HOUSING AND URBAN DEVELOPMENT LEGISLATION OF 1968 WEDNESDAY, MARCH 6, 1968 U.S. SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met at 9:35 a.m., in room 5302, New Senate Office Building, Senator John Sparkman, chairman of the subcommittee, presiding. Present: Senators Sparkman, Proxmire, Williams, McIntyre, Tower, and Percy. The CHAIRMAN. Let the subcommittee come to order, please. We are not going to have long to sit this morning. I do want to finish, though, if we can, the presentation by the Secretary and his staff. Mr. Secretary, yesterday you were at a point on page 28. We had gotten to "National Insurance Development Corporation Act of 1968." Now, you lack about five pages of completing your statement. FURTHER STATEMENT OF ROBERT C. WEAVER, SECRETARY, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; ACCOMPANIED BY ASHLEY FOARD, DEPUTY GENERAL COUNSEL; WILLIAM ROSS, DEPUTY UNDER SECRETARY; AND ROBERT C. WOOD, UNDER SECRETARY Mr. WEAVER. Mr. Chairman, in light of the time, so we can go ahead, I would like to suggest we put this in the record and not read it in the record this morning. The CHAIRMAN. Very well, then, do you want to summarize it just in a few words? Mr. WEAVER. Well, what this does is to outline in some degree the proposal that we are making as far as riot reinsurance is concerned. This would involve a partnership between the Federal Government and the State governments and private industry, in order to make sure that the red lining which has been done in the past, where certain districts were excluded, would be avoided. This would involve a National Insurance Development Corp., which would be a Federal corporation which would reinsure for those companies which were a part of a State "FAIR" plan. And the State "FAIR" plan would encourage them to go into these areas. This, in brief, is what we are proposing. The CHAIRMAN. Yes. Well, fine. Thank you very much. (The balance of Secretary Weaver's prepared statement is as follows:) CONTINUATION OF SECRETARY WEAVER'S STATEMENT NATIONAL INSURANCE DEVELOPMENT CORPORATION ACT OF 1968 Mr. Chairman, with your permission, I now would like to discuss the provisions of S. 3028, the "National Insurance Development Corporation Act of 1968". This bill embodies the Administration's proposals for meeting an insurance crisis in our cities. It recognizes that insurance is instrumental in preserving the inner city. The elements of this proposal were recommended by the President's National Advisory Panel on Insurance in Riot-Affected Areas established last August. That panel, chaired by Governor Hughes of New Jersey, included representatives from the Federal, State, and local governments and from the private insurance industry. The bill would authorize the creation of a National Insurance Development Corporation in the Department of Housing and Urban Development. This Corporation would carry out a cooperative Federal-State-industry program for expanding the availability of essential property insurance coverage in the Nation's urban areas. This legislation has three major objectives: First, it will encourage private insurance companies to offer property insurance in neighborhoods and sections of cities where it has been difficult-if not impossible to obtain this protection. Second, it will offer reinsurance protection to insurance companies so they can continue to provide coverage in their regular lines of property insurance against extraordinary losses from riots or other civil commotion. Finally, it will provide the basis for improving the market for insurance against burglary and theft in center city areas by including such coverage in State "Fair" plans, and by providing a special study of the problems involved in insuring against crime perils. Over the past several decades, a major insurance problem, of seriously growing proportions, has been emerging. Homeowners and businessmen in older city areas have only limited access to some of the most important lines of insurance: fire and extended coverage, vandalism and malicious mischief, and burglary and theft. Private insurance companies have considered it uneconomic to provide this protection. This has led to the practice of "red lining" whole neighborhoods, which means an almost automatic denial of insurance for reasons of location alone, regardless of the condition of the individual property. Without insurance coverage against the perils of fire and crime, banks and other lenders cannot and will not extend credit for the purchase and improvement of real property or for financing business inventories. Thus, without insurance, property cannot be repaired or improved and business is stifled. The result is that property deteriorates and business-particularly small business-stagnates. Families and businesses move out; blight develops and grows. S. 3028 would encourage and provide incentives for State insurance officials and the property insurance industry to develop and carry out approved statewide plans for improving access to essential insurance protection. These are known as "FAIR" plans or "Fair Access to Insurance Requirement" plans. They would provide that property owners could not be charged more than the standard premium rate, or be denied insurance coverage, unless there first had been a physical inspection of the property. If inspection disclosed that the risk was not insurable at standard rates, because of physical hazards on the premises or other deficiencies, the owner would have to be advised of specific measures that would have to be taken before the property would become eligible for insurance at the standard rate. The "FAIR" plans would also include provision for an "all-industry facility" in each State which would try to place approvable policy applications with participating companies in the State. The incentive for insurance companies to cooperate and participate in FAIR plans would be availability of a program of riot reinsurance to be offered by the new Corporation on a State-by-State basis. In addition to providing this incentive, riot reinsurance is urgently needed for its own sake. This is attributable to recent riots and civil disorders in our urban areas. Property insurance companies have customarily reinsured against abnormally high losses from various perils, including riot and other civil commotion, with organizations specializing in reinsurance. However, the unusual amount of losses which the property insurance industry has paid on riot and civil commotion coverage raises serious doubt as to whether this reinsurance will continue to be available or, indeed, whether any insurance coverage will be available in many areas of the Nation's cities. Without reinsurance, underwriters cannot continue riot and civil commotion protection in their various lines of insurance. Their options would be limited. They could cancel policies currently in force, or since most policies are short-term, refuse to renew them. The Administration bill would meet this problem by authorizing a reinsurance program with risk-sharing by private insurers, the States, and the Federal Government. Under the program, reinsurance against the riot and civil commotion peril, for all lines of property coverage, would be offered to insurance companies participating in approved FAIR plans. Agreements would be reached between the new corporation and the insurance industry on the terms and conditions for the reinsurance. Companies would pay premiums to the Corporation for reinsurance, and premium rates would be negotiated, from time to time, between the Corporation and the private industry. Riot losses would be shared among individual companies, the States, and the Corporation. If losses in a particular State exceeded the aggregate rate of losses which the companies agreed to assume plus those to be assumed by the State, the Corporation would reimburse the companies for the balance of the losses. The reinsurance program would be designed to operate on a self-supporting basis, drawing on reinsurance premiums to pay losses. If, however, riot losses to the Corporation throughout the Nation exceeded premiums received by the Corporation from reinsurance, the excess would be paid with funds borrowed from the Treasury. These loans would, in turn, be repaid from future reinsurance premiums. It is our hope that the need for the Federal reinsurance facility provided under the bill is only temporary and, therefore, the legislation calls for the Corporation to be liquidated after 5 years. There still remains the important problem of assuring homeowners and businessmen of adequate insurance protection against crime losses at reasonable rates. It must be recognized that the urban core poses special problems for the crime insurance underwriter. More study of crime insurance is essential. For this reason, S. 3028 would direct the Corporation to conduct a special study and to report to the President and the Congress within one year on the means necessary to assure an adequate market for burglary and theft insurance. It may be necessary, for example, to restructure crime insurance policies-by appropriate use of deductibles, requirements for protective devices, and other underwriting controls in order to make such policies economically sound from the point of view of the insurer and the insured. In the meantime, the FAIR plan mechanism under the bill should offer increased opportunities to those wishing to purchase crime insurance. The CHAIRMAN. In view of the short time we can sit I shall ask very few questions, so that all of the members that are here and those that come in may get to ask some questions. I was quite interested in your proposal to reduce the interest rate on the interest subsidy plan to 1 percent. Last year, as you brought out in your statement, this committee proposed to set the rate at 3 percent. As a matter of fact, there was a suggestion made by Senator Percy that we try an experimental program at 2 percent, and I believe he said he would be willing to see an interest rate made flexible so that it could come down even to zero percent. I believe I am right on that. Senator PERCY. Mr. Chairman, on an experimental basis. The CHAIRMAN. On an experiment basis, yes, to see if it would work. It is interesting to see your proposal come down to a 1-percent basis. Let me ask you, why is the interest rate on rehabilitation loans not set at the 1-percent subsidy rate also? I understand you have no plans to change from the present 3-percent rate. Mr. WEAVER. I believe there are several reasons. I think the rate of interest has to be looked at in terms of the objective of the program. The housing program, as you know, is a 10-year program designed to substantially wipe out all substandard housing. This is a large vol ume program, a program which would have to provide housing for lower income persons than could be included if we had a higher interest rate. It includes both new construction and substantial rehabilitation. So, therefore, the 1 percent becomes a vehicle for achieving a particular objective. Now, the reason that the 1-percent rate was not included in the section 312 rehabilitation program is dual. In the first place, the rehabilitation usually involves a much lesser total mortgage amount so that the amount of subsidy needed is not as great as would be necessary if the mortgage is larger, because the larger the mortgage, eitherThe CHAIRMAN. Not as important a part? Mr.WEAVER. And it is not a large volume program. The CHAIRMAN. Yes. Mr. WEAVER. It could have been done, but it would have necessitated reshaping the program, from one which provides loans at a set interest rate to property owners single-family homes, multifamily structures, and businesses-in urban renewal and code enforcement areas who are required to rehabilitate their property in accordance with the plans for these areas, to one which provided loans at a sliding interest scale commensurate with the income of the property owner. This would cause difficulties, especially for business loans. Also, in these areas, the 3-percent loans may be supplemented by grants which may now be as high as $1,500, under section 115 of the urban renewal law, and which could be as high as $2,500 under an amendment contained in this bill. The CHAIRMAN. Now, let me ask this question on another program while we are talking about the interest rate subsidy. In S. 2700, we provided for college housing loans on a 3-percent interest subsidy rate. Now, you are proposing in this bill to put it back on the old formula and make it a direct loan, is that right? Mr. WEAVER. We are proposing to keep it as it is now as far as the structure is concerned, which is a direct loan. We are proposing to place it back at the old formula on the basis that there are many institutions which can get money, not at 3 percent, but at a reasonable rate. Now, with the 3-percent rate we are inundated by a demand that we could never meet, and we are therefore often helping universities and colleges which have fairly good credit, and some with "excellent" credit ratings, and are not able to help some that really need it. We feel that this proposal will allow a more equitable use of the funds. The administration has a very strong position on this, on the basis that we really, in this credit situation when there are so many demands, should give a low priority to institutions, even though they are educational institutions, which can get money at fairly reasonable rates in the open market. The CHAIRMAN. I did not mention another very important part of the amendment that we proposed in S. 2700, and that is that the colleges would arrange their loans in the private market at the best rate they could get, and the Government, instead of lending that money to them, would pay the difference between 3 percent and the rate that they would have to pay. Mr. WEAVER. These are loans, as you know, which are self-liquidating. They come out of the dormitory fees. And it was our feeling that here was a place where the degree of subsidy would not have to be as deep as it might be elsewhere. This is a developmental factor and a budgetary factor, too, because the size of the program had become so large that it would have reached into billions of dollars if some such The CHAIRMAN. I thought that was one of the troubles with the present program, that it is a Government loan program, which cannot provide enough money to take care of all of the requests for loans; whereas, if it were private lending, the colleges could be taken care of and the impact on the Federal budget would be much less than is now--at least, for the next few years. Mr. WEAVER. There is no question of that, and this would have been consistent with our approaches in other directions. I think the main problem here was whether or not we should be lending assistance at all to those colleges and universities which have a The CHAIRMAN. Which can arrange a reasonable rate. Mr. WEAVER (Continuing). In the market. I think it is philosophical rather than budgetary. The CHAIRMAN. Let me ask you another question that can be answered very quickly. Under your proposal, the home purchaser is to pay a minimum of 20 percent of his income. He must pay 20 percent of his income toward the purchase. Now, why, then, do we require persons renting to pay 25 percent? Mr. WEAVER. Well, when the homeowner pays this amount for his house, he does not include in that amount the payment that he will have to make for the maintenance and upkeep of the property and for the utilities. The CHAIRMAN. In other words, the 20 percent is exclusive of costs for maintenance and upkeep of property? Mr. WEAVER. Right. The CHAIRMAN. Yes; where it is included in rents. Mr. WEAVER. And it almost equalizes. The homeowner may actually be paying a little bit more under the 20 percent than the renter pays under the 25 percent. The CHAIRMAN. I think that is a very good reason. Now, technical aid, you mentioned that. I just want to ask you for the benefit of the record, what is the present status of your research program? Mr. WEAVER. Of our research program? The CHAIRMAN. Yes. Mr. WEAVER. We are now in the process of setting up, as you know, an urban institute to which references have been made before, and we are also in the process of carrying out a series of research programs. Under Secretary Wood has been particularly concerned with this, and I will ask him to speak to it. The CHAIRMAN. Fine, Mr. Secretary. Mr. Wood. Mr. Chairman, the status of the program today has been that in addition to the urban institute and organization of the Office of Urban Research and Technology now headed by Dr. Thomas Rogers, formerly of the Defense Department, we have allocated our funds into major efforts of housing technology and systems research. We hope very shortly, within the space of a few weeks, to go forward with a series of specific inquiries which we think will produce the kind of breakthroughs we have all been looking for. The CHAIRMAN. Am I right in my understanding that this is the first time that we have had a really promising research program? |