Mr. WATSON. Yes, sir. Up until 1972 we were averaging around $3.800 each year for all properties and it has moved up in 1972 to something like $5,000 for all properties at the present time.

Mr. MONAGAN. The average loss on inner city property in some sections of Detroit was around $10,000. This is substantially different. That is why I raised the question.

Mr. WATSON. I remember the $10,000 figure. We have gone back, and the way we tracked it, the 221(d) (2) program was around $6,800 average. There may be properties that we would lose $10,000 or even more, but the average in that area was around $6,800 on the 221 (d) (2) and about $5,000 on the 235 properties in the inner city areas.

Mr. MONAGAN. There weren't very many of those.

Mr. WATSON. No; very few section 235 dwellings. Most of them were 221 (d) (2), 223 (e) and 203.

Mr. ST GERMAIN. You are particularly talking about the inner cities. Are you telling us those figures applied to the inner cities are all 235 programs, or you are giving us the value?

Mr. WATSON. $5,000 is the average loss on section 235 existing property in the inner cities. This is not the suburban-type 235 property. Mr. ST GERMAIN. You don't have-in other words, you are not taking into account a figure of 8,000 units, anything by the inner city program?

Mr. WATSON. For the 235 program?

Mr. ST GERMAIN. That comprises your 235 in toto?

Mr. WATSON. The 1973 projection?

Mr. ST GERMAIN. Right.

Mr. WATSON. On the total program or just section 235?

Mr. ST GERMAIN. Just section 235, you are talking about projections for 1973 for the 235 in inner cities and suburban also?

Mr. WATSON. Right; 8,000 for all section 235 acquisitions.

Mr. BUCKLEY. Could you give us the total number of acquisitions and assignments under the 235 program projected for fiscal year 1973-not just inner city?

Mr. WATSON. The total acquisitions and assignments are currently estimated at about 10.000 units.

Mr. BUCKLEY. 10,000?

Mr. WATSON. Yes.

Mr. BUCKLEY. Now, under the 203 program, what do you project as the total acquisitions and assignments in fiscal year 1973?

Mr. WATSON. The latest projection is 30,000 units.

Mr. BUCKLEY. What is the projected average loss per unit on these 203's?

Mr. WATSON. Around $3,700 in fiscal year 1971. We do not have the actual 1972 figures as of this date.

Mr. BUCKLEY. Now, the 221 (d) (2)'s.

Mr. WATSON. Could I give that to you? We may have that broken down, but I don't have it with me for section 221 (d) (2).

(The information referred to follows:)

In fiscal year 1971, the loss on the sale of acquired section 221(d) (2) housing averaged $4,295. Fiscal year 1972 data will not be available until the end of the fiscal year.

Mr. BUCKLEY. Rather than proceed program by program, could you give us the total projected loss to all the insurance funds in fiscal year 1973, due to the acquisition and disposition of properties, including both multifamily and single-family units?

Mr. GULLEDGE. Only on the single-family side. Our latest projection is around 60,000 acquisitions in 1973. On the multifamily side, we would be talking more in terms of around 60 projects with 8,000 units. Mr. BUCKLEY. So you expect to get 68,000 units back in 1973? Mr. GULLEDGE. In 1973.

(The following chart shows estimated acquisitions and losses for fiscal year 1973:)

1. ESTIMATED ACQUISITION AND LOSSES FOR FISCAL YEAR 1973

Note: A loss is not sustained when a property is acquired; only when it is sold or otherwise disposed of. The Department projects 40,000 single family sales in fiscal year 1973 and 80 multifamily sales consisting of 7,972 units.

Mr. BUCKLEY. What do you expect to be the charge against all the insurance funds to dispose of those properties?

Mr. GULLEDGE. In fiscal year 1971 the average loss on the single family projects was about $3,800.

On the multifamily projects, the average loss was around $1,945 per unit.

However, this is no way to equate that, because we won't sell those multifamily properties that we would take back in 1973. We would be selling some as much as 5 years in the future.

Mr. MONAGAN. You have several funds. This complicates it a little more. You have four funds. Mr. Gulledge?

Mr. GULLEDGE. Yes, sir; four funds.

Mr. MONAGAN. What are they?

Mr. GULLEDGE. The Old Grandaddy, the mutual mortgage insurance fund with the 203 (b) in it, followed by the general insurance fund, created in 1964 or 1965. At that time there were 14 different funds

going into that one. You have the cooperative management housing insurance fund for section 213 cooperatives, and the special risk insurance fund which was created in 1968. Those are the four funds which cover the FHA mortgage insurance programs.

Mr. MONAGAN. Is the general insurance program $1.7 billion?

Mr. GULLEDGE. $1.7 billion is the December 31, 1971 surplus of all four funds, totally.

Mr. MONAGAN. All four?

Mr. GULLEDGE. The general insurance fund was about $144 million in the black, and the mutual mortgage insurance fund had a surplus of around $1.6 billion.

Mr. MONAGAN. The cooperatives?

Mr. GULLEDGE. About $22 million in the black, and the special risk insurance fund was around $48 million in the red.

Mr. MONAGAN. And it is proposed to put $195 million into that; am I correct?

Mr. GULLEDGE. In the 1973 budget, the Department requested Congress to appropriate $195 million to cover the actual and anticipated losses in the special risk insurance fund. We do not have the official report yet from the House Appropriations Committee with respect to the treatment of that. Nor do we have any approval of that request. I would like to point out the data submitted at the time that statutorily the Secretary can ask for appropriations to cover the losses on the sales of the property.

This is what we have anticipated doing from the beginning of the special risk program, through fiscal year 1973. This is not the status of the funds. These are merely the losses resulting without the offsetting income produced as a consequence of the fees and premiums charged. Nor does it take into consideration the operating expenses of the fund. The $18 million figure is the net figure which I just gave you when you deduct offsetting expenses.

Mr. MONAGAN. Does the special risk fund have an income from the insurance?

Mr. GULLEDGE. Yes, sir; it has income from the fees and so forth. Mr. MONAGAN. What properties are assigned to that?

Mr. GULLEDGE. You have your 235, 236, 237, 233 (a) (2), and section 222(e); we collect fee and premium income on all of these sections. Our fiscal year 1973 operating statement in the budget for the special risk insurance fund shows a net income of $2 million.

By the end of fiscal year 1973, there will be a $45 million deficit compared with the $49 million deficit at the end of fiscal year 1972. My own private projection is that by 1975 all four funds will be operating in the black.

Mr. MONAGAN. But you are asking for $150 million more than the deficit, so you must anticipate some substantial loss over your income to the fund.

Mr. GULLEDGE. $75 million of that would be merely for repaying borrowed money from the Treasury. We operate this fund by borrowing from the Treasury.

Mr. MONAGAN. That is a payment of the loss?

Mr. GULLEDGE. No, sir; not necessarily. We pay the claim and take back the property or assigned mortgage so that we accumulate an acquired security inventory. We will have around $400 million tied

up in that way by the end of fiscal year 1973. We got that money by borrowing from the Treasury; the first $20 million was borrowed from the general insurance fund.

We have discounted those properties rather substantially according to our records and Mr. Watson indicated to you the net effect of what we borrowed, and discounting, and so forth, and the interest on the money we borrowed. The Treasury won't let us have it for nothing. It all adds up to the operating statement; if you look at an operating statement, it shows that $47 million is as of the 31st of December, the 6-month period. That is the deficit that fund was in.

Why did we ask for the $195 million is the question. Appropriations for losses are authorized by legislation, and it looked like the appropriate thing to do last August or September when we worked up the 1973 budget.

Mr. MONAGAN. I can see a mathematical reasoning here, and you may want to comment on it, but if, as evidence before us indicated that the loss in Detroit was around $10,000 on a property, and the evidence was also that there were 20,000 serious defaults. If you will multiply those-you have 200 million, so that

Mr. GULLEDGE. That is a good line of mathematical reasoning. It so happens that the entire 20,000 didn't fall in the special risk program, and this is a significant part. I think Mr. Watson will corroborate this. On April 1, the section 223 (e) program inventory in Detroit (Wayne County), was something less than 2,000 properties. A good many of the losses are on properties that were not insured in the special risk insurance fund.

Mr. MONAGAN. Of course, this is a matter of classification, a matter of opinion.

Mr. GULLEDGE. Well, it has pertinence only in terms of what our losses are by program rather than by location. If you take 223 (e), the special high risk programs, they are higher. After all, not all losses in Detroit are inner city losses.

Mr. MONAGAN. There are classifications in the inner city and on the same street that are in different funds.

Mr. GULLEDGE. It could be. Property insured at different times, when different programs were initiated.

Mr. WATSON. I would like to add one point on the original question about those 240,000 units. I believe the Secretary in his earlier appearance before this committee indicated the 240,000 was an unfortunate figure and really did not indicate what the Department would acquire with the losses on the 240,000 units.

Mr. MONAGAN. Mr. St Germain?

Mr. ST GERMAIN. Mr. Watson, on the 67,000 units you project acquiring as a result of defaults, could you give us a rundown on what the principal causes or reasons are for these acquisitions in the multifamily, the 236?

Mr. WATSON. Let's take the single-family units first and, as I said, about 50 percent of our projected acquisitions on single families will come out of the 203 program, which is a normal FHA mortgage insurance program in terms of turnover in defaults and acquisitions.

Mr. ST GERMAIN. Excuse me. The losses there are nowhere near as great as some of the other programs.

Mr. WATSON. No, they are not as great.

Mr. ST GERMAIN. Therefore, they bring the average loss way down. Mr. WATSON. That is true. They bring it down. The other 50 percent are primarily the 235 and 223 (e). On these particular programs, existing houses in the inner cities require a great deal of maintenance; the losses were not properly inspected when the project was put up; the families may be ill and can't make their payments; or a lack of employment may have caused a number of single family properties to come back. We feel very strongly, based on the studies we have made and from looking at the largest portfolios, that the inner city properties are more grounded in inner city problems. There are continuing needs in the home ownership program, they need counseling and so forth. We feel strongly that with counseling we can save a number of these properties.

Mr. ST GERMAIN. Prepurchase counseling?

Mr. WATSON. That is right, prepurchase counseling.

On the multifamily unit side, again, the 236, that will make up a small part of it. The rent supplemental program is the 221 (d) (3) program. It is probably going to provide us with the greatest influx of acquired housing units.

Mr. ST GERMAIN. What is the main reason for that?

Mr. WATSON. The principal reason for that is the constant increase in taxes and the constant increases in operating costs.

Mr. ST GERMAIN. Local real estate taxes?

Mr. WATSON. That is right, and that is what is causing foreclosures in some locations. Just to highlight this, local jurisdictions are literally taxing these people into foreclosure and there is no way they can meet those kinds of payments.

Mr. ST GERMAIN. There is no way to revise the supplement so that it could be increased?

Mr. WATSON. We have one particular incident. I will cite an example. This is not in every case. It is somewhat of a typical case of what is happening. One company had a surplus of $100,000 one calendar year. The next calendar year, by taxes alone, they were something like $150,000 in the red. Many of the owners are trying to carry this deficit for awhile. They make what adjustments they can. We try to make agreement modifications where there is hope. If there is a way, we try to work it out, and in these instances where there is just no hope, no way to do it, it comes back to us.

Mr. ST GERMAIN. And those are multifamily. You mentioned 236 and 221, the small 221(d) (3) program. The principal reason is that your tax factor and in some areas-not always-for instance, a large industrial plant may close. That could well account for a great many vacancies.

Mr. WATSON. I have a breakdown here of 40,253 units on the multifamily side, as of March 1, 1972. We gave, basically, 12 reasons for defaults. For example, there are fiscal factors due primarily to financial resources and delays in final endorsements before they actually come into occupancy. Sixty-four projects with 5,632 units are in this category.

Physical factors such as construction delays and construction defects, 33 projects with 2,858 units; poor marketability due to a depressed economy, 30 projects with 3,037 units; ineffective management