HUD to Suspend Teacher, Officer Aid Over Fraud

The U.S. Department of Housing and Urban Development said Thursday that it will temporarily halt a program that has channeled thousands of low-cost homes to police officers and teachers, citing widespread fraud.

The announcement by Secretary Mel Martinez marks the second time this year that a housing-assistance program managed by the $32-billion agency has been temporarily shuttered because of fraud. The department’s mission is to enhance homeownership, create and provide affordable housing for low-income people and spur economic growth in distressed neighborhoods as well as enforce the nation’s fair-housing laws.

Suspension of the Officer Next Door and Teacher Next Door programs comes on the heels of an interim audit by the watchdog Office of Inspector General, which found that 26% of home buyers sampled “abused and defrauded” the programs.

The fraud has resulted in nine felony convictions, none of them in California. Fifteen other program participants have been indicted and more than 80 are under investigation. Although OIG officials would not disclose the locations of the indictments, Dan Salas, assistant agent in charge of the Los Angeles office, said a number of cases are being investigated here.

The programs for police officers and teachers--launched in 1997 and 1999 respectively--offer HUD-owned single-family homes at a 50% discount, with $500 down payments, in neighborhoods in need of revitalization. Teachers can participate only in the areas where they teach.

About 6,000 homes have been sold under the programs nationwide. As of March 1, about 1,775 police officers and 241 teachers had purchased homes in California under the program, most of those in Los Angeles, a HUD spokesman said.

The goal of the program is to strengthen communities and help make them safer by facilitating home ownership for teachers and law enforcement officers, who certify that they will reside in the homes for at least three years and do not own another.

According to the interim audit, however, participants sold the houses, rented them out and gave them to friends and family, among other problems. The fraud is believed to extend far beyond the audit sample, with program staff estimating that one-fourth of participants violate occupancy requirements after closing.

“The controls aren’t there,” said Michael Zerega, spokesman for the HUD OIG in Washington. “The review and monitoring is not there.”

To qualify for the 50% discount on the homes, participants are also supposed to execute a second mortgage and note on behalf of HUD. The interim audit found that closing agents did not execute the second mortgage in 56% of the property sales sampled. The oversights occurred largely because of poor communication within HUD, the review found.

The review found that HUD failed to execute second mortgages valued at $58.5 million since August 1999, when the requirement went into effect, a condition that “significantly increases the risk of program fraud and abuse, and eliminates HUD’s strongest avenue of recourse against home buyers who fail to comply with the continuing [program] obligations.”

Zerega called the high percentage of fraud detected in the interim audit “startling.” While his office has not yet completed its final review of the program, the findings prompted Martinez to freeze home sales while HUD attempts to reform its oversight.

“The oversight measures simply need strengthening,” Martinez said in a Thursday statement announcing home sales would be suspended from April 1 to July 31. He also called the programs “proven winners for the communities,” and said “the vast majority of officers and teachers who buy houses through these programs play by the rules.”

Another HUD housing-assistance program--the federally insured Section 203(k) Home Rehabilitation Mortgage Insurance program--was suspended earlier this year in the waning days of then-Secretary Andrew Cuomo, after the OIG revealed that real estate speculators and mortgage lenders had defrauded HUD of tens of millions of dollars.