In other words, it provides as an incentive to the proposed builder or owner of the building venture, that if he will give up some of his profit the State will give up some of its taxes in order to make these accommodations available as quickly as possible to those who need it. Mr. RAINS. Mr. Foley, let me ask you one other question, and then I am going to drop out of the picture. The thing that worries me about this bill is: How are we going to explain to the people in this country giving 3-percent interest on cooperative housing to middle-income groups, 4-percent interest to veterans, 412-percent interest to the FHA? The hard question we are going to have to face—and I know I am going to have it with my veterans-is, why can't I have a 3-percent interest if the middle-income class has it who are possibly not veterans? What basis is there for making that differential? Mr. FOLEY. May I make a comment on one point of your discussion, first? Mr. RAINS. Yes. Mr. FOLEY. That is with respect to the rent-control argument. I do not share the view of those whom you have quoted as saying that everybody can now get rental properties and at proper rent, and that the supply is adequate. With that comment, I will go on to the other. The whole question of interest rate, of course, is a constantly perplexing question, particularly with reference to the types of activity in which there are governmental aids. It is one that we have constantly under study. The housing agencies of the Government, Congressman, have no predilection for any given rate of interest. They are concerned only with having a situation in which a rate of interest that is authorized as a maximum is adequate and sufficient to maintain the flow of capital necessary to maintain the high production of housing, which we think is the No. 1 prime necessity if we are going to meet our problems. Mr. KILBURN. The flow of capital from the Government, or from private? Mr. FOLEY. Private. All of the capital flowing in those operations is private capital, Congressman, and the rate of permitted interest charge, if they are to use the vehicles that the Government has provided, is, of course, a key to that flow, whether it is adequate or inadequate, other things being equal. The differential in interest rate as between, for instance, the FHA and the VA operation is a perplexing and troublesome thing. It is very difficult to ascertain from any studies we can make just what is a sufficiently high interest rate to maintain the flow. As brought out in a part of the discussion earlier, it is necessary that lending institutions have an average return upon the funds that they invest, sufficiently high so that they can meet their operating expenses and pay what is a sufficiently adequate return to depositors to maintain the flow of deposits, of savings which provide these funds. It is not an easy question to answer. As has been brought out publicly in the last few weeks, it is closely under study, particularly with reference to FHA and VA rates. Mr. RAINS. Suppose we make this 4 percent instead of 3, would we still get cooperative housing? Mr. FOLEY. If you made it 4 instead of 3--and let me point out again that the bill does not fix an interest rate. Mr. RAINS. I understand that. Mr. FOLEY. We have pointed out that according to the best present judgment of rates, charges, and so on, it would be approximately 3. Mr. RAINS. Yes, I understand. Mr. FOLEY. But it could go higher. It could conceivably go to 4 in the future, depending on what it costs to get the money in to operate, but if you went to 4 the more the interest rate rises the less the reduction in rent, or equivalent charge, to the home owner in the cooperative would be in this proposal which, again, let me say, is needed to meet a particular gap in a broad field and not the whole of the field. The effort to obtain an operation in which there could be an advantage of interest rate was not for the purpose of gaining an advantage in interest rate only. It is directed, as you see, only to a particular type of operation, a cooperative or nonprofit. The significant thing about that is that the profit motive is removed, both from the consideration of what would otherwise be the profit sponsor or entrepreneur, and from the consideration of the participant. Elmer Zilch, the owner of a detached house, under the regular operation, a fee simple title, has rather characteristically, so far in the history of this housing movement, particularly in this century, expected, if he disposes of his house, to do it at a profit, or at least to do it at no loss from depreciation, and that has been characteristically the experience with certain exceptions. That is foregone by the participants in a cooperative operation such as this one here contemplated. Mr. RAINS. How is it foregone? Mr. FOLEY. Because he does not have fee simple title which he can transfer at will and at any price that the market might pay. Under these provisions the cooperative organization, itself, has first claim upon the repurchase and upon conditions fixed in advance. You are addressing the interest rate contemplated here, and the amount of the advantage only experience will tell, as a further incentive and as one of the means of bringing into play a different type of private operation and probably a type of operation which, while it will be broadly used, I do not concede will become the major vehicle in the middle-income field, or any other field in this country. Mr. RAINS. How much appropriation is this going to take out of the Federal Treasury? Mr. FOLEY. As I pointed out, the appropriation from the Treasury for the initial capitalization is authorized to be not to exceed $100,000,000, and in this year's budget record—and correct me if I am wrong in reading these figures-is set up at $35,000,000 as the initial. There is one other point that I didn't cover in your question. The individual, free standing house deal, on which there is a single mortgage on a single house, or a small project of three or four, as distinguished from the type of operation contemplated here, involves much more expense in the handling, in the making, initiating of the loan, and the servicing, and so on. It is an item of expense which is reflected in the rate of 4, 41/2, or 5 percent or whatever else that may be the private rate or charge. There is a differential between that type of lending and the type of lending contemplated here. Fundamentally, the funds, which under this plan would be made available from private sources for lending by this corporation, would cost this corporation about as much as the loans now loaned by a savings bank or a savings and loan or other private lending institution at a 4 or 412 percent rate on single house cases. It costs that institution the interest rate paid, so that the differential between rates is really represented by the probable differential in cost of doing business. Mr. RAINS. Is that a service charge you are talking about by the financial institution who makes the loan? Is that the reason for the increased rate on the small unit? Mr. FOLEY. It is the cost of the operation of the institution. Mr. RAINS. You are saying a financial institution could make a loan for a cooperative for about the same over-all expense of handling the loan as they could to one individual for a small place? Is that correct? Mr. FOLEY. The private lending institution if it made a loan, a large loan, took a single project, a single mortgage, cooperative or otherwise, can afford to make it for a less interest charge than it can afford to make an interest charge which is on a single, small home. That, of course, is inherent in the whole lending experience. If lending institutions generally throughout the country were prepared, willing, and able to make freely the kind of loans to the kind of cooperative corporations herein contemplated, it is probable that they could make them at a lower interest rate than they do to Elmer Zilch on his individual house. If that were the case then probably there would be less of a pressing necessity for this kind of legislation. Mr. RAINS. Let me ask one other question: Take the private lending institutions. If you have the assurance or the belief that they will finance this kind of proposition at, we will say, 3 percent with Government guarantee, what is to prevent them financing FHA or veterans' loans at 32 or 3 percent with Government guaranties? Mr. FOLEY. I am afraid you misunderstood me, Congressman. I did not indicate that I believed that private lending institutions can or will make this type of loan at 3 percent. I am only contemplating in our testimony that this mortgage corporation, set up for this and this purpose only, and without any necessity for earning profits, itself, can make them at 3 percent, or thereabouts. Mr. RAINS. I misunderstood you. I thought you said that private institutions Mr. FOLEY. No; I said, if they could. I did say that they could make such a loan at a lesser rate than they could make a loan to a single-family home owner on a single-family mortgage. Mr. RAINS. Would the loans that are made by this mortgage corporation be a charge against the budget? Mr. FOLEY. The loans made by the corporation, would they be charged against the budget? Mr. RAINS. Yes. The Mr. FOLEY. No, not in the broad sense I think you mean. Budget impact would be reflected only by the amount required to purchase the initial capital stock and smaller items for the advance, preliminary, planning loans that are contemplated, and the administrative expense in the office of the administrator, not in the mortgage corporation. Mr. RAINS. Going back to the rent situation, of course you are not the Housing Expediter, I am well aware of that, but judging from the 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. 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, 314, and 32 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 |