The most recent housing collapse has been covered through a myriad perspectives. It is, if not fully understood, at least known. However, nearly three decades before, something else along the same lines took place at the US Department of Housing and Urban Development. There is no Wikipedia entry and, even in an age of information, commentary on the scandal is relatively scarce.
Brian D. Boyer, however, wrote a book on the subject, which we have been reading. Here is a section that will orient you to the problem,
There is a part of Detroit called the Lower East Side which visitors, in awed voiced, compare with the bombed-out cities of Europe after World War II and, later, of Vietnam. Half and more of the houses on any given block are boarded up with plywood squares. The gutters hang, rain washes in through the holes in the roofs. Ruined by the elements and gutted by thieves, the houses seem to be disintegrating like the stumps of rotting trees. Fires at night cremate the remains. The next day the family moves out of the house next door and another house is abandoned and eventually destroyed.
Most people have had no idea of what has been going on in the government’s housing programs. Especially people who are supposed to be experts. The director of the Ford Foundation’s urban and metropolitan program, for example, told me the disaster was caused by ignorant buyers. Universities teach that urban blight is caused by social factors that nobody understands and only statisticians can chart, like distant scientists marking the destruction of a star by the radio waves being ejected. Most investigators see problems in terms of individual cases, but never as an overall problem. Liberals always blame the conservatives – the conservatives blame the programs.
Let me say at the onset that the disaster known as the FHA scandal was not caused by ignorance or unsophistication. Instead, it was a deliberate program of urban ruin for profit, under the cover of government housing law and with an endless flow of federal money.
Beryl Satter, an Associate Professor of History at Rutgers University, summarized the problem in a blog post,
After decades of refusing to insure mortgages in areas with black residents no matter what their economic status, in 1968 the FHA went to the other extreme and told mortgage companies that if they would loan in low-income minority neighborhoods, the FHA would guarantee those loans 100%.
Speculators immediately exploited the new policy by buying slum properties, and then bribing someone to appraise the properties at, say, quadruple their real value. Speculators might buy a house for $5000 but get a corrupt FHA appraiser to say it was worth $20,000. Once they had that appraisal, they could easily sell that property for $20,000. So what if the price seemed high? The mortgage lender couldn’t lose — after all, $20,000 was the property’s appraised value, and more importantly, the FHA insured the loan 100%.
The speculators made the procedure quick and easy. They did all the paperwork, routinely falsifying the buyers’ income to make it look like they could carry the overpriced loan. The lenders didn’t ask any questions about these loan applications because the mortgages were fully insured; the creditworthiness of the borrower was therefore of no relevance. Since mortgage companies also made profits through the exorbitant service fees they charged for FHA loans, they made money on every sale, with no risk whatsoever.
While the scandal meant ruin for low and moderate-income home buyers, it meant huge profits for those in the game. In Chicago, the FHA paid out at least $42 million dollars to real estate speculators and corrupt mortgage firms by 1975. In Brooklyn, such operators received $250 million from the FHA. In Detroit, which was the city hardest hit by the scandal, a shocking $375 to $500 million dollars in FHA insurance was paid out. As journalist Brian Boyer observed, in return for this immense payout to Detroit mortgage brokers and speculators, the U.S. government received “a deserted slum and the concomitant problems of rampant heroin addition and the highest big city murder rate in the U.S.A.”
The companies exploiting FHA policies were not marginal. In New York top officials of three of the largest mortgage lenders in the region were convicted of housing fraud in 1975. In Brooklyn alone, the U.S. Attorney’s office produced a five hundred-count indictment demonstrating that “real estate speculators, brokers, lawyers, appraisers and bribed FHA employees conspired in the scheme” to get FHA insurance on slums sold at inflated prices.
Anyone truly interested in understanding many of our current problems need to read this to comprehend that the roots of this problem go back decades.