Senator HARRIS. Do you have a prepared statement about that project, Mr. Lewis?

Mr. LEWIS. No, sir; I do not.

Senator HARRIS. Have you been here during the testimony before the subcommittee concerning the Barrington Plaza project?

Mr. LEWIS. Yes, I have.

Senator HARRIS. Would you want to give us the situation concerning the steps taken there in Los Angeles which resulted in the eventual insurance of this project by FHA, so far as you know them, and presenting any letters or memorandums which relate to that situation? Could you do that?

Mr. LEWIS. Well, as far as the underwriting is concerned, I have no jurisdiction over that area, and I am not familiar with the details of the underwriting of the project.

My jurisdiction starts with the operation of the project, when it is finally endorsed.

Senator HARRIS. All right. Would you just start out, and tell us affirmatively what you know about that project from your own position, and then we can go to some questions and answers. That may

shorten it some.

Mr. LEWIS. Well, from my experience, the project started slowly in its occupancy. There were a number of modification agreements and I don't recall the exact number, and I believe that has been testified to before. The occupancy after a period of approximately 1 year remained rather constant. There had been some slight improvement toward the latter years, but generally the income remained about the same for a period of about a year and a half or more.

Senator HARRIS. I will hand you what has been marked as "Staff Exhibit B-111" and ask you to identify that, if you can.

(The document was handed to the witness.)

Mr. LEWIS. Yes, I recall this.

Senator HARRIS. That is a letter that you prepared for FHA Director, Mr. Berry, to be sent to C. Franklin Daniels?

Mr. LEWIS. That is correct.

Senator HARRIS. A letter dated October 18, 1963 ?

Mr. LEWIS. Yes, sir.

Senator HARRIS. That is a correct copy of the letter you prepared? Mr. LEWIS. Yes, sir.

Senator HARRIS. Very well. That will be admitted, without objection, as exhibit 121.

(Document referred to marked "Exhibit No. 121" for reference and will be found in the appendix on p. 364.)

Senator HARRIS. I believe that recommended, did it not, Mr. Lewis, disapproval of Mr. Louis Lesser's request for a modification agreement as set forth in that letter dated October 10, 1963? Is that correct? Mr. LEWIS. That is correct.

Senator HARRIS. Why did you think that the request for the modification agreement should be denied?

Mr. LEWIS. Customarily, in a local office, we are asked for our recommendation on modifications of this nature. In our opinion, Mr. Lesser was not making sufficient progress to indicate that in the foreseeable future this project might be on a paying basis or be able to

carry the mortgage. We also felt that the management was not as good as it should be, and under those circumstances we felt that it would be better to eliminate the present situation rather than try to prolong it.

Senator HARRIS. Now, to get to the situation, at this time the Barrington Plaza project was in arrears on its payments, is that correct, on the mortgage?

Mr. LEWIS. That is correct.

Senator HARRIS. And Mr. Lesser had asked for a modification agreement to do what? Was it to defer some of his obligations under the mortgage?

Mr. LEWIS. That is correct.

Senator HARRIS. And you recommended against that modification in your letter, the exhibit 121?

Mr. LEWIS. That is right.

Senator HARRIS. I hand you what has been marked as "Staff Exhibit B-113," and ask you to identify that, if you can?

(The document was handed to the witness.)

Mr. LEWIS. Yes, this is a phone conversation that we had, documentation of a phone conversation we had.

Senator HARRIS. Just a moment.

I have here staff exhibit B-113. But at this time, go ahead with that memorandum. This is a telephone conversation that you had with whom?

Mr. LEWIS. This is a telephone conversation that we had with Mr. Franklin Daniels. Do you want me to read it, sir?

Senator HARRIS. Just identify it first. Did you make the memorandum?

Mr. LEWIS. Yes, I did.

Senator HARRIS. And that is a correct copy of the memorandum you made?

Mr. LEWIS. Yes, sir.

Senator HARRIS. Without objection, it will be admitted as exhibit 122.

(Document referred to marked "Exhibit No. 122" for reference and will be found in the appendix on p. 365.)

Senator HARRIS. That is a memorandum you made about a telephone conversation you had with C. Franklin Daniels, Stanley Berman, Associate Deputy Commissioner, and George Bradner, Assistant Director in FHA; is that right?

Mr. LEWIS. That is correct. Senator HARRIS. All right. What is the gist of that memorandum? You may read from it or recite from your memory about the telephone conversation.

Mr. LEWIS. We discussed the modification again, and we reiterated our position that we did not believe the modification was wise.

Mr. Daniels gave some reasons here, and he said that he felt that they could obtain $182,000 more by going this route, and he also subsequently referred it to Mr. Berman. Mr. Berman said that he had considered our letter of October 18, 1963, and had concurred with Mr. Daniels' decision of a previous date of October 10, 1963.

Senator HARRIS. Now, he said that they had considered your letter where you recommended against the modification, but that they had agreed to go ahead with the modification anyway?

Mr. LEWIS. That is correct.

Senator HARRIS. Mr. Berman was on the phone with you at the same time?

Mr. LEWIS. Yes, he was.

Senator HARRIS. They said that this matter had also been considered by Mr. Berman and Mr. Berman had also concurred in Mr. Daniels' decision to go ahead with the modification agreement?

Mr. LEWIS. That is correct, sir.

Senator HARRIS. All right, now, just for the record, I will hand you what has been marked "Staff Exhibit B-112" which is a letter dated October 10, 1963, and have you identify that, if you can, as a correct copy from the files of FHA?"

(The document was handed to the witness.)

Mr. LEWIS. Yes, sir.

Senator HARRIS. Without objection, that will be admitted as exhibit 123.

(Document referred to marked "Exhibit No. 123" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. The gist of that is what you previously testified to. That is Mr. Daniels' letter to Mr. Berry, the FHA director in Los Angeles, saying they had decided to go ahead with the modification agreement. Is that correct?

Mr. LEWIS. That is correct, sir.

Senator HARRIS. Now then, I will hand you what has been marked as "Staff Exhibit B-114," and ask you to identify that.

(The document was handed to the witness.)

Senator HARRIS. Is that a letter which you prepared for Mr. Berry's signature, the letter to Mr. Daniels?

Mr. LEWIS. Yes, it is.

Senator HARRIS. That is a correct copy of it?

Mr. LEWIS. That is correct.

Senator HARRIS. Without objection, that will be admitted as exhibit 124.

(Document referred to marked "Exhibit No. 124" for reference and will be found in the appendix on p. 365.)

Senator HARRIS. What is the gist of that letter, Mr. Lewis?

Mr. LEWIS. We are following the same course and that our previous unsatisfactory experience with this mortgage or in the overall management and renting of other projects, left much to be desired and they are both in offices of the U.S. Attorney for foreclosure, and in addition we do not desire to go along with this particular modification.

Senator HARRIS. You state again you do not desire to go along with the modification agreement?

Mr. LEWIS. That is correct.

Senator HARRIS. That letter is dated December 13, 1963, is that correct?

Mr. LEWIS. That is correct.

Senator HARRIS. Now, I will hand you a letter marked "Staff Exhibit B-115," which is dated April 14, 1964, and ask you if that is a

letter which you prepared for the signature of Mr. Berry, to Mr. Daniels?

Mr. LEWIS. Yes, it is.

Senator HARRIS. And that is a correct copy of that letter, is it? Mr. LEWIS. That is correct.

Senator HARRIS. Very well.

Now, that will be admitted, without objection, as exhibit No. 125. (Document referred to marked "Exhibit No. 125" for reference and will be found in the appendix on p. 366.)

Senator HARRIS. Now, would you state what the gist of that letter is, Mr. Lewis, reading any part of it you want to?

Mr. LEWIS. This gives a little more thorough breakdown of the reasons why we do not believe another modification is in order. Senator HARRIS. You still recommend against modification? Mr. LEWIS. That is correct.

Senator HARRIS. Is this the same modification?

Mr. LEWIS. I believe this is a later one.

Senator HARRIS. This is a later one?

Mr. LEWIS. That is correct.

Senator HARRIS. The other modification was approved over the objection that you and Mr. Berry had previously made-it was approved anyway, is that correct?

Mr. LEWIS. That is correct.

Senator HARRIS. This is a new modification which was asked for, while the mortgage was still in arrears. You again prepared a letter for Mr. Berry which he signed on April 14, recommending against the modification, is that correct?

Mr. LEWIS. Yes, sir.

Senator HARRIS. Would you state the detailed reasons in that letter why you recommended against the further modification?

Mr. LEWIS. Well, we indicated that it would take approximately $1,193,877 to bring the mortgage current. Item 2, we indicated if the payments were current and were making the normal monthly payments, with the income that existed at that time, at 100 percent occupancy, based upon the monthly reports given to us in January, February, and March of 1964, there would be a monthly deficiency of $54,000 a month.

Senator HARRIS. Then the total monthly requirements you have added up in that letter, for principal and interest, reserve for replacement, furniture and air conditioning, come to a total of $211,000 per month, is that correct?

Mr. LEWIS. That is correct.

Senator HARRIS. You say that if they were able to rent every apartment in this Barrington Plaza project, at an average monthly rental of $182 per unit, that would only bring a monthly income of $157,000, is that correct?

Mr. LEWIS. That is correct.

Senator HARRIS. Therefore, even with 100-percent occupancy at that average rental, there would be a monthly deficiency of $54,000? Mr. LEWIS. That is correct.

Senator HARRIS. Did you give some other reasons in that letter why you thought the modification agreement shouldn't be entered into?

Mr. LEWIS. In item 3, we referred to our previous letter of October 18, and we reiterated we were still of the same opinion as that letter, and in item 4 we said we felt there was a very urgent need for firstrate management and a mortgagor with a strong financial reserve.

Senator HARRIS. You did not think then that the present management was first rate; is that correct?

Mr. LEWIS. That is correct.

Senator HARRIS. And that the present mortgagor did not have strong financial reserves?

Mr. LEWIS. That is correct.

Senator HARRIS. All right, and what was your fifth reason?

Mr. LEWIS. That had to do with public relations as well as the image of FHA in the community. We felt that the image of this project was going downhill, and could seriously affect the FHA's image in that particular area, as well as affecting our policies and procedures as far as mortgage servicing was concerned if we were to go along with this any longer.

Senator HARRIS. This was at the time when Lesser Development Corp. was the mortgagor on this project; is that right?

Mr. LEWIS. That is correct.

Senator HARRIS. Now I will read the last paragraph for the record, of exhibit 125:

In summary, the foregoing facts and information in our opinion strongly emphasizes the need for our recommendation that the present mortgagor should not be given any modification of this loan after April 15, 1964.

What did you think should be done, rather than enter into another modification agreement?

Mr. LEWIS. Well, the ideal thing, of course, would be if we could have had some sort of transfer of physical assets to a mortgagor with sound financial reserves.

This might have been rather difficult, but this would be a hopeful solution to the problem. The other alternative would be that we would have to not grant the modification, and in that case it would be up to the lending institution as to what their next step might be, which could be either an assignment to us or a foreclosure.

Mr. ADLERMAN. In other words, you had a very unfortunate situation here. You had a situation in which the building was currently mortgaged for $18.6 million, with a deficiency of over $1 million in interest, which had risen to $212 million. You found that the debt burden was so high that it caused a deficiency of $54,000 a month every month?

The CHAIRMAN. What percentage of occupancy did it have at that time?

Mr. LEWIS. At that time, it was in the 65- to 75-percent range. This was a hypothetical figure, this $54,000.

The CHAIRMAN. Your calculations are based on an assumption to begin with. If there was 100-percent occupancy, there would still be a $54,000 deficit each month?

Mr. LEWIS. Yes, sir.

Mr. ADLERMAN. Didn't that indicate to you that the building was badly financed? Would not the Government sometime or other have to take a loss to get realistic financing?