to its present authority of issuing debentures for that purpose. Besides FHA exercising its redemption privileges in the shortest callable period, mortgagees are utilizing to a greater extent their right to pay insurance premiums with FHA debentures. We submit that cash payment would greatly simplify settlement processes, besides providing savings in personnel and administrative expenses. This authority would be particularly suited for use with respect to small-home mortgages, as they constitute the bulk of the claims handled.

We have pointed out in our audit reports that FHA application fees on small homes do not cover the processing cost. A fee of $45 is charged but $25 is refunded if the mortgage is insured. The potential saving in administrative expenses incident to refunding on insurance written in 1952 and 1953 would have been 3.25 to 3.5 million dollars a year, respectively.

Section 14 of the bill relates to the Home Loan Bank Board and the Federal home loan banks concerning which we have no suggestions to make. However, we have recommended in our audit reports on the Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation that they be required to pay for the services and benefits furnished them by the Government without cost, such as retirement, disability and compensation benefits to their employees and rent for office space the Home Loan Bank Board occupies in Government-owned buildings. This suggestion is not novel. It has been applied to several business-type operations of the Government, and the Federal Deposit Insurance Corporation has recently proposed legislation to the Bureau of the Budget to permit it to pay the retirement and disability expense.

Section 16 changes the basis of charging admission fees which the Federal Savings and Loan Insurance Corporation charges lending institutions as an initial payment for obtaining insurance coverage. This change is in accord with our recommendation of long standing. Another proposal we have made with respect to the FSLIC is that there be established a limitation upon the time in which claims for insurance benefits may be filed by investors of insurance institutions in default. The Federal Deposit Insurance Act provides a limitation of 18 months on the filing of claims by depositors of banks that are in default. Provision for this recommendation is not contained in the bill and, while not of serious implication at the present time, it could cause difficulty in the final settlement of claims and in determining the amount of FSLIC liability in the event of a great increase in the number of defaulting insured savings and loan institutions.

Section 17 would reenact section 702 of the Housing Act of 1954 providing for a reserve of planned public works. Instead of being financed solely by direct appropriation available for a specified period of time, a revolving fund of not to exceed $48 million would be established from which the Administrator could make advances to municipalities for the advance planning of public works. It is our opinion that the advance planning program does not warrant the use of a revolving fund because by its nature it will not be a continuing self-sustaining business-type operation, since repayment requirements are indefinite. In fact, many advances may never be repaid by the municipalities because construction of some planned public works will not be undertaken. This has been the experience of the Govern

ment under previous advance planning programs authorized since World War II. We suggest that appropriations with specified time limits be continued for this program.

We now turn to the Armed Services Housing and Insurance Act of 1955, S. 1501. The purpose of this bill is to provide military housing. Under this proposed legislation, which is a modification of the existing Wherry military housing program, a builder would be awarded a contract by a Secretary of one of the military departments to erect housing units on land under control of the military. The builder would obtain private funds through the medium of an FHA mortgage in an amount equal to his bid to construct the project. In other words, a 100 percent mortgage. It is contemplated after the erection of the building that the military department would enter into an agreement to take over the project from the builder and use appropriations for quarters allowances to make the mortgage payments and to operate the project.

It is generally agreed that there is a dire need for additional military housing. The fundamental question for Congress to resolve at this point is whether to satisfy the need by continuing some form of FHA insurance program or by direct appropriations for construction of public quarters. Because the projects are intended to be constructed for, operated by, and to serve the military departments, we believe that they should be financed by direct appropriations rather than the indirect financing approach of FHA insurance.

However, if, as a matter of policy, Congress decides not to employ the direct appropriation method for building military housing projects, we suggest that the bill be changed in one very important respect. The bill would require FHA to insure a mortgage in the amount of 100 percent of the lowest acceptable bid for constructing the project as certified to it by the military establishments. The FHA would practically be a rubberstamp insurance operation without control or responsibility as to the standards of construction or operation of the project which is essential if FHA is to protect its insuring liability. It would be serving only as an accommodating facility in obtaining mortgage proceeds from private lenders, would be impotent throughout the transactions, yet be required to use its reserve funds to pay the mortgagee if the project fails.

Senator CAPEHART. You might add use of its reserve funds to pay the mortgagee if the project fails and that these mortgages will likewise contribute to the fund.

Mr. KANE. That is right. ance fee.

There would be a one-half percent insur

Senator CAPEHART. Yes. These mortgages will contribute to the reserve fund the same as all other FHA mortgages.

Mr. KANE. Yes. There would be the regular insurance fee. Senator CAPEHART. They would be entitled to participate because they will pay into the fund one-half of 1 percent each year. Mr. KANE. That is correct, sir.

Senator CAPEHART. Therefore, from that standpoint, they would be exactly the same as any other FHA mortgage?

Mr. KANE. That is correct, insofar as the fee mechanics is concerned. We think that, if the FHA is not to be given any responsibility, a desirable alternative would be to place the entire responsibility in

the Department of Defense, including the insuring or guaranteeing function.

Senator CAPEHART. In other words, just substitute the Defense Establishment for the FHA?

Mr. KANE. That is correct. If the Department of the Army and the other military establishments were to have the blanket authority to certify to the FHA to insure, then they should be given the responşibility to administer the fund.

Senator CAPEHART. And also receive the one-half of 1 percent the same as FHA would to create a fund for taking care of any losses? Mr. KANE. That is correct.

Mr. NEWMAN. You have got a situation, Mr. Chairman, on this program where the housing is going to be on a military reservation. It is not going to be downtown in Washington or out in Bethesdano normal residential section. And FHA is in the position of paying off and having a piece of property that is in the control of the Army and trying to sell it. It really could not sell it. It is really the Army's property.

Senator CAPEHART. Do you see anything against having the military do it-have them insure it?

Mr. KANE. I do not, Senator.

Mr. NEWMAN. No. They have guaranteed loans before.

Mr. KANE. I think it is a better way to do it. Let them have the complete responsibility.

Senator CAPEHART. Then, what it would amount to is they would award the contract to the lowest bidder based upon their own specifications for the houses?

Mr. KANE. That is correct.

Senator CAPEHART. They would include in their specifications, of course, that they were to organize a separate corporation for each. project and even, I think, designate the name. Then it would be built by the private builder who offered the lowest bid, and then the Defense Establishment, before they ordered the contract, of course, would make a contract with some private company like an insurance company or bank to insure the mortgage. When the project was completed they would advance the money for the mortgage so that the builder could be paid in full, at which time he would turn over the stock in the corporation and the project to the military. They then would act as their own insurer the same as FHA is doing at the moment in respect to all other FHA mortgages? Is that your recommendation? Mr. KANE. That is the mechanics of the bill.

Senator CAPEHART. Yes.

Mr. KANE. Of course, they will be taking out of one pocket the half percent and putting it into a little fund in another market. Senator CAPEHART. Yes; which it might be well to do.

Mr. KANE. That is right. But if the circumstances came where the fund was not large enough to pay off the mortgages because of numerous projects defaulting the fund probably would be insufficient. Senator CAPEHART. Would you like this plan better even though the Congress decided to give FHA let's say some authoritw as to the kind and type of houses and similar authority that they now have with respect to FHA on martgages?

Mr. KANE. Well, we have made a study of some of the Wherry Act projects which the FHA does insure and does have certain authority

with respect to the type of building and the operation of it by the owner. We have found that there has been a lack of coordination between the military departments and the FHA which is not good from an administrative standpoint in the Government.

Senator CAPEHART. Would you think this plan you are recommending here-putting the responsibility a hundred percent up to the military-would be a better plan even though we might give FHA a certain amount of authority in respect to the building and so forth?

Mr. KANE. I did not quite get that question, Senator.

Senator CAPEHART. Well, my question is: Suppose we write the bill giving FHA the same authority that they have now in respect to Wherry projects. Would you prefer that route to permitting the military to insure their own projects and keep the FHA completely out of it?

Mr. KANE. I think the FHA should be kept out of it.

Senator CAPEHART. That is an answer to my question. In other words, you think it would be better to keep them out of it? Mr. KANE. Yes.

Senator CAPEHART. Even though we gave them the same authority that they now have on Wherry?

Mr. KANE. That is correct.

Senator CAPEHART. I see.

Mr. KANE. Because there has been

Senator CAPEHART. I am beginning to agree to that too. I am rather inclined to think that is the better way to do it.

Mr. KANE. If you have divided responsibility there are always delays, there is always buck-passing in a program of that type.

Senator CAPEHART. There has never been any argument at all among anybody either in the administration or any Senators on this committee that is sure or anybody else about the need for doing this. The question has been how is the best way to do it. We introduced this bill, of course, knowing, like all legislation, that it certainly would not be perfect, that we would have to listen to the arguments and learn the facts as we went along.

Your recommendation is that you think appropriated houses would be better than this plan?

Mr. KANE. That is correct.

Senator CAPEHART. But if we do go this route you think it would be better to make the military their own insuring organization? Mr. KANE. They should have complete responsibility.

Senator CAPEHART. I am inclined to agree with you. I want a little more information and to study it further and get some more facts, but I am inclined

Mr. KANE. It would cause the military to give a second thought in planning and deactivation of a post, because they will have to nurse the insurance fund.

Senator CAPEHART. Can you not see some advantages to even this plan over direct appropriations, in that the military would be operating it as a business and have to pay it off out of earnings? They have to maintain it and

Senator SPARKMAN. They would pay it off out of appropriated funds if the insurance funds became depleted.

Senator CAPEHART. Yes; but they would have to handle them. I mean they have got to be responsible for them. They would be operating it as a business, because, while they pay for it out of appropriated funds, naturally, which are paid to the men in the service, nevertheless it does become their money, and they would have to operate it as a business.

Mr. KANE. Of course, you asked me a very important question, Senator, as to our preference with respect to providing housing with appropriated funds and this method. The first question that comes to my mind on this is: This is a precedent. If it goes through, where are we going to stop?

Senator CAPEHART. Well, that is

Senator SPARKMAN. Is that not the same proposal as the-Well, no, not exactly. I started to say the same as the school construction proposal and the road-building program. It is not the same, but it is similar.

Mr. KANE. It is similar but not exactly the same.

Senator SPARKMAN. Not exactly the same, because that was underwriting bonds, whereas this is really underwriting with your own appropriations.

Mr. KANE. That is right.

Senator CAPEHART. What is the difference between a 25-year mortgage that the Government might give and a 25-year bond that they might sell? They have both got to be repaid.

Mr. KANE. There is a slight difference, Senator.

Senator CAPEHART. What?

Senator SPARKMAN. One of them is carried in the national debt, and the other one is not.

Mr. KANE. That is right. That is one of the differences. And actually the mortgage

Senator CAPEHART. Other than that

Mr. KANE. The nonappropriated basis costs a little more.

Senator CAPEHART. What is the difference?

Senator SPARKMAN. I do not think you heard his last answer, Senator Capehart.

Mr. KANE. I am very chagrined to find myself in a position here where I am not in agreement with the Senator.

Senator CAPEHART. Of course, you and I are not in agreement that it will cost more. But let me say this to you: Is it not better for anyone to know exactly what it is going to cost them the next 25 years, than it is to start out on the basis that you are going to be able to sell bonds at an interest rate at the moment for 212 or 3 percent, and find in 2, 3, or 4 years from now they may be 6 and 7 percent? As a businessman, I prefer to know exactly where I stand for 25 years rather than

Mr. KANE. That is true. Now, in speaking of the Government bonds say at 3 percent as compared to the mortgage of 4 percent which on the amortized basis would appear to be less, actually you must keep in mind that the money that is to be used to pay off the mortgage will be borrowed by the Treasury

Senator CAPEHART. Money to pay off what?

Mr. KANE. The military will make the payments on the principal and interest, and in order to do that the Treasury will be borrowing