actually needs it. It is the smaller operator, of which there are probably 5,000, however, who feels compelled to tread extra cautiously until he can again build up a modest reserve. In the meanwhile, his position is vulnerable, and many loans which he would later feel secure in handling are not made.

In order to encourage maximum utility of this insurance during what otherwise will be periods of uncertainty, we recommend that each bank and other lending institution be permitted to carry over at least a part of their already accumulated reserves, to a maximum of $10,000, for use, if needed, in meeting losses on future loans.

These and other suggestions will, of course, be conveyed to the Commissioner.

The members of this association also endorse the proposal to create a title I Housing Insurance Fund to cover title I, class 3 loansloans which provide for the construction of smaller homes in suburban and rural areas, not eligible for title II insurance. This is simply an extension that has proven to be sound and constructive.

Mr. Chairman, if we were asked, we would also suggest that this portion of the bill be segregated and passed separately. I doubt that that is in our province. We are interested in the extension of title I at this time because we feel that it is a particularly sensitive spot in the economy and we are fearful that if title I were suddenly and abruptly discontinued at the moment it would have an adverse effect on business in general and the credit needs of individuals. Whether that will be forever true, I do not know.

The CHAIRMAN. I think it will be passed before the expiration date. Mr. HESS. Thank you. I will be happy to answer questions. Mr. TALLE. Mr. Hess, how do you account for the fact that consumer credit was not developed until very late, whereas investment credit and commercial credit were developed early?

Mr. HESS. Congressman, if you will remember, 20 years or so ago consumer credit was regarded as something that was an evil rather than a boon to the individual. The members of this association have been trying to sell consumer credit for the past 20 years.

Mr. TALLE. Is it not true that until fairly recently the theory of landing was that the loans should be self-liquidating?

Mr. HESS. That is a carry-over from the commercial lending philosophy.

Mr. TALLE. That is right. You see, the investment loan qualified under that theory, and so did the commercial credit loan, whereas if I would borrow money to buy an overcoat that would not be a selfliquidating loan.

Mr. HESS. As I said, we have been trying to sell the theory that time plus earning power plus character is as sound a basis for making a loan as any other form of credit, and I think that that position has been pretty well justified by now in the last 10 or 15 years.

Mr. TALLE. I think you are entirely right. I think it was a mistake to leave the consumer credit field to the loan shark and the pawnbroker.

Mr. HESS. We agree.

Mr. TALLE. So you need not apologize for the position you hold, and I understand that you do not. I say: "More power to you." Mr. HESS. I am not.

The CHAIRMAN. You may stand aside, Mr. Hess.

Mr. Krooth, will you identify yourself for the record?

STATEMENT OF DAVID L. KROOTH, ON BEHALF OF THE NATIONAL HOUSING CONFERENCE

Mr. KROOTH. My name is David L. Krooth. I am appearing on behalf of the National Housing Conference, a nonprofit organization which, during the last 18 years, has been devoted to the objectives of a comprehensive and balanced housing program.

Congress is to be congratulated on its forward-looking action in the recent passage of legislation to provide Federal aid for housing for families of low income and for slum clearance. That measure involved subsidies that were needed to bring decent housing within the reach of low-income families-generally described as those in the lowest income third.

For the families in the highest income third, housing is generally available without Government aids, except those involved in programs of insurance or guaranties of mortgages.

The really serious problem in housing which has not been met by any legislation is the problem of the middle income third. These are the families of moderate incomes, ranging from annual incomes of $2,500 to $4,000. The housing needs of a large group of these families are now neglected. A sound national housing policy requires a program that will meet these needs. The way in which these needs can be met does not involve any Federal subsidies under the provisions of H. R. 5631. Nor does it involve public ownership of the housing. The housing to be provided for these middle-income families would be privately-owned housing that would be privately constructed. To the extent possible, it would also be privately financed. It would only involve Federal lending when necessary and when private financing is not available.

We are in favor of the additional measures included in this bill which will improve the existing aids through private financing for private construction of housing. We also support a program of continued efforts to reduce the cost of housing. These measures are necessary to encourage existing private financing programs to reach further down in the income scale with housing. However, we believe that those measures will not reach down far enough to serve many lower income families, i. e., those whose incomes are above the level eligible for public housing but lower than what is needed to get privately financed housing. To meet their needs requires new forms of Federal aid through long-term loans at low interest rates to cooperatives and other nonprofit organizations.

To bring the monthly cost of housing within the reach of these lower-income families, it is necessary that Federal loans be made at interest rates representing the cost of money to the Government, plus the cost of administration. To assure that the benefits of this financing are reflected entirely in lower monthly costs of housing to the occupant, this type of loan would be available only to cooperatives and other nonprofit corporations.

The cooperative is a means of people building for themselves, and owning as a group rather than owning houses individually. There are certain savings that result merely from the use of cooperatives. First, there is the nonprofit feature because the people are undertaking and operating the project for themselves, without speculative profits. Second, cooperative owners of a group development can do much of

their own work in maintaining the project. Third, by building homes in a group rather than individually, there are savings in construction costs. The use of cooperatives, with Federal assistance, has been most successful in other fields including rural electrification and farm cooperatives, and cooperatives of water users on irrigation projects. Families with modest incomes should be able to get financing for such cooperative, group housing developments, and get the financing on terms which will make it possible for them to afford decent homes for themselves. These should include long-term loans which will allow the people to pay for the housing during the period of its useful life rather than having those living in the project during the first half of its useful life pay the whole cost. They should also include lower interest rates amounting to the going Federal rate plus one-half of 1 percent for administration.

Through the various savings under title III of the bill, it will be possible to reduce the monthly costs of housing from $96 on a typical FHA rental project to a total cost of about $60, including utilities, or a reduction of more than one-third. It is not the position of the National Housing Conference that the housing needs of all of the families in the middle income group can be met only by this program of direct loans by the Government to cooperatives and nonprofit corporations. Title III of H. R. 5631 soundly recognizes that this type of Federal aid is to provide housing only for those families of modest incomes who cannot afford to pay the rents at which decent dwellings are currently being produced in the locality under private financing.

The question has been raised as to whether this type of Federal loan to meet a housing need among lower-income families is in keeping with our system of democracy and private enterprise. It is our considered judgment that it is not only in keeping with these principles, but that measures of this character are essential to the strengthening and maintenance of our system against the threats of communism and other "isms." The strength of our American system depends upon a strong middle class. They constitute the very backbone of this country. Their welfare and their needs must not be overlooked by a housing program which would provide decent homes for the families at the top and those at the bottom but would leave many of those in the middle neglected.

There are some who oppose this program because they call it a departure from our private enterprise system. They do not oppose the part of our housing financing system under which, through FHA or the Veterans' Administration, the Government guarantees the investor against loss from the purchase of mortgages. Nor do they oppose the part of our present financing system under which the Government stands ready to buy these FHA-insured or VA-guaranteed mortgages from the private mortgage institutions under arrangements which permit these institutions to continue to handle the servicing on the mortgages.

The National Housing Conference is in favor of these parts of our present housing financing program. It endorses the provisions of H. R. 5631 which are intended to improve and extend those programs. We believe that those aids represent a part of a sound housing program in a private enterprise system, even though they involve an underwriting by the Federal Government and an assumption of the

risks involved in that mortgage financing. Those forms of Government insurance and guarantees have proved necessary to stimulate adequate housing construction.

We believe, equally, that if private financing is not available, it is an essential function of Government to make loans at low interest rates, with long periods of amortization, to cooperatives and nonprofit corporations when this is necessary to provide housing for lower income families whose needs cannot otherwise be met. The distinction between direct lending by the Government, and a Government guaranty against the risks of loss on mortgages is not substantial, so far as concerns the extent of the Government risk or exposure. In either case, the housing is privately owned. In either case, there is no subsidy. In both cases, the Government is taking the risk, whether through making the loan or through guaranteeing a private lender against loss on his loan.

So far as basic policy is concerned, there are two questions involved here: One, whether there should be direct loans made by the Federal Government and, second, as to the interest rate. It is our position that when the interest rate involved in such loans is attractive to private lenders, we favor Government insurance of the loans to get the private lenders to provide the finances.

It is also our position that when the interest rate is below a level that is attractive to private capital, but when such a rate is nevertheless necessary to achieve an objective in the public interest, or when a loan is unattractive to private capital because of limited experience with the type of operation involved, then we favor direct Federal loans. The final question arises as to the justification for a lower interest rate on loans to cooperatives and nonprofit corporations to provide housing for lower income families whose needs are now neglected. This is a question of basic policy for the Congress to determine in the field of housing. There have been other lending programs in other fields under which it was regarded as sound national policy to make direct Federal loans at low interest rates where this was necessary to achieve an objective in the public interest.

Thus, long-term loans are being made to cooperatives for rual electrification at an interest rate of 2 percent, loans are being made for farm cooperatives at interest rates as low as 2 percent and 3 percent, and cooperatives of water users in reclamation projects are granted periods in excess of 40 years to amortize the cost of irrigation projects without interest.

Clearly if the housing needs of lower income families can be met without this form of direct Federal lending at low interest rates, no responsible group or person would advocate it. Likewise, we feel that if this need cannot be met without this form of aid, it is a responsibility of Government to provide it, as part of a comprehensive housing program. We believe this is the case and, consequently, we urge the passage of title III of H. R. 5631.

We believe that the provisions of title II of the bill represent a sound and carefully conceived program for the disposition of war and veterans' housing. They will get the Federal Government out of the business of operating and managing these housing projects. They wisely recognize that the decisions involving the continued use or disposition of this housing should be made by the elected representa

tives of the community through the governing body of the municipality involved.

We want particularly to endorse the provisions of the bill providing for the transfer of 120 permanent projects for use as low-rent housing, in accordance with the request of the governing bodies of the municipalities.

In conclusion, we favor the enactment of H. R. 5631 as a measure which will make our housing program a balanced and comprehensive one, with housing available to families in all income groups.

With your permission, I would like to file for the record a detailed analysis of the savings and monthly costs achievable under title III of this bill. This analysis shows in detail how a cooperative aided under title III can achieve a monthly saving of $37 and reduce a $96 monthly cost under Private, 608 financing to $59. Over half of this is due to the unique contribution which a cooperative can make, apart from the savings in financing costs made possible by the bill.

If the committee desires further information as to this analysis, I should be glad to furnish it.

I have not tried to go into any of the details of the provisions of this bill, as I felt that the committee would prefer to ask questions concerning them. I shall be glad to try to answer any questions.

The CHAIRMAN. The attached statement may go into the record. (The statement referred to is as follows:)

SAVINGS AND RENTS ACHIEVABLE UNDER TITLE III PROGRAM OF H. R. 5631

The effect of this program of long-term loans at low interest rates to cooperatives and nonprofit corporations can be seen from an analysis of the savings under this new program, as compared with an FHA-insured rental development under section 608.

For a two-bedroom unit the average monthly cost of a 608 rental project is between $90 and $95. Allowing for utilities, a fair average figure would be $96 per month. This is based upon a unit costing $9,000, with a mortgage of approximately $8,000.

A total of $37 per month can be saved by a cooperative or nonprofit housing project which would reduce this monthly cost to $59 based upon a Federal interest rate of 3 percent and based upon no State or local aid. The amount of additional savings that can be achieved by State and local aids will be indicated separately. These savings under this program would consist of the following:

1. The monthly financing would be reduced from $40 to $24, or a saving of $16. The lower figure represents the carrying charges applicable to a mortgage loan of $8,000 on a dwelling. This $8,000 cost figure is comparable to the $9,000 cost on a 608 rental development because those 608 projects include allowances of 5 percent respectively for architects and builders; also allowances based upon the appraised value of the land in use as a rental development, rather than its acquisition cost. These allowances (which often do not include out-of-pocket costs) amount to approximately $1,000 per unit. On a cooperative or nonprofit project, these allowable 608 costs would be eliminated, so that an $8,000 cost and mortgage figure is comparable to the $9,000 figure on a 608 project.

2. The nonprofit feature would save monthly at least $5. It is customary to figure a 6-percent return on the $1,000 of credited investment in a 608 project. There would not be such a return on a cooperative or nonprofit project.

3. There is a vacancy allowance on 608 rental projects representing 7 percent which amount is $6.30 a month. Since the rents are so high and the market is thin at that level, such a vacancy ratio is probably necessary on 608 projects. However, on the lower rental projects made possible by liberal credit, 2 percent would be more than ample. Public housing projects have an experience of less than one-half of 1 percent on vacancy and collection losses. This reduction would involve a monthly saving of $5.

4. The monthly operating and maintenance expenses in FHA rental projects average $33. This includes the provisions of many services by the management.