Profits v. Shortage

In the Senate investigation into profits on Government-sponsored postwar housing, William J. Levitt, biggest U.S. housebuilder, took the stand last week. How, asked the committeemen, had he done on the thousands of houses he had built with Government-guaranteed mortgages?

Builder Levitt answered readily that he had done very well. On the first 4,028 houses that he built for rent in Levittown, L.I., he made a gross profit of about $5,000,000, which remained in the Bethpage Realty Corp., builder of the houses. Later he sold the Bethpage Realty Corp. to Philadelphia's Junto, a charitable organization, for $5,000,000 and thereby paid only a capital gain of 25% on his profits instead of the much higher personal income tax (TIME, March 13, 1950).

Republican Senator Homer Capehart promptly called the transaction another example of a "windfall" profit, i.e., one gained by inflating the value of the mortgage on the houses beyond their actual cost of construction and pocketing the difference. Builder Levitt insisted that his profit was no such thing. He defined a windfall profit as one made by a builder when he pocketed the difference between the mortgage and the building cost and still retained title to the property, thus giving him the right to additional profits from sales or rentals. In his case, said Levitt, the $5,000,000 was simply his building profit and was made only after he had sold out. Furthermore, said Levitt, windfall profits were made under Section 608 of the housing act, which guaranteed one big mortgage loan on the estimated "cost" of the project.

Levitt built under Section 603, which based the size of the mortgage on what the actual appraised "value" would be after the houses were built. Levitt said that he had made $1,200 gross profit on a house that was mortgaged for $7,500, that later sold for $7,200 and is now selling for $8,600. Levitt, who is probably the most efficient builder in the U.S., said that profits on houses that he built later without the help of Section 603 (but with Government-guaranteed mortgages) were "substantially more" than $1,200.

Big Windfall. Levitt was followed to the stand by Builder Alfred Gross, who made no bones about the fact that he had reaped a windfall profit of $6,000,000, the largest uncovered by the Senate committee so far, on the $25-million Glen Oaks Village apartment houses in Queens, New York City. He explained how he--and other builders--had made such profits.

Glen Oaks, said he, had bought land for the apartments for less than $1,000,000 but got FHA-insured mortgages on it totaling $2,400,000. The large valuation was customary practice because FHA estimated the value of the land, not on the purchase price, but on what the improved land would be worth after the apartment was built on it. Gross was also permitted to put in an architect's fee of 5% and a builder's fee of 5%, the customary amounts. Since he was able to get an architect for only 1% and was his own builder (thus got the builder's fee), he already had a big chunk of his profit. When he applied for his FHA-insured mortgage, Gross got a surprise: he was told that his estimate on building costs was too low and, at FHA's suggestion, raised them, thus increasing the size of his mortgage. The reason for this, he explained, was that FHA wanted to be sure that there would be ample money to finish the project, in the event he defaulted on the contract. When he was all through, Gross found that his building costs were $4,600,000 less than estimated. This, plus the increased value of the land and the sums saved on builder's and architect's fees, gave him his profit.

Cake Eaters. Was there anything wrong with this? Builder Gross did not think so. Neither did another builder, Bertram Bonner of Richmond, who had made $1,000,000 in windfall profits. He pointed out that FHA regulations had been drawn to give builders a liberal incentive, and Congressmen had been well aware at the time that costs might be less than the mortgages. Said Bonner: "I find it a source of disappointment that our acts are criticized instead of praised."

Builder Bonner had a point. In the postwar years the U.S. was so desperately short of housing that Congress was willing to face the possibilities of large profits so long as the houses and apartments were built. And they were built--as many as 1,396,000 housing units a year. While some tenants paid somewhat higher rents because of the inflated value of the mortgages, there is no doubt that they would have had no place to live--or paid much more in rent--if the shortage had not been alleviated. And the FHA made money on its mortgage guarantees. In short, it looked as if Congress, now that it had its cake, wanted to eat the builders who had made it.

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