action taken by the Housing Expediter over the past year there must be some easing of the rent situation in this country. Do you believe that the need for rental housing is as great now as it was last year?

Mr. FOLEY. No, I do not. It is lessened by at least the amount of new rental housing that has been produced as against possibly some balancing factor of increased demand by family formation. It is not as intense as it was.

This bill does not base itself upon a claim that there is. It still bases itself on the fact that at present costs of building there remains a problem area within the middle-income group with regard to rental and for-sale housing in certain parts of almost all sections of the country.

Mr. RAINS. There is nothing in this bill which would prevent a municipality or the State from levying an ad valorem assessment on the individual units of the cooperative, is there?

Mr. FOLEY. I had better ask a tax expert. I am not sure I understand your question.

I understand there is not.

Mr. RAINS. When you say it is nonprofit, as I understood you to in your testimony a moment ago, what do you mean by the term that it would be a nonprofit cooperative?

Mr. FOLEY. As distinguished from the private operator who is in business properly for the purpose of making a profit. The nonprofit corporation contemplated here as distinguished from a cooperative ownership set-up would be one that might operate in two fields, as I personally think. One, it would be building and owning apartments for rent, and renting them at a price which does not contemplate a factor of return of profit to it, the owner, as distinguished from the necessary factor of profit to a private owner of a rental property, or it might be constructing other types or that type of property for sale to a cooperative association which would own it. In neither case are you operating for a profit.

Mr. RAINS. The best statement and most convincing one you gave me for the differential in interest rates, is the fact that when a man enters one of these cooperatives he foregoes the opportunity he might have to sell his house at a profit and agrees to give back to the combined ownership of that cooperative, the right to purchase. Is that correct?

Mr. FOLEY. The right to purchase, his equity, his interest, at a price to be calculated by a method predetermined.

Mr. RAINS. But not taking into consideration profit to him?
Mr. FOLEY. Not taking into consideration profit.

Mr. RAINS. That is a pretty good statement. Thank you very much. The CHAIRMAN. Mr. O'Hara has been asking for recognition for a long time.

Mr. MULTER. Will you yield for one statement as to interest?

Mr. O'HARA. Provided you are through by noon. I would like to get a word in for the city of Chicago. We have a large interest in this bill.

Mr. MULTER. May I have a minute?

Mr. O'HARA. Chicago is glad to concede 2 minutes to the city of New York.

Mr. MULTER. Thank you.

Mr. Foley has a statement as to the gross monthly rent, monthly shelter rent, and monthly debt service of $7,000, $8,000, and $9,000 units, that being the cost, on a basis of 3, 34, and 312 percent interest based on those costs. I want to submit these additional figures. If you computed the interest rate at 4 percent, then a $7,000 unit would have a monthly gross rent increase of about $3.50 a month and an $8,000 unit would increase its monthly gross charges about $4.02, and a $9,000 unit would increase by about $4.50 per month.

Thank you very much, Mr. O'Hara.

Mr. O'HARA. Mr. Foley, I wish to observe that I have been profoundly impressed by your constructive and conservative approach to a problem of immediate and distressing concern to the people in Chicago.

Mr. FOLEY. Thank you, sir.

Mr. O'HARA. The part of your prepared statement that most impressed me was one of figures. My constituents are not very much interested in abstract economics when they have the practical problem of finding shelter within their means. On pages 27 and 28 of your prepared statement, you furnished me with something in the way of figures that I can take to my constituents and the constituents of other Congressmen from Chicago. It is something in the nature of an answer to their prayers.

In my district I would say most of my constituents are in the middleincome group. They are educators. They are workers in the steel mills. They are railroad men, and conductors and motormen on streetcars. They are small-business men, executives, professionals, tradesmen, and men and women generally with trades and occupations producing incomes in the middle classification. Some of them cannot afford to pay for shelter, $90 or $100 a month. Naturally they have been expecting the Eighty-first Congress to come forth with some solution of the problem that is closest to them. To them it is a real problem that at the present time it is difficult for them to find shelter for less than $90 or $100 a month, if indeed anything adequate can be found at that figure.

On pages 27 and 28 of your prepared statement you give the figures that under the provisions of this bill, shelter which now would cost something like $90.32 a month can be provided for $64.67. That certainly seems to me the practical approach to the solution of the problem which will interest many of my constituents who could afford to pay $65 a month but who simply cannot stretch the figure for $90.

In arriving at that figure of $64.67, you have allowed for a reserve of 3 percent, a vacancy reserve of another 3 percent and a debt service of $25.83.

Now, can I say safely to the people of Chicago, Mr. Foley, that if the Congress should enact this legislation and should provide the financing of the cooperative housing plan, that the shelter which now costs approximately $90 a month can be made available to them for about $64 a month?

Mr. FOLEY. I would not want you to say to your constituents in Chicago, Congressman, anything that local circumstances might prevent you from making good upon or us from making good upon, so I call your attention to the fact that the figures you have quoted are figures based upon a cost of $8,000 for producing the unit concerned. We

have not contended, and I would like to point it out again, since I think this should be approached very realistically, we have not contended in our presentations here that there is inherent in this proposal anything that is going to produce lower construction costs immediately. We have referred to those only as a potential possibility. So I call your attention, Congressman, also to the chart that has just been referred to, the table, in which the calculations at 3, 32, and 31⁄44 percent interest rates are made and note for you that it refers also to unit costs of $7,000, $8,000, and $9,000.

Now you will find, Congressman, that your district, particularly within the immediate environs of Chicago, is a high-cost production area, and you may find that many of your builders there will maintain that the type of unit you are talking about cannot be produced, certainly in all parts of that area, for that $8,000, but the relative advantage that you have quoted would be there.

Mr. O'HARA. Yes; I understand that, Mr. Foley. In other words, this applies to an $8,000 house under the present set-up?

Mr. FOLEY. That is right.

Mr. O'HARA. And that under this set-up which you are now proposing, that which would cost $90 approximately under the present set-up, will cost only $64?

Mr. FOLEY. That is right.

Mr. O'HARA. It would seem to me that this is a practical solution of a very distressing problem to many of the people that I represent. Now, Mr. Foley, I understand that there is nothing in this bill which infringes upon private industry. That is, the houses have to be built, and workmen will be employed to build them. There will be building management and people must be paid to do that work. That is private industry, isn't it?

Mr. FOLEY. That is right.

Mr. O'HARA. Now, is there any place where this infringes upon private industry? I have here with me a builder from the city of Chicago, a very good friend of mine, Mr. Tewellis. This bill will not adversely affect his business, will it?

Mr. FOLEY. I know of no way in which it will. As a matter of fact, the residential-construction industry, as we know it, is the industry that will have to build these projects for their owners, the cooperatives and nonprofit corporations. That is where the knowhow exists.

Mr. KILBURN. How about private architects?

Mr. FOLEY. Private architects.

Mr. O'HARA. You would say then that it would bring benefit to this large segment of the population of the United States, the middleincome group, who find it difficult to pay the present shelter charges and costs and without in any way infringing upon anybody else, especially the builders and management and labor in the construction industry? That is approximately a correct statement; isn't it? Mr. FOLEY. I believe so.

Mr. O'HARA. I want again, Mr. Foley, to thank you for your splendid contribution to this distressing problem.

Mr. FOLEY. Thank you, sir. It is not of course strictly my individual contribution, you realize.

Mr. O'HARA. You presented it masterfully.

Mr. FOLEY. Thank you, sir.

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Mr. KILBURN. Mr. Chairman, under FHA, as I understand the way that is financed, the rate is 4 and 42 percent, depending on the type of building, plus a one-half percent insurance and the money is all furnished by private money-lending institutions?

Mr. FOLEY. That is correct.

Mr. KILBURN. Under this plan the money is furnished by the Government.

Mr. FOLEY. No. The initial capital would be furnished by the Government, the initial capital stock. The great bulk of the money, which is all the ensuing flow of capital, would be furnished privately and loaned by a mixed-ownership corporation, which gradually will become a totally privately owned corporation.

Mr. KILBURN. Those lending institutions that furnish the additional capital will furnish it on notes guaranteed by the Government, will they?

Mr. FOLEY. They will be guaranteed notes; that is right.

Mr. KILBURN. So that in effect it is just the same as Government bonds?

Mr. FOLEY. There probably is a technical difference but for the purpose of your discussion we will pass that point.

Mr. KILBURN. What I can't understand is why you finance this type of house that way instead of the FHA way?

Mr. FOLEY. I covered the general approach to that pretty thoroughly in my written statement. I presume you do not want me to recite that again. I will just point out that there is a very close analogy. The only point of difference is the point at which the Government applies its guaranty. In the Federal Housing Administration, we insure the mortgages, backed with a reserve fund created by the collection of insurance premium to which you have referred, which is a half of 1 percent.

Out of that half of 1 percent, however, and certain other fees that are collected, the operational expenses of the entire system are paid, so that approximately one-quarter of a point goes to the reserve to protect against losses, but if there is a loss, that is, if there is a default and foreclosure on a mortgage on which a private lending institution has loaned its money with the insurance provision, it can and usually does tender the property and receives debentures in return. Those debentures are fully guaranteed, backed by the reserve fund, but also by the faith and credit of the United States and, in the event of the reserve funds being insufficient, the Treasury would have to pay them, just as in the case of this proposed legislation, the lending institution, the mortgage corporation, will have in its portfolio this volume of mortgage loans made on housing of the type involved here, will have in its coffers reserve funds created by a parallel stipulation in their mortgage payments of an amount for loss reserves and other reserves which the Administrator can require to be created, which are the backing for the debentures, the first line of backing for the debentures issued, just as is the case of the FHA.

In the event that all of that proves insufficient, just as in the event all of the reserves of the FHA prove insufficient, the debentures would have to be met by the Treasury, just as they would have to be met in the case of the FHA.

Mr. KILBURN. Mr. Rains' point, I think, is a good one, and I still don't understand why you finance this differently than you do FHA.

Mr. FOLEY. I think I have given you, Congressman, my complete reasoning on it.

Mr. KILBURN. I can understand the operation of it, but I don't understand why the operation is different. Why did you set it up this way instead of the way FHA is set up?

Mr. FOLEY. Oh, I see; the point of guaranty being different? Mr. KILBURN. Yes.

Mr. FOLEY. That being the only basic difference fundamentally. Mr. KILBURN. There is another basic difference, and that is that if these debentures are guaranteed by the Government it will increase the national debt.

Mr. FOLEY. The debentures issued by this organization and by the FHA, whenever debentures are issued, are guaranteed by the Treasury. There is no difference in the fact that the debentures issued are guaranteed. The difference is the point at which the guaranty is made. In this proposal the guaranty is applied at the time of raising the capital. They are used as a means of raising the capital rather than later paying the losses sustained by the capital.

Practically, as a realistic matter, it is done that way in order to obtain a better market for debentures in order to raise the money privately and gain some advantage, interest-rate-wise, to make possible putting into the field a vehicle which will make use of the other advantages in reduction of cost to the consumer that are inherent in a cooperative and nonprofit operation and which are not inherent in a profit operation.

Mr. KILBURN. It is just to get a low rate of interest then. As far as liquidity goes, FHA is just as liquid as these bonds would be?

Mr. FOLEY. Yes; it's major effect is to produce two things, one a readier flow of the capital

Mr. KILBURN. Isn't there a ready flow of FHA capital?

Mr. FOLEY. Yes; there is; in a different type of operation, however. Experience may prove that this operation is so successful and so sound that capital may become available in such flow and at such sufficiently low rates, so that a guaranty might not in the future be necessary. I can't say, Congressman.

Mr. KILBURN. The real reason for financing this way is to get a lower rate of interest?

Mr. FOLEY. Fundamentally that is one reason and one of the important reasons.

Mr. KILBURN. I mean, the theory there is that under FHA a bank, for instance, in order to apply to FHA, they have to have appraisal, watch the property, get it reappraised, they have to have all the papers and everything checked with the mortgage.

Mr. FOLEY. That is right.

Mr. KILBURN. So naturally they want a higher rate of interest than if they just go out and buy a Government bond, which this will be financed by. Isn't that right?

Mr. FOLEY. Yes. I think I covered all of that in my discussion a moment ago, as to why a differential.

Mr. KILBURN. All right, why don't you finance FHA and the veterans' mortgages the same way?

Mr. FOLEY. For the reason that you have, yourself, pointed out, Congressman, in applying the guaranty at the point that we do does result in a lower interest rate than would otherwise be available to