Troubled Project Points to Risks of Speedy HUD Loans : Housing: In quickly approving refinancing, the agency failed to ensure the funds benefited the property.
Like hundreds of other landlords eager to cash in on a popular federal loan program, the owners of a Riverside County, Calif., senior citizens complex were frustrated by the maddening bureaucracy and lengthy wait at the U.S. Department of Housing and Urban Development.
That was before a supervisor in the Los Angeles field office ordered employees to set aside “all other work” to expedite a $28.3-million government-guaranteed loan to refinance the Country Village apartments in Mira Loma.
The program is intended to preserve the nation’s supply of affordable rental housing for low-income and elderly tenants by insuring loans on properties that otherwise would not qualify for conventional refinancing. But records and interviews show that speedy approval of the Country Village application in early 1994 allowed a politically well-connected Malibu investment banker and his partners to reap some $19 million in cash while spending virtually none of the money on repairs or improvements.
Since then, the 1,194-unit project has incurred management, maintenance and financial problems that jeopardize both the government-backed loan and the “health, safety and well-being” of the elderly residents, according to a recent HUD enforcement notice. Last month, the agency declared Country Village a “troubled project” and cut off the owners’ monthly income flow.
The decline of Country Village illustrates the difficulties that can occur when a federal agency gives preferential treatment to a project without following established guidelines intended to protect the government’s interests. As a result, HUD is locked in prickly negotiations with the owners and tenants to resolve issues that the agency neglected two years ago when the property was submitted for refinancing.
The subject of troubled loans is a critical one at HUD. A 1993 audit found that the Federal Housing Administration, HUD’s lending agency, could lose up to $11.9 billion in insurance claims on faulty loans over the next few years. Housing Secretary Henry G. Cisneros has called it “the single largest” problem he inherited. HUD officials said they are acting now to prevent the Country Village loan from going into default and to improve the project.
Loan Investigated
Country Village is owned by Michael E. Tennenbaum, the senior managing director of the investment firm Bear, Stearns & Co. and a close adviser to Los Angeles Mayor Richard Riordan. Tennenbaum recently served as chairman of the mayor’s Special Committee on Fiscal Administration, a task force of business executives that rendered advice on streamlining city government. Bear Stearns has contributed $77,897 in campaign donations since 1992 to President Clinton and the Democratic Party.
Tennenbaum and his New York partner, financier Meyer Steinberg, who has donated $25,000 in support of members of Congress since 1992, declined to be interviewed for this article. Their attorney said the owners dispute the notion that Country Village is in any way troubled.
The attorney, Philip Glusker, said HUD’s enforcement actions are “strange, peculiar, weird and out of the blue. . . . This project provides affordable housing to elderly people in the Riverside area. It is committed to remaining in that posture for many, many decades.”
An audit is under way by the Office of Inspector General, HUD’s investigative arm, to determine whether the loan was improper.
HUD officials in Washington concede that errors were made last year in approving the loan arrangement. The agency was aware that the refinancing paid the owners $19 million, but it neglected to ensure that some of the money was put back into the property for maintenance and repairs, said Helen M. Dunlap, the assistant deputy secretary for multifamily housing. In fact, once the refinancing was approved, the owners were not required to say what happened to the $19 million, and HUD lost control over how the money was spent.
A Different Approach
“I’m not afraid to say that, if this loan came into our office today, we would do something different than we did,” Dunlap said. She added: “It’s very easy, in retrospect, to critique this transaction.”
Although the Country Village project met all of the requirements to qualify for government-guaranteed financing, the loan application was stuck in the processing pipeline until the fall of 1993, when Dunlap intervened, enabling the owners to leap ahead of more than 200 other financing projects pending in the Los Angeles field office. The housing staff cleared the Country Village loan review in about four months--despite being overwhelmed with requests for assistance shortly after the Northridge earthquake--compared to the usual wait of about a year, officials said.
Moreover, documents obtained by The Times through the federal Freedom of Information Act reveal that HUD hastily processed the loan without following standard procedures. The agency failed to conduct its own thorough appraisal of the property, relied on incomplete financial data, did not review certain revised agreements until after the refinancing was approved, and failed to demand necessary repairs as a condition to the loan.
Dunlap, the only government official familiar with the transaction who was permitted by HUD to be quoted for this article, insisted that neither political considerations nor her intervention contributed to any special treatment for the Country Village loan.
The $28.3-million refinancing was based on the escalating value of the property, which the owners had appraised at $43.5 million, Glusker said. Proceeds from the new loan paid off the existing $8.5-million mortgage while providing the owners nearly all of the remaining $19.8 million.
Cash Influx
In addition, the refinancing provided the owners nearly $1 million in rental revenue in exchange for agreeing not to convert the apartments to condominiums, and about $200,000 annually from the rents in the form of management fees. The payments were made even though the government loan program prohibits conversions for a minimum of five years and no management services are being provided by the landlord, according to HUD investigators.
“I’ve never seen anything like this before,” said Jack Kerry, an HUD consultant who examined the Country Village case.
The monthly payments were halted by HUD last month and placed in an account to pay operating expenses. Officials said they are trying to determine whether the owners illegally diverted income from the project.
Glusker said the monthly fees were negotiated years ago and did not change as a result of the refinancing deal. But the owners now agree with HUD officials that the project needs significant physical improvements, he said.
Under an unusual arrangement, the tenants association is in charge of collecting rents and operating the complex. The owners contend that the tenants have failed to utilize a substantial reserve fund that was established with rent proceeds to cover maintenance and repair costs. The residents say the owners have rebuffed their persistent attempts to spend the money. In any case, the amount of the reserve fund available for repairs is inadequate, Kerry said.
Apartment manager Jodie Pool added: “I’ve been here five years and there’s never been two nickels to rub together. You pay the bills and that’s it. Sometimes, we don’t even have enough to pay the bills.”
Country Village is situated in the northwest corner of Riverside County, about halfway between Riverside and Ontario. The gated community resembles a sprawling military base with its multiple, single-story stucco buildings that each contain 14 garden apartment units. A nine-hole, par-three golf course winds through the property, which is bisected by a concrete flood-control channel and high-tension power lines. The complex includes a swimming pool and clubhouse facilities.
Scattered around the buildings are shuffleboard courts with weathered, park-like benches. While the expansive lawns dotted by shady trees are not particularly well-manicured, there are no broken windows, trash or other obvious signs of blight.
But a recent HUD inspection found numerous “deficiencies,” including a lack of preventive maintenance, 20 vacant units in need of rehabilitation and the potential presence of asbestos in floor tiling. The agency turned up other troubling signs: insufficient staff to manage the complex, inadequate control of the project’s cash reserves, high legal costs and a lack of owner participation as required by HUD regulations.
Country Village was built in 1967 with HUD financing, and within months the original owners defaulted on the property. The following year the troubled project was sold for $1,000 to Mira Loma Associates, a partnership controlled by Tennenbaum and Steinberg. The new owners negotiated a revised mortgage agreement with HUD and pumped $1 million toward paying back taxes and interest, and improving the property, Glusker said.
The owners arranged to sell the project in 1980, but the deal fell through when Riverside County officials refused to allow the apartments to be converted to condominiums. When interest rates dropped in early 1993, the owners applied for the FHA refinancing program.
Expedited Processing
Because the HUD-guaranteed loan program operates on a first-come, first-served basis, the Country Village package was put at the end of a list of about 200 other projects pending in the Los Angeles field office. On Sept. 21, 1993, Tennenbaum met with Joe L. Hirsch, HUD’s director of housing in Los Angeles. Hirsch recalled that Tennenbaum and his representative asked that HUD expedite the Country Village application.
Hirsch, who now runs a consulting business, said he told Tennenbaum the field office would need about nine to 12 months to complete work on the application.
The owners then took their case to HUD headquarters in Washington.
On Oct. 4, 1993, the president of an Atlanta-based mortgage company that specializes in packaging HUD loans sent a letter on behalf of the owners to Assistant HUD Secretary Nicolas P. Retsinas. In the letter, Gary B. Alex said the owners wanted the loan processed in less than four months and were “prepared to ‘pay’ to accomplish that.” Alex said in an interview that he was referring to a “quid pro quo” that the owners had decided to offer HUD: In exchange for accelerated processing, they would extend the non-conversion agreement for an additional 22 years.
Official Prodding
The offer contained in the Alex letter was forwarded to Dunlap’s office. She is the head of a division responsible for 21,000 projects, but Dunlap said it is not unusual for her to become personally involved in individual cases when they are called to her attention.
Dunlap said she decided to use the Country Village project as a management “tool” to prod a notoriously slow field office into producing faster results. Sometime in October, Dunlap recalled, she contacted Hirsch in Los Angeles to discuss the loan. While urging him to set priorities in moving applications along, Dunlap said, she in no way suggested that Hirsch treat Country Village differently than any other project.
According to Hirsch, however, Dunlap specifically expressed an interest in seeing that his office give Country Village its immediate attention. She “clearly gave us instructions on putting this project on the front burner and doing it in a short time frame,” Hirsch said. “. . . It was just another one of those that went political on us.”
During his 15 years as a HUD supervisor in Portland, Ore., and Los Angeles, Hirsch received similar orders from Washington on about half a dozen occasions, he said.
Hirsch said he instructed the four departments responsible for screening loan applications to make Country Village their top priority. When the appraisal section failed to complete its work by a mid-January deadline, Hirsch ordered the appraiser to expedite the case, even if it required working extra hours.
Over the next month, the appraiser assigned to handle Country Village attached three handwritten notes to the case file that described shortcuts he was ordered to take. “Joe Hirsch also directed that this processing be expedited to the extent that normal processing requirements . . . be eliminated. Consequently, not enough time was given to research,” Shinya Ogasawara wrote on Feb. 23, 1994.
Since then, questions have surfaced about whether the Country Village property was overvalued by appraisers. In August of last year, Vivian E. Williams, an HUD case officer who was assigned to investigate tenant complaints, alerted her supervisors that “the project may have been overmortgaged by $8 million,” records show.
Other corners were apparently cut in processing the loan application. HUD officials said they were unable to explain how an architectural review failed to require any repairs as part of the refinancing of such a large project.
Tenants’ Approval
Before the loan could be made final, HUD’s legal department advised that the owners’ plan to extend the non-conversion and management agreements needed the approval of the tenants. Leaders of the tenants association said they came under intense pressure from the owners to give their consent.
Once again, Dunlap interceded in the case.
During a conference call with tenant representatives on Feb. 14, 1994, Dunlap strongly urged the residents to approve the deal, according to separate interviews with the three individuals who participated in the conversation. They are Betty Sayre, the then-newly elected president of the tenant group; Tom Williamson, a former vice president of finance for the group, and Riverside attorney Gilbert M. Gutierrez. At the time, the tenants said, they were unaware that the refinancing would provide $19 million in cash to the owners. Had they known the amount of money the owners were about to receive, the tenant leaders would have demanded significant improvements in the project, they said.
Problems Surface
Sayre said she based her decision to endorse the arrangement largely on Dunlap’s advice.
“I have just whipped myself over and over for being so stupid and being coerced into this,” Sayre said. “It was a big mistake.”
Dunlap, citing her long career as a public housing advocate in California before joining HUD in 1993, said she spoke with the tenants to make sure they were fully informed and comfortable with the transaction. She denied making any statement that either endorsed the deal or encouraged the tenants to give their approval.
The refinancing was completed in March, 1994. Soon after, problems began to surface.
Within a few months, the tenant organization notified the owners that it was on the verge of defaulting on the monthly mortgage payment because the cost of operating the complex exceeded the rental income. The crisis necessitated a rent increase last year. Another increase appears likely in coming months to resolve the current financial woes.
Residents at the complex pay about $200 per month below HUD’s fair-market rent schedule for the San Bernardino-Riverside area. But many tenants, who are on fixed incomes and average 72 years of age, complain that they have been strapped by large rent increases over the past decade.
Ted Samodell, who said his monthly rent for a modest two-room apartment has nearly tripled since 1982 from $158 to $446, criticized the owners for failing to invest in the project.
“They’re supposed to take their profit after everything else here is taken care of,” Samodell said. In his opinion, Samodell said, the owners are “taking money they’re not entitled to.”
Bunting reported from Washington and Gorman from Riverside.
