Comment The FHA insuring office was not receptive initially because of the single union sponsorship. On December 9, 1960, the Director advised the sponsor that the proposal needed the endorsement of the international union and a willingness for the international to step into the shoes of the local in the event of trouble. In response, the FHA Director was given a copy of the following motion which was passed by the international executive council at a meeting during the week of November 10, 1960: "I move that this council authorize the use of the name 'international brotherhood' to the project development outlined to this council by Business Manager Pat Sullivan contingent on the determination that there will be no financial liability and that it is a worthy cause with which to have our name connected; if investigation determines this to be the case, a letter or resolution as may be required to indicate that the international brotherhood will pledge itself to the operation and management of the proposed project in Pascagoula, Miss., in the event that lodge No. 693 is for any reason unable to operate and run the project.” On December 27, 1960, FHA advised this was "entirely satisfactory." Date of first payment was February 1, 1964. No payments were ever made and the project never occupied. FHA headquarters tried to get the international to take over as promised. The new international president, Mr. Russell K. Berg, advised that, while the executive council had endorsed the project, it had never agreed to step into the shoes of the local in the event of default. The motion had never been authorized. On December 10, 1964, this matter was referred to HHFA compliance. Subsequently, an FBI investigation was made, but the Department of Justice found insufficient evidence to warrant continuation of the investigation. The mortgage was assigned to the Commissioner on March 13, 1964, foreclosed, and title to the property taken on May 28, 1965. The project was sold to Care Centers of Mississippi, Inc., a nonprofit group, on September 16, 1965, for $1,950,000, with a $50,000 downpayment, and a $1,900,000 purchase money mortgage. Reader's Digest quote ITEM NO. 2 "In Newark, N.J., after wealthy builder Arthur H. Padula had obtained land costing $33,000, FHA appraised it for $125,000 and guaranteed a $2.9 million construction loan on a high-rise apartment building. After the structure was completed in 1962, FHA let Padula go 3 years without making payment on the principal of his loan" (p. 62). Description of case Project No. 031-00204-Weequahic Park Towers, Newark, N.J. Application received August 1958. Commitment issued November 10, 1958. Commitment successively amended culminating in a final amended commitment September 25, 1961. Comment The FHA estimate of land price was made in the summer of 1958. The FHA estimated the land to be worth $125,000. The sponsor's acquisition cost was not a good indication of value as he held a big piece for many yeras. The appraisal was appealed and on September 30, 1959, FHA headquarters reviewed and concurred in the price as set. The sponsor's contention at the time of appeal was the land had a market value of in excess of $200,000. This was considered excessive by the local office. The local office's estimate of $125,000 was approved. The loan was closed September 12, 1960, and completed in 1962. The property did not produce sufficent earnings to be self-sustaining and modification of the mortgage permitting a deferment to payment to principal was permitted until September 1965. The mortgage has been current from that date to present (April 1, 1966). Reader's Digest quote ITEM NO. 3 "This was just the beginning. Padula had paid $36,339 for another tract of Newark property which FHA in 1963 appraised at $300,000—a jump of 800 percent. The FHA guaranteed a loan of $4.5 million to build a second apartment house" (p. 62). Decription of case Project No. 003-00289-Weequahic Park Plaza, Newark, N.J. Comment In June 1963, the Newark office found a market value of $123,750 for the site, but the sponsor appealed this value because the zoning variance he obtained permitted 10 stories additional to the nmber of stories ordinarily permitted in high-rise construction in that area and allowed a 50-percent decrease in the on-site parking requirements. The sponsor sought a value of $365,000. An adaption of a per unit valuation formula by the multifamily valuation adviser from the Phialdelphia multifamily office produced a figure of $300,000, and this market value was agreed upon in a conference between the sponsor, the director, chief underwriter, and chief valuator of the Newark office, representatives of the Philadelphia multifamily office, and a representative from Washington headquarters. The problem of land valuation following ordinance variances, which give certain advantages to a particular site, is a difficult one. There are many approaches to estimating these values, depending upon the absence or presence of comparable properties. The ultimate finding is one of personal judgment on the facts assembled. In reviewing this case, Washington headquarters also believed the allowance for land value was questionable. Reader's Digest quote ITEM NO. 4 "In Boston a promoter bought a tract for $8,971; the following year, FHA praised it at $131,531" (p. 62). Description of case Project No. 023-00029-Bishop Apartments, Inc., Boston, Mass. Comment The Boston office judgment, to the effect the land had appreciated in value to the point where $131,531 was, in fact, the estimated fair market value at time of commitment for mortgage insurance, was based on two major changes directly affecting the land involved: 1. The land when acquired was not zoned to permit high-density apart ment units. A change in zoning from single family to apartment was obtained. 2. A drainage problem which severely limited the value of the land was corrected which in turn made the land more valuable than the cost of the solution to the drainage. The judgment of the Boston office was reviewed by the chief of headquarters valuation section and approved October 15, 1963. The mortgage is current as of April 1, 1966. Reader's Digest quote ITEM NO. 5 "In Chicago the FHA said it would allow $300,000 for a particular tract so a promoter went out and bought it for $212,000 and proceeded to cash in" (p. 63). Description of case Project No. 071-00137-3900 Lakeshore Drive, Chicago, Ill. Comment The project is a 25-story, high-rise 207 processed in June 1958, at which time the land value was estimated at $8.99 a square foot, or $300,000. The estimate was supported by sales of five comparable sites. The site was originally optioned by representatives of two of the sponsors in March 1957 for $212,000, subsequently purchased at this price in October 1958. The price of $212,000, while the major portion of the cost of acquisition, does not include the cost of the option or any allowance for required additional investment on the part of the sponsors for taxes, interest, or other carrying charges. The cost of this type of site was rising rapidly in Chicago at that time. In January 1964, the land value of this case was reviewed by headquarters personnel and the original estimate of value was found to be warranted. The project was well received by the market and has been a successful operation from its completion with virtually no vacancies. The mortgage has been kept current and the building is well maintained. Reader's Digest quote ITEM NO. 6 "FHA has approved marginal or hopeless projects, let promoters milk them through what GAO calls excessive withdrawal of corporate funds, and then abandon them *** GAO estimated that one promoter pocketed $318,000 while FHA paid taxes and insurance for his defaulted project" (p. 63). Description of case Project No. 054-42043-Savannah Terrace, Inc., North Augusta, S.C. Comment We are unable to determine how GAO estimated that net income of $318,000 was available to the mortgagor from February 1957 through June 1962. The GAO report of January 1964 makes reference to FHA having paid $43,000 in real estate and hazard insurance premiums. We reviewed FHA records and found in the period 1957-62 FHA paid $26,272 in real estate taxes and $16,848 in insurance premiums. Reader's Digest quote ITEM NO. 7 "Moreover, FHA has been letting freeloaders live in repossessed apartment buildings, then writing off their unpaid rents as uncollectible" (p. 63). Comment FHA has experienced a large increase in its property acquisitions beginning in 1960. The increase was primarily in single-family home properties, but the impact was felt by the agency in its overally property management and disposition activities. During this period of increased property acquisitions, FHA had the problem of increasing and improving its own property management staffs in the field and headquarters. We also made very concerted efforts to improve the quality of the contract brokers who manage our rental properties and to improve our supervision of these brokers. Inevitably, the quality of brokers will vary according to circumstances, but for the most part we have made improvements in our total property management activity. We have advised the GAO that since receiving their first reports on this subject, FHA has made many internal changes to tighten and improve the procedures to control rent delinquencies and collections. Much of the delinquent rental had accrued before FHA took over the projects. Some very positive steps have been taken along these lines and GAO has been completely informed. The Reader's Digest neglects to point out that a GAO report dated January 17, 1966, entitled "Need for Increased Efforts to Minimize Rental Delinquencies on Acquired Properties," states, on page 3: "These specific actions, if effectively implemented, and the increased emphasis now being directed toward solution of the problem should, in our opinion, help to minimize losses and improve control over delinquent rental accounts. Therefore, we are not recommending further action by the agency at this time. We plan to make further reviews of the management of acquired properties and the control over rental delinquencies." Reader's Digest quote ITEM NO. 8 "In Jacksonville, Fla., for example, Senator George A. Smathers' old college roommate and close friend, Charles E. Commander, Jr., asked FHA to help him build an apartment house. FHA evaluators opposed the project, declaring it 'doomed from the start.' But one evaluator reports he received 'at least a dozen telephone calls' from a Smathers assistant demanding approval. And though Smathers denies he had any interest in the project, pressures exerted in his name ultimately prevailed. FHA guaranteed a $1.9 million loan, and the 76-unit apartment was built. Naturally enough, it failed; FHA had to pay off the mortgage. For nearly 3 years now FHA has owned this white elephant" (p. 63). Description of case Project No. 063-00023-Commander Apartments, Jacksonville, Fla. Site approval August 19, 1959. Application received November 4, 1959. Commitment issued June 21, 1960-90 units, $1,926,500. Comment FHA is unable to verify the allegation made by the Digest that Senator Smathers asked FHA to help Commander to build an apartment house. FHA has been unable to identify the alleged "evaluator" said by the Digest to have received "at least a dozen telephone calls from a Smathers assistant." The mortgage is now held by FHA and the project is operating under a deferment agreement. Reader's Digest quote ITEM NO. 9 "FHA in 1962 also did its best to produce for another politician, Representative Adam Clayton Powell. Powell's nonprofit corporation sought to buy and 'rehabilitate' a Washington hotel on sale for $2,250,000. FHA obligingly decided that a $4,500,000 loan-twice the price of the hotel-would be feasible' even though a month later FHA had to admit it had no idea what the 'rehabilitation' actually would cost. The deal fell through after Senator Williams took the Senate floor to expose the outrageous handout" (p. 64). Description of case Hotel 2400, Washington, D.C. Comment Initial contact with District of Columbia office April 1962. In May 1962, the sponsor was advised of the need for subsidy of $69,000 per year. The proposal by the Adam Clayton Powell foundation on August 1962 reported a total for all rehabilitation costs in the amount of $2,117,500 plus a total acquisition of $2,295,000. This plus financing charges produced a total of $4,850,000. Preliminary processing indicated that a sponsor subsidy would be required of approximately $12,000 annually provided tax abatement could be obtained. FHA would not proceed with processing unless a tax exemption was obtained for the project and a cosponsor brought in. This was intended to be the Minister's Council for Senior Citizens of Washington. Efforts to get tax abatement were unsuccessful. On March 19, 1963, the application was withdrawn for processing under section 231. A new proposal for insurance under section 207 was submitted. There is no identification of the Adam Clayton Powell foundation with the new proposal. The proposal by the new owners was accepted and committed and insured as Project No. 000-00123, Envoy Towers. Construction has been completed and the mortgage is presently current (April 1, 1966). Reader's Digest quote ITEM NO. 10 "In the little Texas town of Weslaco, Methodist Preacher Paul A. Weiss sought to build a grandiose retirement home which FHA technicians declared was predestined to certain failure. "'If this project is built, one and all who see it will categorize it as an FHA folly,' a regional examiner warned Washington. 'And the loss FHA will sustain will be stupendous' " (p. 64). Description of case Project No. 115-38005-NP-Wesley Manor, Weslaco, Tex. Sponsor: McAllen District of the Southwest Texas Conference of the Methodist Church. Final endorsement expected approximately April 14, 1966. Mortgage amount to be endorsed is $2,733,100, the unit limitation. Reduction is due to change in unit composition during construction. Comment The office found the original proposal not feasible because of the disparity of about $900,000 between the maximum mortgage and the cost of the project. FHA also had concern about the number of units because of a lack of market demand. FHA also had a question about whether the Methodist district was backing the sponsor churches. There were many meetings with the sponsors here and in the field. On May 25, 1962, Washington headquarters authorized continued processing, but advised the Director to encourage the sponsors to recast their plans because the project was overdesigned. The office continued processing and came up with two alternatives, concurred in by the zone multifamly housing representative. Either the McAllen Methodist District and the Southwest Methodist Conference would agree to subsidize the project, or else submit an application for approximately 116 units. An application for 150 units was submitted on February 10, 1963, and rejected on March 14, 1963, because it was not subsidized. Subsequently, a meeting was held in Washington headquarters on March 27, 1963. It was agreed to consider the application for 150 units, provided the McAllen Methodist District agreed to subsidize the project. The financial data of the district, as guarantor, was reviewed by Washington headquarters and found acceptable. The district, by resolution of April 9, 1963, advised that "In the event that Wesley Manor, Inc., incurs deficits in the operation of the project, the district guarantees to subsidize the financial deficiencies in operation." The project is completed, final inspection in November 1965, and final endorsement of the mortgage is expected soon. Initial payments to principal and interest were deferred from February 1 to November 1, 1965. Mortgage payments have been made since November 1, 1965. Reader's Digest quote ITEM NO. 11 "But in Washington on January 23, 1962, a special FHA assistant, ex-Senator Gerald P. Nye, wrote: 'Vice President Johnson has revealed a large interest in the Wesley Manor project, and this office has assured him that everything possible would be done to expedite the hour when constructions could begin'" (p. 64). Comment The quote is an accurate quotation taken from a letter written by ex-Senator Nye, then the Special Assistant for Housing for the Elderly, to the Rev. Paul A. Weiss, executive director, Wesley Manor project. Mr. Nye has the following comment to make with reference to the Digest quote: "The Reader's Digest article would, as is probably intended, have the reader to believe that Vice President Johnson had personally used his influence to win FHA approval of the church-sponsored project in his State of Weslaco, Tex. Such was never the case. To the best of my knowledge, neither I nor anyone in my office had any communication with Vice President Johnson relating to this case. "The quotation in the article from my letter of January 23, 1962, would have been more revealing of fact if only my reference had been to 'a member of the Vice President's staff' instead of 'Vice President Johnson.' At this time I have no positive recollection of any call having been made by a member of the Vice President's staff concerning the Wesley Manor project. However, in view of the fact that I referred to the Vice President in my letter of January 23, I am quite certain that I probably had had some type of a telephone communication from a staff member inquiring as to the status of the case. Some inquiry of this nature would have to have been made in order to prompt me to use the reference to the Vice President. Reader's Digest quote ITEM NO. 12 "Next year, Pickett's friend Sharp and others urged Houston's First Methodist Church to sponsor a retirement home on a large tract Sharp was developing. With Pickett present, a church committee rejected the proposal. The entire |