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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 Administrator 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 ?
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
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?
Senator CrẢNSTON. How many new abandoned homes do you pick
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?
Mr. JARNAGIN. Yes. I want to be sure that I understand that you mean when we acquire property and sell it and then reacquire it!
Senator CRANSTON. Yes.
Senator CRANSTON. These homes, the 300 a month that you have been disposing of, are you renovating them before you dispose of them?
Mr. JARNAGIN. Not all of them.
Senator CRANSTON. What happens to those that are not renovated when you turn them over?
Mr. JARNAGIN. They are sold to individuals with the understanding that they are to be repaired according to the building department's requirements, and we also ascertain their financial ability to do this.
Senator CRANSTON. Could you also give us a breakdown for the record of the number that is sold to individuals and the number that is sold to speculators or brokers?
Mr. JARNAGIN. Yes, sir.
Senator CRANSTON. Jerry Buckley is representing the minority staff on the committee. Did you have any questions, Jerry?
Mr. BUCKLEY. I have no questions, Mr. Chairman.
Senator CRANSTON. Congressman Hannaford, do you have any questions?
Congressman HANNAFORD. Just one question.
Once again, how many do you have now in the inventory? How many houses do you have on your inventory now?
Mr. JARNAGIN. Total inventory in my office is 1,710.
Congressman HANNAFORD. Is there not a substantial number that are not in your inventory that are abandoned and there is a long delay before they get into your inventory?
Mr. JARNAGIN. There is a process of acquisition that might take, say, 8 or 9 months.
Congressman HANNAFORD. Do you always acquire and put them in your inventory as rapidly as possible so that you do have as accurate an account as possible of the problem?
Mr. JARNAGIN. Yes, sir.
[The following was received for the record from VA's general counsel, John Corcoran:]
OFFICE OF GENERAL COUNSEL,
Washington, D.C., September 24, 1975. Hon. ALAN CRANSTON, U.S. Senate, Washington, D.C.
DEAR SENATOR CRANSTON: The following information will supplement the written and oral remarks made by the Veterans Administration at hearings before the Senate Committee on Banking, Housing and Urban Development on S. 1988, held August 29, 1975, in Los Angeles, California. At that time Mr. Gene Jarnagin, Loan Guaranty Officer, Veterans Administration Regional Office, Los Angeles, who testified on behalf of this agency, lacked specific data to respond to two of your questions.
Your first inquiry concerned the number of properties which return to the VA inventory. From the beginning of the VA Loan Guaranty Program through the end of fiscal year 1975, the Los Angeles Regional Office sold 45,176 VAowned properties with the assistance of VA vendee loans. During the same period, 6,078 properties were reacquired.
You also asked the number of properties sold to investors. Although an inquiry is not normally made as to the purchaser's intended use of the purchased property, a review of our records reveals that in fiscal year 1975 approximately 1% of the VA-owned properties sold by the Los Angeles Regional Officer were purchased by investors.
The above data refer to the entire jurisdictional area of the Loan Guaranty Division, Los Angeles Regional Office, which includes that part of California south of the northern boundary of San Luis Obispo County, plus Lincoln and Clark Counties in Nevada.
Thank you for providing VA with the opportunity to present its views on S. 1988. Sincerely,
JOHN J. CORCORAN,
General Counsel. Mr. JARNAGIN. Thank you, sir.
Senator CRANSTON. Mayor Doris Davis of Compton is now with us, and we would like very much to have you come forward, Doris. Doris, we are delighted to have you here.
STATEMENT OF DORIS DAVIS, MAYOR OF COMPTON, CALIF. Mayor Davis. Good morning, and thank you very much. I'm very happy to be with you, and thank you for asking us to make our remarks on the subject that is so vital to the existence and revitalization of our community.
We feel that the problem of abandoned housing ties in with the entire economic development of our city and especially the stability of our city.
We have been very concerned as the city council, as the mayor, to give the emphasis of this particular problem in our community, and we want to compliment you, Senator Cranston, for the introduction of Senate bill 1988.
We've analyzed the bill and have some comments relative to the bill. We have our passouts here that will give you a little background about our city and an idea of the critical problems that are faced in the community of the City of Compton.
Though the City of Los Angeles has the highest absolute number of boarded-up houses, the City of Compton with a population only a fraction of the size of Los Angeles has the second highest number of boarded-up units and the highest number of abandoned properties per capita in the entire State of California.
Presently, Compton has approximately 350 HUD-held properties, 60 VA properties, and an undeterminable number of conventional repossessions totaling between 700 and 1,000 abandoned units.
The problems which are created by abandonment are as follows: the disadvantage, esthetically, of having boarded repossessions appearing in any neighborhood, and especially in neighborhoods, such