Now, do you think in view of the fact that there has been no historical experience in these cooperatives that a rate lower than you generally set up for such operations is justified?

Mr. FOLEY. In view of the nature of the projects themselves, there is a somewhat different and probably stronger incentive that will exist on the part of the owners thereof for their continued and successful operation. I think that you cannot make an exact comparison with experience in the insured mortgage system or at least not with criteria that had been there arbitrarily set up. The experience there has indicated that the amounts required for insurance premiums which will create this same type of reserve-maybe experience would show that they have been too much. There has at least been some experience to that general end, in that it has been possible to pay dividends under the mutuality provision under some groups of mortgages.

Senator CAIN. I do not mean to press that point.

Mr. FOLEY. I understand, but as long as it was raised, we might explore it a little, although it may be repetitious and may appear in the statement.

However, as I just pointed out, the one-eighth of 1 percent, while it creates a reserve that is analogous to your mortgage insurance premium collected, is not the only provision for a cushion against losses. The authority that I have just cited will give to the Administrator under the terms of the amendment the right to require further reserves if his experience indicates it is necessary.

Senator CAIN. I notice that.

Mr. FOLEY. And another factor which is peculiar to this proposed system is the stock investment of 7%1⁄2 percent minimum required. Senator CAIN. Over a many-year period.

Mr. FOLEY. As stated in the bill, at least in the beginning it will be 21⁄2 percent initially and be amortized at not longer than 20 years. That is money provided by the borrower and that goes into the Corporation, and it is also a cushion against losses.

You have to consider the sum total of all those things before you can go ahead and make a particular comparison.

Senator CAIN. Just one more question. What leads you to believe that a cooperator will probably have a greater interest in the success of a venture such as this in which he lives than does the individual home owner?

Mr. FOLEY. I was not saying that with particular reference to an individual home owner, Senator. I had in mind the comparison of it with a rental type of structure, operated for profit by a corporation, where the motive to carry through in time of difficulty and stress would not be nearly as strong as it would be in a cooperative.

Senator CAIN. Thank you.

Mr. FOLEY. May I proceed?

Senator SPARKMAN. Go right ahead, yes.

Mr. FOLEY. It is expected that the Corporation will raise the bulk of its funds needed for mortgage-lending purposes through the issuance of its own obligations on the private market. These obligations are restricted in amount by three limitations. First, the amount outstanding at any one time cannot exceed 15 times the Corporation's outstanding capital stock, reserves, and surplus. Second, the volume of obligations outstanding at any one time cannot exceed the unpaid principal balance of mortgage loans and cash holdings of the Corpo

ration. Third, the total size of the program is limited to $2,000,000,000, of which $300,000,000 becomes available July 1 this year. The remaining 1.7 billion dollars, which becomes available a year later, can be used only with the approval of the President. In this respect, the amendment follows the procedure heretofore established by the Congress in connection with FHA authorizations.

The obligations of the Corporation would be unconditionally guaranteed by the United States, as are those issued by the FHA to mortgagees in case of foreclosures under the insured mortgage system. Questions will be raised, of course, during your consideration of this legislation as to the desirability of this device, which differs from the FHA insured mortgage system chiefly in the point where it is applied. We submit that the guaranty is justified on at least two principal grounds. In the first place, this program is designed to operate in such a way that soundly conceived cooperative housing projects will be able to attain low-cost financing, since the benefits and savings thereby achieved are, in a cooperative or nonprofit operation, translated into direct benefits to consumers in the form of lower charges. In other words, in an operation of this type, there can be no diversion of the financing economies into speculative profits. The second justification for the application of a guaranty to the securities of the Corporation I should like to illustrate by analogy to the FHA insured mortgage system.

In the FHA insured mortgage system we have now for almost 16 years operated a program in which the Federal Government has underwritten mortgage loans which met certain predetermined standards and objectives. So far the Federal Government has not been called upon to make good the guaranty of those mortgage loans, since the system has been able to operate on a fully self-supporting and selfsufficient basis from the premiums and other income which the Federal Housing Administration receives. Nonetheless, the Government has assumed a contingent liability in that program under which there is no question that it would have to make good in the unlikely event that defaults exhausted insurance reserves. Thus, the Government guaranty has thereby effectively protected the private lender from any loss of principal or interest on his insured loans. I think it is fair and timely to point out that a large share of the credit for the heavy current production of housing, by the building industry, and the encouraging proportion of its for-sale product within the reach of moderate-income families in many parts of the country is due to this effective aid by a self-supporting governmental activity. I doubt that the current record would be nearly so good without it.

The amendment contemplates a program largely new, in which housing projects of cooperatives and other nonprofit organizations can be financed through reliance on Government-guaranteed debenture obligations. But, if the projects are soundly conceived and soundly operated, there is no more reason why the net income from lending operations, the investment of private stock in the Corporation, and the build-up of reserves for losses should not enable this financing operation to pay its way than is the case in the established insuredmortgage operation.

It is true that in this case the contingent liability of the Government will be fixed in terms of a guaranty of securities, rather than in the underwriting of the mortgages backing those securities. Since,

upon default of an insured mortgage, the FHA issues to the mortgagee its debentures which are fully and unconditionally guaranteed by the United States, the principle involved, I submit, is essentially the same, and the result, insofar as Government risk is concerned, should be as good. For sake of simplicity, I might summarize the situation this way: In the case of the FHA-insured-mortgage system, the contingent liability to the Government is, in the final analysis, protected by the value inherent in the properties underlying insured mortgages. Under the amendment the contingent liability of the Government in terms of its guaranty of the securities of the National Mortgage Corporation for Housing Cooperatives is also protected, in the final analysis, by the value inherent in the properties securing the mortgage loans which the Corporation makes.

In the FHA system, insurance reserves are built up by the collection of annual mortgage premiums. In the proposal now before your subcommittee, a similar type of protection against loss would result from the requirement for a special loss reserve, to be built up at the rate of percent per annum of outstanding loans, and by added reserve requirements as authorized, if needed. In the case of the Corporation, however, there would also be the additional protection resulting from the required stock investments by borrowers, which is analogous both to premium assessments in the FHA and down payment requirements on FHA insured mortgages.

I believe the enactment represents the development of a proposal which on the one hand would facilitate the financing of soundly conceived cooperative housing projects on reasonable terms, while at the same time providing probably adequate protection to the initial stock investment of the Government and the contingent liability which it undertakes.

Senator DOUGLAS. Mr. Foley, may I just ask you one question there?

Mr. FOLEY. Yes, Senator.

Senator DOUGLAS. Would the Government assume under this corporation you are going to set up a greater risk than it assumes under FHA?

Mr. FOLEY. A greater risk?

Senator DOUGLAS. A greater risk.

Mr. FOLEY. A greater contingent risk?

Senator DOUGLAS. Yes.

Mr. FOLEY. I believe not, Senator, from our analysis of it, but there is

Senator DOUGLAS. But if

Mr. FOLEY. Pardon me, may I finish?

Senator DOUGLAS. Yes; I am sorry.

Mr. FOLEY. While there is a different type of procedure, assuming the same degree of success or a proportionate degree of success in this cooperative operation, as we have had in the various programs of the FHA, I think that the element of risk is no greater.

Senator DOUGLAS. There is just one point. I am very sympathetic to this legislation; I want to say that. But, if the Government does not assume more risk or if the risk which is assumed is the same in both cases, how then do you expect the interest rate to be pushed down from 41⁄2 to 21⁄2 percent? It could only be done if the Government

either assumed more risk, and made the venture a purely riskless affair of if it took over some of the job of servicing and managing the loan. Mr. FOLEY. Perhaps I should qualify somewhat what I said, Senator, although I am not at all sure I understand all of the implications of your question.

In the procedure provided by the amendment, there is one point for instance, at which a lesser risk may be involved for the private investor than is involved in the FHA-insured-mortgage system for the lender making the insured mortgage. That is the item that is involved in what we call contingent claims presented by the lender in the event of a foreclosure. These are relatively small items involving foreclosure costs and some possible wastes in the property; and, in some instances, possibly some interest is not covered by debentures. In the case of a foreclosure of an FHA-insured loan, these items are covered in a contingent claim which is payable only if the property is sold at a price sufficient to recover these costs. Now, the experience with contingent claims and the liquidation of foreclosed properties has ordinarily been quite fortunate. I think I have here some figures which are illustrative but not entirely conclusive on the experience on the payment of those claims.

Senator DOUGLAS. Now, what would happen if a depression should hit the country?

Mr. FOLEY. Well, if a depression should occur, as I have stated frequently and I think both before this committee and before the House of Representatives, it is probable that you would have larger amount of foreclosing. It does not necessarily follow that you would have any amount of loss, except in the case of a very severe and longcontinued depression which would result in a call upon the Treasury. Have I answered your question?

Senator DOUGLAS. Well, there is still this problem I asked you about; namely, have you under this amendment reduced the risk by so much as to justify your hope that you will be able to cut your interest rate from 4%1⁄2 to 2% or 3 percent?

Mr. FOLEY. Well, Senator, in the opinion of all who have studied this and in the opinion of people engaged in that type of security business, yes. We have sought advice upon that point, and we have been advised that there is a wide market for these guaranteed debentures at a rate of interest closely approximating the rate on long-term direct Government obligations.

Senator DOUGLAS. I just understood you to say that the Government did not assume more risk in this connection than FHA, and now you say it has assumed more risk, so much more that in effect the interest is reduced to 2%1⁄2 percent. I am not trying to trap you. Mr. FOLEY. I understand.

Senator DOUGLAS. I am trying to clear up the problem in my own mind.

Mr. FOLEY. And I am trying to clear the point for you, Senator. I may have given my answer on a different basis than you have given your question when I say that the Government is not assuming, in my opinion, a greater contingent risk, assuming relatively successful operation, compared to the FHA.

I mean that, in the final analysis, the Government would not be called upon, in my opinion, to pay out of the Treasury more than it

is likely to be called upon to pay in the case of the FHA insuredmortgage system.

Your point, Senator, as I understand it, is whether the Government is relieving the proposed purchasers of these debentures of more risk than it is relieving the mortgage-lender type of borrowers. Is that your question?

Senator DOUGLAS. That is the first question. The second question is whether the rise as such that is assumed can reduce the interest from 42 to 22 percent. These are not matters of ideology.

Mr. FOLEY. It is a practical matter.

Senator DOUGLAS. These are matters of bookkeeping.

Mr. FOLEY. It is a practical matter. Now, let me discuss it from this point.

Actually, what this seeks to do is to set up a source of funds for this mortgage corporation. Insofar as the cost of those funds is concerned, they are roughly comparable to the cost of funds deposited by savers and others with the institutional type of mortgage lender which makes mortgage loans. For instance, on savings they ordinarily pay about 2 percent.

Senator DOUGLAS. With reference to a savings bank.

Mr. FOLEY. Two or two and one-half percent, something in there; and the cost of that money plus the cost of doing business makes up the interest rate which that lending institution has to charge on mortgage loans that it makes.

Now, in this situation, this plan proposes to set up a single lender that will not be receiving deposits of savings from the public or obtaining its funds for lending in the usual processes that exist. It will be getting them from investors buying a type of security, which type of security, with the kind of guaranty which is here specified, we are advised by persons experienced in the field would probably command a rate of approximately the rate of Government for long terms.

Senator DOUGLAS. I do not want to prolong the questioning, but is this what you are saying: That, whereas in the ordinary case in housing you have individuals operating through the bank as intermediary, you are going to have this type financed by the creation of credits by banks; and presumably, therefore, it would be less costly than the savings out of income by private savers? Is that what you are saying?

Mr. FOLEY. The creation of a type of security which banks and insurance companies would buy as investments.

Senator DOUGLAS. Would you use commercial banking to finance these loans? You see, we are getting into a fundamental question there, Mr. Foley.

Mr. FOLEY. I am stopping now just to think over exactly what you mean by "commercial banking."

Senator DOUGLAS. Well, the normal distinction which is made is that investment banking is a process whereby the savings of individuals out of income can be put into productive use through the intermediary of banks; whereas commercial banking is where the borrower comes to the banking institution and the bank really creates credit against which the individual may draw. There are actually no individual savings borrowed at all; it is just the creation of monetary purchasing power against which the borrower draws. Those are the fundamental distinctions between the two types of banking.