bankers wouldn't use it because they don't have enough assets to be able to take the risks. However, it seems that it should be at least theoretically possible to draw the line between the risk borne by the mortgage banker and the Government at the right point where making a bad loan would hurt the mortgage company but not so much that it wouldn't use the program.

FHA has had a coinsurance program on the books since 1974 which hasn't been used very much. Can you tell me the status of it?

Mr. SIMONS. Well, that's the single family coinsurance program which has not been an active program-I don't know-what do we have a couple thousand loans under the coinsurance. There's very minimum use of the coinsurance in the single family and we are moving in the other areas to implement those programs now. They have not been in the multifamily areas.

To come back to the mortgage banker, I think the delivery of financing in areas that are not adequately served by normal financial institutions has been taken care of by the mortgage banker. The mortgage banker has served an essential function in trying to bring money to those areas which did not have an equal share in the market and they, in effect, must be continued. We believe they are essential to have full delivery of all the programs. They are moving now also into conventional areas and everything else. We could perhaps structure a secondary market coinsurance program which would have some way for mortgage bankers to lay off that portion of their risk. This is what we would have to do because the mortgage banker-there's no mortgage banker that I know of that is sizable enough to hold the risk portion of the coinsurance. That would be a reinsurance of his coinsurance.

The CHAIRMAN. I referred to this once earlier, but how about using conventional lenders more in this area which FHA mortgage bankers have handled in the past so you get a greater variety of lenders and more participation?

Mr. SIMONS. We welcome the conventional lenders.

The CHAIRMAN. What are you doing to get them into it more?

Mr. SIMONS. We have streamlined our processing. We have offered coinsurance to them in the single family.

The CHAIRMAN. To what extent are you making progress?

Mr. SIMONS. Well, the lender has, first of all, has our decision on single family housing in 3 to 5 days, as I pointed out in my testimony. Eighty-five percent of our applications for commitment are being processed within 3 days. This is great service, much better service than the conventional lenders can do in many instances. Yet the lenders are not ready to use the FHA insurance except where they feel they want to put the loan into a little higher risk or not as preferred a risk category as the conventional lending. Once they do that they might as well take the 100-percent insurance. They want the 100-percent insurance. It's not a servicing problem. It's a problem of seeking the security for what they perceive to be perhaps a less preferred risk. Once they make that decision they are going to 100 percent.

The CHAIRMAN. I don't want to seem to be arguing with myself, because I have asked questions on the other side of this. Now I would like to ask you a question which seems to contradict the attitude implied in my questions.

They used to say on "Meets the Press" that the questions in no way reflect the biases or prejudices of the questioner, but they usually do.

You said that you think FHA should compete with private insurance for the middle-income housing market. I don't know that I disagree, but why should the Government compete for a market which seems to be well served by the private sector? Is the secondary market the answer?

Mr. SIMONS. I don't think the secondary market alone is the answer. I think they are moving to create themselves around private mortgage insurance also. I think the answer is there is a large untapped market out there, that is not served by private mortgage insurers, nor by FHA, and that that market exists out there, and I don't know, maybe 30 to 40 percent of the market that is not being served by either one.

I think it is necessary to have some sort of monitoring effect. And FHA competing does have that monitoring effect.

The CHAIRMAN. What this question related to is the people are being served by the private market, why should FHA get into competition there? Why do you need more competition? If the private market is doing the job, why shouldn't that be enough?

Mr. SIMONS. If FHA should withdraw as a secondary market facility, you would then have an untapped portion, percentage of the market, in certain areas where you don't have private mortgage insurers actively engaged, in certain States they don't have as high a profile as in others. Conceivably if FHA were to withdraw, there may not be a place for them to go. The FHA insurance right now is a little better than the private mortgage insurance from the risk standpoint. The CHAIRMAN. That is hardly a justification for a Government program, that there is no place for them to go. If private enterprise is doing the job, why should the Federal Government intrude? After all, it is unfair competition, it is a use of Government bureaucracy in ways where they are not needed, you want to hold down the size of your organization of HUD as much as you can.

Mr. SIMONS. First of all, the FHA program is only a demand program, we are not forcing it on anybody. It is a program that is available to be used. We have structured it in a way in which the insurance premium has remained static, it is there to be used, the method of administration has not been changed, it is there. We are not forcing people to use it.

But the simple fact that it is there has created a monitoring effect on the entire insurance industry.

The CHAIRMAN. Kind of a TVA, in other words, a yardstick. Mr. SIMONS. It is a yardstick approach, but also it provides other incentives where we are able to come in and do a little creative financing, financing techniques. I think the graduated payment mortage plan is a perfect example of where the Government role actively competes.

When I say active competition, I don't mean we are out knocking on the same doors with the private mortage insurers. I mean our presence is still in that market. Having our presence there, we are then able to innovate, build upon that, and we are bringing to the public a brandnew program this year, which if there were no FHA, there would be no way of bringing this program to them.

The CHAIRMAN. Mr. Simons you say the task force concluded that the GNMA tandem plans are the most effective tool currently available for making rents affordable for low- and moderate-income renters in insured housing. If we don't have tandem assistance available, what al

ternatives are there, and who could be assisted? If we do have tandem assistance available, what alternative programs could we implement and who would be served by them?

Mr. SIMONS. Tandem can serve a number of purposes. In the multifamily unsubsidized field, we have found the rental levels of apartments have not risen as rapidly as the prices for housing. As a result, with the 9 or 934 interest rate, conventional or unsubsidized rental housing cannot be built today in many areas where it can meet the market needs of an income level low enough to satisfy the market needs. It is in this area, which is the first area I mentioned, that we need the reduction of the interest rate, because bringing the interest rate down as we have done last year to 71% percent made economically feasible in the markets many, many projects which were not otherwise feasible.

In connection with the subsidized programs, we have found that the continuity and the ability to have the tandem rate reduce the mortgage interest is perhaps a less expensive way to subsidize than to try and raise fair market rents.

In the section 8 program, we are faced with an alternative. We can say that 9 or 934 percent is the going interest rate for new construction and restructure all of our fair market rents based upon the higher interest cost, whatever that interest cost in the market should be.

I personally feel this is an uneconomical way to do it. The Government cost of money is the least expensive to anybody. The tandem program is one of the least expensive forms of subsidy to keep these interest rates down. I personally would prefer, perhaps, to see a tandem to help us in the subsidized field rather than pushing up the fair market rents. But that is my personal opinion.

The CHAIRMAN. Thank you very much, Mr. Simons. I appreciate your responsiveness. We will have a number of questions for you for the record. We are very impressed by your great ability and it is very helpful to have your testimony.

Now I am going to ask a panel to come forward. Mr. Horace Bazan, Committee for the Revitalization of FHA; Mr. Vondal Gravlee, from the National Association of Home Builders; Mr. Daniel Hanrahan, National Association of Realtors; and Mr. John C. Williamson, Mortgage Insurance Cos. of America.

I was able to look over some of our statements because they were available last night. I very much appreciate that. I am going to ask you gentlemen to confine your remarks to 10 minutes, because the hour is late and of course there are four of you who will be speaking. The green light will run for 9 minutes, then the yellow light goes on for a minute, and when red light or stoplight goes on, you have to stop. The first witness will be Mr. Horace Bazan.

STATEMENT OF HORACE BAZAN, COMMITTEE FOR THE REVITALIZATION OF FHA, WASHINGTON, D.C.

Mr. BAZAN. Thank you, Mr. Chairman, Mr. Chairman and members of the committee, I am Horace Bazan, testifying as a representative of the Committee for the Revitalization of FHA. Our committee consists of former FHA Commissioners and other former FHA officials, who got together late last year on a voluntary basis to do what we can.

to help restore the vigor and efficiency of this vital element in our mortgage financing system.

FHA is a part of our mortgage financing system that has a critical bearing on the efficiency of our overall mortgage credit system, how the various elements of that system function in the market, how they relate to our economic stability and growth, how they serve all of our people in all parts of the country, at all times, and under varying circumstances.

Neither private mortgage insurance nor any other development in our residential credit system takes its place.

The FHA-insured mortgage combines absolute safety of investment for the lender or secondary market investor, with liberal, high ratio loan terms for the borrower.

The scope of FHA insurance coverage is 100 percent of the loans. The duration of FHA insurance coverage is the full life of the loan. The quality of assurance is the absolute best available backed by the full faith and credit of the United States.

That is why FHA-insured loans are widely and readily marketable on a nationwide basis, notwithstanding their liberal terms and very high ratio of loan to property value.

An investor can safely purchase an FHA-insured loan on the strength of the insurance guarantee. He does not have to look behind the insurance to the risk characteristics of the transaction itself, the property, the borrower, the terms of the loan, or to the skill, resources, financial condition, and motivation of the originating mortgagee from whom he is purchasing, or further protect himself with repurchase agreements or by requiring a retention by the seller of a share of the loan and the risk. The investor can buy freely, conveniently, with confidence. Moreover, the same is true of any subsequent purchaser to whom the initial investor may wish to sell.

That is why FHA-insured mortgages have a liquidity and marketability that is not characteristic of conventional mortgages in general, whether or not they are covered by private insurance.

That is why FHA-insured mortgages make possible an active, competitive, diversified, private, nationwide mortgage market.

That is why credit-short areas of the country and others served by the secondary market are able to get loans on liberal terms.

That is why, when periods of credit stringency are relieved by increased purchases of FHA-insured loans by Government-sponsored secondary market backup agencies such as FNMA and GNMA, the credit shortages are relieved with liberal loans, and the burden of credit stringency does not have to be borne disproportionately by families. of modest income, first-time purchasers, persons in credit-short areas, or others who need high ratio long-term loans.

Of course, properly operated, FHA is self-financing, out of its premium income, like the Federal Deposit Insurance system.

This, then, is FHA's basic and continuing function, to facilitate residential credit, so that families can make their housing choices in the market.

FHA has declined. This is evident from a simple examination of the volume of FHA home mortgage insurance applications. In 1973, it was doing less than half of its 1968 volume-which was fairly typical of the 1960's. It has improved somewhat but it is still very low.

The decline of FHA weakens the secondary market for mortgages, impairs the mortgage financing system as a whole, and reduces housing opportunities.

Why has FHA declined? How could it happen when many borrowers need its services?

Let me catalog the reasons.

One: Destruction of FHA's professionally staffed and professionally led organization.

Two: The consequent loss, dispersion, and misdirection of the professional expertise necessary to underwrite mortgages and manage the insurance system and its assets. More, not less, professional expertise and objectivity is needed for dealing in high ratio loans and center city lending, and that is what FHA has lost.

Three: Delay, indecision, redtape, and collateral requirements visited

on the customers.

The FHA Commissioner could not marshal his staff and resources to meet his workload. He still can't-even under HUD's proposed new organization. They are not under his control and management.

HUD turned itself into a working model of Parkinson's law, which explained why there were more bureaucrats in the British Admiralty than there were seamen in the British Navy. GAO reports that HUĎ has about two employees in its Washington and regional bureaucracies for every three out on the firing line in its area and insuring offices. FHA formerly had about six employees in its local insuring offices for every two in Washington. It had no regional layer. HUD's budget attributes between 8,000 and 9,000 employees to housing, but even at today's relatively low volume, 60 percent to 80 percent of the home appraisals have to be handled through outside fee appraisers.

The result of all this inefficiency is that FHA is harder, and more costly, to deal with. The prospective buyer may need FHA-insured financing, and have the qualifications to get FHA approval, but FHA may not be able to meet the time requirements of his transaction or the seller or other essential party to the transaction may decide that dealing through FHA is just too cumbersome and costly to be good business for him.

There is one more factor of a very different nature that severely curtails FHA's usefulness at times. That is the rapidity with which inflation in the price of houses keeps outstripping the fixed dollar mortgage limits. Badly needed new mortgage limits have just been approved.

Can FHA be revitalized? Yes; it can, if there is a will to do so. Simply stated, you need to establish a Federal Housing Administration, put an organization under that label, that contains all the elements necessary to operate the residential credit insurance system and deliver the service to the consumer.

The Secretary has made the Assistant Secretary for Housing FHA Commissioner, responsible for the administration of the credit insurance program.

Now what is needed is to put those 8,000 HUD employees that are doing housing work into an organization under the Commissioner's command so that he can do the job for which the Secretary is holding him responsible.

Delegate and supervise. That is management. And the purpose of organization is to manage.

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