Mr. GAMBLE. That was the provision suggested by FHA; was it not, sir? It was put in the House bill.

Mr. LOCKWOOD. It was put in the House bill last year. I do not know who suggested it, but I am sure that sufficient thought has not been given to what the effect of that is going to be.

Mr. GAMBLE. Have you any idea of what the attitude of the Senate Banking and Currency Committee is on that particular provision? Mr. LOCKWOOD. I am not sure as to what their present attitude is. I have not had an opportunity to find out.

The CHAIRMAN. What is the total investment in homes in the United States?

Mr. LOCKWOOD. I read that some short time ago, but I cannot remember. It seems to be $59,000,000,000.

Mr. BUCHANAN. About $60,000,000,000.

Mr. LOCKWOOD. Fifty-nine or sixty billion, I guess, is the answer. There is another phase to this abolition of 505 (a) loans that disturbs me, and that is the fact that it is going to increase the movement of mortgage loans into the Federal National Mortgage Association, which is already purchasing at a very high rate of sixty to seventy millions of dollars and is rapidly becoming a primary instead of the secondary mortgage market that it was intended to be.

Mr. GAMBLE. Fifty or sixty million how often, sir?

Mr. LOCKWOOD. Monthly. Sixty to seventy million dollars of purchases of home loans per month and they are mostly 501 loans; and the reason, of course, is because there is not a ready private market for all the 501 loans at the 4-percent rate of interest.

I would like to renew my suggestion, that I made last year in testifying here, that the solution to this mortgage-finance problem in housing and getting an adequate supply of mortgage funds is to standardize and equalize the interest rates on FHA and VA loans so that the veteran will not be at a competitive disadvantage.

This tremendous flow of mortgage paper into the hands of the Federal National Mortgage Association, in my opinion, would fall off to a trickle-which is what it is supposed to be almost overnight if the interest rate on VA and FHA loans were standardized at some figure that would be sufficient to adduce a flow of capital.

The CHAIRMAN. You represent the builders. Isn't the construction of the higher-cost houses the most lucrative field, and would they not naturally seek to build the better houses rather than the low-cost houses?

Mr. LOCKWOOD. No. The low-cost housing is the better field from the point of view of income to the builder because it offers the greatest volume with the least amount of work. You can organize for highvolume production; you can turn out housing at lower costs; you can make more profits in the low-cost housing field than in any other. Believe me, I have tried all, and I know.

The CHAIRMAN. You get a quicker turn-over.

Mr. LOCKWOOD. You get a much quicker turn-over and you do not have nearly the problems that you do in a higher-priced building. The houses go up faster and you get a much greater volume and have a greater stability in your business.

The CHAIRMAN. You make a greater profit off the people who can least afford it.

Mr. LOCKWOOD. No. Your profit per unit is much smaller, but the over-all is better because of the volume.

Mr. MULTER. The profit is smaller in dollars or percentage?

Mr. LockwOOD. Both.

Mr. MULTER. Take a $7,000 project. Cost of land and construction is $7,000 to the builder. How much do you add on to that before you sell it to the consumer, the home owner?

Mr. LOCKWOOD. The direct labor cost of $7,000?

Mr. MULTER. $7,000 for land and construction, ready to deliver the house to the home owner. The cost is $7,000. At what price will you sell that house to the home owner?

Mr. LOCKWOOD. I will tell you exactly how I compute that. I do not know how much of the $7,000 is land. We will assume $1,000 of it is land. To the $6,000 I would add a mark-up of 15 percent to cover overhead and profit and selling expenses. Out of that I would hope to achieve a net.

Mr. MULTER. Does that 15 percent include your salesmens' commissions and brokerage commissions?

Mr. LOCKWOOD. Selling expense of all kinds-advertising and commissions and overhead; indirect expense of all kinds, depreciation, maintenance of your equipment. Then out of that the builder always hopes to get something better than 5 percent of net.

Mr. MULTER. Wait a minute. Fifteen percent for overhead?

Mr. LOCKWOOD. Overhead, selling expense, commissions and profit. Mr. MULTER. You had to pay some taxes between the time you acquired the land and you got your building ready for sale.

Mr. LOCKWOOD. That is all part of the overhead.

Mr. MULTER. Tax payment is overhead?

Mr. LOCKWOOD. That is right.

Mr. MULTER. Then on that you add how much for profit?

Mr. LOCKWOOD. We do not add anything to the taxes. The only thing we add to is the direct labor and material.

Mr. MULTER. You have $7,000 plus 15 per cent for overhead? Mr. LOCKWOOD. No. Fifteen percent for overhead to cover all of these items first: overhead, selling expense, sales commissions and profit.

Mr. MULTER. And profit?

Mr. LOCKWOOD. Fifteen per cent covers all those.

Mr. BUCHANAN. That would be $7,900? Fifteen percent on the $6,000 and allowing $1,000 for land site.

Mr. LOCKWOOD. I might say that I am talking about what I do. I do not know what others do. I think though that what I do is typical on most builders.

Mr. MULTER. Look, you come here as an expert on these things. You have told us that you have been traveling over the country, talking to builders and owners and lending institutions. Certainly you know what the trade generally does with a house that costs $7,000, do you not?

Mr. LOCKWOOD. I would say that that probably is an average condition.

Mr. MULTER. Is not the average much closer to an addition of 25 percent?

Mr. LOCKWOOD. My competitors never tell me what their mark-up is, and I do not ask them.

Mr. MULTER. From what you know of the industry, let us be fair, is not the amount added to the cost of construction closer to 25 percent than to 15 percent?

Mr. LOCKWOOD. I do not believe so. I think it is closer to 10 percent. My opinion is that the average mark-up, Nation-wide, would come closer to 10 percent.

Mr. MULTER. My opinion is that after you get through adding the 15 percent for overhead, they add an additional percentage for the length of time that they expect to carry, the entire venture until the disposal of the house, and then they add a minimum of 10 percent gross profit to be able to cover their prospective income tax payment and leave a good profit for themselves.

In addition to that, in computing their overhead they do not take a straight 15 percent before they add overhead. They first compute all the carrying charges, architect's fees, officers' salaries, and everything else, and in most instances it is way over 25 percent that is added before it is sold to the consumer.

Mr. LOCKWOOD. I can assure you that that is not the way it is done, because if it were the Federal Housing Administration's appraisal of replacement would not include all these items you have mentioned.

Mr. MULTER. Are you familiar with how they arrive at the multifamily rentals?

Mr. LOCKWOOD. Yes.

Mr. MULTER. Let us start with a $7,000 cost per unit of a multifamily dwelling. The land and cost of construction is $7,000 per unit. How is the owner of that multifamily dwelling then going to compute what he must get by way of rental on that $7,000 unit?

Mr. LOCKWOOD. That depends on the type of construction and the amount of land space, and so on. But he has to make an estimate of what his annual operating expenses are going to be based on the type of building that it is, his necessary reserve for vacancies, a reserve for replacement of worn-out equipment.

Mr. MULTER. How much does he allow, percentage-wise, for vacancies?

Mr. LOCKWOOD. About 7 percent.

Mr. MULTER. How much, percentage-wise, for maintenance?

Mr. LOCKWOOD. There isn't any fixed figure on it. I think it would run about-it depends on the type of building, whether solid masonry or brick veneer or frame. It would range anywhere from 22 percent up to 6 percent, depending on the kind of a building it is.

Mr. MULTER. How much does he allow for obsolescence and depreciation?

Mr. LOCKWOOD. About 212 percent.

Mr. MULTER. How much does he allow for overhead and management?

Mr. LOCKWOOD. About 5 percent.

Mr. MULTER. How much does he allow for amortization of his mortgage?

Mr. LOCKWOOD. Of course, that is 5 percent of the rent-that shelter rent I am talking about.

Mr. MULTER. Let us leave that 5 percent for management aside for the moment. How much does he allow for amortization?

Mr. LOCKWOOD. In arriving at rent you do not consider amortization of mortgage.

Mr. MULTER. In buildings for rent the owner figures a percentage of his rent is going to go, or a percentage of the total will go, to amortize the mortgage?

Mr. LOCKWOOD. In he figures that in, then he does not figure depreciation. He doesn't figure both. One takes the place of the other. Mr. MULTER. Two and a half percent allowed for obsolescence and depreciation won't amortize the mortgage, will it?

Mr. LOCKWOOD. It will more than amortize it. On a 32-year term it will only take 12 percent to do it. On a shorter term 22 percent will do it, as you can see.

Mr. MULTER. How much are you going to allow for interest?

Mr. LOCKWOOD. Whatever the rate is that they have to pay, probably 4 percent.

Mr. MULTER. What else must he include before he can arrive at this rental?

Mr. LOCKWOOD. I think you have covered everything there outside of a return on his investment.

Mr. MULTER. How much would figure the return on his investment?

Mr. LOCKWOOD. About 6 percent.

Mr. MULTER. We have a total, then, taking the minimums and not the averages or maximums that you gave us, of 22 percent before management expense, and he is certainly entitled to something for management. That management percentage will be on the rent rather than on the cost of construction.

Mr. LOCKWOOD. How do you arrive at 22 percent?

Mr. MULTER. You have just given them to me-71/2 percent, 21⁄2 percent, 212 percent, and 4 percent and 6 percent; and that is a total of 22 percent.

Mr. LOCKWOOD. You are applying all of those percentages to the development cost. Many of those percentages are a percentage of gross rent collected, which is an entirely different thing.

Mr. MULTER. Which are a percentage of gross rent?

Mr. LOCKWOOD. The way the FHA figures it, for instance, on the FHA-insured projects the approximate way they compute the amount of rent that can be charged, the shelter rent, is to take 612 percent of the developmental cost per annum as the gross rent. Most developers of rental property figure on about 12 percent of the over-all cost, including the return on investment of 6 percent.

Mr. MULTER. Do you think that this bill, if it became law, would be a serious competitive threat to the lending institutions?

Mr. LOCKWOOD. Certainly, because it would inject the Federal Government into the business of direct lending at more favorable terms than are available privately, and if the housing cooperative idea can be made to work, as far as the personal ability of the participants in it to get along with each other is concerned-if that phase of it can be overcome, obviously this would supplant all other types of financing. Mr. MULTER. It would not supplant all other types because these other lending institutions would give you the same terms as you can get for this type of building. In other words, you would then be able to get a loan from 50 to 60 years instead of 30 years, and you would get a 3 percent interest rate instead of a 412 percent interest rate. Is that right?

Mr. LOCKWOOD. May I ask you a point on that question?

How can one expect a private lending institution which has to pay actual corporation and individual income taxes to the Federal Government to be able to lend at as low an interest rate as a Government organization which does not have to pay any corporate taxes. How can you expect that?

Mr. MULTER. That is the same argument we got from the lending institutions when they said that they could not afford to make amortized mortgages to run for 12 or 15 years.

Mr. LOCKWOOD. Do you realize that when a lending organization lends at 4 percent, on the average 12 percent of that 4 is to pay corporate income taxes

Mr. MULTER. I do not agree with that but that does not change the situation.

Mr. LOCKWOOD. And that if they did not have to pay those corporate income taxes they could therefore lend at 212 percent? Did you ever stop to think of that?

Mr. O'HARA. Mr. Multer is it not getting down to the simple question of which is better: To reduce the profits of the mortgage bankers or to give housing to the American people within their means to rent or buy? Is that not the issue which the witness is forcing to our attention?

Mr. MULTER. I think that is one good way of putting it.

Mr. LOCKWOOD. I think Mr. O'Hara raises another question: Whether it is within the means of the Federal Government to give that housing. That should be considered, too; not only within the means of the person to receive it, but is it within the means of the Federal Government to do it?

Mr. MULTER. Mr. Lockwood, are we to understand that because this may cause a loss of tax revenue to the Government we ought not to go into this problem or set up this kind of a project? You pointed out to us that these private lending institutions are paying 11⁄2 percent of their 4-percent interest in income taxes.

Mr. LOCKWOOD. I think you ought to take into account the loss to the Federal Government in deciding whether you should go into it or not.

Mr. MULTER. You are in favor of reduction of taxes, are you not? Mr. LOCKWOOD. I certainly am, but I am in favor of reduction of taxes equally to all persons and just not a special class or middleincome group that does not have any special claim to exemption from taxes that morally has no special claim to it, I submit.

Mr. NICHOLSON. Mr. Chairman, it seems to me that we ought to be allowed to ask one or two questions. Someone else wants to take all the time here every day.

I would like to ask the question why it is that the savings banks and other banks that have loaned money on property all through the years in my State have gone from 412 to 12 percent. That is what I would like to have answered. If this does not prove it, I do not know what does.

Mr. MULTER. Mr. Chairman, may I continue?

The CHAIRMAN. Were you finished, Mr. Nicholson?

Mr. NICHOLSON. That is the only question I wanted to have answered: Why it has gone from 412 down to 12 percent that we pay the depositors.