Mortgage Bankers Association of America: Brief summary of Housing Law Administration, Simplification and Section by section summary The Federal Housing Administration.. Simplification and improvement of mortgage insurance laws... Reserved for future draft on housing assistance to low-income persons. Mortgage Bankers Association of America, proposed legislation___ National Association of Realtors, statement from Harry G. Elstrom, president. News articles: Chicago-Sun Times, September 11, 1977, HUD to Stop Selling Re- Wall Street Journal, April 3, 1973, "Homeowners Outraged by New- Office of International Affairs, report, "An Insured Building Warranty Page 80 88 96 99 133 134 135 136 46 362 411 409 394 256 United States League of Savings Associations, paper prepared by the Urban 436 TABLES AND CHARTS FHA Home Mortgage Applications, 1968-77-- Information provided for credit time approvals by Mr. Budd Krones.. 31 268 50 230 FUTURE OF FHA WEDNESDAY, OCTOBER 26, 1977 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, D.C. The committee met at 10 a.m., in room 5302, Dirksen Senate Office Building, Senator William Proxmire, chairman of the committee, presiding. Present: Senators Proxmire, Sparkman, Morgan, and Schmitt. OPENING STATEMENT OF CHAIRMAN PROXMIRE The CHAIRMAN. The committee will come to order. The committee begins hearings this morning on the future of the FHA. These hearings are somewhat unusual for the committee in that they are not legislative in nature, nor are they oversight hearings in the normal sense. What they represent is an effort by the committee to take stock of the past and the present FHA and look toward the potential of the agency for playing a redefined role in housing policy in the future. Because this issue is too extensive and complex to explore thoroughly in 3 days, the committee expects that these will be the first in a series on this question. We will focus this week on FHA's role in single-family home ownership with an emphasis on urban housing problems. A subsequent hearing will explore the role of FHA in multifamily housing, and a third will probably be scheduled to examine issues raised in the first two in greater depth. FHA was founded on a brilliantly simple idea-that the Federal Government can, at little or no cost, tap the resources of the private lending industry to meet our national housing needs, by removing the lender's risk on a mortgage loan. Like many apparently simple concepts, this principle is difficult to translate into practice. In order to succeed, FHA must walk a narrow line on the frontier of mortgage risk. It must, on the one hand, push beyond the boundaries or risk which a private lender would accept, in order to make that lender's funds available to an expanded group of borrowers. At the same time, however, FHA must not go too far out on the risk continuum, because insuring unsound loans will undermine its own solvency, and will hurt the home borrower in the process. For about 30 years, FHA performed this balancing act, popularized home ownership, and made a profit. Quite a success. It was probably more important than any other single factor in making this country a nation of homeowners. Its great accomplishment was to prove for the (1) first time that average American families could borrow money under a long-term, evenly amortized mortgage, and would repay it. FHA's experiment led the private sector to adopt the concept, and lenders learned to make long-term loans universally, even without FHA insurance. A private mortgage insurance industry eventually mushroomed, following FHA's profitable model of guaranteeing home loans. About a decade ago, housing policymakers looked at this success story at FHA and decided it was time to turn the FHA insurance mechanism toward meeting the new risk frontier in the nation's cities. FHA was directed to undertake risks greater than it had accepted in the past and was used as the financing vehicle for new subsidized housing programs for low-income families. By the beginning of the 1970's, it became clear that the balancing act had faltered, if not failed. In the absence of strong administration of its programs, FHA had gone beyond the point of sound and profitable insurance. It appeared that coupling FHA 100-percent insurance with loans to low-income, unsophisticated borrowers, in the absence of strong administrative controls, was a recipe for severe trouble. FHA loans became tools in a pattern of manipulative urban neighborhood turnover. In the classic example, real estate speculators used racially based panic-selling pressures to induce urban residents, block by block, to sell their homes at depressed prices. The speculator then gave the home cosmetic repairs, and resold it to a low-income home buyer using an FHA mortgage, often at an inflated sales price supported by a false appraisal from an FHA appraiser who received a kickback. This description, of course, is greatly oversimplified. I believe, furthermore, that these problems were exaggerated considerably by those who used them as a rationalization for freezing housing assistance programs in 1973. The programs, both for high-risk insurance and for direct subsidies, did a great deal of good. Furthermore, even if the programs had been perfectly conceived and administered, they almost certainly could not have stopped the decline of the nation's cities in the 1960's, when larger forces were at work. The fact remains, however, that the FHA scandals left the agency with depleted resources, severe image problems, and very low staff morale. It also left a serious question in the minds of many housing analysts as to whether 100-percent FHA insurance might be perhaps an open invitation to unsound lending. At about the same time that FHA moved into the urban programs, it also began to experience a decline in activity. This has continued until FHA has become, today, less than 10 percent of the housing market. Many people attribute this decline directly to the agency's involvement in the subsidized housing and high-risk programs. Others argue that the programs were sound and the fault lay in poor management by an administration which did not believe in them. Still others blame the decline on using FHA loans as a vehicle for pursuing nonhousing social goals, such as environmental and consumer protection and equality of opportunity. And another group argues that the decline is simply the natural result of the growing, competitive private mortgage insurance industry, which has learned to give faster, cheaper, and better service to the lending community. The debate has been vigorous, but inconclusive. Perhaps policymakers have been discouraged by seeing the high hopes of the 1960's end with problems, and have been reluctant to start again. The question has even been asked, in recent years, whether we still need an FHA at all. I believe today, however, that the answer to that question is yes, and that a strong consensus shares that view. The HUD task force on FHA reached the same conclusion, and virtually every witness who has expressed interest in these hearings has felt the same way. The hearings start on the assumption, therefore, that FHA, or some form of Federal mortgage insurance, has a critical role to play in national housing policy. Our goal today is to move the debate beyond generalizations. We want to define very precisely what FHA's role or roles should be, what led to its decline, and how we should shape its future. In doing so, I hope especially that we will look again at what FHA can do for our Nation's urban housing problems. We have today a tremendous advantage over where we stood 10 years ago because we have the benefit of hindsight. One of the major objectives of this hearing will be to try to learn from the mistakes of the past, and apply the lessons to the future. In the process, it is especially important to remember one of the most fundamental and overlooked lessons of the FHA scandalsthat too much lending can be just as harmful as too little. FHA 100percent insurance, to the extent it can be used by lenders for unsound mortgages, leads to urban decay, blight and broken dreams. I still believe that Federal mortgage insurance is a brilliant approach to meeting national housing needs, but the trick today, as in the past, is to help FHA find the risk frontier-beyond the activity of the private sector, but still within the bounds of soundness. This week's hearings are structured around three central panel discussions, one on each day. The first, today, will discuss the reasons for FHA's decline. The second, tomorrow, will review the problems which have occurred in the past with FHA involvement in the cities, and will look at ways of addressing them. And the third panel, on Friday, will look to the future potential of Federal mortgage coinsurance for tapping the resources of financial institutions which have not traditionally dealt with FHA, and which are looking today for tools to increase their urban involvement. Before getting to these panel discussions, however, we are pleased to have the Assistant Secretary of HUD for Housing, the Honorable Lawrence Simons, as our first witness. Unlike the other witnesses, we have not asked Mr. Simons to confine his remarks to single-family housing, but are inviting him, instead to give us his overview of the FHA. Senator Sparkman? Senator SPARKMAN. Mr. Chairman, I have a brief statement that follows rather closely what you have said. I will just say a word or two about it and then ask that the entire statement be printed in the record at this point. I agree with what you have said with reference to the great part that FHA has played in the field of housing and I have regretted very much seeing the decline that you referred to and I see no reason why FHA cannot be, shall I say, newly stimulated and made to serve housing generally throughout the country. I think it can be and I hope we will be able to devise programs that will get it into operation. As I say, I ask that my statement be printed in its entirety. The CHAIRMAN. Without objection, the statement will be printed in full in the record as though read. [The statement of Senator Sparkman follows:] STATEMENT OF SENATOR SPARKMAN Senator SPARKMAN. I am very pleased that we are holding these hearings on the future role of the Federal Housing Administration. The FHA has been a major success among Federal programs. People tend to forget that the FHA was created during the worst depression this Nation has known to help ordinary Americans become homeowners and to help expand housing production and employment. The FHA helped build the needed housing and generate the needed jobs, all across this country, in large cities and small. And it has continued to do so for many years. FHA insurance has helped over 14 million American families buy their own homes. It has helped the housing industry become a major factor in the economy of this Nation. It has played a vital role in providing millions of Americans with work as well as shelter. In looking back, I would say the FHA program has succeeded beyond anyone's expectations. This is not to say that the FHA has been free of failures. It has had its faults, and its defaults. It has at times been overworked and abused, and at other times neglected. It has not always been administered with wisdom or foresight. No program has. But in its four decades of existence it has shown its ability to make significant contributions to American life, and to adapt to new conditions and challenges. We know that the housing problems of the 1970's are not the same as those of the 1930's, or the 1950's. We know that yesterday's solutions may not work today. These hearings are to help chart a new course for the FHA. We need a new FHA to assist in renewing our cities. We need new FHA programs to achieve housing goals we have not achieved. I'm convinced that we can improve our Federal housing programs, to make them as meaningful for the 1980's as they were for earlier decades. I therefore look forward to hearing from our distinguished witnesses. The CHAIRMAN. Senator Morgan? Senator MORGAN. Mr. Chairman, I don't have anything to say except, I'm delighted to see my friend here this morning and I'm sure we are going to be enlightened a great deal by virtue of his many years of experience in this area. So I will be listening with great delight. The CHAIRMAN. Mr. Simons, you have the floor. Go right ahead. |