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Recognizing that he is entitled to a reasonable amount, he, the builder, is certainly not entitled to an unlimited profit. Senator Capehart suggested that this could be taken care of through renegotiation. I do not know whether that would be a source of discouragement to the builder, but assuming it could be done and the Government would receive a certain amount of that $2 million back, the mortgage would still be outstanding in the full amount of $2 million and the savings would not be applied to the reduction of the mortgages. The mortgage

Senator CAPEHART. Will the Senator yield? The mortgage will always be the exact amount that the Government paid for building the project. Period. It would be no more and no less. The contracts would be awarded to the lowest responsible bidder. You would have exactly the same situation that you have described under direct appropriations. You might award a contract for $2 million under a direct appropriation to the lowest bidder and yet he would build it for $1,500,000. If he did he would make $500,000 profit.

Senator LEHMAN. There would be no mortgages outstanding under those circumstances. It would be based on the actual cost.

Senator CAPEHART. What is the difference between owing $2 million on a mortgage, or simply paying out $2 million in cash now? There is no difference.

Senator LEHMAN. Let me explain how this affects the occupant of the building. His rental would necessarily be based on the cost of operating the home plus the debt service, including amortization. Senator CAPEHART. That is right.

Senator LEHMAN. If you are paying a debt service based on a $2 million mortgage, when the cost of the building was only $1,500,000, then you inevitably require a higher rental or cost from this man against which his allowances are charged than would otherwise be the

Senator CAPEHART. You can take care of it by putting it under the Renegotiation Act. They are not at the moment, but you can write it in. A witness yesterday, representing the Real Estate Board, said it was his best judgment if you did that you would not get contractors to bid on Government projects like buildings, roads, streets, highways, and so forth.

Senator LEHMAN. I do not know whether you could compel renegotiation. I suppose you could. I do not know. But assuming you could, the fact remains that on a $1,500,000 project you would have a mortgage of $2 million outstanding, on which you would have to require

debt service including amortigation, which must be borne by the soldiers regardless of who occupies the building,

Senator CAPEHART. No. You could very easily do it. If you bring them under renegotiation and renegotiate it and, let us say, get back $200,000, meaning the Government gets it back, then they immediately apply $200,000 on the mortgage which reduces it to $1,800,000 and the payments are based on $1,800,000.

Senator LEHMAN. The cost of that could be.

Senator CAPEHART. Yes. It is very simple to do it if you want to do it.

Senator LEHMAN. It is a defect, in my opinion, in the bill that is now before us.

Senator CAPEHART. It is no greater defect than the direct appropriation route because you have exactly the same situation under a

case.

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direct appropriation. I say that because if the Government is going to appropriate the money, then they will appropriate $2 million to build the units you are talking about and will base the rents on the $2 million of appropriated funds.

Senator LEHMAN. No.
Senator CAPEHART. So it would be exactly the same.
Senator SPARKMAN. I wonder if we had better not hold this

argument for executive session when we start marking up the bill, and let these gentlemen talk to us today while they are here.

Senator LEHMAN. I want to say if it is a direct appropriation, then even if the building cost only $1,500,000 that is all the Government has

pay, and that is all that is appropriated.

Senator CAPEHART. Of course you have to let the contractor make a legitimate profit on the building, just as you do with every other contractor for the Government.

Secretary FLOETE. Mr. Chairman, in conclusioin I would like to say we think it would be a grave mistake to interfere with the amount of the appropriated fund for building we are trying to get this year, because unquestionably under any circumstances there will be a lag in getting it into effect.

So we do feel we should go ahead with this program. Of all the methods we have considered heretofore, the methods employed by S. 1501 appear to us to be the best adapted to meet our requirements as a supplemental approach to the appropriated funds.

Senator LEHMAN. Mr. Secretary, may I ask this question? I have pointed out there is divided responsibility and authority. Whereas the work is done by the services, the guaranty is issued by the FHA. Do

you see any way in which this could be done directly by the services without involving the FHA?

Secretary FLOETE. I think it could be.

Senator CAPEHART, The Senator means having the military be their own insuring agency.

Secretary FLOETE. Yes, sir.
Senator CAPEHART. I think that is the better plan.

Secretary FLOETE. I do not think there is any doubt it can be set
up rather simply.
Senator PAYNE. Mr. Chairman?
Senator SPARKMAN. Yes, Senator Payne.

Senator PAYNE. I wanted to ask the Secretary whether or not he cared to comment on the extension of the Wherry Act also ?

Secretary FLOETE. Yes, sir. Senator PAYNE. You would be in favor of that too? Secretary FLOETE. I think the services would spend a certain amount of money in getting plans and specifications together. I think we should disregard that and ask for an extension as to those projects where the individuals are certified by July 1 to the FHA and which were put into commitment by the FHA in the following year. That takes care of any expenditures that may have been made in the way I mentioned, and protects them.

On the other hand, I think if S. 1501 would be enacted it is a better device than the Wherry Act by far for providing this housing.

Senator PAYNE. Would you care to comment on why we have not been able to get more work done under the Wherry Act than we have accomplished up to date ?

SECRETARY FLOETE. To the best of my knowledge there has been no project put under contract since last September when the amendment to the Housing Act became effective which required, in effect, that the sponsor must have a 10 percent investment in the property. I cannot comment on the reasons why, but those are the facts.

I still feel, as I felt very strongly last year, that is a very expensive way of providing housing.

Senator PAYNE. Under the Wherry Act?
Secretary FLOETE. Yes, sir; I feel that very strongly.

Senator PAYNE. I will comment on that when the representative of the Air Force speaks.

Senator LEHMAN. May I make one brief observation?
Senator SPARKMAN. Yes, Senator.

Senator LEHMAN. I think the Senator advanced one argument favorable to S. 1501 which has had a great influence on me. That is the fear that if this is done exclusively by direct appropriation it may mean that less would be appropriated by the Congress for what I consider to be the most urgent defense need of the country and, in that way, possibly reduce what I believe are very inadequate appropriations. I think that is a very, very sound argument.

Senator SPARKMAN. Mr. Secretary, when we are talking about Wherry housing in S. 1800, section 9, reference is made to a certification by the Secretary of Defense, or his designee, made on or before such date, and a commitment to insure on or before June 30, 1956, but the date relating to you is June 30, 1955. In other words, you would have to issue a certification by June 30, 1955, permitting the Wherry Act projects to be built.

Secretary FLOETE. Yes, sir.

Senator SPARKMAN. As presently administered I understand, such a certificate is given late in the processing of the Wherry Act applications. If we continue this procedure we eliminate many proposed projects which could be made eligible under the Wherry Act. If blanket certificates were given on the basis of present information about the permanent installations of housing needs. In other words, this would in effect be programing the Wherry Act housing. Which procedure would the Department of Defense care to follow?

Secretary FLOETE. I'd like to answer your last question, but we have here already made arrangements through FHA, and we have supplied the services a form under which they may certify, a form which is satisfactory to FHA, and they can turn that in today or tomorrow and that completes the certification. Now, anything else turned in

up

until June 30Senator SPARKMAN. Will that be done in projects that are pending or that may be in the process in order that the June 30, 1955, deadline they are given up to June 30, 1956.

Secretary FLOETE. We have already worked it out with FHA.
Senator SPARKMAN. And that will be your policy?
Secretary FLOETE. Yes, sir
Senator SPARKMAN. I wanted to get that into the record.
Did you complete your statement?
Secretary FLOETE. Yes, sir.

Senator SPARKMAN. We will insert at this point in the record the charts Secretary Floete supplied.

(The charts referred to follow.)

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