either assumed more risk, and made the venture a purely riskless affair of if it took over some of the job of servicing and managing the loan. Mr. FOLEY. Perhaps I should qualify somewhat what I said, Senator, although I am not at all sure I understand all of the implications of your question.

In the procedure provided by the amendment, there is one point for instance, at which a lesser risk may be involved for the private investor than is involved in the FHA-insured-mortgage system for the lender making the insured mortgage. That is the item that is involved in what we call contingent claims presented by the lender in the event of a foreclosure. These are relatively small items involving foreclosure costs and some possible wastes in the property; and, in some instances, possibly some interest is not covered by debentures. In the case of a foreclosure of an FHA-insured loan, these items are covered in a contingent claim which is payable only if the property is sold at a price sufficient to recover these costs. Now, the experience with contingent claims and the liquidation of foreclosed properties has ordinarily been quite fortunate. I think I have here some figures which are illustrative but not entirely conclusive on the experience on the payment of those claims.

Senator DOUGLAS. Now, what would happen if a depression should hit the country?

Mr. FOLEY. Well, if a depression should occur, as I have stated frequently and I think both before this committee and before the House of Representatives, it is probable that you would have larger amount of foreclosing. It does not necessarily follow that you would have any amount of loss, except in the case of a very severe and longcontinued depression which would result in a call upon the Treasury. Have I answered your question?

Senator DOUGLAS. Well, there is still this problem I asked you about; namely, have you under this amendment reduced the risk by so much as to justify your hope that you will be able to cut your interest rate from 41⁄2 to 2% or 3 percent?

Mr. FOLEY. Well, Senator, in the opinion of all who have studied this and in the opinion of people engaged in that type of security business, yes. We have sought advice upon that point, and we have been advised that there is a wide market for these guaranteed debentures at a rate of interest closely approximating the rate on long-term direct Government obligations.

Senator DOUGLAS. I just understood you to say that the Government did not assume more risk in this connection than FHA, and now you say it has assumed more risk, so much more that in effect the interest is reduced to 21⁄2 percent. I am not trying to trap you. Mr. FOLEY. I understand.

Senator DOUGLAS. I am trying to clear up the problem in my own mind.

Mr. FOLEY. And I am trying to clear the point for you, Senator. I may have given my answer on a different basis than you have given your question when I say that the Government is not assuming, in my opinion, a greater contingent risk, assuming relatively successful operation, compared to the FHA.

I mean that, in the final analysis, the Government would not be called upon, in my opinion, to pay out of the Treasury more than it

is likely to be called upon to pay in the case of the FHA insuredmortgage system.

Your point, Senator, as I understand it, is whether the Government is relieving the proposed purchasers of these debentures of more risk than it is relieving the mortgage-lender type of borrowers.

your question?

Is that

Senator DOUGLAS. That is the first question. The second question is whether the rise as such that is assumed can reduce the interest from 421⁄2 to 21⁄2 percent. These are not matters of ideology. Mr. FOLEY. It is a practical matter.

Senator DOUGLAS. These are matters of bookkeeping.

Mr. FOLEY. It is a practical matter. Now, let me discuss it from this point.

Actually, what this seeks to do is to set up a source of funds for this mortgage corporation. Insofar as the cost of those funds is concerned, they are roughly comparable to the cost of funds deposited by savers and others with the institutional type of mortgage lender which makes mortgage loans. For instance, on savings they ordinarily pay about 2 percent.

Senator DOUGLAS. With reference to a savings bank.

Mr. FOLEY. Two or two and one-half percent, something in there; and the cost of that money plus the cost of doing business makes up the interest rate which that lending institution has to charge on mortgage loans that it makes.

Now, in this situation, this plan proposes to set up a single lender that will not be receiving deposits of savings from the public or obtaining its funds for lending in the usual processes that exist. It will be getting them from investors buying a type of security, which type of security, with the kind of guaranty which is here specified, we are advised by persons experienced in the field would probably command a rate of approximately the rate of Government for long terms.

Senator DOUGLAS. I do not want to prolong the questioning, but is this what you are saying: That, whereas in the ordinary case in housing you have individuals operating through the bank as intermediary, you are going to have this type financed by the creation of credits by banks; and presumably, therefore, it would be less costly than the savings out of income by private savers? Is that what you are saying?

Mr. FOLEY. The creation of a type of security which banks and insurance companies would buy as investments.

Senator DOUGLAS. Would you use commercial banking to finance these loans? You see, we are getting into a fundamental question there, Mr. Foley.

Mr. FOLEY. I am stopping now just to think over exactly what you mean by "commercial banking."

Senator DOUGLAS. Well, the normal distinction which is made is. that investment banking is a process whereby the savings of individuals out of income can be put into productive use through the intermediary of banks; whereas commercial banking is where the borrower comes to the banking institution and the bank really creates credit against which the individual may draw. There are actually no individual savings borrowed at all; it is just the creation of monetary purchasing power against which the borrower draws. Those are the fundamental distinctions between the two types of banking.

Now, I grant you that they move together, and you will often have a bank performing both functions. But what I am trying to get at is this: Are you expecting to have the loans of this type financed by savings out of income, or are they to be financed by bankers out of the creation of credit?

Mr. FOLEY. By "creation of credit" do you imply an operation broad enough to include the raising of the funds by the sale of a guaranteed debenture?

Senator DOUGLAS. The question is whether you expect the banks would merely subscribe for these securities from deposits which had been placed in their hands by individual savers, or would they be purchased by merely permitting them to draw upon the banks as a whole or merely permitting the corporation to draw upon the banks as a whole? If the banks make the loans together, they could expand the credit.

Mr. FOLEY. Well, I am sure I am not as expert in this field as you are, Senator, but in my opinion it would be the former.

Senator DOUGLAS. Well, then, it would not be any different from the present situation. The savings would come from the same sources; that is, there would not be any difference from the savings financing in FHA and you would draw from individual savings. The basic question is there and now we can effect reductions in what goes to make up the interest rate.

Am I taking too much time?

Senator SPARKMAN. No; that is all right, Senator. Now, I am wondering if the reduction of this interest rate in which the Senator is concerned, and properly concerned, does not arise out of the fact that in the case of the FHA, with which most of the comparisons have been made, and even under section 608 type of structure under FHA, which is more nearly analogous, I believe, the security there is the individual project, whereas here the security rests on all the projects that may be built under the program.

In other words, they are debentures with the Government behind them, and the security for those debentures, as far as the Government is concerned, rests upon all of the properties.

Mr. FOLEY. Yes, sir. From that standpoint you are quite right, Senator. I think I have probably not followed the point that Senator Douglas has been trying to raise in his questioning of me. But, as I say, he is much more expert in that particular field of financing than I.

But your point, Senator, is correct. These debentures are not issued as against a given individual mortgage, but against the resources of the lending bank, which in this case is the proposed corporation. Senator, I am not sure I have answered you or even followed you; but I assure you I am not trying to evade your question.

Senator DOUGLAS. I know you are not; you are doing fine.

Mr. FOLEY. I am trying to answer as well as I know, but I am not sure I follow you.

Senator DOUGLAS. If you will permit another question, do you think that this interest rate of 21⁄2 percent is too low on this cooperativehousing plan?

Mr. FOLEY. You mean too low to expect?

Senator DOUGLAS. Yes.

Mr. FOLEY. Well, Senator, we are going on the best advice that we can get in this field. And, of course, that is approximate; it might be somewhat above that or somewhat below that.

Senator DOUGLAS. Of course it is also possible that the interest rate in FHA of 4%1⁄2 percent is too high?

Mr. FOLEY. The point, Senator, is this, that once those

Senator DOUGLAS. Let me interrupt. You are going to have great difficulty because you have your feet on divergent cakes of ice. One foot is on the 41⁄2 percent of FHA and, if I may mix my metaphors and give you another foot so you will have three feet, then another foot is on the 4 percent for VA.

Senator SPARKMAN. And section 608 loans.

Senator DOUGLAS. Yes, and another foot on the 21⁄2; and I think you may find that each cake of ice may be moving in different directions; and, in that case, then somebody is going to sit down in the middle.

We have already seen what happened because of the divergence between 4 and 41⁄2 percent, which resulted in Fanny May being loaded to the gills on housing loans, and it may be that this perhaps will become another Fanny May. Fanny May is the Government beanstalk, similar to the beanstalk of Jack the Giant Killer, which the planted and which sprouted up overnight.

Now, we thought that FNMA was going to be merely an intermediary to pass on securities to the investing public, but now I find that it has gone to a billion and a half and it is still growing and growing, and the President has asked for a total of 990 million dollars for the fiscal year 1950-51.

Now, are you prepared to drop seed into the fertile soil of Government credit, and are you sure that perhaps you are not going to be starting another beanstalk which will reach up to the heavens?

Mr. FOLEY. No, Senator, although again, if I follow your question, the money obtained at a rate of 2%1⁄2 percent in this proposal or approximately that, according to the best advice we have been able to get, is still money only made available for the whole process of lending. The differential between that and a rate that is necessary to be charged by a mortgage-lending institution for the making, financing, servicing of a mortgage, necessarily has a differential, just as there must be a differential between the rate a savings loan pays to shareholders, and they have their rate which they must charge on loans to operate their business.

As to the further question as to what is a proper and adequate rate of interest in the broad field as distinguished from this and to maintain what we are seeking in the flow of home-financing capital sufficient to maintain the necessary high volume of production which we need to overcome the housing shortage, I am not, I think, prepared to answer exactly what that rate should be. It is a matter that is always under consideration, both within and without the Government.

Senator DOUGLAS. Would your office be willing to submit a memo randum showing in the case of FHA and VA what the various elements of cost are in the respective 4 and 41⁄2 percent rates of interest, and what would be the layers of cost in this interest rate which you expect in this cooperative plan? Then we could get some idea of what is involved.

Mr. FOLEY. I will be very happy to furnish any data you wish. Senator DOUGLAS. I mean figures that would show what would be the cost, what would be the first mark-up of the bank, what is the insurance cost, and what is the secondary mark-up, and so on.

Mr. FOLEY. We will be very glad to give you the data.

Senator DOUGLAS. And perhaps we could correlate them and have a cross-section idea of the various elements.

(The material referred to follows:)

In attempting to establish the probable rates at which cooperative housing projects might be financed under the terms of S. 2246, it was necessary to take into account the layers of cost which enter into the financing of residential properties under varying conditions. While the amount of available data on this score is extremely limited, representatives of four insurance companies did present estimates of their costs at the American Life Convention in Chicago in the fall of 1945. This study shows that on FHA insured loans bearing a gross interest rate of 42 percent, the costs of procuring and servicing the loans together with a pro rata share of administrative expenses, etc. bring the net rate down to approximately 3 percent.

Interest returns on mortgage investments for 4 life insurance companies
[New city loans serviced by correspondents]

Gross rate before insurance charge_

Percent

4. 50

The costs presented above reflect the experience of four insurance companiesMutual Life Insurance of New York, Business Men's Assurance Co. of Kansas City, National Life Insurance Co. of Montpelier, and Liberty National Life Insurance Co. of Birmingham and may be somewhat more favorable than those of lenders as a whole. Thus, having the advantage of geographical diversification, and a better balanced loan portfolio in terms of type and size of mortgagees these insurance companies probably are able to show lower costs and hence a more favorable net return than is true of many of the small local lenders. The extent of the variation in the costs of procuring and servicing mortgage loans is one of the subjects under investigation in the as yet uncompleted study of mortgage lending by the National Bureau of Economic Research. One volume of this study-Urban Mortgage Lending by Life Insurance Companies by Dr. R. J. Saulnier-will show that even among insurance companies themselves the elements of interest cost differ widely depending upon the size of the company and its scale of mortgage lending activity.

It is a well established fact in financial circles that lenders tend to prefer bonds to mortgages. Greater liquidity, lower servicing costs and expenses all are factors bearing upon this preference. By placing a Government guaranty upon the cooperative housing debentures, it seems reasonable to expect that they can be sold on a yield of not more than % percent above the going rate for long term Government bonds. At the current rate of about 24 percent for governments this would mean a rate of about 2% percent on the cooperative debentures. After making an allowance of about % percent for office expenses, servicing and loss reserves, which on the basis of the insurance company experience seems reasonable, it should be possible to make money available to the individual cooperatives at around 3 percent.

Mr. FOLEY. Apropos to that, Senator, since you raised the question and it is very important, the market of this Federal National Mortgage Association, that is a subject that is, of course, under very careful study.

I think now that if I can proceed with this statement, unless you wish me to say more, I might content myself now with this one observation on that.

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