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Question 5. What is the average cost of maintenance between acquisition and resale of a property (i.e. holding cost and repairs)?
Answer. As of May 1975, holding costs on our acquired properties averaged $3,330 per unit; repairs averaged $3,250.
Question 6. What is the average length of time a property is held by HUD? Answer. HUD holds properties an average of 6.8 months.
Question 7. What programs has HUD initiated to decrease its inventory of properties? Do you feel that these programs are effective in dealing with this problem?
Answer. The number of HUD acquired properties in the Oakland area has declined steadily from 359 in October 1973 to 171 in September 1975. This has been accomplished by increased use of private area managers to oversee and expedite the repair and/or sale of properties in their localities, some modest use of as-is sales, local broker incentive programs, coordination with the City of Oakland, streamlining of office procedures and increased advertising.
Question 8. The "as-is sales" program, where HUD urges the sale of all acquired properties on a high bid basis without repairs and without further mortgage insurance, may offer immediate relief to HUD's bulging inventories. However, this program raises the question of whether as-is sales merely recycle the abandonment process by allowing deteriorated housing to be occupied without repair. What precaution has HUD taken to prevent this from happening? (I.e. is there cooperation with city officials as to the impact of these sales? Is there counseling of new owners so that they may be able to get financing for these kinds of properties?)
Answer. Although local considerations are the overriding factors in individual neighborhoods, generally, this office feels that as-is sales are compatible with (or will not have an adverse effect on) stable neighborhoods, upward transi. tional neighborhoods, or already blighted neighborhoods. Conversely, caution is used in utilizing as-is sales in downward transitional neighborhoods where the threshold for tipping into blighted condition may be exceeded.
Of the 171 properties in Oakland now owned by HUD, only 17 are scheduled to be sold on an as-is basis.
The Oakland Building Department is notified of all as-is sales prior to the sale and provides HUD with a list of code deficiencies which are passed on to the purchaser. The City then contacts the new owner concerning repairs needed prior to authorizing connection of utilities. The City of Oakland also maintains a counseling agency to help new and potential homeowners, particularly those who have acquired Sec. 235 homes. There is a prerequisite that those purchasing with Sec. 235 assistance complete a counseling course. Counseling is not mandatory for purchasers of as-is properties.
Question 9. What measures has HUD used to deter the foreclosure rate of HUD insured properties?
Answer. Our single-family mortgage servicing section is in constant telephone contact with mortgages and mortgagees trying to work out reinstatement programs for delinquent owners.
In addition they are making mortgagee reviews where forbearance relief for delinquent mortgagors is stressed.
In the last two months seven mortgagee reviews have been made. Mortgagees are also encouraged to work with HUD Certified Counseling Agencies. Copies of default notices on Oakland properties are sent to the City of Oakland Housing Advisory and Appeals Board and the Oakland Counseling Agency for inspection of the property and direct contact with the owners to offer counseling assistance in an attempt to arrange workouts with the lender whenever possible.
Question 10. Does HUD have any comprehensive program that addresses the revitalization of abandoned neighborhoods? Do you feel that a comprehensive rather than a spot approach is needed? What would you recommend that a comprehensive approach include ?
Answer. This office believes that the revitalization of abandoned neighborhoods must come about through the cooperation of Federal, State and local authorities as well as lending institutions and the community. Many block grant cities have elected to undertake rehab programs.
In the specific case of Oakland, we have invited the City to begin a "greenlining” program which would be a joint agreement on neighborhood rehabilitation project areas and then develop standards and programs for systematic
"code inspections, dwelling rehabilitation, open space, street and drainage improvements, landscaping, including tree planting and neighborhood utilities and services.
[HUD–Washington, D.C., 4070.1 Rev. p 3-2) b. Dwelling. The dwelling máy consist of a one or two family unit and shall have been more than one year old on the date the conditional commitment was issued.
C. Application. In the case of a Section 235 mortgage, the application for assistance must have been submitted within one year after insurance of the mortgage as evidenced by the date of insurance endorsement. In the case of mortgages in older, declining urban areas insured under Section 203(b) or 221(d) (2) on or after August 1, 1968, and prior to January 1, 1973, the application for assistance must be submitted not later than August 22, 1975, one year after the date of enactment of the Housing and Community Development Act of 1974.
d. Extent of Defect. The defect must be a structural or other major defect which so seriously affects the use and livability of the property as to create a serious danger to the life or safety of the inhabitants. To meet this test, the defect must not be speculative or of limited likelihood of becoming an actual danger. A defect which has become a serious danger to the life or safety of the inhabitants, but which was not so at the time of the original appraisal inspection, is not eligible. For those claims involving reimbursement for repairs previously made, the defect must have been such that à judgment can be made that it constituted a serious danger to life or safety at the time of the original appraisal inspection.
e. Determination of Existing Defect. The defect must be determined hy HUD-FHA to have existed on the date the conditional commitment covering the property was issued and must be one that a proper appraisal inspection of the property could reasonably have been expected to reveal.
3-3. Defective Conditions Eligible for 518(6) Assistance. The file must be Tetrieved and reviewed by the field office upon receipt of a claim which appears eligible on its face. Examination of the conditional commitment conditions may determine if the defective
STATEMENT OF FREDERICK CRAIG, LOAN GUARANTY OFFICER, VETERANS ADMINISTRATION REGIONAL OFFICE, SAN FRANCISCO
Mr. CRAIG. Fred Craig, I am Loan Guaranty Officer, Veterans Administration, San Francisco, and I brought these gentlemen with me and I am delighted to introduce them. On my far right is Bill Beven, who is property management representative from our office who works in Oakland. Next to me is Henry Cohen, who is an attorney from the General Counsel's Office in Washington, D.C. On the far left of the table is George Howard, a loan guaranty attorney in San Francisco.
Senator CRANSTON. Thank you very much, Mr. Craig. I have to ask you to summarize in not more than 5 minutes.
Mr. Craig. I am going to be very brief.
Mr. CRAIG. I understand. I just want to say we do not object to the intent of the bill. We believe some fiscal and technical matters need to be clarified and we are primarily concerned with the marketability of the long-term obligations that are mentioned in the bill.
As you know our loan guaranty revolving funds are replenished from the sale of our foreclosed homes and this is our primary concern and I think that can be clarified and probably settled.
Other than that I wanted to talk about the city of Oakland and northern California. We own 235 properties in northern California and Nevada. Fifty-eight of them are in Oakland and 19 of those we have owned more than 6 months.
So we do not have a large inventory here and we do repair the houses before we sell them.
Anything else that I might testify to is already in the supplement that was submitted.
[The complete statement of Mr. Craig follows:]
STATEMENT OF FREDERICK CRAIG, LOAN GUARANTY OFFICER, VA REGIONAL
OFFICE, SAN FRANCISCO Mr. Chairman and Honorable Members of the Subcommittee, as the Loan Guaranty Officer of the VA's San Francisco office, I am pleased to have the opportunity to appear before this subcommittee today and present the views of the VA on S.1988.
This bill, entitled the "Abandonment, Disaster, Demonstration Relief Act" is designed to prevent deterioration and destruction of neighborhoods and communities and to hold and assemble parcels of land for orderly development and redevelopment. This being based upon a general finding that the cause of the destruction and deterioration of neighborhods is 'to a large extent due to abandonment of properties.
The VA is well aware of the problems with abandoned properties. Unfortunately, we believe this complex bill, as currently drafted, contains many provisions which are ambiguous and subject to varying interpretations, leaves many areas unresolved, and will create many problems. For these reasons, the VA opposes S. 1988.
Our objections to the bill are not to its intent but rather to potential problems that could result from the vagueness and technical insufficiencies of certain provisions of the bill. These technical problems make it extremely difficult for the VA to take a firm position on the substance of certain of these provisions as we cannot forecast with any degree of certainty the effect that passage of this bill would have upon existing programs.
While not intended to be all-inclusive, the following are some of the specific areas we find objectionable :
Within the three metropolitan housing markets, to be determined in accordance with Section 5 of the bill, the Neighborhood Protection Corporation, set np to carry out the functions of S.1988, is given authority in subsections (a) and (b) of Section 6 of the bill to take action to declare abandoned residential property forfeited and to seize and take possession of such property. Paragraph 3 of subsection 6(b) of the bill provides such seizure shall be subject to the payment by the corporation of “just compensation” to any person claiming an interest in the seized property. This paragraph further provides that where the person or agency having an interest is a federal agency, payment by the corporation shall be in the form of obligations issued by such corporation. The bill does not specify, however, how payment shall be made to persons or other entities that are not federal agencies. Conceivably, the corporation could make such payment in the form of the same obligations it would issue to federal agencies. Since the bill provides in Section 8(b) (page 20, lines 8 through 14) that such obligations are not guaranteed by the United States and do not constitute a debt obligation of the United States, the marketability of such obligations is at best uncertain. If it is determined that a holder of a mortgage on property deemed to be abandoned is to be paid in long-term debt obligations of the corporation, which may have limited marketability, great reluctance can be foreseen upon the part of the mortgage industry towards making loans on properties in the demonstration areas. If this should occur, potential sellers of residential property would find themselves unable to secure buyers with mortgage financing available to them. As a result, those parties required to relocate might be left with no option other than to abandon their homes. Thus, potentially, 'the effect of this bill could well lead to greater abandonment rather than less.
At the present time the VA Loan Guaranty program is funded by a revolving fund established by section 1824 of Title 38 Ūnited States Code. Claims made upon the VA, based on guaranteed loans, are paid from this source. Properties acquired are usually rehabilitated and then sold by the VA. The proceeds of these sales are deposited into the same fund. If the VA is to receive long-term debt obligations of the corporation in exchange for its acquired properties conveyed to the corporation, a serious impact upon the liquidity of the fund can be seen. The lack of an adequate cash flow might well leave the VA with no alternative but to seek additional appropriations in order that it might meet its obligations on outstanding guarantees.
In those instances where the mortgage covering the abandoned property is insured or guaranteed by an agency of the United States there is provision, as previously indicated, for the seizing and forfeiture of the property with payment of just compensation to the parties in interest. If such payment is to be made to the holder of a mortgage at or shortly after the forfeiture of the property to the corporation, it leaves unclear the position of the guaranty issued by the VA to the lender. Normally the claim under the guaranty would be presented to the VA subsequent to the liquidation of the security and application of the proceeds of the sale to the outstanding indebtedness. Obviously if the holder of the mortgage has been paid in full by the corporation, insofar as the mortgagee is concerned, there no longer is any outstanding indebtedness unless the corporation becomes the holder of the mortgage by assignment. In this event it appears the corporation would then be in a position to file the claim under the guaranty with the VA. Since the corporation would retain title to the property the VA would be in no position to recoup its payment by means of resale of the property, thus further endangering the revolving fund.
It is our feeling that the bill shouid specifically clarify the potential liability of other federal agencies that have guaranteed or insured mortgages in the demonstration areas.
Section 6(d) provides for the corporation to acquire from the Administrator of Veterans Affairs properties to which he holds title, the consideration for the conveyance of the property to be its fair market value. However, the fair market value may not exceed the unpaid balance of the mortgage. Properties held by the Administrator are not usually subject to a mortgage obligation. Therefore, a strict interpretation of this section could result in a requirement that the Administrator convey the properties to the corporation without compensation.
Additionally, the VA may sell a property on an installment contract. Technically, an installment contract is not a mortgage and until such contract is paid in full title remains in the Administrator. It is unclear whether the term "mortgage” at the end of said subsection (d) is intended to be applied in the narrow technical sense. If it is, once again there would be no unpaid balance on the “mortgage.” Additionally, this section makes no allowance for the payment of management and foreclosure expenses or for the reimbursement to the VA of monies expended in improving such property prior to its acquisition by the corporation.
As a final note, Section 3(1) of the bill narrowly defines the term “residential property” for the purpose of S. 1988 to include only those properties which are subject to mortgages which are insured or guaranteed by an agency of the United States or which are subject to mortgages held by a "federally related financial institution.” In addition to guaranteeing and insuring loans, the VA also makes direct loans under certain circumstances. When VA acquires a property, we often resell it on credit (i.e, on an installment contract, or for a note and deed of trust or note and mortgage). The definition in Section 3(1) would not apply to these latter cases. This distinction is especially important in Section 6(d) which refers to “residential properties to which title is held by ... the Administrator of Veterans Affairs." Where the Administrator holds title, as noted above, there may be no outstanding mortgage or other debt, or. if there is, the loan would have been made, but not insured or guaranteed, by the Administrator.
I have attempted to point out some specific objections without attempting to be all-inclusive.
The Department of Housing and Urban Development has prepared a report to the Committee on S. 1988 strongly opposing enactment of the bill and noting a number of major difficulties that the bill would create. Briefly summarized, the major difficulties include:
The bill would duplicate what can already be accomplished by local governments with Federal assistance under title 1 of the Housing and Community Development Act of 1974, and would duplicate HUD's property disposition function.
The bill would create a new Federal Neighborhood Protection Corporation as an agency of the United States, and inject it into problems better solved by local governments and local citizens.
The bill would impose a major burden on the Federal courts.
The corporation's losses would have to be subsidized by the Federal Government. Furthermore, the bill would provide for backdoor financing which is inconsistent with the Congressional Budget Act, and would provide an exemption from budget control.
The corporation's authority to apply properties on a mandatory basis from FHA and other Government agencies would operate to deprive the insurance fund of cash flow that would be realized in property dispositions, and would, in some cases, preclude recoveries that might have been obtained covering full losses.
We urge the Committee to carefully consider the Department of Housing and Urban Development's strong objection to S. 1988.
I thank you for this opportunity to testify and will be glad to answer any questions that you may have.
Senator CRANSTON. Thank you very very much. I appreciate that. In light of the criticisms that have been voiced and I think they are pretty widely recognized that the as-is sales program, should that be modified, can it be made into a workable program, should it be abandoned or what, do you have any view on that?
Mr. Craig. Senator it would be my feeling that the way we are now doing the as-is program in Oakland is probably workable and safe. We have been doing this now for about 4 months and some experience will help us answer the question more precisely.
The interesting thing is there used to be community pressure to sell them rapidly and sell them as is because it did permit someone, presumably with a very small investment, to buy a property.
It is true that resulted in homes being occupied on various substandard basis. Hopefully now we have stopped that.
Senator CRANSTON. What percentage of as-is sales are to brokers and absentee landlords?
Mr. CRAIG. Most of them.
Mr. CRAIG. When you say "brokers," I would enlarge that. Small contractors are heavy investors in the program because they have a small work force that they can put to work on it so it would be brokers plus contractors.
Senator CRANSTON. What programs or procedures do you have to monitor abandoned, boarded up homes to try to reduce the vandalism and destruction that occurs ?
Mr. Craig. Senator, first the vandalism has taken place generally before HUD has title to the property. The renter is supposed to board the property up as soon as they are aware that it has been abandoned and they are supposed to supervise that property until the day it comes into our ownership.
When we receive notice of the foreclosure, it is immediately turned over to an area manager. Mr. Hicks is in the audience today and is an area manager in Oakland. His office secures the property, makes sure that the boards are on or if they aren't that they are put on and we also have a full-time, round-the-clock watchman's service which rotates around Oakland. This has reduced vandalism on our properties though it doesn't totally prevent it.