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ganized housing cooperatives and nonprofit housing corporations to enable them to formulate specific plans for the projects they propose to undertake. The provisions of the bill relating to preliminary advances impose on the Administrator a responsibility to administer such planning advances in the soundest and most economical way. The advances are limited to the amounts required for necessary work preliminary to construction and may not exceed in any event 5 percent of the estimated cost of the project. It is probable that the maximum would be required only in the case of relatively small projects, and that on larger projects such advances would probably run to about 3 percent of estimated project cost. These advances would, of course, be paid out only as actual progress was made in the formulation of the project and the actual preparation of plans, thus reducing the risk involved in making them. The advances would be retired out of proceeds of the permanent loan on the project.

As your committee is aware, it is customary to capitalize in the cost of a rental project preliminary expenses, including architectural services. In the administration of the section 608 rental-housing program, for example, amounts up to 5 percent of project cost may be included for these purposes. Similar expenses must be incurred by cooperatives and nonprofit corporations, of course. Because actual experience has demonstrated the extreme difficulty which such organizations have encountered in their efforts to obtain, funds for this purpose from normal lending sources, the bill authorizes short-term advances to be made by the housing agency. It should be clearly recognized that a new program relying on the formation of what, in many areas, will be a new type of private-enterprise group may well be seriously impeded without provision for some relatively small preliminary advances to enable such organizations to undertake and pay for the complicated job of formulating a housing project or development. I endorse the establishment of an adequate revolving fund to be used for this purpose under proper supervision and regulation as contemplated by the bill.

I wish to emphasize the importance of preliminary advances, along with technical advice and assistance, in assuring the sound development of a cooperative housing project and in obtaining the lowest possible costs. One of the dangers inherent in any type of housing undertaking is excessive costs resulting from unwarranted fees for services, speculative land sales, and charges by promoters or others which could be avoided with sound planning and guidance. With this assistance and funds for developing sound plans, cooperatives will not be forced to pay for planning and related services on an excessive or contingent fee basis. They will be able to present definite proposals to competent architects and to deal with them and others furnishing services on a negotiated contract basis. Advances of funds will thus put cooperatives in a position where they can obtain necessary technical services on a sound and economical basis.

Mr. BUCHANAN. In other words, this is the section of the legislation in which direct loans of 5 percent of the estimated costs would be granted for planning and starting preliminary work, rather than a direct loan to the builder?

Mr. FOLEY. That is correct and at a maximum of 5 percent of estimated cost. It is intended that the temporary loans would be refunded from the permanent financing.

I wish to turn now to what in my judgment is the most important part of the bill-provisions to make it possible to carry out this program through the investment of private capital in housing projects undertaken by cooperatives and nonprofit corporations, thus eliminating the necessity for direct Federal loans. It makes the investment of private capital in this program possible by an adaption of the type of guaranty which has been so successfully used in the moragage insurance system of the Federal Housing Administration, and it uses essentially the same form of organization as is used in the case of the Federal home-loan banks.

The bill would establish, under the direction and supervision of the Housing and Home Finance Administrator, a National Mortgage Corporation for Housing Cooperatives. This Corporation would be established on a mixed-ownership basis with initial capital supplied by the Federal Government but with provision for a steady progressive replacement of this capital by stock investment on the part of borrowing cooperatives and nonprofit associations. This mixedownership Corporation would be authorized to make long-term lowinterest-rate mortgage loans on cooperative and nonprofit housing projects.

The Corporation would obtain its initial capital of up to $100,000,000 from the Federal Government. In return, the Government would receive preferred capital stock in like amount on which cumulative dividends equal at least to the cost of money to the Government must be paid. While the first loans made by the Corporation to eligible borrowers would be made from the initial Government investment, the Corporation is authorized to obtain additional loan funds by the issuance and sale of guaranteed debentures on the private investment market.

Each borrowing cooperative would be required to subscribe to stock in the Corporation in an amount equal to 712 percent of the original principal amount of its mortgage loan. The bill provides that not less than one-third of a borrowing cooperative's stock-that is 22 percent of the mortgage loan-shall be paid in cash prior to obtaining the loan. The borrower would have up to 20 years to pay in any balance of the required stock subscription. In the case of a nonprofit corporation, where there is normally no opportunity to obtain the cash required for initial stock purchase, the entire subscription could be paid for over a 20-year period. We believe that in the case of cooperatives, provision for partial deferment of stock purchases is necessary because of the plain fact that many middle-income cooperatives will probably not have sufficient cash resources to make full stock purchases immediately and still provide for adequate reserves.

The bill does not require a specific minimum reserve accumulation by eligible cooperatives. It does, however, give adequate authority to the Housing and Home Finance Administrator to require the borrower to establish such additional reserves. We believe this to be a wise provision, since it will permit the Housing Agency ample flexibility to make such determinations on the basis of experience and examination of the actual financial resources of applicant cooperatives. In our opinion, a fixed and rigid requirement in law is unnecessary and might well seriously handicap the program.

The bill provides for the retirement of the Government stock, starting when the stock owned by borrowing cooperatives and nonprofit

corporations has reached $50,000,000, although no such retirement could be made if it would reduce the total capitalization of the Corporation below $150,000,000. Obviously, the time at which such retirement would take place will depend upon the speed with which sound projects of cooperatives are developed. While no accurate estimate can be made as to when that period will be reached, we believe it is highly important to provide as this bill does the type of financing plan in which, as successful operations are attained, the Government funds initially required to get this program under way will be withdrawn and replaced by privately subscribed share capital. It is also our firm belief that the capital investments of private cooperative borrowers represent a thoroughly sound and well-justified participation in the risks inherent in a lending enterprise of this sort. They are, in fact, an essential element of the plan proposed, without which its nature would be materially changed. The stock investments of borrowers will provide, from the outset, an increasing additional cushion against the contingent risks being assumed by the Government in this enterprise.

The investment of Government and private funds in the stock of the Corporation, and the retirement of Government stock with funds obtained from private sources, would be comparable to the Government's investment in the stock of the Federal home-loan banks established in 1932. The Government originally invested about $125,000,000 in the stock of these banks, and the private borrowers from the banks— savings and loan associations and others were required by law to purchase a prescribed amount of stock. After the amount of capital of a bank paid in by these borrowers equaled the amount paid in by the Government, the bank was required to apply 50 percent of all further paid-in amounts to the retirement of the Government stock. Private capital has thus been substituted from time to time for Government funds, so that on January 31 of this year the amount of the Government's total investment in the banks will stand at about $75,000,000. This will also be retired in the relatively near future.

The bill provides that the Corporation will make loans at whatever rate is determined to be necessary, taking into account the cost of money to it and the spread necessary for defraying administrative expenses and establishing and maintaining necessary corporate reserves, including the required specific reserve for losses. No fixed interest rate is prescribed in the bill. However, we estimate that, at least so far as initial loans are concerned, this provision probably means a rate of about 3 percent on the mortgage loans made by the Corporation, since it is our present estimate that this figure will provide an adequate spread over and above the cost of the capital initially supplied by the Government and the probable rate on the Corporation's securities first issued to investors.

I should like also to call your particular attention to the requirement in the bill that the Corporation set aside as a specific reserve for losses on mortgage loans an amount equivalent to one-eighth of 1 percent annually of its outstanding loans. This means that the Corporation in fixing the rate on its mortgage loans must anticipate a sufficient spread to allocate at least this much to a specific reserve for losses on its mortgage loans. The figure of one-eighth of 1 percent

has been chosen as probably sufficient in projects of the character contemplated to serve as the equivalent of an insurance premium. In addition to the specific reserve account for losses, the Administrator must require the establishment and maintenance of such other additional general reserves as he deems desirable or necessary in accordance with sound business practice. This would, of course, also be reflected in the interest rate charged by the Corporation on the mortgage loans.

It is expected that the Corporation will raise the bulk of its funds needed for mortgage-lending purposes through the issuance of its own obligations on the private market. These obligations are restricted in amount by three limitations. First, the amount outstanding at any one time cannot exceed 15 times the Corporation's outstanding capital stock, reserves, and surplus. Second, the volume of obligations outstanding at any one time cannot exceed the unpaid principal balance of mortgage loans and cash holdings of the Corporation. Third, the total size of the program is limited to $2,000,000,000, of which $300,000,000 would become available July 1 of this year. The remaining $1,700,000,000, which would become available a year later, can be used only with the approval of the President. In this respect, the bill follows the procedure heretofore established by the Congress in connection with FHA authorizations.

Mr. BUCHANAN. At that point, about how many units would $2,000,000,000 cover?

Mr. FOLEY. Using, as we do, an $8,000 median figure in our calculations, approximately 250,000 units. Of the $300,000,000 initial program, it would cover about 35,000 units.

The obligations of the Corporation would be unconditionally guaranteed by the United States, as are those issued by the FHA to mortgagees in the case of foreclosures under the insured-mortgage system. Questions will be raised, of course, during your consideration of this legislation as to the desirability of this device, which differs from the FHA insured-mortgage system chiefly in the point where it is applied. We submit that the guaranty is justified on at least two principal grounds. In the first place, this program is designed to operate in such a way that soundly conceived cooperative housing projects will be able to attain the low-cost financing essential to reduce monthly charges, and the benefits and savings thereby achieved are, in a cooperative or nonprofit operation, automatically translated into direct benefits to consumers in the form of reduced monthly charges. In other words, in an operation of this type, there can be no diversion into speculative profits of the financing economies made possible by the guaranty. The second justification for the application of a guaranty to the securities of the Corporation I should like to illustrate by analogy to the FHA insured-mortgage system.

In the FHA insured-mortgage system we have now for almost 16 years operated a program in which the Federal Government has underwritten mortgage loans which met certain predetermined standards and objectives. So far the Federal Government has not been called upon to make good the guaranty of those mortgage loans, since the system operates on a fully self-supporting and self-sufficient basis

from the premiums and other income which the Federal Housing Administration receives. Nonetheless, the Government has assumed a contingent liability in that program under which there is no question that it would have to make good in the unlikely event that defaults exhausted insurance reserves. Thus, the Government guaranty has thereby effectively protected the private lender from any loss of principal or interest on his insured loans. I think it fair and timely to point out that a large share of the credit for the heavy current production of housing, by the building industry, and the encouraging proportion of its for-sale product within the reach of moderate-income families in many parts of the country is due to this effective aid by a self-supporting governmental activity. I do not believe that the current record would be nearly so good without it.

The bill contemplates a program, largely new in actual operation but based on sound financing experience, in which housing projects of cooperatives and other nonprofit organizations, can be financed through reliance on Government-guaranteed debenture obligations. But if the projects are soundly conceived and soundly operated, there is no more reason why the net income from lending operations, the investment of private stock in the Corporation, and the build-up of reserves for losses should not enable this financing operation to pay its way than is the case in the established insured-mortgage operation.

It is true that in this case the contingent liability of the Government will be fixed in terms of a guaranty of securities, rather than in the underwriting of the mortgages backing those securities. Since, upon default on an insured mortgage, the FHA issues to the mortgagee its debentures which are fully and unconditionally guaranteed by the United States, and principle involved, I submit, is essentially the same, and the result, insofar as Government risk is concerned, should be as good. For the sake of simplicity, I might summarize the situation this way: In the case of the FHA insured-mortgage system, the contingent liability to the Government is, in the final analysis, protected by the value inherent in the properties underlying insured mortgages. Under this bill the contingent liability of the Government in terms of its guaranty of the securities of the National Mortgage Corporation for Housing Cooperatives is also protected, in the final analysis, by the value inherent in the properties securing the mortgage loans which the Corporation makes.

In the FHA system, insurance reserves are built up by the collection of annual mortgage premiums. In the proposal now before your committee, a similar type of protection against loss would result from the requirement for a special loss reserve, to be built up at a minimum rate of one-eighth of 1 percent per annum of outstanding loans, plus such additional reserves as the Housing Administrator may require, if needed. Of the amounts received by FHA for premiums, it is estimated that an amount equal to one-fourth of 1 percent of insured loans has had to be allocated for administrative and operating expenses in connection with the mortgage insurance programs, leaving about one-fourth of 1 percent for reserves or losses. In the case of the Corporation proposed, there would also be the additional protection resulting from the required stock investment by borrowers, which

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