Sin and Section 608: I

(This is the first of two articles on the current "scandals" in the Federal Housing Administration.)

In a curious switch from the alphabet days of the New Deal, official Washington has lately taken to talking in numbers. For the past two weeks, the big number has been "six-oh-eight." It belongs to a section of the federal housing law that has set off a series of bitter charges, inquiries and firings in recent weeks.

Minor tremors over the past several months gave warning of the shock that was to rip the Federal Housing Administration wide open. It was common knowledge throughout the agency that something was up; T-men and FBI agents had made repeated visits, checked books, collected data. Finally, on Monday, April 12, the government acted: Guy T. Hollyday, chief of the FHA, was dismissed. The normally staid New York Times reached a pitch of near hysteria in reporting, "FHA Chief Out--Frauds Charged--U.S. Opens Study--Files to be Siezed." In an orgy of political moralizing, the press called up spectres of Minks. Deep-freezers and Teapot Dome.

After the first burst of righteous fury, the charges narrowed to two basic areas. The first was concerned with alleged abuses under Title I of the housing act, still in existence, which provides federal aid to home owners for repairs. The other area was Section 608.

Under this provision (which remained in effect from 1941 to 1950) the government had agreed to guarantee mortgages on middle priced apartment housing. This meant that a builder could borrow money (at up to 90% of the appraised cost of the project) with the assurance that the federal government would pay if he defaulted. The charges asserted that many builders had overborrowed, getting more cash than they needed to build the apartment houses, and then had pulled out leaving Uncle Sam to pay.

For the greater part of the press, the issue was clear cut. It was, they claimed, just a new wrinkle in the old shell game; the builders were the chiselers and the taxpayers the dupes. But in trimming the issues to headline size, a lot had to be left out. The real story behind the FHA "scandals" is told in these omissions.

Mobilization Crisis

The nation was at war in 1941 when Section 608 was written. Created under the title "War Housing Insurance" it was aimed at meeting the pressing needs for middle priced dwellings. Time, not money, was the short item, and the government turned to the private builder to get the job done quickly. At the same time, it wrote the builder a code of minimum standards that was not as stiff as the one governing public construction. With this flexibility, the private contractor was able to cut certain costs and build more cheaply than the government itself could. But even if private construction had not been quicker and cheaper than public building, which it was, the federal government would have been restrained on political grounds. A substantial part of the nation in 1941 felt that federal building meant slum clearance, and nothing more. The federal octopus was requested to keep out of middle priced building.

But while builders objected to Uncle Sam moving in on them, they found themseves unable to act without without his help. They were inhibited by the shaky war situation and threats of material scarcities. Rent controls, which lasted up until 1952, made apartment building seem even less economically inviting. Profit hopes looked slim, while risks multiplied.

Meanwhile, growing needs for housing forced Washington to prod the private builder into action. Section 608 was written with a series of gaping loopholes built in as lures. Under a loose and generous appraisal system, the builder was encouraged to pad his estimated costs and borrow more than he needed. At the same time, the government gave up the control position it had formerly held in the private firm. Under this earlier provision it had been able to watch the builder and block his attempts to overborrow. With 608, the government stepped down and turned its back.

Post War Killings

The big killings were not made until 1948. At that time, the provisions were changed to favor the builder in another way. Up until 1948, private construction firms had been permitted to borrow federal-backed money on a per-room basis. (By 1948, they were being granted $1,800 per room.) But now the rule was changed to let the builder borrow up to $8,100 per apartment. The result was a rash of small one-bedroom "efficiency" apartments and some gross cases of overborrowing.

Washington was not being "duped." The FHA, the Administration, even the Congress knew very well what was going on. Money was being pumped into the building industry for a reason. In 1948, the national economy had begun to show signs of faltering, and businessmen were acutely concerned with the possibility of a slump. Industry turned to the federal government for help, and the change in 608 was part of the response. Democrats were not inclined to be stingy with a national election imminent.

There was, of course, a gimmick in the "give-away." The government figured to get most of the money back through its high personal income taxes. But the builders managed to beat the game by treating their windfalls as capital gains, which were not taxed so heavily. Only momentarily outsmarted, Congress, in 1949, passed an act freezing the windfall assets for a three year period. But by 1952 the frozen assets began to thaw, and the builders began to collect.

Even though these subsidies have been realized, it is absurd to talk in terms of huge losses to the taxpayers. The government guaranty service was not free; builders were charged 1/2% of the mortgage principal to ease the federal risk. Many 608 projects have paid off. As in any insurance undertaking, the good bets have helped to cover the bad ones.

Section 608 had a job to do, and it did it. It was created to build apartment houses quickly and cheaply. Even with the large profits that were made, it is doubtful whether public housing could have done the building at a smaller cost to the taxpayer. No one condones the clear cases of fraud and bribery that did occur in some instances. But by and large, the builders acted, and profited, in accordance with the law. Federal Housing chief Albert Cole admitted that the builder "had a right to outguess" the appraiser if he could. Instances of inadequate, matchbox construction do appear, but they are rare. There certainly was no widespread jerry-building reminiscent of the 1920's. On the credit side, FHA established a code of minimum building standards that was uniform for the whole country. But more important, it did what nobody else could do: it got the houses built when they were needed.