The kinds of investors acquiring mortgages covered by terminated contracts, and the contract amounts involved, are shown below:

Some additional comments on the FNMA commitment refund procedure may also be in order. The benefits resulting from this procedure are readily apparent. In the first place, the Government is relieved of the necessity for purchasing mortgages represented by the cancellations thus making those amounts available for other housing programs or for other Government purposes. At the same time, private investors are able to add such amounts to their holdings of longterm Government-backed housing mortgages, thereby improving their investment position and also increasing their stake in the housing economy; and last, but not least, sellers receive a 14 point higher return on their mortgages because they not only save the one-half of 1 percent purchase and marketing fee they would have to pay if the mortgages were sold to FNMA but also get back 75 percent of the 1-percent commitment fee paid to obtain the commitment. Or, stated a little differently, the sponsor, if successful in selling the mortgage privately, will have the protection and assured market afforded by a 2-year firm contract at a cost of only one-fourth of 1 percent of the mortgage amount involved.

It is conceded that the commitment refund procedure is really only effective when there is an abundance of mortgage funds and probably will not be utilized to any great extent at other times. It is, however, a useful, permanent enlargement of FNMA's commitment practices under its special assistance functions, is valuable both to the industry and the Government when market conditions are favorable, and is a good example of the cooperation and practical type of partnership that can exist between private industry and the Government.

Mr. SEMER. I bring in these figures to show the very important factor of the availability of funds; and then over a period of, oh, say 13 years, when you consider the co-op program came in in 1950, the seasoning of mortgages, the movements of rates; so that in just a very short period, 1961 to 1963, you have just five FHA titlesthe co-op, the two urban renewal titles, the elderly, and also the regular rental program, multifamily, special assistance, which used the Treasury money over this period of time. As a matter of fact, the Treasury money for special assistance has been available just since 1954, when the special assistance program was organized to do that job.

And to get out $687 million worth of this paper in this short period of time. And this was not a bargain basement. This was

Senator DOUGLAS. Just one more question I want to ask. How are the commercial banks financing the loans which they now make on home construction? Are they financing these or meeting these of genuine savings or from the creation of bank credit which they then loan out?

Mr. BAUGHMAN. Well, I would presume-I do not know, but I think

Senator SPARKMAN. Would you pull that microphone over, Mr. Baughman?

Mr. BAUGHMAN. Mr. Flexner can probably answer this better than I can, but I would presume that on their permanent mortgages the funds are taken out of the savings department of the bank. Senator DOUGLAS. You mean on time deposits?

Mr. BAUGHMAN. Yes; out of the time deposits, that is right-out of the time deposits or savings deposits.

And on the construction lending, you indicated something about construction lending. Of course that is short term. And that comes out of the regular demand deposits of the bank. usually for 9 months and 2 years at the outside.

That only lasts

Senator SPARKMAN. Well, of course, under the law commercial banks are privileged to use a certain amount of their available funds for long-term real estate loans, I believe; is that not true?

Mr. BAUGHMAN. That is correct.

Senator SPARKMAN. I believe about 70 percent of the banks' time and savings deposits may be real estate loans. I am not sure. Senator Javits.

Senator JAVITS. Mr. Semer, we have talked about middle-income housing for so long here. I would like to ask you the same question I led Chairman McMurray into.

It takes about $16 billion a year to provide the mortgage financing for American homebuilding, does it not, in round figures? Mr. BAUGHMAN. That is pretty close.

Mr. SEMER. That is about right, Senator.

Senator JAVITS. And this is probably about the most colossal financing operation in the Nation, taken together; is that correct? Mr. SEMER. Yes, sir.

Senator JAVITS. Now, a totally new experiment along the lines of these bills is being tried in my State and seems to be going very well. In the New York State Housing Agency, where they are aggregating groups of mortgages, set up direct lending as they did under their previous so-called Mitchell-Lama program; they are aggregating groups of mortgages and then selling debentures without a guarantee. And I just wonder whether you people have explored two thingsperhaps you do not want to answer now; if so, I would strongly invite you to let us have a statement, authoritative, from the agency: (1) How is the present program working?

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(2) What do you think of the New York type of program, and is it germane or apposite to our situation, and might it stand in place and stead of this body of legislation which we are considering today? I would like to just add one footnote to both points.

It will be recalled that when the provisions for middle-income housing now contained in the law, special provisions, for example, permitting cash payment by the FHA in default, and so forth, were before us, Chairman Sparkman and I had a most interesting colloquy on the floor in which he said: I like these New York ideas, but we are not quite ready for them. Let us try this. If this fails, then I assure you you might even have me with you on some such concept. Now, I think we now have gone by a couple of years, and I think the time for evaluation is certainly not ended, but it is certainly beginning. And it is in that spirit, Mr. Chairman, that I pose this question to Mr. Semer.

Mr. SEMER. I recall, Senator Javits, at one time some years ago when you first raised this, I think probably your first year on the com

mittee. And I have run into some language problems, and at the time I think that you referred to the procedure or the mechanism of hypothecation. And I have since found out that that is not always a good word. To me "hypothecation" is a neutral term, and it is fairly descriptive of what is involved.

Well, your first question first on how the middle-income housing program is doing. This is the 221(d) (3) program. And I will furnish the exact detail for the record.

Senator JAVITS. All right.

Senator SPARKMAN. Now, that has only been in existence since 1961, has it not?

Mr. SEMER. We are running a pipeline of about 176 projects with about 25,000-plus units.

From my own personal experience, the biggest difficulty with the 221(d) (3) program, which I think took, by and large, most of the first year, was the problem which New York had gone through, but we had to go through it on a national scale to find out what a nonprofit entity was all about and to learn how to determine the eligibility of a particular applicant.

In your State, Senator, the application from a nonprofit entity can be very quickly checked against its activity as a nonprofit entity. In some other States that either were not familiar with the MitchellLama experience or found it quite novel, weeks, in some cases months, went by before all of the intelligence was assembled for a particular nonprofit sponsor. The 221 (d)(3) program right now is probably the most active and the most valuable program for the middle-income

stratum.

Senator JAVITS. You will give us an exact appraisal, will you, comparing what you have been accomplishing with what our contemplation was in terms of what is needed of a middle-income housing program to really consider it a success? In other words, the absolute figures in themselves are not necessarily persuasive; they may sound like a lot, but when you begin to compare it to our objectives, it may be extremely small.

Mr. SEMER. Yes; we will be glad to do that.

Senator JAVITS. I would like to get some standard, therefore, by which we could judge the success. I have no doubt of the performance, Mr. Semer. I think all of us are very satisfied with the way in which the agency has been run. But this is a common problem, not a matter of legislative oversight.

The second thing is, I do hope we will have a critical analysis from you of the present New York program, which, as I say, seems you have tremendous advantages which I do not necessarily find in these bills. And if I am not here when the representative of the Home Builders finishes, I would like to invite, if I may, Mr. Chairman, Mr. Buchanan on the part of his organization to do the same thing-give us the answer to the very same questions that we have asked of the Housing and Home Finance Agency. And I think in that way we can be helped as the Chairman and the rest of us have appraised. Maybe not for the rest of this year. I doubt very much we will even think of doing anything this year. But when we get into next year, whether we have come into this belief and my guess is we have not; and now further new techniques, further defined, not even depending on guarantees, might even be useful to us in New York.

So far the Housing Agency has been very successful. It has put out about a billion dollars on paper, and successfully. And that is very, very interesting rates, entirely effective rates.

Thank you so much, Mr. Chairman.

Senator SPARKMAN. Thank you.

(The material requested by Senator Javits follows:)

COMPARISON OF THE FHA SECTION 221(d) (3) AND NEW YORK STATE HOUSING FINANCE AGENCY PROGRAMS

SUMMARY AND FINDINGS

A comparative analysis of the FHA section 221(d) (3) (below-market interest rate) mortgage insurance program and the New York State Housing Finance Agency direct loan program for limited-profit housing companies reveals the following:

1. The New York State Housing Finance Agency program is financed by taxexempt bonds issued by the agency. These bonds are not guaranteed by the State and are not part of the debt of the State. The effective interest rate on the three bond issues marketed to date are: July 1, 1961, 3.9773 percent; March 1, 1963, 3.5909 percent; and July 1, 1963, 3.5988 percent. Mortgage loans made to limited-profit companies from the proceeds of the bonds cannot bear an interest rate less than the interest rate on the bonds, but in addition there is a fee or charge of one-half of 1 percent on the mortgage loan. Part of the fee or charge is used to finance a reserve fund for bond debt service and part is used for the payment of the administrative expenses of the program.

A slightly lower interest rate is charged on FHA section 221(d) (3) insured mortgages-the current rate is 3% percent. Moreover, payment of the one-half of 1 percent mortgage insurance premium customarily charged on FHA insured mortgages is waived under the section 221(d) (3) program. Thus, the interest rate charged under the FHA program is appreciably lower than the interest rate plus fee charged in the New York State program.

2. FHA section 221(d) (3) insured mortgages are purchased under the FNMA special assistance program which utilizes Federal Government outlays to finance such purchases. A Federal program patterned after the New York State program would avoid such (repayable) Federal outlays, but would prove more costly to the Federal Government because the income from Treasury obligations is taxable, whereas the New York State program results in the issuance of taxexempt securities that are generally purchased by banks, corporations and individuals in high income tax brackets. Such a Federal program would involve either (a) Federal guarantee of municipal tax-exempt bonds (the Public Debt Act of 1941 prohibits the Federal Government from issuing direct obligations which are exempt from Federal income taxation), or (b) if not actually guaranteeing municipal tax-exempt bonds, would nevertheless be designed to encourage the issuance of such bonds. In the latter event, the results-i.e., the issuance of an increased volume of tax-exempt bonds-would be similar to that produced by Federal guarantee of such bonds.

With respect to the Federal guarantee of tax-exempt bonds, the report of the committee on Federal credit programs to the President of the United States, dated February 11, 1963, recommends on page 19 that “*** no program in the future be authorized which involves guarantee of tax-exempt obligations because (a) the cost in tax revenues to the Federal Government would generally exceed the benefits of tax exemption received by borrowers, (b) such federally guaranteed tax-exempt securities would be superior to direct Federal obligations themselves, and their increasing volume would adversely affect Treasury financing, and (c) the availability of increasing amounts of high-grade tax-exempt issues would tend to attract funds from investors that should appropriately seek risk-bearing opportunities."

3. The FHA section 221 (d) (3) program produces lower per room and per unit costs and lower rentals, and serves families of lower income than the New York State Housing Finance Agency program. The average cost per room for the HFA projects was $3,938, as compared with $2,101 for the FHA walkups and $3,074 for the FHA elevator structures. The average cost per unit was $18,598 for the HFA projects, and $10,915 for the HFA walkups and $15,807 for the FHA elevator structures. The average monthly rental per room (excluding

utilities) for the HFA projects was $28.81, while for the FHA walkups it was $16.08 and $20.27 for the elevator structures, including utilities in part. Family income for HFA projects is limited to six times rent for a family of three or less, and seven times rent for a family of four or more. In New York City, an administrative maximum income limit of $10,000, including allowable deductions has been set. The FHA projects have maximum income limits established according to family size, which for the New York SMSA range from $6,450 for a family of two to $9,900 for a family of seven or more.

These comparisons must be qualified seriously, however, since this New York State program consists entirely of elevator-type projects which are a more costly type of construction than the nonelevator projects which make up most of the FHA projects. Also, all of the New York State Housing Finance Agency program is presently concentrated in New York City which is a high construction cost area, whereas the FHA projects are scattered throughout the Nation. FHA, thus far, has issued commitments under section 221(d) (3) on only one elevator-type project in New York City, hence no valid comparisons of similar type projects in New York City are possible.

4. The loan-value ratio in the FHA section 221(d) (3) program is 100 percent of replacement cost for proposed construction for a nonprofit, public, cooperative, or investor-sponsor mortgagor. In the cases where the mortgagor is a limited-dividend corporation the ratio is 90 percent. In the New York State program the loan-cost ratio is 90 percent for limited-profit housing companies, and 95 percent for mutual companies or membership corporations offering housing for hospital staffs, college students, and the aged.

5. The New York State program provides for real estate tax abatement (exemption from local and municipal taxes, other than assessments for local improvements) to the extent of not more than 50 percent of the value of the property. The FHA program has no such requirement.

6. As of August 31, 1963, the New York Housing Finance Agency, which dates back to 1960 had committed funds for 32 projects with 25,135 units; the New York State loan funds program, dating back to 1955 had committed funds for 32 projects with 5,758 units; and the FHA under the section 221(d) (3) program authorized by the Housing Act of 1961 (effective June 30, 1961) had issued commitments for 104 projects with 14,950 units.

DESCRIPTION OF PROGRAMS

New York State Housing Finance Agency program

The agency was created in 1960 for the purpose of providing safe and sanitary dwelling accommodations at rentals which families and persons of low income can afford, and which the ordinary operations of private enterprise cannot provide. To accomplish this purpose, the agency is authorized to issue its bonds and notes to the investing public and make mortgage loans to companies which are subject to State regulations as to rents, profits, dividends, and disposition of their property.

The interest on the bonds issued by the agency is exempt from Federal and New York State income taxes. The bonds are direct and general obligations of the agency, but they are not a debt of the State of New York and the State is not liable on such bonds. The agency is authorized to issue bonds and notes which in the aggregate do not exceed $1 billion. The underlying security of the bondholders, aside from the mortgaged properties, is the capital reserve fund which maintains an amount equal to 1 year's debt service on all bonds outstanding. About 5 percent of each bond issue is placed into this reserve which is financed from part of the annual fee (payable monthly) of one-half percent on each mortgage loan and is charged to each housing company by the housing finance agency. About 60 percent of this fee goes for this reserve purpose. The balance pays for agency maintenance and operations, and supervising services of the division of housing and community renewal. The State has made a deposit of $2 million in the capital reserve fund, which sum is repayable. The act also provides that there shall be apportioned and paid annually into the fund such amounts as are necessary to restore the fund to an amount equal to 1 year's debt service on the bonds.

The agency may make mortgage loans up to 90 percent of the cost of a project to limited-profit housing companies (for rental-type projects) and to up to 95 percent to mutual companies (for cooperative-type projects) and to nonprofit membership corporations (for housing for hospital staffs, college students, and aged persons of low income). The interest rate to be paid on these mortgages would not be less than the rate or rates the agency is required to pay on the