A preliminary inquiry of certain 220 projects was undertaken by the subcommittee staff to determine

1. Whether FHA approved insurance of loans known to them to be economically unsound.

2. Whether such insured loan approvals were made on housing projects which were not competitive in rental values available in other existing properties in the area.

3. Whether the mortgagee and/or FHA exercised due diligence in the auditing of the mortgagor's handling of the project's finances where the project was known to be in financial difficulty.

4. Whether the FHA administered the program to protect the interest of the United States from fraud or any other abuses. These practices raise a question as to whether they have led to a large number of failures in projects insured by FHA. This has been not only a matter of great interest to the Congress, but the President of the United States has expressed concern as indicated in his letter dated June 18, 1965, to Robert C. Weaver, then Administrator of the Housing and Home Finance Agency. This letter reads as follows:

I am becoming increasingly concerned about defaults on FHA insured multifamily housing mortgages. I am informed that over nine percent of all multifamily mortgages insured by the Federal Housing Administration have terminated in defaults, and the default rate has steadily increased over the past few years.

I recognize that the housing projects now going into default were approved two, three or more years ago and that the current default rate is not necessarily a reflection on the policies and procedures now followed by FHA. I am pleased with the improvements in FHA operations made by Mr. Brownstein since he became Federal Housing Commissioner.

However, I wish you would personally look into the situation to make sure that excessive risks are avoided in FHA multifamily mortgage insurance. Of course, I do not want any procedural restrictions placed on the program which would inhibit the provision of needed housing by responsible borrowers. But I wish you would assure yourself that FHA has adequate market information on which to base its judgment of need, and that its regulations are strong enough to prevent excessive mortgages. I am particularly concerned with the need for strong and effective administration of the programs, both in protecting against abuses and in making certain that prudent decisions are made in the exercise of discretionary authority.

Under present arrangements, the Federal Government bears a heavy responsibility for assuring that projects are soundly conceived and efficiently executed. I believe that the private lender should feel a sense of responsibility for the safety of his investment, and the borrower should have a major stake in the financial soundness of his housing project.

I therefore request that you consider whether further administrative or legislative steps are called for to increase private assumption of responsibility in FHA insured multifamily mortgages.

If you conclude that action is needed,

should like you to evaluate the alternatives, such as higher down payments, smaller sponsor and builder fees, limitation on insurance to less than the full amount of the mortgage, or other steps which might accomplish the same purpose.

Please give me a report on the result of your consideration.

The subcommittee, in its inquiry in Los Angeles, Calif., ascertained that the Barrington Plaza project was a luxury-type, multifamily, high-rise rental project consisting of one 27-story and two 14-story buildings containing 712 apartments, accessory buildings, basement garages, and a 2-story commercial building. The mortgage amount originally insured by FHA for $15,214,900 on November 12, 1959, was increased to $16,702,500 on June 29, 1960, and to $18,604,500 on May 1, 1963.

Information received disclosed that the delinquent interest and principal on Barrington Plaza as of June 1, 1966, amounted to over $21 million. Title to Barrington Plaza has been turned over to FHA by the mortgagee as of June 2, 1966.

The subcommittee has received certain disquieting information involving the diversion of project funds by the owners of Barrington Plaza. This situation will be delved into in detail during these hearings, and inquiry will be made as to whether the Government interest is being adequately protected.

The U.S. General Accounting Office has been requested to make a study and to report to this subcommittee on statistical data summarizing each of the multifamily housing programs and subprograms administered by FHA. The Comptroller General of the United States will furnish findings based on the statistical data to show that for certain multifamily housing programs

1. Expenses and losses incurred have substantially exceeded income; that is, as of December 31, 1965, FHA financial reports revealed that the section 220 program was operating at a loss. These reports showed that all income attributable to the program for multifamily projects amounted to $26.3 million whereas expenses attributable to the program amounted to about $40.6 million, or a net loss of about $14.3 million.

2. A relatively high percentage of projects are in financial difficulty; that is, for cooperative housing projects insured under section 213, 61 of the 140 projects insured or about 44 percent were in financial difficulty on December 31, 1965. The mortgages on these projects total about $136.9 million or about 43 percent of the total amount insured under this program.

This series of hearings will particularly look into the Barrington Plaza project although the subcommittee staff has made inquiry into section 220 projects in other areas which will be the subject of future hearings.

That is the general statement on which we will proceed to hold these hearings, to try to ascertain the facts regarding the information the committee has received, and information it has acquired in making a preliminary investigation.

I may state that from the chairman's standpoint, the general purpose is to find out how Government is operating in this field, to ascertain deficiencies, if any, or lack of efficiency, if any, in the administration of these programs, and to determine whether these programs are economically justified, or whether they are being operated at a loss, and whether that loss, if it exists, is justified or whether it is unnecessary, and whether then it can be prevented in the future.

We will try to be objective in these hearings to carry out one of the functions of this committee in making a study of Government, with a view to determining its economy and efficiency in the administration of these programs.

Senator Mundt, have you any comment?

Senator MUNDT. Yes, Mr. Chairman. I would like to associate myself, first of all, with your presentation statement and certainly the General Accounting Office reports that the chairman has cited indicate that someone should move full speed ahead to see why this pro

gram is operating at a loss and has such a high percentage of projects in financial difficulty.

In taking a fast look at the legislative history behind section 220which is a part of the Housing Act of 1954, or in other words, Public Law 83-560-I noted that the main theme running through the Presidential message and the relatively brief and uncontested floor debates insofar as both political parties in both Houses of Congress were concerned-was for the FHA to insure credit to rehabilitate homes in declining neighborhoods and blighted and slum areas in the various communities throughout our country.

In fact, former Senator Homer Capehart of Indiana, the floor manager of the proposal, explained the purpose of the need for housing to facilitate the urban renewal program, of which the section 220 program is an integral part, by saying on the floor of the Senate on June 3, 1954:

Its purpose is to assist in rehabilitation of existing dwellings and construction of new dwellings in urban areas.

Continuing, Senator Capehart stated the following:

The purpose is to clean up the older sections of the cities and to prevent them from being slums. The Federal Government, in cooperation with cities and States, will be enabled to devise plans for the rehabilitation of the older areas— this affords an opportunity to rehabilitate present slum areas and to prevent slums from developing in the future.

It would seem to me that there would be general agreement now-as there was general agreement then when the House passed the measure on July 30, 1954, and the Senate did similarly on July 29, 1954-that the intent and purpose of this legislation was most commendable. Certainly the need for adequate housing is every bit as great and as desirable as the public concern to rid slum areas. The real question is whether this program is being handled efficiently and economically to protect the public's interest in the tax dollar while, at the same time, serving the purpose for which Congress had intended, to rehabilitate the old structure or to build the new in the form of good and comfortable housing while cleaning up city sore spots.

While Congress has not carefully defined the class of construction intended in section 220 I cannot help but wonder whether a high rise, multiswimming pool, luxury-type with equivalent luxurious rental prices is really what the Congress had in mind when it authorized this program.

I think one thing our committee should investigate as we go along is whether or not we are using taxpayer's money to build luxury residential palaces, or whether, in fact the intent of the Congress to get rid of blight areas and slum areas is faithfully being carried out.

I have a feeling that many taxpayers around the country living in humble homes would be greatly disenchanted if they thought their taxes were going up and the bite of inflation was digging deeper while they were being made to pay the financial costs of luxury-of luxurious, multidwelling palaces with swimming pools, sun decks, air conditioning, and so forth.

I think this committee should take a good, hard look at whether or not this is really a rehabilitation program and a program to eliminate blight areas and slums, or whether in fact it is a program to provide

some new kind of subsidized rent or subsidized construction for people in the higher levels of income, living in the greatest degrees of luxury. (At this point Senator Javits entered the hearing room.)

Senator MUNDT. In that regard, I am reminded of the separate but not opposing views of former Senator Herbert Lehman of New York in the Banking and Currency Committee's Senate Report 1472 when he said:

Certainly the experimental program of mortgage insurance

(NOTE. This is a part of the sec. 220 program) —

while it has my general support, in the absence of alternative means, will be of little avail in supplying housing for low income families in and near the large centers of population * *

I know our folks back home are going to want to know how much of this program is designed to help low income and how much is designed to provide lower rents for the highest income people.

It makes quite a difference, I am sure, as to the general acceptance of this kind of program.

The Chairman has rightfully indicated the concern over the amount of defaults on FHA insured multifamily housing mortgages such as are seen in the section 220 program, and the desire to avoid excessive risks while, at the same time, providing needed housing for responsible borrowers.

The President has stressed the heavy responsibility that the Federal Government bears in relation to the private lender, which I think might well prove to be the case when we listen to the evidence come forth concerning the Barrington Plaza project.

The President has asked that the Housing and Home Finance Agency consider any further administrative or legislative steps needed to increase private assumption of responsibility in FHA insured multifamily mortgages. I respectfully submit that I hope that this subcommittee is able to develop solutions by way of legislative proposals to this and other vexing problems in this section 220 program.

This country is experiencing a population boom and rapid expansion like it never has before, and the problem in the largest cities for this Nation seem to be multiplying every bit as rapidly.

The need for adequate housing-but not governmental-sponsored overhousing supply, as I am told exists in some of our western citiesis of great concern as is, correspondingly the remaining blighted and slum areas in our cities.

The Department of Housing and Urban Development has been created with several of the agencies with which we are concerned in these hearings-the Federal Housing Administration, the Urban Renewal Administration which was formerly a part of the Housing and Home Finance Agency, and others all placed within this department. Another subcommittee of our parent Government Operations Committee is currently conducting hearings concerning the crisis in our cities. It seems we are giving it a double-barreled treatment. I mention these things to stress the importance of this section 220 and many other types of programs and it is my sincere hope that we will have sufficient staff time to delve into other facets of housing and housing programs in the future.

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In conclusion, as I have said several times at the outset of other hearings of our subcommittee, I believe that as pertains to our investigation of the Federal Housing Administration, we should "let the chips fall where they may" and I, for one, will follow that adage in attempting to determine what is best for our citizenry, consistent with what is economic and efficient for our Federal Government in this subject matter which we are currently studying. I am certain, to that end, these hearings will be constructive, factfinding, and objective.

We are going to find out what kind of housing, what degrees of housing, what degrees of luxury, at what levels of rent, for whom is the rehabilitation program intended, and is the operation in conformity with the congressional intent.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Javits.

Senator JAVITS. I have no comment at this time, Mr. Chairman. The CHAIRMAN. Senator Harris.

Senator HARRIS. Nothing at this time, Mr. Chairman.

The CHAIRMAN. Thank you, Gentlemen.

The first witness is Mr. Weitzel.

(At this point Senator Javits withdrew from the hearing room.) The CHAIRMAN. Mr. Weitzel, will you identify yourself for the record, please, sir?

TESTIMONY OF FRANK H. WEITZEL, RALPH E. RAMSEY, MAX HIRSCHHORN, AND SHERMAN HENIG

Mr. WEITZEL. Mr. Chairman, I am Frank H. Weitzel, Assistant Comptroller General of the United States. I am accompanied this morning by Mr. Ralph Ramsey, Associate General Counsel; Mr. Max Hirschhorn, Assistant Director, Civil Accounting_and Auditing Division; and Mr. Sherman Henig, Assistant Director, Civil Accounting and Auditing Division, of the General Accounting Office. As always, Mr. Chairman, we are pleased to appear before the Permanent Investigations Subcommittee of the Senate Committee on Government Operations to testify with respect to the multifamily housing programs conducted by the Federal Housing Administration pursuant to the National Housing Act. In accordance with your request, we have prepared a report on statistical data summarizing each of the multifamily housing programs and subprograms administered by FHA. These data show that for certain multifamily housing programs (1) expenses and losses have substantially exceeded income and (2) a relatively high percentage of projects are in financial difficulty. Also, in recent years there have been significant increases in the amounts by which FHA estimates of insurance reserve requirements have exceeded insurance reserves. If it meets with your approval, I should like your permission to insert the report in the record and to summarize it for

you now.

The CHAIRMAN. Very well, it may be printed in the record in full and you may highlight it if you desire.

(The report appears in the appendix on p. 321.)

Mr. WEITZEL. First, as to the multifamily housing programs administered by FHA.