How HUD Helped Fund Desert Resort Condos

Al Wiggins was a small Santa Ana home builder who started out as a barber. Mac Binger was born to one of the wealthiest families in America: prominent Midwesterners, owners of thoroughbred racehorses and Broadway theaters.

This unlikely pair teamed up to build luxury condominiums around a golf course and country club in the resort town of Palm Desert using a federal Department of Housing and Urban Development program for the poor.

While there is no indication any laws were broken, the Desert Falls Country Club is an example of how far HUD has strayed from its original mission of housing the nation’s poor. It’s a tale of loose regulations that involves a former HUD official hired as a consultant and what a HUD auditor’s report said was questionable use of a program meant for the poor and people of modest means.

Wiggins and Binger turned to the HUD office in Santa Ana when the banks were reluctant to lend them money for Desert Falls.

But when HUD officials in Los Angeles and Washington said luxury condos were not exactly their idea of affordable housing, the two partners hired a former HUD official and promised him $60,000 to help open doors at the agency.

HUD wound up guaranteeing a $13.6-million loan to build Desert Falls Country Club. In return, the agency made the Orange County home builder and Binger promise to sell a fifth of the condos at prices people of modest means could afford.

Two years later the project collapsed into bankruptcy.

Today, James M. (Mac) Binger, is still building there with his new partners, with one big difference: HUD no longer requires any of the units to be affordable. The condos start at $129,000. HUD, meanwhile, has little to show: exactly 20 “affordable” units out of 1,300 planned for Desert Falls.

In many respects, Desert Falls isn’t much different from other projects financed by HUD’s Title X loan guarantee program. Since 1977, according to HUD’s own figures, 25 of 58 developers who got loans insured by HUD under Title X have defaulted, including the developers of Orange County’s Robinson Ranch. That means HUD must repay the lenders, and HUD figures it will lose $90 million on those bad loans.

That’s small potatoes compared to some HUD programs. HUD Secretary Jack Kemp estimates mismanagement, theft and political cronyism under his predecessor, Samuel R. Pierce Jr., may eventually cost the government $2 billion.

Title X had such a dismal record that Kemp announced in June he would end it. Among its biggest failures was Desert Falls. The country club caused such a flap that HUD tightened its Title X rules. Even under the old, looser rules--a HUD auditor would later say--Desert Falls should never have received government assistance.

Investigation Due

Title X has yet to be scrutinized by a House subcommittee investigating HUD although a spokesman for Rep. Tom Lantos, a Democrat from San Mateo and the subcommittee’s chairman, says it will investigate Title X as soon as September.

Should it investigate Desert Falls, the subcommittee will hear about a cast that includes the Binger family of Minneapolis and Montana, heirs to the 3M Scotch tape fortune.

It will hear about Oscar A. (Al) Wiggins of Tustin, who works out of a one-room office in Santa Ana. He’s building a couple of small subdivisions now, but nothing the size of Desert Falls. He lost his stake in that during the bankruptcy.

Binger would not be interviewed. But Binger’s lawyer and fellow Desert Falls investor said Binger was only trying to make a profit and provide affordable housing for retired people.

“This project is not at all like the things you’ve been reading about in the paper,” said George R.A. Johnson, a Minneapolis lawyer with a prominent firm. “Everything here is totally aboveboard and by the book.”

Wiggins insists that Desert Falls was eligible under Title X rules and that the two partners didn’t do anything wrong.

Officials Cite Regulations

HUD officials say the agency insured the loan because it couldn’t turn down Binger and Wiggins under the old Title X regulations.

Now 59, Wiggins had never applied for a Title X loan when he met Binger 10 years ago. Neither had Binger. The two met, according to HUD records, when Binger backed a Loma Linda subdivision in San Bernardino County called Springhill that Wiggins was building.

Wiggins was president of Pacific Coast Builders Inc., which he had started in 1975 after years of working for other people.

Binger, now 47, is the son of James H. Binger, the former chairman of Minneapolis defense contractor Honeywell Inc. and Virginia McKnight Binger, daughter of William L. McKnight, longtime chairman of Minnesota Mining & Manufacturing Co. of St. Paul--3M. At one time, she invested at least $500,000 in one of Mac Binger’s corporations involved in Desert Falls.

Binger lives in a small Montana settlement called Big Arm at the western edge of the Rockies on picturesque Flathead Lake, where he runs a cattle ranch.

Late in 1979, Wiggins and Binger bought 400 acres near Frank Sinatra Drive in the resort town of Palm Desert--near Palm Springs--for $6.6 million.

Wiggins and Binger saw the opportunity to make money in the Palm Springs area, where the warm weather lures wealthy snowbirds away from northern storms and ice.

Building homes in the desert can be risky. Many people who buy houses in resort areas like Palm Springs are wealthy people looking for second homes. And demand for second homes often swings wildly depending on the health of the economy.

In the recession years of the early 1980s, the banks were frightened of lending in the desert. The big loans Wiggins and Binger needed to build Desert Falls weren’t easy to come by.

By late 1981, Wiggins was knocking on the door of the HUD field office on the sixth floor of the federal building in Santa Ana.

Title X--and HUD itself--were products of the 1960s and President Lyndon B. Johnson’s Great Society, tools to lift the poorest Americans out of the slums and ghettos and help them into decent housing.

The same 1965 law that created HUD also authorized the federal government to insure loans to developers for building roads, grading, landscaping and otherwise preparing land for construction. That program became Title X. It was supposed to encourage the participation of small builders in constructing housing for low- and moderate-income people.

The developers, however, weren’t much interested in Title X until the high interest rates of the recession years in the early 1980s made it attractive: If you could just get through the red tape, lenders would offer lower interest rates to developers whose loans were insured by HUD, because HUD guaranteed the lenders would get paid back no matter what happened.

Regulations Loosely Drawn

It was soon obvious, however, that Title X regulations were drawn so loosely that a developer could drive a truck--or slide a country club--right through them.

Title X didn’t, for instance, actually require a builder to construct affordable housing, or specify how much. It only “encouraged” him to do so.

Even so, Title X wasn’t supposed to be used to build resorts, because resorts clearly weren’t housing for the poor or people of moderate means, said a HUD auditor’s report in 1986.

When Wiggins and Binger first approached HUD they had no plans to build any affordable housing. They said they were going to price their condos--at 1981 prices--from $120,000 to $180,000. The Santa Ana office liked the project and passed it along to Washington.

It wasn’t long, however, before the Desert Falls Country Club application ran into trouble. A HUD economist in Los Angeles three times recommended rejecting the project. His reasons: “Too great a risk,” because home sales were slumping in the desert. And where, he asked, was the affordable housing Title X was supposed to build?

All right, said the partners: We’ll make 20% of the units affordable.

By the spring of 1983--more than a year after Al Wiggins had walked into HUD’s Santa Ana office--Alan J. Kappeler, the director of the office of single-family housing in Washington, found himself rejecting Wiggin’s and Binger’s application again. He was still repeating--months later--some of the same objections the HUD economist had raised: The project was too risky; the developers didn’t appear to have enough cash to carry through and there was no assurance that speculators wouldn’t buy up the affordable condos.

Suggested Consultant

It was sometime in early 1983, Wiggins said, that Johnson--Mac Binger’s lawyer and fellow investor in Desert Falls--suggested to Wiggins that Binger felt the company needed to hire another consultant.

The man Binger had in mind was Robert J. Lloyd, who likes to describe himself as just “a country boy from Minnesota.” An outspoken Republican home builder and lumber dealer from Mankato, Minn., Lloyd had been a deputy assistant HUD secretary for public housing up until a few months earlier, a political appointee who vigorously defended the Reagan Administration’s cuts in federal funds for public housing.

Lloyd had left HUD in May, 1982, after only six months. He told a Kiwanis audience in Mankato that he left because he was dismayed by the corruption and the type of “political hardball” played at the agency.

“I was not a lobbyist. I helped them do some stuff they didn’t know how to do,” Lloyd told the Times Orange County Edition. “It’s nothing like the stuff in the papers. I just knew what buttons to push.”

Lloyd said a mutual friend--an officer of the Binger family’s prestigious philanthropic organization, the William L. McKnight Foundation--asked him to help Binger, whom Lloyd had never met.

Wiggins said Lloyd introduced him to a man who purported to be a high-ranking HUD official--Wiggins says he can’t recall the man’s name--at dinner in a Washington restaurant the night before an important meeting with HUD officials in 1983. Lloyd says he doesn’t remember the dinner.

After the project was approved, Wiggins and Binger would sign a note dated Jan. 13, 1984, promising Lloyd $60,000 plus interest in three installments. The note is filed in U.S. Bankruptcy Court, where Lloyd is one of the project’s creditors. Lloyd said he also received more than $10,000--he can’t remember exactly how much--before the note was signed. Wiggins said it was $15,000.

Desert Falls Approved

Finally the waiting came to an end. In June, 1983, Desert Falls was approved by Shirley McVay Wiseman, a political appointee and HUD’s deputy assistant secretary for single-family housing who had been at the agency just a few months. She is now president of the powerful National Assn. of Home Builders, a Washington lobbying group.

Wiseman would leave two years later and lobby the agency herself on behalf of other Title X projects. It was Wiseman, too, who negotiated a controversial agreement to sell the Robinson Ranch on a low bid to developer and Republican contributor William Lyon, according to HUD internal documents. Wiseman did not return telephone calls.

Wiseman said in a memo that the developers had satisfied all HUD’s questions about Desert Falls. As a condition of her approval, however, she insisted that the affordable units at Desert Falls be sold to people whose families earned less than $37,500 a year. Ironically, given what happened after the bankruptcy, she also said the requirement that 20% of the condos be affordable “must be met at every stage of development.”

But nobody at HUD ever checked to see if the buyers were, in fact, people of moderate income.

The affordable condos were supposed to be for working-class residents of the resort town of Desert Palms, who would live in them year-round, according to the partners’ HUD application.

But at least one of the units was rented for $850 a month. And people whose addresses were listed in land records as in Montana--Binger’s home state--bought two of them, according to Riverside County property records. Binger’s lawyer said it is probably a coincidence the two buyers are from Montana, and they are probably retired people who met the HUD income requirements.

In an environmental impact statement that estimated the median income of the Palm Desert area, the developers omitted much of the population of the surrounding area, according to a report by the Riverside County Planning Department. Thus they exaggerated the wealth of their potential buyers. That meant they could charge more for their “affordable” homes.

Letter Chided HUD

The Riverside County Planning Department chided HUD in a letter, but to no avail: “During a time of government budget cutbacks and economic depression,” the letter said, “the public might best be served by the U.S. Department of Housing and Urban Development directing its housing programs and resources to meeting the needs of those low- and middle-income families who can least afford good quality housing.”

Binger and Wiggins promised HUD they would build affordable condos to sell for $75,000. Even that price, HUD admitted in a letter, was outside the range considered affordable. After they got the loan, however, Wiggins and Binger got Wiseman to agree to an $85,000 price.

Thanks to HUD, Binger and Wiggins soon had a $13.6-million land development loan from a subsidiary of Los Angeles’ First Interstate Bancorp. Because HUD insured it, the loan carried an interest rate of 13%, far below what lenders would have charged then for similar projects, according to HUD.

Sure enough, while the 20 “affordable” units were snapped up in no time, the more expensive condos soon stopped selling as Congress studied reducing tax deductions on second homes. In fact, sales in the entire desert area slumped. By the beginning of 1985, Wiggins and Binger had built only about 100 condos at Desert Falls.

Slide Into Bankruptcy

Binger could have averted bankruptcy, HUD says, by infusing more cash into the project. After investing $9 million--according to his deposition in a related lawsuit--Binger chose not to. The project slid into bankruptcy--as did Wiggins’ small construction company--in 1985.

HUD paid off the balance of the loan to First Interstate--about $9.5 million--and the federal government owned the property. (HUD did not insure separate loans to build the golf course and clubhouse.)

In the fall of 1987, after a deal to sell the land to another group fell through, HUD agreed to sell the project for $13.4 million to Binger and his new partner, James F. Temple of Temple Construction Co., a respected Palm Springs builder.

As part of the deal with HUD, Temple and Binger no longer had to build any affordable housing.

HUD still holds the mortgage on the land, but the new partnership must pay only 10% interest instead of the original 13%.

HUD says it will get back all the money it paid First Interstate. But HUD also says it will lose several million dollars it might have earned had it kept charging 13% interest instead of lowering the rate to 10%.

“We could have insisted on an affordable requirement, but the land could also have been sitting there the next 10 years without any buyers,” said Earl G. Fields, who supported the project from the beginning as supervisor of the Santa Ana field office.

“The impetus was to move the property off our books.”

After opening for business in February, 1988, as Villas at Desert Falls, the new partnership through June of this year had built nearly 700 condominiums and sold more than 500. That’s an enviable sales rate.

The condos start at $129,000 and go up to $225,000.

The houses start at $245,000 and go up to $323,000.