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these borrowers. It is a special incentive, a special advantage with a compensating surrender on their part of certain other rights, which is not required in the FHA or the VA or any other type of operation involving the profit motive.

Mr. KILBURN. In your opinion, Mr. Foley, this is just your judgment, of course, you just have to guess at it, what do you think the Government will lose under these bills?

Mr. FOLEY. In my opinion, soundy operated and with the discretionary authority contained in the bill if enacted by the Congress, I mean enacted with the discretionary authority, my opinion is there would be no substantial loss. If I had to assume that there would be, I would have to assume that there would also be substantial loss in the insured mortgage operation. I have been working with that perhaps more intimately than any other one person in the country in the total of my experience for 15 years. I do not anticipate in the insured mortgage operation any substantial loss to the Treasury. Mr. KILBURN. Does it depend on the appraisal?

Mr. FOLEY. Does

Mr. KILBURN. Do the losses depend on the appraisal?

Mr. FOLEY. The appraisal is only one, sir, of many factors. If you mean by your expression "appraisal" finding of the value of a piece of property in dollars or if you mean an appraisal in the broad sense of appraising all the phases of the risk involved the answer is "yes" but there are many phases of consideration standards applied in connection with insured and in connection with guaranteed loans that enter into the erection of safeguards against loss.

Fundamentally-I don't want to get into making speeches here but I think it may be important because we get lost in a maze of details-fundamentally what we are dealing with Congressman is the basic element of strength of this country which is the homes of its citizens and their security in ownership of those homes, particularly, and to a lesser extent proper housing. If there is a proper relationship of the debt assumed to the need of the borrower as well as to his ability to discharge his financing obligations under it, then the risk taken is an extremely small risk when we can spread it over the great aggregate that is involved in these operations.

The CHAIRMAN. I have promised to recognize Mrs. Woodhouse. Mrs. WOODHOUSE. Mr. Foley, in connection with this interest, the 3 percent may sound low in comparison with the old rate but isn't there this difference between FHA and the proposed new set-up. Here you have only one mortgage, don't you, on the whole project, whereas if you have 50 individuals building 50 FHA houses, you would be servicing 50 mortgages, would you not, with all the costs that go with it?

Mr. FOLEY. That is correct.

Mrs. WOODHOUSE. So you really have a large differential there. It would not be possible unless the people who wanted to build FHA housing set themselves up into some sort of a mutual to have such a saving, would it? I mean as long as you have individual mortgages, you are going to have these service costs?

Mr. FOLEY. That is right and if, for instance, this mortgage corporation that we are contemplating were to embark in the business of making a large number of single mortgages on individual properties, they could not lend money at the rate contemplated.

Mrs. WOODHOUSE. That is exactly my point.

Mr. FOLEY. Because they would have a higher service expense. Mrs. WOODHOUSE. I think it would be very interesting to put into the record those additional costs that go into the servicing of a FHA mortgage that will be saved in this type of mortgage.

Mr. FOLEY. You have raised a question, Congresswoman, that for its answer calls for a great deal of statistics that are not very readily available, studies on the cost of lending money, which varies by type of institution as well as by type of loan. There has been a good deal of a rather general nature put into the records and we will try to put that together in brief form for your purpose. Is that what you have in mind?

Mrs. WOODHOUSE. Yes. I think that will be very helpful. (The information requested is as follows:)


The available information on the costs of acquiring loans, of servicing loans, of losses on loans, and of operating a mortgage portfolio are quite limited. The following estimates are for FHA-insured mortgages bearing an interest rate of 42 percent on the basis of the experience of four life insurance companies:

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Source: Hearings before the Committee on Banking and Currency, U. S. Senate, 79th Cong., on S. 1592, pt. 1, testimony of L. Douglas Meredith, National Life Insurance Co. The estimate for acquisition and originating costs covers the commissions or fees paid to correspondents or other outside agents for originating loans which the insurance companies purchase. The estimate for servicing fees covers the fees paid to correspondents or other outside agents for servicing the loans, that is for collecting the periodic mortgage payments, accumulating out of the mortgage payment funds in trust for payment of taxes and hazard insurance, physical inspection of the property from time to time, and in general representing the lender in the particular locality. The estimate of principal loss represents estimated losses on defaulted loans not covered by the FHA mortgage insurance contract and increased costs representing foreclosure expenses. The estimate for home office expense pertains to the estimated home office expenses applicable to the mortgage operations. In addition to these items, the lender collects from the borrower an FHA mortgage-insurance premium equal to one-half of 1 percent on the outstanding balance of the loan, and turns it over to FHA. Out of these premiums FHA pays part of its operating expenses, accumulates reserves against losses and if the loan experience for a particular group of loan accounts proves favorable, the borrower may eventually receive from FHA a participation dividend out of this insurance fund.

The above costs reflect the experience of four insurance companies and may be somewhat more favorable than those of lenders as a whole. The insurance companies have the advantage of geographical diversification, and a better balanced loan portfolio in terms of type and size of mortgage and probably show lower costs than may be true of small local lenders. Also, these elements of cost differ widely among individual lenders depending upon the size of the company and its scale of mortgage lending, tending to be lower for the larger operations and larger loans.

With respect to the National Mortgage Corporation for Housing Cooperatives, the operating expenses exclusive of a charge for losses on defaulted loans is estimated at three-eighths to one-half percent. This is substantially less than the 1.46 percent stated above for a number of reasons. Originating expenses would be very small since it would not be necessary to pay a fee to a corre

spondent to acquire loans. Servicing costs and overhead expenses will be much smaller than on an operation including single family home loans because these costs as a percentage of total investment in mortgages decrease both as the size of the individual loan increases and as the amount of the total investment in mortgage loans increases. The cost of servicing an individual loan in relationship to the amount of the loan decreases substantially as the size of the loan increases. Likewise, certain costs of operation, such as bookkeeping, are related to the number of loans and not the dollar amount of the loan. The Corporation would have no mortgage loans on individual single-family homes but would have large loans on multifamily projects or on groups of single-family homes which could be serviced at a much smaller cost than an equal dollar volume of individual loans on single-family homes. Moreover, as the volume of the lending operation increases, greater efficiency and lower unit costs can be achieved.

In addition to this three-eighths to one-half percent, the National Mortgage Corporation for Housing Cooperatives would charge one-eighth of 1 percent to accumulate reserves for losses. This is a net rate and the entire amount is placed into the reserve account whereas on the one-half percent mortgage insurance premium charged by FHA, roughly about one-fourth percent has been used to help defray FHA operating expenses and one-fourth percent has gone into reserves for losses. With a maturity of 50 years on the loans of the National Mortgage Corporation, a charge of one-eighth percent on the outstanding balance would actually yield about as much income for reserves as one-fourth percent on the same volume of FHA-insured mortgages since all of these would have shorter maturities, and many of them would tend to be paid off or refinanced with an uninsured mortgage prior to stated maturity.

Mrs. WOODHOUSE. Now, you do not expect to have any difficulty in selling these debentures to the people?

Mr. FOLEY. We have discussed the matter with persons whose business is in that field of finance and they do not suggest any difficulty.

Mrs. WOODHOUSE. Because these are tax-exempt, are they not?

Mr. FOLEY. The tax provisions you will find on page 23 of the bill. They are not tax-exempt from Federal taxes. The usual reciprocity arrangement exists.

Mrs. WOODHOUSE. That is what I understood. In several points during your presentation yesterday you spoke of possible reduction in construction costs. Would you refer just briefly as to where those reductions would come in these cooperatives?

Mr. FOLEY. I have taken great care to try to present this realistically on the basis of the present information, as I am sure you would have us do, and you will note that nowhere in our calculations have we made an allowance for reduced cost of construction as againstMrs. WOODHOUSE. I know that.

Mr. FOLEY. We have referred to it as potential because it seems reasonable to expect that once there is a skill developed in this operation and once there are organizations of a fairly large size set up that they could expect to make certain savings. However, they are problematical. If they occur, they would occur in many fields, in many parts of the construction costs, the planning cost, the acquisition and development of land, and so on. Certainly that would be an objective toward which cooperative organizations would work. Experience, you know, is so varied both with their costing less and actually in some cases their costing more, that no claim is presently made by us of savings.

Mrs. WOODHOUSE. I assume that that would be a point on which your research organization would cooperate?

Mr. FOLEY. Very definitely.

Mrs. WOODHOUSE. You mentioned an $8,000 figure. Was that simply a figure for calculation purposes or is that what you expect these units to cost?

Mr. FOLEY. It is a figure for calculation purposes, based upon a probable median of what might be expected, perhaps a little above the median.

Mr. WOODHOUSE. Have you given any consideration to the minimum size, that is, in terms of units for cooperatives? I will tell you why I asked that question. My interest is very much like Mr. Deane's. I come from a different part of the country, but we are a section of small towns. I have no community over 36,000 population in my district. We build free standing homes. I am quite sure that the cooperative idea will be quite acceptable, but there will never be any large group of people who have occasion to build such homes. Would a group of 25 to 35 be economic?

Mr. FOLEY. You are referring to the number of family dwelling places?

Mrs. WOODHOUSE. That is right.

Mr. FOLEY. You notice, I am not saying dwelling units.

Mrs. WOODHOUSE. You are very nice to remember my dislike of that term.

Mr. FOLEY. In a given project. I do not think we have contemplated limiting it to large projects. I think if we did we would probably limit its usefulness. I think they should be sufficiently large so that the cooperative feature can function.

Mrs. WOODHOUSE. What I was trying to get at was an estimate as to the minimum of free-standing houses. We do not build apartment houses to any extent in my territory.

Mr. FOLEY. I think what I just said would apply whether it was free standing or multifamily. When you get into the question of multifamily units you have the question of how small you can make it and still have an economic management. No, I have not made an estimate, although you raise a point that would be interesting for us to study. I think that that would be very valuable if we could have some estimate on that, because if it were very large

Mr. DEANE. Will you include in the analysis the minimum number of units?

Mr. FOLEY. I understood that was the question that Mrs. Woodhouse is raising. Yes, we will try to give an opinion on it. (The information requested is as follows:)


The minimum size of a project will vary directly with the size of the community in which it is to be located. A cooperative project, if the risk is to be kept to a minimum, should not be too large for the market it is to serve and the community in which it is to be located. Thus, it appears that a project may consist of relatively few units in small towns and small suburban areas on the fringe of large metropolitan districts, but that in the more densely settled parts of large cities the project would have to be large enough to exert a stabilizing influence on the neighborhood and minimize the risks involved in neighborhood change and city growth. Obviously, a larger project is required in larger cities to protect the investment of the cooperative and to keep the risk of loss to the National Mortgage Corporation for Housing Cooperatives to a minimum. The more stable and smaller a community is, the smaller the project can be.

Any project, in a small town or big city, must contain enough dwelling units to insure continuity of operations and of the life of the organization. There must be a sufficient number of members of the organization and dwelling units in the project to fulfill the organization's obligations in regard to the turn-over of occupants and members. The smallest possible number of homes that could be built under the moderate income cooperative housing proposal would be affected

by the terms established by the cooperative organization for the repurchase and sale of member equities, and by the degree of risk to continued operation involved in such purchase and sale.

The fundamental problem as to minimum size of project for cooperatives is similar to that confronting FHA in the insurance of mortgages on rental properties. The minimum size of project eligible for insurance is 8 units under section 608 of the National Housing Act and 12 units under section 207. It appears reasonable to believe that under the most favorable conditions, the minimum size cooperative project would contain about the same number of homes.

Mrs. WOODHOUSE. As I understand, this 22 percent has to be paid in. Is that the equivalent of a down payment?

Mr. FOLEY. Yes: I think in the analogy we drew that it would be proper to call that an equivalent down payment and you will note that the bill provides that it is canceled when the balance of the mortgage debt equals the stock subscription.


Mr. FOLEY. Which bears out that analogy.

Mrs. WOODHOUSE. On your figure of $8,000, it would be around $200 ?

Mr. FOLEY. My mental arithmetic is slow but I want to point out, as you no doubt contemplate, that the 22 percent is a part of the stock subscription which in total amounts to a down payment. Mrs. WOODHOUSE. Yes; but that is spread over 20 years.

Mr. FOLEY. Yes.

Mrs. WOODHOUSE. What I was trying to get at was how much money an individual would have to have to go into one of these cooperatives. Mr. FOLEY. On the basis of a stock subscription only your figures would be right. There would have to be some additional expense in the setting up of a cooperative. You will notice the language of the bill contemplates that when, for instance, they come to the Housing and Home Finance Administrator, with an application for a preliminary planning advance, they must have a properly organized cooperative. The expense in that would be relatively small and I think would vary in various parts of the country, but there would be an expense there that had to be borne.

Mrs. WOODHOUSE. But it probably would not amount to more than $25 for each family, would it?

Mr. FOLEY. I don't know. I have read a good deal of literature on this subject, and it varies widely but is never a large sum.

Mrs. WOODHOUSE. The other question I had to ask you was in connection with the Administration. A number of the private organizations interested in housing keep insisting that they would like to see this administered by a constituent agency, rather than by a director under the Administrator. I personally have been in favor of more unification rather than less in the housing agencies. I wonder if you would explain why you think a director under the Administrator would be more effective than setting up a separate agency?

Mr. FOLEY. A separate constituent agency?


Mr. FOLEY. A division is what is contemplated in the bill. We went into that at some length in my prepared statement and gave our broad basic arguments as to why we oppose at this time the establishment of separate constituent agencies. I might enlarge on that a little, if you will, although those are still our basic reasons.

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