Real estate speculators and their financial associates are making millions in Philadelphia by buying deteriorating houses – making minor repairs – and selling them at inflated prices to unsuspecting poor families.
The huge profits are made possible – in fact, guaranteed – by the Federal Housing Administration.
There is no risk involved. And in most cases, everyone gets paid immediately.
There is, of course, a loser: The new homeowner who often finds his house begins to fall apart the day he moves in.
In a two-month investigation, The Inquirer has established widespread abuses in FHA mortgage programs and violations of city building and housing codes and state and Federal statutes.
ITEM: Speculators purchased houses for as little as $500 and within two or three months sold them for $5,500. All were insured by FHA, largely under a little-known program called 221 (d) (2). Markups on the property sales ranged up to 1,130 percent.
ITEM: Appraisers working for FHA-inspected houses filed official reports stating there were no defects – when there were defects – and then certified inflated values on the properties. The appraisers were either Federal employees or real estate agents working on a fee basis.
Building inspectors working under another Federal program inspected the same houses examined by FHA and found dozens of violations. The new homeowners then were given Federal grants up to $3,500 to correct deficiencies which FHA earlier said had not existed.
ITEM: Form 1968 through the first six months of this year, there were 2,848 FHA mortgage foreclosures in the city – more than the total number of foreclosures for the previous 33 years.
Philadelphia has the highest FHA foreclosure rate of any metropolitan city in the country. There were 512 foreclosures during the first six months of this year. If the trend continues, the city will top the 1,000 mark – an all-time high for foreclosures in a single year.
ITEM: In Philadelphia, real estate brokers and speculators continue to advertise and sell their houses as "FHA Approved."
This is despite the fact that George Romney, secretary of the Department of Housing and Urban Development (HUD), said more than five months ago that the practice is "prohibited by Federal statute."
ITEM: FHA officials locally and in Washington have failed to monitor the federally-insured mortgage programs in the inner city. As a result, speculators and real estate promoters have managed the programs to suit themselves.
For one reason or another, speculators have been able to arrange FHA-insured mortgages for their customers with comparative ease.
Real estate brokers and speculators also have purchased houses from one another – and at the expense of the property owner. It works like this:
You own a house in North Philadelphia and want to sell it, so you visit a real estate broker and he places the property on the market.
A few weeks, or perhaps months pass. Finally the broker calls. He has an offer for the house. It is $500.
He assures you that you would be wasting your time to try and get any more money. So you sell. The buyer is the speculator, who also is in the real estate business.
The Inquirer investigation of Federal mortgage programs focused generally on a section of North Philadelphia.
The area is bounded by Front st. on the east, Germantown ave. on the west, Allegheny ave. on the north and Susquehanna ave. on the south.
Reporters also examined properties to the east of that area, in Fairmount, Strawberry Mansion and Germantown.
There were such things as heating problems. . .
"They cemented the chimney shut," recalls Mrs. Alma Murphy of 1461 N. Myrtlewood st. "The gas man said he couldn't turn the gas on until they cleaned the chimney out. He said the fumes would back up and kill us.
"I took a hammer and busted the cement and cleaned the chimney out myself. It was in December and I had to have heat."
And there were water and wallpaper problems...
"The first time there was a hard rain, the roof leaked in my kids' badroom," said Mrs. Francetta Jenkins of 2767 N. Philip st.
"The water came down the wall and all over the ceiling. When winter came and I turned on the heat, the wallpaper started peeling off."
There were electrical problems. . . .
The speculators generally work in changing neighborhoods just outside the worst slum districts. These are areas that could remain stable – or become slums over night.
Who originally owned the houses purchased and resold by the speculators? Why do the houses seem to fall apart after the new owners move in?
The probe disclosed that the speculator usually bought his houses from one to three sources:
– A SLUMLORD who wanted to bail out. Some of these houses had been carved up into apartments. Few major repairs had been made in recent years.
– SHERIFF'S sales and estates.
– WHITE families who lived in the houses but decided to move because they wanted another house or because of the changing racial patterns in the neighborhood.
In nearly all cases, the houses had been left vacant. Sometimes for months. And some had been vandalized.
Most of the houses are about 75 to 90 years old. Even in reasonably sound structural condition these require regular maintenance.
The survey showed that after buying the houses the speculators did little more than apply wallpaper and a fresh coat of paint.
Reporters checked 24 properties and found in 23 of the houses no building, plumbing or electrical permits were issued for renovations, as required by the city's Department of Licenses and Inspections and, in certain cases, state and Federal statutes.
This means that either no substantial repairs were made to the houses, or that if there were repairs, they were made illegally and probably by unlicensed tradesmen.
Thus when the new homeowners moved in – usually a mother and her children - any housing defects were well concealed.
This was especially easy since none of the women had ever bought a house before and none knew what to look for.
"The light switches in the living room and dining room, they don't work," said Mrs. Mildred Ann Baker of 2516 N. Mascher st. "The upstairs is cold and the kitchen is like an ice box. There's no heat in there at all."
And there were houses that were just falling apart. . .
Said Mrs. James Sanders, 2824 N. 9th st.:
"The trouble started the day we moved in. There were no pipes. Water was standing in the basement, but he (the real estate salesman) said it was just from the plumber."
Said Mrs. Allie Jo Metz of 1428 W. Venango st.:
"The house is falling down completely. You can't use the bathroom unless you get buckets of water to flush the toilet."
"When the first heavy rain came, that's when I found out about the rain in the dining room. It just pours in like someone's pouring water. I figure one day the ceiling's going to fall in.
"The pipes have been leaking ever since I moved in. The floorboards are falling in in the shed kitchen. When I first moved in, the furnace blew out."
For the most part, these complaints are not the most serious. They are just typical cases.
When buyers noticed and asked about specific problems, the real estate agent promised to correct the situation after settlement was made. Most times the work was never done.
When housing defects turned up after the families moved in, there seldom was money available to correct them.
Many of the women receive public assistance and they have little money for routine maintenance, let alone extensive work on plumbing, heating or electrical systems.
And most of the women homeowners interviewed are separated, divorced or widowed. So they have no one to turn to who can make small repairs.
Before buying the houses, they said they received no counseling or warning – from the speculators, mortgage brokers or FHA – about what might be expected in the way of maintenance or repair costs.
Now, if water leaks from the bathroom, it continues to leak until the plaster falls from the ceiling on the floor below. If the heater doesn't work, the gas is turned up on the kitchen stove.
If electrical outlets don't work, extension cords are run from room to room. If water comes through the roof when it rains, well, water comes through the roof.
So how did FHA get in the business of insuring mortgages on rundown houses?
Until the 1960s, FHA red-lined large areas of the nation's central cities, generally refusing to insure mortgages on older houses.
As a result of this hard-line policy, the agency was accused of contributing to urban decay. But new housing programs enacted by Congress, beginning in 1961, brought FHA into the cities in a big way.
The idea was to stop the spread of slums, promote family stability through the deep-seated American goal of individual home ownership and ease the social and physical deterioration of the big cities.