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ernment has a strong interest in the quality of housing generally and specifically in protecting the housing which it has insured or guaranteed mortgages. The Demonstration Relief Act establishes a special Government-sponsored corporation to deal with the problem of abandoned housing units.

The agency, to be called the Neighborhood Preservation Corporation, would work in this manner: It would be empowered to seize and acquire title of abandoned housing units quickly to prevent deterioration of the unit and to stem the spread of abandonment in a neighborhood.

The corporation could renovate, rent, sell, construct, demolish units, repair, refinance, purchase property, condemn, and originate mortgages at interest rates below the going market rate.

The corporation could hold land for redevelopment and construct new housing according to a city's housing plan.

This proposal seeks to turn abandonment disaster into a "plus" by preventing deterioration of abandoned units by securing possession quickly and seeing whether a single-purpose agency in abandonment can bring together with the Federal Government, local officials, lenders, renewal and housing agencies, and community organizations, and others necessary to develop a corporative effort for the improvement of urban life.

This is an open hearing of the Senate Banking, Housing and Urban Affairs Subcommittee on Housing. I will not make any formal statement at this time. I think you're all aware that the legislation that we are considering is the Abandonment Disaster Demonstration Relief Act, S. 1988, which I've introduced in the Senate. This bill provides for creating three neighborhood corporations in three different demonstration communities to be selected by HUD that would launch a program with adequate financing that would begin to secure possession and ownership of many abandoned housing units and taking them over, renovating them, making them available for either sale or local rental to families that need housing, with counseling to insure that families don't get into responsibilities that they cannot handle. The alternative would be to tear down the homes if they were in a hopeless condition and to replace them.

I want to welcome Congressman Mark Hannaford who is going to help carry this bill through the House of Representatives. I'm not certain that the bill that we have introduced will be enacted, but I am confident that we will be able to enact something that will be along the general lines of what we are suggesting.

I want to welcome as our first witness, Gene Jarnagin, who is the loan guaranty officer of the Veterans Administration. I wish that for the record you would introduce those with you; and if you could summarize in just not more than 4 or 5 minutes whatever prepared statement you have and submit that prepared statement for the record. Thank you for being with us.

STATEMENT OF GENE JARNAGIN, LOAN GUARANTY OFFICER, VETERANS' ADMINISTRATION

Mr. JARNAGIN. Mr. Chairman, I'm pleased to have the opportunity to appear before the subcommittee today. With me on my left is Henry Cohn from the General Counsel's Office in Washington. On my

right is Mr. Gary Schmidt who is the Chief of Property Management Section, and beyond him is Mr. Gordon Wile, District Counsel in Los Angeles.

Yesterday my colleague, Mr. Frederick Craig, Loan Guaranty Officer of the VA's San Francisco Regional Office, appeared before this subcommittee and presented the views of this agency on-S. 1988 and urged the subcommittee to carefully consider the Department of Housing and Urban Development's objections to the bill.

We concur with that statement. Mr. Craig's remarks are on page 92 of the August 28, 1975, hearing in Oakland on S. 1988.

I'll be happy to answer your questions.

Mr. JARNAGIN. Mr. Chairman and honorable members of the subcommittee, as the Loan Guaranty Officer of the VA's San Francisco office, I am pleased to have the opportunity to appear before this subcommittee today and present the views of the VA on S. 1988. This bill, entitled the "Abandonment, Disaster, Demonstration Relief Act," is designed to prevent deterioration and destruction of neighborhoods and communities and to hold and assemble parcels of land for orderly development and redevelopment. This being based upon a general finding that the cause of the destruction and deterioration of neighborhoods is to a large extent due to abandonment of properties.

The VA is well aware of the problems with abandoned properties. Unfortunately, we believe this complex bill, as currently drafted, contains many provisions which are ambiguous and subject to varying interpretations, leaves many areas unresolved, and will create many problems. For these reasons, the VA opposes S. 1988.

Our objections to the bill are not to its intent, but rather to potential problems that could result from the vagueness and technical insufficiencies of certain provisions of the bill. These technical problems make it extremely difficult for the VA to take a firm position on the substance of certain of these provisions as we cannot forecast with any degree of certainty the effect that passage of this bill would have upon existing programs.

While not intended to be all-inclusive, the following are some of the specific areas we find objectionable:

Within the three metropolitan housing sections to be determined in accordance and (b) of Section 6 of the bill to take action to declare abandoned residential property forfeited and to seize and take possession of such property. Paragraph 3 of subsection 6(b) of the bill provides such seizer shall be subject to the payment by the corporation of "just compensation" to any person claiming an interest in the seized property.

This paragraph further provides that where the person or agency having an interest is a Federal agency, payment by the corporation shall be in the form of obligations issued by such corporation. The bill does not specify, however, how payment shall be made to persons or other entities that are not Federal agencies. Conceivably, the corporation could make such payment in the form of the same obligations it would issue to Federal agencies. Since the bill provides in section 8(b) (page 20, lines 8 through 14) that such obligations are not guaranteed by the United States and do not constitute a debt

obligation of the United States, the marketability of such obligations is at best uncertain.

If it is determined that a holder of a mortgage on property deemed to be abandoned is to be paid in long-term debt obligations of the corporation, which may have limited marketability, great reluctance can be foreseen upon the part of the mortgage industry towards making loans on properties in the demonstration areas. If this should occur, potential sellers or residential property would find themselves unable to secure buyers with mortgage financing available to them, As a result, those parties required to relocate might be left with no option other than to abandon their homes. Thus, potentially, the effect of this bill could well lead to greater abandonment rather than less. At the present time, the VA loan guaranty program is funded by a revolving fund established by section 1824 of title 38 United States Code. Claims made upon the VA, based on guaranteed loans, are paid from this course. Properties acquired are usually rehabilitated and then sold by the VA. The proceeds of these sales are deposited into the same fund. If the VA is to receive long-term debt obligations of the corporation in exchange for its acquired properties conveyed to the corporation, a serious impact upon the liquidity of the fund can be seen.

The lack of an adequate cashflow might well leave the VA with no alternative but to seek additional appropriations in order that it might meet its obligations on outstanding guarantees. In those instances where the mortgage covering the abandoned property is insured or guaranteed by an agency of the United States there is provision, as previously indicated for the seizing and forfeiture of the property with payment of just compensation to the parties in interest. If such payment is to be made to the holder of a mortgage at or shortly after the forfeiture of the property to the corporation, it leaves unclear the position of the guaranty issued by the VA to the lender.

Normally the claim under the guaranty would be presented to the VA subsequent to the liquidation of the security and application of proceeds of the sale to the outstanding indebtedness. Obviously, if the holder of the mortgage has been paid in full by the corporation, insofar as the mortgagee is concerned, there no longer is any outstanding indebtedness unless the corporation becomes the holder of the mortgage by assignment. In this event, it appears the corporation would then be in a position to file the claim under the guaranty with the VA.

Since the corporation would retain title to the property the VA would be in no position to recoup its payment by means of resale of the property, thus further endangering the revolving fund. It is our feeling that the bill should specifically clarify the potential liability of other Federal agencies that have guaranteed or insured mortgages in the demonstration areas.

Section 6(d) provides for the corporation to acquire from the Administrator of Veterans Affairs properties to which he holds title, the consideration for the conveyance of the property to be its fair market value. However, the fair market value may not exceed the unpaid balance of the mortgage. Properties held by the Adminis

trator are not usually subject to a mortgage obligation. Therefore, a strict interpretation of this section could result in a requirement that the Administrator convey the properties to the corporation without compensation.

Additionally, the VA may sell a property on an installment contract. Technically, an installment contract is not a mortgage and until such contract is paid in full, title remains in the Administrator. It is unclear whether the term mortgage at the end of said subsection (d) is intended to be applied in the narrow technical sense. If it is, once again there would be no unpaid balance on the mortgage. Additionally, this section makes no allowance for the payment of management and foreclosure expenses or for the reimbursement to the VA of moneys expended in improving such property prior to its acquisition by the corporation.

As a final note, section 3 (1) of the bill narrowly defines the term residential property for the purpose of S. 1988 to include only those properties which are subject to mortgages which are insured or guaranteed by an agency of the United States or which are subject to mortgages held by a federally related financial institution. In addition to guaranteeing and insuring loans, the VA also makes direct loans under certain circumstances. When VA acquires a property, we often resell it on credit; that is on an installment contract, or for a note and deed of trust or a note and mortgage. The definition in section 3(1) would not apply to these latter cases. The distinction is especially important in section 6(d) which refers to "residential properties to which title is held by... the Administrator of Veteran Affairs." Where the Administrator holds title, as noted above, there may be no outstanding mortgage or other debt; or if there is, the loan would have been made, but not insured or guaranteed, by the Administrator.

I have attempted to point out some specific objections without attempting to be all-inclusive.

The Department of Housing and Urban Development has prepared a report to the committee on S. 1988 strongly opposing enactment of the bill and noting a number of major difficulties that the bill would create. Briefly summarized, the major difficulties include:

The bill would duplicate what can already be accomplished by local governments with Federal assistance under title 1 of the Housing and Community Development Act of 1974, and would. duplicate HUD's property disposition function,

The bill would create a new Federal Neighborhood Protection Corporation as an agency of the United States, and inject it into problems better solved by local governments and local citizens;

The bill would impose a major burden on the Federal courts; The corporation's losses would have to be subsidized by the Federal Government. Furthermore, the bill would provide for backdoor financing which is inconsistent with the Congressional Budget Act, and would provide an exemption from budget control; and

The corporation's authority to apply properties on a mandatory basis from FHA and other Government agencies would operate to deprive the insurance fund of cash flow that would be realized in property dispositions, and would, in some cases, preclude recoveries that might have been obtained covering full losses.

We urge the committee to carefully consider the Department of Housing and Urban Development's strong objection to S. 1988.

I thank you for this opportunity to testify and will be glad to answer any questions that you may have.

Senator CRANSTON. Are you opposed to the bill?

Mr. JARNAGIN. Yes, sir.

Senator CRANSTON. What do you think can be done about this problem?

Mr. JARNAGIN. Well, Senator, I think we are making some progress at this time.

Senator CRANSTON. What progress can you cite that has been made so far?

Mr. JARNAGIN. In our own experience in the fiscal year just ended, we reduced our inventory about 1,000. I think that is significant progress. There are those areas of great vandalism; and we, as a veteran-oriented organization, are not equipped to cope with that. Personally, I think it involves the community

Senator CRANSTON. If you're not equipped to cope with these problems, what should be done?

Mr. JARNAGIN. We are not letting them sit there.

Senator CRANSTON. Well, you say you're not equipped to cope with them, what do you mean by that?

Mr. JARNAGIN. I mean we are not equipped to prevent the vandalizing of the buildings. It would require constant surveillance that we are not equipped to do.

Senator CRANSTON. What is the inventory that you now have of abandoned homes?

Mr. JARNAGIN. At this time our office has a total inventory-I wouldn't say abandoned because many of those are occupied-of 1,710, 1,615 of which are in the southern California area, the balance being in the outer part of our area.

Senator CRANSTON. What other area does that cover?

Mr. JARNAGIN. Clark and Lincoln Counties of Nevada.

Senator CRANSTON. How many new abandoned homes do you pick up in the course of a year?

Mr. JARNAGIN. Well, we are acquiring over 200 a month.
Senator CRANSTON. Over 200 a month?

Mr. JARNAGIN. Over 200 a month.

Senator CRANSTON. Well, if you disposed of 1,000 in your inventory but picked up 200 a month, are you gaining or losing?

Mr. JARNAGIN. Well, we are selling in the neighborhood of 300 a month. We have sold more than we acquired for the past year, accounting for this reduction of 1,000 in our inventory.

Senator CRANSTON. What is your record in getting housing back again once you've turned it over?

Mr. JARNAGIN. I beg your pardon?

Senator CRANSTON. Do you have any ratio of how many homes come back into your possession a second time after you've turned them over?

Mr. JARNAGIN. No, I don't, sir.

Senator CRANSTON. Would you please get for the record the statistics for that and supply them?

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