Senator MAYBANK. Yes; but I just asked that for the record, that the investment is to come from private enterprise.

Senator CAIN. Are you going to expand upon that as you go along? Mr. FOLEY. Yes, Senator.

Senator CAIN. I mean, expand upon the Senator's question, you will, I mean, prove the point that this is an avenue in which private capital can be invested?

sir.

Mr. FOLEY. I believe that the statement I have here will prove it,

It makes the investment of private capital in this program possible by an adaptation of the type of guaranty which has been so successfully used in the mortgage insurance system of the Federal Housing Administration.

The amendment would establish, under the direction and supervision of the Housing and Home Finance Administrator, a National Mortgage Corporation for Housing Cooperatives. This Corporation would be established on a mixed-ownership basis with initial capital supplied by the Federal Government, but with provision for a steady, progressive replacement of this capital by stock investment on the part of borrowing cooperative and nonprofit associations. mixed-ownership Corporation would be authorized to make long-term, low interest rate mortgage loans on cooperative and nonprofit housing projects.

This

The Corporation would obtain its initial capital up to $100,000,000 from the Federal Government. In return, the Government would receive preferred capital stock in like amount on which cumulative dividends equal at least to the cost of money to the Government must be paid. While the first loans made by the Corporation to eligible borrowers would be made from the initial Government investment, intended to be later retired as I have outlined, the Corporation is authorized to obtain additional loan funds by the issuance and sale of guaranteed debentures on the private investment market.

Each borrowing cooperative would be required to subscribe to stock in the Corporation in an amount equal to 7%1⁄2 percent of the original principal amount of its mortgage loan. The amendment provides that not less than one-third of a borrowing cooperative's stock shall be paid in cash prior to obtaining the loan, and would give such a borrower up to 20 years to pay in any balance of the required stock subscription.

Senator DOUGLAS. Do they pay in 221⁄2 percent initially?

Mr. FOLEY. Initially, in the case of a cooperative, yes; and in cash. In the case of a nonprofit corporation, where there is normally no opportunity to obtain the cash required for initial stock purchase, the entire subscription could be paid for over a 20-year period. We believe that in the case of the cooperative, provision for partial deferment of stock purchases is necessary because of the plain fact that many middle-income cooperatives will probably not have sufficient cash resources to make full stock purchases immediately and still provide for adequate reserves of their own.

The amendment does not require a specific minimum reserve accumulation by eligible cooperatives. It does, however, give adequate authority to the Housing and Home Finance Administrator to require such borrower to establish such additional reserves. We

believe this to be a wise provision, since it will permit the Housing Agency ample flexibility to make such determinations on the basis of experience and examination of the actual financial resources of applicant cooperatives. In our opinion, a fixed and rigid requirement in law is unnecessary and might well seriously handicap the

program.

The amendment provides for the retirement of the Government stock once the stock owned by borrowing cooperatives and nonprofit corporations has reached $50,000,000, although no such retirement could be made if it would reduce the total capitalization of the corporation below $150,000,000. Obviously, the time at which such retirement would take place will depend upon the speed and success of the program. While no accurate estimate can be made as to when that period will be reached, we believe it is highly important to provideas this amendment does-the type of financing plan in which, as successful operations are attained, the Government funds initially required to get this program under way will be withdrawn and replaced by privately subscribed share capital. It is also our firm belief that the capital investments of private cooperative borrowers represent a thoroughly sound and well justified participation in the risks inherent in a lending enterprise of this sort. They are, in fact, an essential element of the plan proposed, without which its nature would be materially changed. The stock investments of borrowers will provide, from the outset, an increasing additional cushion against the contingent risks being assumed by the Government in this enterprise.

The amendment provides that the Corporation will make loans at whatever rate is determined to be necessary, taking into account the cost of money to it and the spread necessary for defraying administrative expenses and establishing and maintaining necessary corporate reserves, including the required specific reserve for losses. We estimate that, at least so far as initial loans are concerned, this probably means a rate of about 3 percent on the mortgage loans made by the Corporation, since it is our present estimate that this figure will provide an adequate spread over and above the cost of the capital initially supplied by the Government and the probable rate on its securities first issued to investors.

Senator DOUGLAS. May I ask there, Mr. Foley-I can understand your optimism on getting the capital furnished by the Government at the rate you mention, but you apparently also think that you are going to be able to get a considerable amount of this capital from private investors and to sell, as I understand it, the notes of the cooperative.

Now, why do you think you can get this capital from the private market at something less than 3 percent?

Mr. FOLEY. Because, in the first place, as indicated in the statement and provided by the amendment, they are guaranteed debentures. We have had some inquiries made and have had some consultations with the best authorities in the field, Senator, particularly with the investment dealers who would buy them-and they indicate to us that we could probably expect a rate approximating the going Federal rate, on long-term Governments, which, currently, is about 2.2 percent. Senator DOUGLAS. Then may I ask you this: The FHA paper is guaranteed, too, is it not, by the Government?

Mr. FOLEY. The FHA mortgages are insured.

Senator DOUGLAS. They are insured.

Mr. FOLEY. The mortgages are insured. It is only the debentures which the FHA issues to the mortgagee if the mortgage goes into default which are guaranteed. And in the case of the other difference with FHA, I will comment on that later. I will proceed with my statement first, if I may.

Senator DOUGLAS. Well, now, wait a minute. I want to follow that up. The FHA has 41⁄2 percent interest and the VA has 4 percent interest.

Mr. FOLEY. Yes.

Senator DOUGLAS. But you apparently think that the cooperatives will be getting their capital from the private market for something around 21⁄2 percent. What I am trying to find out is what is the basis for this optimism.

Mr. FOLEY. Because the debentures that will be sold by the Corporation to obtain additional mortgage-loan funds will be fully guaranteed by the Government.

Senator DOUGLAS. And is that the difference between them and FHA and VA?

Mr. FOLEY. Yes, sir; and as I said, I enlarge further on that point later in my statement. Could I proceed?

Senator MAYBANK. In other words, there is a difference in the servicing.

Mr. FOLEY. Yes, it reduces the cost, and the point of application of the guaranty is a different one. I shall enlarge upon that if I am permitted to proceed.

Senator DOUGLAS. I am sorry to have interfered with the witness by asking questions. I know that many people believe that this is not a proper thing for a Senator to do. A Government official comes up here to speak and we are to hear him, and it seems to be the policy not to interfere with the witness with questions; and if that is the policy, then I am sorry.

Mr. FOLEY. Senator, I apologize if I have given you any such impression.

Senator DOUGLAS. And I in turn apologize. But I think there is altogether too much of this tendency for administrative officials to lay down the law and not to submit to questioning. Having come to that, we will call it quits, since we have both apologized.

Senator SPARKMAN. Let me say at this point that it is pretty well understood that any witness who comes here before us subjects himself to questioning willingly at any point in his paper.

I simply understood Mr. Foley to say that he elaborates on that point a little further in his paper. If we wait until he gets to that point, the witness says it is fully set out.

Senator DOUGLAS. The oil has been now poured on the waters and everybody is in a fine humor. But I hope I may be permitted to express a general statement. I have only been here for a year but I have noticed a steady tendency on the part of the executive departments to come down here with legislation and then not to submit themselves to the free flow of questioning, back and forth.

Now, I am agreeable to waiting. I am satisfied to wait. And I will further say that I am in agreement with the greater part of this legislation. I only ask, however, that we not be treated as just

schoolboys and that instead we be allowed to share in the process of government. I think the voters elected us for that purpose.

Senator SPARKMAN. Mr. Foley, let us see if we may not go a little further into this point. Is this not the principal difference between the debentures proposed to be issued here and the insured loans under FHA and VA-that is, that these are outright debentures?

Mr. FOLEY. That is right.

Senator SPARKMAN. Requiring no individual servicing by the purchasers of them, whereas in the case of the FHA and the VA mortgages, each individual mortgage has to be processed and serviced by the organization that holds the paper?

Mr. FOLEY. Yes, that is the point. They are like the coupon bonds. I thought I had made it clear in reply to the Senator's question, but apparently I did not.

And I will say, Senator, that I am very happy to answer questions at any time.

Senator DOUGLAS. All right; we are good friends now. It is always good to get these issues out on the table. We understand each other, but really you ought to be prepared for give and take when you come up here. These hearings should be something like a game of tennis, with the ball going back and forth across the net, and there should be a continuous flow of questions and answers back and forth. Senator MAYBANK. Now may I ask a question, as long as oil has been poured on the waters, as the Senator has said.

Now, Mr. Foley, you say you expect to get this money at this much lower rate of interest, whereas FHA and VA get their money at 41⁄2 percent and 4 percent, respectively, and we know that the banks are interested in them and that that is because of the service charges. Now, how are you going to get them to handle loans if they do not get those service charges. Have you given any thought to that?

Mr. FOLEY. Actually, Senator, what this plan would do is to appeal to a different type of investment institution and capital than is engaged in the active making of mortgage loans, at whatever rate that may be.

Senator CAIN. What sort of institution would that be, Mr. Foley? Mr. FOLEY. Investment funds of the same types of funds that go into the purchase of Governments.

Senator SPARKMAN. In other words, you are looking to bankers and lending agencies here who would make large-block purchases of securities.

Mr. FOLEY. That is right.

Senator SPARKMAN. And they are not interested in buying an individual $5,000 mortgage, let us say, on which they will have to collect the payments on each month.

Mr. FOLEY. That is correct.

Senator SPARKMAN. Whereas, in the FHA field the original lender goes out after the individual mortgage.

Mr. FOLEY. That is right, and engages in the servicing thereof.

Senator SPARKMAN. Is not this type of investment somewhat similar to or analogous to the securities that are issued in the public housing field by the various city housing authorities? They are sold in blocs, are they not?

Mr. FOLEY. That is right; and the type of investment capital is the

same.

Senator SPARKMAN. And those securities sell in that lower range, do they not?

Mr. FOLEY. Yes, Senator, they do. Of course, also, they ordinarily have another advantage, in a tax way, because they are issued by local public agencies, which, like obligations of States and municipalities are tax exempt. Consequently, the advancement of the funds there is at a lower rate.

Senator MAYBANK. In other words, there is no tax on the loan that the city might sell?

Mr. FOLEY. That is right.

Senator MAYBANK. But there would be on these funds?

Mr. FOLEY. That is right. They would not have that advantage. Senator MAYBANK. Is there not a difference, or are there not variances in the interest rate paid on local housing authority bonds?

Mr. FOLEY. Well, I do not know that I could give you an exact answer on that.

Senator MAYBANK. I asked that because I saw, if I understood it, that the New York Housing Authority got it much lower than some others.

Mr. FOLEY. There has been a variance, but I am not at the moment prepared to say how wide a variance.

Senator MAYBANK. And do you think there might be variances on that caused by people either refusing in certain places and accepting in others?

Mr. FOLEY. I think it would be a matter of the market demand and the going rate, plus whatever other factors the investors think ought to be added because of the newness of this type of security.

Our check-up with persons engaged in it and with people versed in the field has indicated that there probably would be a good market, a very wide market, for these securities. As I said before to Senator Douglas, the rate on guaranteed debentures issued by the Corporation to obtain additional loan funds would closely approximate the rate on direct Government bonds or obligations of similar maturity. Until experience has been gained with this security, it might be slightly higher.

Does that cover the subject?

Senator SPARKMAN. Are there any further questions now? Go ahead with your statement.

Mr. FOLEY. I should like also to call your particular attention to the requirement in the amendment that the Corporation set aside as a specific reserve for losses on mortgage loans an amount equivalent to one-eighth of 1 percent annually of its outstanding loans. This means that the Corporation in fixing the rate on its mortgage loans must anticipate a sufficient spread to allocate at least this much to a specific reserve for losses on its mortgage loans. The figure of oneeighth of 1 percent has been chosen as probably sufficient in projects of the character contemplated to serve as the equivalent of an insurance premium. In addition to the specific reserve account for losses, the Administrator must require the establishment and maintenance of such other additional general reserves as he deems necessary. Senator CAIN. Permit me to ask this question.

Mr. FOLEY. Surely, Senator.

Senator CAIN. That rate seems exceedingly low to me, in view of the fact that by the admission of everybody this is a new and unexplored and to some extent doubtful field.