HUD Refused to Act on Abuses, Agency Official Says

Top officials of the Department of Housing and Urban Development repeatedly failed to take effective action against abuses by private lenders in a six-year-old co-insurance program that already has suffered losses exceeding $100 million, HUD Inspector General Paul A. Adams testified Friday.

Two mortgage brokers suspected of fraudulent schemes in connection with the program are now being investigated by federal grand juries, Adams told a House Government Operations subcommittee on employment and housing.

‘We’ve Got a Catastrophe’

In the co-insurance program, the federal government and private mortgage lenders join to underwrite mortgages on apartment projects. Rep. Tom Lantos (D-San Mateo), chairman of the panel, said that the default rate in the program was 12.8%, and he estimated that the eventual cost to the government will “run into the hundreds of millions of dollars.” Rep. Christopher Shays (R-Conn.) agreed, saying: “We’ve got a catastrophe here.”

It was the latest disclosure of alleged waste in HUD programs during the Ronald Reagan Administration, when HUD Secretary Samuel R. Pierce Jr. presided in such a low-key way that he became known as “Silent Sam.”

Meanwhile, new investigations into HUD’s controversial allocations of federal housing grants were foreshadowed when Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, announced an inquiry into the embattled agency. A similar investigation is expected to be approved by the Senate Banking Committee next month, sources said.

An Army of Looters

Gonzalez, who unsuccessfully tried to avert cutbacks in housing programs during the Reagan years, told reporters: “The HUD scandals prove just how dangerous it is when programs are turned over to their enemies. As the (Reagan) Administration swung the wrecking ball at every facet of HUD, there was an army of quick-buck artists--looters--picking through the wreckage for their personal gain.”

New HUD Secretary Jack Kemp has scheduled appearances on Capitol Hill on July 11 and 12 to describe his efforts to reform the agency, which he has termed a “swamp.”

In his testimony before the subcommittee, Adams said an initial audit of the co-insurance program in 1984 found that lenders on eight projects had inflated their appraisals of projects by $36 million, and auditors recommended corrective measures. But top HUD officials refused to take action, terming the criticism unfair and unjustified, Adams said.

A second audit, completed late last year, showed the same kind of abuses of the program and mortgage defaults on 106 properties, or 13% of the total. However, HUD managers belittled the problems and refused to make recommended changes in the program, Adams said.

The inspector general said also that he had urged in January, 1988, that one troubled mortgage broker, DRG Funding Corp. of Washington, D.C., be stopped from doing any more HUD business until it agreed to follow HUD regulations on underwriting.

Firm Had 29% Default Rate

At that time, Adams said, 79 of the company’s 272 co-insured loans totaling $538 million, or 29% of its portfolio, were in default.

“For 11 loans on which DRG has submitted claims, HUD estimated its eventual loss at about $55 million,” he added. But HUD officials did not suspend DRG from the co-insurance program until last March 22, 14 months after Adams’ recommendations and six months after the Government National Mortgage Assn. had dropped DRG.

More recently, Adams said, an audit of Benton Mortgage Co. of Knoxville, Tenn., showed similar inflated appraisals and misrepresentation of rental rates. Unless HUD acts, he said, excessive subsidies of $37 million will be paid by the government.

Adams said federal grand juries are investigating both DRG and Benton.