amount not exceeding 30% of their interest costs. Presumably, such grants would bring interest costs for the bonds approximately into line with what they would be if the bonds were tax-free municipals.

In the event privately sponsored projects were publicly financed and were not dependent upon additional block grant subsidies for their financial feasibility, both the locality and the sponsor could proceed in reliance upon the federal guarantee and the 30% interest reduction grants. But, in the event such projects did require additional subsidies and had to look to an annual allocation under the three-year block grant for financial feasibility, there is no assurance under Section 124 that such subsidies would be available for one year, two years, or more down the road. Such allocations could get ensnarled in local politics or HUD might cut back or shut off future allocations.

Without such assurance, the net result of a long-term concern for financial feasibility would be for localities to hold back from financing such projects and for private sponsors to refuse to go forward without a legal commitment from either the locality or HUD that, come-what-may, such subsidies would continue to be available as long as the publicly financed project maintained its low income status.

In the case of such publicly financed projects (privately or publicly owned), it is unclear under Section 125 whether the federal guarantee of principal and interest payments on state and local obligations could take the form of zrnual payments to specific projects to replace direct block grants subsidies which have been cut off or cut back by either HUD or the locality.

If this is what is contemplated under Section 125, it should be made clear that in such an event the federal government, under its guarantee, will pay that portion of debt service on such obligations which cannot be covered out of project income. But, if this is what is contemplated under Section 125, by guaranteeing local government obligations, the federal government may place itself in a position to be leveraged by local governments. To avoid defaults on the guaranteed bonds and to maintain the low income nature of projects initially receiving block grant subsidies, the federal government might find itself supporting a growing local housing bureaucracy at great cost, but with few actual housing benefits accruing to low and moderate income persons. This would run directly counter to the thrust of Sections 122 and 124, dealing with the application and allocation processes, and could cause this federal guarantee mechanism to ultimately constitute the tail of the tiger insofar as federal funding is concerned—much along the lines of the low rent public housing program with its growing requirements for operating subsidies.

As to those projects which would be privately sponsored and privately financed using FHA mortgage insurance and, again, required a commitment of long-term subsidy to meet financial feasibility, private sponsors and mortgagees would be very reluctant to go forward without a long-term direct subsidy commitment from HUD or the locality.

We considered some of the possible approaches communities might use in marrying-up short-term block grant subsidy commitments with long-term private financing to attract private investment. One approach would be for local governments to use available grant monies, or the proceeds from the sale of guaranteed obligations, to discount long-term mortgage interest rates at the front end, as in the 221(d) (3) BMIR program. Such discounts, however, are enormously expensive. To the extent that this approach is contemplated or authorized, it would produce little housing at a very high short run cost.

A second method would be to provide an interest reduction subsidy; similar to that in the present 236 program. There are several reasons why units of local government might be deterred in the context of the three-year housing block grant from committing to pay such a subsidy over the long term. If the local government gives a private owner and private lender a long-term subsidy commitment, it runs the risk of nonrenewal or reduction in its federal grant at the end of three years, and possibly before. But, if the local unit of government does not give the private owner and lender a long-term subsidy commitment, they then run the risk that the local government would refuse to continue providing subsidy in the event its federal grants were reduced or not renewed. In these circumstances, as noted above, an owner and a private lender would only be interested in projects which were economically feasible without any subsidy.

It appears to us that, without the assurance of a long-term subsidy commitment, few, if any, privately financed low income projects will be undertaken under the block grant program. The programs that will make most sense to the private

sector will be 402 and 502 of the Revised National Housing Act with their FHA mortgage insurance and long-term direct subsidy features.

The question we have is why create this elaborate and cumbersome block grant mechanism if the only programs likely to produce a significant volume of low income housing are 402 and 502 of the RNHA?

In short, we have reached the following con usions regarding the housing block grant approach:

(a) Local units of government will tend to use public financing for the construction of publicly-owned housing;

(b) Most privately owned, privately financed housing would have to be construced or rehabilitated under 402 or 502 of the RNHA;

(c) Having started down the block grant trail, the federal government may find itself locked into providing high levels of grant monies for the indefinite future;

(d) The block grant program, being both complicated, burdensome and fraught with potential conflicts between federal and city governments, is not likely to achieve the maximum or most efficient participation of the private sector; and

(e) We are hard pressed to understand the admonition contained in Section 126 about encouraging the maximum participation of private enterprise in the housing block grant program when the entire administrative and subsidy scheme of this program would appear to drive private enterprise further away from participation in low income housing.

I would like to turn now to a different problem: The eligibility criteria for assistance under the housing block grant program as set forth in Section 123(e) of the Bill. Persons eligible for assistance would be those with incomes not exceeding 80% of the median income for the area. The Bill would also require that at least one-half of the families or persons assisted under the housing grant be "in approximately the lower half of those eligible for assistance"-i.e., if median income for the entire area was $12,000, 200,000 families had incomes at or below $9,600 (80% of $12,000); and 10,000 of these families received block grant assistance over a given three-year period, then at least 5,000 of the 10,000 families receiving assistance must have incomes at or below the median income of those 200,000 families eligible for assistance. Although HUD has authority to vary the 80% standard, no comparable authority exists respecting the requirement that approximately one-half of those assisted be in the lower half of those eligible. Assuming that the median income of families eligible for assistance was 50% of the area median income in one city and 40% in another city, you will have situations where at least one-half of all families assisted will have incomes below the income limits for public housing and 236 housing. The attached table, based on 1970 data and using median income for families of all sizes, compares 50% and 40% of median income with the 236 and public housing eligibility limits in ten of our largest cities. It shows that income levels not exceeding 50% and 40% of median income generally will fall well below the regular and exception limits for eligibility under the present 236 program below the limits for public housing eligibility.

We do not believe it is feasible to require that one-half of those receiving block grant housing assistance have incomes not exceeding 50% of median income of those eligible for assistance. In the first place, the cost of subsidizing very low income families occupying such a high percentage of units is just too great. The management problems created by such concentrations can be disastrous. Finally, unless the eligibility criteria are changed, the combination of public housing and block grant programs may create an artificial housing surplus for very low income families, and an artificial housing scarcity for those whose incomes are in excess of 50% of the median income for those eligible for assistance. We might even find situations where projects could not be filled because very low income families were unavailable, while, at the same time, families with incomes below 80% and above the 50% of median income figure could not find adequate housing. The Section 123 eligibility criteria may also affect site selection, forcing sponsors to locate in the inner city to be assured of attracting the requisite percentage of very low income families.

Based on the foregoing, we propose the following modifications be made with respect to the eligibility criteria: (a) Persons whose incomes are 90% of median income for the ..ea should be eligible for assistance; (b) the requirement that onehalf of the persons assisted be in approximately the lower half of those eligible for assistance shood be changed to require that approximately 25% of the persons assisted should be in approximately the lower half of those eligible for assistance;

and (c) HUD should be given broad discretion to adjust both the 90% eligibility and the 25% concentration figure.

TRANSITION TO HOUSING BLOCK GRANTS

We recognize that H.R. 10036 would allow FHA to continue the existing housing subsidy programs in revised form for use during the transition to the new housing block grant program, and, thereafter, as residual programs for areas not being adequately served under housing block grants. Both the transitional and residual functions of these Revised National Housing Act programs are extremely important. We fully expect that the conversion to a block grant concept of funding will pose serious administrative problems which will delay operational results into the late 1970's. By failing in this transitional period to utilize the limited resources available for housing production, maintenance and rehabilitation, millions of Americans must continue to live in substandard housing while the procedures for providing decent housing are changed. It will also mean that the level of production and rehabilitation will have to be dramatically increased in the late 1970's to compensate for underproduction in the mid-1970's.

In light of this concern, we believe that HUD's standby authority to make available the assistance authorized by Sections 402 and 502 of the Revised National Housing Act should be strengthened. In its present form, Section 126 provides that the Secretary may make such assistance available whenever he determines that the assistance provided by this part is not being utilized to meet housing needs in an area. ." We urge that the Bill be amended to require HUD to make the assistance of Sections 402 and 502 programs available upon a determination that the assistance being provided under the housing block grant is "not being utilized to the maximum extent practicable to meet the housing needs in an area."

MORTGAGE CREDIT ASSISTANCE PROPOSALS

Chapter 3 of H.R. 10036 continues the thrust of earlier legislative proposals to consolidate and simplify existing FHA mortgage credit programs. We strongly endorse this feature of the Bill and several other important changes which would enable FHA mortgage insurance to better serve moderate and middle income families.

One of these changes is the adoption of flexible mortgage ceilings determined by annually established prototype costs by HUD. This concept of trying mortgage amounts to prototype costs is a realistic and practical approach to dealing with the great disparity which exists throughout the country in the costs of land and construction. We would hope that, in its administration of this important change in the FHA mortgage insurance system, HUD will devise a system of constant reevaluation and resetting of prototype costs and will follow the admonition contained in H.R. 10036 to give impetus to good design and neighborhood architectural standards.

We also endorse the concept of flexible interest rates contained in H.R. 10036 which is designed to avoid discounts of more than four points. Under this proposal, whenever an interest rate set by the Secretary exceeds 7%, interest rates on FHA-insured low cost housing would be set at 7% or a higher rate, but not more than 1% below the regular FHA interest rate. GNMA, using the Tandem Plan, would be required to purchase any such mortgage offered to it at a price not less than 96, thus limiting the discount to the seller to a maximum of four points.

These important provisions of H.R. 10036, along with the reduction in the amount of required down payments on FHA-insured home mortgages, will contribute to keeping the cost of mortgage credit at reasonable levels during periods of rising interest rates and tight money, such as we are encountering today, and will generally reopen the benefits of FHA mortgage insurance to today's middle income families.

CONCLUSION

H.R. 10036 is a bold and comprehensive housing bill. There is much to commend in it. But, in our view, the housing block grant program will not prove an adequate or satisfactory replacement for existing subsidized housing programs, Those problems with existing programs which have prompted consideration of the block grant approach (i.e., site selection, cost, program administration, rigid program requirements, lack of local responsibility) can be dealt with

through administrative and legislative improvements—some of which are already covered in the Revised National Housing Act.

We believe that the housing block grant program will lead to more abuses, more confusion and more red tape delay in our housing programs. It will not produce low income housing as efficiently or as efficiently as can be done under existing programs.

We urge this Subcommittee to permit this concept to be tested and evaluated before it is enacted into law as a replacement for our existing programs. To this end, we advocate a continuance of the present programs as revised under Sections 402 and 502 of the RNHA and the establishment of an adequately funded housing block grant experimental program using selected localities over and under 50,000 in population. This approach, coupled with a continuation of the allocation of 402 and 502 subsidy monies to state agencies, will permit a much sounder basis for removing control over the allocation of limited housing subsidies from HUD.

Again, we commend this Subcommittee for its timely conduct of these hearings and hope that they will be followed by prompt action by the Congress.

Mr. DEFRANCEAUX. We think that 402 and 502 are eventually going to be used. We are afraid that maybe you will go through this exercise of the block grant, and you are going to find that the local communities do not use it.

Mr. BARRETT. May I ask you a question here?

Mr. DEFRANCEAUX. Yes, sir.

Mr. BARRETT. If you had to choose between the housing block grants and housing allowances, which would you choose?

Mr. DEFRANCEAUX. I would take the block grants.

Mr. BARRETT. Thank you. Mr. Widnall has a question here, and then we will turn to Mr. Ashley.

Mr. WIDNALL. In your testimony, and I have read through it, on page 6 of your statement, you state only 2 percent of 236 projects were in default and only 0.4 percent had been foreclosed. You failed to note that the bulk of the 236 projects are only 2 to 3 years old, also that the HUD study projects a foreclosure rate of 16 percent in 235 and 20 percent in 236 over the first 10 years. So there is a difference.

Mr. DEFRANCEAUX. I am sorry, sir, that I was not able to bring you updated figures. We tried to get them from HUD, but it is impossible to get these figures out of HUD. I suspect that HUD is trying to make the record the way they want to make it.

Mr. WIDNALL. Is that experience unusual for any adversary or interested party?

Mr. DEFRANCEAUX. No, sir. We feel that will not be that bad from our own experience. Frankly, the biggest problem with 236 has

been the nonprofit sponsor. We did not make that clear in here. either, but if you look at the statistics, limited dividend housing does not have the poor record that nonprofit housing has.

Now, I do not see any reference in your bill, but I am sure that you are going to have nonprofit as well as limited dividend in it. But there should be some method to make nonprofit housing more responsible.

Mr. BARRETT. The gentleman's time has expired.

Mr. Ashley.

Mr. ASHLEY. Thank you.

Mr. DeFranceaux, I think that your statement is a very forthright, honest point of view, but I do not think that it is quite realistic. With respect to the assisted housing delivery system as we have come to know it, business as usual simply is out of the question. It is not a viable alternative any more.

The administration has made this clear, and the Congress has made it clear. The administration has said, we are going to go sometime in the ephemeral future to a housing allowance system, but in the interim we go to section 23, 200,000 units per year, 150,000 new, et cetera. What certain of us in the Congress have said is that we should go to some kind of housing block grant system.

So, what I am saying is, I do not think that it is realistic to think that, in the real world, considering the positions of the administra tion and Congress, that we are going to simply have a continuation of existing programs, improved though they might be through legislation. or otherwise.

On page 18 of your statement, you say that H.R. 10036 would require that one-half of the persons assisted have incomes not exceeding 40 percent of median income for the area. This is not quite what is in the bill. There is nothing about 40 percent of median income in our legislation at all.

What the bill does say is that, within the group of people under 80 percent of median, or higher or lower than 80 percent, as established by the Secretary for the various reasons given in the bill, half of the people to be assisted must have incomes not exceeding the income limit for that group.

Now, I am sure you realize that people are not distributed evenly by incomes. Thus, there may be more people bunched in the $6,000 to $7,000 income range than in, say, the $1,000 to $2,000 range. There may be as many people with incomes between $5,000 and $8,000 as there are between no income and $5,000.

What I am saying, of course, is that if you study this matter carefully, as I think we have, I think you will find that the cutoff will vary from area to area, but it will be higher than the 40 percent of median.

I would go somewhat beyond this and say that the people that we are trying to help are people of low income, and that this provision, however it works out in an area, is an equitable position to take. Why should we opt for a situation where you are helping those in the highest income bracket of the families to be assisted? This is what we have done in the past, and it seems to me it is patently unfair and produces bad results.

Next and I am going to have to hurry to make this vote--we recognize that the housing projects that are to be subsidized over a