the Government should undertake, first, to define the limits of the moderate income family, and, second, to make equal benefits available to all persons within that class. It is obvious that such a program would ultimately lead to the building up of an enormous direct lending Government function of literally billions of dollars per year. It should be kept in mind that the annual production of the home building industry today is approximately $7,000,000,000 a year, according to the Bureau of Labor Statistics of the Department of Labor. As home builders, and as members of the vast army of American small-business men, we see the dangers of this type of program, not only to the lenders, but also to our entire economy. This proposal is only one step removed from the type of thing authorized in the recent Public Housing Act. The only distinction is that in this case loans and not grants will be made to the beneficiaries. In the last analysis, a gift would be made to the participants in such a cooperative in the form of 2 percent a year on the total amount loaned. This is the difference between the cost of home mortgage money on today's market and the 3-percent Government rate. No account is taken in this proposal of the cost to the Federal Government of administering such a program in its inevitable expanded form, nor of the inevitable losses which would occur through default. These costs of loan operation would be additional direct expenses placed upon our taxpayers. Incidentally, in connection with housing cooperatives, there has been some experience with them for 20 or 25 years and they have not worked very satisfactorily. I noticed in reading this morning's Washington Post, an article concerning one of the large cooperatives here in Washington on page 10, in which the headline is "Broadmoor assessments hiked 40 percent," and it refers to a cooperative apartment project called the Broadmoor which is the equivalent of the rent paid in a cooperative, and which is to be raised from the original 1 percent of the original cost of each unit, 1 percent per month, by 40 percent and it says that the original estimates Mr. MULTER. The assessments were increased to 1.4 percent from 1 percent. Mr. LOCKWOOD. 1.4. That is what I would gather from reading the article. It says that the reason for it, is because the estimated cost of operation, evidently estimated before they understood the project, has not provided sufficient funds with which to cover the present actual and recurrent cost for maintenance and operation of the property. Mr. Flynn, who is the man quoted, said: The principal reasons for the increase in the regular assessment were increased expenses such as real estate taxes, sales taxes on fuel and supplies and failure to realize the expected income from services provided. Mr. MULTER. Before you leave that subject, can you supply usnot immediately a statement of other instances of that kind where cooperatives have not proved successful? Mr. MITCHELL. And can you give us the number of cooperatives in the country? Mr. LOCKWOOD. We are not a statistical agency and we may not be able to do that. Mr. MULTER. Will you give us what information you have on the subject? increase the number of loans that the Federal National Mortgage Association will be asked to purchase. Mr. MULTER. Do you not think before we fool around with the interest rate, we might experiment with giving VA the right to make commitments in advance of occupancy? Mr. LOCKWOOD. You mean firm commitments? Mr. MULTER. Yes, just as FHA does. Mr. LOCKWOOD. I am not saying that you should experiment with the interest rate. I am merely saying that you should direct the Administrators to standardize the rate. Mr. MULTER. Before we touch the interest rate or change the interest rate, give VA the right to make commitments in advance of construction and in advance of occupany, just as FHA does and see if that does not step up the program. Mr. LOCKWOOD. I think they are two unrelated subjects. They are not directed at the same thing. The need for firm commitments under the Serviceman's Readjustment Act is in order to take this heavy load of processing off of FHA, issuing commitments that they never expect to enter into a final insurance contract on, and also to make it possible without resort to FHA to give the benefits to the veteran of mass production technique on a large project, which requires a firm commitment as a basis for financing the production of that project, whereas the objective of standardizing interest rates at a uniform figure is to prevent the preference for FHA loans on the part of the lenders, which is a perfectly natural thing, because of the one-half percent higher interest rate, working as it does to the detriment of the veteran in obtaining a loan. Mr. KUNKEL. Mr. Lockwood, are both the VA and FHA mortgages endorsable without recourse to Fannie Mae? Mr. LockwoOD. Yes. Mr. KUNKEL. Both of them? Mr. LOCKWOOD. Up to 50 percent of the portfolio. The provisions of the proposed title III, beginning at page 57 of the bill, together with direct Federal loans through the VA, referred to above, are easily the most controversial portions of the bill, as you know, this title would provide a new Cooperative Housing Administration under HHFA with a billion dollars available for direct Federal loans, including development advances, at a rate of approximately 3 percent for a maximum of 60 years to cooperative or nonprofit housing organizations. These loans would be made by the new agency to construct rental projects for "families of moderate incomes." These provisions contemplate giving the cooperative type of organization a strikingly significant economic advantage over comparable private individuals or corporations with whom they would be competing. Aside from determining the meaning of the wholly unsatisfactory definition of moderate income families is the fact that such cooperatives would enjoy a rate of interest and amortization terms completely unavailable to private enterprise. The resulting economies would thus not be a product of any unique production or organizational techniques, but rather the result of a governmental hand-out. The funds made available to them, which would undoubtedly be expanded as time goes on, could be made available only because of the power of the Federal Government to tax all of the people. Further, this legislation would be of the most discriminatory type unless the Government should undertake, first, to define the limits of the moderate income family, and, second, to make equal benefits available to all persons within that class. It is obvious that such a program would ultimately lead to the building up of an enormous direct lending Government function of literally billions of dollars per year. It should be kept in mind that the annual production of the home building industry today is approximately $7,000,000,000 a year, according to the Bureau of Labor Statistics of the Department of Labor. As home builders, and as members of the vast army of American small-business men, we see the dangers of this type of program, not only to the lenders, but also to our entire economy. This proposal is only one step removed from the type of thing authorized in the recent Public Housing Act. The only distinction is that in this case loans and not grants will be made to the beneficiaries. In the last analysis, a gift would be made to the participants in such a cooperative in the form of 2 percent a year on the total amount loaned. This is the difference between the cost of home mortgage money on today's market and the 3-percent Government rate. No account is taken in this proposal of the cost to the Federal Government of administering such a program in its inevitable expanded form, nor of the inevitable losses which would occur through default. These costs of loan operation would be additional direct expenses placed upon our taxpayers. Incidentally, in connection with housing cooperatives, there has been some experience with them for 20 or 25 years and they have not worked very satisfactorily. I noticed in reading this morning's Washington Post, an article concerning one of the large cooperatives here in Washington on page 10, in which the headline is "Broadmoor assessments hiked 40 percent," and it refers to a cooperative apartment project called the Broadmoor which is the equivalent of the rent paid in a cooperative, and which is to be raised from the original 1 percent of the original cost of each unit, 1 percent per month, by 40 percent and it says that the original estimates Mr. MULTER. The assessments were increased to 1.4 percent from 1 percent. Mr. LOCKWOOD. 1.4. That is what I would gather from reading the article. It says that the reason for it, is because the estimated cost of operation, evidently estimated before they understood the project, has not provided sufficient funds with which to cover the present actual and recurrent cost for maintenance and operation of the property. Mr. Flynn, who is the man quoted, said: The principal reasons for the increase in the regular assessment were increased expenses such as real estate taxes, sales taxes on fuel and supplies and failure to realize the expected income from services provided. Mr. MULTER. Before you leave that subject, can you supply usnot immediately a statement of other instances of that kind where cooperatives have not proved successful? Mr. MITCHELL. And can you give us the number of cooperatives in the country? Mr. LOCKWOOD. We are not a statistical agency and we may not be able to do that. Mr. MULTER. Will you give us what information you have on the subject? Mr. LOCKWOOD. We will be glad to do that. We will forward a memorandum in a few days. I think it is obvious that once you initiate housing of the type envisioned in title III that you would be getting into an enormous direct lending program and no one at this time could tell how many billions of dollars would ultimately be involved. (The information requested above is as follows:) Mr. WILLIAM J. HALLIHAN, NATIONAL ASSOCIATION OF HOME BUILDERS, House Banking and Currency Committee, New House Office Building, Washington, D. C. DEAR BILL: I am attaching a copy of the memorandum which Mr. Lockwood agreed to supply for the record in connection with his testimony, August 4, on housing cooperatives. Kindest personal regards, JOHN M. DICKERMAN, Legislative Director. RISKS INHERENT IN COOPERATIVES In his testimony before this committee, Rodney M. Lockwood, president of the National Association of Home Builders, cited as one instance of unfortunate experience with cooperatives the case of the Broadmoor Apartments in Washington, D. C., which, according to the newspapers on the morning of his appearance, had found it necessary to raise the monthly charges to its owner-occupants by 40 percent. The committee has requested the submission of further instances tending to prove the contention of the association that the history of cooperatives in this country affords no basis to believe that housing over an extended period of time can thereby be provided for members of a cooperative at less than it can be produced commercially. This association, of course, does not have access to the records of cooperative organizations. It cites, however, as a matter of common knowledge two instances in which groups of cooperators failed of their stated objectives to attain lower costs through the cooperative form of ownership. These are (a) The Bannockburn cooperative in suburban Washington and (b) the CIO textile workers group in Front Royal, Va., both of which, starting with the announced purpose of providing members with homes at lower costs, ended by conceding that the homes which they had produced cost as much as (and possibly more than) those built by operative builders. A third project in southeast Washington, the exact name of which we have been unable to ascertain, acquired a sizable tract of land but was never able to commence operations. * * These recent experiences are in accord with the history of housing cooperatives in the late 1920's which strongly indicated that the cooperative form of ownership imposed upon the members a risk of financial loss considerably greater than that assumed in financing an individual home. Reference is made to a note in the Harvard Law Review for September 1948 at page 1407 for a thoughtful discussion of the history of housing cooperatives and their financial risks. The following excerpts should be particularly noted: Page 1410: "* It is reported, for example, that in the 1930's 75 percent of the cooperatives in the Chicago and New York areas failed. The likelihood of such a depression may not be as great now as in 1929. But the possibility of its recurrence, and the near certainty that satisfaction of present inflated demands will to some extent reproduce its effects, create hazards which require an evaluation of techniques available for avoiding them. The financial risk is a dual one. The tenant-owner has the unavoidable burdens of a home owner: in hard times he cannot receive the benefit of paying below-cost rents, and is saddled with an apartment which he acquired when prosperous and which is perhaps more expensive than one he can now afford to maintain. In addition, he carries a prorate shere of the risk of a landlord, paving through his assessments for the upkeep and amortization of vacant apartments. For the cooperative member is not, like the home owner, dependent only on his own ability to absorb the shock of hard times; saving his equity depends as well on the solvency of his cotenants, some of whom may be unable to meet payments and may have to forfeit their leases to seek cheaper quarters. The burden of these vacancies is imposed on the remaining members and with cumulative force increases the likelihood that others will also be unable to meet assessments. Rentals to outsiders can at best retard this progress toward foreclosure, since, in a serious depression, the receipts are unlikely to cover what would have been the full assessments. * * *"" Page 1426: "* * * So long as cooperative apartments are not financed individually, however, even a conservative plan cannot reduce the risk to the level of that undertaken by the owner of an individual house or make the apartment as liquid an asset. It is probable, therefore, that present public interest in cooperatives will decline as the housing shortage is relieved. * * *"" Although the disastrous past history of cooperatives might be claimed not necessarily to have been due to the form of ownership, the recent cases cited as well as normal prudence would indicate at least that there is no basis for the establishment of a $1,000,000,000 loan fund by the Federal Government to encourage cooperatives without further proof of their effectiveness. Such proof can be furnished by a period of experimental operations in this field through the cooperative provisions of the Federal Housing Administration, supplemented by provisions which will assure loans through the Federal National Mortgage Association. If this experimental operation demonstrates that the reasons for previous disasters have been eliminated in cooperatives and that lower charges can be attained to permit housing through such form of ownership by a lower income group than can be obtained commercially, then the Congress can, upon such proof, appropriately expand the encouragement provided to cooperatives. Indeed if such experimental operations show that cooperatives can be successfully conducted and at comparatively lower charges to occupants, there would be good reason to believe that mortgage lenders will then become sufficiently interested in financing of such projects so that large scale Governmental financing will be unnecessary. Mr. KUNKEL. What is the difference between a direct lending program and having FHA insured loans of 100 percent and providing a guaranteed market by the Federal Government, allowing the loans to be endorsed without recourse? The difference is more theoretical than real, is it not? Mr. LockwOOD. There is a real difference. I submit that it must be confusing to a lot of people. The present system, that is, the system the way it had been functioning up to the beginning of this year, when this interest rate differential has begun to have such an effect on the Federal National Mortgage Association, has been that all the FHA has done has been to write an insurance contract on sound actuarial terms. In other words, it has collected a premium in connection with its insurance contract which has proved over 15 years to be more than adequate to cover the losses and they have accumulated a quarter of a billion dollars in reserves. That is a sound business operation, and I think it is pretty generally agreed. It is not a subsidy in any form. The purchases by the Federal National Mortgage Association have always operated in the past as a stabilizing influence, a secondary back up or support to home mortgage credit. It has always operated effectively that way. There have been times when it was necessary to buy loans and they have found other times when it was necessary to dispose of them and sell them back into the market again. It has had a leveling effect on the market. In the process, Federal Mortgage Association has turned a tidy. profit, in excess of $23,000,000 for the Government in support of its secondary mortgages, so it is not a subsidy in any way. But when you get to the differential in interest rates, where there is a tendency to make a primary market out of the Federal National Mortgage Association, then you are getting away from what it was originally intended to be used for. We think that something ought to be done |