INNER-CITY HOUSING PROBLEMS

Mr. BOLAND. In a discussion of the high rate of foreclosures and acquisitions of inner-city properties in the "Fourth Annual Report on National Housing Goals," it says that "One persistent misconception is that the subsidized programs enacted in 1968 are prime contributors to problems with inner-city housing. This is not true. The main programs involved are the older FHA unsubsidized mortgage insurance programs, particularly the section 203 (b) program which was enacted in 1939. and the 221 (d) (2) program enacted in 1954 and amended in 1961 to provide more liberal terms." The 235 program suffered a great deal, I think, because of poor administration. That gives rise to the question why, knowing what the problems were in administration of this particular program, shouldn't we continue in this area.

I know what your feelings are on the subject, but you may expand upon it for the record here.

Mr. LUBAR. If I could just comment on that, Mr. Chairman, the biggest problems we have are in the 221 programs, which are largely central city, very low downpavment, the 223 (e) which are largely central city. They are actually declining areas. In the section 235 program and section 236 program, which we expect could be the worst, these losses haven't been realized yet, because the program is relatively new.

In the mortgage insurance business, differing from other insurance businesses, you experience your worst losses and your worst results in the first 3 to 4 vears, but you have only collected premiums for these few years. The premiums collected later on the good loans will make the future look somewhat better.

In the life insurance business von experience your losses in the very late years, so with the 235 and 236 programs, especially the 236I think 235 is starting to show up-we haven't gone long enough to see what kind of a loss ratio we have, but I think that those 236, 235, the 223 (e) and the 221 will prove to be the real losing programs. It isn't just one to the exclusion of the other.

Secretary LYNN. Showing, Mr. Chairman, the growth in the 235 default rate. Mr. Kliman has provided me with a chart that shows we are predicting as an inventory, as of fiscal year end 1975, of over 41,000 units of 235. The other contenders for the crown in that connection are 221, with 74.000 units projected in multifamily, and another 33,000 plus in single family, so there has been a growth in the default rate, but the statement you made is certainly true that the subsidized programs have not been by any means alone in contributing to our default rate.

Part of the default rate is due to an effort, a very strong effort, made early on to carry out the mandate of Congress under 221 (d) (2) and 223 (e), to take the extra risks that are involved in certain kinds of lending activity.

I would have to say that I think we have learned a good deal within the Department as to what is feasible and what isn't feasible in that respect. One of the ways you learn, unfortunately, is by trying different things and seeing what happens as a result of them, but it is true we have had a lot of learning in the last couple of years.

SECTION 23 AND SECTION 221 PROGRAMS

Mr. BOLAND. In the section 23 revised leasing program, aren't you really copying most of the aspects of the section 221 program?

Secretary LYNN. To be very frank about it, if you will look at table 1 and table 2 that we gave you yesterday with respect to the costs of the programs, you will see that where FHA insurance is inserted along with section 23 we will anticipate default rates that are quite similar to what we would call a modernized default rate if you were to use 236.

One of the quarrels that we have had with the House substantive committee on the legislation is that the committee would not allow us to write into the act a priority to be given to the builder or sponsor who comes in with conventional lending and seeks only the section 23 assistance, because we would like very much to avoid coupling FHA insurance with section 23 wherever we could. But the House bill, as it is presently written, provides that if a fellow comes in seeking section 23 coupled with an FHA 221(d)(3) or (d) (4), we have to give him equal priority with the man who comes in with a conventional mortgage also seeking section 23.

Very frankly, one of the things we are going to have to look at hard is the premium rate that we charge to make these programs actuarially sound. On our table we do show some expense beyond the premium for an expected default rate under this program.

HOUSING SUBSIDY RUNOUT COSTS

Mr. BOLAND. In tables on estimated Federal assistance payments costs submitted for last year's appropriation hearings, the average payments for a 235 unit were estimated to run for 12 years with an aggregate total of $5,200 or $435 per unit per year. Isn't this a relatively low per unit subsidy cost for federally assisted housing? What about the $435 per unit per year cost? Isn't it very low?

Secretary LYNN. I think that has to be compared, Mr. Chairman, on the basis of a given income level. As we said a little earlier, the families being assisted under section 235 are at a level of around, in recent history, $6,700 per family. What we would have to do is compare the cost of other programs for a family earning that average amount of money. That was the reason why, when we submitted the two tables showing the cost comparisons, we did it at two different income levels. Just as I think it would be unfair to compare the cost of a program that serves, say, someone making $6,700 a year in 235 with the cost of even a conventional public housing program that is serving people with, maybe, an average income of $3,000, I don't think you can compare 235 with anything else without always assuming a given income level being served.

SECTION 23 FAIR MARKET RENTS

Mr. BOLAND. With respect to the fair market rents to be established under the section 23 program, what will be the basis and the procedure for determining the fair market rental for existing units and for new units? How will the necessary information be obtained?

Mr. KEARNEY. For the new units, Mr. Boland, the instructions asked for the field market staff to survey 12 projects that have come on the market within the past year, no more than one third of those utilizing FHA assistance, and for comparable building types, high rise, elevator, low rise, detached, semidetached, et cetera, to make the survey and to come up with market judgments as to what the one-, two-, three-, and four-bedroom rents would be.

In the existing units we have taken the median rent updated by the BLS index of those movers who moved in 1969-70, before the 1970 census, and updated those to the present for each market area.

TAX LOSSES IN SECTION 23 PROGRAM

Mr. BOLAND. The HUD study that Mr. Roush referred to a moment ago, "Housing in the Seventies," and other studies, have leveled a great deal of criticism at the high Federal cost of tax benefits accruing to investors through accelerated depreciation and eventual capital gains treatment of sales proceeds. Will not this tax loss be increased through the proposed section 23 emphasis on new structures to be leased?

Mr. KEARNEY. Not really. I think the applicable tax provisions to the section 23 program are the same as any FHA insured program. The one possible section would have been the 221 (d) (3) program which is eligible for the role under our recapture provisions and we have not allowed profitmaking sponsors to apply for insurance under that program.

COLLEGE HOUSING

Mr. BOLAND. We will turn to the college housing program.

There is no appropriation requested for the college housing

program.

How much is unobligated in this program?

Mr. KLIMAN. Mr. Chairman, there is $14.5 million worth of contract authority left over in this program.

Mr. BOLAND. The program is being terminated. Has the Department evaluated the continuing need for this loan assistance? We have had outside witnesses come in before this committee indicating there is still a need for this kind of assistance. You are not going to service any applications apparently in fiscal 1975,under this program. Mr. LUBAR. Based on our evaluation of the program, there is no longer a need for it.

Mr. BOLAND. Why isn't there a need for it? Don't you have applications for it?

Mr. LUBAR. No.

Mr. BOLAND. You have no applications for it? I suppose the reason is you are just not taking applications.

Mr. LUBAR. We are not taking applications, but the reason that we don't think the program is needed is that there has been a decline in enrollments, and there has been an actual surplus of dormitory units at many colleges, and the changing styles of students seem to be away from dormitories. There just didn't seem to be a demand for it.

Secretary LYNN. We have a number of instances, Mr. Chairman, where the universities and colleges are coming to us requesting per

mission at least to change the use of the facility to some other purpose. A child being born this month or next will have a very great choice as to educational facilities throughout the country, it seems to me. Mr. BOLAND. How many are in default now? Do you have many in default?

Mr. CRAWFORD. Yes, we have presently worked out agreements with about 25 projects at 22 institutions.

Mr. LUBAR. There are cases such as in my State, the University of Wisconsin, where students are actually being assessed additional tuition to pay for unused dormitories, so that the debt service can be made.

FHA FUNDS

Mr. BOLAND. We will turn to page F-1, the FHA funds.

For many years the FHA fund was on a sound basis and fees on the insurance provided adequate reserves. However, because of the changing mission of some HUD programs in recent years, specialized programs have been added that are bringing growing insolvencies. I suppose to call some of them insurance programs is probably a misnomer. The legislative intent is clear that losses were anticipated.

You have four Federal Housing Administration funds and they are all listed on page F-1-mutual mortgage insurance, which is solvent; general insurance, which is in the red; special risk insurance is in the red, though nobody anticipated that to be anywhere else but in the red; and cooperative management housing insurance, which is solvent.

MUTUAL MORTGAGE INSURANCE FUND

Do you consider the mutual mortgage insurance fund actuarially sound?

Mr. LUBAR. Yes, we do. It has excess reserves, and it is sound. Mr. BOLAND. Is a merger of all funds still under consideration? At one time wasn't the Department thinking of merging all of the funds? Mr. LUBAR. What we are proposing is to merge the mutual mortgage fund and the general insurance fund. We would suppose that the cooperative management fund, which is quite solvent and does pay dividends, would gradually phase out, and that the special risk fund would be just that, a fund that would be used for subsidized related financing and high risk financing, such as 223 (e), but that the combination of the mutual and the general fund would be an actuarially sound fund, where there would be, based on underwriting and based on premium charges, a sound self-supporting fund.

Secretary LYNN. Unless I am mistaken though, Mr. Chairman, neither the Senate nor the House on the authorizing side has indicated a disposition to make those changes.

Mr. BOLAND. If the funds were all merged together, wouldn't this send all of the profitable business to private insurers anyway?

Mr. LUBAR. I don't think one action is related to the other result. We are now working on a number of measures aimed at restoring our funds to a sound level, and identifying those high risk programs that clearly belong in the special risk fund, and that perhaps in the past under the 221(d) (2) program found their way into the general insurance fund.

UNIT APPLICATIONS

Mr. TALCOTT. Could I ask why the applications in units are up 169,000 and the insurance written by number of units is down 93,000? Mr. LUBAR. That, Congressman Talcott, reflects the lag time of the mortgage insurance business, that often an application is filed and it is 1 year or so before it is actually insured.

Mr. TALCOTT. But you would think that with all the applications that there would be more insurance.

Mr. LUBAR. And there is a substantial fallout. The fallout is 50 percent between applications and what is actually carried through and approved.

Mr. TALCOTT. Thank you, Mr. Chairman.

LOSSES TO THE GENERAL INSURANCE FUND

Mr. ROUSH. The general insurance fund is showing a deficit of $137 million in 1973. This escalates to $413 million in 1974, and $715 million in 1975.

What is being done to curtail the losses in this fund?

Mr. LUBAR. In the general fund?

Mr. ROUSH. Yes.

Mr. LUBAR. A number of things have been done which will start to show results. We are also working on measures in the future. Let me describe the things that have been done.

First of all, we have gone to a modified cost approach in old central city lending, which has served to eliminate the possibility of speculator activity and speculator profit on central city properties. The situation I am talking about is where someone might buy a home for $5,000 and resell it after cosmetic improvements for $15,000. We now limit that spread to a reasonable profit. We have substantially tightened up underwriting, and we have tried to improve our mortgage credit activities.

Those things I believe have shown their effort already in a lower level of defaults that we are seeing right now.

What we are working on now is a better identification of what the risk is. Congress intended that our high risk loan programs, that are written in central city areas, and that carry with them the risk of declining values, be written under the section 223 (e) program. We are working on policies that will clearly explain this to the field, because those loans should be written under the special risk fund.

I would briefly like to call your attention to the significance of mortgage insurance that is written in a declining area. Needless to say, the greatest deterrent to a default is equity in the property. Equity is gained either with a large downpayment-most of our programs are low downpayment programs or it is gained by appreciation of property, so that when you have a combination of little or no downpayment and declining value, you have a very unstable situation that lends itself to not just default but abandonment, which leads to waste of the property itself.

VALUATION POLICY

Mr. TALCOTT. Or you could just reevaluate them higher and give higher loans to the second purchaser.