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 their 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 the 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 favorable, 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. Racial 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.

If there is one point inquiries into abandonment are agreed upon, it is that abandoned properties are not necessarily those of the poorest quality in cities. It might suggest that neighborhood conditions and access have an important bearing on abandonment. Social disorganization in neighborhoods with high concentration of crime (especially vandalism and crime related to youth gangs) and large and broken families accompanied by inadequate supervision of children tends to significantly increase abandonment rates. One interpretation of this finding is that a strategy which substantially focusses on property and property improvement, no matter how efficient, without alleviating the problem of social disorganization and its sources is ill conceived. We would further stress that social disorganization is not pervasive and varies considerably within low-income areas. Therefore, only as far as social disorganization spreads to neighboring areas with abandonment would the process be replicated. Moreover, if abandonment proceeds rapidly in particular neighborhoods and families prone to social disorganization move elsewhere, other forces come into play which reduce abandonment. Not the least of these forces is rising housing prices and perhaps public and private actions which increase the costs of vandalism.

Much has been made in recent years of the so-called "neighborhood effect" where a disincentive is present for individual property owners to reinvest because benefits of such investments flow to neighbors rather than those making the investment. The conclusion derived often is that when investments are made in concert by groups of investors or for that matter a "neighborhood corporation," satisfactory returns may be earned. It is perhaps a more sophisticated version of the contagion theory and has been applied to explain the persistence of slum housing. Under certain special conditions it might also pertain to abandonment. If the "neighborhood effect" is a problem, and the evidence is limited supporting the contention, then indeed a general tendency would be present for disinvestment in many areasof cities. However, it is highly unlikely that the effect is pervasive and conditions can be postulated where even if some of the benefits of investing in property spill over to neighbors, individual property owners indeed would have an incentive to continue to maintain and rehabilitate rather than to abandon.

THE NEIGHBORHOOD PROTECTION CORPORATION CONCEPT

Specifically related to S-1988 we have a number of comments. A basic issue is whether the Neighborhood Protection Corporation is likely to prove an important instrument for halting and reversing abandonment (in general and in specific areas of cities). One reaction is that the Bill evidences an inordinate interest in the physical attributes of property and neighborhoods. Presumably, our goal is to enhance the well being of people who own and occupy structures in neighborhoods rather than properties themselves. The acquisition and rehabilitation of abandoned properties must be accompanied by demand from people to live in them at prevailing prices in the neighborhoods where they are located. If rehabilitation restores confidence in the areas where the properties are then, indeed, benefits may be significant. However, restoration of confidence involves more than physical improvement of the neighborhood environment. Indeed, if the Neighborhood Protection Corporation's activities were to operate in tandem with other programs and involve heavy inputs of additional resources, a total process of neighborhood rejuvenation might be attained. But then it seems reasonable to assume that with sufficient assistance and subsidy any neighborhood and the properties and people within it may enjoy a high level of well being. If we interpret the proposed Bill correctly the purpose of the Neighborhood Protection Corporation is not, however, to be a vehicle for channeling large subsidies to neighborhoods. Quite the contrary, the assumption seems to be that it operate on a fiscally sound basis. Given the time-consuming character of property acquisition, and the high costs of rehabilitating vandalized property, one must inquire whether rents and/or prices are likely to be sufficiently attractive for the Neighborhood Protection Corporation to enjoy a satisfactory spread between the returns and costs.

One way of examining the prospective experiences is to compare the advantages and disadvantages implicit in S-1988 compared to a strictly private corporation with similar goals but lacking certain powers. Major advantages to the Neighborhood Protection Corporation would include (1) the power and duties

to assemble residential abandoned properties overcoming many legal obstacles faced by strictly private corporation; (2) assurances that the capital stock is purchased by the U. S. Treasury; (3) the possibility of selling obligations on the open market at a lower interest than would a strictly private corporation decreasing the cost of debt service (if the U.S. Treasury stood by to purchase these obligations at its discretion, interest on obligations clearly would be relatively low); (4) tax-exempt status on capital, reserves, income, etc. but no exemption from property taxes. Some of the disadvantages relate to (1) Primary concern with abandoned and often vandalized residential property in primarily older neighborhoods imposing heavy costs in clearing up titles, outstanding debt, rehabilitation, etc.; (2) the resources required in providing counseling services to purchasers of housing units; (3) the general problem of relatively high administrative costs associated with the continued public scrutiny directed to the operations of an independent agency of the United States.

Whether the financial advantages embodied in the lower costs of obtaining capital are sufficient to overcome the high risks, uncertainties and generally large costs associated with the functions of recycling abandoned properties would, of course, be determined by the demonstration. But unless a benign neighborhood effect accompanies the activities of the Corporation which in part would be expressed in generally rising housing prices and rents, doubt is cast on fiscal solvency. Of course, one might postulate situations where a total process of neighborhood rejuvenation and redevelopment is accomplished with fiscal solvency, but the effect might well be that experienced with our older urban-renewal programs, namely, the relocation of lower-income populations. It is not difficult to imagine situations where as the Corporation improves properties on a large-scale basis, housing rents and prices rise in neighborhoods and low-income populations find they cannot afford to live there any more. The implications are fairly obvious. "Place prosperity" has been attained, but this should not be confused with "people prosperity." With respect to "people prosperity" one must ask also who are the gainers and losers. Renters probably would lose, whereas property owners would gain. Since renters are more likely to be in a very low-income categories, we are then once again faced with a situation characteristic of most of our production-oriented housing programs-i.e. redistribution of income in favor of relatively high-income populations and failure to attack the basis of low-income problems. Of course, the activities of the Neighborhood Protection Corporation might be joined to housing allowance and leased housing efforts as well as other programs. However, in the process a fundamental goal of certain demand-oriented efforts would be affected. We refer to improved opportunity to obtain not only better quality shelter, but greater flexibility in choosing one's place of residence.

We are sensitive to comparisons made between the proposed Neighborhood Protection Corporation and the Home-Owners' Loan Corporation in the 1930's and 1940's. The HOLC encompassed several functions including the refinancing and management of loans in defaults; lending for reconditioning and the management and sale of distress properties acquired. The very large decline on interest rates for government borrowing during the 1930's placed HOLC in the position where it enjoyed a very favorable spread between what it paid for funds versus receipts (about 2.5 percent on a net basis.)1 Even though HOLC acquired many properties during the depth of the depression and only limited efforts were made to sell them in the early years, it experienced a net loss on this phase of its operations by the final date. Simply put, lending, loan management, and refinancing proved to be profitable, whereas management and sale of properties did not. The latter operation is more akin to the proposed Neighborhood Protection Corporation and, in the case of HOLC, covered properties throughout the urban areas and not necessarily those highly concentrated in a few neighborhoods. Also with respect to abandoned properties the phenomenon became apparent not only in the recent economic recession but had much deeper roots. In other words, comparison between HOLC and the proposed Corporation should be approached with caution.

1 C. Lowell Hariss. History and Policies of the Home Owners' Corporation (New York: National Bureau of Economic Research, 1951.)

SOME ALTERNATIVES

Alternative strategies for addressing abandonment problems have been documented elsewhere and need only be indicated. Broadly they include the following: (1) Let the process of abandonment and renewal take its course; (2) Accelerate the process of abandonment and renewal with public assistance; and (3) Prevent abandonment and revitalize areas with public assistance. The Neighborhood Protection Corporation in many respects might be viewed as supporting all of these strategies depending on local circumstances, but essentially it emphasizes prevention and remedial action. However, it is not equipped by itself to address problems surrounding social disorganization in all of its ramifications, nor would it have the power to provide significant income or housing subsidies. Its relative independence from other agencies poses the additional question what cooperation might be received to orchestrate efforts where desirable. Perhaps a demonstration might suggest how such an orchestration could be designed to cope with the problems effectively. However, past experiences provide little comfort on this score. We are continually caught in the trap where specific programs are enacted to deal with problems whose sources are complex, but this is not reflected in programmatic approaches. With respect to the Bill under consideration, the embodiment of the contagion theory without reference to the costs and benefits to owners, tenants, vandals and neighbors exemplifies the thinking. Perhaps there are strong administrative and federal budgetary reasons why the management and disposition of foreclosed and abandoned property should be centralized especially as this pertains to property with federal insurance and quaranty. Possibly some efficiencies can be attained in the process. But the function of management and disposition should not be confused with the substantial responsibility to rehabilitate including the implicit assumption that a "profit" can be made. Of course, if the Neighborhood Protection Corporation were to acquire the properties at a very low price, then an incentive to rehabilitate might be present. A recent report makes reference to HUD selling foreclosed property "usually . . . for less than half the money it paid to buy the multi-million dolar loans from lenders . . .”1 If rehabilitation of property is the major goal, then purchase at even more favorable prices followed by rehabilitation might lead to a paper profit for the proposed corporation. However, this would represent largely a hidden subsidy to rehabilitation in selected areas without fuller review of whether rehabilitation is the most appropriate course of action. Essentially, it would be a form of financal legerdemain not uncommon in the management of our housing affairs. Inefficient but nidden subsidies are preferred to relatively more efficient but open subsidies.

Assuming, however, that the Corporation would acquire properties at realistic prices, its options would include the demolition, repair, rehabilitation and alteration of units followed by sale or rental. If repaired and rehabilitated a demand must be present for these units at rents and prices which at the minimum meet the cost of capital. Some of the prospective demanders may have access to housing assistance. If this assistance is not tied to a specific property as would be the case under the leased housing program or proposed housing allowance efforts, for example, then one would have to ask whether the combination of neighborhood environment, location, and shelter quality at the prevailing prices or rents are satisfactory to prospective occupants in the light of alternatives. Unless additional steps are taken to improve neighborhood environments, including reduction of social disorganization and improved neighborhood facilites which also have experienced disinvestment as the abandonment process advanced, many prospective residents will choose to live elsewhere. Only if rents and prices are very attractive, indeed, will many people be induced to live in these areas without the additional investments in related facilities and services. In any event, gven the very limited mandate to the Neighborhood Protection Corporation and the responsibility for financial solvency, its contribution to alleviating the existing problems will be relatively small. In many cases the best approach will be to tear down and demolish units rather than to rehabilitate. The question then arises what to do with the land. It could be sold to private profit or non-profit groups or public agencies. Or the corporation

1 The Wall Street Journal, Aug. 15, 1975, p. 2.

might under its own auspices go into building development. The risks in building development are not significantly dfferent for reasons already mentioned. Moreover, where abandonment is spotty and dispersed, the kind of scale effect which has characterized urban redevelopment efforts will be lacking particularly since the corporation's emphasis will be on residential properties. All of these elements impinge on financial solvency. Moreover, the potential actions would be undertaken without influencing income of prospective residents and the general desirability of neighborhoods. Clearly, physical renewal of nousing is not enough, and the prospect for reducing further abandonment may be unaffected unless a benign neighborhood effect is realized. The outlook for such a benign neighborhood effect without collateral action in addition to physical rehabilitation is clouded.

Senator CRANSTON. Valarie, we have to quit in about 10 minutes. If we could cover this in that time frame, I'd appreciate it.

Mr. LEHRER-GRAIWER. Just briefly, my name is Jonathan LehrerGraiwer. I work for the Western Center on Law and Poverty, which is a regional services group. We have been involved in the past. several months in a lawsuit against a "bulk as-is-sale" by HUD of 147 properties in the Dillman Heights area, which is about 650 homes on the west side of San Bernardino.

Mrs. Pope is the executive director of the San Bernardino Westside Community Development Corp., a nonprofit community-based group, and I think she can describe what has happened in her community.

Mr. POPE. Senator, my name is Valarie Pope, and I wear two hats: I'm the cochairman of the Rights Corp. for the County of San Bernardino, and I am also the executive director of the San Bernardino Westside Community Development Corp., which is made up of a group of homeowners and other business people from the general area where the abandoned houses exist.

We all live there in the general area. We feel that we know what the problems are. We started to get involved with redlining and abandoned houses in November of 1971, I think it was, when we first realized that we were a redline community.

We know some of the problems the different governmental programs have tried out on us. We know what those results were. They led up to the point where I think one of the gentlemen said that the savings and loan and FHA got frightened of us and tried to redline us. For all intents and purposes, the savings and loan and FHA abandoned us. We didn't abandon them; they left us.

As a result of that, any home-improvement loans that we may have made to make to bring our property up to the standards of the properties of the white people, we couldn't make those loans. Because of the nature of our community, outside speculation, in many cases real estate speculators went into areas and entice welfare recipients to come into the area to purchase homes, and the real estate broker would make the down payment for the woman, giving her no idea what homeownership was all about, just knowing that for once she'd obtained the American dream of becoming a homeowner. In most cases the real estate broker made the downpayment for her. She got in the house; needless to say, the FHA contract had already come through and did a cosmetic job on the house. Right after she moved in, the roof started to leak. the cesspool backed up, and all the other things that cause a frustrated home

owner.

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