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5. Reductions in local real-property taxes.
6. Direct Government subsidies.
7. Reductions in the size or quality of dwelling units and land.
8. Public ownership or construction.

The last four of these possible methods can be rejected at the outset. No national program for middle-income housing can depend upon local tax exemption or abatement. A number of States have adopted provisions for limited or complete tax exemption in the past, and many States and localities have some such devices in effect at the present time. National legislation on the subject is legally impossible, even if it were economically desirable. The results of taxexemption, except in the case of public housing, have almost always fallen far short of their objectives, and have provided benefits to the consumer only at an excessive cost to the public. For these reasons tax-exemption should not be an essential element in this program, and should remain as it is today, as a supplemental aid offered only upon the determination of local or State governments.

Direct Government subsidies are now available from the Federal Government and from some of the States. These subsidies are necessary to provide housing for low-income families who cannot, under any circumstances, afford decent unsubsidized housing. Any additional subsidies which might become available should be devoted to the expansion of the low-rent housing program, rather than to subsidize moderate-income families. In addition, the size of the present subsidy seems to be in reasonable relation to other current demands upon the Federal budget and to the current capacity of local housing authorities to build the necessary projects.

In recent years substantially all of the reductions in the cost of housing have been achieved through reductions in the size and quality of dwelling units. This trend has gone so far that it must now be arrested and reversed if we are to avoid widespread construction of units which are to be little better than slums at the outset. It can be affirmatively stated that many of the homes being built today do not provide a fit environment for families with growing children. Reductions in the quality of construction are self-defeating. They produce increases in operating and maintenance costs which exceed over the years the capital savings. The construction standards in current use by the building industry are the lowest standards that it is feasible to use.

Public ownership or sponsorship has demonstrated its value in the public low-rent housing program, where substantial subsidies and a high degree of public control are necessary. On the other hand, there appear to be no other advantages to public ownership which could not be achieved as readily by a private organization under civic leadership, and with public support and aid. Indeed, our whole tradition favors private ownership and management wherever possible. A number of local housing efforts in recent years, notably projects sponsored in several cities by veterans organizations and trade-unions have demonstrated that with enlightened leadership, good business organization, and civic and public support, private endeavors can achieve results of a high order. Such civic-sponsored private efforts will avoid the regulation and control necessary in public endeavors, and, more important, will promote the initiative, experimentation, and variety which are difficult to achieve under public sponsorship. Finally, there seems to be little doubt that many Americans prefer some sense of ownership and responsibility for their living environment. This alone should be justification for every effort to develop adequate private institutions for middle-income housing before public ownership is considered.


There appear to be real possibilities for cost reduction through lower construction costs, profits, financing, and operating costs. Any plan for middle-income housing must achieve a maximum of cost reduction in each of these fields if it is to succeed. While the possible cost reductions in any one of these fields is inadequate, the savings possible in the aggregate are quite substantial, and can bring housing within the reach of a much larger market.

(a) Savings on construction.-Some builders have already demonstrated that substantial reductions in construction cost can be achieved through large-scale construction operations, but additional means of encouraging large-scale production under private auspices are necessary. Continuity of operation over a period of years permits the acquisition and amortization of equipment, the development of a cohesive building organization, and the purchase of materials at less than retail prices-savings which can be reflected in lower prices. These savings

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can be expected to become more apparent as competition increases in the years ahead.

(6) Savings on profits.-Reductions in the profits of building and management are even more readily realizable. The building industry is notoriously one in which risks are substantial. Because of this fact, profits must be large to attract capital and effort. Most builders expect to make substantial speculative profits on their enterprises in good times, and to cease or curtail operations severely when times are bad. This is not a criticism of the industry, but rather is a statement of fact about the operation of our economy. In spite of the very large degree of Government risk-taking now involved in most home building, these relationships hold true. Indeed, the effect of these programs has often been to increase the profits of the more efficient builders. The middle-income program can take advantage of the skills of existing building organizations by paying a reasonable profit on construction services rendered without involving the cost to the consumer of speculation.

Profits on operation and maintenance offer similar possibilities for savings. The largest part of present rental housing is built under FHA mortgage-insurance terms which virtually guarantee an annual return of more than 10 percent a yea on project cost, and on projects in which cash-equity investment is often nil, and frequently negative. Tenants should be more than willing to assume much of the management responsibilities involved for a cash rent reduction equal to a share of these lush benefits. Indeed, some of the country's largest builders of rental housing have already recognized that cooperatives would open up a tremendous new market for their projects, and are actively exploring the field.

(c) Savings on operation. The reduction of actual operation and maintenance costs offers proven possibilities for savings. Public low-rent housing projects have long been operated on a tenant-maintenance basis. The savings achievable through central heating and master metering have been demonstrated many times. Upon the basis of this experience, the Housing and Home Finance Agency estimates average savings of approximately 9 percent of the rent of current speculative rental housing. Even more substantial savings have been reported in mutual-ownership projects, where the sense of personal investment and ownership and of group standards is high. There can be no question that substantial savings are possible in this field where tenants have a stake in the project.

(d) Savings on financing.The greatest savings can be achieved in the financing of housing. The range of financing terms used on housing projects is quite wide. Private projects are financed at interest rates ranging from 312 to over 5 percent and for amortization periods of from 15 years to 40 years. On public projects average interest rates as low as 2 percent have been obtained. Without entering a detailed discussion of the factors affecting interest rates, it must be obvious that between these extremes there is ample opportunity for savings without any subsidy. Although a large number of plans have been offered in legislative or other proposals in recent years, all seem to fall into three general classes : Direct Government lending at the cost of money plus overhead, mixed public and private lending, and Goverment-supported private lending.


Direct Government lending has been proposed by a number of groups, and one such proposal was embodied in S. 2246, Eighty-first Congress, which was reported favorably by the Senate Banking and Currency Committee. Under this proposal the Federal Government would borrow funds itself, at average rates of 21/2 percent or less for long terms, and would reloan the money at 3 percent to cooperative or nonprofit housing groups. The one-half-percent spread would be adequate to cover administrative costs and reserves. Such financing, not involving Government subsidy, would produce monthly debt service savings of from $8 to $13 per unit, depending upon capital cost. The direct-loan proposal has the merit of clarity and would assuredly achieve the intended purpose. The major weakness of such a plan would be that the very large increases in the public debt necessary to carry on any sizable program would be certain to encounter opposition even though the debt were self-sustaining. Private lenders have opposed this program upon this ground, and upon the relatively unsupportable ground that it involves "competition” with their operations. Since the same spokesmen have argued for direct Government purchase (through FNMA) of mortgages originated by them, the latter argument is clearly specious.


The second alternative of mixed public and private financing has been proposed by prominent representatives of the building and lending industry on a number of occasions. In essence, this plan would follow that used in Sweden and other European countries. Private lenders would make first-mortgage loans of low ratio, typically 50 to 65 percent, and in view of the substantially riskless character of the loans and their relatively large size, could afford to make them at about 312 percent. The balance of the loan capital would be obtained through a direct Government second-mortgage loan, at an interest rate approaching the cost of money to the Government, say 212 percent. In some cases the firstmortgage loan is unamortized. The effect of these provisions, if workable, could be to make capital available at an average interest rate of about 3 percent for not less than 40 years.

Mixed financing has many advantages. It would utilize private loan capital to the extent feasible, and private institutions might well perform the service function. The plan has proven workable abroad. In addition, the mixed loan might make possible less Government control. On the other hand, the plan has several drawbacks. It requires either a private interest rate at an improbably low level, or a public interest rate that leaves little margin for administration and reserves. It would be difficult to establish in many areas of the country, where much higher interest rates prevail. It would undoubtedly require many years of painstaking effort to establish on a sound and workable basis. After a cooperative program is well established it may prove valuable. However past experience has demonstrated that even with mortgage insurance mortgage loans on cooperative projects are difficult and often impossible to obtain on any terms. Mixed financing is not well suited to an early and urgently needed program.


There are ample precedents for Government-supported private lending in our financial history. The most conspicuous current examples are those offered by the FHA-insured mortgages, the VA-guaranteed mortgages, RFC participation loans, FNMA mortgage purchases, and Home Loan Bank debentures. Indeed, there is very little residential financing today which is not supported in some way by Government. The most promising of these types of financing for the purposes here under consideration is the Government-supported income debenture plan which was enacted as part of the National Housing Act establishing the Federal Housing Administration. That act authorized the FHA Administrator to charter national mortgage associations which would be authorized to issue income debentures backed by insured mortgages. The depression conditions of the thirties never made such associations necessary, and only one association was ever chartered, the Federal National Mortgage Association, now quite active in mortgage finance.

Under the income debenture proposal, a form of financing which is embodied in one bill now before the Congress, a mortgage association or cooperative bank would be established with a Government subscription of capital stock. The association might make mortgage loans to cooperative and nonprofit housing associations at not more than 3 percent and for 50- to 60-year amortization periods. When a sufficient amount of such loans had been issued, the association would “package” them and use them as the basis for an issue of Government-guaranteed and mortgage-backed income bonds. Such bonds would compare favorably as investments with prime corporate bonds, would be readily salable on the open market and could be issued in denominations which would permit considerable flexibility in investment. They would appeal to types of investors not now engaged in mortgage lending at all, and would command rates of about 242 percent. The association might be required to retain one-eighth percent of its outstanding indebtedness and capital stock as a reserve against losses.

This plan could produce mortgage loans for middle-income housing at rates equivalent to those achievable through direct Government loans. It involves no more exposure or risk to the Government than is involved in existing guarantee or insurance programs. It would utilize private financing resources fully since the only Government expense involved would be in the form of an initial capital subscription, and even this could be retired through required stock purchases by participating cooperatives, as in the case in the home-loan banks. Finally, the plan has the advantage of ample, well-established, and proven procedents in a whole series of Government-aid programs in the housing field, including HOLC, FSLIC, FNMA, FHLBS, and in other institutions outside of the housing field. The income debenture plan would therefore appear to be the most advantageous and workable one for a middle-income housing program.


A program of Government assistance without subsidy to housing cooperatives appears to be the most effective means for meeting the requirements for a successful program of housing for middle-income families. Such a program should include the following features :

1. Projects should be owned and operated by nonprofit cooperatives.

2. Permanent skilled building organizations should be developed for the planning and building of cooperative housing projects.

3. Long-term, low-interest-rate loans must be made available to the cooperatives on the best terms available without subsidy.

4. Construction and planning advances must be made available to the building organizations.

5. Special Government encouragement and sympathetic administration of the program will be required.

6. A maximum of flexibility, freedom to experiment, and local initiative should be encouraged.


The nonprofit cooperative has proven successful in many fields. Housing cooperatives in some European countries have an outstanding record in providing excellent housing at reasonable cost. While experience with housing cooperatives in this country has been quite limited, a number of successful projects have been built, and our long experience with cooperatives in other fields is evidence of the possibilities for housing.

The cooperative form of organ: ation is peculiarly suited to housing for several reasons: First, the plan permits groups to take advantage of the economies of large-scale construction, operation, and purchasing on a nonprofit basis; second, while cooperatives have these advantages of large-scale enterprise, they also encourage the sense of responsibility which comes with home cwnership. Thus, ownership cooperatives can give assurance of tenure and can achieve economies in cperation and maintenance which are possible only when the occupant is the owner-resident of the property. Tenant participation in operation and maintenance has demonstrated substantial savings and also assures maximum protection of investment values.

The cooperative form of ownership has other significant advantages. Through cooperatives individual speculation in home ownership can be avoided. To the extent that preferential mortgage terms are made available to cooperatives, there will be assurance that the preferential terms will be passed on to subsequent occupants and not capitalized as a profit by the first owner. This is the only way that such benefits can be maintained on a continuing basis. Finally, the cooperative has distinct advantages in terms of savings upon the transfer of ownership, such as closing and title costs, commissions, and fees. Under some circumstances it will be desirable to permit ultimate individual ownership subject to appropriate repurchase contracts.


Experience in this country and abroad has demonstrated that the complex task of planning and building housing projects requires business skill, experience, and continuity of operations. For this reason, a cooperative housing program will not succeed on a wide basis unless skilled and experienced nonprofit building organizations are developed to produce housing for the ownership cooperatives. Such building organization, through continuity of operations over a period of years, can develop experience in low-cost construction, can experiment with new methods of construction, and take advantage of economies of large-scale purchasing and building. They would, of course, utilize the existing architectural, contracting, and building services of the building industry and would pay competitive prices for services rendered. On the other hand, such building organizations could eliminate the speculative profits so common in the industry. Ownership cooperatives should be permitted to undertake their own building, if they desire, but special efforts should be made to assure that a skilled nonspeculative building service is available to them.


The housing cooperatives must have access to permanent mortgage financing at low interest rates and for long amortization periods. The lowest interest rate that is currently feasible without subsidy or substantial risk is 3 percent including servicing costs, and this rate should not be exceeded. Amortization periods of 40 years are not uncommon in large-scale housing, and with cooperative management the standards of maintenance should be sufficiently high to justify terms of up to 60 years in some cases. Existing programs of aid to housing offer 100 percent mortgage loans to veterans and 95 percent mortgage loans to nonveterans. Since the cooperative program will serve income groups lower than those served by these programs, it is obvious that the mortgage ratios must be equivalent. Loans should be available for 100 percent of development cost for nonprofit building organizations, at least. Since many cooperatives prefer to require down payments, from owner members, a small advance payment should be permitted, at the minimum level necessary to assume stable participation.


Loans for the planning and construction of cooperative housing projects must be made available both to the nonprofit building organizations and, where necessary, to ownership cooperatives. The planning and construction stage presents the greatest difficulties for cooperatives, and if the program is to succeed, funds for the employment of competent services must be available promptly and for the full amount needed.


All of the Government's successful housing programs have required special promotional efforts, technical assistance, and vigorous administration during their formative years. For this reason a separate administrative organization under the Housing and Home Finance Agency is imperatively necessary. That organization must be authorized to provide technical assistance and other forms of aid and support while the program is being launched. The program cannot succeed if it is merely another responsibility of an agency already overburdened with major operating programs.


The Congress has recognized on several occasions that cost reduction in home building requires experimentation, a maximum of freedom to use new methods and materials, and flexibility in administrative controls which will encourage initiative and enterprise. The program must be so organized and administered as to encourage local initiative and experimentation and to minimize governmental controls. This applies not only to the construction phase, but also to management and operation. While every project should be designed and built to serve families in the middle-income group, absolute income or family type limitations should be avoided. It will often be necessary for a small proportion of families in any project to be slightly higher income in order to preserve the cohesiveness of a local group, to provide initiative and leadership, and to avoid the undemocratic effects which stem from narrowly stratified neighborhoods.

While local responsibility must be encouraged to the utmost, it will be necessary to impose restrictions to prevent exploitation of the program by speculators and unscrupulous persons. The enabling legislation should contain positive prohibitions against speculative use of the aids offered and should provide safeguards to prevent the organization of front organizations which are merely a nonprofit mask for operations purely for private benefit.


The Sparkman bill introduced on January 6, 1950, appears to meet most of the requirements outlined in the above report on middle-income housing. The essential features of the bill include Government technical assistance and other aids to the development of cooperatives, (2) construction loans and planning advances, (3) an income-debenture method of financing which will permit investment of funds with Government support, (4) provision for ownership cooperatives and for nonprofit building corporations, (5) emphasis upon the need for

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