Senator SPARKMAN. Thank you, sir. Now, Mr. Klaman, president, National Association of Mutual Savings Banks.

STATEMENT OF SAUL KLAMAN, PRESIDENT, NATIONAL

ASSOCIATION OF MUTUAL SAVINGS BANKS

Mr. KLAMAN. Thank you, Mr. Chairman. Mr. Chairman and Senator Lugar: My name is Saul B. Klaman, and I am president of the National Association of Mutual Savings Banks.

I have a brief statement, Mr. Chairman, but as brief as it is, I am going to make it even briefer, so that we will have ample time for Mr. Brownstein's remarks and time for questioning.

It might be instructive to begin by recalling briefly FHA's original concept and purpose, as I understood it, and as the record indicates. FHA is a child of the Depression. Home mortgage foreclosures were commonplace amidst the economic wreckage of that time. And financial institutions, which had long regarded real estate as the soundest kind of collateral, suffered devastating losses. Their confidence in real estate lending was understandably shattered.

The concept of Federal mortgage insurance, implemented through the FHA, was born in this climate. The goal was to minimize lender risk and attract funds back into residential real estate markets, in order to promote recovery in housing activity and in the overall economy. What FHA did for the Nation's mortgage and housing markets in the Depression and immediate postwar decades, it can do today for the Nation's depressed innner cities. But for EPA to respond to this critical challenge, it first must recapture the pioneering, imaginative, innovative spirit that motivated its founding.

This spirit faded over the years with success; risk-taking with minimum failure bred increasing conservatism and aversion to risk. Relatively few of the contingent liabilities undertaken by FHA turned into real liabilities, except in certain subsidy programs. The mutual insurance fund prospered as delinquencies, defaults and foreclosures were at a minimum.

To be sure, FHA had every reason to be proud of its success story. But as time passed, this very success, in my judgment, caused FHA to retreat from innovative risk-taking into a shell of conservative record protection, and it ceased to operate on the frontiers of real estate finance, where lenders still feared to trend alone.

FHA regional administrators were most proud of the fact that they had little or no mortgage delinquency, defaults, or actual foreclosures in their areas.

Now, more than 40 years after FHA's establishment in the Great Depression, we face a distinctly differen': and probably even more difficult challenge. Today the Nation's cities and neighborhoods are the untamed frontier of mortgage finance and one which I believe FHA should focus on.

Meeting the manifold problems of widespread urban decline will call for a new and expanded public-private partnership which goes well beyond the concept of insuring only housing loans, and only those loans which are conservatively appraised as economically sound. Public and private risk sharing will be essential to channel private credit into inner-city housing and urban revitalization on a large scale.

The role of the private financial institutions will be to supply the manpower, the know-how; the role of Government will be to assume enough of the risk to make private lending and participation feasible.

The need, in short, is for a new Federal urban reinvestment insurance agency. I hesitate to actually establish that as a name, because the acronym might be FURI, and who knows what that might imply. I am really suggesting what we need is a revitalized reoriented FHA. I would also urge that in order to make it quite known to the public, to the financial institutions, and the real estate world that FHA's focus has changed and broadened that FHA be renamed. The name Federal Housing Administration is far too narrow, and we should think of something along the lines of a Federal mortgage insuring agency.

Let me emphasize that this does not imply a radical change in FHA's mission. Rather, what we are suggesting is that FHA in fact return to its "roots." By returning to the original concept as an innovative risk taker, FHA can provide the assistance necessary to private lenders, if they are to place additional funds in urban areas, and yet continue to fulfill their required fiduciary responsibilities to depositors. Let me just turn briefly now to a couple of specific aspects of the proposal.

First, it must be recognized in contrast to FHA's past experience, more contingent losses under an urban insurance program could, in fact, become actual losses.

I want to emphasize, nonetheless, that we are not urging FHA to renounce the concept of the goal of fiscal or economic soundness, which is after all, the basis on which FHA programs were built. Rather, what I am suggesting is FHA operate in a manner that will permit innovative risk taking within the continued framework of fiscal soundness.

For example, we would propose that in underwriting loans in urban areas, FHA should not focus exclusively on the value of a property as it exists in its present environment, but rather should recognize the process of neighborhood revitalization to which its activities will contribute. And it should focus upon a concept of what I would call potential economic soundness of the property securing the loan, rather than immediately current economic soundness.

As the process of revitalization proceeds, potentially sound loans will increasingly become currently sound loans, with an accompanying reduction in risk exposure.

I would suggest, gentlemen, that the Philadelphia mortgage plan, which has been in existence for a couple of years, is in some ways an example of the kind of concept I am discussing.

That program has already been responsible for some $27 million of loans on upward of 2,500 homes.

We also believe the potential losses can be controlled through expanded use of the coinsurance concept.

As my colleague, Mr. Lee Holmes, pointed out, the U.S. League has favored a coinsurance concept, and so has the savings bank industry. Coinsurance would provide the mechanism for sharing the risk of loss between the Federal Government and the originating lender.

We recognize, Mr. Chairman, that the intent of these hearings is to focus on FHA's single family housing initiatives. But the needs of the

urban complex extend far beyond housing. Residential mortgage credit by itself is insufficient to revitalize a neighborhood or a city. Halting and reversing neighborhood decline requires a broader based approach.

So in addition to rehabilitating housing, there must be efficient delivery of essential city services. You know that those encompass schools, police, fire protection, street maintenance, all of the rest. Adequate community facilities of all types are essential. The technicians call it the urban infrastructure.

Former Mayor Lugar doesn't have to be told about this. We need total economic revitalization. What we are really urging is to think about FHA's role in an expanded function. FHA's role in the urban environment cannot be limited to one of solely assisting housing. This would be a mistake. What we advocate is that FHA, in returning to its original purpose, not be returned to its original scope. FHA should be the catalyst for the revitalization of entire neighborhoods and groups of neighborhoods. I use the term FHA, and we all know what it means, but I am really urging a change in name as well as in function. To conclude, the point we want to stress is the critical importance of a creative public-private partnership in solving the urban crisis. The reorganization of the Federal Housing Administration along the lines suggested in this brief statement could be a major step in forging that partnership and helping solve the problems of urban decline. Thank you very much, Mr. Chairman.

[The complete statement of Mr. Klaman follows:]

Mr. Chairman and Members of the Committee, my name is Saul B. Klaman.

I am president of the National Association of Mutual Savings Banks. I appreciate this opportunity to appear before the Committee, on behalf of the savings bank industry, to discuss the role of the Federal Housing Administration in our

national effort to halt and reverse the decline of mature urban communities.

The Original Concept of Federal Mortgage Insurance

Home

As the Committee begins its important task of considering the future role of FHA, it might be instructive to recall FHA's original concept and purpose. The Federal Housing Administration is a child of the Great Depression. mortgage foreclosures were commonplace amidst the economic wreckage of that time. And financial institutions, which had long regarded real estate as the soundest kind of collateral, suffered devastating losses. Their confidence in real estate lending was understandably shattered.

The concept of federal mortgage insurance, implemented through the FHA, was born in this climate. The goal was to minimize lender risk and attract funds back into residential real estate markets, in order to promote recovery in housing activity and in the overall economy. The founders of FHA also recognized that the traditional short-term, nonamortized, high down payment "balloon" mortgage of the 1920s contributed significantly to the devastating

collapse in real estate markets in the early 1930s. The FHA pioneers, therefore, put in place the long-term, fully amortized, low down payment fully

insured mortgage loan.

Thus, in the truest sense, FHA was one of this nation's most innovative economic institutions. It proved to be a major force in the revival, not only of real estate markets, but also of the economy as a whole.

The real estate boom of the late 1940s and 1950s would not have been possible without FHA. It proved to gun-shy lenders that mortgage finance is, under normal circumstances, a sound area of lending. It proved, further, that the long-term, fully amortized, low down payment, fully insured mortgage loan is a sound instrument. And it changed real estate finance from a strictly local affair into a nationwide marketplace by promoting standardization of mortgage instruments and of mortgage underwriting techniques.

Success and FHA's Changed Attitude

What FHA did for the nation's mortgage and housing markets in the Depression and immediate postwar decades, it can do today for the nation's depressed inner cities. But for FHA to respond to this critical challenge, it first must recapture the pioneering, imaginative, innovative spirit that motivated its founding. This spirit faded over the years with success; risktaking with minimum failure bred increasing conservatism and aversion to risk. Relatively few of the contingent liabilities undertaken by FHA turned into real liabilities, except in certain subsidy programs. The mutual insurance fund prospered as delinquencies, defaults and foreclosures were at a minimum.