offices. As a result, builders and consumers who read press reports about the changes contained in the law, experienced the frustration of waiting again for the HUD bureaucracy to act. We would hope that in the future, HUD would be much more sensitive to the need for expeditious issuance of implementing regulations.

Besides the problem of attitude, another major complaint within our industry is that the processing time for FHA mortgage insurance applications is very long and that the FHA programs are wrapped in "red tape". By processing, we are referring to a series of functions performed by FHA personnel, namely the inspection and appraisal of the physical property, credit review of the applicant, and compliance with statutory requirements.

Staffing of the FHA field offices has not kept pace with the additional processing requirements imposed by certain national policy goals, i.e., affirmative marketing requirements to fulfill the goal of equal opportunity in housing, environmental impact analysis and A-95 review procedures to identify the potentially adverse effects of new construction, and in the case of multifamily housing, the Davis-Bacon Act prevailing wage requirements. In order to minimize the delay caused by these so-called "front end" review requirements, NAHB has long advocated that clear lines of responsibility and authority be established and stabilized for the administration of FHA programs, both in Washington and in the field. We also have urged that the Assistant Secretary for Housing-Federal Housing Commissioner be given direct line authority over the housing personnel and policies of HUD. Secretary Harris announced on October 13th, a reorganization of the HUD field office, which we understand is intended to accomplish the objectives we have recommended. We also urge the Congress, in consideration of HUD's 1979 fiscal request, to give careful consideration for increased appropriations to assure that the FHA field offices are staffed adequately.

In conclusion, there are two practical suggestions that NAHB has been reducing processing delays, while also minimizing FHA's personnel needs.

First, NAHB has urged HUD to recognize that many communities throughout the country have their own local property standards, which, while different from those of FHA, also encourage high construction quality. We have recommended that in these communities FHA consider the waiver of Minimum Property Standards, or at least better use of public resources on an inter-governmental basis. For example, subdivision reviews are, in many present instances, subject to examination by local, regional and Federal agencies-sometimes by more than one agency on each governmental level. If the City Planning Commission and the County Health Department are going to review these plans in the first instance, and if they are made aware of contradictory or additional FHA requirements in this regard, they should be able to perform some of the services now performed separately by FHA.

Second, FHA must develop greater program flexibility and simplify its processing system by increasing its reliance on builders, mortgagees, and other customer groups. This would be based on the premise that FHA's function is to supervise and insure, but not actively execute programs. This role is evidenced with respect to actual construction, where FHA merely supervises others. FHA could more closely parallel that role in processing as well, thereby relieving itself of certain functions which might better be done elsewhere.

Some parallels to this suggestion are evident today. FNMA, FHLMC and GNMA acquire mortgages which have been fully processed, with all forms and criteria completed by the selling institution. The secondary market agency reviews the documents to assure compliance with predetermined criteria. It is true that they frequently rely upon FHA and the VA as to propriety in initial processing and construction and do not duplicate these functions. But that is precisely the analogous point: the use of resources that are already available and an absence of unnecessary duplication.

The transfer of functions to private industry would not be delegation of legislative authority, nor a surrender of administrative responsibility. Its goal is to reduce the unnecessary involvement of agency personnel in routine functions and release them from supervisory and technical assistance in a way that provides broader program effectiveness. At the same time it will provide greater inducement for the more experienced and sophisticated producers to enter the program.

Thank you for the opportunity to testify, and I will be happy to answer any of your questions.

The CHAIRMAN. Thank you very much, Mr. Gravless. Mr. Hanrahan,

STATEMENT OF DANIEL C. HANRAHAN, CHAIRMAN OF THE LEGISLATIVE COMMITTEE, NATIONAL ASSOCIATION OF REALTORS, ACCOMPANIED BY BUDD KRONES, MEMBER OF THE EXECUTIVE COMMITTEE, NATIONAL ASSOCIATION OF REALTORS, AND ALBERT E. ABRAHAMS, STAFF VICE PRESIDENT, GOVERNMENT AFFAIRS DEPARTMENT

[The statement read by Mr. Hanrahan follows:]

The National Association of Realtors® is comprised of more than 1,700 local boards of Realtors® located in every state of the Union, the District of Columbia, and Puerto Rico. Combined membership of these boards is approximately 500,000 persons actively engaged in sales, brokerage, management, counseling, and appraisal of residential, commercial, industrial, recreational and farm real estate. The activities of the Association's membership involve all aspects of the real estate industry, such as mortgage banking, home building, and commercial and residential real estate development, including development, construction and sales of condominiums. The Association has the largest membership of any association in the United States concerned with all facets of the real estate industry. Principal officers are: Harry G. Elmstrom, President, Ballston Spa, New York; Tom Grant, Jr., Vice President, Tulsa, Oklahoma; and H. Jackson Pontius, Executive Vice President. Headquarters of the Association are at 430 North Michigan Avenue, Chicago, Illinois 60611. The Washington office is located at 925-15th Street N.W., Washington, D.C. 20005. Telephone 202/637–6800.

Mr. Chairman. My name is Daniel C. Hanrahan, and I am a Realtor® from Elizabeth, New Jersey, and Chairman of the Legislative Committee on the National Association of Realtors®. I am accompanied today by a member of the National Association of Realtors'®R Executive Committee. Mr. Budd Krones of Tucson, Arizona, and by staff, including Mr. Albert E. Abrahams, Vice President of our Government Affairs Department.

It is our understanding that these hearings focus on FHA decline and ways in which the FHA can make a more positive contribution to our national housing problems and, in particular, problems of urban revitalization which continue to occupy this government and our communities.

First, let us say that the FHA Task Force and Secretary Harris, who has embraced the recommendations of that Task Force, should be complimented for their joint recommendations that a more centralized authority for FHA housing programs is in order at HUD. In addition to discussing briefly the importance of these changes among others in this, the twentieth reorganization of HUD since 1969, our statement will also dwell on the processing procedures at FHA and what can be done to improve them.

Before we do that in some detail, Mr. Chairman, I would like to stress a word that is both cautionary and hopeful. It would be wrong for the Congress to expect that FHA, of and by itself, is going to lift the shackles of America's cities and bring those cities, including the one in which I reside, to a sharing partnership borne solely on the shoulders of the government of the United States. At least as hopeful, Mr. Chairman, are the steps that the U.S. League of Savings Associations, the National Association of Realtors®, and other groups are taking to bring about through the private sector a greater realization of the value and the place in American society of our cities. The National Association of Realtors is involved. The U.S. League of Savings Associations has announced its own program for financial involvement in this nation's inner communities. We realize that paper actions won't do the job, but we have a very ambitious program to:

1. To revitalize and preserve the nation's existing housing. 2. To encourage the revitalization, preservation neighborhoods.

and restoration of

3. To enhance the economic and social fiber of the entire community. 4. To encourage and stimulate the participation of more than 500,000 Realtors® and Realtor-Associates® in the program.

Each of our State Associations have advisory committees to work with the member boards within their jurisdictions to establish Realtors®. Neighborhood Revitalization Committees at the local level. Again, we recognize that we can't find the answers on paper, but we have already held, through the leadership of our national President, Harry G. Elmstrom, five day-long seminars in Boston,

Atlanta, Chicago, Denver and San Francisco to acquaint each local board with their responsibilities under this program.

The first phase is for the Realtors® to work with their local government officials to determine which neighborhoods need help and what the officials might do to help.

The second phase is for the Realtors® to meet with the local bankers, savings and loan officials and other financial institution executives, to see if more local funds can be made available for home improvement and home mortgage loans in the targeted neighborhoods.

The third step is for the Realtors® to enlist the help of other consultants and advisers who also would contribute their time free of charge to helping the neighborhood groups meet their goals of modernization.

The next stage is to select a neighborhood, to make a visual inspection of it, and to talk to the resident/owners to determine if they would join a "Modernize This Neighborhood" group and support it fully.

The last stage is to work with the groups of neighbors who willingly join in a program to modernize the area in which they live. The Realtors® help them set up exploratory meetings, assign specific responsibilities, set reasonably attainable goals, and work at the necessary follow-through to reach those goals.

We are developing the manuals necessary to arm our 500,000 Realtors® with the information they need to get the job done. The information is being made available to the residential brokers, the appraisers, the property managers, the industrial Realtors® and all the other individuals and groups who make up the backbone of the real estate industry in this nation. We have almost completed work on one of the most detailed source books of information on federal programs available for housing and community development programs yet written. It will serve as an excellent tool to jog those community officials who need to have more activity considered at the local, particularly at the neighborhood, level.

Our Realtors® program is not aimed solely at big cities and high density neighborhoods. It is aimed as well at every community in the United States where there is housing blight and decay. To supplement the efforts of the private sector, government programs need to be considered, reconsidered, and in some cases, expanded.

We recognize that some of the following proposals go beyond the scope of this Committee's activities. But we would like to recommend that Congress consider the following steps to further deal with the subject of urban revitalization:

1. Continue substantial funding levels ($3-4 billion) for Federal block grants to the cities. (This is in line with long-standing Realtors® support for revenuesharing and block grant programs.)

2. Channel such programs wherever possible to the neighborhoods themselves so that serious grassroots efforts can be mounted. Working through City Hall is essential, but developing new ways to get the plans for neighborhoods formulated and organized at the neighborhood level is equally important.

3. Increase funding for Neighborhood Housing Services and Neighborhood Preservation Projects programs, but keep these programs non-bureaucratic and flexible. These self-help programs perhaps above all others do more to involve local neighborhoods, the business community and government resources than any system yet devised, without heavy commitments of Federal dollars. The Senate, through the leadership of this Committee, has already moved in that direction by giving permanent status to the Urban Reinvestment Task Force.

4. Increase participation in the Section 223 (f) program of the National Housing Act. This will help in providing business incentives for maintenance and rehabilitation of existing properties. Rising operational costs have posed a serious problem for preservation of the housing stock. Building owners, sensing failure of their inner city properties, disinvest, cut down on maintenance, go into terminal default on property taxes and mortgage payments, and often walk away from the buildings.

Section 223 (f), since 1975, uses FHA mortgage insurance to break the pattern. It permits reduction of debt service through a stretchout of term and normal institutional interest rates. It can create enough net cash flow to finance needed maintenance and repairs. About 280 projects involving 50,000 units are being helped or are in the pipeline using this technique.

5. Congress should consider, for example, legislation authorizing either HUD reinsurance of the reserve funds of private mortgage insurance companies which agree to co-insure the risk pools established by city government, lending industry associations, or the risk investments of the thrift institutions themselves. Under such a demonstration program, a city government or an association of lending institutions could establish a pooled risk loan program to make rehab and im

provement loans in a neighborhood where a neighborhood renewal effort is under way. HUD could contract to reinsure the private mortgage insurance company's reserve fund against excessive losses.

Instead of putting the federal government up front, it puts Washington at the back of the line and allows the private sector to take the initiative. The private sector would accept normal losses; the federal government would be responsible for losses only where they were unexpectedly excessive. By limiting this reinsurance program to areas featuring neighborhood-based renewal programs, there would be less concern that the federal government would have significant exposure. This insurance mechanism minimizes federal intrusion, but it will give new confidence to the private sector by guarding their funds against wholly unexpected levels of risk.

6. Rather than forcing lending institutions to make loans in areas where the prospect of repayment is weak, a competitive reward could be provided for those lending institutions which show faith in the capacity of community leaders and local governments to upgrade the economic soundness of a neighborhood. The Chairman of the Federal Home Loan Bank Board and the Chairman of the Federal Reserve Board should explore a borrowing rate reduction for lending institutions based upon the portion of their assets invested in neighborhoods where a citizen improvement effort is under way. Under such a plan, lending institutions which are working actively to reverse decline in urban neighborhoods would gain the benefit of perhaps as much as a one percent lower cost in borrowing at the Federal Reserve or at the Home Loan Bank, as the case may be.

7. Restoring abandoned HUD-owned properties. HUD's procedures for liquidating its inventory of repossesed homes and apartments require bidding by qualified contractors who undertake to restore the units to a habitable form. To be a qualified contractor, rather stringent bonding, insurance and other requirements must be met.

This runs into a practical problem. Many of the HUD-owned properties are in minority areas of the cities. On the other hand, the great majority of qualifying contractors, under HUD procedures, are established white-owned firms which can more readily meet the bonding and insurance requirements. Often, these white-owned firms are reluctant to bid on rehab jobs in minority neighborhoods. The reasons include vandalism, theft, and possible bodily harm. Minority contractors, eager for the work, are relatively small and have difficulty meeting the HUD qualifications.

Closer cooperation needs to be developed among HUD, the Small Business Administration, and the Office of Minority Business Enterprise to help get abandoned homes back on the housing market. The tools exist. SBA is empowered by law to contract with other federal agencies, including HUD, and in turn subcontract to small businesses. Further cooperation can provide the final breakthrough necessary to assure a role for minority contractors in inner city rehabilitation projects.

8. Tax law changes to facilitate neighborhood revitalization.

Three important tax law changes would assist in neighborhood renewal. One would be an accelerated five-year tax write-off of all qualifying improvements to structures located in areas in which renewal programs are under way. This fast write-off will decrease the owner's tax burden, increase the building's cash flow and encourage renovation and good maintenance. For today's problem demonstrates that when a rundown structure is rehabilitated, the cost of improvements must be capitalized over the expected remaining lifetime of the building. This tax change would increase the trend to renovation.

Secondly, in neighborhood renewal areas, a small but relatively significant refundable tax credit should be tried to encourage owner-rehabilitation.

Thirdly, whenever the owner of existing rental housing on which accelerated depreciation has been taken deeds that building to a local neighborhood housing service, community development corporation, or similar organization, there will be little or no recapture of accelerated depreciation benefits upon the transfer. This provision will encourage owners of declining buildings to donate those buildings to neighborhood-based renewal organization rather than to walk away from a declining investment.

9. Law enforcement assistance.

The Law Enforcement Assistance Administration in the Department of Justice was created by the Congress nearly ten years ago as an important element of the war against crime. Over the years, this LEAA has channeled billions of dollars to state and local enforcement agencies, to the courts and corrections systems. LEAA should take the next step. While its efforts have bolstered state and local agencies, it has not yet exhibited sufficient initiative in stimulating citizen programs to make neighborhoods safe. Many have expressed continued support

for neighborhood-based anti-crime programs. These experts have expressed their belief that crime deterrence begins in those very neighborhoods where it occurs, and that citizens should undertake, with local government support, effective steps to assure neighborhood residents that their neighborhood will be a safe place in which to live. Federal funds should be allocated to efforts at the grassroots level where strong programs must be developed to arrest urban decline and to protect the streets.

Back to the processing procedures of FHA. In a recent appearance before your Committee, this Association and the Institute of Real Estate Management, of our affiliates, discussed multi-family processing and its specific problems. Today we will concentrate on the problems involving FHA insurance for single-family residences.

Although the Federal Housing Administration has served an extremely useful purpose in the past, since 1960 its role in the single-family housing market has been declining. We recognize and applaud the fact that private enterprise has, in recent years, complemented so successfully the efforts of the FHA through the development of private mortgage insurance of low down payment conventional mortgage loans. While most of the homes sold by members of this Association are financed by such conventional loans, however, we strongly recognize and support the need for a strong, efficient, viable FHA, as an alternative avenue of mortgage finance. Such an FHA is particularly important in times of tight money, when an FHA-insured loan is frequently the only means of providing low down payment residential mortgage financing.

The Administration apparently also recognized the need for a strong FHA and in June, Secretary Patricia Roberts Harris announced the formulation of a Task Force, chaired by former HUD Secretary, Dr. Robert Weaver, to study the future of FHA. The final report on the "Future of FHA" was made public last month. Although we have reservations about some of the conclusions of the Task Force, this Association is also very pleased about the following recommendations since they could alleviate some of the processing and default problems FHA has experienced in the past:

That FHA should work to expedite processing, reviewing, and revising regs, introducing innovative techniques and making credit available on more reasonable terms.

That counseling should be a priority;

That coinsurance should be used whenever possible;

That FHA study the use of lenders for processing;

That the current FHA structure should be changed to provide the Assistant Secretary for Housing/FHA Commissioner line authority to the field in the area of housing.

It appears that the Administration shares our view and that of the Task Force that there should be more centralized authority for FHA housing programs. In announcements this month, Secretary Harris and Under Secretary Jay Janis announced the twentieth reorganization of HUD since 1969.

Although it is too early yet to be able to recognize all of the benefits and/or repercussions of this move, we are delighted to see that at least there will be greater authority given to the Assistant Secretary for Housing/FHA Commissioner to assure consistency in the interpretation and implementation for the operations of housing programs among all FHA field offices.

In addition to the loss of volume as a result of the developments in the private sector, FHA has lost credibility and business because of a number of processing problems. FHA insurance for single-family loans requires a lengthy process compared to that done by private mortgage insurers. Where it takes four to six weeks to obtain approval from FHA, this can be accomplished in seven to ten days for local credit or ten days to two weeks for out-of-town credit using private mortgage insurance. The applicant from out-of-town who must stay in a hotel or other temporary quarters during this delay will justifiably lean toward private mortgage insurance (PMI) rather than that offered by FHA.

The buyer has as much protection under PMI as he does under FHA because neither discovers latent defects, things that we can't see. If there is a slight crack in a brick wall, however, the PMI doesn't require that we patch it, but FHA does. The private mortgage insuror appraises it as is, and the FHA, as it is fixed up.

Moreover, the National Association of Realtors® advocates the use of standardized criteria for the approval of all government-insured or guaranteed properties. The story is told too often of the applicant who would be granted a VA guarantee, but cannot obtain approval from FHA for insuring the same property. An applicant for a VA guarantee can waive property deficiencies so