Subsidized Fraud

Whenever the Government writes a blank check to the housing industry, some sort of scandal is likely to result. Under the Federal Housing Administration's long defunct Section 608 program, builders in the early 1950s ended the postwar shortage of rental housing by erecting half a million apartments. In the process, many builders pocketed millions of dollars of unearned profit from mortgage loans that exceeded the cost of construction. The loans were based on FHA cost estimates, and nobody had told the agency to check on whether its estimates exceeded costs actually incurred. They often did. The upshot was the notorious "windfall scandals" of 1954.

Last week the FHA's current and popular program to subsidize home ownership for low-and moderate-income families, under Section 235 of the Housing Act of 1968, ran into a similar thicket of trouble. A staff study issued by Wright Patman's House Banking Committee charged that the FHA has allowed real estate speculators using the program to make huge profits at the expense of the poor through what amounts to "sheer fraud." The FHA "virtually turned its back," the report asserted, while unscrupulous operators bought or built ramshackle dwellings, obtained inflated valuations from FHA appraisers and unloaded them on ignorant but trusting buyers. Said the reports: "FHA is insuring existing homes that are of such poor quality that there is little or no possibility they can survive the life of the mortgage. In new construction, FHA has appraised houses for figures that are inflated by several thousands of dollars above the true value of the home. The construction is of the cheapest type of materials. Instead of buying a home, people purchasing these houses are buying a disaster."

Under Section 235, which mainly benefits families earning between $5,000 and $10,000 a year, the Government can pay all but 1 % of the interest on 30-year mortgage loans up to $24,000. Down payments by purchasers run as low as $200. So far, FHA has underwritten Section 235 loans on some 119,000 houses, and the agency expects that the nation's taxpayers will have to put up $800 million for subsidies before the loans are repaid.

Prompted by a torrent of complaints from victimized buyers, Banking Committee staff members investigated Section 235 homes in ten cities. "It is common practice in the inner city," said the report, "to pick up houses for minimal amounts, perform a so-called 'paste-up' or 'cosmetic' rehabilitation which, in many cases, amounts to a few hundred dollars, and then resell the property under Section 235 for a profit of thousands of dollars." Buyers are willing to pay outrageous prices partly because of the exceptionally easy terms made possible by the subsidies. In Paterson, N.J., for example, a speculator recently sold 15 old, substandard properties at prices ranging from $7,650 to $18,200 more than he had just paid for them--with FHA approval. One house, a former tavern that had been ordered boarded up by the city, was sold for $1,800 to a speculator who unloaded it four months later for $20,000. Repairs had been meager: the old bar still stood in the living room.

Instant Slums? In several cities, said the committee study, the staff found supposedly renovated Section 235 houses with "faulty plumbing, leaky basements and roofs, cracked plaster, faulty wiring and heating, and rotting wood in floors, stairs or ceilings." As for new homes built under the program, the staff labeled two projects, in Elmwood, Mo., and Everett, Wash., as "instant slums" because of shoddy construction, flimsy materials or fire hazards. In Seattle, some Section 235 buyers--all on welfare--are suing FHA for damages because, soon after they moved in, the city declared their homes "substandard" and ordered them repaired or condemned.

Defending the FHA, George Romney, Secretary of Housing and Urban Development, last week angrily denounced the Banking Committee study as "inaccurate, misleading and very incomplete." The committee staff based its findings on a look at only 280 homes. "They've picked out a few horror examples," fumed Romney. Still, he conceded that "some shocking situations" do exist. The FHA has already tightened its appraisal rules, increased its inspections and raised its property standards in an effort to stop the speculative spree. Romney, a onetime president of American Motors, noted that a used-car buyer often finds that "it is tough to keep somebody from taking advantage of you. Well, it's child's play compared to the used-house business."

For all the furor, Congress seems unlikely to order any curtailment of Section 235. The program has broad bipartisan support, partly because it provides low-income families with housing at considerably less cost to taxpayers than public housing projects. The disclosures, however, may jar the FHA into taking a more protective attitude toward low-income families that buy houses. One complaint in the study involved a Washington, D.C., woman who made a deal to pay $14,000 for a house that had changed hands three weeks earlier for only $7,100. It was in such bad shape that embarrassed FHA officials last week agreed to transfer her mortgage to another house in better condition.

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