part of it, for example section 221, the 3-percent contribution provision could be dropped, and the facility could be operated exactly as FNMA was in the lush days of 1949 and 1950 when, in its support of the VA housing program, it became one of the principal engines of the price inflation of that period. With the Treasury support given it, this portion of the plan obviously could be made to work, and, especially in view of the impracticality of the first part of the plan, pressure for its invocation would be unremitting.

We think it neither necessary nor desirable for the Government to keep such a financial bomb in its closet. The private mortgage market has, after the postwar turmoil, achieved a good measure of stability. The prospect is that the supply of mortgage funds from the people's savings in the years ahead will be ample to meet the needs of a broadening housing market.

Aside from the assurance of a market rate of interest for FHA and VA loans, no more is needed than a means to reduce the incidence of the usually temporary fluctuations to which the private market is subject.

The association urges that this section of the bill be given thorough consideration. We recommend a return to the principles enunciated and proposals offered in the report of the Advisory Committee; and while, as an alternative, we would accept the initial use of Government capital in lieu of the proposal to permit investment of home loan bank funds, we oppose any further major departure from the committee's plan.

Now, at this point, I should like to make reference to the testimony that was given last Friday by Mr. Shanks, president of the Prudential Insurance Co., before the House Banking and Currency Committee, of which I have seen a copy, in which he proposes the formation of voluntary committees to see to it that money is available in rural and semirural areas and for minority housing.

We have seen that testimony, and we are of the opinion that it is something which should be seriously considered as a part of this legislation.

We believe that this plan, if the life companies are proposing it, can be made to work, and that if it is, it would very largely eliminate the necessity, actually, for any operations of the Federal National Mortgage Association. That testimony, I presume, will be given here before the Senate Banking and Currency Committee.

The CHAIRMAN. If it isn't, it will be made available to us. He will testify here on Friday.

Mr. CLARKE. I thought while he was here discussing this, I would put in our feeling in connection with it.

The CHAIRMAN. We will give a lot of consideration to his suggestions.

Mr. CLARKE. Title IV of the bill, dealing with urban renewal, has our complete endorsement. So important do we feel its provision to be to the maintenance of economically sound cities, healthful and attractive living conditions, and the encouragement of greater private investment in housing property, that we are offering special testimony on this subject.

Mr. James Rouse, who is a member of the President's Advisory Committee, and from what we know, had a substantial proportion of the development of this program, is here, and will testify on our behalf in this connection.

In respect to title V, dealing with public housing, we consider the proposed amendments to be of minor significance. If the existing statute is to provide the basis for the continuance of this activity, they may offer some mild improvement. We regret that the bill does not go to the heart of the question of whether it should be continued at all; but, since it does not, we do not consider it appropriate to discuss the question here.

We are submitting for your consideration a memorandum which we have prepared on this subject, with a request that it be included in the record.

The CHAIRMAN. Without objection, it will be made a part of the record. Is that on public housing?

Mr. CLARKE. It is on the financing of public housing.

The CHAIRMAN. On the financing of public housing?

Mr. CLARKE. That is right.

The CHAIRMAN. You think we ought to continue public housing? Is that a fair question?

Mr. CLARKE. That is a little ticklish question to ask me, sir. (Appendix B to Mr. Clarke's statement follows:)

APPENDIX B

FINANCING PUBLIC HOUSING

A MEMORANDUM SUBMITTED BY THE MORTGAGE BANKEKS ASSOCIATION OF AMERICA

The present plan of subsidizing public housing by making annual contributions sufficient to meet any deficits in the principal and inter st payments on the taxexempt bonds issued by local authorities is unlike any other Federal subsidy operation and has a number of serious objections.

1. It puts on the market a security which at once is tax exempt and federally guaranteed, an anomaly in itself. For years the Treasury has sought to restrict the area of tax-exempt securities, yet in this case it permits an expansion of the area with Treasury endorsement. Yet the gain, ratewise, is small. The last issue of the guaranteed public housing authority 36- to 40-year bonds carried an average yield of 2.34 percent, at the same time as the average yield on high-grade municipals was 2.37.

2. The scheme provides a subsidy for those who buy the bonds as well as for those who live in the houses; and the probability is that the subsidy to the bond buyers through tax exemption is greater than that to public housing tenants. It is doubtful that, from the Treasury's point of view, a more costly way of financing a welfare program could be devised.

3. The financing operations of the local authorities in themselves create difficulties for the Treasury's own financing operations. There is little choice in the timing of the public authority issues. Since the funds are required to replace temporary financing (also tax exempt in most cases) used to pay the development cost of projects proviously authorized and built under contractual authority granted by the statute, the issuance of the permanent financing cannot be long deferred after construction is completed. The timing of such financing may be precisely wrong in respect to that of necessary Treasury financing, as it notably was in the spring of 1953. As things now stand, if no additional public housing were put under construction than presently authorized, approximately $500 million of tax-exempt guaranteed securities must be issued each year for the next 3 years.

4. The provision of subsidies through annual contributions puts upon the Federal budget an item of expenditure over which neither the Bureau of the Budget nor the Congress can have any control. The subsidies represent a 40year contractual obligation, the total annual amount of which accumulates rapidly with the expansion of the program. During fiscal 1953 the amount of subsidy actually paid was $25.9 million. During fiscal 1954, the amount will be $43.3 million. From June 1954 on, with no further expansion of the program, the average annual contribution will be $79,7 million. If even the current relatively low rate of expansion were continued, the amount' would soon be equivalent.

to what would be paid out in capital grants for an equivalent program. But, while the capital grant could be varied from year to year according to budgetary considerations or the state of the economy, the annual contributions, once contracted for, are a fixed charge which cannot be varied on the initiative of the Government. A serious element of budget rigidity is thus created.

Actually, the whole plan is a subtle means of disguising the full cost of the program. The actual cost of additional public housing is concealed, because the Congress is asked to authorize not the cost but simply the carrying charges on the cost. The actual cost of the annual contribution is also concealed because a substantial amount of the cost is hidden in an incalculable loss of revenue through tax exemption.

The straightforward way of handling public housing financing would be through capital grants, which is the way in which all other subsidies for construction operations are handled.

Consideration should be given to placing this program on the same basis as that now provided for subsidies for urban redevelopment-an outright Federal grant representing two-thirds of the total required expenditure, to be paralleled with a local payment of the other one-third. If this were accomplished, the Federal outlay would still be proportionately very generous, but it would be one that would restore to the Congress much closer control and would prevent the accumulation of future trouble in terms of fixed and invariable obligations.

Mr. CLARKE. Although the Mortgage Bankers Association includes but few savings and loan institutions, and consequently is not ordinarily concerned with their special problems, we nevertheless fully endorse the provisions of title VI of the bill that gives these institutions better protection against arbitrary action by Government officials and makes possible their broader coverage of the mortgage market. We can only wish that the same attitude of confidence could be manifested in this legislation to those institutions that more generally deal in insured and guaranteed mortgages.

In concluding my testimony, I ask for greater confidence in these institutions the insurance companies, the banks, and the mortgage companies that, over a 20-year period, have made the insured mortgage system a vital feature of the private mortgage-lending structure of the country.

All but a small fraction of the 3.4 million mortgages financed with FHA mortgages since 1934 have been financed by the institutions I have mentioned. Of the total amount of this activity, only 193,200, or 6 percent, have ever found their way into FNMA, and this mainly during periods or in respect to programs when interest rates were set below marketable levels.

The mortgage lending institutions of the country have well demonstrated their desire to work with the Government in improving housing conditions. They have a great record with insured, guaranteed, and conventional loans. They will keep up this record, provided their freedom to perform is not arbitrarily hampered. In the main, this bill enlarges the area of potential performance.

I have endeavored to point out the sections of the bill that do this, as well as to indicate those sections that appear to us to be in conflict with this objective. We urge your reconsideration of the conflicting sections, to the end that, relying on a "strong, free, competitive economy," we may look forward to even greater progress in the improvement of the housing conditions of our people in years ahead than has been achieved during the troubled period through which we have passed.

I will be glad to answer questions.

The CHAIRMAN. You have some gentlemen with you?

Mr. CLARKE. That is right. I have Mr. Massey, who will talk about section 213.

Mr. MASSEY. Mr. Chairman, my name is Maurice R. Massey, of Philadelphia. I am president of the Peoples Bond & Mortgage Co. in that city. Our firm has been active in the past several years in financing section 213 cooperative housing projects, and I appear before your committee this morning as a member of the board of governors of the mortgage bankers associations, to support the enactment of section 119 of the bill that you have up for consideration.

In connection with that section of the bill, we have one suggestion: Section 213 of the National Housing Act, if amended as recommended by the President's Advisory Committee, and as provided for in your bill, will provide, in our opinion, a very effective mortgage financing device for all types of housing, including new housing in renewal areas and new housing for minority groups.

However, one particular amendment, not mentioned in either the committee's report or in the bill, itself, is vitally necessary in connection with section 213 management-type projects.

The need for this amendment arises not from the legislation itself, but from present FHA administrative requirements.

In section 213 management-type projects involving either elevator buildings or garden-type multifamily developments, the FHA requires that a commitment may not be issued pursuant to an approved certificate of eligibility until 90 percent of the cooperators have been obtained and their required subscription prices have been fully paid. This administrative requirement causes delays costly to the project and provides a major barrier to the early start of construction of many very desirable projects. If the FHA continues this administrative procedure, it is too costly for sponsoring groups to engage in further section 213 projects, and the legislation becomes a useless tool in providing needed and moderately priced housing.

It is recommended that section 213 be amended to provide for the issuance of a commitment to the sponsoring group in the same manner and provisions as are permitted under section 207, in order that construction could be commenced and sales programs entered into during construction or upon completion of the project. The mortgage could be finally insured up to the eligible maximum provisions of section 213 when sales were completed and equity deposits fully paid.

I should like to invite your attention, Mr. Chairman, to a project in Detroit which we are directly sponsoring, and which will illustrate what I am talking about.

In collaboration with several Detroit institutions and firms, we are sponsoring an elevator-type building called River House, at a very fine location in downtown Detroit. We are impressed with this project because of its location, the character of design that we have, the type of accommodations that will be offered to the public will result in carrying charges of $22 per room per month, as against the equivalent accommodations in competitive buildings at nearby locations which run as high as $50 per room per month.

The final sponsorship of this project, aside from our own, includes such companies as Westinghouse, Kelvinator, Briggs, Detroit Steel Products, the Warren-Webster Co., the J. L. Hudson Co., of Detroit,

a number of firms and institutions that have banded together to use section 213 as a device to supply moderately priced housing accommodations.

The CHAIRMAN. Is there any tax exemption on this to enable you to get this lower figure?

Mr. MASSEY. No, sir; no real-estate-tax exemption, and no Federal income-tax exemption.

The CHAIRMAN. None whatever?

Mr. MASSEY. No, sir.

The CHAIRMAN. This is a co-op?

Mr. MASSEY. Yes, sir.

The CHAIRMAN. You are building them, and then you are going to sell the units?

Mr. MASSEY. Yes, sir.

To point up what I am talking about, we build an exhibition building on this site and construct models so that the public can see them and inspect them. We initiated our advertising and opened our sales program on November 1. On November 14, we had 463 sales. By sales, I mean we had interviewed 463 applicants, taken $100 deposits from them, and begun to process their application through the FHA. As of November 14, we also had 107 cancellations for a net sales total of 356. One month later, on December 13, we had 586 sales. 201 cancellations, and 385 net sales.

On January 20, we had 642 sales-this contemplates a 448-unit elevator building-by that time we had had 261 cancellations, leaving a net sales total of 381.

On March 5, we had 691 sales, our cancellations at that point had reached 322; we had a net sales total of 369.

Happily enough, however, now, after several months hard work, and costly work, we have attained our 90-percent quota and we are ready to close the mortgage and begin construction.

The New York Life Insurance Co. has taken a permanent mortgage and a local bank, in collaboration with the Philadelphia bank, is taking the interim financing. But I want to point out if this project had been allowed to go ahead under section 207, with an 80-percent mortgage, if you please, instead of a 90-percent mortgage, with all the sponsoring groups' fees deferred until such time as sales were achieved, then we could have started construction before Christmas. So we, therefore, recommend the following amendment to section 213. We believe if adopted, section 213 could be wisely used in financing multifamily developments in all types of areas.

Following section 119, we suggest an amendment to section 213: Section 213 of said act, as amended, is hereby amended by adding to the end thereof the following subparagraph (h): "The provisions of this section may be extended at the discretion of the Commissioner to an insured mortgage transaction initially insured under the provisions of section 207 where such project was originally intended, at the time of the application for mortgage insurance. to be a cooperative housing project as defined in section 213 (a) (1) and (2).” The CHAIRMAN. Thank you, sir. We will certainly give consideration to that.

Mr. CLAPKE. Now, Mr. Rouse.

The CHAIRMAN. All right, Mr. Rouse.