constructed or rehabilitated pursuant to a self-help program.

Limiting

the situations in which the Secretary can insure construction financing on assisted housing to those in which self-help is involved is undesirable. The need for insurance for construction financing exists in relation to other assisted housing. Under the unassisted single family program, Section 401, such insurance for construction financing is available. Furthermore, the limitation on insurance of construction financing in Section 402(f) is more restrictive than the provisions now operating under Sections 235(j). Under that latter section, insurance on rehabilitation advances is available on any Section 235 rehab project undertaken by a nonprofit organization or public body. As a result, the Section 402(h) should be amended to indicate that advances should be insurable in all situations.

Section 402(h)(1) - One- to Four-Unit Dwellings

The existing 235 program, which Section 402 of the bill would replace, covers not only single-family dwellings but also two-family dwellings, one unit of which is occupied by the owner. Section 402 (h) (2) (a) limits the applicability of Section 402 assistance payments to singlefamily dwellings. There is not sufficient justification for eliminating owner-occupied duplexes from the coverage of this section. One of the major problems with rental housing, which the second unit in a duplex would be, is lack of maintenance. Resident owners, however, appear to have better maintenance records. At least, that is what Professor Sternlieb found in Newark. If moderate-income individuals are able to buy and reside in duplexes or even four-plexes with the 402 subsidies, the maintenance records should be better. A second problem with rental housing is the hostility between tenants and absentee landlords. Again that problem might be reduced if resident ownership of duplexes or four-plexes were encouraged.

If homeownership assistance is extended to dwellings of more than one unit, there arises a question of how to compute the amount of subsidy for the rented units. One solution would be to follow whatever practice is used under the existing 235 program which allows subsidy payments for two-family dwellings. An alternative would be to subsidize the amount of the mortgage payments attributable to the owner-occupied unit under Section 402 and to subsidize the portion of the mortgage attributable to the rented units under Section 502. If the latter choice is made, problems of ensuring that tenants meet the Section 502 requirements would also be avoided.

Section 4C2(i) - Definition of Low-Income Families

Section 402 (i) provides that the maximum family incomes for Section 402 assistance shall be either the median income for the area or a such higher amount which is necessary because of prevailing levels of construction costs. This standard for determining the

income limits for the Section 402 assistance would be essentially the same as the standards now utilized by the Secretary in determining the maximum income limits for the Section 221(d) (3) program. In most areas of the country, those income limits, especially because of the escalator for increased construction costs, are substantially above both the public housing limits which are designed to reach truly low-income families, and the limits for the Section 235 program, which are designed to reach moderately low-income families.

If the maximum limits for the Section, 402 program are to be · set at the levels of the Section 221(d) (3) program, they will be too high. With such maximum limits it is very likely that the program will either serve only individuals whose incomes are at the very top of the moderate income category or require families whose incomes are lower to pay an exorbitant portion of their incomes for rent. As a result, it is necessary to insert some provision that would ensure that families other than those in the upper-moderate income range will receive the assistance of Section 402. If it is thought undesirable to reduce the maximum income limits themselves, an alternative may be to require that certain portions of the units be made available to families whose incomes are on levels at various stages below the maximum income limits. For instance, forty percent of the units could be reserved for tenants whose family incomes do not exceed fifty percent of the maximum income limits determined under Section 402(i), thirty percent of the units could be reserved for tenants whose family incomes do not exceed seventy-five percent of the Section 402(i) limits and the rest of the units could be occupied by tenants whose family incomes did not exceed the maximum Section 402 (i) limits.

Another element which is missing from Section 402 (i) is the preference for low-income families that is now written in to both Section 235 and Section 236. Those statutory provisions, Section 235 (h) (2) and Section 236(i) (2), require that "the limitations prescribed in this paragraph shall be administered by the Secretary So as to accord a preference to those families whose incomes are within the lowest practicable limits for obtaining rental accommodations [or homeownership assistance] in projects assisted under this Section." A similar provision should be inserted in Section 402 (i). Otherwise, the assistance provided will only go to those at the upper levels who are in less need than those whose incomes are lower.

Section 402(j) - Definition of Family Income

Section 402(j) provides that in determining a family's income there should be a $300 deduction for each minor member of the family and any earnings of that minor should be excluded from the family income. This definition of family income is neither the same as nor as fair as the definition of family income used in relation to public

housing. See Section 3 of the Housing Act of 1937 as revised by Section 201 of this Senate bill. Nor is it as fair as the standards being applied in the Section 235 program. Both of those standards would allow a five percent deduction from the family's gross income before payroll deductions and the public housing standard in addition would permit deductions for extraordinary medical expenses and a deduction of $300 for each secondary wage earner. For purposes of uniformity and fairness, the definition of family income for purposes of the 402 assistance should be the same as those used in the public housing program and as favorable as those used now under Section 235.

The Administration's 1970 housing bill, 91st Cong., 2d Sess., S. 3639, which was quite similar to this legislation, included in its home ownership assistance program, a special category of deep subsidies for a limited portion of the housing produced under Section 402. Under that deep subsidy program, the federal government would pay up to sixty percent of the home owner's monthly homeowner's expense even if that payment would in effect include all of the interest on the mortgage and part of the principal. Under the normal standards for determining the Section 402 subsidy, the assistance can never exceed the payment needed to reduce the interest on the mortgage from the market rate to one percent. It is true that some problems have arisen in the Section 235 program, especially in cases where the homebuyers have particularly low incomes. Those problems, however, are created first because the houses purchased by such families are usually older houses in poor condition or very poorly constructed new houses, and second because no steps are taken to inform the purchasers of the problems they will encounter as homeowners. These problems can be overcome, if steps are taken to provide the needed advice on homeownership and if the lower-income families are enabled to purchase the housing, not because it is very cheap, but because the subsidy is made deeper. As a result, it is desirable to add to the existing Section 402 a provision for a deeper subsidy modeled under the provision used in the 1970 bill.

In Section 402 as it is now written, as in Section 401, there is no requirement that the properties sold under the program be in compliance with applicable local health and safety regulations. If section 401 (b) is amended along the lines suggested above, however, the code compliance requirement inserted therein would be made applicable to properties sold under Section 402 by Section 402(h). That subsection authorizes the Secretary to insure home mortgages which meet the requirements of Section 401. If such a requirement is not inserted in Section 401, one must be made applicable to Section 402 houses. Otherwise, the difficulties which have arisen in the past under the Section 235 program will merely arise again.

It is unclear whether the warranties required by Section 401 (f) and the new warranty requirements suggested above would apply to the housing sold under Section 402 as that section is now worded. Section 402 (h) indicates that mortgages which qualify for mortgage insurance under Section 402 must meet the requirements of Section 401. It is ambiguous, however, whether this incorporation of Section 401's requirements as to mortgages also incorporates the requirements as to the seller's warranties. There is no doubt that those latter requirements should be applied to Section 402 housing and it would not be stretching the language very much to interpret it as covering the warranty requirements. However, for purposes of certainty, Section 402 should be amended to include the warranty requirements now included in 401(f) and the new requiremeents for the 401 program suggested above.

Section 402 contains nothing to replace Section 237 of the National Housing Act. Under Section 237, families with weak credit histories are enabled to buy houses with Section 235 assistance if they get credit counselling. Until this year, the credit counselling aspect of this section has never been funded by Congress, but some nonprofits have engaged in credit counselling on their own and have thus qualified potential purchasers under Section 237 who otherwise would not be able to qualify. The current HUD Appropriations Act, includes for the first time three million dollars for funding Section 237. With the success the nonprofits have had under Section 237 and the current encouragement from the Appropriations Committees, it would be a mistake to eliminate the program from the substantive legislation.

Section 402

Non-Financial Homeownership Assistance

The difficulties which have arisen in the implementation of the Section 235 program indicate that the provision of financial assistance in the form of interest reduction payments is not alone sufficient to ensure that all the purchasers will secure decent homes and suitable living environments. The non-financial assistance that

is needed is of several types. First there is a need for a protection against the activities of unethical individuals who would utilize the assisted housing programs to sell houses at inflated prices or in substandard condition. Second, there is a need to inform the purchasers of the houses about problems that are likely to arise in maintaining

the homes in good condition and about the need to solve those problems as soon as possible. Third, there is the need to inform the lenders of the particular difficulties that the low-income purchasers may have in making their mortgage payments and steps the lenders should take to ease those difficulties, especially when there is a delinquency. Despite the experience under the 235 program, the Administration's bill contains no provisions designed to provide this non-financial homeownership assistance. Such provisions should be included.

Section 502 (b)

Existing Projects Financed Under State or Local Programs

Section 502 deals with assistance payments for multi-family housing. Under Section 502(b), those payments may be made either for housing subject to the mortgage insured under Section 502 or for housing financed under state or local programs. If the mortgage is insured under Section 502, then the housing can either be newlyconstructed, substantially rehabilitated or existing housing. If the housing is financed under a state program, however, it must be either newly constructed or substantially rehabilitated.

It is undesirable to exclude from Section 502 assistance

existing housing financed under state programs. There is no good reason for distinguishing existing housing financed under state programs from existing housing subject to mortgages insured by the FHA. Prior to the 1970 Housing and Urban Development Act, existing housing financed under state or local programs was excluded from the benefits of Section 236 assistance. However an amendment to Section 236 contained in Section 118 of that Act eliminated the exclusion of existing housing. It makes no sense to reintroduce in this revision of the National Housing Act the exclusion which had been eliminated by the Housing and Urban Development Act of 1970.

Under Section 502(e), the Secretary is empowered to regulate the activities of the project owner with respect to tenant eligibility and rents. Under the Section 501 program (see Section 501(b)) the Secretary is authorized to regulate project owners "as to rents or sales, charges, capital structure, rate of return and methods of operation." It is arguable that the regulatory powers conferred onto the Secretary by Section 501 (b) are incorporated into the Section 502 program by Section 502(i) (1). That latter section authorizes the Secretary to ensure mortgages which meet the requirements of Section 501. Thus one could argue that the power to regulate the mortgagor "as to rents or sales, charges, etc.," is a requirement of a Section 501 mortgage and thus is incorporated