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Areas Most in Need May Be Real HUD Scandal Victims

July 02, 1989|RONALD J. OSTROW and WILLIAM J. EATON | Times Staff Writers

WASHINGTON — The crime is all the more insidious because it thrives in areas of severe economic distress--Texas, Oklahoma and Colorado these days.

A straw buyer obtains home financing backed by the federal Housing and Urban Development Department and then signs the house over to a conspirator who would not have qualified for HUD financing himself. The conspirator, who might have as many as 50 such deals alive at one time, offers the home for rent but makes no mortgage payments.

The government, hobbled by a combination of HUD's own inefficiency and state-provided protections for defaulting home buyers, needs at least 18 months to identify such frauds. Even then, it has difficulty sending the conspirators to jail--and meanwhile, the perpetrators pocket the monthly rent payments, and HUD is stuck paying off the bad loan.

"Equity skimming," as this particular scam is called, is only one of the frauds perpetrated on HUD during the Ronald Reagan Administration. It was a particularly costly one, with estimates of losses running into the hundreds of millions of dollars.

As a consequence, crimes against HUD now stand second only to defense procurement fraud on the list of abuses against government programs that the FBI is investigating. More than 600 investigations are active around the country.

And that does not even count the political influence-peddling and apparently systematic corruption at HUD that have commanded recent headlines.

Major Republican figures such as former Interior Secretary James G. Watt and former Sen. Edward Brooke (R-Mass.) earned six-figure fees for helping real estate developers win HUD grants to rehabilitate housing for moderate-income renters. HUD Secretary Jack Kemp suspended that program earlier this year but reinstated it when he felt the department had reduced the opportunities for political cronyism.

And only on Thursday, Kemp said he planned to kill a smaller HUD loan insurance program found to be "riddled with abuse." That program, which financed such luxury projects as golf courses, also brought substantial middlemen's fees to politically well-connected consultants.

Nor are these the only sources of scandal at HUD. Congressional committees are looking into charges by HUD's own inspector general that private escrow agents handling HUD-foreclosed properties embezzled at least $20 million from the department. One of these agents, dubbed "Robin HUD," faces a grand jury investigation over charges that she pocketed $5.5 million in an attempt to help the homeless.

Insurance Program

And on top of that, House investigators say HUD's co-insurance program is riddled by fraud and could cost taxpayers as much as $1 billion. Under this program, HUD shares mortgage insurance risks with private lenders who have full responsibility for appraisals and loan approvals. At issue is how some brokers were apparently able to inflate appraisals of multifamily projects to increase the size of mortgages and thus earn higher fees, at the same time letting the government take most of the risk of defaults.

Only two weeks ago the Justice Department directed federal prosecutors throughout the country to conduct a wide-ranging review of fraud against HUD and "possible improper conduct by present or former U.S. government officials."

That apparently reversed the position the department had taken earlier, when officials in the department's public integrity section said they believed no laws had been broken by the influence peddling in the so-called moderate rehabilitation program.

Altogether, predicts a defense attorney involved, the HUD morass will ultimately overshadow the scandals at the Environmental Protection Agency in the first term of the Reagan Administration. Those scandals drove EPA Administrator Anne Burford out of her job and resulted in a jail term for one of her assistants, Rita Lavelle.

The scandals at HUD, according to testimony before congressional committees, can be traced in substantial measure to the laid-back, hands-off management style of former HUD Secretary Samuel R. Pierce Jr., the only Cabinet member to serve the full eight years of Reagan's presidency. Pierce's style, according to a variety of witnesses, created a climate in which widespread abuses went unchecked.

Backwater Department

Throughout the Reagan Administration, HUD was viewed as a backwater department that ran programs that should mostly be slashed or killed. When Congress repeatedly refused Administration requests to kill the moderate rehabilitation program, for example, HUD made little effort to continue monitoring the program, according to an April audit by the agency's inspector general.

Kemp, the activist former congressman and presidential candidate who took over HUD's reins in January, has found it particularly offensive that the misuse of public funds affected programs designed originally to create affordable housing for the poor.

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