By Zane Curtis-Olsen (Click here to view the entire P&R issue)
Despite recovery following the 2008 recession and the continued influx of affluent professionals into U.S. cities, the lack of quality, affordable housing remains a significant and worsening urban problem as rents continue to accelerate while incomes stagnate. A recent study by the Urban Institute found that only 28 adequate and affordable units are available for every 100 renter households with incomes at or below 30 percent of the area median income (Leopold 2015). While local, state, and federal governments wrestle with this problem, it is important to remember the lessons of past attempts to provide or encourage the development of decent housing for the low-income, and the necessity of community input in addressing waste, fraud, and abuse. Despite its good intentions, the Section 221(d)(2) mortgage insurance program and Section 235 homeownership assistance program remain underreported yet disastrous interventions by the federal government in Civil Rights-Era urban housing policy that was only uncovered and addressed due to the tireless efforts of journalists, public-interest attorneys, and aggrieved community members.
In the wake of uprisings in Philadelphia, Watts, and Newark, the Department of Housing and Urban Development attempted to reverse decades of redlining by supporting and expanding programs to insure those who lent money to potential home- owners in low-income neighborhoods. A cadre of local speculators and politicians took advantage of the loopholes and lack of oversight in the programs to cycle collapsing homes through the hands of poor families while skimming money from the federal government. The programs were most egregiously abused in Philadelphia, where politicians, real estate speculators, and their financial associates ended up foreclosing on thousands of properties. Despite supposed concern from the government, the abuses were only uncovered when local journalists worked together with the defrauded to reveal the corruption running through the program. The story of the FHA Scandal remains a powerful lesson in the need for effective oversight in federal housing programs, particularly those that subsidize the market rather than directly support the tenant or build and manage affordable housing.
As decades of disinvestment, deindustrialization, and redlining impoverished minority neighborhoods and fueled urban unrest in the 1960s, the federal government enacted programs to encourage and promote inner-city investment. One such directive was the expansion of Section 221(d)(2) of the National Housing Act, a little-known program that authorized HUD to insure private lenders against loss from default on mortgage loans made to finance the purchase, construction, or rehabilitation of low-cost, one- to four-family homes. The Housing and Urban Development Act of 1968 also amended the National Housing Act to add another program called Section 235. This provision authorized the Secretary to provide subsidies to reduce mortgage interest rates to as low as 1 percent and authorized a new credit assistance homeownership program for lower-income families who were unable to meet the credit requirements generally applicable to FHA mortgage insurance programs.
Though these programs were meant to increase the access of Black families to capital, mortgage-banking interests, speculators (generally real estate brokers who created their own lending institutions), and local politicians took advantage of Sections 221(d)(2) and 235 to further sell substandard properties in inner-city neighborhoods at an incredible markup. Though there were incidents of fraud throughout the country, the worst abuses occurred in Philadelphia and would permanently scar the city. In Philadelphia, politically connected brokers bought properties with serious structural failures from landlords bailing out of properties they had never repaired, sheriff and estate sales, or white families moving out of Black neighborhoods. In each of these cases, the houses—generally 75 to 90 years old—had been left vacant for weeks or even months and were often vandalized. The speculator then made superficial repairs to the property, generally nothing more than applying wallpaper and a fresh coat of paint, and sold them as “FHA approved.” By illegally advertising the property as “FHA approved,” speculators created the false impression that their properties were sound.
As reports of fraud in Philadelphia mounted, they caught the attention of Philadelphia Inquirer investigative reporters Don Barlett and Jim Steele. Barlett and Steele had just started working together at the Inquirer after years working for other papers. The two became an investigative team united in the belief that people should be treated equally, government should not favor one group over another, and that the private sector should be watched as closely as the public sector. The two were some of the first reporters to use computers to better assess large data sets. The FHA Scandal was their first assignment (Dygert 1976). When they followed up on reports of fraud tied to Sections 221(d)(2) and 235, they found 23 of 24 houses they investigated had no building, plumbing, or electrical permits for renovations as required by city code. Still, these properties were approved and appraised as if they had been fully repaired (Barlett and Steele 1971a).
Speculators targeted people who had never owned or maintained a house before, since they did not know what to look for when buying a home. The most common targets were poor, Black single mothers and newly immigrated Latino families. In one case, a real estate agent sold Lucas Velazquez and his wife Iris a property 18 months after they moved to Philadelphia from Puerto Rico. Velazquez, unemployed at the time, was looking to move with his wife and three kids from his brother-in-law’s apartment to somewhere more spacious. According to Lucas, his real estate agent pushed him to buy: “I don’t speak English too well and it was an emergency… The real estate man, he told me it was easy to buy a house because it is your house and I said OK…” Lucas and his family bought an FHA-insured five-room, 13-foot wide row house in North Philadelphia for $5,800. Shortly after moving in, the family found that their house had an uneven bathroom floor, a broken oven, and was missing a front gate (which they had been told would be installed before they moved in). The real estate agents who sold these properties were operating on the directives of a handful of local speculators (Barlett and Steele 1971a).
Theodore Clearfield was one of the first speculators exposed by Barlett and Steele. In one case, Clearfield bought a two-story North Philadelphia row house for $1,550 and sold it to Francetta Jenkins—a 26-year-old Black mother of three living on public assistance—four months later for $4,300. Within weeks of moving in, Jones faced drafty windows, insect infestation, and water that leaked through the roof whenever it rained. When Jenkins called Clearfield about these problems, his only response was “It’s your problem now.” In 1970, Clearfield purchased twenty-five houses for $222,000 and sold all but six of them for $603,000 under Section 221(d)(2). Because the properties were covered under this program, if the prospective homeowner refused to pay the mortgage or defaulted, ownership went back to Clearfield while the FHA reimbursed the mortgage lender (Stranahan 1973).
Another speculator, African-American William L. Tucker, used his real estate firm—Tucker & Tucker Real Estate—to sell properties owned by his investment firm Penn National Investments, Incorporated. United Brokers Mortgage Company generally provided the mortgages for these homes. In one case, Tucker sold an FHA house for $9,200 that included a decayed rear wall that eventually caved in. When asked about the wall, Tucker called it “one of those things that happens.” Tucker’s wife, C. DeLores Tucker, served as Secretary of the Commonwealth of Pennsylvania and a member of Governor Milton Shapp’s cabinet. At the time, C. DeLores Tucker was the highest ranking Black official in any state government, and her wide range of responsibilities (including state oversight of real estate brokers) caused many Black Pennsylvanians to regard her as “their governor.” Though her financial statements did not claim any interest in her husband’s business, she did admit to owning fifteen shares of stock in United Brokers Mortgage Company.
Barlett and Steele further investigated the deep-seated connections that enabled this fraud, aided by aggrieved community members. After being sold a $9,000 house that was promised as “FHA approved” under Section 221(d)(2), West Philadelphia resident Carmel McCrudden found herself personally responsible for thousands of dollars in repairs. McCrudden reached out to the press and Community Legal Services of Philadelphia—the legal-aid arm of the War on Poverty— to connect with 650 other defrauded families. McCrudden and these families—largely led by African-American women—formed the Concerned 221(d)(2) Homeowners of Philadelphia. The Concerned Homeowners joined 367 other grassroots organizations around the country to form the National People’s Action on Housing, a coalition “representing the white, Black, and brown people victimized by the conspiracy between real estate brokers, mortgage lenders, insurance companies, and FHA” through demonstrations, pressure, court actions, and, eventually, testimony before Congress. Newly-recruited Community Legal Services attorney George Gould represented over 1,000 defrauded homeowners in lawsuits against the FHA and local mortgage brokers between 1970 and 1972 (House 1972a).
Collusion among the FHA, private mortgage brokers, and investors in Philadelphia led to the highest echelons of power. Hugh Scott, senior Senator from Pennsylvania and Senate Minority Leader since 1969, was a close personal friend of United Brokers Mortgage Company president, Louis Bank. Scott’s law firm, Obermayer,
Rebmann, Maxwell & Hippel, handled United’s legal work and Scott had served as counsel to the company. United’s entire staff worked overtime calling and mailing postcards out to prospective voters for Scott’s campaigns.
Senator Scott—who campaigned for re-election in 1970 on the slogan “the most powerful senator Pennsylvania ever had”—used his power and connections in Washington to insinuate Banks and his colleagues into federal housing policy. In December of 1969, the Philadelphia Redevelopment Authority, on HUD orders, appointed United Brokers exclusive servicing agent for all housing rehabilitation loans. In 1970, HUD Secretary George Romney appointed Bank to the twenty-member advisory committee of the Government National Mortgage Association, and eastern Pennsylvania FHA director Thomas J. Gallagher made United Brokers Mortgage the first mortgage company permitted to handle their own FHA inspections. Barlett and Steele exposed these connections in the Inquirer on December 13, 1971. That day, Senator Scott’s personal aide Edward E. Pilch was on a $50,000 Caribbean cruise with forty Philadelphia real estate brokers and their wives paid for by United Brokers.
The government’s response to the efforts of the Inquirer and their allies in the community was slow and incomplete. The FHA initially responded to the Inquirer investigation by suspending 160 fee appraisers who worked for private real estate firms. Despite this, HUD refused to reveal the names of individual appraisers involved in suspicious transactions and the Inquirer had to sue for the information. Amid a bevy of such scandals around the country, George Romney took particular notice of the “faults, iniquities, and profiteering” in Philadelphia under the 221(d)(2) program and sent a team of investigators from the HUD Washington office alongside representatives from the Internal Revenue Service, Federal Bureau of Investigation, and two assistant U.S. attorneys. While the Senate subcommittee on antitrust and monopoly conducted an investigation on FHA fraud in Boston, committee chairman Hugh Scott chose to ignore Philadelphia.
On September 25, 1971, the district attorney issued twelve criminal complaints against Theodore Clearfield for failing to obtain housing code certifications covering his properties. Next month, a federal grand jury returned indictments against Clearfield and four building tradesmen for aiding and abetting the submission of false certifications to the FHA about the conditions of eight houses.1 Clearfield was further indicted for falsely representing that houses had been endorsed, authorized, inspected, or appraised and approved by the FHA. By the beginning of 1972, the grand jury had indicted 35 real estate speculators, contractors, and salesmen. Seventeen real estate agents in Philadelphia were convicted or plead guilty. Clearfield was eventually convicted on seven charges of filing false house certifications with the FHA, had his real estate license revoked, and was given a 30-day suspended sentence in prison.
It took another two years, but the United Brokers Mortgage Company became the first company indicted by the federal government under the Truth-In-Lending Act. The Act, passed in 1968, was meant to ensure that private lenders honestly disclosed all of their terms and conditions both to the government and to their consumers. A federal grand jury in May 1973 indicted United Brokers on 50 violations of the Act for certifying to home buyers that the FHA had a valid first lien on properties with outstanding liens, submitting false statements to the Government National Mortgage Association substantially understating the company’s default rates, and making unauthorized profits on extension fees, credit reports, and photographs. With the indictment, the federal government finally suspended all business with United Brokers. In the case, assistant U.S. Attorney Malcolm L. Lazin called United Brokers’ actions “a financial rape” of the low-income community. The company pleaded guilty to 30 counts and was fined $160,000, the maximum penalty under the law. No officials within United Brokers were indicted. William L. Tucker, his wife, and Hugh Scott also avoided consequences for their involvement in the scandal.
Individually, many of the low-level real estate speculators, government officials, contractors, and FHA appraisers involved in the scandal were imprisoned, fined, or, at minimum, forced out of the real estate business. Yet these punishments did nothing to address the impact of their actions. To quote Concerned Homeowners Chairwoman Carmel McCrudden:
There are realtors who are deliberately panic peddling and discriminating in sections as scattered and far apart as Germantown, Kensington, North Philadelphia, South and West Philadelphia. You can see in almost every neighborhood of the city how the opportunity for quick money and real estate speculation has contributed to the decay of the inner city. (Senate 1972)
From 1968 through mid-1971, there were over 2,848 foreclosures in Philadelphia, more than the total number of foreclosures for the previous 33 years. By the end of that year, there had been over 2,100 defaults in Philadelphia under Section 221(d)(2), making up 10 percent of all such defaults in the country (Boyer 1973).
Barlett and Steele’s report on the FHA scandal started a long and successful career in investigative journalism. The two would continue to report for the Philadelphia Inquirer until 1997, when they moved on to Time Inc. and, later, Vanity Fair. In 1975, they won a Pulitzer Prize for a series titled “Auditing the Internal Revenue Service” on the unequal application of federal tax laws to wealthy and poor people. In 1988, they won a second Pulitzer (the only reporting team to do so for newspaper reporting) for a series on the tax breaks for the wealthy written into the 1986 Tax Reform bill. In 1991, they would produce a nine-part series detailing the devastating impacts of Washington corruption and Wall Street greed on the U.S. middle class titled “America: What Went Wrong?” They later won two National
Magazine Awards reporting on corporate welfare and campaign finance. For Barlett and Steele, their reporting on the FHA began a long career of investigating the ways in which government policy increasingly benefited a wealthy elite at the expense of the American people (Barlett and Steele 2012). George Gould continued to work for Community Legal Services of Philadelphia and advocate for tenants in cases of mortgage foreclosure prevention, public housing, landlord/tenant law, and childhood lead poisoning up to the present day.
In 1973, President Nixon’s moratorium on federal public housing construction brought a temporary end to Section 235, as it targeted federally-administered subsidy programs alongside direct public housing construction. Section 235 had regulations placed upon it to try to prevent misuse in 1976, and was terminated entirely by the Housing and Community Act of 1987. HUD discontinued Section 221(d)(2) in 2000. Rampant fraud and abuse had cut off this particular form of federal intervention in the inner-city housing market.
The FHA Scandal of 1967-1972 is a lesson in the dangers of poorly planned and implemented federal affordable housing policy. In an attempt to reverse the negative impacts of decades of disinvestment from minority neighborhoods facilitated by the policy of redlining, the government insured speculators as they further devastated these neighborhoods. Without proper oversight, appraisers, lenders, speculators, and their political allies were able to buy dilapidated properties, sell them as “FHA approved” to poor Black women and newly immigrated Latino families, claim FHA insurance on the mortgage after the homeowners inevitably walked out on their collapsing properties, and then repeat the process until the buildings were uninhabitable. The kind of oversight such programs require—particularly transparency and outside observation of mortgage lending—only came after local journalists, attorneys, and activists exposed the abuse. Though there is an extensive literature critiquing federal attempts to directly address the need for affordable housing by building and managing public housing, this story illustrates that efforts to provide housing by influencing the market and subsidizing developers can be equally counterproductive and destructive. As the need for affordable housing only increases, planners should recognize the potential for abuse inherent in any plan to subsidize housing at the point of real estate development or speculation, and the need for community engagement to understand and combat that abuse.
Zane Curtis-Olsen recently received his Ph.D. in U.S. history from Yale University. zane.curtis-olsen@yale.edu
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