram By far the most important FHA program that does not involve government subsidies is the Section 203 program which covers one- to four-family owner-occupied hous ing. Almost 9 million homes, represent ing some 80 percent of all FHA mortgages, have been insured through this program. Virtually all Section 203 homes are single family units. Approximately two-thirds of the mortgages insured have been on exist ing structures. Insurance on a 203 loan is underwritten through a “mutual” mortgage insurance fund which pools the risks of individual lenders. The mutual fund is self-supporting, and from previously collected premiums the FHA has paid dividends to borrowers after the termination of their mortgage contract. Downpayments on FHA mortgages are much lower . . . percent of sales price Loan terms under 203 are determined by statute. The minimum downpayment on a new home currently is 3 percent of the first $15,000 of appraised property value, 10 per cent of the value between $15,000 and $25,000, and 20 percent of the value over $25,000; mortgages can carry maturities of up to 35 years; the maximum loans allow able are $33,000 for a one-family property, $35,750 for a two- or three-family property, and $41,200 for a four-family property. In 1934, when the 203 program was established, the minimum downpayment was 20 per cent, the maximum maturity 20 years, and the maximum loan allowable $16,000. Over the years, average loan terms under 203 have been more liberal than those on conventional mortgages. In 1971, downpay ments averaged 8 percent of the total pur chase price of an FHA home, while for a conventionally financed home the average was 26 percent. In addition, FHA loans bore original maturities of 30 years, four years longer than the average on conven tional mortgages. Business Conditions, March 1972 The typical 203 family had four members, a gross annual income of $12,900, a $21,000 mortgage, and a monthly mortgage pay ment of $210 in 1970. The family’s cash in vestment in the home, which includes the downpayment plus closing costs, amounted to $2,250. In addition to Section 203, the FHA in sures mortgages under a variety of other programs that do not involve subsidies. Some of the programs cover specialized types of housing, such as condominiums and cooperatives. Others cover housing in geo graphical areas where the loan risk is un usually high, such as in urban renewal areas. Still others cover housing for specific groups of individuals, such as the elderly, the handicapped, or servicemen. Many of the programs have terms which are more liberal than under the 203 program. Through 1971, loans on approximately 1.8 million units had been insured under these programs. the Below Market Interest Rate program (BMIR). The BMIR program, which allows private developers to obtain subsidized in sured mortgage loans, operates by insuring loans made directly by the federal govern ment to builders at less than market rates of interest. Like public housing, the pro gram is restricted to rental units. During construction of a BMIR project, the mortgagor pays a market rate of interest on his loan. Once construction is completed, however, and the units are occupied, the interest rate is reduced to 3 percent. The availability of a 3 percent loan per mits the landlord to charge rents which are $30 to $40 per unit below the levels that would have been required had the units been financed at the market rate. Annual income limits for admission to a BMIR project are several thousand dollars higher than the income limits for public housing, which currently average between $4,000 and FH A-subsidized pro g ram s Prior to 1961, subsidized housing in the United States was almost exclusively public housing. Under the conventional public housing program, started in 1937, local gov ernments construct low-cost rental units using funds provided through the federal government. Today, public housing also in cludes a number of programs—such as the Turnkey and leasing programs—under which private groups may construct and manage projects. The number of units pro vided under these programs has expanded rapidly since 1968, while the number of units under conventional public housing has been declining gradually. There are now close to 1 million public housing units in the United States. In 1961, legislation enabled the FHA to enter the subsidized housing field under Mortgage rates have declined from record highs of 1970 percent Federal Reserve Bank of Chicago 12 $5,000 for a family of four. Approximately 200,000 units have been constructed under the BMIR program. In 1965, another FHA subsidy technique, rent supplements, was introduced. Under the rent supplement program, tenants are required to pay 25 percent of their income toward rent. The difference between this amount and the “fair market” rental value of the apartment is paid to the landlord by the FHA as a rent supplement. Should the family’s income rise to a point where this difference is zero, the family loses the sub sidy but may continue to live in the unit. Under public housing regulations, the family is supposed to move out if its income rises above maximum permissible levels. Mortgages on rent supplement projects are insured through unsubsidized FHA pro grams since the subsidy is not related to the mortgagor’s interest payments. Income limits for admission to the program are comparable to those for public housing. To be eligible, a prospective tenant must be elderly, handicapped, displaced by govern ment action, or currently living in substan dard housing. The typical tenant of a rent supplement unit pays $50 per month in rent and receives a monthly government subsidy of $85. A significant development in FHA-subsidized housing occurred when the Housing and Urban Redevelopment Act of 1968 established two new programs for low- and moderate-income families. These programs were authorized under Sections 236 and 235 of the National Housing Act. annual family income, less a 5 percent de duction for various withholdings, less any earnings of children, and less a $300 de duction per child. The FHA pays a sub sidy, amounting to the difference between the tenant’s payment and the “fair mar ket” rent for the unit, to the mortgage lender in the form of an interest payment. The maximum subsidy permitted on an en tire project is limited to an amount which reduces the mortgagor’s interest rate to 1 percent. To qualify for the interest subsidy, the landlord must agree to reduce rents be low “fair market” levels. Program regula tions stipulate that rental payments to the landlord in excess of an amount that would be charged under a 1 percent mortgage must be returned to the Secretary of Hous ing and Urban Development. Income limits for admission to a 236 proj ect range up to 135 percent of the income limits for public housing. The typical 236 family had three members, a gross annual income of $5,300, and a $115 monthly rental payment in 1970. The average per-unit sub sidy, paid to the mortgagee by the federal government, was $75 a month. Every two years the family’s income must be reex amined for the purpose of adjusting the rental and subsidy payments. Up to 20 per cent of the units in a 236 project can be occupied by tenants receiving rent supple ment payments. Eventually, the 236 pro gram is expected to replace the BMIR pro gram. In fact, since mid-1970, no new BMIR projects have been approved. The 2 3 6 p ro g ra m —re n ta l su bsidies The Section 235 program, called the homeowner assistance program, is the first major subsidized ownership program in the United States. Covering new and existing one- and two-family houses, the homeowner Under the Section 236 program, called the rental subsidy program, tenants pay 25 percent of their “adjusted” income towards rent. “Adjusted” income is defined as gross The 235 p ro g ra m —hom e su b sid ies Business Conditions, March 1972 Characteristics of three FHA programs in 1970 Program 203 235 236 Unsubsidized subsidized subsidized ownership ownership rental one- to four-family one- and two-family five or more units Mortgages insured 300.000 105,000 100,000 new construction 56,000 78.000 93,000 existing structures 244.000 27.000 7,000 Average mortgage (new construction) $21,300 $16,745 $ 2,250 $ 30 years 35 years $ 1,080 $ 500 $ $ 90 $ 75 Characteristic Structure eligible $16,400° Average mortgagor investment^ Average length of mortgage Median monthly gross family income Average monthly payment by tenant 210 Average monthly subsidy n.a.—Not available. °Per unit. b|ncludes required downpayment plus closing costs. makes a mortgage payment equal to 20 per cent of his family’s “adjusted” income. The maximum subsidy payment by the federal government is equal to an amount that would reduce the rate of interest on the homeowner’s mortgage to 1 percent. Mort gages are limited to $21,000 for a four-per son household. The “downpayment,” in cluding closing costs, averaged only $125 per family in 1970. As in the rental assist ance program, the subsidy payment is made to the mortgage lender, and income limits for eligibility range up to 135 percent of the income limits for public housing. The typical 235 family had four members, a gross annual income of $6,000, and a mortgage of $17,000 in 1970. The mortgage n.a. 125 lender received a $90 m o n th ly paym ent from the family and a $75 monthly subsidy from the federal gov ernment. Owners’ in comes must be reex am ined every two years for the purpose of making adjust ments in the assist ance payments. Su b sidized housing gro w s In 1968, units rprovided by FHA subsi$ 44Q dized programs acc ount ed for a p proximately one-third $ ns . . , new subsi , • of- total dized, ,housing. The yr remaining two-thirds came under various other programs, pri marily public housing and programs admin istered by the United States Department of Agriculture. Almost all the FHA housing was provided under the BMIR and rent supplement programs. The grand total for all new subsidized housing in 1968 amounted to 175,000 units, or just over 10 percent of total housing starts. In 1971, total new subsidized housing amounted to about 450,000 units, or about 22 percent of total housing starts. FHAsubsidized programs accounted for roughly three-fifths of all new subsidized housing, and virtually all the FHA-subsidized units were provided under the 235 and 236 pro grams. From only a few units in 1968, al most 260,000 new units were provided by the 235 and 236 programs in 1971. n.a. & 13 Federal Reserve Bank of Chicago More than one-fifth of last year’s record-level housing starts were subsidized million units total housing starts unsubsidized starts subsidized starts 1.6 - 1.2 .8 91% 86 .4 0 H 1967 1968 1969 1970 Note: Figures in bars represent percent. 14 Despite the rapid expansion of FHA sub sidy programs, some serious problems have arisen in their implementation. First, sub standard units have been constructed as the result of questionable practices of contrac tors and appraisers. Second, widespread resistance in many areas to site selection procedures has led to conflicts between resi dents and the builders proposing the con struction of FHA-subsidized housing. Fi nally, it is maintained that the programs have disproportionately benefited moderateincome families at the expense of low-in come families. Housing analysts have projected that as many as 600,000 subsidized units may be constructed for the year 1972. However, the Secretary of Housing and Urban Develop ment has recently indicated that fewer units would be approved, perhaps only 350,000, unless the abuses are corrected. Pending le g islatio n The administration of FHA insurance has become increasingly complex in recent years, particularly since the advent of the subsidy programs. To alleviate this prob lem, the Senate recently passed the proposed Housing and Urban Development Act of 1972, a bill that would simplify and con solidate FHA programs. Under the proposed act, there would be four basic programs. Two would involve mortgage insurance only, and two would involve government subsidies in addition to mortgage insurance. Besides the four basic programs, there would be a number of specialized programs, including ones for health care facilities and for mortgages designated as “special risks.” The “mutual” mortgage insurance fund, currently associated with the 203 program, would be eliminated, and all FHA insurance premiums, except for those in the “special risk” category, would be placed in a general insurance fund. In addition, the proposed legislation would permit FHA rates to vary among programs and would set up an ex perimental dual interest rate structure— one a fixed rate with discounts allowed and the other a floating rate without discounts. Conclusion Although established to operate a mort gage insurance program without government subsidies, the Federal Housing Administra tion in recent years has become increasingly involved in subsidized housing. Moreover, an increase in the number of private companies insuring mortgage loans and the establish ment of a “secondary market” for conven tional mortgages have combined to reduce lender risks normally associated with con ventional mortgages. Conventional loans also have been encouraged by recent changes in regulations which permit savings and loan Business Conditions, March 1972 associations to make low downpayment con ventional loans. Recognizing the changing role of mort gage insurance programs, the Department of Housing and Urban Development has been reorganized to combine all housing subsidy operations of the department, in cluding public housing, with those of mort gage insurance. Mortgage insurance pro grams are now officially referred to as HUD-FHA programs. Subsidized housing played a decisive role in making 1971 a record year for construc tion. It seems certain that subsidized hous ing will be a permanent, and probably grow ing, factor in the nation’s attempt to provide adequate housing for its growing population in the years ahead. 15 Fed era l R eserve B a n k of C h ic a g o Agricultural ►Letter This w e e k ly , sin g le -p a g e re v ie w of the e v e rc h a n g in g bu sin ess of a g ric u l tu re is one o f the C h ica g o Fed's oldest an d m ost respected p u b lic a tio n s. P re p are d b y s ta ff rese arch econom ists, the letter re g u la r ly co ve rs n a tio n a l an d S e ve n th D istrict e ve n ts of interest, an d rep o rts on im p o rta n t d e velo p m en ts on the in te rn a tio n a l scene a s w e ll. It e n jo ys a w id e re a d e rs h ip w ith fa rm e rs and w ith b u sin essm en an d b a n k e rs w h o h a v e an interest in a g ric u ltu re . S u b scrip tio n s a re a v a ila b le fre e of c h a rg e upon req uest. Send y o u r re q u est to: R esearch D e p artm e n t, Fe d e ra l R ese rve B a n k o f C h ic a g o , B ox 834, C h ic a g o , Illin o is 6 0 6 9 0 . BUSINESS CONDITIONS is p u b lish ed m o n th ly b y the F e d e ra l R ese rve B a n k of C h ic a g o . G e o rg e W . Cloos a n d E d w a rd W . B irg e lls w e re p r im a rily resp o n sib le fo r the a rtic le "C re d it rise boosts c o n su m p tio n ," an d P h ilip K. Robins fo r "F H A m o rtg ag e in su ra n c e a n d s u b sid ie s ." S u b scrip tio n s to Business Conditions a re a v a ila b le to the p u b lic w ith o u t c h a rg e . For in fo r m atio n co ncern ing b u lk m a ilin g s , a d d re ss in q u irie s to the R esearch D e p a rtm e n t, Fe d e ra l R eserve B a n k o f C h ic a g o , B o x 8 3 4 , C h ic a g o , Illin o is 6 0 6 9 0 . A rtic le s m a y be re p rin te d p ro v id e d source is cred ite d . P le a se p ro v id e the b a n k 's R esearch 16 D e p artm e n t w ith a co p y o f a n y m a te ria l in w h ic h an a rtic le is re p rin te d .
@FedFRASER