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going to have to create a separate monitoring agency to be responsible
not to the neighborhood corporation, but rather to some external organization like the General Accounting Office, and that this monitoring agency should be charged with doing cost-benefit analyses of the work of the corporation and observing the practices of its officials to make sure that the kind of corrupt practices that have ruined HUD don't emerge here as well.
Senator CRANSTON. Thank you very, very much. [Complete statement follows:]
STATEMENT OF CARY D. LOWE, ATTORNEY, COMMUNITY INFORMATION PROJECT
We believe that this bill represents a significant step forward in dealing with the problem of inner-city housing deterioration and abandonment. By proposing to create a new agency to deal with this situation, it finally recognizes that the private financial community has abdicated its responsibility to the low-cost housing market, and that other government agencies, incluuding HUD, have done more to exacerbate the problem than to combat it.
The intent of the bill is also valid in that it appears to recognize the need to gain control of the entire mortgage market in a given areas as a precondition to dealing with the factors which cause abandonments. This is vital to controlling the activities of nousing speculators, whose activities are inherently linked to the abandonment process. Our research into mortgage defaults and property abandonments in several neighborhoods of the Los Angeles area has consistently indicated that more than half the defaults occurred on properties just previously owned by a relatively small number of identifiable speculators.
It is necessary to construct an alternative to the existing private system of mortgage financing, because of all the vested interests which are involved in the preservation of the speculator market in the private sector. These interests include financial institutions which literally bankroll speculators through highinterest interim financing, low-grade rehabilitation contractors who perform cosmetic repairs at inflated rates, and mortgage bankers who provide financing for the buyer. The buyer, who eventually abandons the property, usually as a result of either the condition of the property or the inability to both keep up high mortgage payments and maintain the property, is often procured pursuant to a conspiracy among all of these parties. Finally, since homes sold by speculators are ordinarily bought with a government-insured mortgage, it is FHA or VA which ultimately has to pay off on the defaulted mortgage and take possession of the abandoned property.
II. COST COMPETIVENESS
In order to effectively eliminate speculator activity in the areas where the proposed Neighborhood Corporation would operate, it is necessary that the corporation be able to do business on a competitive basis with speculators. As it would perform under the terms of the bill, there is some question that the corporation could compete in this regard. First, it must contend with high acquisition costs, in that it is required to go through detailed legal proceedings in taking possession of abandoned properties, and could have higher directpurchase costs than speculators, who can acquire some properties through HUD bulk sales at a discount and others at undervalued cash sale prices. The corporation will also have higher costs than speculators in repairing the properties prior to resale, since speculators would normally do only cosmetic repairs, and the corporation hopefully would do more sụbstantial rehabilitation; a recent study done for the City of Los Angeles indicated that the average cost of rehabilitating a single-family home bought from HUD is over $6,000. Further, the corporation will have to pay realtor commissions since it apparently will have no other source of buyers for the properties it has acquired and rehabili. tated. Finally, the corporation will have to discount its mortgages to sell in the secondary market.
III. CAPITALIZATION The proposed means of capitalization for the corporation described in Section 3 appears somewhat risky, Althouugh the issuance of initial capital stock is within the control of the board of the corporation, the issuance of further obligations, which are apparently intended to support the acquisition and rehabilitation of property, and the origination of mortgages, is subject to the discretion of an outside party, the Secretary of the Treasury.
Furthermore, even if no obstacles are encountered in the issuance of obligations, it remains to be seen whether the private sector will accept them. This is not because there is any reason to doubt that these obligations will be redeemable, but rather because the private financial sector has a vested interest in seeing this demonstration project fail, since it constitutes an invasion of their profit-making territory.
An additional problem is that the bill allows too much discretion in the setting of terms, including interest rates, on these obligations. As a result, the private sector may only agree to accept these obligations at such an inflated interest rate that the corporation is bound to lose money on every transaction. Additionally, this discretion as to the terms of each obligation, which might theoretically provide useful flexibility, also creates an enormous opportunity for corruption.
Our concerns as to these financial matters are expressed here only to ensure that these issues are carefully considered, since we have no specific reason to believe that any of these potential problems will arise.
IV. MONITORING AGENCY
Our greatest concern is that, while the undertaking proposed in this bill has great conceptual merit, and has the best of intentions, it is no different in that regard than many previous proposals which have attempted to deal with massive social ills through equally massive corrective programs, and is subject to all the same problems and abuses suffered by its predecessors. Obviously, the classic case of corruption and inefficiency dooming a well-intentioned program is HUD. But while we are glad to see that this demonstration project is to be operated outside the controls of HUD, many of the same potentials for disaster are present.
To accomplish its purposes, the Neighborhood Corporation needs to be as self-contained as possible, minimizing its reliance on outside parties for contracted services. At the same time, it does need to be constantly monitored by some outside agency which has no incentive other than to ensure the proper operation of the corporation. We propose that such a special agency be created, with the mission of conducting ongoing cost-benefit analyses of the progress of the project, and investigating potential corruption and other abuses. This agency should be required to make its reports to an objective outside party, such as the General Accounting Office, to ensure that it remains free influence. Its staff should also be shielded from pressure, as well as from threats of dismissal in respone to their diligence.
We do not believe that the conflict of interest prohibitions contained within Section 4(c)(3) of the bill are sufficient to guard against potential corruption within the corporation. Even if there are no overt cases of personal profiteering by directors or employees of the corporation, there still exists endless opportunity for awarding of contracts to favored acquaintances, payment of inflated billings with a view toward kickbacks from contractors, and a host of other situations of the type which have so consistently spelled financial disaster for HUD over the years.
The bill also needs to be supplemented with some penalty provisions to be used against outside parties who profiteer at the expense of the project. It is not sufficient to merely blacklist such parties as to future dealings. The corporation must have authority to rescind contracts with them, and to refuse payment for goods and services, up to the amount found by the monitoring agency to have been misappropriated. Furthermore, in the selection of contractors, realtors, and other parties with whom it needs to do business, the corporation should begin by eliminating all those who already appear on the blacklist maintained by HUD.
We also make the following recommendations, as ways to better make this bill serve the interests which it is intended to promote:
1) Single-family homes should only be sold by the corporation to owneroccupants, so as to eliminate the problems generated by absentee landlords who fail to properly maintain properties;
2) The corporation should be required, rather than permitted, by Section 6(g) to perform repairs or rehabilitation on properties which it has sold in substandard conditions ;
3) It is insuficient to rely on a vague standard such as “decent, safe, and sanitary," in Section 6(g), to describe the condition to which property must be brought before resale; instead, compliance with the Uniform Building Code should be mandated ;
4) Wherever possible, rehabilitation work should be contracted to individuals and firms in the low-income and minority communities, as a form of affirmative action;
5) The bill needs to contain some explicit requirements as to the procedures for selection of properties to be acquired by the corporation, to ensure that the limited resources of the project will not be wasted on properties in areas which are beyond rehabilitation;
6) The requirement for counseling of prospective buyers in Section 6(i) is very good as far as it goes, but should be expanded to further require instruction on how to obtain redress for deficiencies in purchased properties, including rehabilitation or compensation in accordance with Section 6(8).
VI. LOS ANGELES
We strongly believe that Los Angeles should be one of the proposed demonstration areas. This is based on two important considerations. First, the problem of abandonment in the Los Angeles area is worse than generally believed. This is because statistics such as those provided by HUD and VA include only properties within the city limits of Los Angeles, ignoring the multitude of abandonments in abutting communities such as Compton and Pasadena. Second, although Los Angeles has a serious abandonment problem in many areas, it also contains many neighborhoods which are beginning to become blighted but are still very much salvageable. This combination of circumstances should make the Los Angeles área an ideal, and necessary, demonstration site.
Senator CRANSTON. I would appreciate it if you would be very brief and summarize your formal statement and then submit your written statement for the record.
STATEMENT OF ELLEN KASTEL, RESEARCH DIRECTOR, CENTER
FOR NEW CORPORATE PRIORITIES Ms. KASTEL. I'll do my best.
Senator Cranston, my name is Ellen Kastel. I'm research director of the Center for New Corporate Priorities, a Los Angeles-based public interest organization which specializes in research on the impact of financial institutions on minorities, women, the poor, and the aged. I also represent the National Task Force on Credit Policy, sponsored by the center, which is attempting to increase the influence of public interest and community groups over credit decisionmaking.
I should also state that Craig Lowe and myself sit on the Los Angeles Community Coalition Against Red-Lining.
We are very concerned because although abandonment is a major problem in Los Angeles, we feel it is only one element in a multifaceted problem, and unless analyzed properly from the beginning and appropriate solutions are found from the beginning, you will end up with just one overlay, one more fragment, one more program, and one more Government bureaucracy. This goes to the demonstration program in the three cities. What about the other cities? What about the continuing growth of abandoned houses even as this program goes into effect ?
We feel that it is really critical to have a full perspective of this issue rather than just deal with isolated problems. One thing that we are very interested in is a restudy of the financial institutions and their impact on mortgage spending and on homes. We know that the Government programs to date have produced failure. We have not produced an adequate home for every individual.
The House of Representatives has to do a study which we hope will take a new look at housing and what kinds of programs and what kinds of insurance mechanisms should be used. We are wondering if the Senate will do anything in this particular regard, or will it only continue with piecemeal programs?
Just because time is short, I will spend some time talking about some things that I think could improve this particular program, especially if it was used in conjunction with other demanding affirmatives.
If this proposed “Abandonment Disaster Demonstration Relief Act” is seen as one facet of a complete revamping of Federal mortgage lending programs, its impact on the communities selected would be increased by incorporation of the following recommendations:
One: I think it is critical that half of the board members should be selected from public interest, consumer, or community groups and that these groups should represent a broad spectrum of socioeconomic characteristics of the neighborhoods which have demonstration programs. I would like to note that in the particular statement that the designation of chair and vice chair as "chairmen." I certainly hope this is not a sign that the nine-person board will consist of nine men. This is just one example of concern of our kind of organization.
The only criteria which is spelled out for representation on the board is that
* * * not more than five shall be members of any one political party * * * The composition of this board is critical to the success or failure of the program. A more detailed description of selection criteria should be included in section 4. As I understand it, Carla Hills, who is in charge of HUD, will be on this board.
Two: The national nature of this board places it out of touch with specific community problems. One fault with VA and HUD programs is their lack of concrete knowledge of the houses they insure.
In Los Angeles County, assuming selection, 12 boards should be set up. One for each redlined area in Los Angeles County. Each board should consist of 50 percent public representation and 50 percent private. The present wording of section 5 does not describe the exact way to insure "local cooperation and assistance," and it must be strengthened to allow for local decisionmaking and control. Above all, it is important to set up a local community-based board of directors for each metropolitan area and neighborhood.
Three: The impact of counseling services provided to prospective buyers and owners of property has been proven to make a difference in the success or failure of other credit programs. This inclusion in section 6 is to be commended; and to fulfill its function, we would like it to be extended to last the life of the mortgage loan, regardless of how long the abandonment of these homes may be.
Four: More attention, as Cary Lowe stated, should be paid to ways of insuring that “homes are in decent, safe, and sanitary condition at time of sale.” Specifically, present HUD and VA programs have failed to develop adequate safeguards for the buyer. Since the corporation involved would be responsible for the cost of any defect that was not corrected at the time of sale--if I'm reading the proposed legislation correctly-inspection programs must be initiated with more care than under present procedures.
With all these changes and a rethinking of the “Abandonment Disaster Demonstration Act," I think the abandonment asked for is good, and we could make a giant step forward in eradicating housing abandonment in our cities.
Senator CRANSTON. Thank you very, very much.
I want to assure you that Carla Hills will be there and will see to it that not just males are appointed to the board.
[Complete statement follows:]
STATEMENT OF THE CENTER FOR NEW CORPORATE PRIORITIES AND THE
NATIONAL TASK FORCE ON CREDIT POLICY I am pleased to be here and to see your concern about the growing abandonment of residential structures in Los Angeles and in other cities around the country.
The Center has just released a study of mortgage lending policies in Los Angeles entitled “Where The Money Is," Mortgage Lending in Los Angeles County. Our steady shows that one million people in Los Angeles County live in neighborhoods which are denied mortgage loans. During the first five months of 1974, these neighborhoods received less than one percent of all single-family loan dollars expended by state-licensed savings and loans. The twelve major areas denied mortgage ollars are Compton, Covina, East Los Angeles, Boyle Heights, Echo Park, Highland Park, Long Beach, Pacoima, San Fernando, Pomona, Pasadena, San Pedro, Venice, Santa Monica, West Covina, and South-Central Los Angeles Our study does not include specific research on the magnitude of abandonment in Los Angeles, but if it did, the map of abandonment would duplicate our map of red-lined communities.
Abandonment is a major problem in Los Angeles, FHA and VA owned property in Los Angeles cited in your bill totals 5,845 abandoned houses. We have requested from savings and loans a list of the abandoned properties they hold in Los Angeles County. To date Gibraltar Savings and Loan, the seventh largest in the nation, is the only one to have supplied this information. Their list total 41 and includes not only residential but also commercial and vacant property. Multiply this figure by the number of financial institutions involved in mortgage lending in Los Angeles County, and a picture of the magnitude of abandonment emerges.
But abandonment, while a distressing component in the decline of our cities, is only one element in a multifaceted process. To state that "housing abandonment is still the major housing problem in our urban cities” is to simplify a complex problem. Housing abandonment is one product of our nation's inadequate mortgage-credit policies. We have, over the years, developed a complex system of regulation; direct and indirect subsidies to the buyers, sellers, builders and financers of housing. Taxing mechanisms; government insurance and a myriad of other, often conflicting tools for providing adequate housing at a reasonable price.