Ghetto Shakedown

The lack of decent housing for poor people living in the nation's largest cities has long been a national scandal. Doubtless it contributed to the fury of the race riots that plagued U.S. ghettos in the mid-1960s. In response, Congress in 1968 directed the Federal Housing Administration to help the poor buy homes in "high risk" areas by guaranteeing mortgages and sometimes subsidizing part of their mortgage payments. But with indictments last week in New York and Philadelphia and investigations under way elsewhere, that program itself was becoming a scandal in which the poor once again had become the victims of greedy speculators and corrupt Government officials.

The federal indictments charge that real estate dealers, lending institutions, lawyers and some FHA officials had conspired to inflate the reported value of cheap houses and sell them at high prices to people who could not really afford them. The ultimate loser was the U.S. taxpayer, since FHA guaranteed the mortgages and was left holding the low-value houses when the owners defaulted on their payments.

Responsibility for preventing such abuses rests with HUD Secretary George Romney, whose department includes the poorly administered FHA. In an eloquent if self-serving speech, Romney tried to divert attention to the broader problems of the ghetto, noting that bad housing was a result rather than a cause of ghetto squalor (see box).

That in no way could excuse what the indictments contend has happened in New York, where a Brooklyn federal grand jury charged 40 individuals and ten firms with 500 specific criminal acts, including bribery, fraud, conspiracy and giving false statements to the Government. More indictments were expected, involving a possible loss to the Government of up to $200 million.

Already indicted were seven full-time FHA employees, two part-time FHA employees, eight real estate firms and ten lawyers. Shockingly, the indictments also named Dun & Bradstreet, long the ultimate arbiter of the credit status of businesses and individuals, and one of the firm's executives. The main lender indicted was Eastern Service Corp., owned by Harry Bernstein and his wife Rose, one of the biggest and until now among the most respected mortgage dealers on Long Island.

The Philadelphia indictments involved houses sold to Spanish-speaking residents. Two FHA inspectors and a real estate broker were charged. Nine other indictments involving FHA-mortgaged homes had been returned there earlier. Investigations of similar abuses or suits charging such frauds have begun in Detroit, Chicago, St. Louis, Boston, Miami, Seattle and Los Angeles. Similar indictments were handed down earlier this year in Paterson, N.J.

Falsified Forms. While details of the illegal transactions vary, a typical deal in New York worked this way: A real estate speculator would buy a ghetto house for $10,000. He would find a poor but working black, induce him to buy the house for $200 down, and promise that monthly mortgage payments would be low, perhaps lower than his present rent. Before guaranteeing a mortgage, FHA would send an appraiser to check the value of the property. The appraiser, who was part of the conspiracy, would get $100 from the speculator for claiming that the property was worth $20,000, and would falsify the detailed seven-page FHA appraisal form. The buyer would agree to pay that price.

To get his mortgage, the buyer would be urged to inflate his own income in his application to the FHA, which is supposed to determine whether a purchaser can really afford the housing. He would sometimes do this by listing a job he did not really hold. The indictments claim that in some cases Dun & Bradstreet would verify this baseless credit rating. FHA would agree to stand behind the mortgage, and Eastern Service would lend the buyer the money. The buyer would then often discover that the house was badly in need of repair, or that the mortgage payments were higher than he expected.

He would fall behind in his payments. Eastern would get its money back either by selling the mortgage to the Government or, on foreclosure, directly from FHA, which would be stuck with the house. Romney has estimated that within a few years more than 240,000 units nationwide could be in default --and that the loss would be "catastrophic." Some are so vandalized that FHA demolishes them; others are repaired and resold by FHA, which figures that it loses an average of $10,000 on each single-family house.

No Faith. In each case, the illegal profits would be spread among the conspirators. The speculator would pick up an immediate profit of $10,000 on the house (buying for $10,000, selling for $20,000). He would pass some of that along to the lending firm, which also charged high service and closing costs. The appraiser, usually an independent operator who gets as little as $35 a house for his part-time FHA work, would get his bribe, as would the FHA inspectors involved in the scheme. The inspectors are full-time civil service employees.

Although HUD is a sprawling agency difficult to control from the top, its local officials should have known their areas well enough to spot the inflated house values. Belatedly, HUD has worked with the Justice Department to initiate investigations. It has tightened regulations to provide better verification of values and buyers' credit.

The evidence for the New York indictments was presented to a grand jury by Anthony Accetta, 28, an Assistant U.S. Attorney who once lived on Manhattan's Lower East Side. He said angrily, "The low-income Italians I grew up with were the same kind of people as the Puerto Ricans and blacks being victimized here--hard-working individuals trying to get ahead. I don't see how anyone who is black or Puerto Rican could have faith in the system after being shaken down like this and then losing his house two months later."

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