Old skeletons pop up in HUD's messy closet

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ACTION SEPTEMBER 1989 19 By HAYDEN Cities Destroyed for Cash: The FHA scandal at HUD, by Brian D. Boyer. Follett Publishing Co., Chicago, 1973. 250 pp. $7.95.

In view of the still unfolding scandal at the Department of Housing and Urban Development (HUD), a most significant aspect of this book is its publication date-1973. It was 16 years ago when another federal housing scandal evoked Congresssional cries of outrage and promises of reform.

The focus of malfeasance and corruption at that time was in the Federal Housing Administration (FHA). This was a BOOK REVIEW program designed to put poor people in decent renovated houses. Instead, FHA produced embittered, impoverished home buyers, intensified civic blight, and raised a new crop of millionaires.

Brian D. Boyer, an editor on the Detroit Free Press, became aware of the problems at PHA as he traveled through the inner city on his way to work. He describes what he saw in a landscape he compares with the bombed-out cities of Europe after World War II.

"Half and more of the houses on any given block are boarded up with plywood squares," he reports. "Ruined by the elements and gutted by thieves, the houses seem to be disintegrating like the stumps of rotted trees."

"What makes these vistas of urban ruin so compelling," he writes, "are the little signs nailed on the doors. The signs tell you that the property is protected by the FBI, and belongs to the Department of Housing and Urban Renewal. The slums, in other words, belong to us."

"A stake in the system"

As a good investigative reporter, Boyer determined to uncover the story behind the boarded-up windows; to discover why the government owned thousands of derelict houses all over America. What he learned is graphically described in "Cities Destroyed for Cash."

The PHA was set up in 1934, Boyer tells us, as a federal lending agent to help middle-class renters buy homes. Most Blacks were too poor to qualify. They were penned up in the inner cities. Then, in the 1960s, the Black ghettos exploded.

Almost in panic, the ruling class paid attention to the city slums. President Lyndon B. Johnson said in effect, "Get those restless natives into homes of their own. It will give them a stake in the system." This was translated into the Federal Housing Act of 1968, which made terms of purchase so easy even a welfare mother could hope to buy a home.

The spirit of the Act was expressed by the exhortation of HUD Secretary Robert Weaver to his staff: Deliver housing. Deliver it as fast as you can, and as much of it as possible to anybody who wants it.

Where was the government going to find the houses? There were plenty for sale in the older areas of America's cities. Better-paid workers were moving to newer homes in the suburbs and were anxious to sell their old houses. Most of the buildings needed renovation but, properly rehabilitated, could offer decent shelter for years to come.

Johnson could have given PHA or HUD the job of buying, renovating, and selling. But the real-estate interests were crowding him to give them a part of the action. They said market forces could be counted to move the program along.

Reliance on "market forces"

Market forces had not produced houses for the poor before, but Johnson made bankers and real-estate interests an offer they could not refuse. First a big tax break. Boyer estimated that if an investor put as little as $20,000 of his own money in a $1 million project, he would get tax savings based on the $1 million. This meant a $12,500-a-year tax break, or $375,000 over the life of the mortgage.

And the mortgage was guaranteed. If the buyer defaulted, PHA would pay off the mortgage holder and take over the house.

Tere was a fail-safe, no-lose proposition that attracted speculators all over the country. There were not only guaranteed profits, but super-profits to be made by those who understood the situation. The situation was the chaos prevailing at HUD as it was confronted by thousands of FHA mortgage applications thrust upon it by speculators and outright con artists. Boyer explains how incompetence, venality, and plain larceny combined to wreck a program that held out hope to our poorest citizens.

He takes a typical FHA transaction and follows it through to its bitter end. First, an unscrupulous real-estate agent finds a decrepit house that is on the verge of condemnation. The owner, who is moving to the suburbs, is glad to unload it for $2000. (These are Midwestern 1970 prices.)

Now the agent calls for an FHA-HUD appraiser. This is the tricky part. He wants the appraiser to set a value of $13,000 on the house. The appraiser is inexperienced and venal. He can be persuaded that a similar house had just been sold for that price. Of course, price and value are not the same, but the appraiser could scarcely care less.

Then there is the matter of repairs. A few of the most obvious defects are noted to make the appraisal credible. The furnace must be replaced, but a second-hand one will do. Paint can be slapped over the dry rot, hiding it for a while.

"Walking the papers through"

After a few cosmetic touches, the old house is ready for a new buyer. This might be a welfare mother with four children, who has been paying too much rent for a rat- and roach-infested apartment. "How would you like to live in your own home?" she is asked. She jumps at the chance. But she does not have even the $200 down payment. Never mind, the real-estate agent will lend it to her. (Strictly against FHA rules.)

Also violating the rules is the employment record the agent concocts to make his client appear eligible. He does not worry because he is going to "walk the papers through" HUD. This means he will personally deliver the application to the bureaucrat he has bribed. The papers sail through and the agent is assured of his $13,000, whatever happens.

What happens is a quick default by the welfare mother who finds that the furnace does not work, the roof leaks, and water is standing in the basement. Her calls for help to the real-estate agent and HUD are ignored. A building contractor tells her the house is not worth repairing. Her response is to stop making payments, and eventually abandon the house.

This does not bother the real-estate agent. He has sold the mortgage to a banker at a discount. The banker takes the defaulted mortgage to FHA, which pays him the full value.

SOCIALIST Baltimore P.O. Box 16005 Baltimore, MD 21218 Boston P.O. Box 1046 GMF Boston, MA 02205 (617) 497-0230 Chicago P.O. Box 578428 Chicago, IL 60657 (312) 327-5752 Cincinnati P.O. Box 21015 Cincinnati, OH 45219 (513) 272-2596 Cleveland P.O. Box 6151 Cleveland, OH 44101 (216) 429-2167 Detroit P.O. Box 32546 Detroit, MI 48232 FHA is left holding the bag, responsibility for all its defects.

Was this an extreme and unusual scenario? Boyer says no. He points out that in 1972 HUD had an inventory of 44,386 foreclosed and abandoned houses. These were the boarded-up houses Boyer saw on his way to work. HUD would try to sell them again. Often the same scenario was repeated with another speculator pocketing thousands, and dumping the property back on FHA.

Astute bankers found a way to transfer a conventional mortgage, which was about to default, into an FHA mortgage to be paid off by the taxpayer. This required even more corruption of HUD bureaucrats, and larceny by "respectable" bankers.

As in today's scandal, the corruption in HUD came to light when a new administration took over in 1973. President Richard Nixon shut down the low-income housing program, and a Congressional committee called witnesses. Federal grand juries indicted 250 speculators, mortgage bankers, and HUD officials. But few convictions followed.

Shutting down this FHA program threw home buyers into the arms of the savings and loans. They refused to make loans in the inner cities, making the houses there unsaleable. To reduce their inventory, the FHA bulldozed many homes—to produce weed- and refuse-covered vacant lots. The government also bulldozed thousands of poor people's hopes of getting a decent home.

Boyer offers a number of proposals for the reform of HUD. But in a very prophetic paragraph he declares, "I am not optimistic that disclosure of the FHA scandal will lead to a more virtuous future. It may only be a prelude to worse things to come"

Sixteen years later, worse things have come. The cancer in the system has spread to ever higher political and financial circles. The failure of reform in 1973 foreshadows a whitewash in 1989. Corruption is endemic to the profit system, and neither Republicans nor Democrats will eliminate it. They will only pile the costs of the scandal on the backs of the poor.

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