The Housing Hustlers

...In such a setting, even a middle-level FHA bureaucrat became a czar who could, with a stroke of the pen, enable one builder to make millions or cause another to be cut out of the profits...

...The normal practice was to designate a private realtor as an "area management broker" and charge him with the task of repairing the homes and preparing them for resale...

...On Long Island, the FHA chief was bribed by the area's largest mortgage bank merely to promote two lesser functionaries who were already being bribed...

...The U.S...

...In Philadelphia alone, the head of the FHA and his deputy were convicted...

...it had taken no risk...

...The Government is also trying hard to recoup some of its losses by repairing and reselling the apartments and homes it had to buy up, but the monthly acquisition of properties still exceeds the sales and no end to the deficits is in sight...

...Not until 1972, when newspapers and prosecutors in Detroit and Philadelphia spread the corruption on the public record, did HUD move to clean its own house...

...It's just greed...

...Priestes paid $30,000 as the first payment for 167 FHA Section 235 commitments...

...By 1975, HUD estimates, one of these funds will have a deficit of more than $800 million, and the other will have a deficit of more than $700 million...

...It was an offer no speculator or banker could refuse: virtually unlimited profits with no risk, except to the Government...

...It was a daily phenomenon...

...Both officially and privately, HUD officials take the curious position that the debacle is not of their doing...

...The FHA scandal is especially tragic because it grew out of a genuine, sympathetic effort to help those who have not benefited from the great postwar housing boom...

...attorney in Philadelphia, Robert E. J. Cur-ran, surveyed a list of indicted culprits recently and noticed that many were comfortable, even rich men...

...H. R. Crawford, HUD's assistant secretary for housing management, says his inventory presently includes about 75,000 single-family homes and 25,000 apartment units...

...It wasn't much of a house, and it was located in a terribly shabby neighborhood, but for Adorno, a man of limited means, it was the best he could manage...

...He would unload it on a buyer for $20,000 after bribing an FHA appraiser to set that exorbitant valuation...

...And a variety of smalltime appraisers and inspectors collected a variety of small-time bribes for declaring, falsely, that Adorno's house was in livable condition...

...Congress and the Johnson Administration, it is claimed, saddled them with unmanageable programs that no one could police against fraud...

...The cost of all this to American taxpayers is enormous and is growing heavier every day...

...Moreover, a Federal district court judge has ruled that the President acted unconstitutionally in refusing to carry out Congress's instructions when he froze the funds...

...Government had to pay off the mortgage, which it had insured through the Federal Housing Administration...

...Basically, it's just greed," he commented...

...Until a few months ago, it had been assumed that the schemes were limited to a few unscrupulous offenders in Philadelphia and Detroit...

...Both assume that what the poor need most is money, and that they are better able than anyone else to determine how they can best meet their needs...

...An FHA commitment for mortgage insurance, permission to raise rents in a project, approval of an appraisal—all suddenly became immensely valuable and, in many cases, easily negotiable...

...A bad deal all around, it would seem...

...HUD and U.S...

...HUD has maintained two insurance funds designed to provide cash reserves to back up the mortgage insurance...

...The 1968 legislation made it possible to subsidize mortgage interest rates to the point that the low-income buyer would pay as little as one per cent...

...Builders could construct low-rent apartment buildings with the assurance that the Government would not only insure their investments but would also subsidize the rental payments of those who moved in...

...The lender put up the money, perhaps bribing an FHA inspector to certify the house and its repairs as sound...

...But not for everyone...

...Government housing programs designed to guarantee the poorest a decent home have been transformed into giant boondoggles for middle- and upper-class entrepreneurs...

...Predictably, the great home-building and real estate lobbies are opposing it...

...Attorney John Hous-ner said in Detroit...

...a national tale of bribery, false documentation, superprofits, and general corruption whose staggering proportions are just now becoming apparent...

...principally, that meant the mushrooming suburbs and the more stable neighborhoods of the big cities...

...In a typical deal, the realtor would buy a slum home for, say, $8,000, and invest another $2,000 in cosmetic repairs to make it appear that the house met FHA standards...

...In both Philadelphia and Detroit the criminality did not consist merely of isolated cases of corruption by a few fraudulent middlemen...

...It is likely that the Administration will be forced back into the subsidy programs by next year...

...All that changed suddenly after an extraordinary speech delivered on October 23, 1967 by P. N. Brown-stein, then the FHA Commissioner, who told an assemblage of FHA directors in Washington that American cities were threatened with a guerrilla war that might prove as dangerous to the nation as the war in Vietnam...

...Already, the Justice Department reports, there have been 180 indictments involving 317 persons for fraud, bribery, and other crimes associated with HUD's inner-city programs for the poor...

...Even without the bribery and fraud that have been uncovered, it is questionable that the poor and even those with moderate incomes would have obtained many decent homes out of a Federal insurance program that works through middlemen, each of whom gets his cut...

...The deals passed through the FHA without anyone questioning whether the housing was sound or the appraisals accurate...

...Even a middle-income black who wished to buy a home in such an area discovered that government insurance for a mortgage was not to be found...

...Water often poured down from the bathroom through the ceiling of the living room...

...The profiteers include those respectable middlemen who have been at the center of the nation's housing complex since the 1930s—builders, realtors, mortgage bankers, savings and loan officials, and, finally, Federal Housing Administration bureaucrats...

...Mortgage bankers readily supplied the funds...

...With their reserves exhausted and more defaults pouring in daily, HUD is being forced to borrow about $1 billion a year from the Treasury to meet the claims...

...But what amounts to one of the biggest, most widespread white-collar prosecutions in history is now under way in city after city...

...It's unbelievable what went on in this city," Deputy U.S...

...It is exploring the idea of housing allowances that would provide money directly to low-income families...

...Bloom's illicit profits came to the attention of FHA Deputy Director John B. Boyle, who concluded that such riches ought to be spread around...

...The concept has an appealing simplicity and pragmatism: Let the people who need homes make their own arrangements...

...This is a rather radical proposition for the conservative Nixon Administration, but it is in keeping with another proposed reform—the negative income tax...

...That meant the ghettos, where blacks and poor white migrants lived in dilapidated tenements...

...At least sixteen Federal grand juries are now delving into allegations of housing corruption...

...There was not enough water pressure to run the shower or even to flush the toilet...

...it was systematic thievery involving rich realtors, FHA bosses, lenders, minor appraisers, and inspectors...

...Some of the money is recouped by selling the properties, but most of the homes (and many vacant lots) are in neighborhoods where there will never again be a market for private housing...

...neither realtors nor bankers had any inducement to see that appraisals were fair or that houses sold were in good condition...

...Boyle also received a payoff from another project manager who testified he once stuffed $1,100 into Boyle's pocket in a men's room at a restaurant where they were dining with their wives...

...Gurney has said he was unaware of the former aide's activities on behalf of his campaign...

...Speculators began buying up whole blocks of slum housing and unloading them on eager buyers...

...It had established, in the 1930s, that housing could be profitably built and sold with low down payments and long-term mortgages for the great mass of regularly employed Americans...

...Boyle said that he was under the impression that I had an arrangement with various contractors that were doing FHA work and that he would like to have a piece of the cake...

...The fault, they insist, is that there was no built-in check on the subsidies and the mortgage insurance...

...The corruption aside for a moment, the FHA experience argues strongly for a different approach...

...He sternly advised them that it was their mission "to rebuild and restore inner city slums and blighted areas . . ." Henceforth, investors were to be encouraged by prompt processing of their applications to move into the ghetto with Federally guaranteed funds, and it was the FHA directors' duty to make their work "easy, pleasant, and rewarding...

...Some of the entrepreneurs' choicest kickbacks came after government-insured projects had gone into default and had been taken over by the FHA...

...One speculator in Detroit testified that he paid the FHA's chief deputy appraiser and three other appraisers more than $100,000 in bribes over three years...

...They profited whether the deal was sound or unsound...

...Federal task forces which include agents from the FBI, Internal Revenue Service, and the Department of Housing and Urban Development are combing the files in twenty-one "target cities...

...HUD is now spending about $2 billion a year to acquire the defaulted properties (more than four times as much as it had to pay in 1970...

...The terms were uncommonly favorable: Adorno paid only a few hundred dollars down, and his monthly mortgage payment was only $81...

...HUD now owns about 15,000 properties in Detroit and more than 4,000 in Philadelphia...

...attorneys are now vigorously prosecuting Federal employes and their friends in the banking and real estate fields...

...Why would men like this jeopardize good careers and comfort for this sort of crime...

...The Adorno story was but a minor installment in William Chapman is a national affairs correspondent for The Washington Post who has reported extensively on FHA housing scandals...

...Until 1967, the FHA had experienced great success in generating housing for middle America...

...Just as carefully, the FHA had stayed out of the more precarious areas, where deteriorating properties, a changing racial balance, or both, made investments dangerous...

...The roof leaked when it rained...

...As one court document put it, the two men were to be promoted so that they could "help in the performance of their official duties corruptly...

...About fourteen months ago, President Nixon froze the major Federal housing subsidy programs that were the source of most of the defaults...

...Whole sections of Detroit and Philadelphia's slums are now officially the property of the U.S...

...Shortly after the family moved in, all of the electrical circuits blew out...

...Within months, as in Adorno's case, the buyer, unable to afford both repairs and monthly payments, simply moved out...

...The idea of a housing allowance is not embraced by everyone at HUD ("Wouldn't it just become a booze allowance...

...But the FHA scandals of the 1970s raise a more fundamental question about public policy: Is it somehow inevitable that government largesse intended for the needy will be funneled into the pockets of white-collar entrepreneurs...

...On the surface, the sordid story seems to be one of sheer avarice, the sort of pilfering of public programs that runs through so many government enterprises...

...Bloom obligingly began paying $100 a week to both Boyle and another FHA official, Michael J. Hughes, chief of the property management section...

...Another 139,000 homes or apartments are in varying stages of default, and about seventy per cent of them ultimately will have to be absorbed by the Government...

...The mortgage banking company, one of Philadelphia's largest, got its money back with interest...

...Seventeen realtors and the big mortgage banking house, United Brokers, were indicted...

...Asked where he thinks it all might end, one high official recently threw up his hands and said, "I wish I knew...

...The U.S...

...Government...

...The debacle has led HUD to an unlikely alternative for the subsidy programs...

...It had done so by carefully insuring home mortgages only in those neighborhoods not likely to decline in value...

...As an extra fillip, Bloom sent cases of liquor to their homes each Christmas Eve...

...One such broker in Philadelphia, Leo Bloom, found he was able to earn $40,000 to $50,000 a year by exacting a flat ten per cent kickback from repair contractors eager to get the business in his area...

...According to an FBI agent's court testimony, "Priestes agreed to pay $500 for each FHA commitment under the Section 235 of the National Housing Act, and Pelski agreed to furnish Priestes with these commitments...

...the case is now being appealed...

...For two years, Adorno patched and puttied, trying to make the house work...

...Bloom testified that at dinner one evening in a restaurant, Boyle came right to the point: "Mr...

...Behind some thin, poorly erected wall panels Adorno discovered gaping holes where rodents romped...

...Then he gave up and moved out, abandoning the house—and the payments on the mortgage...

...He was approached by the FHA director in Coral Gables, William Pelski, who had been enlisted by a former volunteer aide of Republican Senator Edward Gumey...

...In thousands of these cases, the Government paid the full value of the mortgages even though the properties are really worth only a fraction of the appraised value...

...To understand it, one must think back to 1967 and the panicky atmosphere generated by the great urban riots and the real or imagined threat of permanent terrorism in the cities...

...To make the path smoother, appraisers and inspectors were bribed to provide the necessary certifications, and no one higher up bothered to check up on them...

...Paying bribes was just like delivering the mail...

...The Government had to buy up the property...

...He instructed the directors to get into the ghettos with their mortgage insurance commitments...

...In Florida, the promise of high level political clout was offered as an inducement to entice campaign contributions from a prominent builder, John Priestes, who was in need of FHA assistance...

...At last, it seemed, Americans had been shocked out of their apathy, to the point where even the most cautious bureaucracy in Washington, the Federal Housing Administration, recognized that something drastic had to be done...

...Down payments could be as low as $200 and mortgages could run as long as forty years...

...Their choices couldn't possibly be any worse than those that have been arranged for them by the experts and the entrepreneurs...

...Just how "rewarding" the FHA's new interest could be for realtors and lenders did not become apparent until the following year, when a massive new housing act was passed to back up the national commitment...

...This explanation handily ignores the fact that FHA had the duty of policing the deals and that for more than two years after the first news of the scandal broke, little was done to check it...

...One Federal prosecutor described the practice in one city where realtors "literally went out looking for bodies"—for people to sign their names as purchasers...

...The FHA has been forced to acquire thousands of virtually worthless properties because of defaulted mortgages it had insured...

...By 1975, Crawford estimates, HUD will have about 200,000 homes and apartments on its books...

...Even that will not immediately stop the drain on the Treasury, however, because thousands of FHA commitments were made before the freeze went into effect, and the Government must make good on those promises...

...one of the less enthusiastic high officials recently asked) but that is clearly the direction that the Department and the White House want to follow...

...Until the 1960s, its local bureaucrats had "red-lined" whole sections of cities out of bounds—that is, they had literally drawn red lines on their maps to indicate areas in which mortgages should not be insured...

...Along the way, a real estate speculator picked up a huge profit...