In the United States today, the affordable housing crisis has reached a breaking point. Despite a recent surge of apartment construction, rents have hit record levels. According to the June 2025 “State of the Nation’s Housing” report from Harvard’s Joint Center for Housing Studies, an all-time-high of 22.6 million renters—one in two renters nationwide—are now cost burdened, spending more than 30 percent of their income on housing and utilities. With so much of each paycheck devoured by rent, families are forced to cut back on food, clothes, healthcare, retirement savings, and other essentials. Especially for the poorest households, the rent eats first.
At the moment, the dominant liberal policy response calls for unleashing “abundance” by enhancing the incentives for developers to build more housing. The idea is straightforward. If only the government would reduce zoning barriers, streamline regulations, and offer subsidies to developers, the private market would be free to create enough housing for everyone. But the history of incentive-driven housing development offers a cautionary tale. During the postwar era, federal programs with a remarkably similar logic produced impressive volumes of new rental housing. Yet because the programs lacked adequate public oversight, they did so at the cost of rampant profiteering, flagrant bribery, high rents, and deepening racial inequality. They also helped lay the foundation of the Trump real-estate empire.
The history of federal incentives for multifamily housing construction shows that this outcome—excessive profits fuelling higher rents—stems from the very structure of the industry. It’s certainly no scandal for a developer to turn a profit. But private actors are also deeply invested in driving up land values over time, which fundamentally undermines the prospect of building abundant housing that will remain affordable. At the same time, builders often recoil at regulations limiting their ability to profit. When the scandals of the 1940s were exposed and Congress tightened oversight to prevent abuse, far fewer developers utilized subsidies for affordable rental housing. Others ended up twisting the initiatives to construct luxury apartments. As debates rage about “a liberalism that builds,” understanding the conditions under which developers might construct multifamily housing is more important than ever.
War housing
In 1942, amid wartime housing shortages, Congress launched the Federal Housing Administration (FHA) Section 608 program of “war housing” to spur construction of affordable rentals for defense workers. Rather than directly producing new apartments through public housing authorities, with Section 608 the federal government indirectly subsidized private builders. The FHA did not erect buildings or lend money directly, as local housing authorities did. Instead, the FHA offered insurance for private construction loans, socializing the risks for builders and bankers with American taxpayer dollars as the backstop. In other words, if a developer defaulted on their mortgage, the FHA would make the lender whole.
Created in 1934 to stabilize the housing and banking sectors during the Great Depression, the FHA’s mortgage guarantees encouraged lenders to offer loans with longer terms, fixed monthly payments, and lower interest rates. As many scholars have shown, policymakers preferred mortgage insurance to direct expenditures because it kept programs off the federal budget, preserved racial segregation through exclusionary underwriting standards, and maintained the fiction of a free market. When housing shortages mounted in defense production areas during World War II, Congress extended these credit supports to rental housing in the form of the Section 608 program for multifamily mortgage insurance.
Although seldom remembered today, FHA Section 608 marked an important turning point in federal housing policy. It not only protected banks against potential defaults. It also offered increasingly attractive terms for private builders by significantly liberalizing their insurance terms. Section 608 increased the level of FHA insurance from 80 to 90 percent of the mortgage value, reducing their required down payment to just 10 percent (and savvy builders found ways to lower down payments ever further). The program also lengthened the maximum mortgage maturity from twenty to twenty-five years, allowing for lower monthly payments. This arrangement made banks more willing to lend and builders more willing to construct apartments.
In terms of production figures, the program delivered impressive results. Between 1942 and 1950, FHA Section 608 underwrote approximately 7,000 apartment complexes, producing a total of 465,674 new rental units nationwide. Most were concentrated in large metropolitan areas, including some 60,000 units in metropolitan New York City, nearly 16,000 units in Chicagoland, and more than 14,000 units in Los Angeles County. But they were also built in all fifty states, including the smaller cities of Butler, Pennsylvania (142 units) and Boise, Idaho (297 units), and even in Puerto Rico (4,947 units). These FHA-insured projects accounted for two-thirds of all new private rentals during that period, and they produced twice as many apartments as public housing over those years.
Mortgaging out
Behind those numbers was a system rife with fraud and abuse. After the war, as housing shortages persisted, Congress further liberalized the program. The Housing Act of 1948 shifted the cost calculations of FHA-insured loans from “estimated replacement cost” to “necessary current cost.” Whereas initially builders could only count the cost of replacing the building materials, now they could list the full market value of the land and materials. The change invited speculation by allowing builders who had acquired land cheaply to mark it up to the “current” value amid the postwar housing shortage. With a friendly appraiser or by reselling their land through shell companies, builders could push the value even higher and pocket the difference. There was even an industry term for this process: “mortgaging out,” as in maxing out the mortgage to wring more profits.
By 1950, as members of Congress were getting wind of profiteering and bribes, the Senate convened hearings to investigate. Called to testify, Rodney M. Lockwood, president of the National Association of Home Builders, dismissed stories about inflated mortgages, calling them mere “barroom talk.” Likewise, the chairman of the Mortgage Bankers Association said that despite “a lot of experience with Section 608 . . . I have seen none that in my opinion were in excess of the cost.” Yet following the hearings, the industry journal Architectural Forum published an explosive exposé describing how “the FHA gold mine” worked: “this miraculous piece of legislation makes it possible for almost anybody of moderate acumen to become an apartment owner without spending a cent of his own money.” With allegations of fraud and graft mounting, Congress quietly allowed Section 608 to lapse in May 1950.
But when the Department of Justice opened its own follow-up investigation into the Section 608 program, the scale of the abuse discovered was staggering. The unraveling began when a high-ranking FHA official lost $5,000 playing craps at a Virginia Beach casino—about half his annual salary. The FBI found that he had been accepting bribes in exchange for inflated appraisals on FHA-insured mortgages. Whether the builder held the property or, as was often the case, they quickly sold it, renters were left paying artificially high rents to pay down the full mortgage costs.
These revelations snowballed into a major scandal, culminating over the summer of 1954 in a new round of Senate hearings. Sensational testimony from builders and FHA officials exposed how profiteering and speculation fueled the apartment boom. Many builders had overstated their construction and land costs in their insurance applications to secure higher mortgage valuations. After obtaining outsized government-backed loans, they built cheaply and slashed labor costs. Ian Woodner, builder of The Woodner and other 608 buildings in Washington, D.C., included the hefty legal fees for his divorce among the construction costs. Charles Glueck, a prominent mortgage broker for 608 projects in Indiana, did the same for receipts from his Florida vacations. Other builders resorted to bribing FHA officials for higher appraisals. The chief FHA appraiser for Los Angeles, John William Salmon, accepted a Ford automobile and $25,000 cash in exchange for an inflated valuation. The assistant director of the New Mexico FHA, Andrew Frost, enjoyed deep sea fishing trips and boozy parties hosted by builders.
Committee staffers discovered that builders had taken excess profits in 91 percent of the 1,547 Section 608 projects they investigated. One builder in New York invested just $20,000 in a development and walked away with $4.9 million in windfall profits. Another in Ohio scored a $1.1 million windfall after risking just $4,000 of his own funds. Altogether, the investigations found as much as $500 million in leftover funds (the equivalent of around $6 billion today) had been “mortgaged out.” Aghast at the pilfering of FHA-insured mortgages, the Senate called these sums “unconscionable windfall profits.”
Windfall profits
When hauled before Congress in 1954, most builders remained unapologetic. One of the most notorious witnesses was Fred C. Trump, father of the future president. To build the 1,860-unit Beach Haven Apartments in Brooklyn, Trump had invested just $249,000 of his own money. By inflating the land values and adding extra fees on his FHA insurance application, he secured an outsized loan for the dishonest amount. Trump then built the apartments quickly and cheaply, with $3 million leftover as developer’s income rather than physical housing.
At the hearings, Trump denounced “Washington headline hunters” for “circulating false and misleading stories.” News of his $3 million windfall at the Beach Haven Apartments had prompted tenants to demand rent reductions, and Trump moaned that such negative publicity was “very wrong and it hurts me.” Other witnesses were even more indignant. William J. Levitt, builder of the famed Levittown developments, profited from 608’s cousin, Section 603, for single-family rentals. “The housing was produced,” Levitt shot back at the vexed Senators, explaining that without “certain evils” required by “desperate” postwar circumstances, “you would never have gotten any builder over the age of 16 to go in and venture time, trouble, money, or anything else and get the volume of housing that had to be gotten.”
Levitt and Trump identified a central tension in FHA operations. In a sense, the corruption reflected the very design of Section 608. Desperate for new rental units to relieve the housing shortage, FHA officials had come to accept overvaluations as a necessary enticement for builders. While dozens of FHA officials were ultimately prosecuted for accepting bribes, no builders faced any serious legal consequences.
With the “windfall profits” scandal generating national headlines, Senator Homer E. Capehart, an Indiana Republican, expressed his disgust: “I think it is quite an indictment of the private enterprise system . . . that you just can’t get housing unless the Federal Government guarantees it 100 percent.” In its final report, the Senate committee echoed Capehart’s concerns about the troubling logic of credit liberalization and excessive profits as a necessary stimulus for private housing production: “We are not prepared to accept the premise that adequate rental housing cannot be made available to the American people except when unconscionable profits are realized.” “If that is the only alternative,” the report declared, “it is better that the Government build such projects itself.”
Segregation by design
While these revelations became a major scandal, far less discussed were the racial inequalities entrenched by the quest for private profits. As our mapping project on FHA Section 608 makes clear, builders who used the program largely avoided communities of color. Of the 15,672 units of Section 608 rentals built throughout metropolitan Chicago, 82 percent were located in census tracts with 92 percent or more white residents. The patterns were even starker in New York City: in the predominantly white borough of Queens, over 42,897 units of Section 608 were spread across 322 apartment complexes, with only one project—Convent Gardens in Harlem, with just 90 units—built in a Black neighborhood.
By delegating site selection choices to builders and maintaining discriminatory lending criteria, the FHA rental programs had deepened segregation. But when federal officials attempted to make amends for the racial inequalities of FHA credit operations, they found the resulting regulations left builders much less interested in participating.
As Congress pursued the FHA Section 608 investigation, lawmakers were simultaneously debating reforms to urban renewal. Given the racial geography of the hundreds of communities it was planning to destroy, the Housing Act of 1954 established another new FHA program, Section 220, to house displaced families on urban renewal sites. FHA director Albert Cole championed the use of mortgage insurance for urban redevelopment: “Builders who can transform a rolling field into a modern suburb can certainly change a slum into a desirable neighborhood.”
In response to the windfall profits scandal, however, Congress inserted into its urban renewal housing program strict cost certification regulations and profit margin caps of 5 percent. Crucially, because federal and local governments were involved in acquiring and preparing the land for urban renewal projects, builders were prevented from inflating land values. Given such controls against profiteering as well as other logistical headaches associated with urban renewal projects, builders largely stayed away from Section 220. Over the next decade, hundreds of municipalities undertook thousands of urban renewal projects that disproportionately destroyed communities of color. But Section 220 produced merely 45,000 units of rental housing—less than one-tenth of the total under Section 608. By 1964, nearly a quarter of these Section 220 projects reported “some difficulty” in meeting mortgage payments thanks to construction delays and high vacancy rates. Unable to inflate valuations, Section 220 builders often cut all the amenities, producing drab and desolate housing that failed to retain residents.
Facing profit caps and stringent cost certifications, many builders instead used Section 220 for luxury construction aimed at the higher end of the rental market. By the mid-1960s, the program had underwritten several notable high-end housing developments on urban renewal sites: Chicago’s Carl Sandburg Village, Los Angeles’s Barrington Plaza, Philadelphia’s Society Hill Towers, and Washington, D.C.’s Capitol Park Apartments. In builders’ hunt for profits, higher rents represented an alternative to cutting amenities.
When Congress convened another set of hearings in 1966 on Section 220, some representatives questioned the rationale of displacing poor and working-class communities with federal subsidies to make way for luxury housing. By then, however, with many cities losing population and urban rebellions mounting, Congress had abandoned any serious efforts at increasing the supply of affordable housing. Instead, federal housing policy shifted to vouchers, assistance for low-income homeownership, and other demand-side subsidies.
Limits to abundance
Much has changed in the decades since these FHA scandals. During the 1960s and 1970s, the Beltway diagnosis of the nation’s housing problem shifted. Instead of aiming to produce large volumes of new rental housing, policymakers began attempting to match tenants with existing rental housing. Yet as the problems of urban disinvestment persisted, the need for new construction became undeniable. In 1986, the Reagan administration created a new financial instrument to entice private lending in otherwise low-profit projects: not through mortgage insurance, but through tax credits like the Low-Income Housing Tax Credit. Meanwhile, FHA mortgage insurance remained the device for stimulating construction of single-family owner-occupied homes, and Congress progressively liberalized terms to make single-family mortgages easier to access—a market tapped by private finance during the George W. Bush era, with world-shaking results.
In the aftermath of the subprime mortgage collapse, the goals of national housing policy have swung from expanding home ownership back to increasing the supply of rental housing. Given the return of this goal, the history of public-private rental housing merits reflection. The midcentury FHA scandals show that loosened regulations and public subsidies—the main planks of today’s abundance agenda—are not enough to deliver sufficient affordable housing. Fred Trump did not just exploit the FHA system; he embodied its core logics of liberalized credit, socialized risk, and privatized profits. Trusting the same class of builders and recycling similar incentive schemes would be a mistake. Because developers, homeowners, and local governments are all deeply invested in maintaining or boosting property values, clearing out regulations and pouring in subsidies risks fuelling the same kind of speculative, profiteering frenzy that defined not only the windfall profits scandal but also the 2008 financial crisis.
Without strong oversight to regulate costs on both the demand and supply sides, the abundance agenda runs the risk of builders inflating costs to pad their profits, undercutting the goal of affordability. Advocates of the abundance agenda, who prioritize speed and thrift, might resist such regulation. But in real-estate markets where profits depend on scarcity and rising land values, any serious housing agenda must confront these structural dynamics. Or, they might learn the lessons of the FHA windfall profits scandal. To once again quote the 1954 Senate report, there is an alternative to subsidizing speculation: “It is better that the Government build such projects itself.”
An article presenting Brent Cebul’s and Michael Glass’s research on the policy history of multifamily mortgage insurance was featured in June issue of the Journal of American History. A geographic map of FHA-insured rental housing can be found at BuildingInequality.us.
