HUD to Drop Program That Lost $1 Billion

The Department of Housing and Urban Development announced Wednesday that it will end its controversial co-insurance program for multifamily housing, a Reagan-era attempt at privatization that accumulated $1 billion in defaulted mortgages during the six years of its existence.

HUD Secretary Jack Kemp said in a statement that the program, which was designed to split the risk of insuring low-income housing between the federal and private sectors, is “structurally flawed and fundamentally unsound as well as administratively unfixable.”

Given the losses it has incurred, Kemp said, co-insurance “has been a bad deal for the American taxpayer.”

It is the fourth HUD program Kemp has killed or suspended since allegations of fraud and mismanagement at the department first surfaced last spring. Along with the Section 8 Moderate Rehabilitation program, which was suspended but later revived with new rules, co-insurance has been cited by congressional critics as the worst examples of management problems at HUD during the Reagan Administration.

Under the co-insurance program, private lenders collected lucrative fees by making mortgage loans to encourage the rehabilitation and preservation of moderately priced multifamily housing. HUD assumed a majority of the financial responsibility for any default.

One-third of the 39 lenders still active in the co-insurance program are now either under suspension or on probation.

No existing insurance commitments will be withdrawn, but HUD officials said they will require that the terms of each remaining real estate deal be approved in advance. After new regulations are written for the remaining participants, private lenders, rather than HUD, will process the loans.

HUD officials have said the problems with co-insurance centered more on mismanagement than outright fraud.