Mr. BATES. There would be over half in the two groups-way over half. Two-thirds of them would be in those two groups, I dare say. Mr. MITCHELL. Thank you.

Mr. BROWN. You may stand aside. Thank you very much.
We have one more witness with us this morning.

here?

Mr. HENLE. Yes, sir.

Is Mr. Henle

Mr. BROWN. You may insert your statement in the record. Mr. HENLE. If I may, immediately following Mr. Bates' statement. STATEMENT OF PETER HENLE, SECRETARY, HOUSING COMMITTEE, AMERICAN FEDERATION OF LABOR

Mr. HENLE. In this brief statement I want to discuss the savings in monthly rent which would be made possible by the cooperative housing program in title III of H. R. 5631. I particularly wish to discuss that aspect of the program which will be most under attack. during these hearings; namely, the issue of direct loans by the Federal Government.

In working out a bousing program for moderate income families, we are faced with the necessity of saving approximately $35 a month in cost of housing for these families. The problem is simple: At the present time the rent for the average 42-room unit insured under section 608 of the National Housing Act is approximately $100, with some rents going as low as perhaps $85 or $90. What needs to be done is to construct and operate a 42-room unit renting for $55 to $60, instead of this $85 to $100.

Many different possibilities were explored by the various interested individuals and organizations in an effort to find a solution to this problem. These careful studies have led to the program now incorporated in H. R. 5631. As Mr. Bates has mentioned, the program in the bill would make possible savings in several ways:

(1) By utilizing the cooperative type of organization, a saving of approximately $5 a month will be achieved.

(2) The vacancy rate in these projects will be approximately 2 percent, rather than the 7 percent normally allowed by FHA, thereby making possible an additional saving of approximately $5 a month.

(3) Another important source of saving will be the monthly operat-ing and maintenance expenses. The cooperative type of ownership will make possible substantial savings in this factor, since tenants will have a more personal interest in the upkeep of the buildings in which. they live. Tenants might be asked to provide some of the services, such as cutting the grass, normally performed by maintenance personnel. It is estimated that a saving of approximately $11 a month can be made in this way.

However, these savings by themselves are not enough. They amount to only $21 a month, far short of the $35 a month needed if. this program is to serve the moderate-income families.

How can these additional savings be obtained? Anyone who has: studied housing costs is immediately impressed with the very large proportion of the rental or home-ownership dollar that goes to pay back the loan which first made possible the construction of the dwelling. Approximately 40 percent of the average rent which is paid today on an FHA-insured rental project under section 608 is devoted to this one item, payment of principal and interest on the money borrowed to construct the project. It is obvious that if we are to have a housing.

program for moderate-income families, here is where the savings must be made.

I am attaching a tabulation which I submit deserves the attention of every person interested in this problem. It was prepared by the Housing and Home Finance Agency at our request and shows the monthly payments required, covering principal and interest, on a $10,000 mortgage. The figure of $10,000 is used only for convenience in calculations; the actual cost of the units built under title III of this bill will be much less. These figures represent equal and constant payments over the life of the mortgage. For example, a 30-year mortgage at 4 percent means a payment of $47.80 each month during the 30-year period.

You will see from the table the critical importance of the interest rates. At the present time, under section 608 the FHA insures mortgages at an interest rate of 4 percent plus one-half percent for the insurance premium, or a total effective rate of 42 percent. Under the proposed program, the rate would be the going Federal rate of interest, now 21⁄2 percent, plus the one-half percent premium, or approximately 3 percent. Glance at the table and you will find that this change is equivalent to a reduction of $7.80 to $10.30 in the monthly charges, depending on the amortization period of the mortgage.

The bill also sets the amortization period for these loans at a maximum of 60 years, but in any event not to exceed the useful life of the project. On this point the table informs us that at a 3-percent interest rate, lenghthening the amortization period from 35 to 60 years means a further saving of $8.50 per month.

Thus the change from a 35-year, 41⁄2 percent loan to a 60-year, 3percent loan represents a saving of $17.40 a month on a $10,000 loan. Since the units in these cooperative projects are likely to cost an average of $8,000, the actual saving would be approximately $14 a month. Considering the other savings made possible by this program, this amounts to a total reduction of $35 a month. In addition, several States have granted tax exemption to cooperatives or nonprofit housing corporations. This would make possible additional savings of up to $12 a month.

In reviewing this entire problem, it is important to keep in mind the fact that the single most important factor in achieving these savings is the reduction made possible by the lower interest rate and longer period of amortization. These factors are essential if we are to develop a housing program for moderate income families.

(The table referred to and suggested changes in title III are as follows:)

Equal monthly payments covering principal and interest for $10,000 mortgage

Source: Housing and Home Finance Agency, Office of the Administrator, Division of Housing Data

and Analysis.

SUGGESTED CHANGES IN TITLE III

1. Section 304 (d) (p. 62): This section would seem to be so restrictive as to seriously threaten the entire scope of the program. The Commissioner would not be permitted to make any loans unless the estimated rents, plus an "allowance" for deductions made possible by the favorable interest rate and amortization period plus an "allowance" for any special concessions not available to private housing, such as tax rebates, are "substantially" below the level of rents in ordinary private housing.

Because of the "allowances" which must be added on to the rents in the cooperative housing projects, it will be almost impossible for these rents to be "substantially" below the level of rents in private housing. The only opportunity for a substantial gap between private rents and the cooperative rents lies in the nonprofit feature, the reduced maintenance expenses, and possible reduced construction cost.s These factors do not seem to be large enough to warrant the requirement that the cooperative rents be "substantially" below the private rents. We do not believe that anyone intended to include such a restrictive provision.

2. Section 305 (a) (p. 63): We are very pleased that no strict income formula has been established for admission of families to the cooperative housing projects. However, in the wording of this section as it now stands, every family admitted to the project must have an income so low that it "cannot afford to pay the rents at which comparable dwellings in new privately financed rental housing are currently being made available in their locality."

In view of the fact that cooperative housing groups will be organized by unions, veterans' organizations and other groups which are not entirely homogeneous in income, it would seem desirable to permit a limited number of higher-income families to join with their colleagues when such an organization undertakes a cooperative housing project.

*

This would seem to be consistent with the wording of the "Purpose" contained in section 301 (p. 57) which states: "The provisions of this title * * shall be administered in a manner which will encourage and assist the association of persons into such cooperatives who (by reason of their like interests, associations together in other fields, or otherwise) will contribute to the sound, integral character and success of such cooperatives, providing necessary leadership therein, etc." Mr. BROWN. The next witness we have is Mr. Reckman.

STATEMENT OF WILLIAM A. RECKMAN, CHAIRMAN, SUBCOMMITTEE ON MORTGAGE FINANCING AND URBAN HOUSING, COMMITTEE ON FEDERAL LEGISLATION, AMERICAN BANKERS ASSOCIATION

Mr. RECKMAN. My name is William A. Reckman. I am president of the Western Bank & Trust Co., Cincinnati, Ohio. I appear as chairman of the subcommittee on mortgage financing and urban housing of the committee on Federal legislation of the American Bankers Association.

I appreciate this opportunity of presenting the association's views on housing legislation as contained in H. R. 5631. It is a matter of deep interest to us, inasmuch as the banking industry plays such an important part in the financing of homes for all types of people through out the entire country. Since the end of the war in 1945, commercial banks and savings banks have invested more than $7,500,000,000 in mortgage loans on residential and farm properties, which has been a very important factor in helping veterans to obtain homes.

These banks are anxious to continue this participation in home financing, and are sympathetic with the efforts that Congress has made to make housing within the reach of those in great need. But they are also anxious to see that its furtherance is within the framework of sound economic policies and in keeping with the basic principles of our American system of free enterprise.

With regard to direct Government loans, proposals for direct home financing loans to be made by a Government agency are embodied in title III of H. R. 5631; in paragraph (5) of section 112 of title I with respect to cooperative housing; and in subsection (d) of section 401 of title IV with respect to veterans' loans. These proposals for the first time inject a philosophy of direct Government lending into the home financing field.

Direct Government lending, although new in the home financing field, has had its proponents in the past in other fields, such as the financing of small business and agriculture. Whenever bills embracing this philosophy have been taken up for consideration by congressional committees, the American Bankers Association has made known its opposition.

We firmly believe that private financing institutions are better able to meet the needs of the public, whether it be for a loan to finance a home or a business or a farm. The making of direct loans, except in times of war or extreme economic emergency, is not a proper function of Government. Such a governmental activity is not consistent with the American concept of a system of free enterprise and such activity threatens to lead step by step to a complete socialization of credit.

We recognize that the Government lending proposals are offered in all sincerity with the honest desire to assist veterans and others of moderate income status to acquire homes. What their proponents may have failed to realize is that they may well defeat their own purpose. They call for public funds to finance these projects, and with Government expenditures already exceeding its revenues they would add to the amount of deficit financing which the Treasury would be obligated to undertake. Deficit financing has an inflationary effect on the business economy of the country which is reflected in increased costs of goods and services, including the cost of housing. While our fundamental objections to H. R. 5631 are directed to its Government lending provisions, there are certain other provisions in title I and title IV on which we wish to comment.

In our opinion, the FHA, as originally conceived, provided a sound Government-sponsored insurance system. The provisions for minimum standards of construction, inspections and appraisals, and monthly amortization requirements have had a beneficial effect on all mortgage-lending practices.

It appears to us, however, that there is an ever-growing tendency to further and further liberalize its provisions, which tend to encourage unsound and inflationary lending.

Section 101 of title I of H. R. 5631 provides for an extension to July 1, 1952, of FHA title I insurance of home repair and improvement loans. When originally enacted, title I was planned as a temporary measure during a time of widespread unemployment. It was designed to assist in providing work for those who needed employment. It helped in accomplishing this purpose and by a continuous series of extensions it has been continued in effect for 15 years.

Under present circumstances, we recognize that to permit this title to terminate on September 1, 1949, as presently provided in the law, may not be desirable. We believe that the proposed 3-year extension is too long and should be shortened to 2 years. This will permit Congress to review the need for this title in the light of conditions as they then exist.

Mr. BROWN (presiding). I understand you are not against this title, but you think 3 years' extension is too long?

Mr. RECKMAN. That is right. Section 102 of title I provides for a new FHA mortgage-insurance program for small homes similar in nature to those presently permitted under FHA title I, class 3. There is every reason to believe that small loans of this character could prove of great assistance to borrowers whose requirement is for modest homes and who may contribute much to its cost by their own labor and personal efforts. Their needs for financing can be well served by this type of loan, which eliminates for them much of the delay and red tape involved in the more formal requirements of loans provided by other titles. But we believe the provisions of this section, which permit a maturity as long as 30 years, to be excessive. Also the proposed method of insurance under this section should be an improvement over title I, class 3, loans from the standpoint of lenders. In localities where sound homes can be built for $5,000 and less, lenders can take a more active part in financing them, for the loans under this section would be individually insured. However, it is doubted that these loans would be attractive to lenders if they are to have a 30-year maturity.

Section 104 of H. R. 5631 provides for a higher loan ratio for loans insured under section 203 (b) (2) (D). It has been less than a year since Congress amended this section of the National Housing Act. The amendments contained in the Housing Act of 1948, which was enacted last August, considerably liberalized the then existing insurance provisions, and yet, before sufficient time has elapsed to afford a fair trial of these more liberal amendments, this section proposes a further liberalization.

In the year 1948 approximately 900,000 new homes were built, a volume exceeded only once in the past 30 years. Although the volume of housing construction has been slightly less so far this year as compared with the corresponding period last year, 100,000 units were started in June, which is higher than the number started in June of 1948 and almost equals the all-time monthly record established in May 1948. The production of all this housing was accomplished with financing by private lending institutions.

With these impressive records before you it is difficult to understand the justification for more liberal mortgage terms. Easier credit by itself will not produce more housing, nor will it bring the cost of home. construction down.

Only through a reduction in the cost of building materials, greater efficiency and economy in construction, and more productivity by labor will housing costs be reduced and more housing be built. Higher loan ratios and longer maturities are merely a palliative, not a cure. They tend to perpetuate higher prices for housing by making it less painful for those who need housing to pay such prices through smaller cash down payments and easier monthly amortization.

Section 109 authorizes the FHA Administrator to issue rules or regulations permitting or requiring provisions, in form satisfactory to him, to be included in FHA insured mortgages on one- to four-family dwellings, which would provide for a deferment of monthly payments for a possible period of 3 years. When borrowers run into financial troubles through no fault of their own, lenders would like to have the right to work out a solution within the borrowers' limited ability.