Essentially the aim of the proposed amendment is to make it possible for cooperatives to be properly formed, and soundly organized, to be given a good start, and to be assured of reasonable financing, supplied by private investment capital.

The amendment provides, first of all, that the Housing and Home Finance Administrator shall undertake a program of technical advice and assistance in the organization of cooperative and nonprofit housing corporations. The carrying out of this responsibility would require the development of recommended plans and methods for the sound organization of cooperatives, including technical advice and assistance in their formation, and in the planning, construction, and operation of their projects.

We believe that this is a function which must be undertaken at the outset if a fair and practicable opportunity is to be given to fully test the usefulness of cooperatives in the housing field. It is a type of activity no different from that undertaken from time to time in many other areas by the Federal Government. It would be similar to the professional and technical guidance supplied through the Department of Agriculture that has accomplished such outstanding results in the farm field. It would parallel the technical service and assistance that was undertaken through the Home Loan Bank Board in the Federal savings and loan field when authorization was first given for the chartering of those institutions. It is entirely comparable to the great variety of services rendered to the building industry, land developers, mortgage lenders, and individuals in the Federal Housing Administration program.

The amendment provides that this function be performed as a public service and that it be handled from a division within the Housing and Home Finance Agency. I know there are some who believe that there should be created a separate constituent agency, within the Housing and Home Finance Agency, with a statutory responsibility for handling these activities. While I appreciate the sincerity of purpose which undoubtedly motivates such recommendations, I do not believe that it is consistent with sound principles of efficient Government organization. It is certainly inconsistent with the recommendations of the Hoover Commission. It would be directly contrary to the policy established last year by the Congress in providing that the newly established, important program for the clearance of slums should be handled by a division within the Housing Agency, just as is contemplated by the proposed amendment. Moreover, if the program contemplated by the proposed amendment is successful, the time will come when these advisory activities need not be continued on the scale which will be necessary at the outset. Therefore, by any practical test, the provisions of the proposed amendment to provide such services through a division within the Housing Agency seem obviously more sensible and economical.

Related to the task of giving technical advice and assistance in the formulation and organization of cooperatives, is the task of providing adequate funds for the development of plans and specifications for a particular housing project. The amendment authorizes the Housing Agency to make preliminary advances of funds to housing cooperatives and nonprofit housing corporations to enable them to formulate specific plans for the projects they propose to undertake.

The provisions of the amendment relating to preliminary advances impose on the Administrator a responsibility to administer such planning advances in the soundest and most economical way. The advances are limited to the amounts required for necessary work preliminary to construction and may not exceed, in any event, 5 percent of the estimated cost of the project. It is probable that the maximum would be required only in the case of relatively small projects, and that on larger projects such advances would probably run to about 3 percent of estimated project cost. These advances would, of course, be paid out only as actual progress was made in the formulation of the project and the actual preparation of plans, thus reducing the risk involved in making them. The advances would be retired out of the proceeds of the permanent loan on the project.

As your subcommittee is aware, it is customary to capitalize in the cost of a rental project preliminary expenses, including architectural fees and supervision. In the administration of the section 608 rental housing program, for example, amounts up to 5 percent of project cost may be included for these purposes. Similar expenses must be incurred by cooperatives and nonprofit corporations, of course. Because actual experience has demonstrated the extreme difficulty which such organizations have encountered in their efforts to obtain funds for this purpose from normal lending sources, the amendment authorizes short-term advances to be made directly by the Housing Agency. It should be clearly recognized that a new program relying on the formation of what, in many areas, will be a new type of private enterprise group may well be seriously impeded without provision for some relatively small preliminary advances to enable such organizations to undertake and pay for the complicated job of formulating a housing project or development. I heartily endorse the establishment of an adequate revolving fund to be used for this purpose under proper supervision and regulation as contemplated by the amendment.

In favorably reporting title III of S. 2246 last year, the Senate Banking and Currency Committee has already approved in principle the recommendation of the President in his state of the Union message last week. This called for the enactment of legislation authorizing a vigorous program to help cooperatives and other nonprofit organizations build housing which middle-income families can afford, as one of a series of aids to private enterprise.

Senator MAYBANK. Mr. Foley, you have called attention to this phrase "private enterprise" several times in your statement. You are going to enlarge upon that, are you?

Mr. FOLEY. Yes, sir.

Senator MAYBANK. Thank you.

Mr. FOLEY. In my judgment the most important feature of the amendment is that it would perfect title III of S. 2246 by making it possible to carry out this program through the investment of private capital in housing projects undertaken by cooperatives and nonprofit corporations, thus eliminating the necessity for direct Federal loans, as originally contemplated.

Senator MAYBANK. In other words, by this amendment we are to have private enterprise wherever possible instead of the Federal Government, in your opinion?

Mr. FOLEY. Yes, Senator. I will expand on that as I go along.

Senator MAYBANK. Yes; but I just asked that for the record, that the investment is to come from private enterprise.

Senator CAIN. Are you going to expand upon that as you go along? Mr. FOLEY. Yes, Senator.

Senator CAIN. I mean, expand upon the Senator's question, you will, I mean, prove the point that this is an avenue in which private capital can be invested?

sir.

Mr. FOLEY. I believe that the statement I have here will prove it,

It makes the investment of private capital in this program possible by an adaptation of the type of guaranty which has been so successfully used in the mortgage insurance system of the Federal Housing Administration.

The amendment would establish, under the direction and supervision of the Housing and Home Finance Administrator, a National Mortgage Corporation for Housing Cooperatives. This Corporation would be established on a mixed-ownership basis with initial capital supplied by the Federal Government, but with provision for a steady, progressive replacement of this capital by stock investment on the part of borrowing cooperative and nonprofit associations. mixed-ownership Corporation would be authorized to make long-term, low interest rate mortgage loans on cooperative and nonprofit housing projects.

This

The Corporation would obtain its initial capital up to $100,000,000 from the Federal Government. In return, the Government would receive preferred capital stock in like amount on which cumulative dividends equal at least to the cost of money to the Government must be paid. While the first loans made by the Corporation to eligible borrowers would be made from the initial Government investment, intended to be later retired as I have outlined, the Corporation is authorized to obtain additional loan funds by the issuance and sale of guaranteed debentures on the private investment market.

Each borrowing cooperative would be required to subscribe to stock in the Corporation in an amount equal to 71⁄2 percent of the original principal amount of its mortgage loan. The amendment provides that not less than one-third of a borrowing cooperative's stock shall be paid in cash prior to obtaining the loan, and would give such a borrower up to 20 years to pay in any balance of the required stock subscription.

Senator DOUGLAS. Do they pay in 21⁄2 percent initially?

Mr. FOLEY. Initially, in the case of a cooperative, yes; and in cash. In the case of a nonprofit corporation, where there is normally no opportunity to obtain the cash required for initial stock purchase, the entire subscription could be paid for over a 20-year period. We believe that in the case of the cooperative, provision for partial deferment of stock purchases is necessary because of the plain_fact that many middle-income cooperatives will probably not have sufficient cash resources to make full stock purchases immediately and still provide for adequate reserves of their own.

The amendment does not require a specific minimum reserve accumulation by eligible cooperatives. It does, however, give adequate authority to the Housing and Home Finance Administrator to require such borrower to establish such additional reserves.

We

believe this to be a wise provision, since it will permit the Housing Agency ample flexibility to make such determinations on the basis of experience and examination of the actual financial resources of applicant cooperatives. In our opinion, a fixed and rigid requirement in law is unnecessary and might well seriously handicap the

program.

The amendment provides for the retirement of the Government stock once the stock owned by borrowing cooperatives and nonprofit corporations has reached $50,000,000, although no such retirement could be made if it would reduce the total capitalization of the corporation below $150,000,000. Obviously, the time at which such retirement would take place will depend upon the speed and success of the program. While no accurate estimate can be made as to when that period will be reached, we believe it is highly important to provideas this amendment does the type of financing plan in which, as successful operations are attained, the Government funds initially required to get this program under way will be withdrawn and replaced by privately subscribed share capital. It is also our firm belief that the capital investments of private cooperative borrowers represent a thoroughly sound and well justified participation in the risks inherent in a lending enterprise of this sort. They are, in fact, an essential element of the plan proposed, without which its nature would be materially changed. The stock investments of borrowers will provide, from the outset, an increasing additional cushion against the contingent risks being assumed by the Government in this enterprise.

The amendment provides that the Corporation will make loans at whatever rate is determined to be necessary, taking into account the cost of money to it and the spread necessary for defraying administrative expenses and establishing and maintaining necessary corporate reserves, including the required specific reserve for losses. We estimate that, at least so far as initial loans are concerned, this probably means a rate of about 3 percent on the mortgage loans made by the Corporation, since it is our present estimate that this figure will provide an adequate spread over and above the cost of the capital initially supplied by the Government and the probable rate on its securities first issued to investors.

Senator DOUGLAS. May I ask there, Mr. Foley-I can understand your optimism on getting the capital furnished by the Government at the rate you mention, but you apparently also think that you are going to be able to get a considerable amount of this capital from private investors and to sell, as I understand it, the notes of the cooperative.

Now, why do you think you can get this capital from the private market at something less than 3 percent?

Mr. FOLEY. Because, in the first place, as indicated in the statement and provided by the amendment, they are guaranteed debentures. We have had some inquiries made and have had some consultations with the best authorities in the field, Senator, particularly with the investment dealers who would buy them-and they indicate to us that we could probably expect a rate approximating the going Federal rate, on long-term Governments, which, currently, is about 2.2 percent. Senator DOUGLAS. Then may I ask you this: The FHA paper is guaranteed, too, is it not, by the Government?

Mr. FOLEY. The FHA mortgages are insured.

Senator DOUGLAS. They are insured.

Mr. FOLEY. The mortgages are insured. It is only the debentures which the FHA issues to the mortgagee if the mortgage goes into default which are guaranteed. And in the case of the other difference with FHA, I will comment on that later. I will proceed with my statement first, if I may.

Senator DOUGLAS. Well, now, wait a minute. I want to follow that up. The FHA has 41⁄2 percent interest and the VA has 4 percent interest.

Mr. FOLEY. Yes.

Senator DOUGLAS. But you apparently think that the cooperatives will be getting their capital from the private market for something around 21⁄2 percent. What I am trying to find out is what is the basis for this optimism.

Mr. FOLEY. Because the debentures that will be sold by the Corporation to obtain additional mortgage-loan funds will be fully guaranteed by the Government.

Senator DOUGLAS. And is that the difference between them and FHA and VA?

Mr. FOLEY. Yes, sir; and as I said, I enlarge further on that point later in my statement. Could I proceed?

Senator MAYBANK. In other words, there is a difference in the servicing.

Mr. FOLEY. Yes, it reduces the cost, and the point of application of the guaranty is a different one. I shall enlarge upon that if I am permitted to proceed.

Senator DOUGLAS. I am sorry to have interfered with the witness by asking questions. I know that many people believe that this is not a proper thing for a Senator to do. A Government official comes up here to speak and we are to hear him, and it seems to be the policy not to interfere with the witness with questions; and if that is the policy, then I am sorry.

Mr. FOLEY. Senator, I apologize if I have given you any such impression.

Senator DOUGLAS. And I in turn apologize. But I think there is altogether too much of this tendency for administrative officials to lay down the law and not to submit to questioning. Having come to that, we will call it quits, since we have both apologized.

Senator SPARKMAN. Let me say at this point that it is pretty well understood that any witness who comes here before us subjects himself to questioning willingly at any point in his paper.

I simply understood Mr. Foley to say that he elaborates on that point a little further in his paper. If we wait until he gets to that point, the witness says it is fully set out.

Senator DOUGLAS. The oil has been now poured on the waters and everybody is in a fine humor. But I hope I may be permitted to express a general statement. I have only been here for a year but I have noticed a steady tendency on the part of the executive departments to come down here with legislation and then not to submit themselves to the free flow of questioning, back and forth.

Now, I am agreeable to waiting. I am satisfied to wait. And I will further say that I am in agreement with the greater part of this legislation. I only ask, however, that we not be treated as just