Figures were decoted fra 17 ABA SEMya zi sunak annyitse Aref members begin ako 2 De Tras a cutive Officer in sezarete sent by 454 Puchin To NAD The sample was decured bsIA 1 NDÒM QIZSLAVE) ratios for each of the ren F20 depost atYONE Sample size agorawi Number of respodente porZNYAN Total of time and rings deposits for Sands nyerg For disbursements category-MINISMS pervent of E WITH For commitments category-0112 Methon (28 percent of xxwww. (Total time and savings deposits for all commercial bankx, Ivomber al 1969 $197.8 billion.) "Residential" means 1-4 family nonfarm and nonfarm multifamily proste Blow-up factors were obtained by multiplying the ratio of analysoite mortastat activity to aggregate time and savings deposits for the sample by the total amount of time and savings deposits as of December 31, 1989, for each of the ten digualt categories as reported by the FDIC. The CHAIRMAN. Thank you, Mr. Robertson, and gentlemen, on t very fine statement, and we do appreciate it. Our next witness will be Mr. Jenard Gross, president of the National Apartment Association. Mr. Gross, would you come around, please? We are very glad to have you and we have your statement. You may proceed as you see fit. STATEMENT OF JENARD M. GROSS, PRESIDENT, NATIONAL APARTMENT ASSOCIATION Mr. GROSS. Mr. Chairman and members of the subrcanmilles mig name is Jenard Gross, president of the National Apartmen tion. I am an investment builder and have taunt garden agradhanbadi ahi four States. Texte, Louisiana Arkations, and kunida and burphy,big operate in excess of 3000 unita. There are angle of advantagre i senghad One, you get à states to earn a o tom speakers And the other would be that they say most everything that you had to say. So we would like to request our full statement be entered in the record and we will proceed with a few comments on the statement. The CHAIRMAN. That will be done (see p. 1250). Mr. GROSS. We will extract from that statement certain items. Basically we endorse in principle the administration's bill, S. 3639, which would revise and recodify, as well as simplify, the very complex statutes on housing programs which appear to have proliferated with increasing complexity during the 36 years that have elapsed since the FHA was created by the National Housing Act. We do strongly feel that subsidies and mortgages should be limited to 70 percent of the median income rather than ranging upward above this level. We would also like to go on record as endorsing bill S. 4088, which would encourage rental of existing housing to qualified tenants in authorized payments and contract payments directly by the Secretary of Housing and Urban Development. We feel that furtherance of this program in many instances can reduce the quantity of expenditure proposed for public housing activities. We find that in some areas of the Nation especially in cities like Seattle, Wash., today in which there have been great cutbacks in aerospace industries that this problem exists. There is a great deal of rental housing to be used in this area. Some of this housing, I understand, has been offered to the local authorities to alleviate the low rental situation. In the meantime, some programs were started at the beginning, at the time of the Boeing employment-which was originally 115,000, and dropped off 45,000 this year; these programs have proceeded full steam ahead, even though the situation has shifted dramatically in the community. Funds for such a bill as above referred to, 4880, would perhaps prevent recurrence of this situation in other cities throughout the United States. I believe one of the previous speakers alluded to providing housing in circumstances where it may not be needed at that time. Additionally, there is another bill before the Senate, the proposal for a Housing Management Association under FHA which we feel is unnecessary as an added governmental expenditure and burden, which would be better omitted. We do not feel it would fulfill any particular useful function at this time. Of primary concern to us is the continued growth of equity participation on the part of lending institutions. As a part of our statement we have submitted a copy of an article which appeared in the current issue of Fortune magazine which is called, "The Future Largest Landlords in America." We found that in a tight money period the institutions could obtain virtually any type of deal from the borrower, ranging from various percentages of participation, by which they merely added higher interest rates to actual equity situations, and where they either groundleased the property and eventually owned it, or participated in ownership from the outset. But, perhaps the price has reached a point who don't necessarily coincide today. p We feel that if we can keep this level low we will focal the needy in operation, the disadvantaged, and at anche plugs at Hel needs are satisfied, we could then undertake to toll to adli auh sidies of higher earning groups if we find it memory at Hod Ho.. Thank you very much. The CHAIRMAN. Thank you very much 1 we pullar tider det the magazine article, the article from Fortune trage in Mr. GROSS. Yes, sir. ༔་ ་ The CHAIRMAN. The article that your attached as qeli haven't had time to read it fully yet but I begrot the article is entitled, “Firm Large + Landibel Has ta's become quite viber,post! ༈་ Of course, we have to add parenthetically that it also increases their risk. But this doesn't seem to be too major a concern to most of them today. I would say that at least 50 percent of the loans that are being made on apartments and commercial projects today include some form of equity, and probably 90 percent of them include equity or the participation factor. So it has gotten really almost totally widespread throughout the industry. The CHAIRMAN. You think the real cure for this, though, adequate supply of available funds? Mr. GROSS. Yes, sir; that's one of the points in my testimony. It is a problem of supply and demand of funds; as long as there is a shortage the money is going to flow to where it is going to get the best yield, and the equity helps it to get the yield by way of this kicker. The CHAIRMAN. I gather that you are not suggesting that this could be properly cured by Federal legislation? Mr. GROSS. We would like to think that it could be, but we are not 100 percent confident we can. No. 1, if it were legislated, it is conceivable that it could channel. money out of the entire industry. On the other hand, if it is not channeling it, you have the problem of how do you prevent them from at some point really owning the vast majority of real esetate in the country? So it is we are in a quandry, let's put it that way. We are not sure that we know what the answer is. We know that we have the problem. We are aware of the fact that we have that problem. The CHAIRMAN. I think it is good that you called it to our attention. I may say that I have had it called to my attention a good many times over the last year or two. But, I have not read this article that is just in the current edition of Fortune. Mr. GROSS. Yes. The CHAIRMAN. I look forward to reading it with a great deal of interest. Thank you very much, and we appreciate your contribution. (The full statement of Mr. Gross, and the article from Fortune magazine follow :) STATEMENT OF JENARD M. GROSS, PRESIDENT, NATIONAL APARTMENT ASSOCIATION Mr. Chairman and members of the subcommittee: I appreciate this opportunity to present this testimony on behalf of the National Apartment Association, a trade association consisting of approximately 16,000 apartment owners, developers, and managers. Our Association endorses in principle the Administration's bill, S. 3639, which would revise and recodify as well as simplify the very complex statutes on housing programs which appear to have proliferated with increasing complexity during the thirty-six years that have elapsed since the FHA was created by the National Housing Act. However, we would like to express one word of caution at what appears to be substantive rather than procedural changes in the bill's approach to assisting lower income families to obtain decent adequate shelter. Our Association has endorsed the Section 236 and the rent supplement programs which provide ef fective mechanisms to assist lower income families to obtain adequate rental housing. However, we detect in the bill, as explained by HUD Secretary George Romney in his July 13 testimony before the Subcommittee, an attempt, through higher income limits and higher mortgage limits, to extend the benefits of these programs to higher income families. We strongly oppose the extension of these rental assistance programs to families whose incomes are 80% of the median in the area and we are more emphatic in our opposition to the use of 20% of the contract authority for families whose incomes are up to the median income in the area. Such income limits presuppose that this nation can afford to house with subsidies half of the families of the nation. When there are fourteen million American families earning less than $6,000.00 per year, it is difficult to comprehend how we can provide subsidies for families earning up to $10,000.00 per year. Up to now, we have barely made a dent in assisting families that are truly in the "poor" category; how can we afford to divert our energies to families in income groups that are being housed adequately without subsidy? Our nation's housing goals will be accomplished not by expanding the rolls of subsidized tenants to embrace the great middle class, but by pursuing sound fiscal and monetary policies which strengthen the economy through a more stable price level thereby attracting more savings into thrift institutions. It is true that housing has borne a disproportionate burden of the monetary policies made necessary by an unfortunate inflationary psychology which appears to have the country in its merciless grasp. However, the answer does not lie in expanding the rolls of families to be assisted to embrace half of America's families. To divert energy and treasury to assist families earning up to the median income is to diminish the effort which must be brought to bear to solve the housing problems of the thirteen million American families who are truly in need-those earning up to approximately $6,000.00 per year. We recommend, therefore, that the maximum income limit of families eligible for Section 236 and rent supplement housing be not in excess of 70% of the median income with ample safeguards so that families of relatively low income, but with ample assets, not be eligible or these subsidies. The National Apartment Association would also further like to go on record as endorsing Bill S. 4088, which would encourage rental of existing housing to qualified tenants, in authorized payments and contract payments directly by the Secretary of Housing and Urban Development. We feel that furtherance of this program, in many instances, can reduce the quantity of expenditure proposed for public housing activities. We would like now to address ourselves to a subject which, while it is not a part of pending legislation, is nevertheless most serious and threatens the role of the private entrepreneur in multi-family construction. I refer to the increasingly prevalent custom of institutional investors requiring an equity kicker or a piece of the "action" as a condition for making a mortgage loan on the property. This practice is causing great hardship to private industry at all levels of activity within the apartment industry. The concept of participation by mortgage lenders, both long term and short term, began several years ago. This has taken several forms. Some of these have been a demand for a percentage of the gross income, such as 2% of the gross; others have taken the form of a percentage of income above a defined level, such as 10% to 20% of income above 80% or 90% occupancy. Other forms have been to take a participation in future rent increases. All of these have the effect of increasing the return to the lender of the mortgage funds to an unconscionable level. Since the advent of the initial approaches as above mentioned, new concepts have been advanced which go beyond the point of trying to get added interest and end up with ownership situations. One of these is an approach whereby, in addition to making a mortgage on the property, the lender buys the land out from under the owner and leases it back for a period ranging from 30 to 70 years. At the end of that period of time, the lender owns the property and the original owner-the developer-has merely been the manager of the property in the interim. There are several other devices which have come to light recently. One, for example, involves a permanent mortgage and a percentage of the profit from any future sale of the property. One problem which arises with any of these approaches is the simple fact that the borrower is having to deal with a lender from a position of weakness. There are inadequate funds in the mortgage markets today, which have placed |