range of needs in the whole middle-income market, even though we are confident that these provisions would be of substantial benefit in assisting private enterprise in serving a greater proportion of that market than is now the case. I believe there should be general agreement that a sound and workable method for helping to meet those further needs, particularly in the lower ranges of the middleincome market, would be in the public interest.

I am calling these considerations to the attention of the committee in connection with title III of the pending bill because I believe they merit and require careful study. This is particularly so in view of the fact that the financing proposals contained in this title represent a substantial departure from the Federal Government's existing role in housing finance, except in connection with those problem areas where public subsidy is clearly necessary.

With these considerations in mind, I believe the committee will also wish to appraise the effectiveness of the proposals in title III from the standpoint of serving the broad range of needs in the middle-income housing market. On the basis of studies made by the Housing and Home Finance Agency of this and similar proposals, we estimate that the financing formula contained in title III (i. e., a 100 percent loan with interest at 3 percent and a term of 60 years) would result in a gross rent of approximately $69 a month for a 41⁄2 room unit involving an over-all capital cost of $9,000. This estimate makes full allowance for the nonprofit character of the corporations which would be eligible to develop projects under title III as well as for substantial operating economies, including management and operating services well below the level ordinarily furnished in privately financed rental housing projects, plus a considerable amount of tenant maintenance. The FHA's experience with large-scale rental projects with management and operating services of the character generally supplied in privately financed projects indicates that monthly operating charges might well be $10 higher, with a corresponding increase in rents.

Assuming an average range of 20 percent upward and downward from the national cost average between the lowest-cost areas and the highest-cost areas, this estimate would indicate a possible range of achievable gross rents of from about $55 to about $83. Of course, the populations in the higher cost areas generally have relatively higher average incomes and, conversely, the families in the lower cost areas generally have lower average incomes.

On the basis of these estimates, it therefore appears that the financing formula in title III, even when combined with the maximum operating economies which can realistically be expected from a nonprofit cooperative operation, would under current conditions result in rates suitable only for roughly the upper half of the middle-income market.

From the standpoint of public policy, I assume that the committee will also wish to examine other questions in connection with the program proposed in title III, including such matters as (1) the extent to which the economical production of sound quality housing would be assured, (2) the adequacy of safeguards against competition with private financing in markets it can adequately serve, (3) the extent to which the special financing benefits of the title will actually be reserved for middle-income families, and (4) the degree to which the program would become self-supporting on a basis of comparison with

private financing, whenever and to the extent that tenant incomes permit.

With respect to the first two points, title III contains a number of affirmative provisions. Thus, loans would be authorized only for meeting sound standards of design, construction, livability, and size for adequate family life and could not be of elaborate or extravagant design or construction. The economies made possible by the very liberal financing terms offered, as well as by the nonprofit and cooperative provisions of the enterprise, would have to be fully reflected in reduced rents. The estimated rents, plus an allowance for the reduction in debts service resulting from the financing terms, would also have to be substantially below the level at which comparable dwellings in new privately financed rental housing are currently being made available in the locality. Eligible projects would be required to meet a need for families of moderate income not otherwise being met, and admission would be limited to families with incomes too low to afford the rentals on comparable new private rental housing.

With respect to the second two points I have mentioned, I believe the provisions of title III are inadequate to accomplish the objectives set forth. The proposed program would offer extraordinary financing terms, not available to other families, and would do so on the justification of need and of inability to pay the rentals on comparable new privately financed housing. However, title III contains no provisions for the withdrawal of those extraordinary benefits in the event that the incomes of the families occupying the housing increased about the level justifying such benefits. For example, the average incomes of the members of a housing cooperative assisted under title III might well increase over a period of 10 years to a level readily permitting the payment of the going rates for private mortgage financing; notwithstanding this fact, the return to the Federal Government would be frozen at the original low rate for the balance of the loan term. It should be recognized, moreover, that the 3 percent interest rate proposed in title III would involve some net cost to the Federal Government, after taking into account the cost of money; the estimated costs of administrative overhead, including supervision of project development, loan servicing, and supervision of project management; and the possibility of some capital losses.

In the light of these comments, I would like to submit certain alternative suggestions for the consideration of the committee, in the event it should desire to recommend a program of this nature, which would have the effect of adjusting rents to the actual current needs of the tenants and of placing the projects on a completely self-sustaining basis whenever justified by increased tenant incomes. At the same time these alternative suggestions would permit greater flexibility in reaching further down in the middle-income market.

Under this suggestion, a borrowing corporation would establish both a minimum and a maximum rent schedule for the dwellings in a project. The minimum schedule would represent the lowest rents which could be achieved after allowance for operating expenses, including a minimum interest payment of 2 percent. The maximum rent schedule would be the minimum rents plus an allowance for an additional interest payment of 2 percent and an amount equal to 1 percent on the average balance of the loan outstanding. The annual rents charged tenants would be either the minimum rents, or 20

percent of the family's annual income up to, but not exceeding, the maximum rents, whichever of the above were the greater. There would also be a requirement for annual reexamination of tenant incomes and annual adjustments in rents in accordance with changed family income on the basis of the above formula.

On a dwelling unit costing $9,000, the minimum gross rent would be approximately $63 a month, with a possible range in achievable rents from about $50 per month in the lowest cost areas to about $75 per month in the highest cost areas. At the same time, the rents charged families with incomes above the level justifying the minimum rent would be correspondingly higher. Furthermore, as average family incomes in a project should rise over a period of years, the revenues of the project would move toward a fully self-sustaining basis, on a basis of comparison with private financing, and the refinancing of the loan in the private market would be facilitated. In my opinion, such terms would represent a considerable improvement over the present provisions of title III from the standpoint of assuring that the special financing benefits of such a program would be reserved for middle-income families and that the program would become selfsupporting to the extent that tenant incomes permitted.

In my opinion, both the provisions of this title of the bill and these alternative suggestions call for complete and careful study.

Mr. PATMAN. On that point, I would like to ask this question. Instead of having that 3 percent interest rate, with all these things to be done, including a review of the incomes of the tenants every year, suppose we made the interest rate 4 percent and left all those alternatives out. Would that be satisfactory, Mr. Foley?

Mr. FOLEY. Well, of course, you would then have a situation not particularly different from what we are already proposing in section. 213, except that you would contemplate perhaps a longer term of mortgage.

Mr. PATMAN. 213 is a 40-year term?

Mr. FOLEY. Yes, sir, of course we are supporting the proposals in title 1.

Mr. PATMAN. That is 40 years, is it not?

Mr. FOLEY. Yes, sir.

Mr. PATMAN. What is the rate of interest on that?

Mr. FOLEY. Four percent.

Mr. PATMAN. If we made this 4 percent, there would not be a great deal of difference?

Mr. FOLEY. The major difference as far as financing terms are concerned, would then be that under section 213 the maximum maturity would be 40 years, whereas under title III the maximum maturity would be 60 years.

Mr. PATMAN. Why not have a higher interest rate and not have these reviews? I think that would be objectionable, myself.

Mr. FOLEY. In that case, you would have, insofar as your financing terms are concerned, insofar as you have stated them, only the difference in the amortization period from 40 to 60 years. The term proposed in section 213 is 40 years. However, you would have other differences that I would like to comment on and I have commented on them here briefly.

I would also like to comment briefly on the administrative arrangements proposed in title III, involving the establishment of a new

Cooperative Housing Administration as a separate constituent agency in the Housing and Home Finance Agency. Having in mind that such a program, if it were enacted by the Congress, would clearly be of an experimental nature, I believe there is serious question as to the advisability of establising a new and separate organization for its administration, particularly before the effectiveness of the program had been tested by actual experience.

The committee will recall that in recently authorizing the new program of slum clearance and urban redevelopment under title I of the Housing Act of 1949, the Congress did not establish a separate constituent agency for the administration of that new program but rather authorized the Housing and Home Finance Administrator to appoint a director and staff to operate the program under his direction and supervision. I believe that such an arrangement would be preferable in this case if the Congress should decide to proceed with such a program.

Mr. PATMAN. I am inclined to agree with you on that.

At first I did not, but in view of what I have learned about it since, I believe I do.

Mr. FOLEY. Well, that covers substantially my written statement on title III, Mr. Chairman. I will be glad to answer any questions or proceed to the brief discussion of the remaining titles, or if you wish, to place the remainder of the statement in the record.

Mr. PATMAN. How much difference would there be in this section 213 (a) in title III, if we made the interest rate the same, 4 percent? Mr. FOLEY. The chief difference that I remember offhand-I have to stop and remember many provisions of these bills-would be in the terms, 60 years.

Mr. PATMAN. One is 40 years and the other is 60 years.

Mr. FOLEY. That is correct.

Mr. GAMBLE. This is 40 years?

Mr. FOLEY. Title III proposes up to 60 years.

Mr. GAMBLE. Up to 60 years?

Mr. FOLEY. Yes; a 60 year maximum limit and section 213 of title I to which Congressman Patman is referring, has a 40-year limitation.

Mr. PATMAN. Why could we not compromise and make it about 50 years and 4 percent?

Mr. FOLEY. That would, of course, be a matter for the committee to consider, sir. I think in connection with that you would probably like to have us present you with some break-down of what might be the effects of such a change.

Mr. PATMAN. Yes, sir.

Mr. FOLEY. And we will be glad to do that.

Mr. PATMAN. Suppose you break it down on the basis of 40, 50, and 60 percent.

Mr. FOLEY. I will be glad to.

(The information referred to is as follows:)

For a nonprofit cooperative, the estimated gross rents on a 41⁄2-room unit costing $9,000 are presented in the table below. Gross rent includes all utilities and services. Operating expenses included in rent were assumed to be the same as on a rental housing project whose mortgage was insured by FHA under section 608 of the National Housing Act. Rents may be reduced below these estimates to the extent that over-all construction costs are reduced below the $9,000 assumed, and economies in operation are achieved which will result in lower operat

ing expenses as compared with those for section 608 projects. Estimated gross rents are as follows:

Term of mortgage in years

90-percent mortgage.

100-percent mortgage (all-veteran membership) –

401

$88.85
93. 32

1 Sec. 111 of H. R. 5631 with respect to sec. 213 of the National Housing Act.

Mr. RAINS. Of course, there are other provisions which are entirely different in 213 (a).

Mr. FOLEY. Oh, yes.

Mr. PATMAN. You mean about research?

Mr. RAINS. Review, escalator clauses, and so forth.

Mr. FOLEY. If I understood Congressman Patman correctly he was asking me, if we put 50 years in section 213; would there be any difference.

Mr. RAINS. As I read it I do not see even the same philosophy of the Government program for housing in title III that I see in section

213.

Mr. FOLEY. I agree with you, as I have tried to point out in my statement.

Mr. RAINS. That strikes me that we are moving into completely new and unexplored territory in the housing program with title III, and without too much study, because most of the bills, it appears to me, were introduced into this session of the Congress and even though you have moved up the interest rates it has an entirely different philosophy because there are more direct loans.

Mr. FOLEY. Yes; I may have misunderstood Congressman Patman's question. I understood that he was asking me, if 213 were changed, what would be the major difference in the terms of the mortgage. Now, as you point out, there are many fundamental differences in the approach as between 213 and title III. I do not want to leave any confusion as to my answer on that.

Mr. PATMAN. Title III provides for redevelopment projects, where you can have stores, movie houses, and everything else, does it not? Mr. FOLEY. I do not recall exactly.

Mr. PATMAN. Does 213 (a) go that far?

Mr. FOLEY. Other community facilities necessary to the project shall be included, I believe.

Mr. PATMAN. Under section 213 (a)?

Mr. FOLEY. Yes.

Mr. PATMAN. Then there is not a great deal of difference, is there? Mr. FOLEY. Not on that point, but I think Congressman Rains' position is correct that there is a fundamental difference in the approach.

Mr. RAINS. As I see the difference, in this particular section, it appears to me we decide that those in the middle-income group are entitled to the same kind of Covernment aid for housing-not subsidy that we have declared to be the policy of the Government with reference to the extreme low-income group. It appears to me that we are moving up the ladder, step by step.