reasons that these people have stated, you go through the public option and they go to HUD. They go well, how long will it take?

You can either give a dishonest answer or an honest answer. And if you give an honest answer, then you don't get an application or people don't participate.

Mr. HILL. Mr. Chairman, could I just sort of jump in here and tell you where we are?

Obviously-and I think Larry Dale picked up on it earlier in his comments with respect to multifamily-we are coming out of a very awful period for FHA in relation to the multifamily.

It is no secret. I think everybody knows that we took tremendous losses in the coinsurance program and continue to take losses in that area.

From a management perspective, trying to manage an efficient and effective program, that's not something you take kindly to.

We are trying to absorb losses for the people of the country, so to speak. We have coinsurance total volume of about $10 billion. Today, through Ginnie Mae and back into FHA, we have recaptured about $5 billion of those dollars that were out there in terms of defaults in portfolios that we are now managing.

That translates into, as early as January of this year, we incurred losses of $1.7 billion in the coinsurance program, a big number for us.

But in addition, we have reserves for losses in the future as defined by Price Waterhouse.

Now we have audited financial statements, so the tests that are normally performed on a portfolio that you are auditing have certainly been done by Price Waterhouse.

We estimate that we are going to have to reserve another $3.5 billion. That's $5.2 billion conceivably that we could lose, the taxpayer could lose.

We obviously shut that program off because it didn't make good management sense to stay in the market. We were losing our shirts. Everybody knew that. And the numbers are reflecting that today as we sit here.

And what do you do when you hit a brick wall like that? You don't continue in that direction. You try to retool and reenter the market, which we have tried to do and we are doing.

A year ago this month, as a matter of fact, we instituted the delegating processing program. The public was suspicious. Those who had used FHA and utilized our distribution network before coming up with delegated processing, it's reasonable to expect one to be suspicious.

But the activity tends to reflect, with respect to delegated processing, that it is working. It's taking time.

The Congress has modified the way we can do business in the delegated process approach.

Before we have a modification with respect to NAHA, we cannot utilize delegated processors who are not HUD approved. Now we can. We're moving in that direction.

Business is up about 33 percent so far.

We estimate in the pipeline now we have about 141,000 units, and you include the 202's, the 223f, with respect to refinancing, as well as some of the other programs that we have.

It takes time. We would like to do it faster, but it's just not easy to do it that way.

We've sent out notices to our field operations to increase production. Before delegated processing, before coinsurance, it was taking almost 24 months to get a response. Coinsurance gave you faster responses but we got heavier losses.

Now we think we have an opportunity to get pretty decent responses in less than a year and minimize the losses with increased activity.

We also cannot forget that we are just coming out again, as I indicated before, of a very bad economic environment. Also, we've had S&L's who have been major players in this market, as well as banks, go under, go out, exit the market. So you have less players.

I'm happy to hear that Freddie Mac is going to re-enter with a $1 billion-and if you want to annualize it, a $2 billion activity or portfolio. That's encouraging.

I think as the market turns to a positive direction in terms of the economy, I think we will see more activity. We have obviously gone through a tremendous period and from a management perspective, you can't ignore that.

In terms of material weaknesses, as defined by Price Waterhouse, we do have systems problems. There's no question about that.

I wish the multifamily side of the house, so to speak, was as mature as the single family. It's not there, yet, but we're getting there and we're working aggressively to cure some of our material weaknesses through the implementation of financial systems to account for the lack of proper internal controls.

Additionally, I think, Mr. Chairman, the last meeting we had here before you, when you were kind enough to pull us together from a roundtable perspective, we, at least I recall saying to the groups that were here, let's meet next Tuesday of that week, and convene in my office or conference room, and start to have a dialogue about reinsurance, about trying to standardize documentation, and also the utilization of the secondary market with respect to multifamily. We started to do that.

And I think those of you who have been participating can attest that that is starting to move in the right direction. And we're taking your thoughts into consideration. But it has been awful and a tremendous burden in trying to work our way through this coinsurance mess, if I can put it that way, and the Price Waterhouse analysis and audits, which is very important, have been very helpful, to help us get through it.

One last comment, Mr. Chairman. As we did an actuarial study on the single family side, we're now looking at what's called a GEI Fund Study. That will give us an opportunity to see whether or not the risks that we've been taking on the multifamily side have been properly analyzed from a premium standpoint. We're never going to make a profit on that side, because we're not defined that way because of the subsidy program. But we do want to be able to reduce the cost to the taxpayer and try to be more efficient in the way that we underwrite, and also utilize the market to our advantage as well, the reinsurance and standardization in terms of documentation and ultimately the secondary market, I think, if we can

all get there, that would be very appealing and enticing and also provide for some efficiency.

Senator CRANSTON. Mr. Freedman?

STATEMENT OF TONY FREEDMAN, POWELL, GOLDSTEIN,

FRAZIER & MURPHY, WASHINGTON, DC

Mr. FREEDMAN. Mr. Chairman, my name is Tony Freedman. I'm a housing lawyer in town. I used to be the head of Housing Policy at HUD.

I see about 30 tax credit projects a year and God knows how many other low income and market rate projects.

I will tell you, without disagreeing with anything that Mr. Hill has said about the state of the inventory at HUD, we have to recognize, first, that a significant portion of HUD's absence from multifamily finance right now is a self-inflicted wound.

And that is in the devotion of time and resources to the subsidy layering guidelines viz-a-viz tax credit projects, as well as in the absence of workout remedies that are frankly made available to Mr. Hill to deal with the problems that he's got in the coinsurance inventory.

We need an affirmative decision by HUD to become a player once again. When I talk to the people who work in low income housing projects, they know and assume that the only housing finance available is Fannie Mae, if they're lucky, or the Federal Housing Finance Board, if there are very small affordable housing program funds out there. Otherwise, they're going to their State housing agencies or going to their city governments and beginning. HUD is not present, in large part, because it refuses to become present, because of the subsidy layering guidelines. I would say that the first part of getting multifamily financing going is getting HUD back in the game.

And frankly, by the Congress saying to HUD, you will not look at another subsidy layering approval until you can produce a D4 commitment, until you can approve a transfer plan under LPRA or approve a preservation plan under LPRA, until you can deliver home funds to State and local governments, and until you can do workouts in the form of the coinsured inventory, don't spend one human body on administering those subsidy layering commitments. The second thing that you charged us with today is to look to the future and look at new approaches to credit enhancement in dealing with multifamily finance.

I would say that when we get HUD back in on their basic level, we then get to the point that you raised in the very beginning, which is the systematic dismantling of HUD's capacity to originate multifamily loans.

In a sense, it's almost a misnomer to talk about new forms of credit enhancement. What we're really talking about is recognizing the changes that have taken place in origination in the last 10 or 11 years.

Unfortunately, as we've seen the Federal capacity decline, and when we're talking about HUD's in-house staff, we're also talking about the decimation of the multifamily mortgage banking indus

try that resulted from coinsurance, because we, in fact, destroyed a very powerful and professional industry.

But if we're talking about rebuilding the capacity to originate multifamily loans, we're first talking about looking at the State and local governments because precisely matching the decline in Federal underwriting capacity has been the growth in the capacity of the State housing agencies in the last 10 years.

Driven by bonds, driven by the low income tax credit, these agencies have in fact developed substantially increased capacities to originating.

The same thing has happened at the local level. Mr. Lappin's agency, for example, the CPC, will originate loans on behalf of any number of lenders, any number of credit enhancers in New York City.

So what we're really talking about is developing Federal mechanisms and Federal approaches which can work best with the new shifts that have taken place in origination capacity.

Senator CRANSTON. Yes?

Ms. CINCOTTA. When I look at the multifamily problem on a scale of folks for lower rent, as I see it, it's a mixed bag. There's enough blame to go around for everybody.

One on the low income housing tax credit. You steadily have to deal with Congress to get them renewed, get them renewed in 6 months. When you're putting nonprofits especially, or putting projects together, the timing delay, going to fight the battle again., So if we had permanent loan from housing tax credits, where the investor had to put X percent within a short range, how much you have to have in that property before you get that tax credit, so that a business doesn't get a tax credit for just a minimal investment in a multifamily property. But if that was ended and over, and we didn't have to do that fight.

The other piece, Freddie Mac, especially, now that we have CRA agreements, we have banks, insurance companies, etcetera, coming into this market more and more. They are dealing with layered kinds of mortgages. They are keeping them almost all in portfolio, not because they're not performing, but because they are different. With Freddie Mac shutting down, not buying up these loans from again season loans for Aetna Life and Casualty, Harris Bank and the city of Chicago First National Bank, they are glutted with these in their portfolios. They don't want to keep them. It's harder to get them to do the next loan.

So my perspective, by bankrolling speculators in the Bronx and other parts of New York City, they hurt themselves. The whole country has suffered for it, and they say every one of those loans is bad, rather than look at who did they give the loans to. You know, they didn't give them to a bank where the work was done, and they didn't take the money and just go out and buy another building.

The other part that Congress can do is increase the home funding and deal with HUD as far as the layering. I talked to John Weicher on that early, the subsidy layering, the process of everything has to go maybe to Washington after it's put together, is a killer.

And I know they want to stop fraud, but I think you make the rules tight. You say, if you do this, you are going to jail. And then they monitor that and they stick a few folks in jail. And I guarantee, it might stop.

But I don't think every one of these deals has to go to Washington.

You can make 15 percent profit. If you make more, you're going to jail.

I think that we over complicate some of these things. We spend so much time winning the same battle. And if we don't stop the layering, we don't deal with the low income housing tax credit, as we move to trying to have one stop shopping.

Like we're putting a loan pool together in Illinois. We're going to have the State, the banks are going to buy the bonds from the State. There will be low income housing. The city's going to put an extra amount of money in the drawer of the State so that they can do the subsidy.

We're going to come up with a $10 million loan pool as a start, where the interest rate is going to be four, 4.5 percent.

To get it all to coordinate, because it's layered, they have to wait again, and you've taken away the advantage of one stop shopping that you can put a deal together in a couple of months, rather than by having to get the okay with the low income housing tax credit. One building, a city write down somewhere else, the bank somewhere else, you take a year, a year and a half.

In that process, the buildings are vandalized, if they're older buildings. Just by inflation the cost goes up. So you do less building, you do less units.

And so looking at this from having to deal with the nonprofits, the system has to work.

If you can give us the low income tax credits permanently, be my guest. Do it right away. And if you find people dealing with fraud, we'll go testify against them and help you lock them up. [Laughter.]

And Freddie's got a function. They can't just pull out of the market for a couple of years and say, well, we're going to look at it, you know. The pieces have to go together. It's not all of HUD. It's getting the plates up in the air. You feel like you're in a sideshow.

You got one plate. Now you've got the banks and the insurance companies giving you the loan. You get that plate up. Now you've got the Federal Government over here, and then the secondary market. And it's silly. And you look at all those pieces there.

If we're not smart enough to do it more streamlined and better, let people off, including the non-profits and the for-profit developers off the hook.

Senator CRANSTON. Thank you very much.
Mr. Lappin?

STATEMENT OF MICHAEL LAPPIN, PRESIDENT AND CEO, THE COMMUNITY PRESERVATION CORP., NEW YORK, NY

Mr. LAPPIN. Mr. Chairman, I'm not sure our jails are big enough to do that. [Laughter.]