Areas Most in Need May Be Real HUD Scandal Victims

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.

“I want our programs at HUD to be focused on those they are meant to serve--not the special interests,” Kemp said in April when the scandal began to emerge. As a measure of the scandal’s potential for attracting attention, two more congressional committees--the Senate and House banking panels--announced Friday that they would use their sizable investigative staffs to launch their own inquiries, on top of the probe already under way by the House Government Operations subcommittee on employment and housing.

While voicing confidence in Kemp’s integrity, House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said: “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. The HUD scandals prove just how dangerous it is when programs are turned over to their enemies.”

Pierce has tried to shift blame to Deborah Gore Dean, his politically well-connected executive assistant until 1988.

‘Liked Power’

Talking with reporters after his sole appearance before a congressional panel since the scandal broke, Pierce said the 33-year-old Dean “liked power. She liked the idea: ‘I can call the shots. I can get this for you if I want. I can stomp on you. I can kill you.’ That’s the kind of thing she liked.”

Pierce added, without being specific: “There was some lying going on, no doubt in my mind.”

Dean, daughter of Mary Gore Dean, who had a close relationship with the late former Atty. Gen. John N. Mitchell--himself a recipient of a $75,000 HUD consultant’s fee--invoked her Fifth Amendment protection against self-incrimination when she appeared last month before a House subcommittee.

Dean declined to be interviewed last week through her lawyer, Joseph E. diGenova, former U.S. attorney here. But in interviews with the Wall Street Journal last April and May, she said the moderate rehabilitation program “was set up and designed to be a political program,” and “we ran it in a political manner.” Dean left HUD early in 1988 after questions about difficulties in her personal finances and about her educational record and experience prevented her from winning Senate approval of her nomination as an assistant secretary. She set up a HUD-related consulting firm but has closed that office since the scandal broke.

The HUD scandal broke in April with a voluminous, highly critical report on the department’s moderate rehabilitation program by HUD Inspector General Paul A. Adams. Adams’ report focused not on Dean but on Thomas T. Demery, former HUD assistant secretary for housing and a federal housing commissioner, and $290,554 of contributions to Demery’s favorite charity, F.O.O.D. for Africa, by beneficiaries of HUD programs.

Many of the contributors contended that they were genuinely interested in the charity, which seeks to feed starving children in Mozambique and elsewhere in Africa. But Justice Department and congressional investigators are still probing the coincidence of their contributions and approval of HUD-backed projects.

Rivals for Power

In the power structure at HUD, Dean and Demery were rivals, according to sources at the department. Since the scandal surfaced, each has reportedly been trying to shift investigators’ focus to the other.

In his April report, HUD Inspector-General Adams identified no behavior as criminal. Kemp, commenting on the report, emphasized that it had found “no evidence of criminality or legal wrongdoing of any kind.”

That is a conclusion that some federal prosecutors and former prosecutors now consider premature at best.

Adams, in an interview, said he maintained “an ongoing dialogue” throughout the investigation with attorneys in the Justice Department’s public integrity section. His conclusion of no legal wrongdoing, Adams said, was “predicated in large part on the advice” of those lawyers, specialists in public corruption.

But Edward S. Dennis, assistant attorney general in charge of the Justice Department’s criminal division, said there were “some consultations (with Adams) at a fairly low level dealing with the issue of influence peddling.”

Dennis declined to characterize his evaluation, adding that “not all influence peddling is criminal.”

At this point, Adams’ report and other evidence, including the subsequent testimony by former HUD officials and consultants, are under review by the Justice Department, Dennis said.

That puts an impressive roster of Republican heavyweights on the Justice Department’s radar screen. In addition to Watt and Brooke, those picking up hefty HUD consultant fees included Paul J. Manafort, a political consultant to George Bush in 1988, and Frederick M. Bush, a major campaign fund-raiser for Bush last year and his nominee this year as ambassador to Luxembourg.

Altered Testimony

On Thursday, Frederick Bush, no relation to the President, altered his earlier testimony to the House employment and housing subcommittee. He acknowledged much closer ties with Dean, saying he met with her on 15 to 18 occasions, rather than four or five times that he acknowledged on May 25, while his company had 13 grant requests pending before HUD.

The activities by the high-profile Republicans have overshadowed the kind of HUD fraud that has so far dominated the FBI’s interest.

Equity skimming and related HUD fraud are under investigation by 60 FBI agents around the country, double the number of four years ago, according to Larry A. Potts, chief of the FBI’s white-collar crime section.

Depressed local economies, Potts said, spawned much of the equity skimming. In one permutation of the scheme, a debt-plagued homeowner with a HUD-backed mortgage sells the mortgage to a conspirator who moves in a renter but then pays nothing on the mortgage.

Homeowners are particularly desperate in the Southwest and in Denver, where home values in many neighborhoods have been falling. In Oklahoma, a special Justice Department team of attorneys has recently won 18 convictions, mostly through guilty pleas, for felonies involving HUD-insured loans for middle- and low-income housing.