And second, it may be difficult to find a warranty program in existence in your part of the country that will insure you. As I say, despite 3 million homes bought and sold each year, warranty programs today insure only a few thousand. It is simply a matter of not having access to that kind of program in many parts of the country.

Senator SPARKMAN. I notice you head your statement as representing Housing Research Group the research group center for study of responsive law. Just what is that?

Mr. STANTON. I should have said at the beginning of my statement. In the rush to begin, I guess I forgot. We are a group sponsored by the Ralph Nader organization. I am director of the Housing Research Group, which is a team of professionals looking into various housing issues from the perspective of the consumer.

Senator SPARKMAN. Thank you.

Senator Lugar?

Senator LUGAR. Mr. Chairman, thank you. Let me trace along with you basically the thinking in your statement. As I gather, you are making a case that as these inspections become the warranty policies, actuarily, the expense of them might be anticipated to go down. Presently one reason why people may not approach this privately, is because it is an expensive process, and you have very few cases and a small track record.

What I suppose I am wondering is, in the event that we got a fairly universal application of warranty, is it possible that one objective of that might be as it is in other sorts of insurance programs, that the number of defects found by the clients would increase substantially, and as a result the numbers of defects that would need to be met become greatly more expensive, so that the total cost runs again, for housing generally, might move upward?

Mr. STANTON. I guess one has to separate that answer into two parts, for new homes and existing homes. For new homes, the standards are fairly well set. The problem is to make sure that homes which do not meet this standard are brought up to that level so the home buyer who is fairly well strapped for cash, after making the purchase in today's market, doesn't have the unnecessary expense of repairs.

In the used-home field, it shouldn't be code enforcement, but rather the result I would anticipate would be a lowering of the sales price in negotiation between buyer and seller to reflect an accurate assessment of the quality of the home. On the first point you raised, in terms of the likelihood of reducing the cost of warranty programs, we have consulted with James Stone, the State Insurance Commissioner for the Commonwealth of Massachusetts. He indicates to us that he believes fairly strongly that with some competition, with an actuarial track record, there is every reason to believe warranty rates could go down.

Senator LUGAR. You believe in the case of the used house, that the program could be structured, that Congress could legislate in such a way that this negotiation of price, the reduction in price, for the person buying, would be the outcome of this as opposed to a national change in the price, involving everybody?

Mr. STANTON. We believe this because the result of the proposed legislation is really very small. It gives the buyer the option. It doesn't make it mandatory that there be an inspection of the home. That is all the legislation in effect does.

Senator LUGAR. From your research, about how many homes would be covered presently in one form or another, if we did use Federal financing or some operation in some way?

Mr. STANTON. Sír, we have no way of anticipating. Here we have quite deliberately separated ourselves from the British model. In Britain every new home must be covered by warranty. We haven't said that. We said it is a question of consumer choice and let the market work itself out according to the costs and benefits. We want to make sure the option is available to consumers to protect themselves.

Senator LUGAR. As I recall your recommendation for legislation, it applies only to houses financed by some Federal program.

Mr. STANTON. No, sir. We don't want to put a burden on FHA and one more reason for people to leave FHA for the private mortgage market. Rather we would prefer to cover homes with federally related mortgages, savings banks and so forth, generally the gamut of mortgage money in the United States.

Senator LUGAR. Using the broader definition, say, of banks and savings and loans, almost everyone would have some tie with the Federal Government and therefore you would have the universal situation. Mr. STANTON. Yes, sir.

Senator LUGAR. Thank you. What is the likelihood of the private insurance industry or perhaps not the conventional private insurance industry, some industry that's being involved in home insurance, that would rise to the challenge of dealing with this on this volume that might be mandated by the legislation?

Who then could deal with the sufficient numbers and confidence to perform this application?

Mr. STANTON. The problem of getting people into the field might have to be solved by legislation with a prospective date sometime in the future so people know it's coming and so they can gear up to some

extent.

There are companies in the field which, judging by conversations both with inspection and warranty companies, could come into the field if they knew there was going to be the prospect of that kind of market.

Senator LUGAR. In other words, you would favor a rather incremental or gradual phasing in, so that the number of persons of competence who eyeball the house and inspect it and make recommendations and what have you, are sufficient, because I am not aware there are a great number of these people in American society presently with that degree of competence.

Mr. STANTON. That's an accurate assessment. An alternative might be passing a statute today with an effective date of January 1, 1980, or something like that.

Senator LUGAR. The training and aggregation of the firms and so forth. How will we start out in terms of the actuarial principle again, granted you have large volumes, can we anticipate optimistically that the rates will fall, but in the initial years, what sort of phasing, is possible there?

Mr. STANTON. With respect to new homes, we already are gaining an actuarial track record, from the National Association of Home Builders' program and from the private warranty programs on existing homes. As I understand it, the tendency in the initial years will

be for the insurance companies to pad their rates. This incidentally is what happened with the original FHA mortgage insurance program, that the initial rate was on the high side.

As they developed the experience and immunity from the uncertainty of the risk, they could lower their rates to take account of the realities of the market.

Senator LUGAR. Initially we are likely to have fairly high rates. There might be some homeowners, that have this phasing out of the life of the mortgage, or perhaps some other method of paying some fairly sizable chunk of premium.

Mr. STANTON. The programs for previously occupied homes run something between $200 and $300. That in my mind is fairly high. The option should be given to the homebuilder, to amortize that across the life of the mortgage so it doesn't add to already atrociously high settlement costs. That high cost is going to deter a number of home buyers at the very beginning from participating. I think that phase-in will be a gradual one, as rates begin to go down, thereby attracting more home buyers into the market.

It will not be a regulated phenomenon as much as a natural working of the market.

Senator LUGAR. It's a voluntary thing in which the homeowner has to make the decision to buy a house and decide whether it's worth $200 or $300 at that stage to obtain this warranty and your idea is the warranty must be made available and the new mandate is the avail. ability. The homeowner determines whether he or she wants to make that decision and move that way.

Mr. STANTON. Yes, sir.

Senator LUGAR. Then that would require, presumably, cooperation of banks, of people who are offering the mortgages, if this phasing or amortization of the $200 or $300 which occurs in making the mortgage. Mr. STANTON. Yes, sir. Frankly, I haven't worked out the technicalities of that precise point, but we consider it important that we not add to the up-front settlement cost if possible.

Senator LUGAR. Particularly if it be $2 per thousand, it could move up fairly rapidly in the more expensive houses. As the average cost of houses goes up, this would be a significant chunk I would think for the home buyer.

Mr. STANTON. Yes, sir.

Senator LUGAR. Finally, let me ask this. Would the legislation ideally list the specific things that were to be warranted? It appears to me it might be desirable to do that. In other words, foundations, roofs, heating systems, basic things, or does this become a catchall?

In other words, how exclusive or inclusive would you be in terms of what is to be covered by this mandate?

Mr. STANTON. There will have to be some guidance, probably, through regulation rather than legislation, because it does get to the nuts and bolts of an issue. Possibly similar to the Federal minimum property standards. The standards might change over time, according to demand, according to problems of supply. We would hope that the Federal regulatory structure would remain very loose, that there would be established some clear standards, but in terms of the settlement of claims and so forth, this could be worked out in the private process according to those standards and not through some sort of Federal claim settlement.

Senator LUGAR. My only reason for suggesting the fairly definite number of things is that once again I anticipate with the program out of the way, there will be a list of items that homeowners might want to have covered or would feel really ought to be covered, it might become fairly large, and the expense of doing so would be substantially greater.

Mr. STANTON. With respect to new homes, most State laws relating to applied warranties simply have categories. Major structural defects, defects in quality of workmanship and materials, and it is left to the decisionmaker in the decision of a particular claim, in most States, it's the court system, to decide whether or not a particular problem has violated those standards.

I believe that will be far preferable to having the Government specify every inch of the house, whether-I mean minimum property standards get frightfully specific. Wall sockets every 12 feet. I would just as soon keep the Government out of that business.

Senator LUGAR. I do, too, in fact the major categories you have suggested as opposed to the specifics of the house, where we have code enforcement that sometimes is very debilitating locally

Mr. STANTON. Yes, sir.

Senator LUGAR. Thank you very much.

Senator SPARKMAN. Thank you very much.

The next witnesses are a panel consisting of Mr. Lee Holmes, Mr. Saul Klaman, and Philip N. Brownstein.

For the record, I should like to mention that Mr. Lee Holmes is staff vice president, is that right?

Mr. HOLMES. Yes, sir.

Senator SPARKMAN. Of the U.S. League of Savings Associations. Mr. Philip Brownstein I suppose we all know, he was FHA Commissioner from 1963 to 1969. I believe that is the longest that any Commissioner has served.

We are very glad to have all of you here. Mr. Holmes, we will hear from you first.

Do you have a prepared statement?

Mr. HOLMES. Yes, sir, I do. It is a very short one.

Senator SPARKMAN. It will be printed in the record, but you may proceed as you see fit.

STATEMENT OF THOMAS WESTROPP, CHAIRMAN, URBAN AFFAIRS EXECUTIVE COMMITTEE, U.S. LEAGUE OF SAVINGS ASSOCIATIONS, PRESENTED BY LEE B. HOLMES, STAFF VICE PRESIDENT, U.S. LEAGUE OF SAVINGS ASSOCIATIONS

Mr. HOLMES. Since I am standing in for Mr. Westropp who was unavailable because of weather conditions this morning, perhaps it might be best, with your permission, if I read his statement for the record.

Senator SPARKMAN. Very well.

Mr. HOLMES. It notes, of course, that he is the president of the Women's Federal Savings and Loan Association of Cleveland, Ohio, and that he is the chairman of the Urban Affairs Committee of the U.S. League, which developed the publication "New Approaches to Urban Housing," which I believe has been distributed to all members of the committee.

[The statement of Mr. Westropp, as read by Mr. Holmes, and an additional paper received from the U.S. League of Savings Associations follow:]

STATEMENT OF THOMAS C. WESTROPP

Mr. Chairman: My name is Thomas Westropp. I am President of Women's Federal Savings and Loan Association of Cleveland, Ohio, and appear today in my capacity as Chairman of the Urban Affairs Committee of the United States League of Savings Associations.1

As always, the U.S. League appreciates your courtesy in inviting our participation. Because I know your time is valuable, and in keeping with the focus of this particular day of hearings, I will emphasize our organization's interest in co-insurance and risk-sharing in my remarks today.

The overall theme of these hearings is the "FHA's Role in Single-Family Housing". As I'm sure you know, the savings and loan business has traditionally originated and held in our portfolios conventional mortgage loans-with only a minor portion, by now less than 5 percent, FHA-insured. Even this modest amount has declined with the fading activity of FHA in the 1970's. The trend, no doubt, reflects the rapid growth of the private mortgage insurance business, as well. While my particular institution has offered an FHA-insured alternative to our customers, the savings and loan business in general has shied away from the HUDbacked loans for all the reasons explored in Wednesday's hearings-processing delays, rigid minimum property standards, paperwork and redtape, and so forth. Despite these problems, our organization strongly believes that FHA unsubsidized single-family loan programs can play a meaningful role in new urban initiatives by the Congress and the Administration. We recently summarized our views in a document entitled "New Approaches to Urban Housing" which, I understand, has been circulated to Members of this Committee.

This Committee and this 95th Congress have already taken significant steps to make FHA workable by adjusting loan ceiling amounts and downpayments for the basic Section 203 program. I might note, however, that implementing rules have not yet emerged from HUD (as this statement is being written), though the shape of this portion of the 1977 law has been well known for many months.

With the new emphasis on the cities and their revitalization, we believe it is important to develop Government-sponsored programs which will not only bring us "to the trough" but make us "want to drink." As FHA-approved mortgagees, savings and loan associations are clearly "at the trough" for the HUD programs. The question, then, is what are the missing elements needed to stimulate S&L use of insured or guaranteed programs?

We believe that two relatively recent developments are instructive.

First of all, our Urban Affairs Committee developed two years ago an "80/20” co-insurance or risk-sharing proposal for conventional loans. The plan calls for an insurance fund and the originating lender to share the risk of loss on an 80 percent-20 percent basis. The lender would remain exposed to its portion of possible risk for the life of the loan (even if sold)—thus encouraging careful underwriting and a sustained commitment to the community where the property is located. Simply stated, this proposal indicates that savings associations are willing to step up urban single-family lending if the speed of processing can approximate that of other conventional loans, the interest rate is negotiable (thus diminishing the need for "points") and conventional underwriting standards are maintained.

A study commissioned from Dr. Andrew Brimmer, the distinguished former Governor of the Federal Reserve Board, confirmed our judgment that increased risks are inherent in lending in some neighborhoods. But our willingness to accept a 20 percent risk of loss, a ratio in excess of that of any other Government guaranteed or insured program, demonstrates, we believe, our commitment to meet the home loan demand from a broader spectrum of the public-including modestincome buyers in urban neighborhoods.

1 The U.S. League of Savings Associations (formerly the U.S. Savings and Loan League) has a membership of 4,400 savings and loan associations, representing over 98 percent of the assets of the savings and loan business. League membership includes all types of associations-Federal and State-chartered, insured and uninsured, stock and mutual. The principal officers are: John Hardin, president, Rock Hill, S.C; Stuart Davis, vice president, Beverly Hills, Calif.; Lloyd Bowles, legislative chairman, Dallas, Tex.; Norman Strunk, executive vice president, Chicago, Ill.; Arthur Edgeworth, director-Washington Operations; and Glen Troop, legislative director. League headquarters are at 111 E. Wacker Drive, Chicago, Ill 60601; and the Washington Office is located at 1709 New York Avenue, NW., Washington, D.C. 20006; Telephone: (202) 785-9150.