However, sympathetic as I am to getting low-cost homes for middleincome groups to live in, I do not see how we can loan money at 3 percent without it costing our Government for the program. I think that a rate of 4 or 41⁄2 or 5 percent made by a private lending institution, after their operating expenses, taxes, and all the other incidentals to the operation of business are taken care of, does not leave the institution a very large percentage of profit.

Mr. KROOTH. I am not urging that the lending institution should make the loan at 3 percent, because they are in business for profit. They have their stockholders and others to account to. I think you are entirely right.

You cannot expect them to lend at anything other than what is a fair return for the money, but then the question is, if you have a substantial part of the people in the middle-income group whose needs are not taken care of, do we let their needs go neglected, or does the Government have a responsibility to try and find some sort of program to help meet the need?

Mr. MCKINNON. Would you say that these people in the middleincome group, the $2,500- to $4,000-a-year-income group, would be able to pay, say, $50 a month for the house?

Mr. KROOTH. Yes. Based on their spending 20 percent of their income, they are able to pay from $42 up to $67 a month.

Mr. MCKINNON. Under the terms of this bill we have here, on the private construction line, if we make available 5 percent money, that is with the FHA insurance included, over a 40-year period, they will be able to build themselves an $8,000 home with monthly payments of $38.46. By the time you add to that your maturities and insurance, you would be up to $50 a month. That would take care, pretty much, of this middle-income group.

Mr. KROOTH. I think there has been a tendency, sometimes, in talking about the FHA program, to assume that the monthly mortgage payment represents the cost of the housing to the individual. I think it is interesting in that connection to look at the FHA's own table on that subject.

Mr. MCKINNON. I did not say that. I said with additional costs it may amount to $50.

Mr. KROOTH. Let me just cite what it is. This is an FHA table. Again, it is the Second Annual Report of the Housing and Home Finance Agency for 1948. It is page 222, and it is table 35.

Just to take a case where the amounts of the mortgage involved was $7,731, the table shows that the total monthly mortgage payment, and that includes principal, interest, and taxes, was $62.52. But when we look at total monthly housing expense, which included utilities and heat, and so forth, that was $91.75. That was on a $7,731 mortgage. It included, to some extent and the table does not make clear how much-some of the people who were getting some secondary financing through the Veterans' Administration.

Mr. MCKINNON. That is over a 25-year amortization period, is it not?

Mr. KROOTH. That is correct.

Mr. MCKINNON. So if you extended that over a 40-year period, you would find your monthly payments somewhat less?

Mr. KROOTH. Somewhat less. If you would like the monthly figure, I will give it to you, how much less that would be.

The differential in the interest rate and amortization period is awfully important, but if we take the difference between a 40-year and a 25-year at 5 percent interest, on an $8,000 house, the 25-year at 5 percent would be $46.80 a month just for principal and interest. If we go to 40 years, that is $38.50, so you save about $8.30. By the way, I just want to say that I for one am in favor of that, where the kind of house involved has a useful life of 40 years. I think that is a sound thing, to lengthen the period of amortization.

Mr. MCKINNON. Would you not say that the average home constructed under FHA standards has an economic life of at least 50 years?

Mr. KROOTH. Actually, I think that is true with a good many of the houses. They will last as high as 50 years, and I think that there has not been enough done about lengthening the period of amortization on home mortgages.

Some people, and some of the bankers, particularly, have argued that a man ought to pay for his house during his lifetime. I do not think that that is true. I mean, if the house is still going to be there and be usable, if it has a mortgage on it, when he dies, he can leave the house with the mortgage on it and I think the really important thing is the relationship of the life of the house to the life of the mortgage.

Mr. MCKINNON. That is one of the principles you are incorporating in your cooperative feature, is it not?

Mr. KROOTH. That is right. And I would like to see that feature carried over into the individual mortgages, because I think that is sound. In the case you have cited, it reduces the monthly payments by $8.30. That is important.

Mr. MCKINNON. We did not finish up on our list of cooperatives. We had an item where we had $3.50 instead of $5.

Mr. KROOTH. I still say that $5 is the result of the combination of the lower financing and the cooperative. If you were under the title I program, involving FHA insurance of cooperatives, you would not have the $5 saving there, because your rents would be higher, so to that extent, I think you and I are pretty much in agreement as to what is involved on that point.

Mr. MCKINNON. Will you come to item 4 where you have an $11 saving for a cooperative over an individual unit? It seems to me, in reading that offer, you primarily have gotten into the proposition of comparing unlike things, because you are taking away certain services that private rules offer, that the cooperative would not have in the way of some luxuries and other items, and it seems to me that if we got down to an actual competitive market, which we are beginning to approach now, and we are not there yet, but we are heading that way, that you will find that if the private rental offered only comparable services of what you would find in cooperatives, that that $11 item would be a far less saving than you itemize there.

Mr. KROOTH. What you get there is a question like this: In public housing projects, the people are required to, in a good many of the projects, help keep the halls clean. In a lot of the projects they do their own decorating periodically. If a person is living in something they own through a cooperative and they do those things themselves,

that is a very healthy thing. What they are doing is they are contributing their labor. When we make it possible for them to do it through a cooperative, they can afford to live in that place because they are doing part of this work, themselves, whereas if they went into a 608 rental project, well, they just are not set up that way. So that is part of what flows from a cooperative, that people do some of the things for themselves.

Mr. MCKINNON. Is it not true that sometimes one family owns one or two units and the owner will go in and do the repair work himself and does not charge a thing to his operating cost or in other cases the tenant himself with a little cooperation from the landlord will do those things, too? I think it is more a matter of human nature than how the deal is set up.

Mr. KROOTH. By setting it up in a cooperative, you can require, if they are coming into it, that that is what they have to do in order to get the monthly payments down to this level.

Mr. MCKINNON. This man who is requiring these things is going to be an expensive man.

Mr. KROOTH. No more than in public housing. Three dollars and eighty-three cents a month for total management cost is what it is there. If it has been possible for them to get management at that cost in a public housing project, it should be in a cooperative because there is far less work in a cooperative. They do not have the question of reexamination of incomes each year and all the other problems that come about from operating a subsidized project.

Mr. MCKINNON. I think that is a matter of personal experience and opinion, but it has always been my opinion that things that have been done cooperatively work swell for a little while, but after a while the people get tired of the cooperative effort and get to be individuals again and lose sight of the greater social aim.

Mr. KROOTH. Let us take the rural electrification program. billion and a half dollars has been loaned.

One

Mr. MCKINNON. I do not think you can compare that with cooperative housing. That is an entirely different relationship there. You are talking about a utility district which is one thing in a business proposition, and you are talking about people living together and no one owning any particular thing, but everybody owning everything. Mr. KROOTH. The people in the Rural Electrification authority or in a farm cooperative own it, they are working together and living together. It is a question again of degree.

Mr. MCKINNON. Are they living together or just working together? There is a lot of difference.

Mr. KROOTH. I think that each will live in his own apartment and the problems that come up as between apartments will be problems of working together, just as it is in cooperatives of other types.

Mr. MCKINNON. You, of course, as former Public Housing Administrator, are well aware of the squabbles that develop in public housing?

Mr. TALLE. Will you yield to me there?
Mr. MCKINNON. Yes.

Mr. TALLE. Is the point not this: If you occupy an apartment in a cooperative building, you cannot escape hearing your neighbor's dog bark, but there is a lot of distance between the house on one farm and the house on another.

Mr. MCKINNON. I think your point is well taken.

Mr. MITCHELL. Mr. Chairman, I would have covered a good deal of the same ground that Mr. McKinnon has covered, perhaps from a little different viewpoint. I have here a letter from Mr. Foley, which is to a certain degree a criticism of the savings which Mr. Krooth has indicated for the cooperative method. This is based on your testimony before the Senate some time ago. It seems to me, however, in an effort to save time now, that I will ask permission to put this letter in the record, Mr. Chairman.

Mr. HAYS. Without objection it may be done.

Mr. MITCHELL. And ask that Mr. Krooth prepare a statement to go along with that letter. It indicates a difference of opinion on the maintenance cost of the apartments. some other vacancy factor and a few other things whichI think would be useful to have in the record. (The letter and statement referred to above follows:)

HOUSING AND HOME FINANCE AGENCY,
OFFICE OF THE ADMINISTRATOR,
Washington 25, D. C., July 18, 1949.

Hon. HUGH B. MITCHELL,
House of Representatives,

Washington, D. C.

DEAR CONGRESSMAN MITCHELL: This is in reply to your letter of July 11 requesting information on monthly cost savings for a dwelling unit financed with 100percent, 60-year direct loans bearing interest at the rates of 22 and 3 percent, as compared with a rental unit whose mortgage is insured by the Federal Housing Administration under section 608 of the National Housing Act.

As a basis for comparison, we have assumed a unit with total cost of $9,000 and consisting of 41⁄2 rooms-2 bedrooms, living room, kitchen, dinette, and bath. The bath is not counted as a room. The monthly rental for this unit-including all utilities—under the direct loan proposal, and assuming that low operating expenses as in PHA projects are achievable, is about $66 for a nonprofit association with a 100-percent, 60-year loan at 21⁄2 percent interest, and about $69 if the interest rate on the 100-percent loan is 3 percent. In comparison, the monthly rental for the same unit financed with a 90-percent FHA-insured loan under section 608 is estimated at about $100. It is assumed that the owner of the FHA project is a private corporation operated for profit rather than a nonprofit cooperative. The estimated reduction in rent amounts to about $34 in the case of 21⁄2-percent financing and about $31 in the case of 3-percent financing. In lower-cost-construction areas the amount of rental reduction would be less than indicated, although in such areas the level of rent achievable with the direct loans proposed would be lower than the $66 indicated. The same would hold true for lower-cost units where the room count is less than the 41⁄2-room unit assumed herein.

In the testimony of the representative of the National Public Housing Conference referred to in your letter, an achievable rental of $56.50 or $39.50 below that of an FHA-insured project was claimed for a nonprofit organization receiving the benefit of a 100-percent, 60-year direct loan with interest at 21⁄2 percent.

The estimated rent reduction of $34 mentioned above is attributable in the main to two factors. One factor is that the monthly payment of interest and principal on the 100 percent, 60-year direct loan at the 21⁄2 percent interest rate is about $24 less than the total of interest, principal and mortgage insurance premium on the FHA section 608, 90-percent loan and the estimated return on the 10 percent equity. This differential also reflects the nonprofit character of the association under the direct-loan proposal. However, it should be noted that the reduction attributable to the nonprofit factor is also achievable under nonprofit cooperative projects presently eligible for insurance under section 608.

In the testimony of the NPHC representative, the statement was made that in building a project certain allowances under a section 608 project amounting to approximately $1,000 on a $9,000 unit-could be eliminated by the nonprofit association under the direct-loan proposal. The fees mentioned for the architect and the builder under a section 608 project would not be eliminated by a nonprofit cooperative, for these services would still have to be performed and paid for. There is no valid reason to believe that under similar conditions, construction costs for a project constructed for a nonprofit association under the direct loan proposal would be lower than on a section 608 project. For this reason, the claim of the NPHC representative of a reduction of $18.50 in debt service alone differs from the $16 we estimate as the reduction achievable.

The other major factor in lowering rents is the lower operating expenses assumed under the direct-loan proposal. Because of the lack of experience, it was assumed in these estimates that such operating expenses would be the same as on low-rent public housing projects assisted under the United States Housing Act-$24.40 per unit per month. This is a very low operating cost, representing what is achievable with minimum services and efficient operations. For example, it reflects benefits of tenant maintenance; also, low insurance rates due to location, generally fireproof construction and to a Nation-wide effort with insurance companies to secure more favorable rates. It is doubtful whether nonprofit associations can achieve such low operating expenses as $24.40. In the testimony of the representative of NPHC a figure of $22 was indicated, but we do not believe this is realistic.

For multifamily projects, mortgages on which are insured by FHA, estimated operating expenses based on actual operating experience adjusted to reflect a national average operating experience for well run projects, are $33 or almost $9 above the $24.40 estimated for the direct-loan projects. The $33 stated includes all utilities and services, and could be reduced somewhat if minimum services were rendered and if tenant maintenance was used. However, PHA experience indicates that the savings achievable through tenant maintenance are not large. While this factor has merit, its importance has been considerably overplayed. Another difference in costs which is minor is the difference between a 5 percent vacancy reserve considered conservative for direct-loan projects plus a 3 percent contingency reserve on expenses, and a 7 percent vacancy allowance for the FHA insured project. The NPHC representative testified that a 2 percent vacancy allowance was adequate, but our experience indicates that this is too low. Because of extremely low rents, PHA generally allows about a 3 percent reserve, although in actual experience the loss has run about one quarter of 1 percent. With rents substantially higher than on PHA assisted projects, a reserve of at least 5 percent is justified on a long-range basis.

To summarize, our estimate as explained about for a $9,000 42-room unit under the direct-loan proposal-22 percent interest rate is $66 per unit per month, or about $34 below that of the same unit in a section 608 project. In comparison, the testimony referred to States an achievable rental with which we cannot agree of $56.50 or $39.50 below that of the same unit in a section 608 project. A table representing these comparative figures is enclosed.

Sincerely,

RAYMOND M. FOLEY, Administrator.