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allowances we set aside should be willing to occupy housing which is identified as being in danger of abandonment.

Finally, I do have a suggestion for shortening the vacancy period. I don't see this as a legal problem; I see it as an economic problem, and the reason is that I believe that statistical work has shown that abandonment occurs when a house or a building is considered valueless; in other words, the economic value, it has no market value. The landlord sees no reason to retain ownership or even try to sell it because it has no value on the market.

My suggestion is that subsidy money be provided to acquire this housing just before it becomes valueless; in other words, at nominal prices to acquire the buildings, offers of $100, $200, $300 to landlords who will relinquish their housing for that amount.

Some further arrangements would have to be made for housing which is encumbered by mortgages, and basically I think the same kind of opportunity could be offered to the lenders that they could receive $200 or they can try to sell the house on the market. If it's really valueless on the market, then they will take the $200, and then the non-profit corporation or whatever kind of corporation the Housing Community Act which does this, which does acquire these properties, will have title and without the legal hassle that goes with court action.

Senator CRANSTON. You've given us some good suggestions on how to prevent housing from being abandoned. What would you do with the housing that has been abandoned and vandalized ?

Professor CLAPP. Well, I think the Housing Community Development Act of the Senate, title 1 or part of it, could be used to (a) rehabilitate, (b) demolish. In many cases, there is nothing there, and it just has to be demolished.

Senator CRANSTON. Obviously, if we're going to do that, there will be a need for funding for that effort. Mr. BUCKLEY. I wanted to say thank you for the suggestion on how

. we would prevent abandonment and just to review one point: you were suggested that HUD should go to the lender in the case of a mortgage on a single-family home and offer him slightly more than the amount of the mortgage so that he would turn the property over.

Isn't there the possibility that HUD could go to the owner himself and let him know that he doesn't have to walk away from this house in order to avoid his responsibilities under the mortgage, if he doesn't have the money to pay off the mortgage. He can sell the property to some entity-whether it's FHA or some other entity-which will secure the property immediately, and he can make $200 or $300 on it so that the property will not be economically unviable.

We have found in Detroit and Chicago and elsewhere that people bought older houses with only these cosmetic repairs, and the house has been refurbished. They put $500 down. They didn't have the money to repair the furnace, when it gave out. If they couldn't provide the money to repair the furnace, you could buy the house from them, put


up to code, and then sell it to someone else or lease it to some other person or to the individual who was in there himself. You can even buy it from him and lease it back to him.

Professor Case. Let me say something from the lender's viewpoint. First, let the lender have a tax write-off if he turns over an abandoned house equal to the amount of unpaid mortgage. Secondly, don't let the home loan bank, Federal Savings and Loan Corp., get in the act by requiring the lenders to put up special reserves for property which appear near abandonment or in areas where there may be some special problems. Just let a savings and loan make the loan and not ask him to put up these other things so he can make his normal profit, and I think you'll get along a lot better with savings loan people.

Senator CRANSTON. Do you have any advice to us on the conflict between, on the one hand, the view of the Administration that we should not set up new entities like the Neighborhood Corps., and on the other hand the dismayed advice by the previous witnesses over the idea of leaving this in the hands of the present HUD operation?

Professor CASE. Yes, definitely. If we are going to get more housing in the United States, we are going to have to save the stock we have. Each year we lose around a million to a million-and-a-half units. If we can create an organization whose only goal is to keep at least 5 percent of that stock from being abandoned, we have a good reason for a new organization.

If you look at FHA, VA, TRA, THA, the whole array, they are not dealing with the existing inventory in an effort to keep it from becoming abandoned. They want simply to improve it, and they want to provide new houses.

Yes, I think there is a need of an agency whose only goal is to save what there is. It has no other function except that. Let us keep from losing in 1 year more units than are financed new by all the Government agencies combined.

Senator CRANSTON. Well, what about the administration's pretty firm position against setting up more agencies!

Professor MITTELBACH. Perhaps our full testimony evidences more skepticism than was shown in the summary. I do feel that it would add an additional layer of complexity.

I think there is something that became quite apparent this morning in the discussions and that is the extraordinary constraints and institutions that surround housing. I mean, it is a morass, and the question comes up as to what would another layer do; particularly, when the problems, perhaps, are not so much in the physical property per se but have to do with the social conditions and income and neighborhood situation where much of this housing is.

Now, it is our contention in the testimony—and I would sustain this idea-that by itself, strictly looking at the property without serious concern with the people that are currently living in there or which have lived in there or that might live in there, would be a very serious mistake.

We must orchestrate a variety of efforts in order to preserve and maintain older neighborhoods. It is not strictly a housing problem at issue of abandonment, and I think we would stress this and emphasize as much as we can.

Senator CRANSTON. Thank you.

Professor CASE. Senator, specificially I would take the FHA, and I would make it into a private operation. I would make it somewhat, perhaps like the Home Loan Bank operates or one of those organizations, where those who participate in the FH program buy stock in the organization. The Treasury finances it additionally, and then you buy stock and participate in it that way. There are enough private mortgage guaranty insurance companies around that the functions of the FHA could be well performed by them.

The HA is now constituted and responding to conditions of 1932 and 1938. It is still responding to an outdated housing policy. It's the housing policy that has to be changed. There are several of these housing agencies that I would suggest ought to be returned to the private sector so that the Federal Government can spend its resources where its most urgently needed for the one-third of the population that continues to be unhoused, although in 1932 we said that we were going to solve that problem.

Professor MITTELBACH. Let me make an additional comment.

We are somewhat concerned, also, about the fact that this particular bill tends to, once again, emphasize the property and production site as contrasted to the question of increasing the demand and the capability of people for housing and a demand in specific neighborhoods.

I think we have had a most unfortunate experience in the production of homes, and we would hope that any steps that are taken would not perpetuate this situation.

Professor CLAPP. I'd like to say that, once again, under the Housing Community Development Act of 1974, new organizations to deal with the abandonment problem are quite possible, but they would be locally based organizations and not another layer of Federal bureaucracy, and I think the Administration would find this acceptable.

Senator CRANSTOX. Yes, I think that is a good proposal.

I want to thank you very, very much for coming. Despite your skepticism about the value; it was of value to us. [Complete statement follows:] STATEMENT OF FRANK MITTLEBACH, PROFESSOR AND JOHN CLAPP,


In our presentation at these hearings, we are mindful of one of the key purposes, namely, to consider S-1988 which is intended to support corrective actions to alleviate housing and other property abandonments in many areas of our cities and to generally enhance housing and community environments. We note with interest a reference in S-1988 to selected federal mortgage insurance and guaranty programs. The contention seems to be that these program made a contribution to aggravating housing abandonment problems. We would like to examine this contention presently, but if, correct, troublesome questions are raised. These very programs also were designed with the best of intentions, and the assumption prevailed at the time of enactment that they would significantly improve housing and the residential environment of low-and moderate-income populations, especially in innercity areas.

The point we wish to stress is that often there is a wide disparity between the intent of many of our housing programs and their final effects. Past experiences witn housing programs suggest that efficiency, equity and other goals are often compromised although, at the time programs were initiated, expectations were high that the goals would be advanced. In part, our failures of the past resulted from the fact that insufficient attention was paid to the expected behavior of self-interested consumers and producers in contact with these programs. Presumably, we would like to avoid or reduce the risk of unanticipated and undesirable side effects in structuring programs for the future. Therefore, it is incumbent tnat we realistically evaluate implications of proposed programs.

Our prefatory remarks may serve to place what we have to say in perspective. We do not challenge the goal of facilitating conditions which will reduce the abandonment of housing especially when the quality of units is not substandard and undesirable neighborhood effects are experienced in combination with abandonment. Also, we do not challenge the proposition that low-income populations and areas occupied by low-income populations are particularly affected by abandonment. Our primary concern is with the proposed measures partly designed as an antidote to the medicine we prescribed and administered in earlier periods. If we appear unduly skeptical, this is attributable to a concern we have that policies and programs at least move us in the desired direction at a reasonable cost.

In this context we note with relief the experimental character of S-1988. It indicates an appropriately cautious posture and offers the opportunity to evaluate failures and accomplishments periodically should the Bill be enacted. Some, of course, may deplore such a statement as supportive of hesitant action where stronger steps are called for. But past policies and programs provide sufficient clues that significant budgetary support, without substantial preknowledge on prospective outcomes, may carry with it wastefully or inappropriately applied resources.


In general one may agree with the proposition that abandonment in many cities “is affected by a combination of neighborhood degradation, absentee ownership, racial antagonism, tenant vandalism, landlord abdication, and credit shortages.” 1 It identifies the multi-dimensional and complex character of the abandonment problem.

Of course, in many areas, and Los Angeles offers illustrations, one observes single-family formerly owner-occupied housing where abandonment is substantially associated with selected federal programs. The scenario is familiar. Low-income families have been induced to purchase often poorly repaired homes with low down payments and attractive payment schedules (including subsidies). With low equity in their homes, a decline in income, and little promise of selling the homes at advantageous prices, the loss experienced in walking away is relatively small. Lenders on insured homes, in turn, will be prone to foreciose rapidly with defaults and delinquencies rather than to work with clients, because the federal insurance or guaranty is more readily exchangeable into cash than the promise of borrowers. Access to these programs, of course, transfers risk from private institutions to the general taxpayers. Thus, incentives are present to use these programs where possible. However, to place responsibility for abandonment on those programs and the general behavior of suppliers ignores the fact that FHA and VA programs have played a very significant role in building the American suburb. In these areas low down payments and attractive terms have provided the opportunity for large numbers of people to leverage their limited equities into handsome gains at the time of sale as housing prices sky rocketed.

Obviously, there is a difference between (1) vacant but not abandoned housing, (2) housing vacancies with abandonment, and (3) vacant abandoned housing that has been vandalized to the point where it is unfit for occupancy requiring either demolition or substantial capital investment for reliabilitation. In determining which of these conditions is likely to prevail, it may be well to consider the alternatives faced by the many participants in the process. An owner-occupant, let us say, who considers movng has an incentive to either find a tenant or to sell the home. In the face of weak demand which is expressed in anticipated low rents or low-sales price and sluggishness in finding a tenant or buyer, this owner-occupant would examine the cost to him of holding a normal vacancy. If the costs of holding a normal vacancy are high and expectations of future rents or sales price are unfavorable in relation to the costs, then he may be encouraged to abandon. Also, the decision

1 George Sternlieb, et. al., “Housing Abandonment in the Urban Core," Journal of the American Institute of Planners, Vol. 40, No. 5, September 1974, pg. 331.

to move is determined by the availability of alternative housing whose net benefit stream is satisfactory compared to his current residence. Parenthetically, we might note that abandonment research has paid relatively little attention to where tenants or owner-occupants move to and whether tneir housing conditions have improved or not.

Lenders presumably are motivated to assure regular repayment of principal plus interest and protection of the capital which is the security for a loan assuming for a moment they have no recourse to federal insurance or guaranty. However, if the costs are high in collecting payments from borrowers, or with foreclosure high operating and maintenance costs are experienced in the face of weak sale or rental demand for property, then they will be prepared to write off the loan.

Vandals might include former occupants, children, neighbors, or even specialists from within or outside the community. For example, we have been informed of situations where property owners are offered price lists for repurchasing fixtures and equipment formerly in property. However, we do not really know very much as to whether in general vandalism is casual or organized. In view of the fact that vandalism impacts on housing supply and neighborhood quality with potential effects also on housing prices, we are reluctant to invoke strictly concepts of self-destructive behavior and the rage of low-income populations. We tend to the view that the gains from vandalism exceed the losses for many participants in the process. The gains take the form of sale of materials and equipment or incorporating these into one's own property. Potential losses would include housing price effects, penalties associated with the probability of getting caught and prosecuted, as well as tne loss associated with applying one's energies to alternate endeavors. Clearly, if the net gains from alternate occupations were attractive, vandalism would probably be reduced.

The previous comments may serve to throw light, on an assumption reflected in S-1988. The assumption is that abandonment operates like a contagious disease which spreads rapidly and inexorably throughout neighborhoods and communities once the process begins unless remedial measures are taken. Similar reasoning was applied to and formed the basis of many urban-renewal programs to remove and replace slum housing. With due respect, we have difficulty in digesting the concept that large segments of cities would be simultaneously abandoned and occupied by slum dwellers. The contagion theory in our estimation is weak and relies on superficial observations. Fundamental factors other than contagion have been identified as contributing to abandonment. These factors have to do with incomes, costs, prices, and socio-economic behavior in response to levels and changes therein. Also, a possible “neighborhood effect" may come into play which determines the investment or disinvestment behavior of property owners in interaction with each other and with consumers. Moreover, we do not deny that racism also contributes importantly.

Housing is a bundle of services. Conditions on and surrounding the property as well as

access to variety of opportunities substantially determine the quantity and quality of housing services in a particular residential location. Prospective residents searching in the market evaluate the bundle of services in the light of the prices-currently and in the future. Supplier in turn examine the costs in relation to current and expected returns. If net returns are favoralile, they will invest. Race and ethnicity enter into the picture in that they are often treated as a surrogate by demanders and suppliers and are assumed to signal the expected directions neighborhoods take. Racial change is believed to indicate neighborhood decline when more often the process is reversed. Racia). change becomes possible because neighborhoods have declined already. Suppliers then may refuse to provide capital even at a very high price to particular areas in the face of racial change without reference to the capabilities of individual investors in homes or apartments. This is what "red-lining” is all about. But we should also note that as whites flee from these areas and minority demand is not expanding rapidly, vacancies result and these become targets for vandalism and abandonment. The situations is further confounded as upwardly mobile minority populations move out and are replaced by those of even lower income. It should not be forgotten that large numbers of minority investors are caught in the vandalism-abandonment cycle and often suffer severe capital losses. This profoundly affects the rate of capital accumulation in minority communities.

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