The Windfall Merchants

When the Senate banking committee opened public hearings last week on chicanery in the Federal Housing Administration, it knew that it was tapping a rich vein of scandal and corruption. Estimates of excess windfall profits by dollar-grabbing contractors ranged from $100 million to $500 million. But no sooner did the hearings start than the committee ran into Fifth Amendment trouble.

First reluctant witness was Clyde L. Powell, who "resigned" last April as assistant commissioner of FHA. While in his job, said Committee Chairman Homer Capehart. Powell had authorized Federal loan insurance on $6.5 to $7 billion worth of mortgages. The committee wanted to quiz Powell on his gambling losses, which first put the FBI on his trail and led to the housing investigations. Committee Counsel William Simon said that Powell, whose salary was $12,000 a year, had reportedly lost almost that much in one gambling session. Powell, who was appointed in 1934. clammed up tight. But the committee did put on the record that he had a long police record, although he had stated in his job application that he had never been arrested. His record: eight arrests and at least two convictions since 1917, on charges that included larceny and bad-check passing.

Party-Girl Fees. Another silent witness was Andrew Frost, who was suspended a fortnight ago as assistant FHA director for New Mexico. Did he ask a contractor to throw a party, with girls, on the night of a ground-breaking ceremony? Did he attend another party at a motel in Alamogordo, N.Mex. at which a contractor supplied three girls at a cost of between $400 and $500? Did contractors pick up the tabs for two fishing trips to Mexico? Did a building supplier send him two carloads of concrete block for his own house? Frost refused to answer any of the questions, ducked behind the Fifth Amendment.

But from others, the committee heard about many deals in which fat windfall profits were made, and apartment rents, based on watered-up values, were higher than they should have been. The scandals harked back to the Democratic Administration, since they were made possible by the National Housing Act's Section 608, repealed four years ago. When Democratic Senator Harry Byrd began investigating the deals, the Republicans brought them out in the open by firing Federal Housing Commissioner Guy T. O. Hollyday (TIME, April 26). Section 608 provided that the Government would insure mortgages up to 90% of the building cost, and many a builder was able to "mortgage out" by putting up a building for less than the amount of the mortgage, then pocket the difference as his windfall. Examples:

P:A Brooklyn apartment project cost $3,500,000 less to build than the amount of the mortgage. Promoters put the difference in their pockets.

P: A group of British subjects helped finance a Long Island development, and excess mortgage money gave them $336,000 profit on a $3,380 investment.

P: A dozen stockholders, including three members of the Du Pont family, invested $7,325 in a Delaware housing project, and drew $549-375 in profits 45 days after the building was completed.

P: An Indiana mortgage broker, who made consistent profits on federal housing deals, ranging up to $400,000 on a $50,000 investment, made no profit when he sold half an interest in a Fort Wayne apartment project for $7,500 to his good friend and penthouse neighbor, the late R. Earl Peters, then Indiana FHA commissioner.

Furthermore, charged William McKenna. top Government investigator of the housing mess, staff members in the Washington office got eight television sets and 14 wristwatches as gifts from local contractors. But FHA officials waited until the three-year statute of limitations expired before reporting this to the Justice Department. Of 163 cases that the FBI sent to the FHA over a two-year period, he said, only nine were brought out and investigated.

Compensatory Fees. For the first time a play-by-play account of how one of the windfall deals worked was furnished by the contractors themselves. Three Washington builders--Herman W. Hutman, Earl J. Preston and Bryan Gordon Jr.--told how they got $13,846,000 in FHA-insured loans to put up the Shirley-Duke apartments in Alexandria, Va. To meet FHA requirements that the sponsor must have put in 10% of the estimated cost of the project, the builders reported that 1) they had spent $750,000 for architect's fees instead of the $63,000 they actually paid; 2) Gordon owned land valued at $84,725. although he had only a word-of-mouth agreement to get the land "if the negotiation went through"; 3) the entire tract of land was listed at a value of $505,500, although they had actually paid only $178,000 for it.

Part of their equity consisted of $22,000 in "cash" from Gordon. Actually, it represented his fee for drawing up the application. The application also stated that a New York broker would put up $181,783. The fact was that none of them knew the broker.

The three builders went on the payrolls of separate corporations at salaries of $20,000 a year. The $14 million in mortgage money was borrowed--after FHA backing was assured--from Minneapolis' Investors Diversified Services, later controlled by Robert R. Young's Alleghany Corp. While the FHA mortgage was based on a cost of $6,600 per apartment unit, the contract with I.D.S. specified that no unit would cost more than $5,500. I.D.S. got 6% interest for the Government-insured loan, and in addition was repaid by extra fees of $919,298, plus a $173,075 premium on the mortgage, and a management contract giving the investment trust 1 1/2% of all rents for six years.

As for the three builders, their wives, and a handful of other stockholders, they invested a total of $6,000 for stock in six corporations organized to build the apartments. After mortgaging off their costs, including fees to I.D.S., they were able to walk off with $2,084,823 in profits, or $1,737 for each $5 invested.

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