Mr. BROWNSTEIN. There are some very finely motivated nonprofit groups who really are interested and desirous of providing some needed housing that don't have very much money, Mr. Chairman.

Senator HARRIS. I understand that, but I want you to answer me yes or no.

Mr. BROWNSTEIN. Let me put it this way: They then have found ways of getting the needed seed money to provide this kind of a housing accommodation.

Senator HARRIS. I am going to ask you in a minute whether or not that is a practice which ought to be looked at. But I want to ask you first: It is true, then, that there are situations, as was testified to here, where the promoter is the only one that has any money in the operation, and the nonprofit operation hasn't, is that correct?

Mr. BROWNSTEIN. The nonprofit sponsorship needs funds to get this thing started. The question is where do they get it? We now have revised our procedure so that there is an allowance that goes into the mortgage for what we believe will be the operating capital needed to get the project off the ground.

This, then, cuts out the necessity of tying the nonprofit sponsor in with the promoter to obtain their money.

Senator HARRIS. What does? Say that again.

Mr. BROWNSTEIN. We put into the mortgage an allowance for the amount that we believe will be necessary to get the project started in the normal way. Now, if we believe that the project

Senator HARRIS. Some operating money?

Mr. BROWNSTEIN. Yes, sir.

Senator HARRIS. You capitalize some actual operating expense? Mr. BROWNSTEIN. That is correct.

If we believe that the project is going to have to be subsidized for a period of time before it can get off the ground, then even though it is a nonprofit sponsor they have to give us a guarantee which we know will be enforceable, letter of credit or something of this nature, put the money in escrow, whatever we believe that operating deficit to be, and this has to be put up before initial endorsement.

Senator HARRIS. That is not your own money but it is money that you have insured?

Mr. BROWNSTEIN. No, sir. This is money that the sponsor has to raise, itself.

Senator HARRIS. Not capitalized operating expense in the mortgage?

Mr. BROWNSTEIN. That is right.

Senator HARRIS. I take it, then, that you are making a judgment similar to the judgment made by GAO that this type of operation could be a little more hazardous than others?

Mr. BROWNSTEIN. We have to be very careful about the approval of nonprofit sponsors and the qualification of nonprofit sponsors.

On the motivation, we want to be very sure that they haven't been shopped by some enterprising individual.

Senator HARRIS. I know of situations where a fellow who is a promoter comes to a nonprofit organization and says, "You are a nonprofit corporation already in existence, and so forth. You haven't thought about building any multifamily housing, but I have, and I

know how to finance it. I will build it and then I will turn over the beneficial interest to you and it won't cost you anything. You won't have any liability in the situation."

I know of some instances of that, myself. Is that a hazardoustype situation, in your judgment?

Mr. BROWNSTEIN. It could be. It depends on the nonprofit sponsor and what they really are trying to achieve through this. That is what we have to try and watch out for.

Senator HARRIS. The thing that may cause a nonprofit corporation to be interested may be simply a way to make some money to finance whatever their regular program is. Doesn't it seem to you that there ought to be better policing by you to be sure that the nonprofit corporation is really interested in building this multifamily housing and is not just receiving a beneficial interest hoping to make some money on it?

Mr. BROWNSTEIN. This is why we have a preapplication conference with the nonprofit sponsor. We tell him what the responsibilities are that he is entering into. We try and determine from that whether he does have the kind of motivation that we believe is essential to the success of the project.

Senator HARRIS. So now you are requiring that some money be put up by the organization, itself. Is that what you have said earlier? That is, in escrow, a letter of credit or something?

Mr. BROWNSTEIN. That is in those cases where we believe there may be an operating deficit during the term of the mortgage. If we believe there will be such a deficit, and this is judgmental, Senator Harris, then we do require that this be done.

Mr. ADLERMAN. Is that over and above the amount that you capitalize for operating expenses?

Mr. BROWNSTEIN. Yes.

Mr. ADLERMAN. Let's take a specific instance. If it is an investorsponsored type, perhaps an orphan home, a hospital, an old-age home, something of that sort

Mr. BROWNSTEIN. We couldn't have an orphan home or a hospital. We cannot insure mortgages on orphan homes or hospitals. Mr. ADLERMAN. Could you insure a home for the aged?

Mr. BROWNSTEIN. Yes.

Mr. ADLERMAN. Let's take one of the investor-sponsored type. What would that be, for example? Would that be a home for the aged?

Mr. BROWNSTEIN. No. That would not be, Mr. Adlerman.

Mr. ADLERMAN. What would it be?

Mr. BROWNSTEIN. An investor-sponsor would be one

Mr. ADLERMAN. That is, when a charitable organization is involved. Mr. BROWNSTEIN. That would not be a cooperative. That would not be in 213 at all. That would be a 231. It could be a 221 (d) (3).

Senator HARRIS. Actually, this chart is a little misleading for this conversation. I had switched to something else when I looked at this chart.

Mr. ADLERMAN. In those cases when you do have 231 projects, when you have charitable organizations as sponsors, they don't put any of their own money in. They have promoters come to them, as described

by the Senator. You look at one of these and you say they are motivated. You figure the cost of the building, the cost of construction, the land and so forth, is, say, $1 million, and you will figure that the operating costs, startup cost, whatever you want to call it, for a year or 2 years, may run another $100,000.

Would you give them a mortgage for $1,100,000?

Mr. BROWNSTEIN. The maximum that we will allow for this is 2 percent.

Mr. ADLERMAN. Two percent?

Mr. BROWNSTEIN. Yes.

Mr. ADLERMAN. Two percent over the cost or value?
Mr. BROWNSTEIN. Two percent of the estimated cost.
Mr. ADLERMAN. Two percent of the estimated cost?
Mr. BROWNSTEIN. Yes, sir.

(At this point Senator McClellan entered the hearing room.)

Mr. ADLERMAN. Then you will require in addition that the sponsor or the cosponsor, the promoter, put up some additional cash?

Mr. BROWNSTEIN. If we believe that there will be an operating deficit during that period.

Mr. ADLERMAN. Do you have a percentage arrangement on that?
Mr. BROWNSTEIN. It depends on what we estimate the deficit to be.
Mr. ADLERMAN. There is no limitation?

Mr. BROWNSTEIN. There is no limitation.

Senator HARRIS. I want to look again at the chart under that last one referred to. That will be exhibit 4.

On exhibit 4, talking about section 213, look at that chart, Mr. Brownstein, and you will first notice the management type of financing situation. There it appears that the mortgage amounts in financial difficulty, the percentage of the mortgage amounts in financial difficulty, have actually decreased from 1964 to 1965.

Is that the situation as you understand it?

Mr. BROWNSTEIN. I have no reason to question this.

Senator HARRIS. Now look on the right-hand side of that chart, investor-sponsored type financing. According to GAO it has shown at percentage increase in the mortgage amounts which are in financial difficulty.

Would you first agree that that is true, and then would you or would you not agree about their definition of financial difficulty?

Mr. BROWNSTEIN. Again, these charts, I am sure, were checked with our office and I have no reason to think that there is any inaccuracy in them.

I believe that Mr. Weitzel pointed out our position on what we consider to be financial difficulty, or what our interpretation is on many of these projects. It is not at all unusual for a project to go into modification, or forbearance, during the early period of construction.

This, we find with many of our projects. This, you will find with conventional mortgages as well. Particularly has this been true during the last several years when the pent-up demand for housing no longer exists. Housing is now abundant on the market, and many of these projects are in competition with a good many more. A lot of the FHA projects are in competition with a good many conventionals.

For example, FHA's total share of the multifamily housing market in the last several years has run under 10 percent. Ninety percent of them are conventionally financed.

I will venture to say that you will find a very high percentage of them which go into modification or forbearance during the early years. This is not to say that they are going to be failures. What it does mean is that they have to be watched carefully. They need nurturing. In time we hope they are going to work out.

Senator HARRIS. What about the point that Senator Mundt made this morning? While I am sure it is true, as you just said, that a project which gets in trouble in the early years may pan out very well eventually, what would you say about the point when in its later years it might also run into difficulty?

Mr. BROWNSTEIN. Of course, there is a reserve created for replacements, which is supposed to take care of the things that may go wrong with it during those later years, Senator Harris.

Senator HARRIS. And you feel that that is a sufficient kind of reserve?

Mr. BROWNSTEIN. This is the purpose for it, and this is why it is created.

Senator HARRIS. Looking at the right-hand side of that exhibit 4 chart, does the fact that you had only $2 million more in the investorsponsored type section 213 loan in 1965 over 1964 indicate that you slowed down some in approval of that kind of insurance?

Mr. BROWNSTEIN. Very likely it would, because we have been watching them much more carefully.

Senator HARRIS. Are you able to say? Your answer was very likely it would. I am interested not only in what is very likely but what are the facts.

Mr. BROWNSTEIN. I can't tell you how many submissions come into our offices that are rejected, Senator Harris, because they don't get into our statistics.

Senator HARRIS. Has it just been accidental if what you say is very likely has happened? Has it just been accidental or do you have a policy on it?

Mr. BROWNSTEIN. We have been tightening all of our requirements. These I would hope to go into in a little bit, to show you that we are trying to come to grips with this problem and do something about it.

Senator HARRIS. Whatever definition you use of financial difficulty, so long as it was the same definition for 1964 as for 1965, wouldn't it be a matter of some cause for alarm that 43.2 percent in 1965 were in financial difficulty on mortgage amounts of investor-sponsored type 213 loans, as compared with only 24.7 percent in financial difficulty in 1964?

Mr. BROWNSTEIN. It certainly is cause for concern, and something that I think we ought to look at very carefully, and we are looking at very carefully.

Senator HARRIS. That is what I am trying to find out. You say it is very likely you have tightened up on that type of loan but you don't know whether that is true.

Mr. BROWNSTEIN. I know we have tightened our procedures. There is no question about this.

Senator HARRIS. That is what I want to know. Whether it is a proper thing for you to do or not is not a judgment for me to make right now.

Mr. BROWNSTEIN. We have, indeed, tightened our procedures. Senator HARRIS. Now I would like to look at the chart, if I may, on the 207 and 231.

This chart, Mr. Brownstein, is exhibit 3. First, looking at section 207, do you have some comment about that type of basic multifamily loan program which shows a percentage increase in financial difficulty from 1964 to 1965? Do you have any comment about that change? Mr. BROWNSTEIN. I think it is the same, Senator Harris, that we have in all the multifamily programs. In the last several years there has been a tremendous amount of multifamily construction in many areas, and it has resulted in a highly competitive market.

As a consequence, there are additional mortgages in 207 as well as our other programs, in modification and forbearance. We are still very hopeful that they are going to work out.

Senator HARRIS. What has been the percentage required to be contributed by the borrower in the 207 loan program, and has that changed lately?

Mr. BROWNSTEIN. The mortgage is 90 percent of value in the 207 program. That has gone up from 80 percent of value.

Senator HARRIS. Would that be involved, do you think-if you are able to say-in the percentage increase in mortgage amounts in financial difficulty?

Mr. BROWNSTEIN. I would say that the more likelihood in that would be the highly competitive nature of the rental housing market in many areas, and the fact that there has been so much conventionaltype competitively created that has caused this.

Senator HARRIS. Is the fact that there is greater competition now for the type of housing financed under section 207 an indication of any need on the part of FHA to slow down the approval of that type of loan?

Mr. BROWNSTEIN. We are watching it very, very carefully, Mr. Harris.

Senator HARRIS. Take section 231 from the same chart, Housing for Elderly. It shows also a percentage increase of mortgage amounts in financial difficulty.

I wonder if you might comment on that.

Mr. BROWNSTEIN. It is the same thing there. We are paying a good deal more attention to the sponsorship. As Mr. Weitzel mentioned this morning, we are being very careful about tax adjustments, tax abatements, tax forgiveness, which happens in this kind of a

program.

Again, I think we have tightened our procedures substantially. Senator HARRIS. What do you mean about paying more attention to the tax situation?

Mr. BROWNSTEIN. Now we require that if the mortgage amount is based on the assumption that there will be tax forgiveness because of the type of housing which is involved, we have our general counsel check to make sure that this is a legally sufficient finding that is being made.

Senator HARRIS. Are all these loans 100 percent?

Mr. BROWNSTEIN. No, sir; they are not.

Do you mean the 231's?