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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 å 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 tne 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.
1C. 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 programınatic 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 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.
1 The Wall Street Journal, Aug. 15, 1975, p. 2.
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
After all that, we tried to negotiate with the FHA, number one, as více chairman of the NAACP to try to get the FHA to lift the redline from our community. Well, that didn't happen. We tried to get the FHA to let us be under any kind of program that FHA may have had, which we know of no programs they did have.
I remember once we submitted the 235J program to the Santa Ana FHA office. After months of negotiating with that office, they told us we were in the wrong office. They sent us to the Los Angeles HUD office. After months of negotiating with the Los Angeles office, we were told we were in the wrong office, and they sent us to another. Before we could complete the negotiations there, the President put a moratorium on all 235 programs. The only thing I'm saying is about the frustrations that we have been through to reach this point.
I have read your bill just briefly. I just found out about it last night. I haven't had an opportunity to prepare a statement. But in reading the bill, the one problem I find with it is that you expect organizations such as us—I hope you have us in mind when you talk about neigborhood organizationsto take on this large responsibility and then somewhere down the line become self-supporting. I would hope at the time the telephone bill comes through is the time you expect us to become self-supporting. I don't know how we can do that; that's number one.
No. 2, you talk about Carla Hill. I'm sorry that she's a woman. She's the Director of HUD. I've seen no changes in HUD or FHA since she has taken charge, and you say she will be president of this corporation. Regardless of all the revisions within that bill, I don't see it working. I don't see it working if FHA or HUD has anything whatsoever to do with it.
I live in a community now that is a result of a bulk sales program. I'm living with those results. At least before the bulk sale, the houses were boarded up. We raised enough cane to get them boarded up; but as a result of the bulk sale, they are all unboarded. They purchased the houses. It was 147 houses in our community from two- to four-bedroom houses, for a total of $296,000 from FHA; but then within 15 minutes' time that guy that bought those houses for $296,000 turned right around and sold that for $472,000. He made approximately $176,000. My understanding is he paid FHA $29,000 for the option. He collected the money for the future sale from the new buyers and he used that money to pay FHA off, so he never had any more than $29,000 involved in a sale at any one given time, and he made $176,000.
We had the city of San Bernardino offer to purchase the houses from FHA, to give the city of San Bernardino under the Housing Community Development Act of 1974, a block grant, an opportunity with the city and the community working together to develop those houses so that they would be retained for low- and moderate-cost homeowners. This is one of the problems that we have. Sure, there is housing all over, but we can't afford it. We can't qualify. The houses they can qualify for are the kind of houses that are going to fall apart as soon as we get in.
I run a program right now that develops housing for low-income people; it's under the Veterans Administration. We can get little or no cooperation out of FHA; only the VA would help us. It took $20,000 to develp that contract. Where did that money come from? It came from all kinds of grants, to get to the point where we could implement the program.
We are developing houses where what we call a Spanish stuccowe've color coded the exterior-is guaranteed to last from 10 to 15 years. We guarantee the roof for 5 years. We guarantee the house for 1 year. It's a three-bedroom house, fenced yard, carpeting and builtins. A three-bedroom house in southern California will go for $10,000, $15,000. A two-bedroom house is $9,200. House payments on a twobedroom house is $92. House payment on a three-bedroom house is $102.
In the area that I'm talking about just one street north of where we are working now in Dillman Heights, we are selling houses there. We have the same housing owned by the Veterans' Administration. We rehab them. They put them back on the market for $8,200 for a three-bedroom house, $82 a month. The sale buyer has the same house. He's charging $17,500 for it. The same house we sell for $8,200; I mean on the same block. What I'm saying is that I agree with whichever one of the gentlemen talked before that you need to come into the communities.
Senator Cranston, I've been in your office many times in Washington. I've talked to your office many times in Los Angeles. I've appeared before you several times, but I have yet to be able to sit down and talk to the person who calls up those bills about what our problems are; I've yet to be given that opportunty. College professors give all these statistics and suggestions, but how can they really know what the problems are? I'm a living witness, and I bet you I've got the experience. I've lived the research, and I do it daily.
We use manpower money to pay the people in the community to rehabilitate those houses. After they've gone through a minimum of 6 months to a year training with us, then they are ready for entrylevel apprenticeship programs. We find we have 68 percent now and placement is very good, and many times we find this the best way to accomplish what needs to be done, but I employ the people from the community. You talked about vandalism. I've been running this Housing Development Corp. developing housing for 18 months, and my vandalism is running at a cost of $500 out of those 18 months because the people that live there are developing the houses. We don't have somebody coming in from Orange County in an air-conditioned limousine checking out our work. We check it out, and we do it.
Thank you for your time.
Senator CRANSTON. I want to thank you very, very much. You are very straightforward and very constructive, and I appreciate it very, very much. Carolyn Jordan and Jerry Buckley would like to meet with
you and talk with you and some others now about some of the particular things you haven't had a chance to express in detail and ask you some questions, and maybe you have some questions to ask them. They are going to be working on this bill trying to revise it in the light of these hearings into something that we can pass and any more information that you can furnish us with would be of great