Now, I grant you that they move together, and you will often have a bank performing both functions. But what I am trying to get at is this: Are you expecting to have the loans of this type financed by savings out of income, or are they to be financed by bankers out of the creation of credit?

Mr. FOLEY. By "creation of credit" do you imply an operation broad enough to include the raising of the funds by the sale of a guaranteed debenture?

Senator DOUGLAS. The question is whether you expect the banks would merely subscribe for these securities from deposits which had been placed in their hands by individual savers, or would they be purchased by merely permitting them to draw upon the banks as a whole or merely permitting the corporation to draw upon the banks as a whole? If the banks make the loans together, they could expand the credit.

Mr. FOLEY. Well, I am sure I am not as expert in this field as you are, Senator, but in my opinion it would be the former.

Senator DOUGLAS. Well, then, it would not be any different from the present situation. The savings would come from the same sources; that is, there would not be any difference from the savings financing in FHA and you would draw from individual savings. The basic question is there and now we can effect reductions in what goes to make up the interest rate.

Am I taking too much time?

Senator SPARKMAN. No; that is all right, Senator. Now, I am wondering if the reduction of this interest rate in which the Senator is concerned, and properly concerned, does not arise out of the fact that in the case of the FHA, with which most of the comparisons have been made, and even under section 608 type of structure under FHA, which is more nearly analogous, I believe, the security there is the individual project, whereas here the security rests on all the projects that may be built under the program.

In other words, they are debentures with the Government behind them, and the security for those debentures, as far as the Government is concerned, rests upon all of the properties.

Mr. FOLEY. Yes, sir. From that standpoint you are quite right, Senator. I think I have probably not followed the point that Senator Douglas has been trying to raise in his questioning of me. But, as I say, he is much more expert in that particular field of financing than I. But your point, Senator, is correct. These debentures are not issued as against a given individual mortgage, but against the resources of the lending bank, which in this case is the proposed corporation. Senator, I am not sure I have answered you or even followed you; but I assure you I am not trying to evade your question.

Senator DOUGLAS. I know you are not; you are doing fine.

Mr. FOLEY. I am trying to answer as well as I know, but I am not sure I follow you.

Senator DOUGLAS. If you will permit another question, do you think that this interest rate of 2%1⁄2 percent is too low on this cooperativehousing plan?

Mr. FOLEY. You mean too low to expect?

Senator DOUGLAS. Yes.

Mr. FOLEY. Well, Senator, we are going on the best advice that we can get in this field. And, of course, that is approximate; it might be somewhat above that or somewhat below that.

Senator DOUGLAS. Of course it is also possible that the interest rate in FHA of 42 percent is too high?

Mr. FOLEY. The point, Senator, is this, that once those

Senator DOUGLAS. Let me interrupt. You are going to have great difficulty because you have your feet on divergent cakes of ice. One foot is on the 42 percent of FHA and, if I may mix my metaphors and give you another foot so you will have three feet, then another foot is on the 4 percent for VA.

Senator SPARKMAN. And section 608 loans.

Senator DOUGLAS. Yes, and another foot on the 22; and I think you may find that each cake of ice may be moving in different directions; and, in that case, then somebody is going to sit down in the middle.

We have already seen what happened because of the divergence between 4 and 4%1⁄2 percent, which resulted in Fanny May being loaded to the gills on housing loans, and it may be that this perhaps will become another Fanny May. Fanny May is the Government beanstalk, similar to the beanstalk of Jack the Giant Killer, which the planted and which sprouted up overnight.

Now, we thought that FNMA was going to be merely an intermediary to pass on securities to the investing public, but now I find that it has gone to a billion and a half and it is still growing and growing, and the President has asked for a total of 990 million dollars for the fiscal year 1950-51.

Now, are you prepared to drop seed into the fertile soil of Government credit, and are you sure that perhaps you are not going to be starting another beanstalk which will reach up to the heavens?

Mr. FOLEY. No, Senator, although again, if I follow your question, the money obtained at a rate of 2%1⁄2 percent in this proposal or approximately that, according to the best advice we have been able to get, is still money only made available for the whole process of lending. The differential between that and a rate that is necessary to be charged by a mortgage-lending institution for the making, financing, servicing of a mortgage, necessarily has a differential, just as there must be a differential between the rate a savings loan pays to shareholders, and they have their rate which they must charge on loans to operate their business.

As to the further question as to what is a proper and adequate rate of interest in the broad field as distinguished from this and to maintain what we are seeking in the flow of home-financing capital sufficient to maintain the necessary high volume of production which we need to overcome the housing shortage, I am not, I think, prepared to answer exactly what that rate should be. It is a matter that is always under consideration, both within and without the Government.

Senator DOUGLAS. Would your office be willing to submit a memo randum showing in the case of FHA and VA what the various elements of cost are in the respective 4 and 41⁄2 percent rates of interest, and what would be the layers of cost in this interest rate which you expect in this cooperative plan? Then we could get some idea of what is involved.

Mr. FOLEY. I will be very happy to furnish any data you wish. Senator DOUGLAS. I mean figures that would show what would be the cost, what would be the first mark-up of the bank, what is the insurance cost, and what is the secondary mark-up, and so on.

Mr. FOLEY. We will be very glad to give you the data.

Senator DOUGLAS. And perhaps we could correlate them and have a cross-section idea of the various elements.

(The material referred to follows:)

In attempting to establish the probable rates at which cooperative housing projects might be financed under the terms of S. 2246, it was necessary to take into account the layers of cost which enter into the financing of residential properties under varying conditions. While the amount of available data on this score is extremely limited, representatives of four insurance companies did present estimates of their costs at the American Life Convention in Chicago in the fall of 1945. This study shows that on FHA insured loans bearing a gross interest rate of 42 percent, the costs of procuring and servicing the loans together with a pro rata share of administrative expenses, etc. bring the net rate down to approximately 3 percent.

Interest returns on mortgage investments for 4 life insurance companies
[New city loans serviced by correspondents]

The costs presented above reflect the experience of four insurance companiesMutual Life Insurance of New York, Business Men's Assurance Co. of Kansas City, National Life Insurance Co. of Montpelier, and Liberty National Life Insurance Co. of Birmingham and may be somewhat more favorable than those of lenders as a whole. Thus, having the advantage of geographical diversification, and a better balanced loan portfolio in terms of type and size of mortgagees these insurance companies probably are able to show lower costs and hence a more favorable net return than is true of many of the small local lenders. The extent of the variation in the costs of procuring and servicing mortgage loans is one of the subjects under investigation in the as yet uncompleted study of mortgage lending by the National Bureau of Economic Research. One volume of this study-Urban Mortgage Lending by Life Insurance Companies by Dr. R. J. Saulnier-will show that even among insurance companies themselves the elements of interest cost differ widely depending upon the size of the company and its scale of mortgage lending activity.

It is a well established fact in financial circles that lenders tend to prefer bonds to mortgages. Greater liquidity, lower servicing costs and expenses all are factors bearing upon this preference. By placing a Government guaranty upon the cooperative housing debentures, it seems reasonable to expect that they can be sold on a yield of not more than % percent above the going rate for long term Government bonds. At the current rate of about 24 percent for governments this would mean a rate of about 2% percent on the cooperative debentures. After making an allowance of about % percent for office expenses, servicing and loss reserves, which on the basis of the insurance company experience seems reasonable, it should be possible to make money available to the individual cooperatives at around 3 percent.

Mr. FOLEY. Apropos to that, Senator, since you raised the question and it is very important, the market of this Federal National Mortgage Association, that is a subject that is, of course, under very careful study.

I think now that if I can proceed with this statement, unless you wish me to say more, I might content myself now with this one observation on that.

60838-50- -3

The situation developing there, while it does involve the interest rate, a differential interest rate, probably involves as well a number of other factors, such as, for instance, the ratio of loan and the preponderance of 100 percent loans, and standards applied, and so on. It is all rather complicated, but I agree with you that it is very pertinent at this time.

Shall I go on?

Senator SPARKMAN. May I just ask a question at this point? As I understand it, the 2%1⁄2 percent rate, more or less, is simply something that you wish for or that you expect. The Government does not seek in this legislation to set any rate of interest.

Mr. FOLEY. That is right, and that is pointed out.

Senator SPARKMAN. And it is to be determined entirely by the market, by the open competitive market, by the private competitive market, by what that market provides.

Mr. FOLEY. As pointed out in some detail in my statement, no interest rate that shall be charged by this mortgage corporation to its cooperative or nonprofit borrowers is fixed in the bill. It provides a formula for an interest rate to be arrived at, on the basis of, first, what it has to pay for its funds; second, the administrative cost of doing business; and, third, the required reserves. But we have, again I say, very carefully noted that this does not fix an interest rate of 2% or 3 percent or any other rate. We pointed that out carefully, Senator.

Senator CAIN. Mr. Foley, what you are telling us here is that in your considered judgment it will be somewhere around 21⁄2 percent.

Mr. FOLEY. As against the best estimates that we have been able to get, and the best advice we could secure on this point, the cost of money to the Corporation currently should not be more than that. It could be less. This should mean that the rate of interest to be charged by the Corporation on the mortgage loans it makes should. be about 3 percent.

Senator SPARKMAN. You may proceed, Mr. Foley.

Mr. FOLEY. It is our view on the basis of studies and consultations that the present financing proposal well meets these two objectives. On the basis of the best analyses we have been able to make on the rent schedules which could be attained on projects built under the proposed amendment, giving full consideration to the nonprofit and cooperative character of the project, a substantial degree of tenant maintenance in view of the ownership characteristics of a project of this sort, and the terms of financing, we estimate that an $8,000 42-room unit in such a project could rent at an estimated monthly gross figure of $64.67. This figure should be sufficient to cover operating expenses (including all utilities and a reserve for replacement) estimated at $24.40 per month and based on the actual operating experience of the Public Housing Administration in the low-rent public housing program. The gross rent figure also includes realestate taxes computed at 1.6 percent annually, a contingency reserve of 3 percent, a vacancy reserve of 3 percent, and debt service of $25.83 per month which is adequate to retire the loan at 3 percent over a 50-year period.

Senator BRICKER. I have one question at that point. Concerning the real estate tax, could you say whether that 1.6 figure is an average, the general average?

Mr. FOLEY. That is based on a general study, it is not based on a single project.

Senator BRICKER. But the rate could be higher, could it not, on a particular project than 1.6 percent? Some cities are running as high as 5 percent.

Mr. FOLEY. The tax rate itself. Of course, you have the factor there also of ascertaining what ratio of the cash value the assessment is. We find very wide variances in that ratio. This is not put forth as a figure applying in all cases, but it is based on a study to arrive at an average.

Senator BRICKER. The 1.6 percent is based, of course, upon the cost value?

Mr. FOLEY. That is right.

Senator BRICKER. Some States require real estate to be appraised at its actual value, or true value in money is the term generally used, I think. Of course, we know that is not generally done.

Mr. FOLEY. There is a wide variance, as you know.

Senator BRICKER. Yes, a wide variance, between 50 and 75 percent. Mr. FOLEY. That is right.

Senator BRICKER. And you think this 1.6 percent would bring it down to the actual?

Mr. FOLEY. Well, for the purposes of this kind of study, which is not intended to be exact as to the dollars but generally indicative, I think, yes.

Senator BRICKER. And if the property runs, let us say, 50 percent of value, that would make it about 3.2 percent.

Mr. FOLEY. It could be higher; yes. Does that cover the subject? Senator BRICKER. Yes, that is all.

Senator SPARKMAN. And you may proceed.

Mr. FOLEY. As shown on the tables which have been furnished to your subcommittee, the comparable rent for a similar unit financed under section 608 of the National Housing Act would be $90.32, as contrasted with $64.67. This higher figure is, of course, the result of a shorter term loan, a higher interest rate, owner's profits, substantially higher operating expenses due to the type of services customarily required when a rental project is operated for profit, and necessarily higher allowance for vacancy reserves. If our computations and estimates are reasonable, and we believe they are, a project constructed under the amendment to S. 2246 would come substantially closer to meeting the rent-paying ability of middle-income families than is possible under existing programs.

(The tables referred to will be found on p. 37.)

These computations are estimates. While they represent our best judgment, actual results can only be learned in the course of actual operations. Obviously, such results may vary somewhat from estimates. For example, if the Corporation's debentures bear somewhat higher interest rates than have been estimated, the final rental equivalent would be increased somewhat over the figure presented in the estimate.

In order to give your subcommittee some idea as to the effects of varying interest rates and loan terms under this proposal, we have prepared and submitted to your subcommittee a detailed analysis showing estimated achievable monthly shelter and gross rents under three assumed financing schedules ranging from 3 percent for 50