The former chief federal housing official for the Washington area testified yesterday that he concluded in late 1977 that P.I. Properties' largely unpaid mortgage on the dilapidated Clifton Terrace apartment complex should be foreclosed because the firm was "no longer capable of managing the property."

James E. Clay, who headed the Department of Housing and Urban Development's local office, said federal housing officials "spent a great deal of time trying to work out what we considered to be a series of deficiencies in management" by the P.I. Properties' officials operating Clifton Terrace.

But Clay, who is now the D.C. government's housing director, said that Mary Treadwell, P.I. Properties' president, and other company officials never produced the financial records necessary to justify a rent increase at the project to solve their purported financial woes or any audit to document the questionable expenditures the firm had made.

"One of the problems we had with Clifton Terrace was a lack of information," Clay testified on the 17th day of Treadwell's fraud and conspiracy trial. She is accused of using the firm to defraud the federal government and Clifton Terrace's impoverished tenants of thousands of dollars.

Clay said he first recommended to his superiors in the national HUD headquarters that the agency foreclose on the Clifton Terrace mortgage in June 1977, but changed his mind a month later after Treadwell again promised that an audit of P.I. Properties' books would be performed.

Clay said, however, that by the time he left HUD in December 1977 no audit had been produced and that "some of things with regard to financial reports that I had expected to be corrected had not been.

"I concluded it was in the best interests of the government to go ahead and foreclose," Clay said.

HUD eventually foreclosed on the mortgage in August 1978.

Clay testified that the financially troubled companies with which HUD dealt normally funneled their management fees, a fixed percentage of the revenue from tenants' rents, into their operating accounts to cover regular expenses.

According to testimony at the trial, however, P.I. Properties' officials regularly paid themselves the management fees. Clay conceded under cross-examination by Treadwell's court-appointed attorney, John W. Nields, that there was no requirement that the management fee be used to pay operating costs.

FBI agent Richard Legore told the federal court jury of eight women and four men earlier in the day that from 1974 to 1978 Treadwell was paid a total of $70,680 in management fees from the P.I. Properties' operation.

Under Nields' questioning, Legore admitted that was an average of $17,670 a year, an amount that the defense claims was insignificant for the president of a firm that was managing Clifton Terrace and two other apartment complexes.

In other testimony, Jack Gifford, a retired HUD loan management officer, said Treadwell reimbursed Clifton Terrace's operating account for some of the questionable expenses P.I. Properties' officials had incurred in the mid-1970s.

But Gifford said that Treadwell did not reimburse more than $5,000 that had been paid to a New Jersey accounting firm she claimed was performing an audit of P.I. Properties' books. One of the partners of the firm, Ronald S. Williams, later married Treadwell, although the two are now divorced.