sible to build about 250.000 homes. It is wisely recognized in our judgment that this program would start gradually, so that authorization for the first year is limited to $300,000.000. The balance is to be made available upon a determination by the President that increases are in the public interest.

Sixth. The new bill by encouraging individual dwellings becomes completely workable in small communities. In the larger cities where land is expensive, it is necessary to build larger apartments and have more intensive use of the land. In smaller communities, it is possible to build single family dwellings and duplexes and this is encouraged under this bill, in conformity with the pattern of those communities.

In all of these respects, we feel that the new bill shows the great care and study which this legislation had since title III was introduced as part of last year's bill. The legislation has been the subject of extensive consultations to reflect the best views and judgment of those who have had experience in cooperative housing and in housing generally.

AMENDMENTS PROPOSED TO NEW BILL

However, there is one respect in which we feel that the new bill is decidedly inferior to the former title III, namely, the form of organization of the housing unit which is to administer the program of preliminary loans and other assistance. The new bill provides that this program shall be administered by an official appointed by the Administrator, and that this official would be the head of a division in the office of the Administrator.

It is our considered judgment that the success of this program is largely dependent upon its administration. We believe this program requires a form of organization which is of the same dignity and status as the Federal Housing Administration, the Public Housing Administration, and the Federal Home Loan Bank Administration, the Commissioner of which would be appointed by the President, with the advice and consent of the Senate. An appointment made in this manner, and with this dignity, is more likely to attract the caliber of leadership and talent which this program requires. It also provides a responsibility to the Congress and the President which is vital. in a program of this character. From the standpoint of public interest organizations, we cannot emphasize this point too strongly. Moreover, the establishment of a separate constituent within the Housing and Home Finance Agency is a greater assurance that this program will receive the single-minded concentration and devotion that it requires, without the diversion of the many other grave responsibilities already lodged in the Office of the Administrator. That office should be concerned with over-all matters of policy and broad supervision. It should not involve itself in the specific operations of specific programs. That was the underlying purpose and principle of the housing reorganization plan approved by the Congress. It was a sound principle then, and it is still a sound principle. At the same time, we want to make it clear that we are in complete sympathy with broadening and strengthening the powers of the Administrator so far as matters of policy and general supervision are concerned.

There is one other amendment we suggest to the new bill with respect to the period during which a cooperative must pay for its stock

subscription in the National Mortgage Association. We agree that onesixth should be paid at the time of filing the loan application with the Mortgage Association, but feel the second one-sixth should be paid at the time of the last rather than the initial loan disbursement, so as to give the moderate-income families more time to save up for this down payment.

SAVINGS ACHIEVABLE UNDER THIS BILL

I would like briefly to indicate how this bill will accomplish the objective of providing decent houses for families of moderate income. These include savings that can be achieved through the better financing methods made possible by this bill. Financing costs represent a large part of housing costs, so savings here are important.

Reductions in monthly housing costs would be accomplished, in part, by making loans which would be repayable over a longer period of years. There is no reason why the people who live in housing during the first half of its useful life should have to pay the whole cost of the housing. It is only fair to amortize the cost of housing in a community development over a period more nearly approximating its useful life. This spreads the payment for the housing among all the people who will be living in it. Such a longer period of amortization reduces monthly financing costs substantially. The new cooperative bill would authorize loans for a period of 50 years. This means substantial reductions in monthly costs as compared with the present 36-year periods of amortization on rental housing, and 25years on sales housing.

The rest of the saving in financing costs results from lower interest rates. These are made possible by a new consolidated method of financing which will appeal to a different class of investor and tap a new market of money that would be available at lower interest

rates.

I was interested to note that in the Senate subcommittee report on their study of cooperative housing abroad that they had found that periods of amortization there ran from as much as 60 to 100 years. Evidently in Sweden the wood structures are amortized over a period of 60 years and masonry structures over a period of 100 years.

Mr. MITCHELL. Is there any basic difference in their methods of construction?

Mr. KROOTH. No; I think not. I think it is a basic difference in approach to the question as to whether it is necessary to retire a housing loan in a shorter period of time than its useful life. We have gotten accustomed to thinking in terms of quicker retirements in the housing field, although in many other fields like self-liquidating projects on bridges and waterworks it is customary in this country to set the loans on the basis of the useful economic life of the property.

Mr. MITCHELL. You probably remember the home builders came in here last year with some pamphlets on European construction. One of the structures they had illustrated in that booklet appeared to be made out of 10 x 10 timbers which they said was 700 years old, but today the construction in the European countries you are talking about very similar to our own.

is

Mr. KROOTH. That is my understanding.

-The rest of the saving results from lower interest rates. These are made possible by a different type of financing which will appeal to the investor and tap a new market of money that would be available at lower interest rates.

The mortgages on each development would not be sold but would be pooled as security for the bonds of the Mortgage Association which would be sold. The consolidated financing would get the protection of diversity of security. The mortgages would be retained by the Mortgage Association and serviced by it as a nonprofit cooperative. The bonds sold to private investors would relieve the investor of the servicing costs and responsibilities on mortgages. He would merely clip his coupons and collect his payments from the central Mortgage Association. Moreover, he would be fully protected by the Government guaranty. In view of the combination of the absence of risk and the elimination of servicing costs, it is anticipated that these obligations will sell at a figure roughly approximating the interest rate on Federal Government bonds. It is estimated that the rate may be approximately one-eighth of 1 percent above.

The Mortgage Association would make its loans to the individual cooperatives and nonprofit corporations. It would not include any profit on the loans or any excessive service charges, because the Mortgage Association also would be a nonprofit cooperative-which would be owned jointly by the borrowers and the Federal Government. The interest rate would include a charge to cover the cost of administration on a nonprofit basis. It is expected that the interest charge would be 3 percent representing the total of the following: Two and three-eights percent, based on the low cost of the money to the Mortgage Association on its consolidated financing; plus its cost of administration; and plus a reserve of one-eighth of 1 percent against losses.

As a result of the lower interest rates and a longer period of amortization, there would be a saving in monthly housing costs of $14, in comparison with the present financing costs or FHA-insured rental projects.

Of course, in comparison with sales housing, where the period of amortization is 25 years and the interest rate higher than on 608 projects, the savings would be greater.

I would like to depart from the text before you for a moment and discuss comparisons with interest rates on individual houses, as that subject has come up in a number of discussions before the committee.

In drawing such a comparison, it should be remembered that those mortgages on single homes necessarily involve higher servicing cost plus a greater cost in their sale and handling. In contrast, the private financing involved under this bill represents savings resulting from the following facts:

One, the use of a wholesale mass operation in the financing by the Mortgage Association. It will sell its bonds under a consolidated financing against many mortgages of different cooperatives, which are pooled and held by the Mortgage Association. Thus, it would have a single bond issue of $100,000,000 and this would cover mortgages on about 12,500 homes.

Second, in addition to using the consolidated financing in the sale of its bonds to the final, private investors, the Mortgage Association, itself, will use a wholesale financing procedure in making each loan to a

cooperative. It will cover all the houses involved in any one develop ment by a blanket mortgage. Thus, on a development of 100 homes, it would have one mortgage instead of 100 mortgages.

On $100,000,000 of lending operations involving loans to cooperatives for 100 houses each, it would have a total of 125 mortgages instead of 12,500 mortgages on that many homes. This reduces costs of handling and servicing.

Third, the cooperative borrower will not obtain individual mortgages from each of the members of the cooperatives, even if they are buying the houses and will get title to them. Instead it will have a simple contract under which it will collect monthly payments similar to rentals.

Fourth, profits will be eliminated on servicing of the blanket mortgages and the handling of collections from each home buyer. Both the Mortgage Association and the cooperative borrower are nonprofit organizations and will be handling these services on an actual cost basis. Profits on the sale of individual mortgages will also be eliminated.

These financing methods make it possible to get the lower interest rates which are contemplated under this bill which we estimate at 3 percent. The difference between this rate and the 4 or 42 percent charged by private lenders on Government guaranteed or insured loans is not based on a legislative decision to make loans to cooperatives at a lower interest rate and absorb the difference, because these are not Government loans. The difference in rate is based, in part, on the different type of security sold to the final private investors. It is based on the lower costs of servicing involved in this financing. It is based on the nonprofit handling of the mortgages and collections. Finally it is based on the elimination of the profits and brokerages in the sales of individual mortgages.

The amount involved in these differences is shown by a report from four insurance companies that appears in the Senate committee hearings that have just been concluded, at page 29.

This report shows that even though the mortgages that were being purchased by these four insurance companies had an interest rate, before insurance premium, of 42 percent, the net return to the insurance company was 3.04 percent. In other words, there was a difference of about 12 percent insofar as the final return on the money invested by the insurance company. That difference was made up of service fees and operating commissions and home office expenses of the insurance company. When you are dealing with individual mortgages even if the local mortgage company looks over the papers and passes on them, the insurance company taking a mortgage will have their lawyers look at it.

Then, too, since it is a mortgage security on an individual house, they have to follow up and make sure that taxes and insurance are paid, and that involves substantial costs.

The insurance companies involved were the Mutual Life Insurance Co. of New York, the Business Men's Assurance Co. of Kansas City, National Life Insurance Co. of Montpelier, and the Liberty National Life Insurance Co. of Birmingham.

I mention this because the difference in the interest rate we are talking about is due to the nature and difference in security. The

Mr. DEANE. I had the opportunity some weeks ago to visit a colored public project in Raleigh, N. C., and I can report a remarkable maintenance. As I visited in several of the units a very special interest was being shown by each occupant. It was most pleasing and represented a real appreciation on the part of the tenants.

Mr. KROOTH. That has been my observation, too. There is one thing I want to say on this point and that is that, in citing these figures, I don't think that there is any intention-I know there is no intention on my part-to cast any reflection on the manner in which private operators are handling their rental properties. I think it is just a question of difference of approach. In a private rental development, it is customary for management to provide a number of services. On the other hand, we started out way back in public housing saying that if we were going to get the rents way down, that the people would have to do their own painting and do the maintenance of the halls and take care of more of the grounds. The projects were designed with that idea in mind and certainly that is the underlying thought here, that the people would do more of their own work. Actually this bill requires that for a project to be eligible, there must be a showing that the project will be laid out in such a way, and that it will be operated in such a way, that the people undertake these selfhelp obligations, because that is part of the program to get the costs down.

Finally, on the matter of savings, there are the savings that result from eliminating one of the high charges included in the rents of FHA rental projects. Part of the rent charged in those projects is to create a high vacancy and collection reserve because of the thinness of the market at the high rentals charged. With more moderate rentals, it is possible to reduce the amount charged for this purpose. The FHA rental projects add 7 percent to the rents to cover possible future collection or vacancy losses. Only 2, in our judgment, need be charged in a cooperative project involving modest rents for which there will be a continuing market. Actually in public-housing projects, experience has shown that collection and vacancy losses were less than onehalf of 1 percent. The savings from eliminating this high charge for vacancy and collection reserves equal $5 per month.

In summary, it is our view that we can reduce the cost of housing by $21 per month through the use of a cooperative which takes advantage of nonprofit and self-help methods. This, together with a $14 saving in financing costs, would mean a total reduction in rents of $35. Three-fifths of this saving is the result of the use of the cooperative to undertake the housing, with its nonprofit and self-help features. The other two-fifths is the result of the new financing methods, which reduce costs and, therefore, can demand investment at a lower interest rate. The combination of savings would reduce the average FHA 608 rental to about $60 a month, including all utilities, or a shelter rent of about $52. And this figure is definitely within the means of middle-income families.

The important point to recognize is that the savings involved in this program are only partially savings resulting from more attractive financing. These financing terms would be made available only if the project could demonstrate that it would achieve the other types of savings which I have described so that the project can achieve a monthly housing cost within the reach of families of moderate income.