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now exploring the advantages of mortgage investments. At the present time, the yield on FHA mortgages is better than competitive investments. It is already apparent that we have entered a new supply-and-demand environment in the mortgage money market as a reduced volume of mortgages is being developed. Taking these facts into consideration leads me to the conclusion that competition for FHA mortgages may develop later in the year.

In conclusion, I want to reiterate my optimism that is based on my confidence in the home-financing and construction industry. Considering its increased strength, leadership, and initiative, together with current economic conditions. I am convinced that the outlook is for a healthier, mort stable industry.

The production of adequate housing will have an important role in making our country stronger and better and toward that end the FHA will give every help that can be given.

On February 5, 1952, I presented a detailed statement of FHA operations to the Subcommittee on Housing of the Committee on Banking and Currency of the House of Representatives. The statement contains considerable information on the exact nature of FHA standards and procedures and I am pleased to incorporate it as I believe it contains pertinent and valuable information.

STATEMENT BY FRANKLIN D. RICHARDS, COMMISSIONER, FEDERAL HOUSING ADMINISTRATION, BEFORE THE SUBCOMMITTEE OF THE HOUSE BANKING AND CURRENCY COMMITTEE

I appreciate the opportunity to appear before your committee today and present, step by step, the manner in which the FHA mortgage insurance plan operates. I shall endeavor to give you an outline of the organization, the standards that have been developed, our system of supervision with its checks and balances, and a brief summary of FHA accomplishments in carrying out the objectives of Congress as expressed in the National Housing Act.

At the outset I want to say I appreciate that no system, however carefully planned, can always operate with perfect efficiency because it cannot eliminate the factor of mistakes in human judgment. Nevertheless, the FHA system has been so designed with requirements for constant reviews and checks to eliminate insofar as possible the human factor of error.

In the last 171⁄2 years the FHA plan has grown from an idea to a very substantial self-supporting Government administration. That is an enviable record. I believe it is based on sound legislation and sound administration of the operations under that legislation.

In passing the National Housing Act in 1934, the Congress stated that the primary objectives were to encourage improvement in housing standards and conditions; to provide an adequate home-financing system; and to exert a stabilizing influence on the mortgage and residential real-estate market.

Under authority of the National Housing Act, which has been amended a number of times, the FHA provides insurance against loss on over 20 different types of loans relating to realty made by private lending institutions.

The FHA does not make loans, and does not plan or build housing. I want to emphasize the fact that every cent of money advanced under any FHA plan is private capital of private lenders. It is important, too, to take into consideration that this is a completely voluntary system. The $25 billion in loans that the FHA has insured is solely because of the confidence of lenders and borrowers in the system.

In order to render adequate and efficient service on a Nation-wide scale, the Federal Housing Administration operates on a decentralized basis. I have brought with me four organizational charts to show you. The first one demonstrates how Washington headquarters functions in order to establish policies. procedures, and standards. An executive board consisting of the principal staff officers in the Washington office considers policy and procedural matters and makes recommendations to the Commissioner. The greater portion of the headquarters staff is required for housekeeping and extensive fiscal operations. Another function of Washington staff members is to supervise and check the work done in the 137 field offices of the Administration. In order to centralize control and supervision in an effective manner, the country is divided into five zones, each under the direction of a Zone Commissioner who divides his time between Washington headquarters and the field offices under his jurisdiction. Through the Zone Commissioner's office, the Audit Division and the Underwrit

ing Division in Washington, supervision is continually carried on. Audits are made. Procedures are examined. Efficiency is rated. Costs, inspections, valuations, and every phase of work is checked.

The other three charts show the practical application of the FHA check-andbalance system in the field office itself. While the Director is the administrative head of the office, his authority to insure or reject any loan for insurance is held in balance by the recommendation of the technical officer, who is the Chief Underwriter. No commitment or rejection can be issued, or loan insured by the Director, unless the Chief Underwriter so recommends. In case of a disagreement between the Director and the Chief Underwriter, the recommendations of each, together with supporting data, must be sent in to Washington headquarters for review and decision. Devices for checking the possibility of mistakes in human judgment run through the entire processing procedure and I shall go into that later in further detail.

In the field offices the FHA has a staff of 3,806 employees and the Washington headquarters personnel numbers 1,481.

At the present time there are approximately 18,000 lending institutions that have been approved to submit applications for FHA insurance on mortgage loans they wish to make. Generally speaking, these institutions fall into two classifications-those under governmental supervision and companies not supervised by either Federal or State authorities. All applications for approval as mortgages are carefully reviewed at Washington, and where the lender is not under governmental supervision the FHA requires $100,000 capitalization and adequate mortgage experience. In addition, FHA makes periodic examinations of approved mortgages that are not otherwise supervised.

One measure of the effectiveness of the operation of FHA's insurance plans is in the actual record. Let me give you a very brief summary. The FHA has insured a total of $25,850,000,000 in loans and of this amount not quite one-half has been paid off through amortizations and prepayments, leaving a little over $14 billion of insurance in force. It is estimated that the FHA insurance plan has been utilized by 13 million American families-on the basis of 3.7 persons in each family, the FHA has directly touched the lives of more than 48 million persons. The losses on the insurance written have been negligible.

But even these impressive statistics do not give the complete picture of the impact of the insured mortgage system on the communities of this country and the housing and home financing industries.

When the National Housing Act was passed in 1934, the real-estate market was in a chaotic condition, resulting from the general economic situation that prevailed and the faulty lending practices that were prevalent. The building industry in 1933 built only 93,000 new dwelling units. Besides being an important economic factor in the economic recovery of the country, the FHA played a major role in improving the mortgage lending practices.

Before going into details of how applications are received and analyzed, I should like to give you just a few of the enduring benefits that are accredited to the mortgage insurance system-not by us in the Federal Housing Administration-but by the industry and housing economists:

The single, long-term, totally amortized residential mortgage has become standard practice, whereas renewable notes and second mortgages were the accepted means of financing a house before the establishment of the FHA.

Residential mortgage loans have a liquidity unknown before the initiation of the insured mortgage system. The market for mortgage securities has expanded from one of local scope to national operations because investors recognize the quality of the insured mortgage loan and FHA provides a standardized mortgage instrument.

In addition to these fundamental changes in mortgage practices, the FHA through the establishment of minimum property standards has contributed materially to improving the physical security itself.

The Administration has exerted an important influence on the location, planning, and orderly development of subdivisions throughout America by means of land planning and market analysis services.

The interest rate under the FHA has been maintained at a lower level than customary under conventional mortgage lending and has proved to be an effective rate.

From the beginning FHA has encouraged the production of lower-priced dwellings that the average American family can afford. The Administration has also made special efforts to encourage builders to enter the neglected field of housing available to minority group occupancy.

In the war emergency and in the present-day emergency, FHA has acted to see that production of housing is geared to national needs.

The confidence of lenders and borrowers in the FHA system has meant stabilization of production in the building industry, building trades, and producers of equipment that goes into housing.

From this general discussion of how the FHA operates and its effect on a broad scale, I should like to go into the actual processing of an application for homemortgage insurance. I would like to give you a picture of just what happens, administratively and technically, in an FHA field office from the time an application for insurance is first discussed.

PREAPPLICATION ANALYSIS

When individual or groups of properties proposed to be constructed and offered as security for FHA-insured mortgages are situated in a subdivision, where the builder has unified control, i. e., where the lots form all or a part of a subdivision, which is not fully developed with recorded lots, installed streets, etc., land-planning processing is required. This land-planning processing takes the form of inspection of the land by FHA land planners and the FHA subdivision valuator and subsequent conferences with the sponsors in order to achieve the most desirable land development plan. This land-planning procedure takes specific cognizance of:

1. Analysis of topographical data in order to determine the most desirable and practical locations of streets, lot grades, storm-water drainage, sanitary sewer lines, preservation of existing desirable conditions, such as large trees, existing contiguous built-up areas, if any, and similar practical land development considerations.

2. If individual sewerage systems (septic tanks) or individual water-supply systems are proposed, FHA land-planning procedure requires that percolation tests of the soil (porosity) be taken at specified intervals, in order to determine the ability of the land to absorb septic tank effluent successfully without danger of pollution of water supply. The nature and extent of these and similar tests are specified in relation to required engineering data on stipulated FHA forms. Minimum capacities of septic tanks also are specified in relation to the size (number of bedrooms) of the properties proposed to be constructed on the lands. Street, grading (both rough and finish), landscaping, material, lot sizes, and similar items also are specified in the subdivision report.

RECEIVING PROCEDURE

Following completion of preapplication discussions, the mortgagee submits a detailed application for insurance.

All applications for mortgage insurance, remittances for fees and premiums, and all other documents associated with applications for mortgage insurance are initially handled in a receiving section. This section is supervised by a bonded clerk and all submissions are opened by a bonded clerk. The foregoing applies equally to submissions received by mail and over the counter.

Clerks in the receiving section review all papers received to determine that required documents are present and properly executed; for example, applications, plans and specifications, exhibits, contractor's bid or purchase agreement, property description, plot plans, etc. A bonded clerk is responsible for safeguarding, receipting for, accounting for, recording and depositing of all checks, money orders, and other cash collections received in payment of fees or premiums. An official receipt is issued for each collection item and all collections are listed on schedules of collection and certificates of deposit, prepared daily. At the end of each day a bonded clerk in the receiving section and the office manager, or other responsible official, independently verify the correctness of cash accounting records by comparing entries in the official receipts, schedules of collection, and certificates of deposit. Both the bonded clerk and the office manager signify this verification by signing the schedule of collection. All receipts are deposited daily in a Federal Reserve bank or in a bank approved by the Treasury Department as a Federal depositary.

An identification number is assigned to each application received. All supporting documents associated with the application bear this number, and fees and premiums received are scheduled and deposited by the number assigned to the application. All papers associated with a particular application are filed in a binder bearing the case number of the application. These numbered binders.

containing applications and supporting documents are routed to the Underwriting Division of the office for preliminary examination and assignment to processing personnel.

UNDERWRITING PROCESSING

The assignment valuator, in the Underwriting Division, inspects the application and exhibits to determine

Whether the application is eligible. In order to make this determination he must, among other things, find that the property meets

The general eligibility requirements, referred to in the compliance inspection portion of this statement;

If the property is situated in an area which has been found as being generally eligible;

If the property meets basic minimum property requirements;

That all of the required application forms and exhibits have been supplied by the applicant.

If the application meets these preliminary tests, the application and exhibits are forwarded to the Architectural Section.

In the Architectural Section the case is assigned to a construction examiner, who analyzes the plans and specifications in order to determine

That the design of the structure meets established FHA minimum requirements as to

Room sizes;

Adequacy of light and ventilation;

Adequacy of circulation within the structure to assure privacy and convenience;

Adequacy of the proposed mechanical equipment, plumbing, electrical, heating.

That the construction elements of the structure are adequate to assure safety and durability.

That the property meets other minimum construction requirements applicable to the area in which the property is proposed to be situated.

Minimum property requirements vary considerably, according to variations of climate, market customs, indigenous materials, etc.

Many items other than those enumerated here must be considered by the examiner at this time, to determine eligibility. Additional items to be considered refer to the placement of the structure upon the land, grade elevations, front and side lot lines, adequacy of rear-yard area, minimum lot area, distance from finish grade to lowest course of exterior-wall area, attic ventilation, and many other similar items.

When the analysis of plans and specifications has been completed in the Architectural Section and the structure is found eligible, the Architectural Section then makes a construction-cost estimate.

The cost estimate is made by relating the type and quantity of materials specified to construction-cost information which is gathered by a member of the Architectural Section from locally available information sources, such as building-materials suppliers, contractors, prevailing labor rates, prevailing labor efficiency, workmen's compensation insurance rates, typical mark-ups for overhead and profit included by typical builders in the area, etc. These cost data are accumulated monthly and are constantly adjusted in the Cost Data Handbook to reflect current changes in construction costs.

When the Architectural Section has completed its analysis and made the cost estimate, the case is then assigned to a valuator in the Valuation Section. The valuator works closely with the land-planning consultant and the subdivision valuator who have done the previous land-planning processing.

The valuator makes an inspection of the site to determine

That the site is eligible with respect to fundamental considerations, such as: That it has adequacy of transportation;

That the land is suitable for construction purposes;

That there is access to community and civic centers and places of employment;

That there is a demand for the type of property proposed to be created; That it meets requirements of off-site construction, such as streets, sewers, sidewalks, grading, etc., as may be necessary to make the land under analysis useful for building purposes;

Establishes a valuation of the lot by comparison with other lots in the community which are suitable for similar development or which have been so developed;

Land valuation is made by comparison and the insuring office accumulates voluminous data with respect to land prices, land sales, cost of land development in the various areas within its jurisdiction. These data, for appraisal purposes, are similar in their use to the construction-cost data referred to previously.

When the valuator has found the site eligible and has valued it, he adds to this value the estimate of construction cost. This constitutes the FHA estimate of reproduction cost, new. This figure constitutes the upper limit of value which can be found by the valuator. It will be noted from this operation that the Valuation and Architectural Sections are required to establish an upper limit of value in connection with proposed construction.

In making out his report, the valuator must set forth this estimate of replacement cost. He is also required to show on his report the prevailing asking and sale prices for similar or comparable properties situated in the same or comparable areas. These data, together with much collateral data required on the form, guide the valuator to his estimate of value by comparison. The prices which he finds being paid in the market may be greater than the replacementcost estimate, but his final valuation would be, in this instance, limited to the replacement-cost estimate. However, the valuator may find prices paid being less than the replacement cost, and, in such case, his valuation would be the lesser of the two figures. The valuator also is required, in the case of properties to be rented, to make a valuation by capitalization. The lowest of the three value findings constitutes the final valuation made by the valuator.

The case is now referred to the Mortgage Credit Section. Here the mortgage credit examiner analyzes the financial aspects of the mortgagor applicant, that is, the borrower. Financial information relative to the borrower is required to be included in the application exhibits. Such borrowers fall into two general categories, as follows:

If the borrower is the builder, he is analyzed as to his capacity to build the property, with respect to

Demonstrated building knowledge and experience;

General credit record; and

A financial statement indicating financial capacity to consummate the proposed building operation.

A determination of eligibility of this type of borrower will result in a so-called firm commitment or a conditional commitment.

The firm commitment will obligate the Commissioner to insure a mortgage executed by the builder applicant in the amount specified.

The conditional commitment will obligate the Commissioner to insure a mortgage in a specified amount, conditioned upon the presentation of a borrower who meets the stipulated eligibility requirements.

If the proposed borrower is an individual who has title or will take title subsequent to completion of the property, he is analyzed as to his

Credit and character records;

His present income and the probable continuity, increase, or decrease of such income;

His other liabilities which constitute a demand on such income; and, finally,

His evident ability to meet the equity and monthly payment requirements of the proposed transaction.

The mortgage credit examiner also computes the maximum insurable mortgage in relation to

The established valuation of the property;

The estimated capacity of the mortgagor; and

The statutory limitations applicable to the proposed mortgage insurance transaction.

The extent and complexity of these latter mortgage credit computations will be realized by virtue of the fact that there are more than twenty separate and distinct mortgage insurance provisions in the National Housing Act. Each of these have different statutory limitations as to amount of loan, term of loan, and eligible borrowers.

The findings of the processors, made in each of the underwriting sections are subject to review by the section chief or his appointed deputy and, in connection with problem cases a review committee, comprised of the various chiefs

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