many other factors which go into the building economy, your project cost at the end may be $800,000 or it may be $1,100,000.

Yet you cannot, nor can any builder or any agency in the building industry that I know of, predict what it will ultimately cost 21 months from now.

I think you would find that is the reason that in the earlier 608 projection a 90-percent loan was insufficient, and in many cases it actually worked out to 85 percent.

During the past year, with the decrease in the cost of materials and a freer labor market, having been projected back in July of 1948, or some earlier date, figuring 18 months, those have worked to the advantage of the builder, and there is no stabilizing factor that can be involved.

The same thing would apply if the Bowery Savings Bank, to mention my own institution, said to a builder, "We will make you a 6623-percent conventional loan on this. It is worth a million dollars. We will give you a commitment for $660,000."

He goes ahead and builds it. He does not build it overnight. He builds in it 12 or 15 months. We have still got to make good that commitment, even though his costs may go down 20 percent. We may have an 80-percent loan, although actually in effect we have a 66-percent loan.

Senator LONG. I know, certainly, that your bank would not make any loan on which there was not actually a true equity represented by the investment of the property owners unless you had a Government guaranty of the investment. Certainly you would not make a 100-percent loan on anything, or a 110-percent loan on anything. Mr. HELD. We are not permitted under State law.

Senator LONG. If you wouldn't—it would not be sound banking practice.

Mr. HELD. The chances are it would not.

Senator LONG. I have certain objections to the present provisions of section 608, and I am wondering if we might not find the same thing again.

The average person building a project is disappointed if he cannot get a relatively high estimate of his costs. Usually he builds as a corporation. The landlord technically is a corporation. Usually the corporation contracts with the contractor himself.

Of course, actually it is all the same person in the last analysis. But he protects himself from personal liability by doing business with the corporation in setting up the individual project.

But on the estimated cost there would be an item which there is no way in the world of avoiding of, we will say, 5 percent for the contractor's profit. Then there is an item of 3 percent for the contractor's overhead. He might not have 3 percent overhead. It might be just 1 or 2 percent overhead, with a 1 or 2 percent difference.

Then there would be an allowance of up to 10 percent for the property. If he purchased the property some time before and he put it in at the enhanced value, he might have only an actual investment of 3 percent in the property, although he might have it at 10, which would be 7 percent more.

The estimated cost is estimated on what it would take a typical contractor, you might say, to build it. There is every incentive for the person who is getting the FHA loan approved to try to get the

cost approved just as high as he can because the higher cost he can have approved the higher the amount of the loan he can get.

The FHA has told me this, that they would estimate that an efficient contractor might build something for 5 or 10 percent less than the possible cost otherwise. That might give you a saving of 5 percent more. There you would have a guaranty at 90 percent. Adding those figures that I have listed, that would be about 19 percent saving that could be effected that he did not actually put into it.

It is true that the contractor might have put his own brains and ingenuity into building this project and giving his leadership to the project, but it did not actually represent his money being put in. So he can in effect feel that he could pocket 9 percent of the total investment.

Mr. HELD. Provided he wanted to throw in his builder's profit of 5 percent, that is true. Of course he does have certain expenses that are involved in connection with the project, such as drawing plans and specifications. The fact that he is a corporation, of course, is required under 608. He has to be a corporation before he can apply for the loan.

I cannot say that possibly some of these loans were not in excess of 100 percent.

As pointed out before, I believe, they accomplished housing. Only the future will tell whether they are going to live on the basis of 105 percent loan or 100 percent loan or 85 percent loan.

Senator LONG. I was told by a builder, as an example, that he built his section 608 project at 70 percent of the estimated cost and that he had an immediate profit of 20 percent of the estimated cost. So he then owned the project, and he had made a profit of 20 percent, you might say, over what his actual cost was to him.

Mr. HELD. In New York in the FHA office we have effectively put a stabilizing influence in there insofar as they have created three different zones above which the top rent cannot go in those particular

zones.

FHA, of course, figures their value on 90 percent of the estimated current cost as of December 31, 1947, or the present-day cost, whichever is least. But then below that they have a different factor which is the capitalization based upon 91 percent of the total amount multiplied by 6 percent, which, in effect, has brought practically all of the new projects under this capitalization premise rather than under the cost premise.

I know of cases where we have closed loans and the builder has actually put on the table at the time of closing anywhere from $231,000 to complete the project.

I might also point out that a great many of those builders in and about New York had projected these things on the basis that they might get a conventional loan. They are much better than a normal FHA loan. They found they could not get conventional loans of $2,300 a room, and they swung over to FHA. But in swinging over to FHA, they still had sizable amounts to put up.

I understand the same thing applies in Pittsburgh.

Senator LONG. The important thing to me is that the landlord in getting a Government-guaranteed loan should actually have some equity in terms of capital he had actually invested in.

It would seem to me that you would have some small equity, at least, under cooperative housing. I certainly would not want to see any promoter promote one of these projects to make a profit such as some of these 608 people have been doing, and then pocket their money and say that regardless of what happens they have made their money and they have no further liability to worry about.

It occurs to me that the danger of the Government losing the money is in this rental provision rather than in this cooperative housing.

If you have a legitimate cooperative with the people there holding an interest at the time they contract for their building, they would certainly want to make sure that they got every possible nickel of value that could be squeezed out of the contractors in building these projects.

Mr. HELD. That is quite true. I was interested in the testimony of the first witness this morning that in California they were able to get contractors who were willing to turn back half of any profit that they made over and above the estimated profit on the development.

Actually, in these developments, such as Bell Park, the contractor turns back all of the profit over and above his set-up price. He turns back his entire profit. But here you have not only FHA supervision of the construction and FHA underwriting experience, but you also have State housing authorities supervising construction and setting up standards.

The State housing agency must screen every tenant that goes in. The State housing authority must approve every dollar of expenditure for the entire life of the project. There is a very important factor.

Dr. Silk pointed out very clearly that unless they have a tremendous amount of experience in the management of this particular type of project, any group is bound to have money going out the back door without some adequate supervision.

I was very much interested in his testimony that in each community they had a municipal representative on the board to watch for that. Senator LONG. It seemed to me that under the type of rental provisions that we have there are certain people, such as FHA inspectors and possibly State housing inspectors, who try to make the contractor put everything into the project that should be there.

However, the incentive of the person who owns the building, being the contractor himself, is to cut costs wherever he can and to put less rather than more into the housing.

On the other hand, in cooperative housing, if members of the cooperative, they would certainly want to take every precaution to see that they got every nickel of value that should go into the housing project.

Mr. HELD. I might say that in these jobs these fellows actually got better accommodations than the accommodations in a 608 directly across the street which is renting at $85 a month.

Senator LONG. I take it you mean these mutuals that you financed. You thought these people did get better value for their money? Mr. HELD. There is no question about it.

Senator LONG. How were those mutuals organized beforehand? Mr. HELD. Assuming this legislation passes, you cannot hope to get any housing under it for the next 3 years, before your tenants actually

move in.

On this plan, from the day we sat down with the members of the American Legion and the Veterans of Foreign Wars and the Uniformed Firemen's and Policemen's and Veterans Association, the State housing commissioner, and ourselves on the financing of it, it took 18 months before we actually had this thing under way.

Every apartment was sold. Every cooperative owner had his 5 percent down. We were ready to shoot at that time.

Senator LONG. In other words, the apartments had been sold and 5 percent of the money was deposited before the thing was started under construction?

Mr. HELD. I might also add one additional factor which I think may be of interest to this committee.

There are 800 cooperative veteran tenants in this apartment. We selected eight at random in order to get some thinking of the man on the street.

One of the questions that was asked these fellows was, "If there was no down payment, would you have been interested in Bell Park Gardens?" To a man they said "No."

We said, "Why?"

They said, "Because we wanted people who had the same responsibility as ours is, as our cooperators and neighbors.

Senator LONG. How did you handle this problem? Any time a house is being built for an individual owner, at every opportunity the owner usually goes around to look the project over to see what he is going to have when it is completed. Of course, that is a major source of complaint for contractors, that they are being constantly bothered by the prospective home owner.

How did you handle the problem of having 850 proposed home owners who wanted to see what their building was going to be like?

Mr. HELD. They had nothing to say about that. They were given this folder. Their apartments were assigned to them, and they were given a lease on their apartment, and they put a hundred dollars down upon signing the lease."

Senator LONG. Were they permitted to come and inspect the building as it was being erected?

Mr. HELD. Surely. Not only that, but the veterans cooperative committee themselves were on the job constantly.

Senator LONG. Did that committee represent the people who were actually going to live in the apartments?

Mr. HELD. That is right. I might also add that the cooperators gave a luncheon to the mortgagee, the FHA, the city authorities, and the State authorities, as a thanksgiving luncheon in appreciation for what they got.

Senator LONG. I am inclined to agree with you that if you had this type situation and more of this you would correspondingly reduce the need for any cooperative housing legislation by the Federal Government.

What provisions were there in the State laws to help out in a project like this other than what you might have in a State that had no particular legislation?

Mr. HELD. Nothing at all. We did it under our limited-dividend law.

Thomas Gardens was mentioned by Walter Reuther this morning. We used that legislation.

Senator LONG. That was a guaranteed loan, was it not?

Mr. HELD. Oh, no; we are making a loan now to Amalgamated Dwellings for their Bronx job on a completely conventional basis without FHA or anybody else.

Senator LONG. Without any FHA financing?

Mr. HELD. The Amalgamated Clothing Workers are putting in the differential between our cost and their $8,000,000 that the job is costing. Senator LONG. I see on the inside of the cover of your folder the statement that application for mortgage insurance is being made to the FHA.

Mr. HELD. These projects listed in the brochure were FHA-insured. Senator LONG. That was the Bell Park Gardens?

Mr. HELD. And that is completed and all the tenants are finishedSenator LONG. What type of FHA loan was that?

Mr. HELD. FHA 207 (c), which gives a 95-percent loan on a 40-year maturity, although we did not take the 40-year maturity.

Incidentally, I might also mention that under 207 (c) the Housing Commissioner has to find that the project is economically sound before he can issue insurance on it.

Senator LONG. I certainly admire those projects. I wish we had more of that sort in this country.

Senator SPARKMAN. Thank you very much, Mr. Held.

I think this might be a good place to insert in the record a news item from the New York Times of January 12. I will read it very briefly :

Nearly 85 percent of new housing units started in New York City during the first half of 1949 under the FHA-insured emergency large-scale rental program is intended to rent for more than $90 a month.

Federal Housing Administration figures revealed also today that, of the 16,359 units begun during this period, none is intended to rent for less than $60 a month. These figures, brought out during hearings on a new cooperative housing bill designed to spur construction of middle-income accommodations at lower cost, showed also that only six-tenths of 1 percent of the units would rent for less than $70.

Only 5 percent will rent from $70 to $79.99, while 10.3 percent of the units will be let at $80 to $89.99.

Nearly three-quarters of the whole private building operation in the city under this program will rent at $90 to $125 a month. Twenty-three percent will be put up at $90 to $99.99, 24.5 percent at $100 to $109.99, and 26.7 percent at $110 to $124.99.

The remaining 9.9 percent of such housing was intended to rest for more than $125.

In contrast, building in Washington, D. C., under the program-totaling 13,853 units for the same period-produced nearly half of its projects to rent for less than $80 a month.

Congressman Karsten, of Missouri, is with us and has a very brief

statement.

Congressman, if you will come around we will hear from you right now. We appreciate your coming by and are glad to know of your interest.

STATEMENT OF FRANK M. KARSTEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSOURI

Mr. KARSTEN. Mr. Chairman, I appreciate this opportunity of making a statement in support of the cooperative housing legislation which has recently been introduced in the Senate and House of Representatives.