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it. The day is coming when they are going to get a fair return for their investment and their labor and for these other things. This is the basic problem.

Mr. RESNICK. Thank you. I would like to ask a couple of specific questions.

One, FHA money is very scarce once you get into the cities. In other words, when you get into a city of 50,000 the local banks are not interested in FHA mortgages. What do you do about that?

Mr. Wood. This is a common problem. Beginning in 1965, we set up a new special processing program with special handling for small community FHA transactions. I will have to supply for the record the details of that program. From time to time special efforts have been made to make FHA financing easily available in small communities.

(The information follows:)

FHA ACTIONS To PROVIDE HOUSING IN RURAL AREAS From time to time special efforts have been made to assure availability of credit for housing in rural areas. A new effort was made by the Federal Housing Administration early in 1965 when it issued new instructions with respect to the processing of housing loans in rural areas and wrote letters to mortgage lenders urging their cooperation in this effort. Meetings were held with builders and real estate people and lenders. Minimum property standards were adjusted to permit variations in small communities. In evaluating mortgage credit risks, consideratiton is permitted to be given to the lower living costs existing in small communities.

Following are copies of instructions issued in 1965 to insuring office directors emphasizing the need for making FHA insurance available in small communities. Included also are charts showing the volume of FHA insurance in small communities outside of standard metropolitan statistical areas.


January 13, 1965.
To: Insuring office directors.
Subject: FHA mortgage insurance programs in small communities.

The purpose of this letter is to emphasize the positive actions and the present policies which can broaden the utilization of Federal Housing Administration mortgages in small communities and outlying areas.

It is an inherent principle of our form of government that governmental serrices and facilities must be available to all citizens without regard to remoteness or to the cost of extending service. It is our continuing responsibility to make FHA insured mortgage financing available to all eligible borrowers wherever they may reside. No community in the United States should be considered too remote or too isolated for FHA to serve in a prompt manner.

FHA has the programs and the procedures to serve all areas. However, constant attention by the insuring office director and his staff is needed if the objective of service to all is to be met. Service to the public has first priority at all times; it is never set aside to take care of duties and functions of lesser importance.

During recent years FHA has made many positive changes in its outlook and in its procedures to meet the objective of prompt service to all.

THE SMALL TOWN MARKET FHA recognizes that the small town may have its own standards which differ greatly from the standards required in metropolitan areas. All features of the physical property and its environment must be judged in the light of local acceptance and preference.


In many instances the small town has sufficient stability and market depth to warrant use of Section 203(b). Merchants and professional persons have the financial capacity and the desire to own properties in the higher value ranges. In addition, demand is increased by improved highways and motor vehicles which permit commuting to places of employment in distant urban areas. These conditions widen the market for small town properties to such a degree that there should be no hesitancy to use Section 203(b).

Relaxed standards for Section 203(i) and Section 221 (d) (2) operations permit acceptance of many properties located in areas where it is not practicable to obtain conformity with many of the requirements essential to the insurance of mortgage on housing in built-up urban areas. There must be a constant awareness of the differences between the small town market and the urban market.

PROCEDURAL CHANGES TO ASSURE PROMPT SERVICE In order to reduce the time needed to process an application, FHA introduced major procedural changes, all of which have been highly successful :

1. The conversion commitment procedures now enable the offices to proc. ess about 95 percent of the conversion requests in 3 days or less. A companion procedure for the issuance of conditional commitments is being tried in selected offices.

2. The new compliance inspection procedure permits the builder to continue construction without the delays associated with waiting for the FHA inspector.

3. Dual appraiser-inspector positions are established in comriunities remote from the insuring office whenever the workload warrants. Also, fee appraisal assignments are available to a greater degree than in the recent

past. The foregoing reliefs have had a salutory effect in increasing our total productivity and in developing applications from lenders and areas not heretofore reached by FHA. We expect to develop additional timesaving techniques.


A serious problem in meeting the objective of service to all qualified borrowers is the general non-availability of mortgage money in many small towns. The problem is not insurmountable if each insuring office director will use his good offices to encourage additional sources of mortgage money.

We have the assurances of the Federal National Mortgage Association and of the Mortgage Bankers Association of America of their full cooperation in ex. tending secondary market facilities to small town lenders originating insured mortgages. Insuring office directors have the opportunity to be the catalyst to bring the mortgage originator and the secondary outlet together.

To fulfill this essential catalytic function, directors and their key staff must meet with approved mortgagees, real estate brokers, builders and others in the small towns to familiarize them with current FHA procedures and the benefits that are available to participants in our programs. These educational efforts should extend to detailed assistance in the preparation and submission of applications, the training of mortgagee and builder personnel in FHA requirements and rendering assistance to brokers, builders and others who generate mortgage business.

The State Directors and County Supervisors of the Farmers Home Administration have a good deal of information relating to rural housing, financing needs and availability of mortgage credit. Directors or their designees should meet with the Farmers Home Administration officials to obtain such information and to acquaint them with Federal Housing Administration requirements and processing procedures. Where arrangements are made with approved mortgagees for Federal Housing Administration loans in given areas, the County Supervisors should be notified so that they may refer prospective applicants to the mort. gagees. On the back of this letter is a list of the Farmers Home Administration State Directors from whom the names and addresses of the County Supervisors may be obtained.

It must be realized that all of our efforts will be to no avail unless we can stimulate lender interest. To accomplish this should be a goal for 1965.




Washington, D.C., January 14, 1965. To: All approved mortgagees. Subject: FHA mortgage insurance programs in small communities.

It has become increasingly apparent that there is a substantial unsatisfied demand for FHA mortgage credit in the small communities. From the standpoint of investors, as well as the mortgage banker, we believe that there are loan opportunities in many of these areas which would be profitable and at the same time satisfy the home financing needs in the communities.

FHA is undertaking a series of actions aimed at satisfying the needs of home purchasers in these areas. Attached is a copy of a recent letter to the insuring office directors outlining their responsibility in making mortgage credit available. We have initiated a number of procedural changes bearing on the processing of applications, making appraisals and compliance inspections, and examining credit. We also recognize that minimum property standards in small towns may differ substantially from those in metropolitan areas, and these differences are being taken into account. As we have outlined in our letter to the directors, the Federal National Mortgage Association is also interested in filling this financing void.

Our insuring office directors would be happy to work with lenders, builders, realtors and others in stimulating the availability of FHA-insured mortgage financing in the small communities.


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May 14, 1965. To: Insuring office directors Subject: Underwriting instructions for processing home mortgage applications

in small communities Commissioner Letters 28 and 29 emphasized our policy that prompt service, to the fullest extent possible, under FHA programs and procedures is to be provided small communities and outlying areas.


In the near future, revised instructions which will modify and simplify the analysis of home mortgage properties in small communities will be issued to field insuring offices. These changes, when fully implemented, will provide new procedures whereby the processing of proposed and existing construction will be more compatible to each other.


Meanwhile, the present Minimum Property Standards for One and Two Living Cnits or the MPS for Low Cost Housing will apply. In the application of these standards, specific attention is directed to Letter 1753. The specific case variation procedure described therein is particularly applicable, and greater emphasis on the use of this tool may be warranted.

In consideration of specific case variations, particular attention should be given to customs and practices which have established market acceptance in small communities within each jurisdiction. Variations of this nature may occur in any portion of the MPS, although it is anticipated they will occur in the parts pertaining to building, planning and site improvement. In any case however, FHA must fulfill its statutory obligation to the consumer. Thus, whatever local standards may be recognized, all must be commensurate with structural soundness and durability, must provide reasonably low future maintenance, and must suit the needs of the intended occupants. There shall be no compromise with prescribed standards of health and safety.

Insuring office personnel engaged in the technical processing of applications shall become familiar with the management policy expressed in Commissioner Letters 28 and 29. In addition, the special instructions set forth in 71460.1 through 71460.6 of the manual remain applicable and shall be reviewed.

It is important that technical processing personnel at all levels understand that real estate patterns in small communities include social and economic preferences which are dissimilar to if not markedly different from those encountered in large towns and cities and the residential clusters which are contiguous to such urban centers. Erroneous conclusions are inevitable where field underwriting personnel accustomed to working in metropolitan areas attempt to modify or adapt "big city" standards or market criteria to the analysis of properties in an outlying area or isolated community. It must be recognized that citizens in small towns tend to be less exacting and demanding than buyers in large urban centers. In other words, Section 203 (b) operates in small communities and rural areas just as satisfactorily as in metropolitan centers. The examples discussed below serve to illustrate this concept.

1. Metropolitan area subdivisions may be provided with concrete curb, gutter and sidewalk. Properties not having these amenities would be at a competitive disadvantage and adversely affected in the metropolitan market. In the small community the predominant type of street improvement may be grass swales and oil-treated gravel wearing surfaces. Street improvements of this type are eligible in FHA processed subdivisions when there is no measurable adverse effect on marketability.

2. Close proximity to railroad yards and the noise and fumes associated with diesel locomotive operations may be totally unacceptable in the urban market and rejection of applications would be warranted. In the small community it may be impossible for any site to avoid the railroad, for the town grew around the railroad which was there first. Therefore, little consideration should be given to adverse effects on marketability because of the railroad.

3. Metropolitan area home owners may prefer to have their children walk to nearby elementary schools and playgrounds. Less convenient locations may be at a competitive disadvantage. In the small community all children may travel by bus to more distant township or district schools. Therefore, little consideration would be given to adverse effects on marketability be. cause of the location of schools. Every property in the community is subject

to the same condition. Also, it is unusual for speculative building to occur to any extent in small communities. New building responds much more in such areas to actual supplydemand relationships. Thus, the fact that real estate transfers occur much less frequently in small towns and sales exposure extends for a greater length of time is no indication of a “thin market" unless one compares such market to that existing in a metropolitan center. This nullifies the concept sometimes advanced that valuations in small towns must always be below replacement cost because of a "thin" or "slow" market.

Historically, residential areas in small towns fan out in all directions from the central part unless restricted by geographical limitations. There may be, in fact, no "best" neighborhood to use for comparison. Family income levels tend to vars sharply with a resultant inter-mixing of homes of wealthier citizens among those of modest means. Many existing dwellings in small towns would be considered obsolete or even “reject” if compared with metropolitan markets. Such compari. son is erroneous. It is necessary to view each property in terms of the housing market within which it must compete. With few exceptions, underwriting analysis, properly applied, results in value estimates which are supported by such local market comparisons.

The foregoing illustrate but a few of the many differences to be considered between metropolitan and small town markets. Local social and economic attitudes must be clearly identified in processing analysis if FHA services are to be equally available to all persons, regardless of where they may live.


(Supplements No. 1992)

July 27, 1965.
To: Insuring office directors.
Subject: Variations from minimum property standards to meet local market

conditions. This letter will further implement the policies emphasized in Commissioner Letters No. 28 and 29. The interim instructions set forth in Underwriting Letter No. 1992 are now confirmed and expanded as discussed herein.

The modified underwriting procedures detailed below are effective immediately and will provide a more flexible approach to the analysis of home mortgage applications for proposed construction. They are applicable under all existing small homes programs where the Minimum Property Standards for One and Two Living Units, FHA No. 300, or the Minimum Property Standards for Low Cost Housing, FHA No. 18, apply.


Where local market practices are considered sound and of established acceptance, variations from a literal application of the MPS may be accepted in the various field office jurisdictions where it is deemed appropriate and necessary to conform.

In other words, while the scope and complexity of FHA's programs requires development of uniform operating procedures, these processing instructions cannot cover all situations. Underwriting personnel are expected to exercise initiative and imagination as well as careful judgment in the analysis of proposals. The MPS are basic guides to such judgment for the achievement of sound construction. They are not intended as a handy barrier which may be thrown up to justify an arbitrary decision.

APPLICATION OF MINIMUM PROPERTY STANDARDS The purpose of this letter is not to be construed in any way as a lowering of the level of quality of FHA construction standards. The objectives are to expand the principles expressed in Letter 1753 which are particularly applicable to small communities but equally available in any local market where conditions warrant variations from the national standards.

As one example, the typical builder operating in one or more small towns builds relatively few houses a year and has many different problems as compared to the large volume urban builder. His potential market is smaller, thus he is more service oriented to the purchaser and usually responds readily to personal needs and desires. He may be less inclined to the use of new techniques and materials, relying more on traditional patterns in the community, some of which may vary from current urban standards. Working outside the pressures of volume construction, many of these builders are craftsmen who take pride in their work and handle complaints and latent defects promptly. It is essential that architectural personnel adopt an attitude of helpfulness and understanding in their relations with such builders and avoid the implication of acting as though they were “enforcers” or some sort of federal policeman. -- Similarly, purchasers in small communities or segments of larger urban markets may express individual desires and preferences which require an application of judgment and reasonableness on the part of FHA personnel. The size of the family kitchen may be more important than privacy considerations. Or, a location near friends or relatives may exert more influence than the proximity of land uses which might adversely affect value in other market areas.

Wherever justifiable, planning or construction variations from the MPS should receive a fair and understanding analysis on the part of processing personnel. These variations, however, are obviously not intended as a device whereby properties will be insured which are deficient in structural soundness and durability, hare features which will require costly maintenance, or express design or planning concepts so unusual that values and future market acceptance will be endangered. There shall be no compromise with prescribed standards of health and safety.

ARCHITECTURAL PROCESSING AND INSPECTION PROCEDURES Under instructions stated in underwriting letter 1753, an insuring office is permitted to accept deviations from an explicit MPS requirement, as a "specific case variation" provided “the stated objectives are attained by alternate means." The subject letter extends this concept.

When market analysis indicates that current practice or local custom supports certain variations from the MPS, "guide" tables shall be prepared. These guide tables will be henceforth known as “local acceptable variations." The local acceptable variations will be estabilshed by the Chief Architect and used as a reference by processors and inspectors.

When local market conditions warrant processing of a case under LAV procedure, this will be noted by writing LAV on Form 2800_3 under item 13 in the space provided for the builders name and address. It will be the responsibility of the Chief Architect to designate such cases.

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