I have signed the Form 2264 covering the above-described property. The figures contained in this 2264 are predicated on the instructions we received from Washington and do not necessarily represent what the true findings would be had we not received these liberal instructions from Washington. The original pencil copy of the 2264 shows a rating of net income expectancy of 64.

I might say this is addressed to Mr. Morgan, chief underwriter.

This was revised by you to a rating of 76 in order to make the project work for the highest insurable amount. The typewritten copies do not mention this change.

We in valuation have done all in our power to interpret the Section 220 regulations in the most liberal manner. However, I wish to restate to you that my opinion has not changed from that given to you in writing at the introduction of this project, wherein it was determined that the project was unsound.

At the time I stated (and it is still my opinion) that the proposed project will be a misplaced improvement, that rentability will be most difficult at the rents assigned, due to the location and its many adverse environments.

As you will recall the original request on this property was around $12 million. Since that time there has been some betterments made to the residential structure. However, the commercial structure has been reduced from a six-story building to a two-story, and it would seem that the estimated cost today is somewhat high.

This is signed "E. D. Roe, Chief Appraiser."

I wonder if you have any comment, Mr. Brownstein, in the face of that kind of recommendation from FHA's own local official, about why this commitment would have thereafter been approved in Washington?

Mr. BROWNSTEIN. In the case of that kind of a recommendation, Mr. Harris, there should have been full documentation on why the project was approved. This is not to say that it ought not to have been approved, because we are in an area that judgments will vary on. But clearly there should have been good documentation supporting the position.

Senator HARRIS. That was on the $12.5 million application. Thereafter, the commercial structure was reduced from a six-story to a two-story, and then the application was eventually approved at $18 million plus.

Does that suggest to you that somebody's judgment, at least, ought to have been questioned a little about approval of this thing?

Mr. BROWNSTEIN. Again, a part of this increase was increased land values. Under these instructions which I have introduced into the record, this could not any longer occur if the instructions are followed. Secondly, this could have legitimately been the right determination because there were some additional betterments added, I understand: air conditioning, carpeting, a good many things that were expensive. But the kind of documentation that I would like to see is lacking.

Senator HARRIS. Wouldn't you think it would be your responsibility, or somebody's, to look into this thing a little further and to talk to some of the people whose judgments were involved here about why this was done?

I mean in addition to changing regulations.

Mr. BROWNSTEIN. This, at the present time, Senator Harris, is being considered by our compliance people.

Senator HARRIS. We will go on for the time being.

Are you familiar with the condition of this building, Barrington Plaza, and the deficiencies which have come to our attention in con

struction, such as leakage during rainfall, inadequacy of bathroom space, closet space, and the failure to provide air conditioning, in what is supposed to be a luxury-type apartment?

Mr. BROWNSTEIN. I have seen these reports.

Senator HARRIS. Has anything been indicated to you about any remedial action or change in procedures that those facts would cause you to think about?

Mr. BROWNSTEIN. We have now acquired this project and we own it. We are going to have to make some corrections to some of these things, Senator Harris.

Senator HARRIS. Is it true that the building leaks during rainfall? Mr. BROWNSTEIN. This is my understanding, that there are some areas where there is leakage.

Senator HARRIS. Would you say it was substantial?

Mr. BROWNSTEIN. I have no personal knowledge on how extensive this is, but I know that it does occur.

Senator HARRIS. Would you say that it was a deficiency in the plans of this building that the bathroom and closet space are inadequate and that air conditioning wasn't provided in the construction?

Mr. BROWNSTEIN. On the air conditioning, my understanding is that at the time that this project was designed it was not customary in that area, even in high rental projects, to have air conditioning. This was a later involvement and this is why later on they did put some air conditioning in.

On the other, I guess it was a question of the design, how large the bathrooms, how much closet space; these things are important, of

course.

Senator HARRIS. Do you think that is some failure in the design? Mr. BROWNSTEIN. Again, I can't tell you specifically how good or how bad the closet space or the bathrooms are. But if this is a basic reason why they are not renting, then I would say it is a failure of design.

Senator HARRIS. What would a typical apartment in this building have to rent for to pay out?

Mr. BROWNSTEIN. The rental estimates initially for a three-room family unit-this is a living-dining area, kitchen and one bath—was $155; living-dining room, kitchen, two bathrooms, two bedrooms, bath, was estimated at $222; a living-dining area, kitchen, two bedrooms, den, $293.

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

Senator HARRIS. Are you familiar with the amounts, if any, that were paid in by the Lesser Development Corp., or Louis Lesser Enterprises, on the interest or amortization of the principal during the 212year period?

Mr. BROWNSTEIN. I have some material on that, Mr. Chairman, but I understand that our Comptroller. Mr. Thompson, is going to be here and he is much more familiar with that than I.

Mr. ADLERMAN. Isn't it true that they paid little more than maybe 2 or 3 months interest in the 2 years that they had the property?

Mr. BROWNSTEIN. The figure that I have on the total payments received, and this is interest, mortgage insurance

Mr. ADLERMAN. I am just talking interest now.

Mr. BROWNSTEIN. The interest was about $330,000.

Mr. ADLERMAN. You have them credited with $330,000 in interest payments?

Mr. BROWNSTEIN. This is the figure that I have, but I would hope you would ask our comptroller about this, Mr. Adlerman.

Mr. ADLERMAN. I think Mr. Lesser would be a little surprised.

Mr. BROWNSTEIN. This is not only Mr. Lesser. This is the entire project. This is the total interest paid on the mortgage for the entire life of it.

Mr. ADLERMAN. Throughout the life of the project during the course of construction and all?

Mr. BROWNSTEIN. No, this is not construction interest, but it does go beyond the time that Mr. Lesser sold it.

Mr. ADLERMAN. How much is the entire deficiency in interest?
Mr. BROWNSTEIN. It is the interest at the debenture rate.

Mr. ADLERMAN. No, the mortgage rate.

Mr. BROWNSTEIN. Again, I would have to ask you to talk with our comptroller on that.

Mr. ADLERMAN. It is well over $2 million?

Mr. BROWNSTEIN. It is over $2 million.

Senator HARRIS. Are you able to testify about the specific basis for the belief-I believe that is the word you used in your statement-of FHA, that the new purchasers of this project would strengthen the project?

Mr. BROWNSTEIN. One of the problems that we had been informed was causing the difficulty was lack of good, strong, aggressive management. It was our understanding that the new owners were going to come in and take a personal hand in the management, and it was our further understanding that they were competent in this area and would be able to do something about it.

The fact of the matter is they did bring up the occupancy from 64 percent, I believe, to 77 percent.

Senator HARRIS. Had they had any experience in the multifamily housing field?

Mr. BROWNSTEIN. I do not know, sir.

Senator HARRIS. Do your files reveal whether or not they did?

Mr. CALLAHAN. Mr. Chairman, I believe our files would indicate that one of the partners, a Mr. Jack Gorden, had had previous experience in this area. The other two partners had had limited, if any, experience in high-rise, multifamily operations.

Senator HARRIS. Did they put any cash, any substantial cash, into this project when they bought it?

Mr. BROWNSTEIN. There was some payment made. Again, I would have to refer you to our comptroller for the figures on this-there was some payment made on the mortgage, and there was some other consideration that passed to the mortgagee. What they paid to the Lesser interests, I don't know.

I do believe we should know. We should have known, but I cannot give you this from personal knowledge.

Senator HARRIS. Isn't it true that they made 1 month's mortgage payment to the mortgagee?

Mr. BROWNSTEIN. Again, I would have to have our comptroller

check that.

Senator HARRIS. Prior to the sale of the Barrington Plaza, did FHA make any evaluations as to the estimated project income and expenses, including estimated occupancy factors, in order to arrive at some target date when the project might become self-sustaining? Mr. BROWNSTEIN. There isn't anything in our file to show that this was done, Mr. Chairman.

Senator HARRIS. Is there anything in your files to indicate, or can you testify, why FHA consented to the sale of this property whereby Lesser received property from these folks having a valuation of over $1 million, and Lesser was required only to make a 1-month interest payment of about $81,000 as a condition for approving the sale?

Mr. BROWNSTEIN. Certainly it would seem to me that in a case of this kind where the mortgage is in default the person who is withdrawing ought not to get very much out of it, ought not to get any more out of it than is absolutely necessary to assure the new and strengthened ownership to take over.

If there was any such amount as that that passed to the former owner, then I would not agree with it.

Senator HARRIS. When did John Hancock Co. notify FHA that it had elected to foreclose on the mortgage?

Mr. BROWNSTEIN. May 3, 1966.

Senator HARRIS. What, if any action, did FHA take then to protect the Government's interest in the project?

Mr. BROWNSTEIN. Well, we acquired title on June 2, 1966, as soon as we did we had a receiver appointed.

Senator HARRIS. Were there some diversions from the capital of the company from the period of the notice of foreclosure to the time the Government took over ownership?

Mr. BROWNSTEIN. There has been an audit made. We have run into a problem, Mr. Chairman, that the former owners have not produced the records despite the demand that we have made for them. Our General Counsel presently is in the process of preparing a complaint to bring action against them to produce these records and also for any improper diversions.

Senator HARRIS. Senator Mundt?

Senator MUNDT. I only have a few questions, Mr. Brownstein, which are sort of general in nature, so that I can get a better understanding of the basic philosophy which is involved in FHA.

Are there any maximums of any kind, legal or regulatory, as to the rental rates to be charged for the kind of apartments which are insured by FHA?

Mr. BROWNSTEIN. The only maximums, Senator Mundt, are on mortgage amounts and on unit costs or unit limitations. There are no maximum figures on rentals.

Senator MUNDT. What, in your books, in your experience tables, are the highest rentals for unit dwellings that you have insured, in buildings which you have insured?

Mr. BROWNSTEIN. I could not give you this figure at this time, Senator Mundt.

Senator MUNDT. Could you supply it for the record?

Mr. BROWNSTEIN. Yes.

(The information requested follows:)

The highest rental currently reported for single apartment units financed with FHA-insured project mortgages is $1,300 monthly for penthouse units overlooking the Hudson River in the Horizon House project in a prime location in Fort Lee, New Jersey. These units (four in each of the two sections of the project) consist of living room, dining room, kitchen, four bedrooms, foyer, den and three and a half baths. Other units in this project range in monthly rentals from $155 to $275 for 1-bedroom units; from $250 to $360 for 2-bedroom units; from $365 to $470 for 3-bedroom units; and $700 each for two 6-bedroom units in each section. The penthouse units are 4-bedroom units renting for $1,300 monthly. Occupancy in the two sections was reported as 95 percent in March 1966, including 100 percent occupancy in the penthouse and 6-bedroom units. The two sections of this project were committed for Section 207 mortgage insurance in September 1960 in response to applications in June 1960. Both sections were completed in 1963.

Senator MUNDT. In going over this sheet

Mr. BROWNSTEIN. I can give you the highest rentals that we have a record of.

Senator MUNDT. Don't you get a record as to what the rentals will be?

Mr. BROWNSTEIN. Yes.

Senator MUNDT. You have records on those that are operating? Mr. BROWNSTEIN. We have them on all cases.

Senator MUNDT. The highest one that shows up here in what is called Barrington West would indicate to me on the 23d floor an apartment, it says "02" at the top-I guess that has two bedroomsunder that it says "one room, balc." It has $600 per month. Would that be right, do you think?

Mr. BROWNSTEIN. It sounds very high.

Senator MUNDT. It looked high to me. I though maybe that "02" at the top might mean a two-bedroom apartment.

Mr. BROWNSTEIN. I can find out and supply that for the record. (The information follows:)

1. Apartment on 23rd floor of Barrington West (02) is actually Apartment 2302. The present rent of $600.00 per month includes $50.00 charged for furnishing. Apartment has 1,263 square feet, 2 bedrooms, den, and 2 baths. Stove, refrigerator, air conditioning, and garbage disposal are part of the shelter rent of $550.00. Rent paid through the month of August. Apartment is now vacant.

2. In addition to the foregoing, there are 3 other apartments in the $500.00 range according to our present schedule. Apartment 2502 at $500.00 per month with the same square footage and rooms as Item 1 but without furniture. Apartment is occupied and rent is being paid.

Apartment 2410 at $500.00 per month-the same as Item 1. This is now a model apartment. Apartment 1910 at $550 per month includes $50.00 for furnishings. This is also the same as Item 1. Apartment is occupied and rent is being paid.

Senator MUNDT. Do you know whether that is a furnished or unfurnished apartment?

Mr. BROWNSTEIN. They have some furnished apartments in there. I do not know whether that particular one is.

Senator MUNDT. Does FHA supervise at all the rentals which are charged by the owner?

Mr. BROWNSTEIN. We determine the propriety of the rentals in relation to the mortgage amount to see whether the rental income will support the maximum mortgage. These mortgage limits are set by statute, the maximum mortgage amount, and also the maximum mortgage per unit. These have been increased by the Congress from time to time as costs have increased.