Estimated monthly rent per unit achievable by a nonprofit association using 100 percent direct loans compared with a rental project whose mortgage is insured by FHA under sec. 608 of the National Housing Act, assuming a 42. room unit with total cost of $9,000 1 1 The figure of $9,000 for the total cost of a 41⁄2 room unit does not represent a determination that such a figure is an achievable average cost. For each $1,000 by which actual costs were increased or decreased above or below the $9,000 figure, the estimated monthly rent per unit on the HHFA estimates should be increased or decreased as follows: In the case of the nonprofit association $4.36 where the interest rate is 211⁄2 percent, and $4.70 where the interest rate is 3 percent; in the case of the FHA sec. 608 project, $7.16. Assuming sponsor is a private corporation operating for a profit, rather than a nonprofit organization. Data derived from testimony of NPHC representative, pp. 250-251, Hearings Before a Subcommittee of the Committee on Banking and Currency, United States Senate, on General Housing Legislation, February 1949. 4 Figures are for all utilities, including gas and electricity. These figures for estimated operating expenses represent a Nation-wide average based on actual operating experience on low-rent public housing projects assisted under the United States Housing Act. They represent what is achievable with minimum services and efficient operation, and reflect the benefits of tenantmaintenance. Insurance rates are low due in part to location and generally fireproof construction, and in part to a Nation-wide effort on the part of PHA with insurance companies to secure the most favorable rates. These figures for estimated operating expenses represent actual operating experience on large-scale rental housing projects insured by the Federal Housing Administration adjusted to reflect what in the opinion of FHA represents a national average operating cost on a well-run project. All services are included. 7 Including FHA mortgage insurance premium of 2 of 1 percent. 8 Based on a 100-percent $8,000 mortgage. The NPHC representative testified that the unit costing $9,000 assumed under a sec. 608 operation could, under this direct loan proposal, be reduced to $8,000. A contingency reserve of at least 3 percent would be advisable. 10 The vacancy reserve estimated at 5 percent is conservative. FHA, because of extremely low rents, generally allows about a 3-percent reserve, although in actual experience the loss has run about 4 of 1 percent. 11 Represents a 7-percent vacancy allowance. 12 Represents a 2-percent vacancy allowance. ANALYSIS REQUESTED OF DAVID L. KROOTH ON BEHALF OF THE NATIONAL HOUSING CONFERENCE RE ESTIMATE OF ADMINISTRATOR OF HOUSING AND HOME FINANCE AGENCY As requested by the committee, we are furnishing herewith our analysis of the differences between the estimates furnished by the Administrator of the Housing and Home Finance Agency and the estimates which we have furnished as to the savings achievable under title III of the bill. First. The Administrator and we are in agreement that substantial savings can be achieved through the proposed program. The Administrator states that with loans of 3 percent interest under title III the monthly savings in comparison with a 608 rental project would be $31. He makes his comparison with a $100 FHA rental. We have cited a savings of $37, based upon a comparison with a $96 FHA rental. Second. As to the amount of rental achievable in dollars, based upon a 3 percent interest rate, the Administrator has stated that the rental achievable is $69, whereas we have stated that it is $59-a difference of $10. The explanation of those differences and the justification for our estimate is as follows: 1. There is a $3 difference as to the estimated amount of debt service because the Administrator is assuming that a $9,000 FHA 608 rental unit would cost a nonprofit cooperative $9,000. We do not believe this to be the fact. It is com mon knowledge that the developers of FHA 608 projects have gone into them on. a basis where they expected to mortgage out, and most of the developers succeeded in achieving that expectation. The reason that this was possible was because they were granted an allowance for their land based, not on its cost, but on its appraised value in use as a rental housing project. In addition, they were allowed 5 percent for architects' fees and 5 percent for builders' fees. In actual practice, we understand, the difference between the actual costs and these allowances has approximated $1,000 per unit. A cooperative nonprofit corporation would not put its land in at more than what it cost, nor would it charge into the project more than the actual cost of architects' and builders' fees. There is no reason why they cannot achieve the same level of actual costs on these items as developers on 608 projects. Since they are not seeking a profit representing the difference between actual costs and allowances or "credited" investments, their $8,000 unit will be the equivalent of a $9,000, 608 rental unit. This difference of a $1,000 accounts for the $3 per month difference in debt service between our figures and the Administrator's. 2. The Administrator includes a contingency reserve of about $2 per unit in the cooperative projects although no such item is included in FHA 608 rental projects in this table. Just as the FHA operating expenses include reserves for repairs, maintenance, and replacements, these items are included in our estimates of operating expenses on cooperative projects. Accordingly, we see no justification for adding the $2 figure to the estimated rents of cooperatives when a like figure is not presently included in the FHA 608 rental projects. As a 3. There is a difference of over $2 between the allowance for vacancy and collection losses included in the Administrator's estimate and our own allowance. While the Administrator states that public-housing projects include a 3-percent reserve in the rents for vacancy and collection loss, his letter admits that in actual experience the loss has run about one-fourth of 1 percent. Consequently, the reserve is 12 times as great as actual experience proved necessary. result, these reserves in public housing projects do not continue to be cumulative but are later merged in a general reserve. Based upon the estimated rentals of $60 under title III and the cooperative ownership of the projects with consequent reductions in turn-overs, we feel a 2-percent allowance for vacancy and collection losses is entirely adequate. It is eight times greater than the actual experience in public housing projects. 4. The balance of the difference consists of differences between our estimates as to the savings in operating expenses The principal reason for these differences reflect the estimates as to the savings from tenant maintenance. We have assumed that in a cooperative where the people owned the project we could expect tenant maintenance equivalent to the best that had been achieved in public housing projects rather than the average. There is a difference of about $2.50 between the best achievement on tenants maintenance and the average achievements. We think it is fair and reasonable to assume that there will be greater incentives in cooperative ownership to have a larger degree of tenant maintenance, and therefore it is not unreasonable to assume that the best experience in public housing can be achieved in cooperatives, so far as tenants' maintenance savings are concerned. For the foregoing reasons we continue to stand on our estimate that a rental of $59 is achievable under title III of the bill, and that our estimate which is $10 under the Administrator's is justified by experience and by the nonprofit cooperative features involved. However, even on the basis of the Administrator's estimate, it is admitted that the savings achievable will be $31 under a comparable FHA 608 rental project. Mr. HAYS. It is understood you have the privilege of indicating in the record any comment. Mr. MITCHELL. You indicated that the bill here would prove the ability of the housing industry to meet the housing needs. I wonder if you could outline that a little more for the record. Mr. KROOTH. For one thing, insofar as the bill will help to assure the GI that he can get a 4-percent loan on a 25-year basis, it is going to keep his monthly cost down. So many of them have not been able to get that kind of financing, but have had to go to 5 percent financing on part of what they need and then go over into secondary financing on the balance, so I think that is one way in which the bill helps.. Another way is on a couple of points, there is an extension of the period of amortization. I think that is a step in the right direction. Personally, I would like to see 10 years, or even 15 years more allowed on home mortgages, but with the proviso that the limit on the length of the mortgage would not exceed the useful life of the property. To the extent that this bill tends to keep interest rates down or to encourage longer periods of amortization, it helps to bring privately financed housing within the reach of more of the people. Mr. MITCHELL. What is the situation with regard to interim financing for housing construction projects? Mr. KROOTH. I think that is a very serious problem that is being faced today, particularly in the case of GI financing. Even in those cases where the mortgage banker is willing to take the GI paper at 4 percent and 25 years, there is no method by which you can get construction financing on it under the VA program. The houses have all got to be sold first for VA guarantees. Yet, you have to have a take-out on the permanent financing before you can go to any bank in order to get the construction financing. I happened to be present at the hearings before the Senate committee when the Home Builders Association were testifying and suggested the need, if we are to have a GI system, for a firm commitment to the builder under that system, similar to what we have under the FHA system, so that construction financing will be available. I agree with that suggestion. Another thing is, as an outgrowth of the committee hearings that Senator Flanders held a year ago on the high cost of housing, Congress enacted section 611, which was supposed to encourage large scale modernized construction. The limit put into the law was too low. It provided for $6,000 and this bill would boost that, but in addition to that, I would like to see the secondary market opened up, so that if the private bankers would not take that kind of paper under section 611, then under the secondary market provisions it would be available so we could achieve the purpose of making construction financing available for some of the progressive builders who are trying to get lower costs. Mr. MITCHELL. It has been said here this morning and it has been said in the hearings, too, that the cooperative method of approaching the problem is experimental. To what extent do we have information now on the success of the proper approach to housing. Mr. KROOTH. In the case of the public housing projects disposed of to cooperatives, I think that those have proven very successful. Way back in the Public Works Administration program, there were loans at 4 percent interest to a few cooperatives and they had built projects. There is one in Philadelphia that has been operating successfully. Here recently the New York banks have gotten together and there is a multi-million-dollar cooperative that is going up in New York. It is going to reach an income group a little bit higher than what we are talking about under title III. But evidently those bankers, on the basis of their analysis of other cooperatives were willing to put their money into the cooperative, because they felt that as a method, it was sound. That feeling is not widespread yet, but I think those folks who have decided to go into it, made a study of it and satisfied themselves that it was a sound thing. Mr. MITCHELL. We talked here this morning about living and working together. Do the cooperatives that exist so far indicate a willingness on the part of the people both to live and work together, to get the savings which we are talking about today? Mr. KROOTH. I would say "Yes," and I would say this further thing: That the success of a cooperative does not depend on its just being a group of people together, because I think it is important to the success of a cooperative that the group that works together is a group that has some common interest. Now, the American Legion and the Veterans of Foreign Wars and the labor groups each have as their idea that they will go out and help their members form themselves into cooperatives, so that the cooperative will have the aid from an organization that helps to keep them together on a basis of common interest. I think it is important to the success of a cooperative to have an integral character in the group in terms of community of interest. That is part of helping them to work together. Mr. TALLE. Will you yield to me there? Mr. MITCHELL. Yes. Mr. TALLE. How many in-laws do you permit in a cooperative? Mr. KROOTH. I have had no sad experience on that particular subject, Congressman, so I am not a good one to answer that question. Mr. TALLE. Neither have I, but I have heard so many mean things said in this room about in-laws, and that is why I asked the question. Mr. KROOTH. Seriously, I do think that the problem about in-laws living with people is one of the sad incidents of our housing shortage, and I know it has made many unhappy families. This measure, to the extent that it would help meet the housing shortage, would help the in-law question. Mr. MITCHELL. One more question. In regard to your statement and the necessity of a separate agency to administer this title, Mr. Foley indicated in his testimony that since the job to be done was a new and experimental one, that perhaps it would be better to go along without a constituent agency handling this specific problem. My own feeling is that its experimental part is perhaps the reason for having a separate constituent agency which would work on this one problem. I wonder, on the basis of your experience, both in Government and out of the Government, whether you would comment a little more completely on that. Mr. KROOTH. I personally feel that just as important as passing good laws, is the question of good administration. Lots of times good laws and good intentions get defeated either by bad administration. or a lack of concentrated administration on a particular problem. When we are going into a new program, like cooperatives, I think it is just as important as having legislation to fix a responsibility in an individual of Presidential appointment, who would have an organization working on that problem alone. It need not be a big one to start with, but it would have that job and no other job to do. Otherwise, administrators are all so busy that if they get additional responsibilities, they are likely to keep on working on the things that they are accustomed to, and tend to neglect the new programs that are added. It is just a part of human nature. Mr. MITCHELL. The administrators now are getting those responsibilities? Mr. KROOTH. That is correct. Mr. MITCHELL. In an already difficult situation? 94397-49- -17 Mr. HAYS. Thank you, Mr. Krooth. You may stand aside. STATEMENT OF J. A. RIGHTLEY, CHAIRMAN, NATIONAL CO- Mr. RIGHTLEY. I am J. A. Rightley, chairman of the National Cooperative Mutual Housing Association. I am an auto worker, currently working as director of the United Auto Workers cooperative housing program, and am interested tremendously in housing. I want to testify in support of House Resolution 5631, and do not necessarily want to make any changes in the title III section on the cooperative provision. There are several things, though, that might be changed. One is in the 100-percent mortgages that in our cooperative set-up we would require an individual to make some kind of a substantial down payment. That has been the practice in the past. The National Association of Housing represents a group of 20 groups that have been formed in the 40's, had to suspend operations during the war and they are very anxious now to start building houses for their members. They seem to have run into several difficulties, and I would like to testify specifically for a separate Cooperative Housing Administration. We have in Detroit the Schoolcraft Gardens, which is a group of technical people. The fellow who heads it up is an architect. There are several people there that are interested in architectural and planning work, that have developed the project, plus about 40 people who are of moderate-income groups. They had been planning for about a year and a half when House Bill 6959 was passed at the special session of Congress last year. That provided to give aid to a group such as Schoolcraft Gardens. It now lacks about 8 days of being a complete year since that bill was passed and made law and there has not been one housing project developed under that. The reasons are that there were no procedures worked out by which the group could operate under this. In working under FHA, it seemed that every time they met any of the requirements that were set up there seemed to be some changes made which represented another obstacle that the group had to go through to be able to qualify for FHA loans, and so forth. I just met with this group this week, before I came here, and they are quite concerned about it, because it seems as though the people in FHA, who do not understand cooperatives, just were not in favor of having cooperative housing being built, even though this act was passed specifically to give aid to such groups. It seems as though the people that administer it interpret the law to sort of stymie the group, or put obstacles in their way. That is one of the reasons we would like very much to have this administered under a separate set-up under the Housing Agency. Another provision that we would like very much to talk about is the amortization over the useful life of the property. Our people, or people that are in these cooperatives that I know of, are people that represent an income group of around $3,000, maybe as high as $5,000. The bill states in very general language that for a middle-income group, it does not put any maximum limit there. We do have one project in Center Line, Mich., which is just outside of Detroit, a |