WASHINGTON - Federal Reserve Governor Lawrence B. Lindsey said Monday that the government must remain in the mortgage insurance business.

"I really don't think it is possible to do without a federal involvement," Mr. Lindsey said. "I think there is a natural market failure there."

Mr. Lindsey made his comments during a question-and-answer session at the National Community Reinvestment Coalition's annual conference in Arlington, Va.

He refused to say whether Congress should retain the Federal Housing Administration to run the program, which insures mortgages of low- and moderate-income individuals.

"I'm going to let people in a higher pay grade, like members of Congress, decide that," Mr. Lindsey said.

Mr. Lindsey also said the Fed and the other banking agencies want to encourage banks and community groups to work together to refurbish inner- city properties.

"Rehabilitation is crucial," Mr. Lindsey said. "I think you'll see we've tried to protect it" in the CRA revisions.

The Fed's point man on CRA also defended the central bank's handling of banks that don't invest in their communities. A majority of denials of bank applications by the Fed are for CRA reasons, he said.

"In large means, that process has already begun," he said of an expanded Fed interest in fair lending.

Mr. Lindsey focused his prepared remarks on the evolution of lending assistance programs. He said the country's mutual savings banks began the trend in the 1890s when they extended credit to allow people to buy "rental triple-deckers."

The owners lived in one unit and rented the other two to pay off the mortgage, Mr. Lindsey said.

The next innovation occurred during World War I, when banks lent money to allow renters to buy row houses. Banks offered five-year balloon payment loans, which allowed many people to buy homes for the first time.

"The five-year balloon, radical as it was at the time, made home ownership possible," he said.

The next innovation occurred after World War II, he said, when millions of veterans returned home and demanded housing.

"The low down payment, fixed-rate, 30-year mortgage became the standard," he said, noting that the program so stimulated the housing market that the country added more new homes in 1950 then it had in the preceding 25 years.

Next came the secondary market and adjustable-rate mortgages, two institutions are only two decades old, he said.

"We now take this for granted," he said of the programs that allow more and more people to own homes.

Just as all of these programs seemed radical at the time, current efforts to expand home ownership may appear equally crazy, he said, but, the are actually "part of a century-old process of innovation," he said.

Expanded home ownership will boost inner-city development as local entrepreneurs tap into their housing equity to fund their business ventures, he said.

Mr. Lindsey also reiterated his call to let banks make equity investments in low-income communities. The investments allow banks to lend their expertise and money to individual projects, he said.

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