When contractor Joseph D’Alozo first started working on 550 West 156th Street two summers ago, it was still a crack den, where squatters stole gas and electricity from other buildings. “They had every Rube Goldberg thing that could be done in there,” he remembers. He had no idea that this wreck was actually a gold mine for a group of real estate speculators.

D’Alozo initially estimated it would cost about $80,000 to rehabilitate the building. But he soon noticed serious structural damage: The floor joists needed replacing. His clients, the nonprofit Word of Life Ministries, disagreed. “They told me to just put plywood over it,” recalls D’Alozo, “and don’t worry about it.”

But D’Alozo was worried. He soon quit a project that increasingly looked like a fool’s enterprise. (He was also never paid.) The building, he came to believe, “needed another $150,000 of work” just to be habitable.

This rowhouse’s troubles, though, went far deeper. Financially, it was perched atop a tower of speculative financing, burdened with hundreds of thousands of dollars in debt.

In May 1998, Long Island-based Diploma Realty had bought the building for $100,000 (this figure, and other purchase prices in this story, were calculated based on taxes on the sales). Shortly after, Diploma sold the property for $285,000 to Word of Life, which paid for the building with a loan backed by the Federal Housing Administration. The loan included $42,000 to rehab the building. It also came with a guarantee that the federal government would reimburse the bank if Word of Life didn’t pay its bills. It was all part of a U.S. Department of Housing and Urban Development program intended to turn decrepit buildings into affordable housing.

But Harlem never got new apartments in the deal. Word of Life stopped paying its mortgage last February, leaving its bank, Firstar, with a $324,000 bill, and West 156th Street with an abandoned building blanketed in graffiti.

Last summer, Firstar put the building on the market, in an attempt to make back its substantial investment. Its asking price: half a million dollars.

This sagging building is just one of more than 150 rowhouses in Harlem that have fallen prey to a high-stakes profit-making scheme that has shamelessly exploited a federal affordable housing loan program and left decaying and gutted buildings–and a hotly disputed $50 million-plus bill–in its wake.


As City Limits reported last fall in The Harlem Shuffle (November 1999), the effort was set up to produce quick cash, and virtually guaranteed that the federal government would be responsible for paying back a flood of bad loans.

Most of the transactions relied on the speculator’s trick known as flipping. Diploma and other realtors purchased large numbers of properties cheap, then quickly resold them, at much higher prices, to nonprofit organizations eligible for special federally insured loans.

For example: In April 1998 Cazzo Realty purchased 336 West 145th Street from an estate for $20,000. Seven days later, it sold the building to Word of Life for $225,000. (Cazzo, Diploma and the other real estate companies involved in the deals are all registered for business at the same Mineola law firm.) The nonprofit was able to swing the deal and 16 others like it courtesy of the federal Department of Housing and Urban Development’s 203(k) loan program, which encourages banks to lend to nonprofit organizations looking to purchase and rehabilitate run-down housing.

A Long Island financial institution, Mortgage Lending of America, issued Word of Life a $316,000 mortgage on the building, part of which was to pay for repairs. MLA could lend generously and confidently because all 203(k) loans are insured by FHA, a subsidiary of HUD. If the deal went bad, an insurance fund would pay the company back in full.

The loan did not remain MLA’s for long, anyway; the lender soon sold it to Firstar, which routinely purchases mortgages from other financial institutions in order to profit from interest payments. MLA got instant cash. And Firstar inherited the guarantee that HUD would pay loans back in full should anything go wrong.

Each deal was structured much the same way. Nonprofits purchased run-down Harlem buildings from the real estate companies, for prices much steeper than the realtors had paid for them. The majority were bought with loans from MLA, which quickly resold them to other banks. And most of the buildings were managed on behalf of the nonprofits by Cobb Management, another company registered with the Mineola law firm. A developer familiar with the arrangement says the law firm lured nonprofits with promises of $5,000 fees for each property they bought, and the prospect of having rehabilitation and management handled for them.

Now, Cobb has stopped paying the mortgage bills, and virtually all the properties it ran are heading toward foreclosure. The last mortgage payment on Word of Life’s 145th Street building, for example, was made last February. The nonprofit still owes Firstar $312,000. Cobb itself went out of business last summer. And MLA closed up shop last July, leaving the banks that had bought its bad loans with nowhere to return them to.

Firstar isn’t the only bank that took on millions in bad loans. M&T Bank bought at least $27.6 million of them from MLA and other lenders. Another nonprofit that had bought 46 buildings from the realtors, St. Stephen’s Community Development Corp., only made one small payment on one of its properties, 108 West 119th Street. On that property alone–where tenants have had to pick up a $2,700 Con Ed bill left behind by Cobb–M&T is looking to collect $400,000.


Because of the vast extent of the collapse, it is difficult to determine exactly how much money was generated from the dozens of flips. Full transaction records obtained for 31 of the buildings shed light on the extent of the gains. The realty companies paid a total of about $4 million to buy those buildings in 1998 and 1999. The nonprofits, in turn, took out $10.7 million in mortgages to buy them from the realtors. Today, those nonprofits still owe $10.2 million in mortgage payments.

Counting the outstanding bills on 167 buildings, Firstar and another bank, M&T, are now owed more than $50 million, and those bills are coming due. The responsibility of paying back those bad loans has fallen on HUD.

The banks tried to make back the full amounts of these bad mortgages by attempting to sell the decrepit buildings. But the realtors’ scheme, which relied on pumped-up appraisals, had inflated prices far beyond what the market would bear. One Harlem realtor, who tried futilely last summer and fall to sell dozens of these properties, commented at the time that “we’re flooding the market with overpriced buildings that can’t be sold.”

M&T spokesperson Michael Zabel agrees that the situation is extraordinary. “We’ve never seen anything like this before,” he says, emphasizing that the bank trusted HUD to properly screen the developers who take out 203(k) loans. HUD did not return repeated calls for comment.

Asserting that the banks should have subjected the loans to greater scrutiny, HUD initially refused to pay them back. But it has now agreed to allow the banks to revalue and sell the properties at lower market prices. HUD will make up the difference from FHA’s insurance pool, which is funded by small annual charges to mortgage borrowers. “We’re going to try to put the properties back out with realistic market value,” says Zabel. “Many of the prices are inflated. We are going to try to rectify that.”

Zabel would not comment on why M&T decided to purchase the loans from MLA, or what process it uses to evaluate such loan deals. But aside from the money that the bank can make servicing the loan, it also receives credit under the Community Reinvestment Act for buying the mortgages.

Even before surrendering its license, MLA had been in trouble with HUD, which last year barred the lender from making any more 203(k) loans. HUD data shows that the lender’s default rate was a staggering 99.04 percent in Manhattan and 58.7 percent in Brooklyn during the last two years.

Now, the lender is a defendant in a suit by the New York State Attorney General, which alleges that it collaborated with a Brooklyn nonprofit and another realtor to profit heavily from 203(k) loans. The U.S. Attorney, Manhattan District Attorney and Federal Bureau of Investigation are all now investigating the Harlem deals. HUD has reportedly taken action or is recommending action against more than 150 individuals and organizations, including MLA.


The numbers may be frightening, but the most spectacular wreckage is visible in the streets of Harlem. Under HUD rules, work on many of these buildings was supposed to be finished by the summer of 1999, but most were still far from habitable. Some were outright disasters, with sheared-off floors or mere gestures for roofs. Others were hollowed out, then abandoned.

Little has improved since. In 34 buildings surveyed by City Limits, 15 have been gutted or half-renovated, and another 15 don’t appear to have been worked on at all. Just four are finished. On 123rd Street, three 203(k) buildings in a row are essentially junkyards.

The Harlem realtor who tried to sell the buildings couldn’t believe the condition she found them in. “I’m walking into shells and all the rehab money is gone,” she marvels. “Who signed off on this stuff?”

All told, suppliers and workers are owed about $115,000. Philip Glick Supply Co. suffered some of the biggest losses. “We cut them more slack than we probably should have,” says company owner Adam Glick. With Cobb out of business, Glick and other vendors have put liens on the buildings in the hope of eventually seeing some money. But in the process of foreclosure, smaller claims like Glick’s often get swept aside.

D’Alozo realizes there’s little hope of a HUD bailout for him. “Will I see my money? Probably not,” he laments. “I’ve written it off.”

Research assistance by Amanda Bruscino and Kevin Fleming.