The question immediately arises as to whether such savings in cost of housing are possible. I believe, after 11 years of working with this problem, that they are not only possible but probable. The Department of Labor has estimated increase of building labor efficiency postwar at 15 percent. The market we are discussing lends itself to mass production with demonstrable opportunities for saving. Competition in the industry will become keen because war housing taught many builders the potentialities of large production. New techniques and materials are almost certain to appear. The older, expensive land development methods are being altered. In other manufacture the surest incentive to getting down to lower sales prices has always been existence of a large market unable to absorb the higherpriced product. Extending longer and longer mortgage maturities in order to cover higher cost will not furnish such an incentive.

However, in the very lowest brackets of the middle market, if cost reductions cannot make possible housing to fill the need, then it may be that an opportunity of obtaining an equity hold on a house, even with a lifetime of mortgage payments in prospect, is better than no opportunity for ownership, and that this would tend to offset the economic unsoundness otherwise apparent. If, therefore, such a 95-percent 32-year loan is proposed at all-it should be with reference to the bottom of the market, rather than as now contemplated. Presently I think it unnecessary as a means of stimulating production, because there will be for the next year or two more demand than we can probably meet, and this in a market well equipped with equity money. The larger equity payment possible to obtain on the entire production during that period will itself accomplish the reduction of monthly payment this bill seeks to accomplish by longer terms at what we consider the sacrifice of soundness for the house buyer and, consequently, for all others concerned.

Senator TAFT. What did you mean by saying that, if it is proposed at all, it should be with reference to the bottom of the market, rather than as now contemplated?

Mr. FOLEY. In the bottom of what we are now terming the middle market. That does not mean that gap down below, for which it has up to now been presumed that private housing could not be built.

The CHAIRMAN. The bottom of what? Of what would you say? Mr. FOLEY. Oh, I would say around the $1,500 mark, just to state a figure. I will say a little more on that subject, if I may clarify that point.

Continuing with my statement:

And if such a method is proposed, it ought to be at a later date, when conditions of production are stabilized, and better views can be had of all possibilities. It ought then perhaps to be in a special insuring fund and geared to some other consideration than merely price or mortgage amount. As presently proposed, it would in fact have applied in the great bulk of all business ever done in new construction by the FHA.

All of these grave disadvantages could be eliminated, while at the same time making much progress toward the broad objective by simply adapting the 95-percent mortgage for an owner-occupant and, if any inducement to lenders is thought desirable, by attaching to these mortgages the same provision for issuance of debentures as in wartime section 603.

All these considerations apply to the rental housing provisions. A rental housing mortgage is of the same nature as the firm commitment to a builder upon which I have just commented. A 90-percent rental housing mortgage cannot ordinarily be justified as economically sound.

Section 404 amends the rental housing provisions of section 207 of our act by providing for the insurance of a 90 percent mortgage in localities where the Administrator finds that there is a need which cannot adequately be met by dwellings currently produced, and a 95-percent mortgage where the mortgagor is a nonprofit mutual ownership housing corporation or a corporation of similar character provided the mortgage does not exceed 31⁄2-percent interest and a 40-year maturity.

The second sentence of paragraph (c) of this section requires the mortgage to contain a lapsed payment provision which in our opinion would render the mortgage wholly unacceptable to lenders. This provision is not only subject to the objections outlined with respect to section 309 but other objections arising from the fact that the mortgage would be executed by a corporation some of whose members might be in excellent financial circumstances while others were unemployed, thereby creating additional uncertainty as to whether or not the mortgage was in default by reason of the statutory causes for failure to keep up the payments. The provision which we suggested as a substitute for paragraph (b) of section 309 would also cover mortgages of the character here described and we, therefore, suggest that this sentence be eliminated.

Section 405 amends the payment provisions of section 207 of our act with respect to mortgages of the character described, in section 404 of the bill by providing that the mortgagee, upon transfer of the defaulted mortgage to the Administrator, shall be entitled to debentures equal to the full amount of principal and interest due under the mortgage less an amount equivalent to one-half of 1 percent of the unpaid principal on the date of default.

It is clear that the purpose of this provision is to render such 3% percent mortgage more attractive to lenders. We believe, however, that the fact that the mortgage is relieved of all foreclosure expense in return for a 1 percent deduction would make the loan sufficiently attractive and would tend to maintain the coinsurance principle, which is a valuable incentive to proper servicing of the mortgage on the part of the mortgagee. It might be pointed out that the present provisions of section 207, with respect to the 4 percent mortgage, provide for a 2 percent deduction where the defaulted mortgage is assigned to the Administrator, but, in the event of foreclosure by the mortgagee, provides for no part of the foreclosure cost in debentures. We, therefore, suggest that in mortgages of the character here described the amount of deduction in the case of assignment be changed from one-half to 1 percent of the amount of the mortgage, and in the event of foreclosure by the mortgagee that the debentures be permitted to include two-thirds of the actual foreclosure costs paid by the mortgagee and approved by the Administrator.

This could be accomplished by amending section 405 to read as follows:

Section 405 (a). Section 207 (g) of the National Housing Act, as amended, is hereby amended by inserting in clause (ii) before the word "and" the following: "or in the case of a mortgage insured under the second proviso of section 207 (c)

(2) an amount equivalent to 1 per centum of the unpaid amount of such principal obligation," and by striking out of the proviso at the end thereof the words "in the case of a mortgage which is in default under section 210" and inserting in lieu thereof the following: "under section 204 (a)."

(b) Section 204 of the National Housing Act, as amended, is hereby amended by striking out of paragraph (a) the words "under section 203 or section 210" and inserting in lieu thereof "under this title"; by striking out of paragraphs (c) and (d) the words "under section 210" and inserting in lieu thereof "under sections 207 or 210"; by striking out the period at the end of the second sentence of paragraph (d) and inserting in lieu thereof a colon and the following: "Provided, That debentures issued in connection with any mortgage insured under section 207 shall be dated as of the date of default as determined by the Administrator and shall bear interest therefrom"; and by inserting in clause numbered (1) in paragraph (f) immediately preceding the words "any excess" the following "if such mortgage was insured under section 203."

Section 406 amends section 207 by specifically providing that the powers of the Federal National Mortgage Association, pursuant to section 301 (a) of our act, may be utilized in connection with projects of the character described in the second proviso of section 207 (c) (2). With respect to the mutual ownership idea, we are very much interested in its possibilities and desirous of encouragingthe development of such a plan. It does not follow that the extent of mutuality, probably possible in the usual project, furnishes a pool of resource sufficient to remove ordinary considerations of soundness.

Under the provisions for mutual ownership and rental housing under title IV, it would appear that they are subject to the same or greater hazards of equity maintenance which I previously pointed out in connection with the 95 percent 32-year loan.

However, in mutual ownership corporations it might be possible to establish certain reserve or contingency requirements, such as would minimize or offset the risk to the home owner created by a combination of low equity and long term. Possibly this can be done without seriously affecting the low payment sought. I suggest it be fully explored. The economic soundness of such projects and the benefits of mutual ownership to the members cannot be determined without analysis of such provisions as might be contained in the charter establishing such corporations.

It should be remembered that the risk of the individual cooperator is affected by the economic experience and performance of others in the group, and consequently the matter of equity margin becomes increasingly important to him, since the project may fail because of the nonperformance of others in spite of his own best efforts.

As to the other titles of the bill, title V adds a new title VII to the National Housing Act to be operated by the Federal Housing Commissioner, which provides a plan of insurance of direct investment in rental properties. In our opinion, direct investment (that is, the holding of the title by the entity which has provided the funds) is a far sounder approach to the problem of producing rental housing for the mass market than continuous reduction of equity requirements as a result of which the mortgagee provides all the funds, but does not have control of the project, which may suffer because of the lack of responsibility of the owner. While there seems to be considerable question as to the probable amount of housing that may be produced under this plan at an early date and of its attractiveness to investors, in our opinion it is worth a trial.

My only comment is that it is perhaps slightly more favorable to the investor than may be absolutely necessary. Since, however, the

activity has never been tried, I can merely express an opinion without the definite proof adduced above with respect to mortgage operations. I believe that requiring the investor to accept only 10 percent of the residual risk under the first proviso of section 701 may perhaps be going further than is necessary and that increasing the coinsurance to 15 percent would still accomplish the purpose.

We are also vitally interested in title VI which provides a system of Federal assistance to municipalities for land assembly in connection with urban redevelopment programs. This we believe to be a start in the right direction and by and large we feel that the provisions of this title, while perhaps subject to later amendment, in the light of experience, offer promise of being able to do this job. We have only a few, and perhaps comparatively minor, suggestions.

In section 604 (a).(1) it is provided that upon sale or lease of any land acquired by the municipality with the assistance provided by this title, the purchasers or lessees must agree to give preference in the selection of tenants to families displaced from the project area. This, it seems to us, may be unduly limiting to the private redevelopment of such areas and may tend to weight all redevelopment projects toward public housing operations which, of course, is avowedly not the intention of the bill.

In many cases, under proper city planning, the areas would not be developed with the type of housing perhaps suitable for the persons displaced from the area. Such persons under other provisions of the bill may be amply provided for by housing in other parts of the municipality. The proper redevelopment of the area should not be unnecessarily impeded by a mandatory requirement to rehouse persons displaced on the same area.

I note also that there is no provision in this bill for the Federal Government to elect to meet its contribution by an outright grant at the time of definite financing rather than by annual contributions. It would seem to me entirely possible that all or a great part of any project area may be sold rather than leased and under such circumstances it may be to the advantage of the Federal Government to have the right, at its option, to discharge its obligation under the bill outright rather than over a period of years.

Senator TAFT. I thought we had a provision of that sort in it.
Mr. FOLEY. There may be. I may have overlooked it.

Senator TAFT. It cannot be done at once, but I thought it could be done at the end of 5 years.

Mr. FOLEY. I may have misinterpreted the language of the bill. We had to make our study of it very quickly. Thank you very much for having been so patient with my reading and I will be glad to answer any questions.

The CHAIRMAN. On that 32-year proposition, I am going to stick to 32 years. That is just my own personal view.

Senator TAFT. However, with the 32-year mortgage may we have the other chart-showing the principal payments on the mortgage are less than the depreciation for the first 10 years or 15, so that for a while the house is worth less presumably than the principal of the mortgage. That is due, I suppose, to the fact that the 32-year plan is a flat plan-that is, it means high interest rates and low amortization, and the amortization gradually increases as the interest rate goes down; is that it?

Mr. FOLEY. That is right, to the level payments.

Senator TAFT. I suppose if you change that so that the principal on those larger amounts is paid in in the first 10 years it would defeat largely the purpose of the 32-year mortgage, would it?

Mr. FOLEY. Well, of course, it would result in raising the monthly payment at the beginning and the very purpose of the 32-year provision is to get the lowest payment possible. We are sympathetic to anything along that line, but we feel we have to point out this situation as it relates to soundness. That, of course, would overcome that difficulty.

The reason why you have a situation of that kind is, of course, what you have stated, plus the depreciation of the property which we have there estimated much more conservatively than is commonly estimated in many operations.

Senator TAFT. On your 25-year plan, does the margin between the payments due get less than it was at the beginning?

Mr. FOLEY. This is the 25-year curve.

Senator TAFT. Is that always 95 percent, or does it get up to more than 95 percent?

Mr. FOLEY. It never gets above 95 percent. There is actually 1 percent more equity after 5 years than at the beginning.

Senator TAFT. The equity is never less than 5 percent?

Mr. FOLEY. That is right. This gives you the relationship as against this red line.

The CHAIRMAN. Are there any other questions? (There was no response.)

The CHAIRMAN. Thank you very much, Mr. Foley. (The charts presented by Mr. Foley are as follows:)

CHART I

VALUATION OF NEW HOMES STARTED UNDER THE FHA PLAN*