Kemp Unveils Reforms at U.S. Housing Agency : HUD Chief Promises Responsible Direction, Sound Business Practices

Housing Secretary Jack Kemp announced a series of reforms Tuesday that he said would bring “responsible financial management and sound business practices” to the department’s Federal Housing Administration, which has been plagued by losses and mismanagement.

In letters to Sen. Alan Cranston (D-Calif.) and Sen. Alfonse M. D’Amato (R-N.Y.), ranking members of a Senate subcommittee that is investigating the housing administration, Kemp outlined a series of “structural, financial and managerial” actions changing FHA procedures.

The government, he said, must “reinvigorate FHA, strengthen its finances and recommit the agency to its mission of increasing home ownership opportunities for low- to moderate-income families and first-time home buyers.”

The FHA operates programs to spur improvements in housing, provide mortgage insurance and stabilize the mortgage market. It insures mortgages up to $67,500, or up to $101,250 in high-cost areas, to enable low- to moderate-income people to buy homes with smaller-than-usual down payments.

Losses in Hundreds of Millions

The agency has been sharply criticized in recent months for allowing some independent escrow agents to divert funds for their personal use from the sale of property seized in foreclosure actions. The most notorious case was that of Marilyn Louise Harrell, an escrow agent here who became known as “Robin HUD” after she admitted diverting as much as $5.5 million in HUD funds and gave much of the money to charity.

HUD officials have estimated that, at the very minimum, the department has lost hundreds of millions of dollars in recent years through fraud and mismanagement in the FHA.

At a hearing Tuesday before the congressional panel, the Senate Banking, Housing and Urban Affairs Committee’s subcommittee on housing and urban affairs, Comptroller General Charles A. Bowsher testified that the FHA is “in terrible shape.”

Bowsher said the General Accounting Office had been forced to halt audits of the agency several times because it could not get adequate financial information to assess its operations.

“To an extent, there will always be people who try to abuse government programs,” Kemp said, citing “the case of ‘Robin HUD.’ ” However, he added, “HUD’s practices should not make such abuse too easy and tempting.”

Kemp said the department is considering establishing a new review board of housing experts who could advise FHA and “help protect the long-term viability of its programs.”

Inside the agency, Kemp said, FHA computer and accounting systems would be redirected to better catch abuses and program managers will be held accountable for the “timely and accurate” reporting of financial conditions.

Until now, Kemp said, there had been no managers “accountable to a bottom line,” and “in such a culture, losses are either not noticed, or ignored.”

The majority of FHA’s insurance is distributed by outside firms. As a result, Kemp said, lenders have viewed this “delegated authority as a right instead of a privilege, and HUD has failed in its efforts to firmly monitor and control lender activities.”

To Publish Audits

To remedy this, Kemp said, the FHA would review lender standards “to ensure that only responsible and soundly capitalized firms participate in HUD programs.”

Kemp said HUD will begin publishing annual FHA audits that will show “the actual financial status of the funds on a timely basis.” Past failure to do so, Kemp said, had undermined the agency’s ability “to make decisions on the long-term financial strength of the funds.”

He added: “Without timely recognition of losses, programs can run for years before cash losses bring attention to the problem.”

Kemp said HUD will also hire one of the eight major accounting firms to conduct a full analysis of the FHA’s main insurance funds.

Bowsher recommended that the agency conduct annual audits, such as the one that Kemp proposed.

Recent writedowns, he said, have reduced FHA’s equity from $3.1 billion to $1.2 billion at the end of fiscal year 1987. For fiscal 1988, Bowsher said, there will also be large losses because large lenders went under, adding: “In two years, the equity has been hit pretty hard.”

Inadequate Monitoring

Tom Craren, a partner in the Price Waterhouse accounting firm, which is auditing FHA under contract with GAO, said the problems at FHA include inadequate monitoring of appraisals, property management and agents who sell FHA properties.

Bowsher said it may take three or four years to install the right kind of internal controls and computer changes to make information more readily available to managers.

Alluding to former HUD Secretary Samuel R. Pierce Jr., Bowsher said: “There was a lack of management commitment for a number of years. If top management doesn’t want to address problems, they won’t be addressed.”

Times Staff Writer William J. Eaton contributed to this story.