Mr. FOLEY. I would like to present the rest of this statement, Senator, and then perhaps answer the question more closely.

The CHAIRMAN. I just want to ask, before you go on: Say a man is earning $125 a month. What would you figure ordinarily would be his rental today? Would it be about one-fifth? Is that what we assume?

Mr. FOLEY. $125 a month income, Senator?

The CHAIRMAN. Income, yes.

Mr. FOLEY. Of course, I think it is always dangerous to draw any rule of thumb as to what a person can afford to pay on the basis of only his income figure, especially in the low brackets, because we have all the problems of family. The normal rule of thumb in the usual range of incomes has been, for many years, 25 percent for shelter. I think when you get down into the low-income groups, the very low-income groups, the fact of the matter is that they usually have to pay more than that, more than 25 percent, for any kind of decent shelter. That is the man I hope we can develop better housing for some day, because when we get down into those lower-income groups and with normal family obligations it is obvious that even 25 percent for shelter can only be met by the sacrifice of some other things that probably are close to being essential.

The CHAIRMAN. Yes. Well, I have in mind

Mr. FOLEY. And yet the fact remains that many of them do have to pay more than 25 percent in order to get a decent place to live in, and that is the very thing that we are trying to attack through this bill and through our effort.

The CHAIRMAN. Yes. All right.

Mr. FOLEY. I have already shown that the FHA, through its-I think I had read that.

The differences between that proposal, however, and the proposal in this bill are in addition to reducing the equity (a) the term of the mortgage is increased from 25 to 32 years; (b) the builder's responsibility in the transaction is weakened through raising his permissible direct mortgage from 80 to 85 percent; and (c) the lender's interest is nonexistent in that the debenture provision gives him a practically risk-free investment. Thus, in addition to the reduction of the borrower's initial equity, which was our suggestion, the provision in effect seriously weakens the other elements of economic soundness in the transaction; to wit: Relationship of risk to property, value, builder's responsibility and lender's coinsurance of the risk.

As to the relationship of risk to property value, we have made comparisons for maximum mortgages permissible under our suggestion and a 95 percent, 32-year mortgage with respect to the relationship between the outstanding principal of each loan and the estimated depreciated value of the property at the end of certain periods of time. Loans of both terms have been assumed to bear interest at 4 percent. We have used the following assumption of property depreciation: During the first 10 years, depreciation of the original cost of improvements at 24 percent annually, with annual depreciation thereafter at a rate of 1.8 percent of the cost of improvements, to leave at the end of 50 years only the original cost of the land as the depreciated value of the property. Under this conservative assumption of depreciation, as shown in the charts III and V, which you have, the 32-year loan at the end of 5 years constitutes 99 percent of the then value, and at the end of 10 years 101 percent of the then value,

as contrasted to 94 and 89 percent, respectively, for the 25-year term mortgage after 5 and 10 years.

This comparison, of course, ignores possible fluctuations in the general or real-estate price levels. In other words, the rate of repayment of the 32-year loan does not even keep pace with a conservative estimate of depreciation of the value of the property.

As to the builder's motivation, we have already provided under existing statutory powers an 80-percent firm commitment to builders which, in the series of conferences on our postwar program with representative builders which I mentioned earlier and in other conferences since the program was announced, has met with hearty approval as being adequate to enable builders to do this job. It permits the builder to operate with a minimum equity consistent with responsibility on his part. To reduce this equity by an 85-percent loan to builders is therefore unnecessary. Moreover, it has distinct elements of unsoundness. A 15-percent builder's equity is of a different nature from the equity supplied by a purchaser by way of down-payment. It is at best only in relatively small part a cash investment, as distinguished from the case of a purchaser. It is based upon value rather than cost, and, since values are a matter of judgment rather than an exact science, an 85-percent mortgage to the builder will dangerously enlarge the possibility that the builder will be contributing to the deal little but his time and prospective profit. Under such circumstances, of course, the builder's motivation to produce a good house and to exercise his best judgment in connection with the entire transaction is weakened. This is intensified in those States where possession of the property can be obtained by foreclosure only after a very long period, during which a builder with little or no equity is subject to the temptation to realize profit through milking the property. Under such circumstances, neither the lender nor the Government as insurer can effectively prevent serious deterioration in the soundness of the conception and of construction of such projects, to the detriment of the purchaser and with inevitable loss to the Government.

It must be evident that a satisfactory answer to the problem of housing for the lower ranges of the middle market is not to be found by constant lengthening of mortgage terms by which to purchase an article in itself too costly. In the very low income groups it may be that allowing an entire lifetime to pay for a house is a better solution than refusing opportunity for home ownership.

But it seems to me that the proper and only finally hopeful approach in the mass of this market is through reduction of cost of the house. Every incentive to private enterprise to produce decent housing at less price should be offered. I am convinced this can be done. It will require facilities and materials for full production and an over-all increase of efficiency.

Senator TAFT. May I ask the experience of the FHA under the Lanham Act building on builders' mortgages? What was the percentage advance?

Mr. FOLEY. Under the Lanham Act?

Senator TAFT. Under the Lanham Act. I mean under title VI. Mr. FOLEY. Under title VI of the act?

Senator TAFT. Yes.

Mr. FOLEY. 90 percent under the title VI provision, 90 percent of the appraised value, but not to exceed the actual cost of the project.

You will recall, the economic soundness provision was removed from that section of the act.

Senator TAFT. What is the experience? Did the builders-did these things happen?

Mr. FOLEY. Did the builders produce the houses?
Senator TAFT. Yes.

Mr. FOLEY. They produced the houses; yes, sir.

Senator TAFT. Do you think they were did they produce poorer houses by reason of having that money, having that guaranty?

Mr. FOLEY. It would be difficult, of course, to make a comparison between the circumstances of wartime and the circumstances of peacetime, Senator. In the first place, I think there were many elements of cost involved which wouldn't normally be involved, due to material shortages, substitutions of material, and so on. I think it is rather difficult to make comparison. I have said, and still say, substantially the wartime housing permanently built under FHA inspection is sound housing and will serve a useful peacetime purpose. I am not able to say that it was in all respects as good construction as we would get under our normal operation; no, sir. But there is a further thing, and we may still have some serious experience with it, the matter I just mentioned: the fact that there exists no actual cash equity on the part of the builder. Under certain situations it can lead to a dangerous amount of default and using of the full foreclosure period.

Senator TAFT. I mean, has it resulted or have the builders all got rid of their houses? Which?

Mr. FOLEY. No, sir; they have not gotten rid of all of them, but we do have situations in which foreclosures are taking place in which we have to suspect that it is for the purpose of milking.

SENATOR. Of course, the economic soundness provision was removed from title VI in wartime largely because houses had to be built in places which couldn't possibly be permanent places, so that you coundln't have an economically sound proposition, and I was only trying to get the actual experience of these builders' loans, whether they had resulted in difficulty or not.

Mr. FOLEY. The answer to that probably can't be given fully this soon, Senator. Our experience thus far leads to the belief that we will receive by foreclosure a much larger percentage of title VI than of title II-very much larger.

Senator TAFT. Well, that, however, might be from

Mr. FOLEY. And that, as I started to say, might be for location reasons; it might be for many others.

Senator TAFT. And it might be all because that is the figuresfrom ultimate figures as well as the figures from builders.

Mr. FOLEY. But after all, we are only a few weeks out of the war experience. In fact, we are not out of it. We are not in a position to judge it.

Senator TAFT. You haven't had to foreclose from any builders as yet, or have you?

Mr. FOLEY. Yes.

Senator TAFT. To any considerable extent?

Mr. FOLEY. I have one situation in which I am having to foreclose with the properties fully rented, and have been fully rented and fully occupied from the time they were ready to be occupied, and earning sufficient to carry the mortgage, and deliberately being milked.

Senator TAFT. What do you figure is the percentage of profit and overhead?

Mr. FOLEY. Generally

Senator TAFT. Profit in time, you say. Profit in time.

Mr. FOLEY. 15 percent is the usual figure for profit and overhead. Senator TAFT. Some of the overhead, of course, has to be paid. Mr. FOLEY. That is right. That is why I said that the cash equity would be small.

Senator TAFT. What do you think is the figure which doesn't have to be paid out in cash? Ten percent or fifteen percent?

Mr. FOLEY. It varies with builders, of course, because with any set of standard cost data you will find differences in efficiency of management, and so on, which account for differences in cost between individual builders in the same community and on the same types of projects; but again as a general figure I would say 10 percent, assuming of course that you are talking about a situation in which the costs are stabilized.

Senator TAFT. And in spite of your objection to this, you yourself have very recently extended the builders' mortgage of title II up to 80 percent?

Mr. FOLEY. 80 percent; that is right.

Senator TAFT. However, you said there was no criticism. There is some criticism, because

Mr. FOLEY. Oh, I don't say there is none.

Senator TAFT. And you only did it up to $6,000, and they want it up to $7,500?

Mr. FOLEY. We went to six thousand on 80 percent and 60 percent on excess of valuation above six thousand to ten, a maximum of seventy-two hundred on a $10,000 property, for the very reason we are here discussing. We are trying to channel something into the lower-price field and make it more attractive there than in the higherpriced field.

Senator TAFT. Well, I have no-my general source of the 15 percent is based on the theory that 5 percent of it ought to be real cash. That much cash the builder would have in it, which in the case of, we hope, a fairly large number of houses at one time might amount to a very considerable capital.

Mr. FOLEY. In today's costs, sir, in the general situation of costs today-current and such as we are able to recognize in our effort to make the economic soundness provision in the interest of the ownerI would say that he would probably have more than that invested. That is as of today or the next few months. I am addressing my remarks here to a situation which we hope will develop before too long, when costs will have stabilized to a point where we will be recognizing the existing cost in our commitment calculation.

Senator TAFT. I mean, what would you think of adding to this a provision such as your testimony suggested, that in addition to 85 percent, not more than 85 percent, it be not more than 95 percent or 90 percent some figure of the actual cost of the actual outlay?

Mr. FOLEY. That might solve the problem, sir. I should like to examine that.

Senator TAFT. Well, I wish you would consider something of that sort.

Mr. FOLEY. I will be glad to.

Senator TAFT. I mean, I think it would be unwise to have the builder have nothing in it. I quite agree to that, but I————

Senator BUCK. Isn't it possible, Mr. Commissioner, for a builder to get all his equity out of this if he has excessive appraisal of the property, of the land?

Mr. FOLEY. It is possible, yes, sir; if he bases his loan on very advantageous terms.

Senator TAFT. Excessive appraisal, though, would have to be made by the FHA itself.

Mr. FOLEY. Well, it wouldn't necessarily be an excessive appraisal, sir, since we would here by appraising use value, you see, rather than cost price.

Senator BUCK. I dare say that has happened.

Mr. FOLEY. I would be surprised if it had not.
If I may continue with my statement:

That means not only greater efficiency of labor but of management and of all the groups who contribute to providing housing. It includes the many who produce, fabricate, plan, finance, and sell before the house is delivered to Joe Doakes-those who deal with land, men, money, materials, management, and method. It does not mean lowering wages, but getting maximum productive returns for each dollar received, by whomever received. I believe that savings through better techniques, lessened profit per unit, and greater production per hour can be achieved and must be encouraged by the Congress. This result is negatively affected by offering further greatly extended credit in a cost bracket already attainable by the industry in large parts of the Nation.

Senator TAFT. Now, Mr. Foley, the suggestion here was, you say that "cost bracket already attainable by the industry in large parts of the Nation," but in those parts of the Nation you should put the $5,000 figure still lower.

Mr. FOLEY. Conceivably.

Senator TAFT. I mean that was the provision in the bill. In other words, the bill is attempting to do this particular service only for the lowest type of the cheapest house that can be properly built as a good house in each different area.

Mr. FOLEY. The charts I here present indicate a degree of economic unsoundness in such a loan, combining 5-percent equity with 32-year term. But its greater unsoundness still is that it removes incentive for reduction of costs.

Gentlemen, I am not primarily concerned that the insurance fund might take losses on such a plan. Economic soundness to me goes far beyond that. I am concerned as Commissioner in insuring loans economically sound for the home buyer. This chart shows a dangerously high degree of risk for him, continuing for a long period. So I recommend against it, in its general application.

Here is another chart- chart No. VI-which, without sacrifice of economic soundness, shows how an even greater reduction in monthly payment can be achieved through a 25-year mortgage, by a cut of 10 percent in the sales price of the house. The chart also shows that such a transaction results in a saving over the life of the loan of $1,900.90 in total mortgage payments for the borrower and a release from debt 7 years sooner, while maintaining an unimpaired equity balance position throughout the debt period. As the chart indicates, this total saving consists of $500 in principal, $1,245.42 in interest, and $155.48 in mortgage insurance premiums.