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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 CAPEITART. A total of 727,000 ?
Secretary FLOETE. Yes, sir.
Senator CAPEHART. How many


have at the moment? Secretary FLOETE. That follows in the subsequent sheets. 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.

4. Limit claim payments to 90 percent of unpaid balance (90–10 coinsurance).

5. Eliminate the Federal guaranty of debentures. II. Steps which can be taken immediately

1. Terminate participating dividends to borrowers.

2. Reduce loan terms to 80 percent, 20 years for existing houses and 95 percent of first $7,000 and 70 percent of excess for new houses for 25-year maturities.

3. Make a one-time charge to the borrower of 3 percent of the excess of loan over 60 percent of value, such charge to be added to the loan and amortized over the first 24 months.

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 a modified 95–5 percent coinsurance).



The United States Savings and Loan League believes that a sound FHA program can definitely make a contribution to housing. The benefits and advantages of the FHA plan were intended to result from the insurance principle of spreading the risk over a tremendous number of widely divergent loans and borrowers. Benefits were not intended by Congress to stem from Federal subsidy.

In actual practice the insurance principle has been so badly diluted that the program is not self-sufficient and requires a heavy backstopping from the Treasury. The reserves of about 2 percent are grossly inadequate compared to private lenders with reserves of around 10 percent. If the risks assumed by the FHA are brought in line with the reserves, or vice versa, the program will become self-sufficient, will conform to congressional intent, and will be immune from legitimate criticism by private lenders. To do this requires that the risk be reduced and/or income and reserves increased.

Group No. 1 of the recommendations reflects those changes required to put FHA on a proper basis. Group No. 2 of the recommendations provides for a more gradual transition and represents changes which are more feasible politically and would avoid the risk of any sudden effect on the economy.

Brief Explanation of Recommendations 1. Requirements for mutualization

1. Terminate the participating dividends to borrowers.—This is the quickest, easiest, and least painful way to increase FHA income and reserves. Up to 1953, $47 million had been returned to borrowers and another $60 million was earmarked for distribution to be repaid under the present program. This "windfall to mortgagors” (words used by Administrator Cole before Senate committee), plays an insignificant part in encouraging homeownership or popularizing FHA. It can be likened to the $160 interest gratuity for VA loans which was dropped by Congress practically unnoticed and unprotested. Actually, the insurance premium is collected to meet losses over a total cycle. Until there has been a total cycle there is no true basis for a refund. Under the present procedures all of the losses will have to be met out of one group of loans and the risk has not been truly prorated. The point is well summarized by Commissioner Hollyday before the Senate Banking Committee (Housing amendments of 1953): "I think the following is quite important, gentlemen : The anomaly of substantial dividends to mortgagors while the Treasury is exposed to appreciable expense on account of the system is a consequence of inadequate provision for spreading the burden of contingent cyclical losses throughout the entire system of group accounts."

The President's Housing Advisory Committee, in recommending “major modification of the mortgage insurance system,” had this to say: “The final major factor which has limited the accumulation of surpluses to meet future losses has been the extent of participating shares distributed to terminating mortgagors. This factor continues in effect although partially abated by the legislative action in the housing amendments of 1953, and constitutes the main objective of the specific proposals listed below for carrying out recommendation No. 12."

2. Set maximum terms at 80 percent, 20 years for existing homes and 90 percent, 25 years for new homes.-Until reserves are built up to a higher level some reduction 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, 142 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.

last year.

United States in the second column you will find there are 165,000 required here. I am inclined to think that that figure should be actually 180,000, because included in the assets are certain projects under the Wherry law which have been requested by the services, but which are not under contract. But I think those figures of 165,000 as broken down into 51,000 for the Army and 33,000 for the Navy and 80,700 for the Air Force are what is given for the continental United States.

In the Territories and possessions there is a further requirement of 11,000. In foreign countries it is 56,000, making up a total deficit of 233,000.

Now that gives us the general picture of what our requirement is. I think these other gentlemen here are better prepared to speak on the morale features of this matter and on the effect of the failure to have houses on the rate of reenlistment, so I will not say anything about that. I will leave that to them.

Senator CAPEHART. How much direct appropriation do you have at. the moment, or how many units do you have under direct appropriation at the moment?

Secretary FLOETE. We only have $75 million that was appropriated
Senator CAPEHART. How many units will that build?
Secretary FLOETE. That will build about 8,000.
Senator CAPEHART. 8,000 units?

Secretary FLOETE. Because some of it was used for other than housing

Senator CAPEHART. So you have a direct appropriation at the moment for 8,000 units with this deficiency of 233,000 ?

Secretary FLOETE. That is correct. In this year's program we show on chart 6 what we are asking for by way of direct appropriation. We are asking for an authorization of $254 million and an appropriation of $365 million. The difference is the $110 million cash carried over from last year's authorization bill that was not funded last year.

Senator CAPEHART. And this $254 million would build about 8,000 units?

SECRETARY FLOETE. No. We will get out of the $365 million a total of about 26,000.

Senator CAPEHART. In other words, if you get this direct appropriation you will be able to build 26,000?

Secretary FLOETE. Yes, sir.

Senator CAPEHART. And the appropriation you are working under at the moment builds 8,000 houses. Is that right?

Secretary FLOETE. Yes, sir. That is approximately right. To meet the gross requirements we have considered all the methods that have occurred to us. We have considered using a revolving fund from prior unused appropriations. We have considered the lease-purchase agreements and have considered the Wherry Act, and considered creating a Military Housing Corporation, with authority to issue bonds; and we have found objections to all of those methods. There is something wrong with every one of them. So last year we went to the appropriated fund method and Congress authorized $175 million, and appropriated $75 million.

Senator CAPEHART. That would build how many units?
Secretary FLOETE. About 13,000 units.

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

a 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

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