exists today in multifamilies-you have heard around the table today-is something that with an enhanced FHA presence, together with State agency participation, can, I think, significantly increase the delivery of affordable rental housing.

Senator CRANSTON. Thank you.

Mr. BRASS. Mr. Chairman, I would just like to emphasize Mr. Logue's comments. I'd also like to point out that the discussion should not be limited just to State government but many local governments have the capacity, as well.

In fact, in many jurisdictions, the local government's participation in multifamily housing endeavors exceeds those of the States that they are in.

So I would hope whatever actions the Congress takes in this area will include a role for local housing agencies, as well.

Ms. MARTINEZ. Senator, I'd like to point out the role of the Federal Home Loan Bank system in supporting its 3,000 members in actually providing a retail delivery system for housing origination and local underwriting.

That is a very important role and it is a point that should not be missed.

Second, the Home Loan banks do have access to the capital markets through consolidated obligations. It has a strong balance sheet and banks can pool credit enhanced, provide purchase assets, smaller mortgages. This is a role that needs to be explored.

Obviously it has to be done in such a way as to support the risk profile of its members and make sure that the capital investment of the members is not jeopardized in any way.

But I think there is some room for some possible models and inspiration in that area that is very compatible with what the GAO and the task force are recommending.

So I wanted to be able to put this on the table.

Mr. FREEDMAN. Mr. Chairman, I think it would be very important for this committee and the Congress to authorize HUD to explore new credit enhancement arrangements. I would suggest there be three elements to an authorization.

First, as the GAO recommended, and everybody has said, it ought to be focused on State and local governments. First because that is where the action is right now. Second because that is where we need to continue to build the capacity. They are growing. And I think it is very important for the Federal Government to take advantage and help this growth continue.

Second, these arrangements ought to be conducted on either an individual mortgage or a pooled basis.

Mr. Hill's experience is happily very valuable here, because before he served as Assistant Secretary, he of course was president of Ginnie Mae. And I think that HUD can explore alternatives as to individual mortgage insurance versus pooled mortgage security arrangements. And they are very well equipped to do that.

Third, the authorization ought to comprehend credit enhancement operating both on a shared risk basis and a shared underwriting basis.

You know, in the last couple of years we have used the term coinsurance almost as a bogey man to scare little children.

I'm telling you, Mr. Chairman, that after the last 5 years there are precious few little children surviving in this industry.

The real question is whether you trade the Federal credit risk for a sharing in that risk, as in fact Fannie Mae has quite successfully done, or for underwriting standards that are monitored and implemented as HUD is seeking to do in delegated processing.

The truth is either can work if they are done well. I don't think you ought to be scared by the word coinsurance from authorizing shared risk arrangements as well as shared underwriting arrange

ments.

Senator CRANSTON. Yes?

Mr. DALE. The last 15 or 20 minutes of comments makes me think of FHA in both single family and multifamily terms. Frankly, the reason we are all here is that FHA has brought an extraordinarily valuable support to the U.S. residential finance system, that is, Federal credit.

And some of us, many of us, I think, are concerned that that support is diminishing or being lost.

It happened to bring that support, as Tony indicates, in a loanby-loan insurance structure that it essentially owned, operated, managed and controlled in every detail.

I think what we are hearing is that's not the only way that Federal credit could be brought to the support of residential financing. Indeed, the concerns we have heard are lack of systems, lack of timely data, lack of procedures that are workable, lack of controls to detect fraud, lack of the ability once fraud is detected to control it and keep it from happening again without very cumbersome procedures going forward.

It brings you sort of full circle.

There are other players, many of whom are sitting around this table, with the State agencies, local agencies, nonprofits who can do housing counseling effectively, local governments who can provide the local support, a Fannie Mae who can operate an operational system and control and manage a lender base very effectively and has a good securities outlet for investors.

There are other players who can bring and respond to most of the other ingredients of the system.

The one thing none of us can bring to the table that FHA has been so successful at is the Federal credit support.

And it seems to me that one of the things the Congress could do along the lines that Tony just suggested is opening up the FHA to be able to bring its support to the table for residential finance, both single family and multifamily, in nontraditional ways, not necessarily just a loan-by-loan retail system, but looking at coinsurance, looking at other ways of bringing that support to the table. Mr. EIFLER. Mr. Chairman, one other thought.

A lot of financing is required to get us out of the position we are presently in. A lot of financing is needed in this market.

The task force emphasis has been to try to bring the private sector to play. Standardization is very important to that but credit enhancement is equally important to that.

If FHA doesn't have the resources to provide 100 percent insurance, we think that FHA needs to be working with the other subsi

dy participants in the marketplace to make all the pieces work together to leverage FHA's money.

If that's really going to work, it's going to require FHA to be flexible.

And I think on the subject of single family housing, the point came up that while we need time to look into these things to see how they work through, I think one of the things that the people on the task force have been concerned about is how do we get started on something so that we actually have something to show for it. This is a big problem which isn't going to be solved right away. But I think many members of the task force would be very much in favor of seeing this committee recommend to FHA that they begin to work with participants in the marketplace to create a couple of projects so we can begin to develop some experience and what kind of flexibility is required and how flexible FHA can be in performing a portion of the subsidy process in conjunction with the state, in conjunction with the private market participants.

Perhaps with FHA taking the bottom loss, not the top loss, but to get on with it in that sense rather than just looking at the whole big problem and trying to solve it all at once.

Senator CRANSTON. Do any of you have any other last minute suggestions about things you would like to see in the legislation?

STATEMENT OF CHRIS LEWIS, VICE PRESIDENT, ACORN,

WASHINGTON, DC

Mr. LEWIS. Senator Cranston, if I could make one simple point. Chris Lewis with ACORN.

I wanted to perhaps return to some comments that were made earlier this morning regarding risk based capital standards.

I think it's very critical that the committee explore new credit enhancement options for multifamily housing and that that be coordinated with federal banking policy.

We have found, as community organizations in the field working in our efforts to work with local lenders on community reinvestment strategies, that the current risk based capital standard weightings is a very severe obstacle to us in our efforts to work with lenders to obtain mortgage credit.

In effect, the current risk weightings amount to a very severe tax, Federal tax, on local lenders who wish to meet affordable housing credit demand.

We would, I think, simply propose the suggestion that any Federal credit enhancement that might be put on the table, that that credit enhancement be reflected in the risk weightings and that that would permit those of us that work on the local level to work more, I think, successfully and efficiently with local lenders.

I think it would permit local lenders to retain some of their historical flexibility in meeting the local credit needs as well as should Fannie and Freddie get more into this market, retain the further option to securitize those loans.

Senator CRANSTON. Thank you very much.

From our standpoint, a lot of the discussion about risk base may be changing from the bank standpoint. It's kind of a network of members. If you have one lender in an area that has the expertise

and the infrastructure to deal in multifamily, but then quickly runs against the one-to-one borrower, there are problems.

The system's ability to participate and share mortgages among members that share the capacity and have needs for the assets.

It's not just changing the risk base, but we think the system's ability to use this network to maybe purchase and participate. And then you've got a lender in an area with the expertise that can continue to originate. And other lenders in the area could share in the asset as well as the return, as well as the risk, obviously, as well.

So I think that's an important part of the participation of mortgages.

Thank you all very much. It has been a very helpful discussion. It has given us a lot of ideas to work on and several suggestions that I am sure we will need in various aspects of the legislation to put together.

We would like to be able to continue to turn to you for advice on questions that come along and we will do so.

Our plan is to try to have the legislation on the fast track and to report it out of committee early in May so that we have plenty of time to move it along through the whole process.

Thank you all very, very much for being with us. We stand adjourned.

[Whereupon, at 12:30 p.m., the hearing adjourned.] [Prepared statements of witnesses follow:]

Statement of

ARTHUR J. HILL

Assistant Secretary for Housing--Federal Housing Commissioner

JOHN C. WEICHER

Assistant Secretary for Policy Development and Research

U.S.Department of Housing and Urban Development

Before the

Subcommittee on Housing and Urban Affairs

Senate Committee on Banking, Housing and Urban Affairs

April 3, 1992