WEDNESDAY, JULY 21, 1937.

FEDERAL HOUSING ADMINISTRATION

STATEMENTS

OF STEWART MCDONALD, ADMINISTRATOR; WESLEY ZANE, EXECUTIVE ASSISTANT; THEODORE B. NICKSON, COMPTROLLER; AND B. C. BOVARD, ASSISTANT GENERAL COUNSEL

REDUCTION OF LIMITATION OF MUTUAL MORTGAGE INSURANCE FUND FOR ADMINISTRATIVE EXPENSES

Mr. CANNON. We have before us a proposal of the Federal Housing Administration submitted in document no. 297, in which you ask that

The paragraph in the Independent Offices Appropriation Act, 1938, under the caption "Federal Housing Administration" is hereby amended by striking out the words and sum "not to exceed $10,000,000" and inserting in lieu thereof "not to exceed $5,000,000 of the mutual mortgage insurance fund and $5,000,000.” We will be glad to have you make a statement in reference to this

matter.

Mr. McDONALD. The proposal, Mr. Chairman, speaks for itself, and any further explanation I would make would be to state, in effect, that we are asking to use $5,000,000 of our income to pay our operating expenses as we go. The reason for that proposal came about in a discussion as to how soon the Federal Housing Administration might be self-supporting, or whether it would be self-supporting in 1939, or not. It was suggested that during 1940, and possibly in 1939, we would be self-supporting, or partially self-supporting. We would be partially self-supporting now if allowed to use a substantial part of our income with which to pay our expenses. We determined on this sum of $5,000,000 to be used out of our total estimated income to pay expenses.

Mr. SNYDER. How much would that be for the fiscal year 1938? Mr. McDONALD. For the fiscal year 1938, we should have, estimated upon the rate of business coming in, $7,387,134. That would be made up of interest on our fund of $561,000; there would be premiums on insurance written in 1937, of recurring amount, amounting to $1,977,000; premiums recurring for the year 1936 amounting to $965,000 and the premiums for 1935 amounting to $57,000; and added to that there would be, from the new business put on the books estimated at $450,000,000; examination fees, $1,575,000; insurance premiums, $2,250,000, making a total of $7,387,134; out of which we propose to use not to exceed $5,000,000, leaving a balance of $2,387,134, to be again added to our fund which has now grown from the sum of $10,000,000, which was originally authorized, to the sum of $18,726,822, not counting some uncollected and unestimated income which would bring the amount to approximately $20,000,000. So, we have a fund now of approximately $20,000,000 which has been accumulated during the 3 years that the Federal Housing Administration has been in operation. It is now believed that we could safely use for this year $5,000,000 of our income to pay our own expenses, and probably a greater proportion in subsequent years.

COMPARISON OF OPERATING EXPENSES

Mr. CANNON. How are your current operating expenses as compared with your operating expenses during the past 2 years? Mr. McDONALD. Do you mean our operating expenses?

Mr. CANNON. Yes.

Mr. NICKSON. Would you like to have that by months or by years? Mr. CANNON. You can give it by years.

Mr. NICKSON. In 1936, our operating expenses were $11,337,848.56. During the year 1937 we changed our appropriation procedure and went from a cash basis to an accrual basis, and there were certain expenditures charged to 1937 which were incurred in 1936, when we were on a cash basis. The operating expenses during that year, under the combined methods, were $11,007,386. Of that amount, it is estimated that approximately $700,000 would pertain to the prior fiscal year, so that our real operating expenses for the current fiscal year would be about $10,200,000.

Mr. CANNON. What about the operating expenses for 1935?

Mr. NICKSON. For 1935, the first year, or for a part year of operations, the total expenditure was $6,430,000. There were some unpaid bills charged to 1936 that were on the cash basis.

Mr. CANNON. Under the present plan, do you think that from now on there will be an increase or decrease in the operating expenses? Mr. NICKSON. The Administrator is adjusting the field operations. Mr. McDONALD. Of course, a certain proportion of our operating expenses depend entirely upon the volume of business we do. For instance, as noted here, the examination fees were $1,350,000 estimated for this year, and that is in direct ratio to the number of new residences built and examined. We examine each new residence, and in each case we charge a fee for, which fee is based on $3 per thousand of insurance. I should say that our business has increased 40 percent during the first 6 months of the current year over the same 6month period in the last year. Notwithstanding that, we were able to reduce our expenses from around $11,000,000 to a little under $10,000,000.

ACCUMULATIONS TO MORTGAGE INSURANCE FUND

Mr. CANNON. What is the total amount in the fund accumulated up to the present time?

Mr. McDONALD. Approximately $20,000,000.

Mr. CANNON. That has been accumulated during the last 3 years? Mr. McDONALD. Yes, sir.

Mr. CANNON. Suppose you give it by years.

Mr. NICKSON. In the first year, it was a very small amount. In 1935 we had hardly any insurance. Our accretion to the fund from interest amounted to about $70,000. In the second year, there were about $1,000,000 in appraisal fees. In the first year, the accretion from appraisal fees and premiums was $282,000; in the second year, $2,100,000, and in the third year, $5,300,000. These are actual collections deposited in the Treasury. It is not considering the items in process.

Mr. McDONALD. Give it for the last few months. There has been a gradual accumulation.

Mr. NICKSON. In January, of this year, we collected $363,000 in premiums and appraisal fees, which is income related directly to this item of insurance, but does not include collections under title 1. In February, the amount was $343,000; in March, $467,000; in April, $495,000; in May, $524,000; and in June, $528,000. So there is a gradual increase.

Mr. CANNON. With this rapid increase, why not take more than $5,000,000 from income.

Mr. McDONALD. There are two reasons for that, I think; in the first place, it is considered the judicious thing to do to still be adding something to the insurance fund, which is now $20,000,000. Instead of not adding to that fund at all, we believe that it is judicious to add to the fund. Furthermore, out of this income, a portion of which we propose to use, a certain proportion of it must be used to pay losses. The losses that have occurred to far have been very negligible. The record has been good, and the loss has been practically negligible; but, at the same time, anybody in the insurance business must look forward to a time when they may have to meet losses. If the present prosperity of the country continues, and things run along as they are, we cannot see anything that would cause greater losses to us, but if those conditions do not continue, our losses might run up.

PRECAUTION TAKEN IN SELECTION OF INSURANCE RISKS

Mr. CANNON. Do you attribute your small losses to the generally better business conditions?

Mr. McDONALD. We have in connection with the Federal Housing Administration a system of selecting our insurance risks, just as we have a system of selection in the handling and appraisal of property. That appraisal, however, is taken, in turn, as a coefficient, along with the man's earning power. That is where we can see ahead for a year or 2 or 3 years, and determine that the man is getting a good income, that he has a good job, with a high-grade concern, or is in good business, and so forth.

Mr. LUDLOW. Does the character element enter into it?

Mr. McDONALD. Yes, sir; he must have an excellent credit rating in his local community. All of that is taken into consideration. It does not mean that the income has to be large. We sometimes take cases where there are two or three members of the family earning an income, as where the father is earning an income and, perhaps, his daughter is working as a stenographer. All of it goes to make up the family income. We use both income and character, or we take both into consideration. We take into consideration the character of the man and his earning power, as well as the appraised value of the property. The two together give us fuller knowledge and a better basis than we would have under the old mortgage system. Mr. CANNON. And you take precautions to guard against unfavorable business conditions.

Mr. McDONALD. Yes, sir.

FORECLOSURES ON PROPERTY

Mr. SNYDER. How are your operations distributed among the several States? Is it spotted, or are all the States represented? Mr. McDONALD. We do business in all the States of the Union, including Alaska and Hawaii. Hawaii stands as number 61 on our

'ist, and we did $498,000 worth of business there the first 6 months of this year.

Mr. LUDLOW. What has been the percentage of defaults?

Mr. McDONALD. We have had conveyed to us after foreclosure approximately 30 properties, and of those 30 properties we have sold, I think, 11. On those 11 properties sold, we have taken a loss of approximately $3,000.

Mr. LUDLOW. How would you say your defaults compare with the defaults in similar nongovernmental operations?

Mr. McDONALD. We have had fewer defaults and a higher rate of payment than in any insurance or mortgage operations ever before conducted in the United States.

STATUS OF FUNDS NOT TO BE WITHDRAWN FROM RECONSTRUCTION FINANCE

CORPORATION

Mr. LUDLOW. The R. F. C. has authority to extend to you $10,000,000 for administrative purposes, and you propose under this new language to draw on the R. F. C. for not more than $5,000,000, as I understand it.

Mr. McDONALD. For not more than $5,000,000; yes, sir.

Mr. CANNON. You are authorized under the Independent Offices Act to use not to exceed $10,000,000 of funds advanced by the R. F. C., and now you propose to use only $5,000,000 from that source, taking the other $5,000,000 out of your own funds.

Mr. McDONALD. Yes, sir.

Mr. CANNON. What becomes of the remaining $5,000,000 that you would otherwise use of R. F. C. funds? Does that money go back into the Treasury?

Mr. NICKSON. It lapses.

Mr. McDONALD. It does not exist.

Mr. CANNON. So far as you are concerned, you make no further disposition of it.

Mr. McDONALD. That is true.

Mr. NICKSON. There will be that much less withdrawn from R. F. C. funds.

Mr. CANNON. There will be an actual saving, then, of $5,000,000. Mr. McDONALD. Yes, sir.

Mr. SNYDER. The R. F. C. will freeze that $5,000,000.

Mr. McDONALD. It really means that the Budget of the United States is reduced by $5,000,000. Indirectly, it means that the Budget of the United States is reduced by $5,000,000 and that our surplus is not increased by that same amount.

AMOUNT AND INVESTMENT OF SURPLUS INSURANCE FUND

Mr. LUDLOW. You have actually piled up here a surplus in a considerable amount.

Mr. McDONALD. We started with $10,000,000, and now it amounts to almost $20,000,000.

Mr. LUDLOW. That surplus exists in what form, or in what way? Mr. NICKSON. In Government securities, under the Secretary of the Treasury.

Mr. LUDLOW. What percent do you get from this investment.

Mr. NICKSON. It is 3 percent. For some investments it is a little over that, and for some it is under. It is 3 percent plus.

Mr. LUDLOW. In terms of dollars, how much does it amount to? Mr. McDONALD. Our interest fund this year will be $561,806. Mr. NICKSON. We had actually invested on the first of June $17,718,000 in Government securities.

Mr. SNYDER. The interest from your surplus is increasing. Mr. McDONALD. Our business increased 40 percent during the first 6 months of this year.

Mr. SNYDER. How did you get that increase? Was its pontaneous? Mr. McDONALD. We have gone through a very intensive educational operation, in which we have shown both the borrower and the lender the advantages of this system. In that way we have built up the business.

PERMANENCY OF FEDERAL HOUSING ADMINISTRATION

Mr. LUDLOW. Awhile ago, you spoke of the time when you thought your activities would be self-sustaining. Do you look forward to a time when it will be desirable to discontinue this operation, or do you think it will be a permanent activity on the part of the Government? Mr. McDONALD. Yes, sir; I do.

Mr. LUDLOW. You do not think it is a temporary activity or agency?

Mr. McDONALD. No, sir; it should be a permanent agency. This agency is receiving a great deal of credit for providing the proper kind of residential construction. We are making it possible for people to own small homes which have a greater value than small homes ever had before. This agency has been performing a very important service in rounding out and in supervising suburban developments, which is something that was badly needed, because one of the greatest crimes in this country heretofore was the fact that suburban property could be developed by fly-by-night operators. The operator would open up an area for development, and would be gone before the paving of the streets was finished. Now we see to it that before the operator secures F. H. A. approval of his project, he must be a man of financial responsibility. We see to it that the plans are good, and that in the construction of the houses the plans are carried out. We see to it that the last building constructed is as good as the first, and that the streets are properly laid out so that the children will not be killed by fast moving motor cars. We see to it that the schools are built, and that sewers and water works are provided.

Mr. LUDLOW. Is your activity extended over all the States? Mr. McDONALD. Yes, sir; over every State in the Union. If the operator does not meet the requirements I have mentioned, he does not get the F. H. A. approval, which means that he cannot get credit at the Federal Housing Administration banks and lending agencies on an insured basis. This cuts him out of access to half the borrowers and half of the concerns who would handle the mortgages.

Mr. LUDLOw. What are the fees?

Mr. McDONALD. We charge $3 per $1,000 for appraisals and charge one-half of 1 percent for insurance.