Senator LEHMAN. It is very possible that a careful reading on my part of the bill itself will give me the answers.

Senator CAPEHART. No. I think your questions are very good. Senator LEHMAN. But what would happen in case of default? Senator CAPEHART. In case of default of the bonds? Well, FHA of course would reimburse the mortgage company just as they do now on all FHA mortgages. Then we may want to go further and take FHA out of a portion of that and say that the Air Force or the Navy or the Army might do it. But under the bill as it is written at the moment the FHA does it just like they do with any other default on an FHA mortgage.

Senator SPARK MAN. The purpose of the insurance premium is to build a reserve to take care of that.

Senator CAPEHART. That is right.

Senator SPARKMAN. So it seems to me you probably want to retain that feature and not make it a direct burden on the armed services in case of default. Assuming, of course, you reserve a fee sufficient to handle it.

Senator CAPEHART. In that respect it is intended to be the same, although maybe the bill is not drawn that way, as any other FHA mortgage. They will pay one-half of 1 percent insurance premium on these mortgages just as other FHA participants do.

Now here is another point.

Senator SPARKMAN. May I follow up those questions by Senator Lehman to bring out a few points?

Senator CAPEHART. Surely.

Senator SPARKMAN. Who would pass upon the necessity for this housing?

Senator CAPEHART. The Secretary of Defense and the three services. Senator SPARKMAN. Has that been the procedure followed under the Wherry Act?

Senator CAPEHART. That was the procedure followed under the Wherry Act, excepting that FHA had more to say under the Wherry Act than they do under this bill as it is written.

Senator SPARKMAN. There was considerable confusion over the Wherry Act in the beginning when they were trying to get started. Senator CAPEHART. There was too much confusion because there were too many people involved. There was the FHA, and the sponsor, and in many cases the builder. The sponsor rented properties and handled them and it was just doomed to failure from the very beginning for that reason.

Senator SPARKMAN. Will the Secretary of Defense be required to certify that the installation at which this housing was to be built is a permanent installation?

Senator CAPEHART. Yes. If the bill is not strong enough in that respect we must make it strong enough to make certain they never build any projects that are not needed, and never build them where it might be a temporary camp. It must be done on a businesslike, practical basis.

Also it is not a part of the bill now, but I am sure we ought to make it a part of the bill, and that is the Defense Establishment agrees to take over for the unpaid balance any of these Wherry projects sitting out there now that may go in default. I think we have to write that

into this bill too. They would take them over on the same basis as the bill would permit them to build new ones.

Do you follow me on that?

Senator SPARKMAN. Yes.

Senator CAPEHART. I think it is one thing we will want to give a lot of thought to to writing into this bill, because I do not want the services to be duplicating anything. Let us take the Air Force again and take Mather Field at Sacramento, with which I am familiar. They have a very fine Wherry project out there. We would not want the Air Force to say, "We want another 1,000 houses at Mather Field under this bill," and then have them build them and then have the Wherry project, which is a very good one, fail. We are not going to permit that. If the bill does not have sufficient language in it to stop that then we must write it in. If that Wherry project out there would fail of its own weight, and if they get into trouble, then I think we ought to write something into this bill that the Defense Establishment may, if they want to, take those over. Of course, they cannot build any new projects if they do not want to and we should not force them to do it. But we certainly ought to stop them from building any new houses under this bill as long as there was a defaulted Wherry project as a part of that particular camp. I do not think there is any question but what we ought to do that.

Senator SPARKMAN. I do not have in mind any Wherry project which was left stranded. Possibly there have been some, and undoubtedly there have been some at the closing of camps. However, I have known of some title IX projects which were left high and dry as a result of camps closing. Do you think sufficient protection can be written into the bill to prevent that?

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Senator CAPEHART. Your problem there would be no greater than you had direct appropriations. It is just a matter of judgment. Senator SPARKMAN. Let me say in regard to direct appropriations that I have never personally favored a direct appropriation for the building of houses on Army posts, except around posts where we have few personnel which was necessary for the maintenance of the post. I think that is all right. But I remember Senator Maybank frequently made reference on the floor of the Senate to the fact, and he did it out of his experience both as chairman of this committee and as a member of the Subcommittee on Military Appropriations, that direct building by the military of housing was always entirely too expensive. I think he had the figures to justify that statement too.

Senator CAPEHART. Really in respect to this matter we ought to do everything we can possibly do to write into this bill that the Defense Establishments must be very, very careful and never build at any point where it may be just a temporary camp. We have to be very, very careful writing into it that they do not overbuild. We have to put all of the language we can in the bill and in the report to assure they handle it in a practical and sensible way.

It is not the intention of this bill to get a lot of houses that are going to be idle and vacant. We have to make sure of that. We are interested in only one thing-good housing in each of these permanent camps for the service people, so that they can get away from this bad situation which we have at the present moment.

Senator SPARKMAN. Do you not think there is merit in the contention of the General Accounting Office that the FHA, if it is to carry

the insurance, ought to have a little more discretion in determining whether or not it is an insurable project?

Senator CAPEHART. Oh, I am not going to arbue about that particularly. I think maybe they should. I do not know that I care particularly, excepting that I do not want to see the same amount of redtape we had under the Wherry Act, because it will tie this whole business up so that we will get no place. I think the services would be better qualified to know the kinds and types of houses they want than FHA. My observation of FHA is that they are always complaining they only have a handful of inspectors, and only a handful of employees. I do not think they go out and do much inspecting on these new buildings. I do not think with the amount of work they have to do and have had to do in the past that they do too much inspecting. But I have no objection to that at all if we take away some of the redtape so that we get the job done. That is all I want to do. Maybe we ought to do that.

I would like to leave it at that and hear from FHA and these people to see what they have to say on it.

Here is an objection. The bill makes FHA a rubber stamp with no discretion as to construction standards or operation of the project. We just talked about that.

Here is another one. Since the bill insures the project 100 percent, FHA should be allowed to withhold approval if proposed construction cost is too high. Well, it does not insure the project mortgage 100 percent. It does not do that. What it insures is the lowest bid of the builder who is awarded the contract to build it. That is what it amounts to. The Government is going to own it, and they do own it, and they take title to it. It is subject to the mortgage when finished. It is not 100 percent or 90 percent, but it is the actual cost, which was based on the low bid and based on the specifications set up by the service.

It is just as I said a moment ago, like awarding a contract to build 100 airplanes, or 100 tanks, or 1,000 pairs of shoes, or something else. Senator SPARKMAN. Of course, in effect you would have the Government paying insurance to one of its agencies to carry the risk.

Senator CAPEHART. That is right.

Senator SPARKMAN. But the risk would be on the Government all the time.

Senator CAPEHART. Except that we must remember that the servicemen who pay the rent pay for the whole business.

Senator SPARKMAN. That is the law today. If they live in quarters they forfeit their allowances.

Senator CAPEHART. Under this bill you could either—I think it is better for the services just simply to deduct it rather than pay it to them and let them pay it back to them again, but that is something we might want to check into also.

Senator SPARKMAN. That is the system now. They are just withholding it.

Senator LEHMAN. May I ask you a question?

Senator CAPEHART. Yes.

Senator LEHMAN. Is the situation such that if a service decided to go ahead and ask for bids on 1,000 or 2,000 buildings, the FHA guarantees the mortgages for 100 percent of the bid price?

Senator CAPEHART. They guarantee the actual cost of whatever the bid was.

Senator LEHMAN. Not the actual cost, but the bid price?

Senator CAPEHART. The bid.

Senator LEHMAN. I wonder if there is any objection to giving FHA the authority to disapprove the bids or disapprove the project on which they have to guarantee the mortgages when the costs will be too high?

Senator CAPEHART. That is a matter we should discuss and want to discuss. I have no particular objection to this, excepting that we do not want to see the matter tied up in a lot of red tape so that we do not get the job done.

Senator LEHMAN. I have just one other question. It is subject to discussion, of course, but say a man makes a bid for a certain number of units at $13,500 per unit. The FHA guarantees the mortgage up to the cost of the bid or, rather up to the amount of the bid at $13,500. Then the builder erects those houses, let us say for $10,000. Let us say there are a number of instances where the situation varies as much as that.

Senator CAPEHART. In this case since he no longer will own the property, it is different from the Wherry Act. Under Wherry Act and section 608 when we were talking about windfall profits, the builders got not only the proceeds, but they continued to own the property. In this instance you have to keep in mind it is exactly the same as though the Government gave a contract to build 1,000 tanks. When the tanks are completed the Government owns them. If the tank manufacturer makes a profit, it is something he should get. He is subject to renegotiation on it.

Also, he is subject, of course, to the regular normal taxes.

Under this plan the builder would never be permitted or entitled to pay taxes on the capital gains basis. It would always be normal taxes.

The builder or contractor and the Defense Establishment would have exactly the same status that they have now with any other contractor that they do business with. It is just the same. If he makes too much profit you take it away from him through renegotiation.

Senator LEHMAN. But the mortgage stands for the full amount? Senator CAPEHART. But you must keep in mind that the Government owns it. I do not want to fool anybody at all. This is the Government doing business with the Government. That is all. It is just a method of maintaining as far as we can the private enterprise system whereby private enterprise would build them and finance them and the Government would run and operate them just like they do the tanks and Air Corps materiel.

By this route we get private enterprise into it. The other route, of course, would be by direct appropriation. Then, of course, private enterprise would build the project also but I think I have proven that the direct appropriation route will cost more in interest than the mortgage route.

Under this plan in this bill you can start almost immediately getting houses for the boys, which I do not think you can do under an appropriation.

Senator IVES. Senator Capehart, do you feel this bill is foolproof against windfall profits?

Senator CAPEHART. It is just as foolproof against windfall profits as building tanks, or building airplanes, or building ships, or anything else is. You award the contract to the lowest bidder and expect him to make a profit. But if he makes too much you take it away from him in renegotiation. You always have normal taxes on any earnings here. You do not have that argument we got into on section 608 and the Wherry Act as to whether or not it was the capital gains tax. Any profit they make they will pay normal taxes on, which at the moment is 52 percent. In addition they come under the Renegotiation Act. If they do not, they should. We will write it into the bill.

The status is just exactly, from that standpoint, the same as it is with the Government ordering anything else.

Senator LEHMAN. I still do not quite understand. There may be an explanation, as to why you feel convinced there cannot be any windfall profits in this bill. Let me give you an example of it, or a few examples.

A bid is accepted for $13,500 and the sponsor guarantees it in that amount. The cost is demonstrated to be only $10,000.

Senator CAPEHART. That is right. You mean he bids $13,500 and builds it for $10,000?

Senator LEHMAN. That is right.

Senator CAPEHART. He makes $3,500, which would be 35 percent. Under the Renegotiation Act I am sure they will renegotiate him down probably to no more than 13, or 14, or 15 percent.

Senator LEHMAN. That is true, but the mortgage would still stand in the full amount of $13,000 or $13,500.

Senator CAPEHART. That is right. But that mortgage at no time is more than the Army, Navy, and Air Corps will prove to you they can easily amortize these mortgages at and have money left over from the rental allowances that the boys are getting now.

We want the contractor to make a profit. We want him to make the same kind of profit that any contractor makes in doing business with the Government. We do not want him to make an excessive profit. That is why we have the Renegotiation Act. It is so that if somebody does make a mistake and he makes an excessive profit you renegotiate him down to a fair and normal profit. The purpose of the Renegotiation Act is to take care of those mistakes.

Senator LEHMAN. I want him to make a profit too, of course, but on the other hand if he makes the profit and a mortgage is placed on that house of $13,500 and the cost is only $10,000, the mortgage remains in existence throughout the life of the property.

Senator CAPEHART. That is right.

Senator LEHMAN. And the rental for that house will be based on the mortgage.

Senator CAPEHART. Yes.

Senator LEHMAN. Does that not mean that the purchaser of the house will have to pay a higher rental than he would ordinarily pay? Senator CAPEHART. Yes. I think that will be true, but I think you will find on talking to service people that the rental allowances are more than ample to take care of it.

Senator SPARK MAN. By the way, while you are talking about that rental, I would like to call the attention of the Senator from Maine