Cleaning House

The Senate Subcommittee on Investigations has quietly begun to examine the Federal Housing Authority's policies and procedures for insuring mortgages. There is considerable evidence that the FHA has been misreading and mishandling Federal slum clearance legislation.

Section 220 of the Federal Housing Act of 1954 authorizes the FHA Commissioner to insure mortgages of "high risk" projects if their goal is the elimination of slum areas. The Committee Report accompanying the law implied that these mortgaged projects should provide low-rent housing.

But the FHA, reading the law literally, has underwritten the construction of many luxury buildings. Even if such buildings replace slums, they offer no new housing for uprooted residents, who must move to other slum neighborhoods. And some of the projects, like the Barrington Plaza apartments in a high-rent section of Los Angeles, are not even near blighted areas.

But in addition to misinterpreting the law, the FHA costs the government millions of dollars with its inefficient management practices. The FHA fails to collect its due in interest charges from builders and leaves the way open for intentional defaults, through which unscrupulous investors can make money at the agency's expense.

The FHA forfeits income under the 220 program by failing to charge interest as soon as construction begins. At present, an investor does not pay interest until the final mortgage papers are signed. But the FHA frequently negotiates a mortgage several times because of unforeseen construction costs or fluctuations in the demand for apartments. Builders can take in their first profits before paying a penny in interest.

The FHA's mortgage policy also can make an intentional default profitable for the builders. The agency insures up to 90 per cent of the total cost of a 220 project, including both the market value of the land and a 10 per cent profit allowance for building in its computation of the cost. But investors can sometimes swing deals to buy development plots below market value, and then take the 10 per cent profit for their own construction companies. They may also build projects for less than the estimated cost. If the investor defaults, he retains the mortgage money, well-padded over the actual cost of erecting the project. And the FHA must reimburse the bank that advanced the loan for the outstanding debt, then dispose of the building -- often at a loss.

To cut down its losses, the FHA should develop a more thorough system of determining actual land values and building expenses, and begin to collect interest as soon as ground is broken for a project. The subcommittee should not miss the chance to force these reforms upon the FHA. Nor should the Senators neglect to hold the agency to the spirit of the law by financing only low-rent housing that can have a legitimate effect on urban slums.