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Washington, D.C. The subcommittee met, pursuant to recess, in room 301, Senate Office Building, at 10:15 a. m., Senator John Sparkman, chairman of the subcommittee, presiding.

Present: Senators Sparkman, Lehman, Capehart, Bush, and Payne. Senator SPARKMAN. Let the committee come to order, please.

Mr. Cole, will you and your associates come around, please! When we stopped yesterday you lacked something of having finished your direct statement. You also said you would comment on the special bills or extra bills. So you can proceed and handle it in your own way this morning



Mr. COLE. Thank you, Mr. Chairman.

Subject to the committee’s approval, it would seem appropriate that perhaps I would comment on the bills introduced by the Members of the Senate now and then let the committee return to the statement of the Home Loan Bank Board.

Senator SPARKMAN. Fine. We will proceed that way.
Mr. COLE. If that is satisfactory.

Mr. Chairman and members of the committee, in addition to my testimony on the Housing Amendments of 1955 (S. 1800), your committee has requested statements on several other bills which you have under consideration. Farm housing

The first two of these bills scheduled for hearings are S. 789 and S. 1022, which relate to farm housing programs administered in the Department of Agriculture. S. 789 would continue its programs of loans and subsidies to farm housing and buildings authorized by title V of the Housing Act of 1949. The other bill, S. 1022, would continue the authority for such loans to farm owners for housing and buildings on adequate farms, and would add new provisions authorizing the Department of Agriculture to insure such loans. However, it would terminate the authority to make loans and annual contributions for housing and buildings on "potentially” adequate farms, and would terminate the authority for loans and grants to assist minor improvements to farm housing and buildings.

We are of course aware of the need for providing and improving farm homes. Inadequate or dilapidated housing exists in rural as well as urban areas. Mortgage insurance and other programs of the Housing Agency designed to assist in improving housing conditions are frequently not adaptable to the special financing problems involved in the construction or improvement of farm homes. These problems are closely related to other farm credit matters which are the principal concern of the Department of Agriculture. However, we are interested in knowing that adequate statutory authority exists for credit assistance to housing in rural areas which is comparable to that available for housing in urban areas. It is our understanding that the Farmers' Home Administration has authority and funds to meet the credit needs of persons who own and operate family-type farms and wish to construct, repair, or remodel buildings on those farms. As this program is administered in the Department of Agriculture, it is in a better position to advise you whether any additional legislation is necessary to meet credit needs for the provision or improvement of farm homes.

I will pause if the chairman desires to ask questions at any time.
Senator SPARKMAN. Are there any questions?
Senator CAPEHART. I think you had better take them up in order.

Senator SPARKMAN. I want to say that Mr. McLeish will be here later,

Mr. COLE. I will continue then. Military housing

Another bill being considered by your committee is S. 1501, a bill for the provision of military housing, introduced by Senator Capehart and a number of other members of this committee and the Senate.

The bill would authorize the secretaries of the Army, Navy, and Air Force to enter into contracts with builders for the construction of housing for military personnel on lands owned or leased by the United States and situated on or near military installations. Contracts would be made with builders who had submitted the lowest acceptable bid for constructing the housing. The builder would finance the construction of the housing through mortgage borrowings which would be insured by the Federal Housing Administration under a new title X to be added to the National Housing Act by the bill. Immediately after construction, the housing would be acquired by the respective Secretary and be maintained and operated by the military. The Secretary would be authorized to assume the obligation to pay off the mortgage which the builder placed on the property either during construction or upon completion, and prior to transferring the housing to the Government. The housing would be assigned to the military personnel in the same manner as other public quarters are assigned. According to statements of the sponsors of the bill, the military services would use the quarters allowance to pay the mortgage.

As I understand the purposes of this bill, it is intended basically to give the miiltary services a means of obtaining, through the use of mortgage insurance, additional family housing to be used as public quarters with all of the other advantages to the military which are now available under direct Federal construction. Because of this very desirable objective and the recognized urgent need of the military for additional family housing, our Agency and others in the executive branch have given very careful study to S. 1501 and possible alternatives. It is my understanding that, to achieve the objective of full management and control of military housing by the Department of Defense, direct construction by the Department is less costly and more practical administratively than any other method so far developed. The Department of Defense will, of course, be in a better position to advise you on the need for controlling occupancy

in the projects and to otherwise exercise rights normally possessed by the owner of rental property.

Several features of S. 1501 have given us concern. While construction under the bill would be financed initially by borrowings from private mortgage lenders, the payment of the mortgage would apparently be assumed by the military as soon as the construction is completed. The military would then have the obligation to repay the amount of the mortgage from quarters' allowances or other funds, and there would be, in effect, a borrowing by the Government in this manner in place of regular borrowings by the Treasury. The only legal difference between this proposal and Treasury borrowings, if any, is that the obligation would be a mortgage debt of the military department instead of a bond issue by the Treasury. However, under the proposed arrangement, the Government would be paying a maximum interest rate of 4 percent, which would mean that the interest costs would be higher than if the housing had been financed initially from Government borrowings through the regular governmental financing channels. Even long-term Treasury bonds (maturing in about 28 years) now have a market yield of only 2.89 percent, which is substantially lower than the mortgage interest rate contemplated by S. 1501 for mortgages having maturities of only 25 years. Added to the increased interest costs would be the expenses incident to FHA participation, as well as the administrative expenses of making payments on the mortgages through the utilization of quarters' allowances withheld from the military personnel assigned to the housing:

It is true that the bill contemplates the technical assumption of the mortgage after construction is completed, while normally governmental debt, if any, is incurred when construction is started. This difference is purely technical, because the start of construction makes it clear that the Government will in fact soon be required to assume an obligation equal to the cost of construction. The position of FHA insurance in the operation has also given

It is difficult to see the necessity for or the advantages which would follow from FHA insuring the payment of mortgages which the Federal Government will assume. Under the bill the FHA would have none of its usual underwriting or inspection functions to perform, as the military services would be responsible not only for determining the need for the housing but also for deter


us concern.

mining the responsibility and reliability of the builder, for inspecting the properties during construction, for determining the acceptability of title, for fixing rents, and approving methods of operation, and for otherwise exercising supervision and

control over construction and operation of the housing projects. While it appears that the FHA would be expected to acquire preferred stock in the builder corporations and to establish eligibility requirements in the form of administrative rules, it is not clear that these actions would serve any useful purpose.

Senator CAPEHART. Would you prefer to get completely out of this? Mr. COLE. Yes. FHA would.

Senator CAPEHART. You do not want anything to do with it at all. Is that true of the Federal Home Loan Bank too, and other agencies? We put them all together at one time so that they could be in a position where they could be coordinated. Now are you saying to us you

do not want them to be centralized in your agency? Mr. COLE. No, Senator. If you would give the FHA and Housing Administrator the authority to coordinate and supervise, that is a different problem. Our problem here, Senator, is you have merely given FHA the authority to insure, and no other authority. We would have no control over the market and no control over the supervision or coordination of this activity at all under this bill. All of the decisions would be made by the military as to where and how to insure, and under what conditions, and under what terms. FHA would have none of that responsibility or authority. Not having that, then we would say it becomes a military matter and a military housing bill. If so, then we think it should be that way.

Senator CAPEHART. You think we ought to set up a military insurance; let the military insure their own mortgages and handle them?

Mr. COLE. We think under this bill, Senator, you have set up a guaranty on the housing on the part of the military. We see no reason why the FHA should insure the guaranty on the part of the Department of Defense. I have no objection to the military doing this if it is the desire, or if the Congress feels that is the thing they should do. Whatever the military and Congress believe should be done to provide adequate housing, should be done. I

agree with the Senator parenthetically that housing is important and necessary for the personnel of the armed services. The job has not been done as well as it should have been done in the past, and I think it is fine that the Senator is interested in this problem, and that the Congress is interested in it. It is important. But I do have the responsibility of pointing out we do not believe that it is necessary for FHA to insure mortgages guaranteed by the Department of Defense.

Senator CAPEHART. What we are trying to keep away from is a lot of redtape that ties the whole business up.

Mr. COLE. I would certainly agree with that objective.

Senator CAPEHART. We were under the impression that FHA could insure these mortgages and handle that detail. That you would be perfectly willing to do it and would desire to do it in order that you might coordinate all housing in one spot. Now you indicate that you want to see FHA business in your office decentralized. You want military housing to be handled by the military. I think it would be very simple to do that.

Mr. COLE. I think it would be very simple to do that.
Senator CAPEHART. If that is what you want.
Mr. COLE. We want one or the other.

Senator CAPEHART. But I think likewise you weaken the purpose of the law originally setting up your office, which was that you wanted all housing matters in one spot, in which all could be handled.

Mr. COLE. That may be true, but you are not doing that in this legislation. You are not giving FHA, or the Office of the Administrator, any authority

Senator CAPEHART. Suppose we gave you some authority in these things?

Mr. COLE. We would be willing to look at it very carefully, because one of the things which concerns me very much is the difficulty which we have encountered in the Wherry Act housing, and that is the inability of FHA or the Office of the Administrator to exercise authority and control over this housing with respect to its impact on the private housing market. This is not provided for in this bill.

Senator ČAPEHART. What?
Mr. COLE. I say it is not provided for in this bill.
Senator CAPEHART. What is not provided for?

Mr. COLE. Market analysis and control of the market to determine the impact of military housing on the private market and the housing insured by FHA and guaranteed by VA.

Senator CAPEHART. There is no question but what we will have an amendment prepared. We always intended to. There is no question but what we have to tie it into existing Wherry housing. If any of them go into default the military have to take them over and operate them under this bill. That will be made a part of the bill. There is no question about that and there is no question but what we have to tie it up so that the military will not be building units they do not need, that they will not be building units which will cause the default of existing FHA housing:

Mr. COLE. If the Congress would be interested in that approach

Senator CAPEHART. I think it is an insult to our intelligence to say we did not intend to do that. We do intend to do it.

Mr. COLE. Certainly none such was intended, naturally.

Senator CAPEHART. A lot of people use that as an argument against this bill. We intended to do that from the very beginning, and always intended to do it. Frankly, it looks to me as though your objections to this bill are very, very weak. First you talk about it costing more. It is not going to cost the Government anything. It is going to cost the boys who pay the rent.

Mr. COLE. The matter of cost is not so much a concern from my viewpoint as an Administrator. This is a matter for the Congress and military to determine. I point out that the amortization tables on mortgages and interest on amortizing bonds are rather similar. Whether or not it would be more costly is a matter for considerable hearings to be undertaken in order to determine it.

Senator CAPEHART. Any good businessman, if you were going to do this, would take a 25-year mortgage at 4 percent and know exactly what it was going to cost him for that 25 years.

Mr. COLE. That is right.

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