projects, many of which have become hardship projects, would also require lifting the statewide limitation from $3.5 million to $10 million. If such an authorization is made, and we would highly recommend it, we would also suggest in making advance commitments FNMA give priority to bona fide consumer-sponsored cooperatives which are those in which the board of directors of the cooperative and the project sponsor consist of persons who purchase memberships in the cooperative and will eventually reside in the project, or who are representatives of consumer organizations or other nonprofit organizations formed to assist cooperative housing. Among the builder-sponsored cooperatives, priority should be given for such mortgages as have the greatest difficulty in securing financing due to occupancy of the housing by minority racial groups. It has been suggested to your committee that you authorize dual commitments under sections 207 and 213 of FHA to facilitate the mortgage procedure. We would approve of this if there are adequate safeguards to see that the procedure is not used merely for increasing the profits on a speculative project. If the 213 program is as effective as we believe it to be, we feel that Congress should extend the mortgage insurance available under section 213 to rehabilitation of existing housing where ample safeguards are applied, and to the disposition of Government-owned housing which can be sold to cooperative associations of tenants now living in such projects. The President's Advisory Committee on Housing also recommended that the Housing and Home Finance Agency give serious study to a proposal for the formation of a housing cooperative mortgage corporation which could pool the FHA-insured mortgages on a cooperative housing projects and issue debentures against such a portfolio. This would make it possible for retirement funds and other similar sources of finance to participate directly in the cooperative housing program, often making it possible for union pension funds and retirement funds to be used for housing for union members. Present financial requirements make that difficult, and such a mortgage corporation would facilitate increased self-help on the part of such groups in meeting their own housing needs. We would appreciate the liberty to insert in the record a proposal which we have made to Administrator Cole for his further study in this regard. Thank you very much. The CHAIRMAN. How voluminous is the study you refer to? The CHAIRMAN. Without objection, that may be included and also the table attached to the prepared statement. (The material referred to is as follows:) Mr. WALLACE J. CAMPBELL, KROOTH & ALTMAN, Washington, D. C., January 7, 1954. Cooperative League of the United States of America, Washington, D. C. DEAR Mr. CAMPBELL: I am sending this letter to you to accompany the submission which you are making to Mr. Albert M. Cole, Administrator of the Housing and Home Finance Agency. This letter deals with the proposal of various public interest groups for a Housing Cooperative Mortgage Corporation. It includes the revisions which we have made in our proposal since the issuance of the President's Advisory Committee Report on Government Housing Policies and Programs. A NEED FOR COOPERATIVE HOUSING AND A HOUSING COOPERATIVE MORTGAGE The report of the Advisory Committee states that the Housing and Home Finance Administrator should "study proposals for the establishment of a cooperative housing mortgage corporation to assist in the production and financing of cooperative housing projects" (p. 13, item V-5). The report of the Subcommittee on FHA and VA Programs states that: (1) "The fundamental principles of cooperative housing are workable. By banding together, families in need of housing can often obtain such housing at relatively low cost not only in suburban areas, but also in the concentrated areas of our larger cities" (p. 42). (2) "We have found that there is only a resricted market today outside of FNMA for the mortgage paper arising out of section 213 financing" (p. 41). (3) The subcommittee "listened to witnesses who argued for the establishment of a cooperative housing mortgage corporation to make housing loans to cooperatives. In the time available to the subcommittee, it was not possible to study this proposal in detail. We therefore suggest that the Administrator should make a careful study of this matter" (p. 42). The purpose of this letter is to submit to the Housing and Home Finance Administrator our current proposal for the establishment of a Housing Cooperative Mortgage Corporation so that he may study it as recommended. We hope that on the basis of the modified proposal which we are now making, the Administrator will recommend that the proposed Housing Cooperative Mortgage Corporation be included as part of the legislative program for the coming session. To the extent that coooperative housing achieves lower monthly costs and makes it possible to serve families of moderate incomes who cannot be reached through other types of private building operations, it represents a private enterprise solution to the problem of providing homes for such families of moderate income and helps fill the gap between other private building operations and subsidized public housing. The widespread interest in the cooperative housing program confirms the demand and support for it. Such a program should not be denied further progress and expansion by reason of the lack of a market for mortgages on cooperative housing-a condition confirmed by the President's Advisory Committee; rather the solution lies in finding a sound way to provide such mortgage financing. This can be done through the establishment of a Housing Cooperative Mortgage Corporation. B. HOW OUR PROPOSED HOUSING COOPERATIVE MORTGAGE CORPORATION WOULD OPERATE We have modified the proposal which we submitted to the FHA Subcommittee of the President's Advisory Committee by limiting its function to the purchase of FHA mortgages under section 213 of the National Housing Act, as amended. The mortgage corporation which we are now proposing would merely provide a market for mortgages insured by FHA under section 213 and in this way it would make that program operative and effective. FHA would continue to process the applications, insure the mortgages, and inspect the construction. Following the successful pattern established by the Federal home loan banks and the Central Bank for Cooperatives which makes farm loans, the Housing Cooperative Mortgage Corporation would be created and operate in the following manner: 1. Legislation would be enacted to create the Housing Cooperative Mortgage Corporation to operate within the Housing and Home Finance Agency. Initially, the Federal National Mortgage Association would subscribe to capital stock of the corporation aggregating $50 million. This stock would be retired from earnings of the mortgage corporation and from the proceeds of the sale of stock to housing cooperatives who would be required to subscribe to such stock concurrently with the purchase of their mortgages by the mortgage corporation. In this manner, the stock purchased by FNMA would gradually be retired and the mortgage corporation would become privately owned by the housing cooperatives. This is the same procedure followed with the Federal home loan banks in which all of the federally owned stock has now been retired. The $50 million. to be initially subscribed is the same amount of subscription which has been recommended by the President's Advisory Committee for the National Mortgage Marketing Corporation. As a matter of procedure, it is proposed that when the amount of earnings and capital paid into the Housing Cooperative Mortgage Corporation by housing cooperatives equals $50 million, the mortgage corporatin would be required to apply any subsequent earnings or collections from subscriptions to its stock to the retirement of the stock issued to FNMA. 2. When the FHA-insured mortgage of a housing cooperative is purchased by the Mortgage Corporation, the housing cooperative would be required to subscribe to capital stock in the Mortgage Corporation in an amount equal to some prescribed percentage of the mortgage purchased. With respect to the National Mortgage Marketing Corporation, the President's Advisory Committee recommends that the amount of stock to be purchased by institutions selling mortgages to the corporation to be maintained at not more than 4 percent of the unpaid balance of such morgages held by that Corporation, while there is a minority of the Committee which recommends that the requirement be 2 percent. Whatever percentage figure is finally established for the National Mortgage Marketing Corporation (which we believe should be 2 percent rather than 4 percent) should likewise be applicable to the Housing Cooperative Mortgage Corporation. However, the requirement would be that the housing cooperative (rather than a financial institution) purchase the stock in the Housing Cooperative Mortgage Corporation. It is recommended that the housing cooperatives be permitted to make payment for their stock subscriptions in installments over a period of 10 years. 3. The Mortgage Corporation should be authorized to issue an advance commitment to the financial institution handling the FHA application of a housing cooperative, with the housing cooperative being required to subscribe to stock in the Mortgage Corporation at the time of issuance on this advance commitment. The first payments on the stock subscription should be made at the time of the delivery of the FHA-insured mortgage to the Mortgage Corporation pursuant to its purchase commitment. It is necessary that such advance commitments be issued in order to enable construction financing to be obtained from banks and other private institutions on the basis of a take-out through permanent financing. 4. The Mortgage Corporation would purchase FHA-insured mortgages on housing cooperatives projects, using its initial capital to purchase the initial mortgages. When the Mortgage Corporation had purchased a number of mortgages, it would be authorized to issue debentures in an amount equal to the unpaid principal of the mortgages held by it. As in the case of the Committee's recommendation of the National Mortgage Marketing Association, the Housing Cooperative Mortgage Corporation would be authorized to issue debentures on the private market up to 12 times the amount of its stock and surplus, but in no event in an amount exceeding the unpaid balance of FHA-insured mortgages which it holds. 5. As was done initially with the Federal home loan banks, and with the Central Bank for Cooperatives on farm loans, these debentures should be guaranteed by the United States. Since the portfolio of the Mortgage Corporation would consist entirely of mortgages insured by FHA under section 213 in a dollar amount at least equal to the debentures issued, the basic underlying security behind the debentures of the Mortgage Corporation would include the right to have Government-guaranteed debentures issued in case of a default on any of these mortgages. Consequently, the Government guaranty of the debentures issued by the Mortgage Corporation would involve no new or additional contingent liability on the part of the United States. It would merely place the guaranty on the debenture which is to be marketed so that it will command a lower interest rate and a better and wider market. Since the underlying security in the portfolio already includes the contingent liability of the Government, it would be most unwise to sacrifice the lower interest rates and better market by not having the Government guaranty appear on the face of the debentures of the Mortgage Corporation. 76. The Government would be protected against losses on its guaranty of the debentures of the Mortgage Corporation because the debentures would only be issued against FHA-insured mortgages held by the Mortgage Corporation on which insurance premiums are paid. Such premiums provide the same protec tion against loss which is characteristic of the entire program of FHA insurance. 7. The primary objective of the Mortgage Corporation would be to assure the availability of mortgage money for cooperative housing projects financed under section 213. The program does not involve any cost to the Federal Government or any subsidies. Servicing fees would be charged to cover the cost of administration of the Mortgage Corporation. The Mortgage Corporation would operate on a self-supporting basis and require no appropriations for its administrative expenses. 8. The Mortgage Corporation would be managed by a Board of five Directors appointed by the President. As the Mortgage Corporation would be a mixedownership corporation, with partial private ownership as soon as it makes its first mortgage purchase, there should be representation on that Board for the housing cooperatives. At least two of the Directors should be appointed from among the members of the stockholding housing cooperatives or other persons representative of housing cooperatives. 9. When all the stock owned by FNMA is retired and the housing cooperatives own all the stock of the Mortgage Corporation, all of the Directors should be appointed by the President from among such housing cooperatives or their representatives. 10. As part of its servicing of the FHA-insured mortgages which it purchases, the Mortgage Corporation would provide the assistance and supervision required to assure that cooperative housing projects are soundly operated with all necessary protections. It is recognized that cooperative housing projects require such additional assistance. The Mortgage Corporation dealing solely with housing cooperatives can gear its operations to meeting these problems. In this way, it can help develop an ever-growing strength and confidence in the cooperative housing program. 11. The debentures of the Mortgage Corporation would represent an attractive investment as they could carry a Government guaranty reflecting the guaranty underlying the portfolio of FHA-insured mortgages on cooperative housing projects. Purchasers of these debentures would not have the problems involved in owning or servicing the mortgages, but would merely clip coupons to collect interest on the debentures. We believe labor unions and other institutions interested in cooperative housing (who have been unable to purchase mortgages on cooperative housing projects) would be prepared to invest large sums in the debentures of the Mortgage Corporation because of the absence of servicing burdens and the shorter maturities of debentures. Consequently, the debentures would tap new and large sources of investment for cooperative housing which are not now available. Thus, at the same time that the Mortgage Corporation would provide an assured source of financing for cooperative housing projects, it would provide the means for securing the investment funds to be used for this purpose, through the sale of debentures. 12. In the operation of the Mortgage Corporation, a priority should be established for the purchase of mortgages of consumer-sponsored cooperatives, as distinguished from builder-sponsored cooperatives. Such consumer-sponsored cooperatives are those which have a nonprofit sponsorship where the members of the initial board of directors of the cooperative, as well as the sponsors of the project, consist of people who will purchase memberships in the cooperative and reside in the project or who are representatives of nonprofit consumer groups (such as labor unions or the National Association for the Advancement of Colored People) or organizations interested in the encouragement of consumersponsored cooperative housing (such as the Cooperative League of the USA or the Foundation for Cooperative Housing). The reason for such a priority is that through consumer-sponsored cooperatives of a nonprofit character, there is a fuller realization of the cooperative objective of better housing at moderate prices, produced in the interest of the consumer. As between different consumersponsored cooperatives, a priority should be given to projects which have the greatest difficulty in securing financing due to occupancy largely by minority groups; likewise, there should be a similar priority to such minority projects as between cooperative projects in the builder-sponsored category. 13. It is necessary that there be this separate Mortgage Corporation to purchase the FHA-insured mortgages on housing cooperatives because: (a) It is clear that the National Mortgage Corporation would not provide a market for these mortgages. As recommended by the President's Advisory Committee, the functions of this corporation would be limited to facilitating the free operation of the mortgage market with respect to those mortgages for which a normal market exists. The subcommittee on FHA-VA problems has indicated that there is only a restricted market today for this mortgage paper. Moreover, as the National Mortgage Marketing Corporation will be owned (first partially, and later fully) by private financial institutions who were not willing to purchase these mortgages, there is no basis for relying on their purchasing them through the National Mortgage Marketing Corporation. (b) A separate cooperative-housing corporation is required to meet the special problems of housing cooperatives and their need for special servicing in the operation of their projects. (c) Housing cooperatives desire to purchase stock in a Mortgage Corporation which they will ultimately own. They should be given this same privilege which is being extended to financial institutions in the case of the National Mortgage Marketing Corporation. (d) The establishment of a separate Mortgage Corporation for housing cooperatives follows the sound precedent of the Central Bank for Cooperatives which makes farm loans, and the Federal home loan banks which service the institutions which purchased stock in those banks. C. CONTINUANCE OF FNMA PENDING ESTABLISHMENT OF HOUSING COOPERATIVE MORTGAGE CORPORATION 14. In order to avoid any interruption in the purchase of housing cooperative mortgages insured under section 213, it is recommended that FNMA continue to function through the issuance of advance commitments for the purchase of cooperative mortgages until the Housing Cooperative Mortgage Corporation is established and ready to function. Consequently, it should continue to carry on this function until the Housing Cooperative Mortgage Corporation is ready to make such purchases of FHA-insured mortgages on cooperative housing projects. 15. It is necessary that there be an immediate increase in the authorization of FNMA for the issuance of advance commitments to purchase FHA-insured mortgages under section 213, since the $30 million authorization was not adequate to take care of the eligible mortgages on cooperative housing projects which were covered by statements of eligibility issued by the FHA prior to September 1, 1953. That was the date specified in the FNMA legislation to establish the eligibility of such cooperative mortgages for advance FNMA commitments. Sponsors proceeded in good faith and incurred great expense on cooperative projects in the expectancy that FNMA funds would be available to purchase the mortgages on the projects. Recognizing the equities of taking care of such projects, subject to a 10 percent limitation on the amount to be allocated to any one State, it is recommended that there be an increase in the authorization from $30 million to $100 million, and an increase in the limit to be allocated to any one State from $3,500,000 to $10 million. 16. To relieve the hardship of sponsors whose projects were approved before September 1, 1953, but who failed to get a FNMA commitment because of the insufficiency of the available authorization, it is urged that separate legislation be immediately introduced to cover the necessary increase in the FNMA authorization. 17. It is recommended that in connection with this increase in authorization, a provision be included in the legislation to establish the priorities described in paragraph 12 above covering the purchase of mortgages of consumer-sponsored cooperatives, and, as between projects in this category, those occupied largely by minority groups-with a like priority to such minority projects as between cooperative projects in the builder-sponsored category. Sincerely yours, DAVID L. KROOTH. |