(FORTUNE Magazine) – What has gone before: The U.S. Department of Housing and Urban Development is rocked by scandal. It seems that ''influence peddlers'' have actually exerted influence on certain HUD decisions. Led by Tom Lantos of California and Barney Frank of Massachusetts, solons repeatedly get time on the tube to feign astonishment over these signs of evil in the executive branch. Silent Sam Pierce, HUD Secretary during the entire Reagan Administration, is raked over the coals and ends up taking the Fifth. Quite a story line, eh? And yet, somehow, we rate the other HUD scandal more dudgeonworthy. The other scandal, which has been viewed with cosmic indifference by Washington's moralists, is the one where the whole federal government is behaving like the Gambino family. To be specific, the feds are muscling a sizable number of developers out of profits to which they are contractually entitled -- the contracts having been signed with HUD itself. HUD Secretary Jack Kemp has been trying to lie low on this one, but it seems fairly clear that he is in on the fix, along with Congress and the President. Also a strong story line, one would think. To be sure, the American people may not yet be ready for dramatics in which the landlord is the hero. To revert to the starting line: Back in the Sixties, Congress decided that the country needed a whole lot of low-income housing. Since public housing was already a program in disrepute, and since the private sector had no market incentives to build new housing for poor people, Congress decided to tempt the builders with interest-rate subsidies. The government would offer 40-year mortgages with interest rates of around 1% to 3%. To sweeten the deal, there was another provision. If the property rose in value, then the developer could prepay the mortgage anytime after the first 20 years -- at which point he no longer had to maintain the controlled rents. When he was out from under the mortgage, he could go to market rents or turn the units into condos. This legislation had a number of predictable consequences. First, it did result in a lot of low-income housing getting built -- something on the order of 600,000 units over several years. Second, it resulted in a significant number of developers wishing to prepay their mortgages, and test the private market, as the 20-year terms began expiring in the late Eighties. Third, it resulted in Congress suddenly discovering, as that time frame drew closer, that this low-income housing was occupied by poor people. What a blow. This discovery meant that the tenants would not be able to buy the condos or pay higher rent and therefore would have to find other lodgings. What to do? Don't get us wrong, fellows. We agree that large numbers of people being evicted from subsidized apartments is some sort of social problem. We are unstunned at discovering that the U.S. political establishment wishes to prevent these evictions. Still, it does seem remarkable that hardly anybody in Congress is willing to insist that a deal's a deal -- and that if the government wishes to walk away from the deal, it should be prepared to pay heavily and not just stiff the developers. The stiffing thus far has taken the following form. First, Congress made a little finding. Lots of people have self-interested opinions, but when Congress has one it's a ''finding'' -- even if it came about in the absence of any serious hearings. The finding was that ''more than 330,000 low-income housing units'' could be lost through prepayments, and this would be a ''grave national crisis.'' Solution: the Emergency Low Income Housing Preservation Act of 1987. It said that no prepayments would be allowed for two years, while the feds tried to work something out. . Two years later, it is the fall of 1989 and, naturally, nothing has been accomplished. So -- Congress extends the ban on prepayment through next summer. The extension is woven into the Housing and Urban Development Reform Act of 1989, a bill redolent of ethical uplift and in the present environment impossible to vote against; in any case, the prepayment extension occasions absolutely no debate in either chamber. The reform bill is signed by George Bush in mid-December. The process of working something out is about what you might expect. Both Congress and HUD have various schemes for buying off the developers -- persuading them to accept new sweeteners like, say, the right to take out a second mortgage. Jack Kemp's proposal is a deal in which the low-income tenant gets a voucher worth ten to 15 years of rent payments and uses this to buy the unit. Unfortunately, the developer has no reason to assume that the voucher's value will equal market value. Negotiating about these matters is a tricky business for the average developer. Taking the government to court is a daunting exercise, especially since a lot of courts automatically defer to congressional findings. A real estate investor in Raleigh, North Carolina, went to court in an effort to establish his right to prepay -- and ran into an instant summary judgment against him. So some developers we know sound as though they would be easy enough to buy off, even if they end up with a lot less than the contract entitles them to. On the other hand, some legal scholars believe that a combative developer who reached the Supreme Court would have a good chance of having the whole double cross declared unconstitutional on several grounds -- one being that the breach of contract violates the Fifth Amendment guarantee of due process. Amazing, is it not, how often that amendment keeps getting mentioned around HUD?