I have before me here some charts which we have made up in the past from which I would like to talk. These charts have been developed from information secured by us during the present spring from the three military services. They are as accurate as a chart of this kind can be. We do not profess to say they are exact to 1 or even 100 or more units, but we do say they give you the general picture. We have started out by using the projected military strength for June 30, 1956, of 2,859,000 men. We have secured the information from the services as to what their participation will be in that number, and as you will note on page 1, there is a total of 1,027,000 in the first column, which is the Army, consisting of 113,400 officers and 911,000 enlisted men. Generally the Navy consists of 857,000 and the Air Force of 975,000. That is the basis on which we have developed the subsequent figures. We know from experience about 90 percent of our military strength consists of enlisted men and about 10 percent officers. There is some variation, but that is the general rule. We also know approximately 80 percent, in the case of the Air Force 85 percent, of the officers are married. In each case approximately 20 percent of the enlisted men are married. From those figures, which are well substantiated, we developed certain gross housing requirements which are shown in the righthand side of chart 1. In the case of the Army, 230,000 units, consisting of 88,000 for officers and 134,000 for enlisted men; in the case of the Navy and the Marine Corps, a total of 227,000 units; and in the case of the Air Force, 270,460, including 113,000 officers and 154,000 enlisted men. We believe that gives us our gross requirement of the men and officers entitled by permanent law to public quarters. Senator CAPEHART. A total of 727,000? Secretary FLOETE. Yes, sir. Senator CAPEHART. How many do you have at the moment? Senator CAPEHART. I see. Secretary FLOETE. On chart 2 that relates to the Army only. It starts out with 230,000 gross requirements and shows 88,000 officers and 134,000 enlisted men. Then we have as assets presently owned, 81,800 in the case of the Army, of which 52,000 are permanent public quarters which Congress has heretofore appropriated funds to build. There are 21,000 Wherry Act and rental guarantees. There are only very few of those in New York, and a very small additional number. That gives us a deficit of the difference between 230,000 and 81,800, or 148,000 units. That is before providing for any civilian support. Admittedly, the amount of civilian support is a tough thing to determine. You actually cannot determine it unless you go to a specific installation and make a survey to determine at that special or particular time that there is so much civilian support. Senator SPARKMAN. When you speak of civilian support, do you mean units that are available in the community for officer occupancy? Secretary FLOETE. Yes, sir. They are privately owned. Senator SPARKMAN. For occupancy by married personnel, officers and enlisted men? Secretary FLOETE. Yes, sir. And it varies very considerably. But we have fond from our experience under the Wherry Act and also under last year's Appropriation Act that it runs some place around 45 to 50 percent. We have used the general figure of 45 percent. We admit it is not sound, but it is close enough, I believe, again to give you a proper picture. Senator PAYNE. Mr. Chairman, if I may just ask a question there? Senator SPARKMAN. Yes, Senator Payne. Senator PAYNE. In that figure on community support-and the same would be true on the other charts that are included-is the determination made that the facilities that would be available through private sources in the communities or surrounding areas would be both adequate and at a rate of rental that would be in line with that which the enlisted and officer personnel would be able to afford without having them being "fleeced?" Secretary FLOETE. That is right. We would use those criteria in determining it. Senator PAYNE. Right. Senator CAPEHART. This does not give effect, however, to certain sections of the country where there is a tremendous deficiency on the part of the community services, like camps that are isolated, or camps out in thinly populated sections. Secretary FLOETE. That is correct. Senator CAPEHART. You make no effort to give any effect to that sort of thing? Secretary FLOETE. We feel it falls within 45 percent. Senator CAPEHART. The overall total, but you may have exaggerated situations. Secretary FLOETE. Oh, yes. Senator CAPEHART. At given points. Secretary FLOETE. That is correct. Senator CAPEHART. Because the camp has 50,000 servicemen in it and it is supported by a town of perhaps 10,000, or a series of little towns numbering a few thousand each, 50 miles away. Secretary FLOETE. Yes. Senator CAPEHART. You have a lot of situations like that, do you not? Secretary FLOETE. But we still think it averages out at about that. Senator CAPEHART. I understand that, but you do not have the houses, though, in those isolated sections. Secretary FLOETE. That is right. Senator CAPEHART. For example, it would be pretty hard to make an argument that in Washington, D. C., with a camp within 5 miles of Washington, D. C., you would not have a lot of houses available. Secretary FLOETE. That is right. Senator CAPEHART. They might not be the proper kind and they may be a little too expensive, but I would say the boys would be able to find some place to live. But taking isolated sections, perhaps in Wisconsin, Oklahoma, or portions of Texas, or up in Senator Payne's State of Maine, or other points, they are just not available regardless of the cost or regardless duction must be made in the new risk assumed. These terms represent liberal lending and exceed the terms typically offered without insurance. It seems irrefutable that present reserves for FHA are grossly inadequate. This inadequacy has been pointed out by the Hoover Commission, the Hoover task force, the President's Advisory Committee on Housing, and the FHA itself. According to exhibit 7 of the President's Advisory Committee on Housing based on figures supplied by the FHA, section 203 mutual mortgage insurance fund has estimated available surpluses of $151,900,000 against unpaid balances outstanding of $9,196,100,000 as of June 30, 1953. This is a reserve ratio of approximately 1.6 percent. The FHA itself estimated the reserve requirements at that time to be $245,500,000, indicating approximately a $100 million shortage. Savings and loan associations have reserves against conventional loans of approximately 10 percent. The following exchange before the Senate Banking Committee in 1953 bears out the point: "Senator DOUGLAS. *** Would you regard this is a very adequate reserve, 11⁄2 percent, against maintaining 83 percent of value at the time of construction? "Mr. HOLLYDAY. No, sir, but I do think you have to bear in mind that we get back properties, and we are not under enforced liquidation. "Senator DOUGLAS. I understand, but after all, you only have a sector of the real-estate market. "Mr. HOLLYDAY. Yes. "Senator DOUGLAS. Suppose there is a general decline in the real-estate market? "Mr. COLE. That is one of the reasons why we suggest in this bill that we strengthen the reserves." At another point Commissioner Hollyday, describing an FHA study of possible losses, said: "The difference of $77,399,716 constitutes the prospective liability of the United States Treasury for payment of MMI fund debentures which the MMI system would have issued but been unable to redeem if a depression had started at the beginning of this year." In the report of the President's Housing Advisory Committee you will find this comment: "The subcommittee has been informed that in the event of an immediate depression the FHA surplus accounts in the mutual mortgage insurance system might be as much as $70 million to $100 million or more below the amounts required by the most serious assumed standards of losses. This amount may be considered an approximate measure of the inadequacy of the accumulation of assets resulting from a more than normal period of prosperity." The Hoover Task Force on Lending Agencies had this to say: "While FHA is sometimes represented as being one of the business-type Government corporations, the fact is generally conceded that there would be no market for the loans which it insures were it not for the Government guaranty behind the debentures a lender will receive in the event that he forecloses an FHA-insured loan. So there is a contingent liability of the Government with respect to the total amount of FHA-insured loans outstanding at any time, less the amount of loss reserves that have been accumulated by FHA to meet the contingencies. The long-range adequacy of the reserves for that purpose has been questioned by thoughtful students of the subject." The Hoover Commission Report on Lending Agencies contains this comment: "As noted earlier, the $17,921,863,000 of mortgages insured by the Federal Housing Administration as of June 30, 1954, is supported by reserves and surplus of $338,826,000 or a reserve of about 2 percent which compares with a reserve generally carried by private savings banks on outstanding home loans of 6 percent. It seems to us that the adequacy of Federal Housing Administration reserves should be thoroughly explored, particularly in view of the low minimum equities which have been required in many of these loans and guaranties." Thus FHA reserves are actuarially inadequate. The two available remedies are to increase reserves and decrease risk. The inadequacy is so great and so obvious that both steps should be taken. The recommended cutback in maximum terms would sharply reduce the FHA's risk since it will require 50 to 100 percent greater equity by homeowners and speed amortization of loans. For instance, on a $10,000 house, a 95 percent loan at the end of 5 years will have an unpaid balance of $8,721. A 90 percent 25-year loan will have been paid down to $7,974. In the latter case the loan would be safe against a 20 percent drop in property values; in the former case against a 13 percent drop. To put it another way, a 25 percent drop in values would result in respective losses on the loans of $474 or $1,221, the slight change in terms making a 3 to 1 difference in ultimate loss. 3. Increase the premium to 1 percent.-With FHA reserves totaling less than 2 percent of the unpaid balance of loans, income must be increased to permit greater allocations to reserves. Much of the present one-half of 1 percent premium goes for administrative expenses and even an increase to 1 percent would leave for reserves considerably less than 1 percent. Savings and loan associations which build their own reserves have in recent years been allocating in excess of 1 percent solely for losses. 4. Limit claim payments to 90 percent of unpaid balance (90-10 coinsurance).-Lenders should participate in some of the risk of title II loans just as on title I loans. This makes for better appraisals, supervision, and tighter processing. A lender who is not willing to assume up to a maximum of 10 percent loss on a loan should stay out of the lending business. 5. Eliminate the Federal guaranty of debentures.—As the reserves and the risk are brought into line the debentures will lean on the Federal guaranty to a lesser and lesser degree. The Federal guaranty of the debentures should be dropped just as soon as such action can be taken without drastic consequences to the FHA program. II. Steps which can be taken immediately 1. Terminate participating dividends to borrowers. See above. 2. Reduce loan terms to 80 percent and 20 years for existing houses and 95 percent of first $7,000 and 70 percent of excess for new houses for 25-year maturities (30 years for houses costing less than $10,000). See above. These suggested terms represent approximately the terms offered prior to 1954. 3. Make a one-time charge to the borrower of 3 percent of the excess of the loan over 60 percent of value, such charge to be added to the loan and amortized over the first 24 months. If it is not feasible to immediately adjust the premium, then a quick way to produce necessary income to add to reserves is to make a flat charge based on the risk portion of the loan. On a $10,000 home this would amount to a charge of about $90 to be prorated over 2 years, which is less than $4 a month, but it would quickly add millions of dollars to FHA reserves. 4. Pay 100 percent of claims only to those lenders whose loss claims after effective date are less than 50 percent of premiums paid after effective date. Lenders exceeding this ratio would receive 95 percent of unpaid balance. (This is modified 95-5 percent coinsurance.) This provides a very minimum of lender participation and has some salutary effect on improving lenders' supervision and processing of loans. Senator SPARKMAN. Next we will have Mr. Arthur J. Packard, of the American Hotel Association. Good morning, Mr. Packard. We are glad to have you here. We have your prepared statement. Proceed, if you will. Multifamily housing mortgage limitation STATEMENT OF ARTHUR J. PACKARD ON BEHALF OF THE AMERICAN HOTEL ASSOCIATION Mr. PACKARD. Thank you very much. I will take very little time. I am Arthur J. Packard, and I am chairman of the American Hotel Association governmental affairs committee. First, I want to thank you gentlemen most sincerly for your action in incorporating section 513 into the 1954 Housing Act. In the main, we think this will ultimately provide the relief desired. It should also terminate much of the unfair competition which we have been experiencing from Government-financed projects which were found to be renting units transiently with hotel services. We shall long remember and appreciate the consideration which we received from your committee last year; and you, Senator Capehart, of course, were particularly familiar and sympathetic to our problem because of the case in Indianapolis with which you are familiar. I am glad to report that we feel the Department of Justice and the Federal Housing Administration have been diligent in enforcing the provisions of section 513 which were enacted last year. However, this objectionable practice of transient rentals has not yet been completely stopped. But when three cases, now before the Federal courts, are decided, we hope that the pattern of procedure will have clearly emerged, and that the controls which the Congress established will begin to be effective. Even though this is a very serious business to the hotel industry, the preliminary litigation is not without its paradoxical angles. For example, the Commissioner of FHA ordered one apartment building to cease and desist from its practice of transient rentals, whereupon the FHA borrower brought action in Federal court to compel the Commissioner to desist from further harassment and annoyance in the operation of his property. But with the Department of Justice depending the case, I hope the Commissioner has not missed any sleep over that action. I would like very much to recite a few observations to your committee today, during the brief time that I will require for this statement. First, one of the points we stressed in our testimony last year was the fact that there are roughly 1 million hotel rooms throughout the country. Compared with this number, we understand that there are approximately 500,000 units in FHA projects which were financed. under section 608 and section 207. These federally financed facilities could conceivably take over our entire business, if permitted generally to rent on a transient basis. However, Congress took care of that situation last year by forbidding such transient rentals, except under certain circumstances. But today there are already several bills before the 84th Congress today which would exempt certain FHA projects from section 513, and permit transient rentals by those certain properties. And even though it be said, in some cases, that the borrowers are in difficult financial straits, may I observe that the hotel industry, too, finds itself in difficulty. Nationally, our occupancy has been steadily downward ever since 1947. And we will not soon forget that in the decade of the 1930's, 82 percent of all hotels either went bankrupt or were obliged to refinance. And this happened, if you please, without competition from Government-financed properties which now represent a potential competitor with 50 percent of our total available space. Second, we note that Administrator Albert Cole recommended to your committee that the mortgage limitation on multifamily housing projects be raised from $5 million to $12,500,000. There probably are valid reasons why Mr. Cole lodged this recommendation with the Congress. But I should like to point out that there are probably no more than 25 hotels in all America, whose assessed valuation today would equal $12,500,000. You are, therefore, thinking in terms of building properties which generally surpass anything known in the hotel field. When you are dealing in sums of that size, gentlemen, I believe that a builder would find himself able, for the first time, to finance the construction of one of these properties in the Chicago Loop, or the very heart of the downtown business area in almost any American city. Thus could be created an establishment which could very simply be converted to hotel operation later and largely supplant a number of |