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Miss MATARRESE. I wanted to add a little something on this issue of homeownership versus renting.
In our dealing with the 235 program, we found that in almost every situation the families that we were putting in those houses had been paying more in rent for smaller units, for extremely dilapidated units than they were paying under the 235 program and the 235 program sets their housing payments at approximately 25 percent of their income so they are obviously paying too much to begin with. There are an awful lot of people out there who can cut the bucket so to speak in homeownership and simply don't have the opportunities and people who are presently paying an awful lot more in a far worse condition than they could in some kind-It might not have to be 235 program but some way of getting homeownership opportunities. It could even be some kind of cooperative, scattered-site program for single-family houses but unless you are really committed to making homeowners out of more people in communities like East Oakland, I think you are going to have a far greater recurrence of the kind of problems we have now.
Senator CRANSTON. I want to ask this of each of you or any of you who feel like responding but what do you feel about the preauction system? How does that work out?
Mr. Ilgin. The present what, auction system?
Mr. Ilgin. What we had here with HUD in the past was that the auction would be on a Monday morning but first choice would go to speculators and investors and they would be able to bid on the house. This is HUD houses and I think if the house doesn't get sold the first week-Mr. Price will be able to explain it better than I can but if it didn't get sold the first week, then the 235 certificate holder would have his chance.
I believe that that has very recently been changed due to our urging so that 235 certificate holders and all others have an equal opportunity to bid on the first time the house is put up for sale.
Our position remains as it has been, that the 235 certificate holder should have prime choice.
Senator CRANSTON. What seems to happen to a property that is picked up by an investor or so-called speculator!
Mr. ILGIN. Past experience, and there have been abuses, and I am talking about abuses that have been such abuses in the past, that while the speculator was supposed to have come in and rehabilitate the house before it was put on the market or occupied, subsequent to inspection by someone from HUD, would reveal that someone had indeed moved into the house before anything was done to it.
I think Mr. Price could probably give you a much better picture of that.
Senator CRANSTON. Do you think HUD programs or disposition of these properties leads to abandonment?
Mr. Ilgin. If HUD properties are left for long periods of time, I am certain that abandonment is the final result and I think you address yourself to that problem, time element in the bill, and of course any kind of abuses of any program will lead to further abandonment.
There was one other concern that we have regarding the bill and was that the question is does it amount to something similar to 100 percent financing? Does it tend to bail out the city? That's our
Miss MATARRESE. I was just going to say I think it is a measure of the way the HUD is using the 235 program to sell their own property, but not allowing it to be used for any of the other abandoned properties. In many areas there simply is not the market for the properties.
In terms of bidding procedure itself, we have purchased a number of properties from the bidding procedure and I think there are probably more efficient ways of dealing with these properties. For example in the past there was a nonprofit organization used to be able to go into HUD and obtain these properties prior to going through the bidding procedure with the understanding that these were to be rehabilitated and resold to owner-occupants.
In some ways it is a more efficient procedure than having it go through HUD bureaucracy.
Senator CRANSTON. Does the present system where investors or so-called speculators get a hold of a piece of property, lead to more or less abandonment in the course of time?
Mr. Ilgin. That would be difficult for me to say but our past experience would indicate the presence of an overabundant-an overabundance of rentals which generally means speculators in your area is not good for a neighborhood where the residents are primarily interested in their single-family dwellings.
Senator CRANSTON. Thank you very, very much.
Our final panel now will consist of James Price, Area Director, San Francisco Area Office, U.S. Department of Housing and Urban Development and Fred Craig, Loan Guaranty Officer of the Veterans Administration.
If you could first of all lead off by commenting, Mr. Price, on the various statements that have been made by people that refer to you in your operation.
Mr. PRICE. Thank you, Senator. I was going to say rather than reading the statement you already have, I would be glad to respond to those and only use a little of the material in the statement.
Senator CRANSTON. Fine. That would be very good.
STATEMENT OF JAMES PRICE, AREA DIRECTOR, SAN FRANCISCO
AREA OFFICE, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. PRICE. As a general opening remark, however, I would like to say that we are very pleased with the attention that is being received now on these kinds of programs. We can hardly underestimate or perhaps I should put it more positively, we can hardly expect enough attention to the problem and this type of hearing will help achieve that type of result.
We also are very pleased with the East Oakland Housing Committee and other organizations because they have focus on the problem. 1 am firmly convinced that to get action on these problems will take local community effort, that no agency of the Federal system or State system will actually solve these problems.
I woud like to comment on the house that we visited this morning because I think it is a significant example of the kinds of problems that exist.
At 6226 Bromley, a house that was built in about 1922 was most recently purchased by the immediate occupant in April of 1974. Foreclosure was started by the lender in February of 1975 and we received it on August 6 verifying that approximately 6 months' foreclosure process.
By that time, of course, it had been abandoned and had been seriously damaged. However, another key point to this is that during the period from April of 1974 to the time of foreclosure, no payment was ever made on that property. The downpayment for the purchase price of about $19,000 was around $600 including closing costs.
The net etfect was that the party who abandoned that home occupied it at a rate of less than $50 a month during that period of occupancy then left it without ever paying a nickel toward the mortgage.
Now, one problem is we have no way-we do not know now where that party is—So we have no way of discovering what the circumstances were, and I will not make any judgment about why this happened.
Congressman STARK. Was there any indication how long the person lived in the house?
Mr. PRICE. There is no evidence as to the date that they actually moved out if that is what you mean.
Congressman STARK. What was the purchase price? Do you have any idea what the purchase price was?
Mr. Price. The purchase price was $19,000; the HUD loan, $18,600, is what HUD paid off to the lender. Our estimated repair cost on that property is $8.000 which is a little higher than average. You saw it was stripped of plumbing.
Congressman STARK. One of the things that occurs to me is that the real estate commission on selling that house had to be $1,140, with a $600 downpayment, if that wasn't in cash or was just a note, it just opens the way for a whole lot of chicanery to put in a dummy purchase with a $600 note, if that can be done by our underwritings, where the unscrupulous real estate broker puts $500 in his pocket and nobody lives there at all.
Mr. PRICE. We believe this is an act of practice, and it is difficult to track as you are aware.
We are very well aware of the practice of a speculator buying a property, maybe one of ours or maybe another property on which we will put a mortgage and they will say in writing they will be the owner-occupant and, therefore, they get the very low downpayment but, in fact, they never do occupy
Congressman STARK. Do you prosecute those cases when they come to your attention!
Mr. PRICE. We give that information to the U.S. Justice Department which rarely prosecutes because they claim you cannot prove that the party didn't really mean to live there then just changed their mind.
It is a ripoff, Congressman, and we have expressed strong concern about this to our central office.
To continue on that house bill, we estimate, $8,000 repair. Our holding operation during this will cost about $1,000 when we sell it.
When you add to that what we will pay by way of commission, closing costs after the rehabilitation, we will have in the house—by “we” I am talking about the people of this country-$29,150.
We estimate that house will sell on the market for $18,150 leaving a net loss to the insurance fund of $11,000.
Now, this was insured under the inner-city program which is funded by Congress in a special risk fund so it is that fund which will lose the $11,000. Now since we got it on August 6, the city has inspected it per our agreement with the city. There is a long list of repair items, termite inspection and so forth and a sale recommendation has been prepared by our area manager, and we received that today. We are prepared now to proceed with that house. The recommendation is to repair it. Our option is to sell it as is, and I understand that is of interest to the committee and I do have some other things we wanted mentioned but if you want to get into the as-is comment, I will be glad to get into that.
A comment was made by Mrs. Matarrese regarding our sales. I would like to exchange with her a correction and an apology. She referred to a press release which I sent out about the 518 repair program and said it included a statement 235 would be included in that program.
She is correct. My press release did say that. I was wrong. It is not included. That is a legislative matter and as much as I am interested in the Federal system, I seldom want to take on the burden of being a legislator so that is not in the legislature and I apologize, Fran. I apologize. That was a serious error on that press release. On the other hand, Mrs. Matarrese
Senator CRANSTON. Could we interrupt. Let counsel read one portion of the law on this point so there is no misunderstanding.
Mr. PRICE. If you are going to tell me what I just said is not true, that's extremely interesting because I am repeating what my central office has told me and I would be very happy to put 235, if you can
Mr. BUCKLEY. I shall read to you the language of section 518(b) that was enacted as the part of the House Development Act of 1974.
“The Secretary is authorized to make expenditures to correct, or reimburse the owner for the correction of, structural or other major defects which so seriously affect use and liveability as to create a serious danger to the life or safety of the inhabitants of any one or two family dwellings which is covered
by a mortgage insured under Section 235 of this Act or which is located in an older, declining urban area and is covered by a mortgage insured under Section 203 or 221 ..." et cetera.
It seems from what I have read that the legislation does include section 235.
Mr. PRICE. We have just accomplished something. I have already invited the East Oakland Housing Committee to send me cases where they feel the 235 buyer should receive this assistance so I can in turn go to our central office and advocate the program be expanded.
I would guess the Department's position is related to the fact that the 518 was acted for 235, we feel we adequately serviced that in this area. However it would certainly not be fair for me to say that we covered everybody who should have gotten it by the deadline and I would be glad to expand it.
Another comment was made by Mrs. Matarrese that I think should be responded to.
When we saw our property at the Monday morning auction, our first priority is to a proposed owner-occupant and that is stated in our ad.
Our second priority is to a proposed owner-occupant with 235. However that program is now suspended or terminated by somebody in Washington.
Now, I wouldn't try to say who but at any rate we are no longer offering 235's at this time but when we were, they did have priority.
The speculator, so called, was the third priority and only received the property if we were not able to sell it to the first two priorities.
One of the comments that I make in my statement is that because of our strong concern about the whole insuring program the rehabilitation program, we have sent this week to Mayor Reading a formal invitation to participate with us in a greenlining program. We are prepared to make an agreement with the city and community organizations and lenders which will be backed up with an agreement that we will provide mortgage insurance in so-called marginal areas. At the same time the city will take on certain programs to help further insure the safety and the benefit of that neighborhood and we, of course, will ask the lender to cooperate.
Because of the activities of the east Oakland housing committee, we believe that that may be successful.
Another concern that we have is the cost of buying a home. This has already been referred to but I would like to give you a specific figure based on a fairly typical sales price in east Oakland of $17,500.
The FHA formula on income would require an $11,000 annual income whereas the Oakland average income is well under that. So that a present of a home in east Oakland on an average would not be eligible for an FHA loan on their own house at this time at the present interest rate.
Another subject that has come up a number of times is the number of homes that are actually foreclosed, and so forth. There is a statement released by your office, Senator, which inadvertently contains a misstatement to the number of homes that are owned by HUD.