KF26 B39 1977 at COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WILLIAM PROXMIRE, Wisconsin, Chairman JOHN SPARKMAN, Alabama HARRISON A. WILLIAMS, JR., New Jersey EDWARD W. BROOKE, Massachusetts H. JOHN HEINZ III, Pennsylvania KENNETH A. MCLEAN, Staff Director 78-601881 (II) Lawrence B. Simons, Assistant Secretary for Housing-Federal Housing Commissioner, Department of Housing and Urban Development. Horace Bazan, Committee for the Revitalization of FHA, Washington, Vondal Gravlee, vice president and treasurer, National Association of Daniel C. Hanrahan, chairman of the Legislative Committee, National Association of Realtors, accompanied by Budd Krones, member of the Executive Committee and Albert E. Abrahams, staff vice president, Government affairs department... John C. Williamson, vice president, Mortgage Insurance Companies of Kennon V. Rothchild, immediate past president, Mortg Association; accompanied by Claude Pope, first vice president; Burton Wood, legislative counsel; Bruce Johnson, deputy legislative counsel; and Peter Kaplan, senior director for management services.. Peter Maier, Housing Research Group, Center for the Study of Responsive Law, Washington, D.C.; accompanied by Thomas Stanton.... Jeffery Zinsmeyer, economist, Neighborhood Revitalization Project Center Thomas H. Stanton, director, Housing Research Group, Center for Study Thomas Westrop, chairman of Urban Affairs Executive Committee, United States League of Savings Associations, presented by Lee B. Holmes, staff vice president, U.S. League of Savings Associations____ Saul Klaman, president, National Association of Mutual Savings Banks__ 433 455 465 ADDITIONAL STATEMENTS AND DATA 363 Committee for the Revitalization of FHA, letter, to Senator Proxmire, 35 FHA line authority and staff functions--- 31 News release dated July 27, 1977- 252 Single family property disposition program 370 Mortgage Bankers Association of America: Brief summary of Housing Law Administration, Simplification and Section by section summary. The Federal Housing Administration.. Simplification and improvement of mortgage insurance laws.. Mortgage Bankers Association of America, proposed legislation.... National Association of Realtors, statement from Harry G. Elstrom, Chicago-Sun Times, September 11, 1977, HUD to Stop Selling Re- Wall Street Journal, April 3, 1973, "Homeowners Outraged by New- Office of International Affairs, report, "An Insured Building Warranty "Opportunities for Abuse: Private Profits, Public Losses and the Mortgage Page 80 88 96 99 133 134 135 136 46 362 411 409 394 256 United States League of Savings Associations, paper prepared by the Urban 436 TABLES AND CHARTS FHA Home Mortgage Applications, 1968–77_. Information provided for credit time approvals by Mr. Budd Krones.. 31 268 50 230 FUTURE OF FHA WEDNESDAY, OCTOBER 26, 1977 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, D.C. The committee met at 10 a.m., in room 5302, Dirksen Senate Office Building, Senator William Proxmire, chairman of the committee, presiding. Present: Senators Proxmire, Sparkman, Morgan, and Schmitt. OPENING STATEMENT OF CHAIRMAN PROXMIRE The CHAIRMAN. The committee will come to order. The committee begins hearings this morning on the future of the FHA. These hearings are somewhat unusual for the committee in that they are not legislative in nature, nor are they oversight hearings in the normal sense. What they represent is an effort by the committee to take stock of the past and the present FHA and look toward the potential of the agency for playing a redefined role in housing policy in the future. Because this issue is too extensive and complex to explore thoroughly in 3 days, the committee expects that these will be the first in a series on this question. We will focus this week on FHA's role in single-family home ownership with an emphasis on urban housing problems. A subsequent hearing will explore the role of FHA in multifamily housing, and a third will probably be scheduled to examine issues raised in the first two in greater depth. FHA was founded on a brilliantly simple idea-that the Federal Government can, at little or no cost, tap the resources of the private lending industry to meet our national housing needs, by removing the lender's risk on a mortgage loan. Like many apparently simple concepts, this principle is difficult to translate into practice. In order to succeed, FHA must walk a narrow line on the frontier of mortgage risk. It must, on the one hand, push beyond the boundaries or risk which a private lender would accept, in order to make that lender's funds available to an expanded group of borrowers. At the same time, however, FHA must not go too far out on the risk continuum, because insuring unsound loans will undermine its own solvency, and will hurt the home borrower in the process. For about 30 years, FHA performed this balancing act, popularized home ownership, and made a profit. Quite a success. It was probably more important than any other single factor in making this country a nation of homeowners. Its great accomplishment was to prove for the first time that average American families could borrow money under a long-term, evenly amortized mortgage, and would repay it. FIIA's experiment led the private sector to adopt the concept, and lenders learned to make long-term loans universally, even without FHA insurance. A private mortgage insurance industry eventually mushroomed, following FHA's profitable model of guaranteeing home loans. About a decade ago, housing policymakers looked at this success story at FHA and decided it was time to turn the FHA insurance mechanism toward meeting the new risk frontier in the nation's cities. FHA was directed to undertake risks greater than it had accepted in the past and was used as the financing vehicle for new subsidized housing programs for low-income families. By the beginning of the 1970's, it became clear that the balancing act had faltered, if not failed. In the absence of strong administration of its programs. FHA had gone beyond the point of sound and profitable insurance. It appeared that coupling FHA 100-percent insurance with loans to low-income, unsophisticated borrowers, in the absence of strong administrative controls, was a recipe for severe trouble. FHA loans became tools in a pattern of manipulative urban neighborhood turnover. In the classic example, real estate speculators used racially based panic-selling pressures to induce urban residents, block by block, to sell their homes at depressed prices. The speculator then gave the home cosmetic repairs, and resold it to a low-income home buyer using an FHA mortgage, often at an inflated sales price supported by a false appraisal from an FHA appraiser who received a kickback. This description, of course, is greatly oversimplified. I believe, furthermore, that these problems were exaggerated considerably by those who used them as a rationalization for freezing housing assistance programs in 1973. The programs, both for high-risk insurance and for direct subsidies, did a great deal of good. Furthermore, even if the programs had been perfectly conceived and administered, they almost certainly could not have stopped the decline of the nation's cities in the 1960's, when larger forces were at work. The fact remains, however, that the FHA scandals left the agency with depleted resources, severe image problems, and very low staff morale. It also left a serious question in the minds of many housing analysts as to whether 100-percent FHA insurance might be perhaps an open invitation to unsound lending. At about the same time that FHA moved into the urban programs, it also began to experience a decline in activity. This has continued until FHA has become, today, less than 10 percent of the housing market. Many people attribute this decline directly to the agency's involvement in the subsidized housing and high-risk programs. Others argue that the programs were sound and the fault lay in poor management by an administration which did not believe in them. Still others blame the decline on using FHA loans as a vehicle for pursuing nonhousing social goals, such as environmental and consumer protection and equality of opportunity. And another group argues that the decline is simply the natural result of the growing, competitive private mortgage insurance industry, which has learned to give faster, cheaper, and better service to the lending community. |