It is a combination of refinancing of existing products, nursing homes, new construction. I think HUD needs to, number one, to begin to set some production goals and to streamline these applications through.

The difference between applications and actual production are two different things, and at this time we have to begin to look at the actual production and field offices need to set production goals. I think the other thing there is the whole idea of delegated processing. That's kind of at the whim of the field office and we really believe that there should be some teeth put into delegated processing for some goals, where you say when you reach a certain point and you have a backlog of so much, you must get this delegated processing coupled with your in-house processing in order to get this job done.

And you shouldn't wait until you get to that point, because the restrictions under delegated processing take 90 to 120 days to get that approval, to approve the processor.

I think all of those will be steps in the right direction when we begin to correct the problems that were succinctly stated. Senator CRANSTON. Other comments on this?

[No response.]

Senator CRANSTON. Let's go on to another aspect of multifamily. The 1991 financial audit received by the subcommittee this week identifies several persistent material weaknesses in FHA's internal controls and recommends a number of administrative reforms to prevent loan defaults and minimize losses to the Federal Government.

From your various perspectives, what material weaknesses, socalled, do you perceive in FHA's operations and how would you correct that?

More significantly, to what extent has the culture of risk avoidance taken hold at FHA and what steps, if any, can Congress take to effect such administrative behavior so that while we take risks into account, we don't go overboard and become overly cautious? Mr. BRASS. Sir, my name is Chuck Brass from the New York City Housing Development Corporation. I'd like to address one area where I think, through the statute, you can hopefully address the issue of risk and affect what has really been the debilitating impact on the limits in terms of using FHA insurance in high cost areas like New York, as well as in your own home State of California.

One area of particular importance to us is the statutory mortgage limits, which are constantly limiting our ability to finance affordable housing in New York.

We are always playing catch-up in terms of rising costs and our ability to use the FHA program in New York.

So we hope in the Congress your committee will consider increasing the limits. We know that HUD has had problems with that because they are risk averse and they are afraid that higher insurance limits will lead to bigger mortgages, which will potentially lead to bigger defaults.

But in New York, my agency, we have originated over 40,000 units of housing from 1977 to 1987, which was the last time that

HUD increased the limits, Congress increased the mortgage limits for multifamily housing.

Since 1987, we have only been able to do one affordable housing project with FHA insurance, for 62 units. That's 12 units a year in a city of 72 to 8 million people.

We feel that the one action that Congress could take would be to increase the limits so that where we have projects that are affordable, where the numbers work, that the statutory limits themselves do not inhibit our ability to access FHA insurance for multifamily housing.

Senator CRANSTON. Yes?

Mr. DALE. Senator, as the largest investor in multifamily housing, Fannie Mae first would like to have some company in the investment trust side of the business. So we would welcome a stronger FHA presence in that business.

Second, we would enjoy having more partners in the business, so it doesn't necessarily have to be just another alternative investment source. But it might well be opportunities for Fannie Mae or others to work with the FHA in providing financing on some kind of shared basis.

I guess not only are we the largest, but I would commit to you that we will be expanding our presence in the multifamily business, particularly in the affordable housing and low and moderate end of the spectrum.

Although virtually all of the multifamily housing that we finance conventionally serves families, if you look through the rent levels and back into the family incomes that are necessary to afford those rents, they will serve families that are typically defined as affordable housing families, below the median income, and in most cases below 80 percent of the median income.

I guess in specific answer to the question you posed about whether there is a risk aversion culture that one might want to take another look at, clearly HUD and FHA experienced a horrible experience in their coinsurance program. It is going to cost the Government and the taxpayers an enormous amount of money to fix what was a terribly misguided program, in its administration, at any rate.

The net effect of that seems to be an aversion to any kind of sharing of responsibilities or risk, not an entirely irrational response under the circumstances.

But I guess I would pose two thoughts that maybe we could break open those walls a little bit.

One, Fannie Mae entered into a similar program actually in concept to coinsurance delegated under servicing in 1987.

În 1988, the program was administered very differently and a lot of the details that were critically important to the success of our program were quite different.

Our performance in that program has been quite good. The overall delinquency rate today is 12 percent, even on the very first loans that we put on the book. It has performed quite well even through the recession.

Second, I think there may be some other approaches.

However, I am not suggesting that FHA go back to a coinsurance model. I think that's probably a moot point but there may be other

approaches of sharing risk or sharing responsibilities in a transaction.

I'll give you one example and there are, I'm sure, many others that I think Congress might do well to explore.

For budgetary reasons, most of the subsidy programs these days are done in relatively short increments. It's very difficult to finance apartments with a 5-year loan that is expecting a 5-year subsidy contract to support the income. The numbers just don't work. It may well be appropriate for the FHA to play some kind of a role where they are not insuring the loan itself but where they are taking the responsibility that if the Federal subsidy renewal doesn't occur, that then they will step up to the risk, because that after all is something that the lender cannot evaluate, the possibility of nonrenewal of the subsidy contract.

There may be ways that the FHA can work in concert with Fannie Mae or others. The State housing finance agencies or others who have been affected in the private market and share some of the risks and the responsibility in delivering affordable housing in the multifamily setting.

Senator CRANSTON. Thank you very much.

I'd like to address a question to you, Mr. Watt. Where is Freddie Mac's multifamily program at this point? And when will we see a return to the market?

STATEMENT OF THOMAS WATT, SENIOR VICE PRESIDENT, MULTIFAMILY HOUSING, FEDERAL HOME LOAN MORTGAGE CORP., MCLEAN, VA

Mr. WATT. Senator, Freddie Mac will be reentering the new business market in multifamily, we estimate, in June of 1992.

Our initial phase is going to involve program targeting of high coupon existing loans that Freddie Mac has in its portfolio.

We feel this not only meets a critical market need, but it also meets the need of our borrowers, who are dealing in today's low return environment with loans that were made 5 and 6 years ago. We estimate that the size of the program we will deliver this year will be in the $1 billion range.

When you think about that, if you double that, that would be an annualized program of $2 billion.

As we have said consistently in the past, Freddie Mac's reentry was basically going to be conditioned on three litmus tests.

We had to have our problems under control. We have been very forthright about the degree of our problems and what we are doing to deal with them, and we are making progress. Though I will tell you that our problems are continuing to increase, albeit at a much slower rate than they did in 1989 and 1990. But we are getting much more comfortable now.

We think that through the execution of this program, we are going to learn a lot about the reforms that have been put in place. We have also consistently said that our entry is going to be measured and slow, with a lot of testing. But we think that this program not only emphasizes that we are committed to the business but in a very viable way it really makes sense in the marketplace today.

Senator CRANSTON. Thank you.

STATEMENTS OF J. STEVEN BRITT, EXECUTIVE DIRECTOR AND SYLVIA MARTINEZ, DIRECTOR, HOUSING FINANCE DIRECTORATE, FEDERAL HOUSING FINANCE BOARD, WASHINGTON, DC

Mr. BRITT. Senator, Steve Britt.

Perhaps while you have got the housing GSE's, speaking on behalf of the Federal Housing Finance Board, I'd like to just pick up on Mr. Heller's comments, which I think were well taken and maybe Larry Dale's invitation for other participants and other investors.

I do think the Federal Home Loan Bank system has a role to play. I think Mr. Heller is right that we have got to find a way to bring the private depository sector, institution sector, back to the table.

I think we've all watched the effect of the risk based capital rules, the lack of enhancement, the lack of long term financing, which has driven away private institutions' ability and willingness to originate and hold.

We think the Federal Home Loan Bank system has a way to work with its membership to help deal with some of those disincentives in ways that maybe can help address some of this problem. We've got strong capital. We've got housing expertise and a field structure which we think can play an important role.

And I would just want to say the Federal Home Loan Bank system and the Finance Board are working together to see ways in which we can help our members deal with the disincentives and the risk and probably specifically looking at some form of a multifamily purchase program of participation and credit enhancement program that can bring the resources of the system to bear on this issue.

So we appreciate Mr. Dale's invitation and hope to perk up the committee's interest in this direction.

Senator CRANSTON. Any other suggestions on what you would like to see FHA doing?

Mr. HELLER. I don't want to be particularly critical with respect to the culture of risk avoidance, because I think when you look at particularly banks today, the culture of risk avoidance there is much greater in some respects than FHA.

I would like to offer, in addition to the suggestions in our specific proposal, the thought that a carefully developed program involving the FHA, perhaps in conjunction with the risk capital rules, could be a most targeted and useful way of dealing with particularly lowand moderate-income housing.

There are 24 million renters in this country. Over 24 million units. Of those, only 41⁄2 million enjoy Federal assistance.

So the bulk of rental housing in this country for low- and moderate-income families comes from outside direct federal support.

Thus we need a system which ensures to the maximum degree the participation of nongovernmental entities, notwithstanding the great work that Fannie Mae, in particular, has been doing.

I would suggest that a targeted program where you adjust the risk capital rules in accordance with the type of housing, perhaps buttressed by credit enhancement by FHA, could be useful.

We now have a blanket approach to risk capital, whereas a more sophisticated approach targeted to specific needs could be useful, just as in the credit crunch today you might well develop a targeted jobs credit tax base for banks in order to facilitate some kind of enhanced program.

So I would urge that this committee expand its thrust, much as Mr. Britt and others have inferred might be possible through that entities role.

Senator CRANSTON. Thank you. Ms. Martinez.

Ms. MARTINEZ. If I can add to that.

Obviously the risk based capital is an area that we're really going to have to explore. It's a burden to primary originators.

We need to really establish different levels of risk and understand those. This is why the Finance Board is very receptive to analyzing these types of loans, especially when you are dealing with affordable housing loans.

Their risk profile is markedly different. It can be well underwritten. They do perform. And loan to value rules which apply for conventional multifamily financing on the nonaffordable side, I would say, are very different from the affordable side.

I think as a first step it needs to be taken, because we can learn much from that market and there are some good examples.

So as we state in our testimony, that's an area that we really need to start focusing on, to echo his comments.

Thank you.

Senator CRANSTON. Yes?

STATEMENT OF CHARLES BRASS, DIRECTOR OF DEVELOPMENT, NEW YORK HOUSING DEVELOPMENT CORP., NEW YORK, NY Mr. BRASS. One area where, as a local government, we could perhaps, if Congress were to so mandate or allow HUD to enter into risk sharing arrangements with State and local governments that have the capacity to underwrite real estate.

Granted the coinsurance program may not have been an actuarial success when it was in the hands of some private mortgage bankers or unsupervised. But Government agencies now have enormous experience in underwriting multifamily mortgage loans and State and local governments, especially New York, have local mortgage insurance entities which have the capacity, maybe not to do larger projects by themselves, but in combination with HUD to take a share of the risk and to expedite, as well, the processing so we don't have to go through the HUD bureaucracy in terms of getting the insurance approval which

You know, in our area, the office can take well over a year to get a commitment for a project, during which time interest rates change, cost assumptions change.

And when a developer comes in and they want to build affordable housing and you tell them about credit enhancement, in which there really aren't any private options any more because of the