WASHINGTON — Four former Housing and Urban Development department officials made more than $5 million in profit from three housing projects that they renovated with HUD subsidies after investing only $61,000 in cash, a General Accounting Office staff member testified Wednesday.
John M. Ols Jr., a housing specialist for the GAO, cited the $5.7 million in pretax earnings by the "Winn group" of former HUD officials as an example of "excessive" profits made by prominent Republican real estate developers from government programs intended to benefit low income tenants.
The testimony before the Senate Banking, Housing and Urban Affairs Committee, which is intensifying its investigation of abuses at HUD in recent years, shed new light on benefits received by Republican developers from the housing agency's controversial programs. A parallel inquiry by a House Government Operations subcommittee has focused on large fees earned by Republican consultants on certain projects.
"In previous hearings we've identified the rats and now we're looking at the cheese that attracted them," said Sen. Bob Graham (D-Fla.), who presided at the hearing.
"If they hadn't been raking it off this way, we could have built more housing for the poor," added Sen. Paul S. Sarbanes (D-Md.).
The "Winn group" included former Federal Housing Commissioner Philip D. Winn; former HUD undersecretary Philip Abrams; Lance H. Wilson, former executive assistant to former HUD Secretary Samuel R. Pierce Jr., and Joseph M. Queenan, former regional administrator of the Denver HUD office. Winn, who has left the firm, Winn & Associates, is now ambassador to Switzerland.
The GAO estimated that on one project--the Sierra Pointe apartments in Clark County, Nev.--the development firm made $1,821,006 on a cash investment of only $54. Other projects in Denver and Tulsa, Okla., that received HUD subsidies under the Section 8 moderate rehabilitation--or Mod Rehab--program, along with tax credits, earned the firm $1,970,440 and $2,089,727, respectively.
According to the GAO analysis, developers identified properties as good prospects for low income housing and then obtained commitments from HUD for subsidies to renovate them. Using the HUD grants as collateral, the developers were often able to get loans to buy the properties with only small cash payments and letters of credit.
After renovation was complete, the developers could sell the projects for large sums, with the rent subsidies guaranteed for the units and the tax credits that were available providing a strong lure for buyers.
"What made this lucrative is they knew how the system works," said Ols. ". . . Developers were able to realize substantial gains on their limited investments while undertaking very little risk."
Ols said that "excessive" returns on eight projects, including the three involving the Winn group, could add up to $25 million over a 15-year subsidy period.
In related testimony, HUD Inspector General Paul A. Adams said that 20 high-paid consultants hired by developers received fees totaling $5,719,469 for obtaining HUD grants for 51 projects, accounting for one-fifth of all the housing units subsidized during the 1984-88 period.
Leading the list was Joseph Strauss, former special assistant to Pierce, who received $1,684,875 for his HUD consulting work. In second place was Louie B. Nunn, former Republican governor of Kentucky, who got $594,000 in fees. Richard Shelby, a former Oklahoma Republican official and former campaign adviser to President George Bush, received $442,000 as a housing consultant, the inspector reported.
Among others on the list with fees they received for HUD work: former GOP Sen. Edward W. Brooke of Massachusetts, $183,000; Frederick M. Bush, a Republican fund raiser not related to the President, $315,000; Carla Anderson Hills, former HUD secretary, $138,445; Paul J. Manafort, a GOP political operative, $348,500; Michael Karem, former HUD deputy assistant secretary for housing, $360,000, and Gerald Kisner, former HUD deputy general counsel, $282,500.
Abrams, a member of the Winn group, received $100,000 in consultant fees. He has testified before the House subcommittee that he used his influence at top levels of HUD to obtain federal grants for rehabilitation projects.
Lynda M. Murphy, a Washington attorney who was a close friend of Deborah Gore Dean, a HUD official who played a key role in allocating federal grants under the Mod Rehab program, received $83,400 in consultant fees. Murphy has testified that she hired Dean for a $5,000 retainer and paid her $2,500 a month after Dean left HUD.
Gerald R. Carmen, former head of the General Services Administration in the Ronald Reagan Administration, was a partner in another rehabilitation project, a 352-unit apartment known as Pebble Creek in Arlington, Tex., for which the GAO estimated profits of $2,102,963 on a cash investment of $85,688.
As the Senate committee opened its own wide-ranging inquiry into the HUD scandals, the House Government Operations Committee's subcommittee on employment and housing voted to issue a subpoena for a Sept. 27 appearance by Wilson. Wilson, the former HUD official and Winn group executive, reportedly made several million dollars from his HUD connections.
Senate Democratic leader George J. Mitchell of Maine said it appears that billions of dollars were lost to fraud and abuse in the housing agency during the Reagan Administration.
"The process was driven by greed," Mitchell said in a statement. "Large sums of money intended to help poor and working class Americans were diverted into the pockets of well-heeled and well-connected political operators.
"It is obvious that HUD was used as a political slush fund where political appointees gave favors, amounting to millions of dollars of taxpayers' money, to politically well-connected individuals," he said.