To investigate ways to use Fannie Mae and Freddie Mac MBS pools to securitize small subsidized projects.

And to investigate the feasibility of a national system of regiona and/or local conduits which will buy pool, credit enhance, and sel smaller affordable housing mortgages in the secondary market.

While the final report will be more detailed, this provides you with the major credit enhancement recommendations of the Task Force.

But the whole emphasis of the Task Force is to create a compre hensive multifamily system which addresses all of the obstacles from loan origination to placement with investors. Credit enhancement is only a small piece, although an important piece.

Barbara Cleary will now address the process of loan origination. standardization of subsidies and other issues which provide the foundation for all the other improvements.

Senator CRANSTON. Ms. Cleary?

STATEMENT OF BARBARA CLEARY, PRESIDENT, AFFIRMATIVE INVESTMENTS, BOSTON, MA

MS. CLEARY. Thank you, Mr. Chairman, for the opportunity to speak to you today on behalf of the Task Force.

The Task Force has sought to make recommendations in the areas of loan origination, standardization of subsidy, and housing production, which draw upon what is actually working in the field. I would like to briefly summarize the findings and recommendations.

One of the Task Force's key findings is that successful multifamily investment must remain rooted in local origination and underwriting, but at the same time, must be standardized on the national level, if it is to access the capital markets.

Reconciling these two conflicting requirements, the need for standardization and the need for flexibility, has been one of the most difficult tasks that the Task Force has faced.

The forthcoming recommendations of the Task Force regarding standardization of the first mortgage and other aspects of the origination process may prove to be surprising and counterintuitive to many.

The recommendations seek to preserve standardization where it is critical to success, but also to preserve flexibility where it is critical to success.

Some of the recommendations include:

Standardize only a few key provisions of the first mortgage; for example, term and amortization schedule and prepayment protection.

Develop a common approach to underwriting which for key issues relies on the expert judgment of experienced underwriters, as well as numerical rations and guidelines.

Underwrite the underwriters. That is, create appropriate and rigorous qualifying and requalifying criteria for seller/servicers of multifamily housing.

And, finally, develop standardized documents industry wide for multifamily lending.

In addition to the standardization for the first mortgage and its origination process, it's also critically important to standardize key subsidies.

Since the Federal Government's role in the direct subsidy of the multifamily system has decreased, innovative programs have been developed on the State and local levels. This is a positive development.

On the other hand, this has resulted in increasing fragmentation and complexity in production of resource delivery systems for multifamily housing, the problems that have been alluded to several times earlier today.

In making its recommendations with regard to standardization and subsidies, the Task Force has sought to preserve the most promising innovations of these programs.

The forthcoming recommendations of the Task Force will describe specific provisions for the subordinated debt financing commonly provided by State and local agencies, with the aim of preserving a clean, that is, unencumbered first mortgage that will be saleable on the secondary market.

The intent here is to prevent what has already been referred to as the reserving in portfolio of these layered loans, because of the secondary mortgages.

The report also recommends the development of standard subsidy documents in order to reduce transaction costs and facilitate production.

With respect to the object of facilitating production, the Task Force recognizes the importance of volume production as a prerequisite to a large scale secondary market at the national level.

Accordingly, a chapter in the forthcoming report is dedicated to the production problem.

The concluding sections of the Task Force report focus on two related issues. The first is investor needs, and the second is the specialized nature of multifamily lending and development.

If only the problems identified by the Task Force and discussed here today were solved tomorrow, multifamily housing would still face a number of obstacles in getting access to capital and obstacles which relate to these two issues.

The issue of addressing investor needs for information-I think the Task Force recommendations will be very much in line with the GAO recommendations.

The Task Force recommends the following:

First, that research begin immediately on the past performance of multifamily housing, with a focus on identifying fact based determinants of default;

Second, that a data base be established with an appropriate structure and in sufficient detail to be useful to investors; and

Third, that educational programs and materials be developed for investors and their advisors, based on the foregoing information. Finally, in recognition of the fact that multifamily housing is a separate field, requiring its own specialized institutions, the Task Force recommends the creation of a new institution at the national level, the Multifamily Institute, dedicated to addressing the special issues and problems associated with multifamily housing, especially affordable multifamily housing.

The Institute would help develop and promulgate standards and conventions. It would facilitate the collection and/or development of information and data needed by the industry, and it would serve as a forum and information clearinghouse.

In the minds of the Task Force members, the primary membership of the Multifamily Institute would be those in the business of financing and developing multifamily housing.

A board and diverse membership is viewed as critical and should include, first and foremost, lenders and investors, as well as for profit and not-for-profit borrowers, the Federal mortgage agencies, and State and local housing finance agencies and other public sector entities. In addition, the participation of FHA and Ginnie Mae would be encouraged.

The Task Force recognizes that progress is currently being made. on many issues which the Institute would address, but it believes the need to move more quickly is urgent.

The Task Force believes the Multifamily Institute, applying professional expertise in coordination with the field would significantly advance the cause of affordable housing.

The Report of the National Task Force On Financing Affordable Housing will be provided to the subcommittee prior to publication later this spring.

We and other members of the Task Force thank the subcommittee and the Staff for the opportunity to testify today. We look forward to further discussions and communications.

Senator CRANSTON. Thank you very much. What would be helpful now would be to hear from others of you, particularly the HUD representatives in the following aspects.

What is your response to GAO's suggestion that FHA should engage in new types of credit enhancement arrangements with State housing finance agencies?

How would these arrangements differ from the failed coinsurance program?

Would bringing State housing finance agencies into the process serve to augment the capacity and capabilities of HUD staff at the State level?

Which, if any, of these suggestions would best expand the supply of affordable housing to lower income families?

And to what extent, finally, should this year's Housing Reauthorization bill contain legislative initiatives to test new types of credit enhancement for multifamily housing?

What forms should we seek in such initiatives? And please be as specific as you can.

If any of you want to address any questions to those folks, please do so.

Mr. HILL. We have obviously not had an opportunity to review the GAO study, even though we had some discussions with them, I guess several weeks ago.

Mr. Chairman, one recommendation I would have is that we are already starting to meet to try to siphon out, if you will, opportunities for credit enhancements for standardization in terms of documentation, as I had indicated earlier, as well as the utilization of the secondary market as a source of capital for financing the multifamily product.

Speaking for us here today, we would have no opposition to formalizing a task force to study to see if, in fact, some of these opportunities may be available to us. We welcome the opportunity to participate in the market with those who are reentering, such as Freddie Mac, as well as finding ways to participate in a more efficient and productive manner.

As it relates to reauthorization, again, we have not had an opportunity to study the GAO's analysis or their report, so I have no comment with respect to that other than to say we would be willing and able to participate.

Senator CRANSTON. Thank you for your responsiveness. Mr. Logue.

STATEMENT OF JIM LOGUE, EXECUTIVE DIRECTOR, MICHIGAN STATE HOUSING DEVELOPMENT AUTHORITY, DETROIT, MI

Mr. LOGUE. Thank you, Mr. Chairman.

Obviously, representing the National Council of State Housing Agencies, we are very pleased to see the recommendations that have been outlined here today by GAO. In fact, we have been working with GAO on some of their report.

Some of, I think, the questions you posed to them are very germane to where we go from here. And maybe a little background on what State agencies have been doing and why we are so interested in seeing FHA as well as the other parties around the table here today with us really address and focus on multifamily housing.

Because we at the State level have seen this as a major significant issue in meeting our mission, which is to provide housing for low income people and rental housing is one of the best ways to do it.

The state agencies, I think, are somewhat unique in the delivery system and I think, going back to the coinsurance program, some of the experience there suggests that had we had players in the coinsurance program that run like State agencies, we may not have had the types of problems we had with the coinsurance program. It is interesting to point out that when the coinsurance program was terminated, one provision that allowed the State agency coinsurance group to continue or to exist was not terminated, because I think although the limited experience that state agencies had in the coinsurance program was a very limited participation, that participation work did occur and did not have the types of problems that the coinsurance program as a whole experienced.

I think it is important from the perspective that the State agencies are different. The state agencies are units of government. They are institutions.

My State agency in Michigan has been in existence for 20 years and will be there long after I am gone and many others. So they are institutions of Government that have stability, that aren't going anywhere. They are not going to be in the business one day and out of the business the next. They are there.

And they have in many instances the direct or implicit backing of the State government in all of their financing activities.

We have a tremendous history of providing for multifamily housing and have done it even with the decline in the last 10 or 15

years in direct and indirect assistance from the Federal Government.

In Michigan, we have produced over 44,000 units of rental housing, some of which started back 20 years ago. And our record with managing that portfolio is, I think, outstanding.

Many State agencies have independent ratings from the major rating agencies and can access on a regular basis the public markets for municipal debt and have done that frequently and are regarded by Wall Street and investors as good risks.

Our own State in Michigan, the portfolio I mentioned, 44,000 units-97 percent of that portfolio is uninsured. Only 3 percent has FHA or other types of insurance on the portfolio.

So we are used to taking risks. We take all the risk on that. We manage it well. We know what we are doing. And for that reason we think we have experience that some of the programs that the GAO recommended would enhance our ability to do even more with no additional risk to the Federal Government.

As a function of the problems that occurred on the national scene in multifamily housing, State agencies have become experts at putting together disparate sources of funding and knitting them together to make housing work.

Many of our State agencies will be administering the home funding programs coming out of the National Affordable Housing Act. We and almost every State administer the low-income housing tax credit, so we do have Federal resources and we do know how to manage them and have managed them well over a long period of time.

Quite frankly, FHA multifamily insurance is something that had not been part of our portfolio to any great extent for some time. And we think the time is ripe for moving on with some of the suggestions that GAO has made and maybe some of the others that would come out of this group to put together an effective multifamily delivery system.

While we do have these resources and have managed them well, we need FHA in many instances.

We have had recent discussions and very positive ones with Fannie Mae on doing more with the State agencies and accessing the secondary market and developing a secondary market.

We have had very good discussions with the Federal Home Loan Bank system and look to see some real opportunities there.

And we certainly would look forward to Freddie Mac's reentry and we hope to work with them.

But we do need FHA. We need another option. The options we have in multifamily, while they may sound like a lot, are very limited, and FHA is too big a player not to be part of that.

We need that additional option. We need the ability to develop new programs that will, quite frankly, entail additional risks by the State agencies.

Again, State agencies, not all of them but many of them, are able and willing to take on risk in conjunction with risk sharing arrangements with FHA and other parties.

We do have, again, in many instances, the staff and the expertise to carry through on the programs, so delivery of the product in a timely fashion, which I think is one of the major problems that