(1) The bills do not establish standards similar to those prevailing under FHA which would assure that housing meets proper requirements as to design, materials, land planning, utilities, and other amenities. These standards are necessary for the protection of the homeowner and the community. They are also important to assure that there is sound security for the mortgage.

(2) The bills lack standards concerning the techniques for appraisals of properties or for determining credit acceptability of mortgagors. Under the FHA and VA systems, these are matters where uniform standards are established which provide some protections besides the underlying Federal insurance or guarantees. Similar standards are necessary to qualify mortgages as acceptable for purchase by a secondary market institution.

(3) We question whether S. 810 would encourage lower interest rates. The securities of the mortgage marketing corporations are of a risk character, without Government guarantees, which will not attract low-interest money. Taking into account the cost of servicing mortgages and the cost of the operations of these corporations, we are concerned whether they will tend to attract mortgages of higher risks and higher interest rates. From the point of view of the consumer, it is important to assure that additional secondary market facilities are established in a manner which will facilitate lower financing costs. (4) While S. 810 provides for Federal chartering of corporations for the insurance and marketing of mortgages, we question the adequacy of its provisions relating to Federal supervision. There is a lack of standards for the determination as to when a charter should be issued, including requirements to show the need for the institutions and their potential for success.

(5) As to S. 811 which would establish a Home Mortgage Corporation, we are impressed by the statement of the Chairman of the Federal Home Loan Bank Board and the questions which he has raised concerning the feasibility and need for this legislation.

(6) As to S. 2130, it is equally lacking in standards concerning the housing and mortgages which would be eligible by purchase by the Federal National Mortgage Association. This bill provides for the acceptance of private mortgage insurance as to the portion of mortgages which exceed 80 percent of appraised value. We raise the question whether there has been sufficient experience with private insurance programs to merit FNMA's purchase of such mortgages. In the final analysis, mortgages will be readily marketable and collectible only if the underlying security represents a good house in a well-planned neighborhood, at a price which people can afford. We must assure that all necessary measures are taken to keep financing costs at the minimum necessary to attract the capital required for homebuilding.

We know that the committee will be giving further study to these bills and that they may be the subject of additional hearings next year. We urge that the bills be revised to incorporate adequate safeguards and standards which are necessary to assure the soundness of the proposed secondary market operations and to protect the public and consumer interests.

Senator SPARKMAN. Thank you very much, Mr. Krooth. By the way, this document you referred to, "Legislative Proposals for 1963,"

I just glanced at it rather hurriedly. That covers pretty much your whole program; does it not?

Mr. KROOTH. That is correct, sir.

Senator SPARKMAN. It includes the public housing, middle-income housing, urban renewal, subjects of that type?

Mr. KROOTH. That is right.

Senator SPARKMAN. Without objection this will be printed as a part of the record in connection with your statement.

We are very glad to have had you.

Mr. KROOTH. Thank you, sir.

Senator SPARKMAN. Yesterday Senator Javits asked two or three questions. Were you here yesterday?

Mr. KROOTH. No; I wasn't, Senator.

Senator SPARKMAN. One, he asked, "How is the middle-income housing program of the housing agency working?" I wonder if you would care to comment on that briefly?

Mr. KROOTH. Yes. I think that it is meeting a long unmet need. I believe that it is accomplishing the purpose which Congress contemplated. In a good many communities I know that houses are being built at monthly charges which make it possible to reach people who fall in the gap between public housing and the area that private enterprise normally would serve.

I think there are two problems, partly administrative and partly legislative. First, on the legislative problem, section 221 is the only section of the Federal Housing Administration Act which does not permit occupancy by a single person. This excludes from 221 (d) (3) the unmarried man or woman who needs housing, and also a residual of an elderly family.

Secondly, there is the administrative problem which results from zealousness on the part of the agency to make sure that it is carrying out the congressional intent. In order to assure its reaching lower income families, FHA has established cost limits which in some of the larger cities are proving unworkable, especially in the central areas. As a practical matter under these costs limits, it is generally impossible to build high-rise structures unless there is a tax abatement granted by the community.

Apart from those matters, I would say that the 221 (d) (3) program is doing well, and that Congress should be pleased with having taken the initiative in putting it on the statute books.

Senator SPARKMAN. Of course it is a new program.

Mr. KROOTH. That's right.

Senator SPARKMAN. Just about 2 years old now, isn't it?

Mr. KROOTH. That is right, sir.

Senator SPARK MAN. A second question he asked was, How good is the performance in relation to the need for units? I presume it represents only a start so far, doesn't it?

Mr. KROOTH. Yes. Of course that area of the lower and middle income group has long been neglected. These people have obtained housing only through the trickle-down process; so there is a large area of unmet need. This program is just a start toward meeting that need.

Senator SPARKMAN. A third question he asked: What is your view of the New York State plan for middle-income housing?

Are you familiar with it?

Mr. KROOTH. I haven't studied it in detail recently, Senator; therefore I prefer not to comment on its current operations.

Senator SPARKMAN. Very well.

Thank you very much. We appreciate your coming before us. Mr. KROOTH. Thank you, Senator.

(The National Housing Conference document referred to follows:)

NATIONAL HOUSING CONFERENCE LEGISLATIVE PROPOSALS FOR 1963 (AS REVISED JANUARY 28, 1963)

1. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

The National Housing Conference reaffirms its support for the establishment of a Federal Department of Housing and Urban Development. The conference recommends that this be done through the enactment of legislation comparable to that favorably reported during the last Congress by the Government Operations Committees of both the House and the Senate. If congressional action on such proposals is not possible via legislation, then the conference recommends that the President again undertake to establish such a department by a reorganization plan.

The new Department should immediately address itself to the development of a coherent set of Federal housing, renewal, and urban development policies for adoption by the Congress and for implementation by all Federal agencies.

2. EXPANSION OF THE FUNCTIONS OF PHA

The conference recommends that the Public Housing Administration be expanded to include all federally assisted programs concerned with the provision of housing for low income families. A restudy of the functions and organization of PHA is recommended in this connection.

3. HOUSING FOR LOW INCOME FAMILIES

The conference reaffirms its recognition of the important contributions being made by the public low rent housing program in meeting the needs of low income families, and recommends the following changes to make this program more responsive to such needs:

(a) An increase in the present annual contributions authorization of $75 million per year. The PHA is nearing the end of the number of low rent dwellings for which it can contract under its existing authorization, and the recommended increase is necessary to permit the advance planning which is essential for the maintenance of its present production rate.

(b) Authorization of capital grants from urban renewal funds for the writedown of site costs on public housing outside of urban renewal areas on the same terms as now available for public housing inside such areas.

(c) The revision of the annual subsidy formula to permit annual contributions equal to full debt service as established by permanent financing, with residual receipts being used either for project rehabilitation and improvement, or accelerated amortization. At any time after completion of a project, provision should be made for reopening development cost, if necessary, and making additional loans for needed rehabilitation or improvement with annual contributions correspondingly increased.

(d) Authorization for the sale of projects or parts thereof to tenant cooperatives or to tenants where they are prepared for homeownership responsibility; and where such sale would serve local housing needs, and new units would replace those sold.

(e) Authorization of relocation payments in connection with public housing development on a basis equivalent to those available to displaced families and businesses under title I of the Housing Act of 1949, as amended.

(f) Retention of the statutory prohibition on the use of extravagant design or materials for public housing development, but the elimination of the present statutory limits on construction costs per rental room, and the adoption of a policy of construction cost limitations which recognizes prevailing local costs and changes in cost levels of well-designed public housing.

(g) The amendment of the act to eliminate to 20-percent gap between the lowest private rents and the upper rental limits for admission to public housing. (h) The provision of supplementnal financial assistance to local housing authorities to provide families resident in low rent housing with essential services not otherwise adequate provided in the areas of health, homemaking, employment, and family problems.

(i) Additional methods of housing assistance to low income families, such as low interest loans and/or grants for rehabilitation of private homes, participation in mutual help programs, and cooperation with nonprofit philanthropic organizations, should be actively explored and definite recommendations formulated.

(j) An additional contract authorization of $5 million for the demonstration program for low income families. This entire program should be transferred

to and be administered by the PHA.

4. URBAN RENEWAL

The conference recommends the following essential changes in the urban renewal program:

(a) An increase in the capital grant authorization in the amount of $3 million to permit the continuation of this program at the rate of local government applications for assistance, presently approximating $750 million per year. The funds should be available until expended at the rate of eligible local applications. (b) Authorization to local public agencies to engage in the purchase, rehabilitation, and sale or lease of properties suitable for such treatment without limitation as to proportion or number.

(c) The establishment of relocation payments on a uniform basis for all federally aided programs. In addition, the conference recommends that relocation payments be increased to include the first month's rent in a standard accommodation, subject to the limitations and in accordance with the provisions of State law and local ordinances. Small businesses should be compensated for loss of goodwill where relocation payments will not reestablish the owner in an equivalent business position.

(d) Authorization of local public agencies to make conditional sales of industrial and commercial land to industrial development corporations sponsored by local agencies on the same basis as that now authorized under area redevelopment legislation.

(e) Amendment of title I to recognize parking facilities as an eligible local noncash grant-in-aid.

(f) Elimination of the present 30-percent limitation on nonresidential projects by an additional 10-percent increase at such times as such increases is required by the exhaustion of the present quota.

(g) Review by the Congress of the adequacy of present eminent domain laws, the fairness of compensations made under them, and the necessity for changes in such laws, or in other compensatory awards.

(h) Inclusion in all community renewal plans of adequate studies and programs for meeting the needs of low income and elderly familes. In localities without community renewal plans or with community renewal plans deficient in respect to low income or elderly families, funds should be made available to local housing authorities under section 701 for these necessary studies and programing.

(i) An increase of $5 million in the authorization for the use of urban renewal grant funds for demonstration programs.

5. MIDDLE INCOME HOUSING

(a) Extension and modification of present program: The conference urges that the present 221(d)2 and (d)4 programs be extended for a 3-year period. In addition it urges that the present 221(d)3 program be modified to permit local housing authorities to act as sponsors and to permit the reduction of interest rates to a minimum of 1 percent where necessary to accommodate families of lower and middle incomes. At the same time, the conference urges that interest charges be increased as families' incomes rise so that projects initially written with interest rates of 1 percent (or such higher figure as results from the income distribution of families initially occupying the project) may be expected to pay the cost of money to the Government over the life of the mortgage.

The conference further urges that these programs be modified to eliminate arbitrary income or cost limits and that a formula be developed which would assure that the program serve families in income groups below those now being served by conventionally financed new sales and rental housing, at such income levels as are dictated by local construction cost, housing expense cost, and the income distribution of families in the community.

(b) Rental housing for lower and middle income families: A new program should be adopted to assist private enterprise in expanding its market to serve families in the middle income group. Profitmaking rental projects should be financed by Federal loans written at the going interest rate for private mortgages and covering all or substantially all the project costs, on condition that rents for a portion of the units (say one-half) be scaled down in accordance with family incomes. The rents which these families could pay should be certified by the local housing authority (if available) or by another local public body. For each family paying less than the market rent because of deficient income, the sponsor should receive a corresponding credit on his monthly debt service payment to the Federal Government. The rent reduction for any family should not exceed the debt service on its unit.

There would be no income limits for admission or continued occupancy, and rent paying ability would be reviewed only when leases are renewed. When a family becomes able to pay the full market rent its subsidy would cease, but it would continue in occupancy at the market rent.

Under this proposal there will be a flexible adjustment of rents to individual needs, resulting in a democratic admixture of families of various income levels rather than the stratified income group which results when a reduced interest rate is applied to a project as a whole. Normal owner-tenant relationships would be maintained and families and neighbors would not know which families are or are not benefiting from rent reductions.

This program should be limited to new construction or new substantial rehabilitation. By enlarging the market for private enterprise it should result in an expanded housing production and accelerate the filtering down of existing standard housing to lower income levels.

(c) Sales housing for lower and middle income families: The 221 (d)3 formula should be extended to cover parts of ordinarily financed sales housing built under FHA mortgage insurance and subject to the following limitations: The sales price should in all cases be identical to the price at which other comparable units in the same project are being sold. This would assure that preferential credit terms are not used to inflate prices of specially assisted housing. Incomes of buyers should be reviewed as they are in any case by FHA's credit review procedure. The interest rate on each mortgage should be set to accord with the monthly payment ability of the family. Thus, a family with a $4,000 income might receive a 2-percent mortgage and a family with a $6,000 income might receive a 4-percent mortgage. As families' incomes rise they would be reviewed by a credit report every 2 or 3 years to establish a current monthly payment rate and current interest rate. When the family income can support a market rate mortgage, the mortgage would be converted to a regular FHA mortgage and be transferred to the portfolio of the servicing lender.

If any owner of a home who was the beneficiary of a submarket interest rate desires to sell his house, the house may be sold with conventional financing on the market at any price, the special financing being canceled. If the owner does not desire to sell the house with conventional financing, he may quitclaim title to the servicing lender who can sell the house subject to conventional financing or sell it at a fixed price (the unamortized balance plus costs) to another eligible income buyer at an interest rate meeting the needs of that buyer. Such resales would be subject to the same preferences and procedures used at initial sale. Sooner or later almost all houses originally financed with preferential terms would be resold at market prices and refinanced conventionally. During this period there would be a steadily diminishing pool of middle income housing available on the market. In other respects the program should operate through the FHA-FNMA private lender-private builder procedures now used in other programs.

6. COOPERATIVE HOUSING

The conference recommends:

(a) The removal of the present mortgage ceiling on cooperative housing loans to permit the modernization and improvement of existing projects originally financed with FHA insurance where such modernization or improvement will enhance the value of the project.