Comparison of important provisions of existing title VIII, Wherry Housing (12 U. S. C. 1748) with proposed Senate bill S. 1501 entitled "Armed Services Housing Insurance Act of 1955"-Continued

Title VIII

Senator CAPEHART. I do not know who prepared it.
Mr. CASH. The General Accounting Office.

Senator CAPEHART. They point out the differences between the Wherry bill and this proposed bill and then make certain recommendations. I have been talking about most of these recommendations. I do not think they stand up. Some of them I think are good and some of them I think we ought to either write into the bill or make a part of our report and make certain that the services do include them in their rules and regulations.

For example, one of the recommendations they make is that we ought to have cost certification, meaning that they cannot make any windfall profits. Well, they cannot make any windfall profits under this plan. You do not need cost certification because the Army, Navy, or Air Force are going to award the contract to the lowest bidder. You no more need cost certification under this bill than you need cost certification under a contract that the services might award for building tanks, or automobiles, or airplanes. You take care of that through renegotiation and through your taxes.

In this instance the man or the contractor is simply building the facility for the service. He is building it according to the service's specifications. He was a bidder on those specifications and was awarded the bid because he was the low bidder. I hope they all make money then. That is the private enterprise system. I say that because when the difference between this and the Wherry Act is that when they finished building under the Wherry Act they continued to own the property, and they continued to operate it. However, under this bill they are building these structures for the services. When they are finished, they deliver them to the services. They deliver all of the stock and deliver the title subject to the mortgage. The Government accepts the mortgage, this is, the responsibility for the mortgage. So that talk about windfall profits does not apply here, because when the project is finished the Government takes it over.

Under the Wherry Act, as you know, the FHA guaranteed the mortgage, but the sponsor continued to rent the properties and own them, and continued to operate them. He was supposed to make his money out of operating or renting the properties and not out of constructing them. Here they make their profit out of constructing them and have absolutely nothing to do with renting them.

Another thing is, I am sure the services will testify since the Congress wrote into the Housing Act the certification amendment requiring that builders certify their costs, and if they were less than the bid price or the FHA insured price of the mortgage, they were to reduce the mortgage by the amount-I am sure on that point the services will testify there has not been a single Wherry project started since that time. Not one.

So you are not getting any military housing except what little you are getting through direct appropriations. The services do have a small amount of money from direct appropriations. But you are not getting any houses under the Wherry Act, since we wrote in the cost certification.

Here is the analysis of the Comptroller General and what he says. He says military housing should be built by direct appropriation. I do not know why he makes that statement. I just showed it might

cost the Government more by direct appropriation than this method. In fact, by this method it will cost the Government nothing, because the mortgage is amortized and paid from the rents that the man in the service will pay. They will amortize them. Every married serviceman now has a rental allowance. I think we can definitely prove that the rental allowances are more than enough to amortize the mortgages for the amount that they need.

Senator SPARKMAN. The rental allowance is graduated.
Senator CAPEHART. That is right.

Senator SPARKMAN. According to grade.

Senator CAPEHART. That is right.

Senator SPARKMAN. According to grade or rank.

Would you provide different size homes?

Senator CAPEHART. I think so. Yes. Up to $13,500.

Senator SPARKMAN. That would be equivalent to the allowance? Senator CAPEHART. Yes. I think it is.

Mr. Chairman, I would like to have placed in the record this chart, showing the difference in costs of direct appropriation, that is, selling Government bonds to build this project as compared to selling the mortgages.

Senator SPARKMAN. Without objection, it will be placed in the record at this point.

(The document referred to follows:)

Senator CAPEHART. This is based, of course, on the theory that the Government would build, and I think they would have to, let us say $100 million worth of these houses, in which case they would have to sell $100 million worth of bonds over 25 years. Either that, or they would have to sell short-term bonds and keep selling them from time

to time. Then they have no assurance that they can get an interest rate which will be the same as it is now. It might be that if you got into an inflation 10 years from now you would have an interest rate of 10 percent. I always thought it was better, if you are going to go into something over a 25-year period to know what you are doing during the entire 25 years, instead of taking a chance.

Senator LEHMAN. Senator Capehart, may I ask you a question? Senator CAPEHART. Yes.

Senator LEHMAN. When these houses are completed and the mortgages are placed on them, who would be the legal owner of the houses? Senator CAPEHART. At what point?

Senator LEHMAN. When the houses are completed and they are mortgaged for 4 percent, who would be the legal owner?

Senator CAPEHART. What you do is this: Here is the cycle. Let us take the Air Force, although it could just as well be the Army or the Navy. The Air Force decides they want to build 1,000 houses in X camp. They draw up specifications and decides the sizes and number of rooms, and, the types, and so forth. They make a complete 100 percent specification, just like they would do if they were going to order 1,000 tanks.

Then they advertise for bids. They award the contract to the lowest bidder. Under their rules and regulations, though, and the terms under which the bidder has bid, he agreed to organize a separate corporation to build the project. He organizes that corporation and owns all of the stock in that corporation until such time as the project is completed, and he has been paid in full his bid price, which may have permitted him to make some profit, or it may not have. But when he is paid in full the bid price, then he delivers the stock to the Air Force. They own it from that point on. They own it subject to the mortgage, of course. In the meantime, some private enterpriser, or some insurance company or bank, bought the mortgage. So the service owns it subject to the mortgage. Then they proceed to amortize the mortgage. At the end of 25 years the mortgage is paid in full and the Air Force then would own all of the houses. They own them in the meantime subject to the mortgage, of course, and they operate and rent them. Senator LEHMAN. When the builder is paid in full the amount of the bid?

Senator CAPEHART. Yes.

Senator LEHMAN. Would he be paid only out of the proceeds of the mortgage guaranteed by the Government?

Senator CAPEHART. That is right. But he is paid in full and gets his money. When he gets the exact amount of money he said he would build the project for under his bid, and it is completed and according to the specifications and the services have accepted it, then he delivers the stock and the services take complete charge of it.

Senator LEHMAN. Supposing that the mortgage cannot be sold at 4 percent. What happens?

Senator CAPEHART. If it cannot be sold? You ascertain that, of course, before you award the contract, just as you do now under FHA on these projects, and just as you did under the Wherry Act. In other words, you do not build it until you know. You enter into a contract with some mortgage company to buy the mortgage before you even award the bid.