Mr. ADAMS. I've got to tell you the rocket scientists are not the ones out there selling homes.

Mr. BUCHERT. My comment would be the same. I've been an FHA builder for 25 years and you've been using FHA, using FHA, using FHA. And then all of a sudden you change the program and you start using Fannie Mae's community home buyer program in place of it.

There's a change in the marketplace. We're out there selling homes. And it's one thing for a group of accountants to sit down and decide that this is what is taking place and this is what is going to take place. And there is another for people who are out there every Sunday afternoon, as my wife and I are, selling houses and seeing what is happening Wednesday night at 7:30 when you meet with a couple to sign a contract.

There's a difference between what is happening in the marketplace and what you are hearing in accountants' reporting.

The second thing is the data. We really don't have access to the data, including through the Freedom of Information Act.

Yet we're told, you know, read these two reports and be satisfied. I think we could be a lot closer to maybe having a better idea of what the problems are if we had access to the data, and I would welcome the access to that data, also.

Senator CRANSTON. Thank you. Mr. Dale.

STATEMENT OF LARRY DALE, EXECUTIVE DIRECTOR, NATIONAL HOUSING IMPACT, FEDERAL NATIONAL MORTGAGE ASSOCIATION, WASHINGTON, DC

Mr. DALE. Thank you. Larry Dale with Fannie Mae.

At the risk of incurring the wrath of both sides in this argument—But I think the data is fairly critical here.

We have heard a lot of talk of the recession and that impact on the numbers of December 31, 1990. Those numbers are a year and a half old. Housing losses and losses to the FHA Fund tend to be a lagging indicator of recessionary trends, not a leading indicator.

And I think there is some question as to whether the performance of the FHA Fund between 1989 and 1990 was due to the recession. After all, the recession had barely begun at that point and I expect we will see that the recessionary effects will show up in later years' calculations.

The second point is that while we have heard a lot of discussion about the effect of FHA on new loans that are being underwritten, I think Secretary Weicher indicated that that has only really been in effect for nine months.

Well, if you are looking at a 9-month old single family loan portfolio, to be candid with you, you really don't know how that is going to perform. It's way too young. You can begin to look at the indicators of that portfolio in terms of LTV and guesstimate how it's going to perform.

I don't think that Mr. Lasko and Mr. Weicher were all that different when they said that certain loans off the top were not being made, certain loans off the bottom in terms of risk were not being made. And Secretary Weicher's comment that the overall balance of the portfolio was about the same as it had been.

But it's way too early in the life of that portfolio to see how it will remain.

I guess the last point is, from our perspective at Fannie Mae, from talking with our customers, clearly, while the FHA gross dollars of business did not decline that dramatically in late 1991 and early 1992, the percentage of the business that was going to FHA in what record origination volume months in that period of timeclearly the percentage of business that was seen to have been going to FHA was much lower and our part of the business was concomitantly higher.

Mr. LASKO. You asked about the long term prospects of the Fund, Senator.

Let me say that the Price Waterhouse study is a very credible study and Secretaries Weicher and Hill gave us quite an explanation.

Like any mathematical exercise that tries to project the future, it is as good as its estimates and its assumptions.

That model they use-and they use historical data to make the projections-shows delinquency rates and claim rates—I am generalizing a bit but rising into the next decade, higher FHA claim rates.

That may or may not occur. We have a sound basis for that.

Remember, at the same time, FHA since 1987 has put in place over 30 improvements in underwriting, most of them very sound. They, for instance, reunderwrite on assumptions of mortgages. They have tightened front end and back end ratios. They, by statute, no longer do investor loans. They no longer do vacation loans. A lot of good steps.

It's not at all clear that the Price Waterhouse model fully captures the likely forward going effects of all those improvements.

We would just suggest that before we fail to make some rolling back at the margin of these, for instance, complications in the down payment formula, before it is too late because we think it may be too late and we do think the fund is going to implode on itself that the Congress should take some remedial action.

Because there have been, as I say, over 30 improvements already made. The model doesn't necessarily capture them very well. The model is only as good as the assumptions that go into it, good as the model is.

Senator CRANSTON. Thank you. Ms. Cincotta.

Ms. CINCOTTA. I think there are realtors and there's builders, who get their money when the deal is done. New home, used home. The mortgage bankers are 100 percent guaranteed by the Federal Government.

The other side is the family that loses its home, the neighborhood that loses, and the taxpayers who have to pay the bill.

I think that's kind of our discussion. It's like incredible to me when somebody says they do a good job in Chicago. It wasn't us. They are saying they put in 100 percent FHA and that it would be bad if maybe now we are moving to 10-15 percent in those same minority communities as conventional with heavier counseling to keep folks in their home and have people make the choice, that that is somehow bad.

But I think that you have the people who want to make money in the industry that are pushing it one way. And some of the rest of us are saying "Gee, let us catch up. Let us get people in their homes to stay. Let the taxpayers have a break, not to have to bail out another fund somewhere else."

I think that's the contrast we are having, saying I am a good lender because I put 100 percent FHA in these minority neighborhoods-is not necessarily your saying that you are very good. Because on the other side, all the CRA studies have shown on the conventional side these same minority neighborhoods, these same individuals are turned down more and more and more than any other race.

And to bring the conventional and the other in is part of what I think is very important. And to stop the foreclosures and stop the hit to the neighborhoods and the taxpayers.

If you change it and make it easier, they will go out, they will sell homes, they will make bucks and we are going to be talking here again about another HUD demonstration program to clean up all the foreclosures.

We haven't cleaned up the ones we have now. We cleaned them up in the early 1980's and they are back to haunt us. We've got to be able to come out of that.

People have got to have decent neighborhoods and not be put out in the street.

When you take away the American dream for 80-90 thousand families a year, under FHA the Federal Government is giving them a dirty deal and their neighborhoods a dirty deal and the taxpayers a dirty deal.

Senator CRANSTON. Thank you. I think we should move to the multifamily arena.

As I noted in my opening remarks, the decline in FHA multifamily activity has been very dramatic. At the same time, demand continues that will outstrip available suppliers as the stock of low cost housing in the United States dwindles at a precipitous rate.

HUD estimates that 5.1 million renter households are living in substandard housing or have rent burdens exceeding 50 percent of their income.

How do you explain the decline in FHA's role as the premier credit enhancement for affordable multifamily housing? To what extent has this decline contributed to the nation's affordable housing crisis?

To what extent are FHA's current activities like the new delegated processing program sufficient to rebuild the capacity of its multifamily operation and have a meaningful impact on the supply of affordable housing?

To what extent have other secondary market actors stepped in to fill the void of an inactive FHA multifamily housing program? What are the differences between the mortgages purchased by these entities and the ones traditionally insured by FHA? Who would like to take a bite at all that? Yes.

STATEMENT OF J. RODERICK HELLER III, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, NHP, INC., WASHINGTON, DC

Mr. HELLER. Senator Cranston, my name is Rod Heller, chief executive of NHP. I'm here today on behalf of the National MultiHousing Council and the National Apartment Association.

I have now been in the real estate and finance industry for only 6 years. I joined NHP in part because it seemed to me that certain fundamental changes clearly were going to occur.

I thought today rather than deal, as has been done in the last hour, with some fairly precise technical questions which we have addressed in large measure in our testimony, that I would provide a little perspective on how I see the apartment industry, the longer term implications which I think are going to be dramatic in the next 5 to 10 years and will make some of the issues that we are grappling with today appear of less long term validity.

Today it is almost impossible to finance multihousing acquisition or construction except for a limited number of entities of scale with access to the public finance markets.

This broad statement has a number of specific implications, both I think nationally in economic terms and also in terms of the direction of the apartment industry.

First, we hear a great deal about home building being an engine of economic recovery. If you look at the decline in the aggregate statistics published by the home builders, you will see that the bulk of the decline in home building is, in fact, multifamily.

The peak year in home building was 1985, roughly 1,700,000

starts.

Last year, 1991, we had roughly a million starts. Of that decline, 500,000 was multifamily, from 669,000 housing starts to about 174,000.

Single family declined from 1,074,000 to about 880,000. But the aggregate reduction was principally in multifamily with obvious concomitant results for the national economic recovery or indeed for the economy broadly.

To put it a different way, in 1985 multifamily was roughly 65 percent of the total single family starts. This year it is projected to be less than 20 percent.

Last year, as widely reported, was the first year where total loss of stock in multifamily was greater than new construction, accelerating a process which has particular impact for low- and moderateincome families.

There is a second, though, broader implication which I would like to stress which I think is particularly relevant for the FHA. That is, you are beginning to see for the first time large scale consolidation in the apartment industry.

I have long felt that the apartment was going to be, as the hospital industry was 30 years ago, moving from a mom and pop single ownership to large national entities with the access to computers, capital and standardized approaches which will make apartment projects cogs in a larger financial system, as opposed to the traditional one unit projects we have always enjoyed.

Our own company has had to move from being traditional tax shelter syndicator to an economic entity. We have finally broken

some of the financial problems that afflicted us and in the last year have roughly added 15,000 units and are looking at a number of large scale acquisitions which will lead, I think, to our company and a number of others like us becoming the owners of a large portion of the affordable as well as the nonaffordable stock.

To put it another way, the conventional and the nonfederally assisted stock.

This has some positive aspects. We would hope, through introduction of standardization of property management, that we will be able to develop lower costs in operation through access to capital and computerization. We will do the same.

And it may be that there will be an overall improvement in property management.

But there are some significant negatives, and to some degree I am speaking almost schizophrenically today because our company, to some degree, benefits from the continued weakness in multifamily finance because we are one of the few that will have access to large scale capital.

The real losers are those entities that have been so dependent on traditional sources of multifamily finance.

I urge the committee to move beyond the specific kind of questions that are important to examining how we reconstruct a finance system which will provide a basis for what I think is probably a healthier kind of system with many entrants into the capital market able to provide the kind of construction and operation of multi-family housing that has always marked our country.

We have noted in our testimony a number of changes that we think are essential.

Risk based capital should be carried at 50 percent rather than 100 percent, which in itself may be as important as a number of the other instances you are concerned with.

For our purposes today, we agree that FHA is not playing its role. The reasons are many. Ultimately it goes down to leadership, and I think with the talent we have at FHA, it is possible that FHA could take the lead in serving in a program as credit enhancer, working with Fannie Mae, Freddie Mac and others, which would ensure better sources of multifamily finance than now exist. Broadly, though, we urge that the recommendations we stress in our paper be taken into account in the context of the changes that I think will dominate the apartment industry, which are only beginning to emerge as the effects of tax reform wear off and as the society itself moves out of this recessionary period.

Senator CRANSTON. Thank you very much.

Mr. BUCHERT. Thank you, Mr. Chairman. The Homebuilders concur with the Apartment Owners Association.

When you look at the fact that about a third to a half of those were tax credit deals, and when you look at the fact that HUD's implementation and subsidy layering restrictions makes it really impossible to use HUD programs in conjunction with tax credits, I think that really defies the realities of the marketplace.

I think HUD needs to reassess that.

Second, I think when you look at the number of applications, the applications for multifamily financing through HUD is up. It is higher than it has been.