Imágenes de páginas
PDF
EPUB

down. Now, one way that that happens is that they find that they can't get conventional mortgage loans, including for repair and rehabilitation loans, on their properties. They know they are on their way to being FHA, and they know that that means that the property is going to go down and the neighborhood is going to be less desirable. At this point, speculators can come into the neighborhood and pick up the properties at low cash prices, buying out people who are willing to give up a lot of the bulk of their equity because they'd rather sell out now for cash than wait 5 years down the road when the neighborhood is in miserable condition, and they are not going to get much for their property at all.

Once the speculator acquires the property, which may or may not be in good condition-let's assume that this is an older property that is in some need of repairs and rehabilitation to bring it up to housing codes, and needs to have some money put into it. The speculator who has now acquired the property, who has standard arrangements with housing rehabilitation contractors to do cosmetic repairs, will simply contract with his usual colleagues to do repairs that may look good. They may look like they meet code standards, but they won't.

We've had discussions about this with local code enforcement people, and they recognize that they can't enforce the codes to the hilt. They often have to do the most superficial kinds of inspections, and they don't manage to make sure that the properties are brought up to proper code levels.

At some point realtors steer incoming residents, often lower-income minority people, into these communities and arrange financing through their standard low procurers to get FHA mortgages to these properties. The new buyers are often much less sophisticated than the previous owners. They don't realize that the properties are in the condition that they are in. They don't realize that the mortgage terms being offered are the ones they are not going to be able to make consistently and still maintain the quality of the property. I could go into this further, but I think you get a sense of what I'm talking about.

Once they are in the realtors, the housing rehab contractors, and these other individuals who got them in there leave the scene, and they have no one left to deal with except whoever is holding the mortgage at that point and is demanding payments from them. Of course, they default in large numbers; and when they default, they either voluntarily abandon or are evicted. At that point the property is left for FHA, HUD, or whomever, to worry about boarding it up. Senator CRANSTON. Thank you very much for your description of the property.

Mr. Lowe. You get the idea.

Senator CRANSTON. Could you sort of abbreviate the balance of your testimony?

Mr. Lowe. Let me make some specific comments about the Act that you're proposing, because although I think the intent in it is extremely good, I see some holes in it that lend themselves to the kind of abuses that we have seen in the past.

It seems to me that the first place you need to be concerned is about how the plan is going to be capitalized. I'm not a financial expert;

but from my reading of the section of the Act dealing with capitalization, it seems to me that it depends too much on acceptance by the private sector and on the obligations that are going to be instituted by the corporation. If the private sector wants to accept those-that is, if it purposely wants to thwart the intent of the neighborhood corporation-it will not accept the corporation's obligations on the second mortgage. They will be worthless obligations because no one will accept them in trade for properties, and the results will be that the corporation will be stuck with properties.

Unless it can dispose of its properties, literally as quick as it acquires them, the corporation won't have liquidity. It's going to have millions and millions of dollars tied up in properties that have just acquired, but they will be stuck with them, and they won't be able to do anything else with them. They probably won't even be able to properly rehabilitate the ones that are acquired.

As far as rehabilitation of the property, it seems to me that you need much stronger standards than the ones now. To simply say that the corporation may rehabilitate or repair the properties before selling them to incoming new residents, is much too loose. You need to have a standard-such as the Uniform Building Act or some other constant standard-across the country to be followed; and it has to be required to be met, not to be put on a "They may do so" basis. I would also say that sales of the properties, once they have been rehabilitated, should only be to owner-occupants. If you let absentee landlords get into these neighborhoods that are going to be rehabilitated, you just go back in the same cycle of speculation and exploitation.

Senator CRANSTON. Well, might there not be some organizations that would be appropriate for that?

Mr. LowE. Conceivably nonprofit corporations could also fill that gap, yes. I think that is a good point.

Ultimately, the neighborhood corporation has to be competitive with the private sector, or it's not going to work, and it has to be made competitive during the demonstration period; or, obviously, it's not going to reach the full basis that the bureau contemplates.

The reason this may be difficult, if not impossible, is that the corporation is going to have, first of all, higher acquisition costs than the private sector does. It's not going to be buying on hard bulk sales, but rather making acquisitions from sellers. Its rehab costs are going to be considerably higher because it's going to have to meet code standards rather than simply doing cosmetic repairs, and it's going to have to pay realtor commissions in acquiring properties, which speculators don't have to do.

For all of those reasons, I'm skeptical about the ability of the corporation to compete financially with the private sector, that's going to require some subsidies, and I'm in favor of that. I'm just saying that it has to be anticipated before this bill goes through.

I've covered all the main points except that I want to add in closing that if you want to avoid with this plan what has happened with HUD, you need to have some objective outside monitoring being done. HUD has failed to a large extent because of both internal corruption and just gross inefficiency, and it's my feeling that you're

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

I. INTRODUCTION

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 substantial 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 rehabilitated. 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 of 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.

V. MISCELLANEOUS

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 insufficient 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(g).

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 area 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

« AnteriorContinuar »