The proposed bill authorizes the President to establish, pursuant to section 201, the greater maximum amount as provided in the proposed amendment. This is not satisfactory as this discretionary power would create a serious problem in the planning of any largescale cooperative project. It is essential for the proper planning and financing of such a project to have determined in advance the amount. of the FHA-insured loan. It would be to the advantage of the program that the maximum insurable loans be established in the present proposed bill without the necessity of obtaining the authorization of an increase from the President.

Section 119 of the proposed act, dealing with cooperative housing, provides that the insurable loan shall be based on the estimated value of the property or project instead of, as formerly provided, on the replacement cost. Insofar as this change pertains to section 213, cooperative housing, I believe it to be impracticable, unless there is a definite provision that replacement cost and valuation are one and the same. Under the existing criteria used by the FHA in determining value under section 207-if the same basis of computation is to be used under section 213-there is a difference between valuation and replacement costs. This comes about because, in addition to the replacementcost analysis, a criteria based on capitalization is used. As all cooperative housing under section 213 is erected on a nonprofit basis, it would be impossible to create value under the existing tables of capitalization. For the same reason value could not be based on comparability. It seems to me that the only basis of computation, to determine the maximum insurable loan, is by replacement cost as provided in the existing law since a nonprofit cooperative corporation does not lend itself to basing mortgages on a valuation basis as there is no profit motive.

I might qualify that for a moment, and say when I speak of "profit motive" I mean in its operation, not in its erection, because in the erection of these buildings every builder makes a profit on the general construction.

In the proposed amendment allowing for increases for veteran membership, there is eliminated increases based on the percentage of veteran membership. The proposed amendment permits the increase only if 65 percent of the members are veterans. By reason of the elimination of the pro rata increase based on the percentage of veterans, I believe the requirement should be lowered from 65 percent to 50 percent. In the New York area, particularly Queens County, I have confirmed that it is becoming increasingly difficult to obtain the required percentage of veterans in order to obtain the maximum insurable loan.

To further strengthen cooperative housing I would recommend that section 213 be further amended so as to permit the sponsor-builder to file an application for a cooperative housing project and have same processed so that a commitment could be issued without the necessity of first obtaining applications and approval of the purchasers of 90 percent of the number of units contained in the project. This would eliminate the necessity of selling the stock in the cooperative corporation prior to the initial loan closing. It would greatly speed up the building processes if a builder-sponsor were able to receive a commitment prior to the sale of the apartments. The project could then be

erected and the sale of the apartments could take place during construction.

The payments received for the sale of the stock would be held in escrow until the project was completed and, upon completion, said funds would be paid over to the builder-sponsor as reimbursement for equity capital advanced by him out of his own funds on behalf of the cooperative corporation.

Upon completion of the project and reimbursement to the buildersponsor the stock purchased by the cooperators would be issued. This would afford a greater protection to the cooperators for any moneys that may have been paid for their stock by reason of the fact that until the project was completed all funds paid by the cooperators would be held in escrow.

I also wish to respectfully recommend that in connection with title III: Federal National Mortgage Association, some provision should be made so as to permit FNMA to issue prior commitments in connection with section 213 cooperative housing projects where mortgage loans to be guaranteed by the FHA are not readily obtainable from private lending institutions.

Senator BRICKER. Thank you very much, Mr. Kahn.
Mr. KAHN. Thank you.

• Senator BRICKER. Do you have anything further that you want to offer?

Mr. KAHN. No; I think I have presented it as completely as I can. (The following was submitted for the record :)

Senate Banking and Currency Committee,

JAMAICA, N. Y., March 18, 1954.

Senate Office Building, Washington, D. C. DEAR SIR: In reference to a discussion on March 16 with your staff, I would like to briefly restate the major points raised by myself and my associate, Mr. Sidney Lipkins, in connection with S. 2938 now before the committee.

Section 201 of the bill authorizes the President to establish greater maximum mortgage-loan amounts. This proposal is a step in the right direction and certainly is commendable. In my opinion, as a practical matter, this proposal is not satisfactory as this discretionary power vested solely in the President would not only bring about undue pressures, but would create a very serious problem in the advance planning and financing of any large-scale rental and cooperative housing project. As we all know, it is vitally necessary, in the proper planning and financing of any big project where heavy expense is involved in the acquisition of the land, architectural, engineering and land-planning exhibits, etc., that the sponsor-builder know the maximum mortgage limitation so he can estimate, in advance, the approximate amount of the FHA insured loan before be finally obligates himself to spending any large sum of money.

From the practical viewpoint of the sponsor-builder and to the advantage of the 213 program and other housing programs, the maximum insurable loans should be established in the present proposed bill without the necessity of obtaining authorization of the increases from the President.

Section 119. Section 213 (b) (2) of the bill substitutes "estimated value of the property or project” for “estimated replacement costs" as now successfully used.

In FHA Commissioner Guy Holliday's testimony before the committee, he spoke upon the risk of loss to FHA of mortgages most recently insured, the reserves for the FHA insurance system and, in recommending the use of value instead of replacement costs, stated in the last sentence of his testimony, page 12, "Basing mortgage limits on appraised value instead of replacement costs would increase the protection of the insurance fund and would encourage elimination of any elements of costs which do not contribute to value."

The concern seems to be that there will be a depression, therefore, we must strengthen our FHA insurance reserve account and, more particularly, our reserves for section 213 by reducing mortgage-loan amounts by the use of "value" and by eliminating any "elements of costs which do not contribute to value."

After over 3 years and 8 months of operation, not one cooperative project has been foreclosed, but let us assume that we do have a depressed period and foreclosures result. If so, section 213 cooperative housing projects have these advantages over other sections of the National Housing Act in weathering the depressed period.

A general operating reserve account is established of not less than 3 percent of the total monthly expenses to be charged to the members, which is paid monthly by the members. The total monthly expense charged to the members includes the FHA estimate of debt service, MIP, cooperative housing expense, taxes, special assessments and ground rents, if any. This results in a very substantial reserve account which can be applied to increases in taxes, amortization, and interest, etc. This 3-percent operating reserve charge, which is not required under other sections of the act, could very well be considered as an additional insurance premium to that of FHA's present MIP of one-half of 1 percent.

I am informed that in the FHA New York insuring office jurisdiction, the total monthly carrying charges for 213 cooperative apartments average approximately $21 per room per month, whereas section 207 rental housing projects built during the same period average approximately $40 per room per month. It seems obvious to me, therefore, that if this same proportionate difference exists in both the high- and low-cost housing areas throughout the Nation, in the event of a depression, high vacancy factors and defaults will occur in the higher-rental brackets, as has been the experience in the past, much before those in the lower-rental brackets under which cooperative housing has been built.

Another factor of safety for cooperatives is that the cooperative members themselves can always take over many of the functions of fee management and salaried employees, reduce legal retainer fees now being paid, and perform many of the miscellaneous tasks around the project, thus effecting substantial savings in operating costs, which, of course, are reflected in total monthly charges.

I understand that the FHA, from time to time, in order to avoid foreclosure, has granted section 608 and 207 rental housing projects a temporary stay of amortization and a stay of payments for the reserve for replacements account. If there was a severe depression or if a few 213 projects here or there were in default, as a last resort temporary stays could also be granted for amortization and reserve for replacements for cooperative projects.

It seems to me, therefore, that, while the FHA insurance fund reserves may not be all that is desired in the event of a depression under other sections of the act, if we are to sum up the foregoing plus the amenities of home living and pride of home ownership, the FHA, as well as the lending institutions, have greater protection under section 213, even though such protection is not entered on the books of the FHA as actual reserves.

The proposed substitution of value for replacement costs, in my opinion, would have a serious effect upon the cooperative-housing program in the total amount of mortgage to be insured and thus bring about for middle-income families what may be considered for them a substantial increase in downpayments, which now average, in New York, approximately $212 per room or $875 per unit (for 6-story-elevator-type structures). This amounts to approximately 82 percent of the average purchase price.

I have been informed that there should be very little difference between value and replacement costs and that, generally, value and replacement costs should be the same. These statements just don't seem to be borne out by the facts as first, we have Commissioner Holyday's statement that "Basing mortgage limits on appraised values instead of replacement costs would increase the protection of the insurance fund and would encourage elimination of any elements of costs which do not contribute to value," and, secondly, in the 19th Annual Report of the HA on page 116, it states "the relatively low ratio of loan to replacement costs under 207 results in (1) the maximum mortgage amount under this section s limited by statute to a proportion of the estimated value of the project rather han replacement cost (which invariably averages higher than value).”

Inasmuch as there seem to be differences of opinion as to whether value is less r equal to replacement costs on project mortgages, may I suggest to the committee that a study be made of section 207 rental housing cases committed or

insured in 1952 and 1953 in the New York FHA insuring office along the following lines:

(1) The total dollar amount of the summation (total estimate of replacement cost of property) as shown under section VI, page 3 of FHA form 2264, and (2) The total amount of the fair market value of the property in fee simple shown under section IX, page 3, FHA form 2264, and

(3) The percentage difference between summation (total replacement costs) and the fair market value; that is, the lowest percentage shown on any one case, the highest and the average.

While I and my associates, at the present time, have no interest in section 213 sales-type projects, the use of value would apply across-the-board to both 213 types-management and sales and, therefore, further suggest that, in addition to the New York study, a study be made of the Long Beach, Calif., sales-type projects known as Lakewood and Carson Park Mutual Homes, which some of my associates have inspected. The study should be along the following lines covering mortgages insured, commitments issued and statements of eligibility outstanding.

(1) The total amount of FHA's replacement costs, as shown on page 3 of FHA form 2264W, and

(2) The total amount of the estimated value under section 203 criteria, page 4 of FHA form 2264W, and

(3) The average percent, difference between total replacement costs and value. To date, in the overwhelming majority of 213 cases, the 90 or 95 percent of replacement costs has not governed the mortgage loan amount, whereas the present statutory per-room limitation of $1,800 or $1,900 per room whichever has been the lesser, has determined the maximum mortgage loan amount.

It is my considered opinion, therefore, if value is used for both the management and sales-type 213 cases, it will always be below replacement costs, therefore, in determining mortgage amount, the contemplated increase of mortgage amount in the new bill to $2,250 or $2,375 per room will seldom, if ever, apply, as the percentage of value will be lower and will be the determining factor in establishing the maximum mortgage amount.

Commissioner Hollyday stated, "Basing mortgage limits on appraised values instead of replacement costs-would encourage the elimination of any elements of costs which do not contribute to value."

I interpret Commissioner Hollyday's statement to mean that the important items of legal and organizational expense now required for section 213 projects will not be reflected in any finding of value. I wish to point out that under section 207, which is on a value basis, the items of legal and organizational expense can be considered as minor, therefore, their omission does not affect value to any great extent. On the other hand, under section 213, legal and organizational expense are substantial and, therefore, can have a very definite effect upon the cost of the project and downpayment requirements.

The problem is much greater in 213 sales-type projects because, in addition to these expenses, it is required that the project be built under the Department of Labor's standards of prevailing wages. Prevailing wages are not a requirement under section 203. The result is that where value does not recognize prevailing wages, legal and organizational expense, any sponsor of a 213 salestype project has a problem.

It is interesting to note, for example, that under the new bill, with a $10,000 valuation, the mortgage loan under 213 for nonveterans would be 90 percent, or $9,000; for 65 percent veterans, $9.500. Under section 203, with the same value, the mortgage would be $9,100 or $100 more than the 213 nonveteran loan, and only $400 less than the 213-65 percent veteran loan. With a $12,000 valuation, the 213 nonveteran mortgage would be $10,800; the 203, $10,600, a mere $200 less.

While it is true that if 65 percent veterans participate in a 213 sales-type program, the mortgage amount would be somewhat higher than 203 mortgage amounts, one cannot overlook the fact that a sponsor-builder would think twice before placing himself under the bookkeeping, payroll, and penalty requirements of the Department of Labor standards, absorb legal and organizational expense, and undertake all the extra effort and grief that is required to put a 213 sales-type project together and sell it, in the hope he will find 65-percent veterans who will meet FHA credit requirements.

It is the considered opinion of those who are familiar with the 213 sales-type projects that, if the new bill increases section 203 ratios of loan to value, as contemplated, and value is used instead of replacement costs for 213 sales-type

projects, then there would be no advantage to either a self-propelled cooperative group or to a sponsor-builder type of project to build under the section 213 program.

In my testimony before the committee, I recommended that, to strengthen the cooperative housing program, section 213 be amended so as to permit a sponsorbuilder to file an application for cooperative housing and that a commitment be issued without the necessity of first selling 90 percent of the total membership in the project before construction starts. With this amendment, it would be no problem for the FHA to amend its present administrative requirements and, for purposes of clarity, I offer the following brief outline of FHA processing of a combination of sections 213 and 207 processing to accomplish this purpose: 1. Joint application is filed with the FHA under title II, sections 207 and 213 of National Housing Act.

2. Upon completion of processing, sponsor-builder is furnished copy of FHA form 2264 (very similar to form 2264W used in section 213 cases). The criteria on page 4 of form 2264 sets forth the mortgage amount insurable under section 207 provisions. Inasmuch as page 3 of the 2264 discloses the total estimated replacement cost of the project (summation), a further criteria would be set forth on page 4 showing the estimated mortgage insurable based on section 213 provisions and a new type section 213 statement of eligibility would be issued stating the mortgage amount insurable for nonveterans and 65 percent veterans upon completion of the project. (A form 2264W, which would be copied from the 2264, could be issued also.)

3. A 207 mortgagor corporation would be formed.

4. A 213 nonprofit cooperative mortgage corporation would be formed.

5. Subject to certain conditions, the 207 mortgagor corporation would agree to sell and the 213 mortgage corporation would agree to purchase, at a specific figure, the assets of the 207 mortgagor corporation upon completion of the project, subject to, of course, the mortgagees' and FHA approval.

6. The FHA would issue its commitment to insure to the 207 mortgagor corporation under the section 207 provisions and, after initial loan closing, the corporation would start construction.

7. At any time before construction started, during construction or after completion of the project, the 213 mortgage corporation would proceed to sell the dwelling units to the individual cooperators for such downpayments and monthly charges as approved by FHA.

8. FHA would issue a commitment to insure upon completion to the 213 mortgage corporation when 90 percent of the total membership had been sold and their credit approved.

9. All equity or downpayments collected on the purchase price of the stock would be placed in escrow together with the stock, and not disturbed or paid into the 213 mortgage corporation until sale and transfer of the 207 corporation's assets to the 213 corporation and final endorsement of the 213 credit instruments. The shares of stock would be issued to the shareholders simultaneously with final endorsement of the 213 note and mortgage.

10. If, during the course of construction, some of the structures were completed efore others, prior occupancy could be granted prospective stockholders (even hough they had not paid for their stock in full) under a month-to-month rental greement at schedules approved by FHA, but not in excess of the estimated total monthly charges under the 213 provisions. This accessory rental income would elong to the 207 mortgagor corporation and eventually, upon completion of the roject and sale to the 213 corporation, would become an asset of the 213 corporaion to be used to increase the 3-percent operating reserve or disbursed as patronge refunds to the cooperators.

11. Failure to sell the 213 dwelling units before 120 days after completion of he project would require that the sponsor-builder and his mortgagor corporation -ould have to accept final endorsement of the note and mortgage under the proisions of section 207 and, thereafter, operate as a rental-housing project. In is event, they would dissolve the 213 mortgage corporation and return any oneys held in escrow.

If this suggested amendment were in effect and the FHA administrative reirement that a commitment to insure cannot be issued nor construction started til 90 percent of the membership is sold were deleted, 6 or more months' time uld be saved in the start of construction. Any delay in the start of a cooperae project proves costly. Many members become impatient and withdraw their bscriptions, which has resulted, in many cases, to as high as 50-percent turner in membership and, before the project can be started, these memberships