I'm Michael Lappin, President of the New York City Community Preservation Corporation.

We have been financing the construction and renovation of lowand moderate-income housing, basically apartment houses.

I think two things I want to mention. Most of the owners that we deal with, the apartment owner of the 40-unit building in the Bronx, are rather unsophisticated.

The finance market does not reach these owners right now. The thing that stops the market from reaching them is, one, the complexity of the application process. None of these individuals will go to FHA simply for that reason.

They do not have the resources, the time or the sophistication to deal with such a complex process.

When you add on to that, as Gale has said, the necessity for getting subsidy for doing a construction loan, for coordinating the subsidy requirements with the construction loan and tying that into the permanent loan, it becomes almost an impossible production problem for the low and moderate income apartment owner.

Clearly what we do need, and I would second what Gale has said, is some kind of a development of a one stop shop. This requires an enormous amount of work with local governments to remove some of the barriers that they put in the face of building in New York City.

There's a whole array of things that we need to streamline, which we have to some extent, like in my operation.

The second thing that defeats getting financing to this market from the national secondary markets and from the national perspective is some of the underwriting standards.

There is a real diversity of housing in the country, walk-up housing in New York City. There's about 500,000 units of this. There's a real aversion, in a national way, to financing this kind of housing, because they discount the top floor's income. Which means you can't do any of the financing.

The thing that we do have, locally, as Mr. Freedman pointed out, is the States and the city have stepped into the breach, to some extent, and have established local credit enhancement programs to cover a significant portion of the top loss of any risk on these investments.

By doing this, they have been able to overcome the processing problems. They've in some ways worked to streamline the processing so we can reach these smaller owners of affordable housing, and they've also adjusted to the underwriting standards that makes sense locally.

We do a lot of walk up housing in New York City with credit enhancement from either the State or the local government.

A very critical role though, to expand the reach of these local credit enhancers is reinsurance from the FHA, and also Freddie Mac or Fannie Mae or even Federal Home Loan Bank. And to do that for reinsurance, without imposing such difficult additional processing requirements or difficult underwriting standards, not bad economic underwriting standards, but underwriting standards that just don't make sense in a particular market place, like walkup apartment houses. Not to impose such standards as to make

such reinsurance not accessible to that 40-unit apartment owner in the Bronx.

I think that reinsurance role can be done in a way that does not increase your risk significantly, because the city and State, in our instance, in New York's instance, is willing to take a significant portion of the top loss, and it's simply a matter of leveraging their position, and also puts you in a sound, I think, a reasonable economic position. Also, during reinsurance, it lowers the cost of this housing because interest rates are down.

Senator CRANSTON. I'd now like to turn the discussion to an examination of specific alternatives to multifamily credit enhance

ment.

I'm pleased to welcome both the General Accounting Office and representatives from the National Task Force On Financing Affordable Housing.

The 1990 National Affordable Housing Act requested the General Accounting Office to conduct a study to identify legislative or administrative actions that could improve the availability of mortgage financing for affordable multifamily housing through credit enhancement.

While that study is still on-going, GAO will present its preliminary findings or recommendations this morning.

The National Task Force On Financing Affordable Housing evolved out of a perceived need among the most active participants involved in multifamily housing, for significant improvements and stability in the multifamily finance markets. The Task Force has worked for over 2 years, and will soon publish its findings and recommendations.

We'll get a snapshot of these findings and recommendations now. I want to ask the GAO to begin its testimony first, and the Task Force to follow.

We'll then take some time to discuss the recommendations that the two witnesses will present.

So, first, Ms. Judy England-Joseph of the GAO.

STATEMENT OF JUDY A. ENGLAND-JOSEPH, DIRECTOR, HOUSING AND COMMUNITY DEVELOPMENT ISSUES, RESOURCES, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION, GAO MS. ENGLAND-JOSEPH. Thank you, Mr. Chairman. I appreciate the opportunity to be here. I also want to thank the rest of the panel members. I think they've all laid excellent groundwork or foundation for what we would like to discuss in terms of options. My testimony, as you stated, is based on preliminary results of our on-going study required by the National Affordable Housing Act of 1990.

Our study examines the role that credit enhancements can play in improving the availability of permanent mortgage financing for affordable multifamily housing.

Credit enhancements are additional collateral, reserves, or third party guarantees to ensure the payment of debt obligations.

And today, I want to discuss several credit enhancement options to increase multifamily financing that focuses primarily on modifications to FHA's insurance program.

Before turning to these options, I would first like to highlight several issues that have already been discussed to some extent, but I think they bear more discussion.

And that is that major changes have occurred impacting on multifamily financing during the 1980's, as well as the need to expand the multifamily secondary market.

Financing for affordable multifamily housing has undergone major transformation during the last decade, caused by policy, legal, regulatory and social changes. These changes, while having positive implications, including ending over building in some areas and promoting safety and soundness within depository institutions, have nonetheless generally worked to discourage investments in multifamily housing.

These changes include the Tax Reform Act of 1986, the Financial Institutions Reform Recovery and Enforcement Act of 1989, and a shift away from project based subsidies to tenant based subsidies. Multifamily housing also acts in a well functioning secondary market and the absence of this market creates several problems. For example, lenders are generally only willing to make short term adjustable rate loans, because holding long-term fixed rate loans in their portfolio would subject them to losses, should interest rates rise.

A viable secondary market has not evolved to serve affordable multifamily housing for several reasons.

Three of the more important reasons are the risks associated with affordable housing projects, the absence of a reliable data base on the performance of affordable multifamily housing loans, and a reluctance on the part of the primary capital market institutions— FHA, Fannie Mae, Freddie Mac, and Housing Finance Agenciesto expand their activity in the affordable multifamily housing market.

Mr. Chairman, I would like to now provide an overview of the four credit enhancement options which were developed after consulting a wide range of experts in the housing and finance field, several of whom who are sitting at this table.

These options are: delegated processing, delegated underwriting, primary bond insurance, and bond reinsurance.

The first two options are intended to improve the availability of Government insurance on individual loans, while the last two would be primarily for groups or pools of loans.

These options, we believe, provide a starting point for discussion if an expanded secondary market for affordable multifamily housing loans is desired.

As a first step, we would suggest limiting the availability of these options to housing finance agencies with demonstrated successful programs in financing affordable multifamily housing.

These agencies are organizations of State government known entities in the financial market place and publicly accountable to their legislatures.

A demonstration of these HFA's would be viewed as an initial first step which, if successful, would be modified to include other market participants.

Under each of the four options, HFA's would agree to assume expected losses on loans they would assume based on a restored loan

performance. This is not to imply that the Federal Government is not exposed to risks under these options. Rather, the Federal Government's insurance would cover losses beyond those expected and not covered by HFA's.

Finally, to the extent that these options are implemented, we believe that projects benefitting from credit enhancements should include a certain percentage of affordable housing units.

The minimum percentage should be comparable to or higher than the percentage required for obtaining low income housing tax credits.

Also, consideration should be given to requiring that these projects be consistent with local comprehensive housing assistance strategies.

If such enhancements are employed, it is important that they be cost effective in achieving the desired results. However, showing cost effectiveness is partly dependent on having accurate performance data, which reflects the costs and risks involved in financing affordable multifamily housing.

Currently, such a national data base does not exist. A data base would provide financial institutions with access to information that would enable them to quickly evaluate price and manage risk.

In conclusion, there is a broad range of mechanisms that the Federal Government can employ to assist low income households in meeting their housing needs.

My testimony today has focused on one of those avenues; mortgage credit enhancements, and employing credit enhancements to expand the multifamily secondary market would expand the supply and lower the cost of affordable housing. The extent depends on the details of how the policy options might be implemented and the availability of other subsidies needed to make such projects financially viable.

We have not attempted to quantify the impact of these options described here, or the need for other subsidies.

Mr. Chairman, thank you. That ends my summary remarks.
Senator CRANSTON. Thank you very much.

Mr. Eifler.

STATEMENT OF CARL EIFLER, MANAGING DIRECTOR, FIRST
BOSTON CORP., NEW YORK, NY

Mr. EIFLER. Mr. Chairman, thank you. We have long admired your leadership and personal commitment to housing. We appreciate your inviting the Task Force here to join this group here this morning.

Barbara Cleary and I are here representing the National Task Force On Financing Affordable Housing. Besides our formal statement, the Task Force's final report will be available in about a month.

We would like to request that you consider having it submitted for the formal record as well, when it's available.

We will be brief.

I will describe the Task Force and summarize its findings, and address the issue of credit enhancement.

Barbara will conclude with some comments about the need for standardization and data collection.

The Task Force was brought together to address the issues that have been brought up here so far this morning. And on the one hand, the success of the single family secondary market is clear. It has withstood significant changes in the economy and the mortgage lending industry, while still providing a constant source of capital for home ownership.

Multifamily rental housing, on the other hand, is presently without such a system. The secondary market for multifamily housing is small, without the depth or confidence of the single family system.

And the Task Force, comprised of leaders in multifamily housing development and finance, including Michael Lappin of CPC and Larry Dale of Fannie Mae, who are here this morning, set out to identify the obstacles preventing the development of a strong, viable secondary market, and to create realistic recommendations which could assist in creating a more effective system and addressing the issues we brought up this morning.

We believe a larger scale integrated secondary market is essential to the success of any viable long-term multifamily housing finance system.

Our recommendations, applicable to both conventional and subsidized rental housing, address a number of key areas.

Streamlining the production of multifamily housing at the local level, standardizing the key elements of the financing forum, from origination of mortgages to the sale to investors, establishing a more comprehensive data base to analyze and track performance of multifamily loans, creating a multifamily institute to assist the development of industry standards and data collection, and exploring new risk-sharing mechanisms between old and new sources of credit enhancement.

Let me briefly address the credit enhancement issue.

Access to the capital markets is essential, and provides the investors with confidence in credit quality and security against risk.

Multifamily housing is presently suffering from major deficiencies. There is no universally accepted criteria for rating the risk, the withdrawal of FHA, which has been discussed this morning, with respect to multifamily housing, and an unpredictable production pipeline, especially for smaller subsidized rental housing projects.

To address these three problems, the Task Force recommends the following:

To work with the rating agencies to develop a universal risk weighting system for multifamily housing, to meet investor needs. To investigate new State and local housing agency rules in risk sharing that has been described here this morning in part.

To expand the flexibility of and the scope of Fannie Mae and Freddie Mac's existing programs to accommodate subsidized

projects.

To restore FHA as an effective vehicle by reexamining its role and investigating new vehicles, such as risk sharing with State and local agencies and reinsurance.