Fresh Dirt

In Manhattan last week a one-man Senate investigating committee spaded up some fresh dirt on postwar apartment projects backed by the Federal Housing Administration (TIME, July 26). Called to the stand by Connecticut's Republican Senator Prescott Bush was Lawyer Thomas Grace, who was New York State FHA director from 1935 to 1952.

Grace testified that while in office he had received $48,500 in fees from his family's law firm, Grace & Grace. He admitted that the firm did most of its business representing clients before FHA, and from 1946 to 1953 the firm processed applications for FHA loan guarantees totaling $84,771,030. Asked Chief Committee Counsel William Simon: Did Grace know that it was unlawful for an FHA director to accept fees charged on FHA cases? Replied Grace: "No, sir, I did not."

"Friends in the Game." The commit tee was curious about the help that Grace & Grace had given loan applicants. A Pelham, N.Y. builder named Warren Schaller who applied for a loan guarantee in 1949 waited six months for FHA approval. The FHA granted the guarantee, said Schaller, two months after he hired Grace & Grace on the advice of "friends in the game." But Grace said the sequence of events had no significance ; the handling of the application was routine. The committee cited another builder whose application for a $325,000 guarantee had been turned down by the FHA. When Grace & Grace handled the request, however, the guarantee was approved for $485,000.

The committee also turned up a new group of builders who had made millions in windfall profits. A whopping gain was made by Real Estate Dealer Alexander Hirsch and several other shareholders in Brooklyn's 2,496-unit Farragut Gardens apartments. Hirsch testified that the group had put up only $15,000 of its own money to receive an FHA-insured loan of almost $22 million. Since the project cost only $18 million, the promoters pocketed the $4,000,000 difference. A committee investigator who had looked over the apartments found leaking roofs, cracked plaster, and testified that unless extensive repairs are begun soon "the buildings will not be standing in 30 years."

Cash in Question. Senator Bush was also suspicious about large amounts of cash that the Farragut Gardens builders had paid out, called the project's lawyer, Abraham Traub, to the stand to find out who got it. Had any of the cash gone to Clyde L. Powell, former assistant FHA commissioner who resigned last April and has dodged behind the Fifth Amendment to escape testifying? Traub said that none of it had, but he could not explain who had got the money. The committee ordered him to bring in his books, but at week's end both Traub and the books were missing.

Other builders summoned to the stand told how they had also made big windfall profits under the now-defunct Section 608 of the housing act. Among them:

P: Builder Harry Osias cleared $4,879,258 on five New York City projects on a total investment of $20,000.

P: Builder Israel Orlian put $27,400 into nine apartments in New York City and North Bergen, and netted $1,200,000.

P: Long Island Builder Morty Wolosoff cleared nearly $500,000 on a $3,000 investment; Builder Alfred Wohl also made close to $500,000 on a $6,000 investment.

Plugging the Holes. This week FHA moved to plug loopholes in the housing law that had made it possible for builders to make such windfalls in the first place. Henceforth, they will be obliged to certify their actual construction and property costs at the project's end, and return any excess mortgage money. FHA also set out to try to recover some of the millions already pocketed. The charters of the apartment-building corporations formed under 608 prohibit unearned income (i.e., windfalls) from being handed out to shareholders, said Housing Boss Albert M. Cole. The firms that did so, declared Cole, were in default of their guarantee agreements ; therefore. FHA had the right to take control of them and sue for recovery.

The first target was Linwood Park, Inc., builder of a Fort Lee. N.J. project, which netted the builders a $2,456,821 profit. If FHA could successfully take over the corporation and get back the windfall cash, it planned to go after all the other windfall profiteers.

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