Haunted Housing

A THEFT FROM YOUR GOVERNMENT IS A THEFT FROM YOU. So read the stern red-and-white warning signs put up by federal officials on thousands of abandoned homes across the U.S. The signs are meant to discourage vandals, but in fact the houses themselves have all too frequently been used and discarded in a loan-fraud scheme that costs the Federal Housing Administration--and U.S. taxpayers--dearly. Last week the Department of Housing and Urban Development, which oversees FHA operations, estimated that since 1968 the Government has lost $1.4 billion on the foreclosure and resale of homes originally bought with FHA-backed loans.

When the FHA was created in the depths of the Depression in 1934, its mission was to stimulate the moribund residential-construction industry by guaranteeing Government repayment of loans made to home buyers. For the next three decades, the agency pursued a conservative policy of backing mortgages almost exclusively in low-risk, middle and a few high-income neighborhoods. But during the late 1960s, after fiery rioting erupted in the ghettos of many U.S. cities, FHA'S policy changed. The Housing and Urban Development Act, passed by Congress in 1968, authorized the agency to help poorly housed low-income families by insuring and in some cases subsidizing their mortgages and rents. The result was a sharp increase in FHA loan activity that did help the urban poor but also attracted the attention of unscrupulous real estate brokers, building contractors and mortgage bankers.

Over the past four years, major scandals involving FHA loans have been uncovered in 20 cities across the U.S. The latest is Chicago, where the Tribune recently turned up dozens of cases of mortgage shenanigans that have cost the Government millions of dollars. Often, real estate dealers would lure a low-income family into buying a ghetto house, perhaps by putting up part of the down payment. The company would then secure FHA insurance for the mortgage on the house, typically based on an unrealistically high appraisal that inattentive FHA officials did not question. After the financially strapped tenant let the house fall apart and moved out, the mortgage company would foreclose. It would then collect a fat check from the agency in repayment of the defaulted loan, leaving the FHA stuck with a house that could be resold only at a heavy loss.

Task Force. In the Chicago area, where the number of Government-repossessed houses has risen from a few hundred in the late '60s to 3,300 at present, foreclosures occur seven times more frequently on FHA-insured mortgages than on conventional mortgages. Upset by the Tribune's revelations, Mayor Richard Daley persuaded the FHA to cancel an auction of 700 foreclosed houses scheduled for last month while a federal-city task force inspects them to determine their fitness for habitation. The local U.S. Attorney is investigating allegations against six mortgage lenders for mortgage-insurance fraud.

FHA officials usually blame greedy brokers and lenders for the program's problems. Says John Waner, the agency's Chicago area director: "They saw the big demand for housing in the inner city, and they moved right in to exploit these helpless, low-income families." But Carla Hills, President Ford's new Secretary of Housing and Urban Development, has begun to tighten up the FHA'S own loose procedures. She has directed audits of loan-guarantee programs in Chicago and four other cities and ordered FHA offices to check more thoroughly all credit applications and foreclosed properties.

Last week the FHA published new regulations designed to prevent lenders from foreclosing quickly on home buyers. Among other things, the new rules encourage "forbearance agreements" (temporary moratoriums on mortgage payments for home buyers who run into trouble), provide for partial payment of installments on mortgage loans, forbid lenders to foreclose merely because a home buyer has not paid late charges on his monthly payments, and require lenders to confront home buyers face to face when they do foreclose.

Homeowners are not always victims in rip-offs of the FHA. Last week the General Accounting Office estimated that in 1974 alone, home buyers shook an illicit $25 million out of a subsidy program under which the FHA helps low-and middle-income people whose mortgage payments come to more than 20% of their adjusted gross incomes by paying the excess over 20%. Of 400,000 participants, the GAO estimates 110,000 obtained illegal overpayments by understating their incomes. Some got away with it because bankers failed to ascertain true figures, others because the FHA did not check tax returns.

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