Senator SPARKMAN. You mentioned near the end of your statement you are advocating renaming FHA. Is that right?

Mr. KLAMAN. Yes. Speaking for myself, Mr. Chairman, I think this would have some important implications. If you read the U.S. League's statement, for example, during FHA's 40 years of history, the savings and loan industry has never been oriented toward FHA. They don't like it and they have never participated in it. If you go back to the early hearings in the 1930's, they testified against it. It was a foreign, alien concept to them. This fact was underlying the proposal that you establish a coinsurance program within the Federal Home Loan Bank Board system, which they understand and can work with.

They are not drawing back from that. I think a small savings and loan, or other lenders, they see the word FHA, and that is not for them, it is redtape, confusion, problems, and it is unnecessary.

What we are really talking about is urban mortgage insurance. That is what I would like to focus attention on.

Senator SPARKMAN. Well, thank you. Mr. Brownstein, we are very glad to have you back with us. You have spent a good bit of time in this committee over the many years. You do not have a prepared statement?

Mr. BROWNSTEIN. No; I do not, Mr. Chairman.

Senator SPARKMAN. We will be very glad to hear what you wish to

say.

STATEMENT OF PHILIP N. BROWNSTEIN, ATTORNEY AT LAW, WASHINGTON, D.C.

Mr. BROWNSTEIN. Thank you very much, Mr. Chairman, and Senator Lugar. It is good to be back in this committee room. I have spent a lot of time here, as the chairman suggests. I do not have a prepared statement, but I would like to make just a couple of general observations and then join in the questioning session.

I think it is important to recognize that there is now in being a rather important mechanism to deal with the problem of providing mortgage capital to the inner city and to these areas we have been discussing.

It is there now, it has been provided by legislation. The only problem is that it is not functioning effectively. By that I mean that the FHA has the ability in my opinion to undertake this kind of a mission.

Mr. Klaman was talking about the risks that ought to be assumed. The chairman and I go back quite a ways. We both remember when FHA was created. At that time it was believed that an 80 percent 20year mortgage was bordering on the verge of irresponsibility. There were the original terms of the FHA mortgage, with a mere 20 percent down. Many thought this program was going to bankrupt the Federal Government.

Well, we know what has happened. We now have a program of 97 percent loan to value ratios, and indeed we have the VA loan program with no downpayment, which is one of the most successful housing programs that the Government has ever undertaken.

I think that the FHA should again get into the role of innovator, into the role of leadership, that they can bring back mortgage capital to the inner city, and they can encourage lenders, even the savings and loan associations, as Mr. Holmes suggests, provided they can deal with this effectively.

It seems to me that where the focus is needed is not in the devising of new programs or in concerning oneself with how you structure the new program, but how to make effective what is now available. I believe that this can be achieved.

I think it is important to recognize that many of these areas are going to be risky. They are going to cause losses in excess of what we normally expect in terms of mortgage losses. I think it is important for the Congress to recognize this, because if they are encouraged to go into these areas and to assume the risks that are inherent in programs of this nature, it can't be done if there is the apprehension that the Congress and the General Accounting Office and others are going to be looking over their shoulder and being concerned that the losses are inordinate compared with losses in other types of programs. Obviously, care should be exercised, but the losses will be higher than normal even with the exercise of reasonable diligence.

I think it is important, also, as Mr. Klaman suggested, that there be provision for adequate community facilities and community services. The mere provision of mortgage capital is not going to solve this problem. It is going to take more. The cities have a responsibility. I don't believe that anyone ought to expect the lenders and the FHA to take the full responsibility for this. I believe it must be a coordinated effort. The cities must participate, it must be evident that the neighborhood has a prospect of being viable. And this is going to take a commitment on the part of the cities. Also, there should be a close working relationship with neighborhood service groups.

But with all of these elements put together, it seems to me that we can achieve the objectives that are being sought. And we can perhaps play a dominant role in the revitalization of many of our decaying

areas.

Thank you, Mr. Chairman.

Senator SPARKMAN. Thank you very much. FHA, I always thought, was a wonderful program. What caused the slippage?

Mr. BROWNSTEIN. Well, I don't know that I can answer that, Mr. Chairman.

Senator SPARKMAN. I might say if it was a slippage.

Mr. BROWNSTEIN. I think there has been slippage. Probably it is a combination of things. First, I think it ought to be recognized that there is not the need for the same kind of a FHA that was needed back when the agency was created in 1934 and indeed the one which was very active during the 1950's.

I think that there probably is a changed role for FHA. Then, as it was taking on new missions, as it was moving into other areas, really it moved away a good deal from the concept of the original FHA, and as it got into some of the new programs, some of the subsidized housing programs, I think there probably was a failure on the part of many to recognize that this transition had occurred, and that indeed there was to be a change in the objectives of FHA.

I think perhaps one of the answers to your question, Mr. Chairman, is that that was not recognized.

In addition, it has gotten considerably wound up in redtape, some of which was not the fault of the agency, but some of which was. But I believe a whole series of reorganizations that occurred over a period of 8 years did no good for the agency. I think that it has

inhibited the agency's ability to cope with the problems that it ought to be facing.

Senator SPARKMAN. Any comment from the rest of the panel?

Mr. KLAMAN. Yes, Mr. Chairman. I am sure there are a lot of specific reasons, and certainly Phil knows them probably better than anybody from his long experience. But I think in examining this whole issue, as I tried to stress in my statement, I hope the committee and its staff will broaden its focus rather than concentrating and working with the FHA Commissioner and so forth, on the details of reducing administrative delays, and bringing commitments and actual loan availability down to 5 days rather than 30 days.

Because what I am suggesting here, and the only difference between what I have said and what Phil Brownstein said, I think, is probably semantics. Mr. Brownstein said FHA already has in place all of the programs it needs to do the job. What I am suggesting in my statement is that it doesn't yet have all of these because FHA is simply empowered to insure residential mortgage loans. I am really urging an innovative, broadened approach.

We have the agency in place and rather than going out and establishing a new one-this is why we didn't see any need to put another insuring program in the Federal Home Loan Bank Board systemnearly everything is in place. Now it needs to broaden its focus to encompass all of the supporting facilities.

Otherwise you must establish a new insuring agency to do that. Of course it must work with the cities and State governments. That insurance risk may be shared. Neighborhoods must be viable and have proof there is a life ahead of them before this can be undertaken. But I am suggesting we should be prepared, and we-the savings bank lenders are to do more than single-family lending to undertake that risk.

But no sound fiduciary institution can be expected to go into a bombed-out area and make a loan on one single standing structure. This is ridiculous. No examiner would ever permit it.

So we need that kind of public-private partnership again, that innovative risk taking and let's use economic soundness, don't get rid of that, but let's have our approach a little more imaginative and put it in terms of potential, as you visualize that area, an architectural drawing saying this is what an area will look like, fellows, will you put money up on that basis. Yes, we will, if most of the risk is assumed. We can't be sure it will look like that. And we can't, as a private fiduciary, take all that risk.

Keep the concept, go back to the innovative risk taking as we knew it then, and broaden the approach to include residential lending and the supporting neighborhood facilities.

Senator SPARKMAN. Mr. Holmes?

Mr. HOLMES. I think it is also important to note FHA has been put at a disadvantage, as a large Federal corporate entity if you will, when it has had to compete with a number of private institutions, in this case savings and loans and other types of residential lenders working with private mortgage insurance companies, which can very quickly make a corporate decision to market a new product.

It is very difficult for a Government agency which has to be given new powers by the Congress, and all that goes along with that, to compete effectively.

So I think we would have to share some of the views that have been expressed by Mr. Klaman, as well as by Mr. Brownstein.

I think it is fortunate that the agency is already in existence. Also, I am happy to be able to report that our long-time resistance, or reluctance, to use FHA is probably diminishing. I think there is quite a change in the savings and loan business attitude about the Agency. Today it is not accurate to say that savings and loans make no FHA loans.

Mr. Westropp, who was to be here, is an active FHA lender of more than just 203 (b) type loans.

But I do think that a great deal more education has taken place in our business about the Agency, particularly if FHA is to change and become more competitive with the other mortgage insurance vehicles which we already have available to us.

Savings associations hold nearly 40 percent of the outstanding mortgages on central city single family homes, according to the 1970 census. So it is clear the savings and loan business is going to have to engage in the redevelopment, revitalization, whatever you wish to call it, of the Federal Housing Administration. We have a significant investment in this effort.

Mr. SPARKMAN. Thank you. Senator Lugar.

Senator LUGAR. Mr. Chairman, it seems to me there was some agreement at least that one of the things that might come from this partnership is that the Federal Government would provide insurance money and the banks would furnish the expertise of screening, because they had maybe a 20-percent responsibility. As Mr. Holmes testified, they would take a continuing interest in the loans.

Whether that plan has come to fruition or not, some thought seems to underline the testimony of all three of you in a way that the partnership will involve private people who are on hand in the neighborhoods and who want to continue, want to become active, but private people who appreciate that a substantial amount of insurance on the part of the Federal Government may be required to meet the risks that are more substantial.

What I am wondering and this is sort of an impossible question to answer, but just explore it off the top of your heads, if you will. Mr. Klaman has mentioned, and I think this is correct, and Mr. Holmes just touched upon it, it would not be responsible for a savings and loan or a bank to make a loan on a single family residence in a bombed out

area.

Now the facts of life are, however, that moving from that extreme situation, into many inner-city areas in America, which if not bombed out, at least have suffered severe ravages of time and of lack of community interest in some cases.

Who makes judgments as to whether a community, a neighborhood in the inner city is still viable? Because we hear testimony all of the time from people in places, which I am afraid in my own mind, as a sort of a judge of city life, I would say are nonviable, as a matter of fact, are in the process of dispersion without really any community tie, and yet they are suggesting that the Federal Government has an obligation to coerce the private lending people into making loans there anyway, come hell or high water, and if in effect they are not making loans there, they are redlining.

Now the private people are trying awfully hard not to be caught in the redlining situation, so they are trying to use some terms such as prudence or viable, or something of that kind, which is perfectly natural. Indeed, they should, for either the Federal Government or private people who are making a lot of loans in a situation in which at city is unable to provide adequate police protection, fire protection, and in which the city itself as a local government is not very viable is an absurdity.

Yet this is the nature of the argument that we see back and forth again and again. What wisdom can you shed on this particular situation?

Granted that we might accept the thought today that FHA ought to go through a pioneering period again, ought to move from such a conservative no-loss situation into tough situations. But what sort of criteria do we set up to determine what is viable?

What could really respond to this sort of lending partnership? Does anybody have a thought as to how we literally make these separations or decisions and what FHA might be willing to do?

I am afraid that if we leave this simply on the shoulders as we have, of the private lending institutions, then the Federal Government has the best of all worlds. Maybe FHA's real role ought to be to set up criteria of what is viable and what is not. That could be maybe the single most important reinsurance factor that could be available.

So then we determine really where money can go and it would make a difference. Do you have any thoughts about this?

Mr. BROWNSTEIN. Well, I think, Senator, since the risk taker is the Federal Government, that the Federal Government, as you suggest, has to play a very predominant role in this.

The basic question, obviously, is going to be: is this going to be an insurable product? And that decision is going to lie with whatever the entity is that is doing the insuring. If that is FHA, then FHA would be the one.

I would agree with you, that probably is where the decision is going to have to be made.

In addition to which, it is likely that the Federal Government is in a better position to have some hard talk with the local community, with the city, in terms of what is expected of the city in order to bring Federal insurance into the area. But it also is essential for the city and the community to be closely tied into the decisions.

Senator LUGAR. Let me follow up on that for a moment. For instance, in the New York Times there was a story yesterday of a bizarre incident, maybe not an unusual one, in which a fairly large apartment building in New York had been taken over by a gang. Now understandably most of the tenants had left. I think only two were remaining. The gang expressed surprise that all of the tenants felt a need to leave under the circumstances; they felt they were involved in some sort of social redistribution there. But the police in New York claimed they were either unaware all of this was going on, or if aware, not really certain they could cope with it.

Now, this is the sort of hard case I am afraid in real life that the Federal Government or private industry has to face.

What would be the role of the Federal Government in this, to visit with the mayor of New York City and indicate to him that there is a