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1 mends a termination of the demonstration, it shall include 2 in such report a detailed plan for the transfer of the assets, 3 liabilities, and functions of the Corporation and for its

4 dissolution.

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THE GENERAL COUNSEL OF FOUSING AND URBAN DEVELOPMENT

WASHINGTON, C. C. 2040

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Honorable William Proxmire
Chairman, Committee on Banking,

Housing and Urban Affairs
United States Senate
Washington, D. C. 20510

Dear Mr. Chairman:

Subject:

S. 1988, 94th Congress (Cranston, et al)

This is in further response to your request for our views on
S. 1988, a bill relating to the problems of housinz abandonment.

s. 1988 would establish a Neighborhood Protection Corporation
as an agency of the United States and authorize that Corporation,
as a demonstration, to carry out certain functions in three
metropolitan areas. The functions would include seizing and
taking title to certain abandoned properties which are covered
by federally insured or guaranteed mortgages or mortgages held
by "federally related" financial institutions, improving,
leasing, selling or otherwise disposing of such properties,
and redeveloping communities or neighborhoods. The Corporation
would be authorized to issue capital stock and debt obligations
to the Secretary of the Treasury in amounts not to exceed
$35 million and $350 million respectively, and its receipts
and disbursements would be specifically excluded from the budget.

This Department is sympathetic to efforts to devise new and more effective methods of preventing the abandonment of needed housing and for coping with community problems presented by abandonment. We are also particularly interested in proposals that might facilitate the handling and ultimate disposition of properties subject to defaulted FHA-insured mortgages. Nevertheless, we believe that the approach set forth in s. 1988 involves a number of major difficulties, as detailed below.

First, the authorities contained in the bill would largely duplicate what can already be done by local governments with Federal assistance under title I of the Housing and Community Development Act of 1974 and would also duplicate property disposition functions of this Department and, to a lesser extent, the Veterans Administration. Title I funds can be used by local governments for property acquisition, rehabilitation and disposition purposes, as well as for supporting neighborhood services and improvements, and we see no need for establishing a Federal Corporation for these purposes. Moreover, we believe it would be wasteful and inefficient to create a Federal Corporation with property disposition functions which parallel but do not displace or supersede those which this Department would retain in affected areas with respect to properties not acquired by the Corporation.

Second, the approach of the bill would inject a Federal agency into innumerable problems best left to local governments and local citizens. Under s. 1988, for example, a Federal Corporation would be empowered to carry on direct local development and redevelopment programs that may last for years and involve countless matters of strictly local and neighborhood concern. Such an extensive, continuing Federal role is not required to protect the financial interest which the Federal Government may have in some of the property involved. Nor is such a role consistent with efforts made in recent years to reduce Federal oversight and expand the responsibilities of local elected officials.

Third, the bill would impose a major burden upon the Federal courts in the areas in which the Corporation would operate. The procedures authorized for seizure and forfeiture would require these courts to make findings on a variety of issues that could entail complex factual disputes and substantial evidentiary presentations on matters not normally within the purview of those courts, such as whether services have been reduced below an "adequate level", whether abandonment "tends to create a danger to the community", whether owners have knowingly permitted deterioration, and whether the liquidity of the mortgagee is in jeopardy. In many instances, these procedures, instead of expediting handling and ultimate disposition of property, could result in new delays and uncertainties that would complicate existing problems.

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Fourth, the bill appears erroneously to assume that the Corporation could be self-supporting. As a result, it provides no mecharisn for meeting the losses which we think are certain to be involved in the Corporation's operations, and if implemented would chus involve a potentially large hidden subsidy in the fos of Federal borrowings which could not be repaid. Also, the bill would provide for backdoor financing which is inconsistent with the Congressional Budget Act and contains an exemption from budget controls which we believe to be unnecessary and unjustifiable, particularly in view of the substantial costs, borrowing and real economic impacts contemplated.

Fifth, the bill would provide that the Corporation would acquire properties frou FHA and other Government agencies, on a mandatory basis, through the issuance of corporate obligations in amounts based on fair narket value but not to exceed the unpaid balance of any mortgage. These provisions, in the case of FHA, would operate to de'rive the insurance funds of cash flow that would otherwise be realized in property dispositions and would also in some cases preclude recoveries that might have been obtained covering FULL losses. In this respect, the bill would complicate the already difficult financial problems of the Special Risk and General Mortgage Insurance Funds which would be charged with most of the properties likely to be acquired by the Corporation.

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The above comnants are made with recognition of the fact that the program. Proposed by S. 1988 is a 'demonstration" only. However, the demonstration would be costly, involve creation of an entity and program that might be difficult to terminate, and contemplates an approach which for the reasons indicated we believe to be unpromising and undesirable.

For all of .19 reasons discussed above, we strongly oppose enactment of the bill.

The Office of Management and Budget has advised that there is no objection to the presentation of this report from the standpoint of the Administration's program.

Sincerely,

/s/ Robert R. Elliott

Robert R. Elliott

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