The Case for Fraud: "HUD is a sewer"

(Third of a multipart series) 

I

HUD is a sewer!

So starts a series of indictments by Catherine Austin Fitts – see Dillon, Read & Co. Inc., and the Aristocracy of Stock Profits, in particular, chapters 7, 11, 13, 14 and 16 – of a government agency whose express purpose, as it’s stated on its own website, “is to increase homeownership, support community development and increase access to affordable housing free from discrimination.  To fulfill this mission,” the statement continues, “HUD will embrace high standards of ethics, management and accountability and forge new partnerships -- particularly with faith-based and community organizations -- that leverage resources and improve HUD's ability to be effective on the community level.” 

High-sounding words, so divorced from reality.  It’s just another instance of our government at work, of criminal confluence of public and private interests with the government as the major enabler of fraud, illegal activity, and profiteering.  Unlike the earlier example, however, whereby the administration of prisons was handed over to politically-connected investors and firms ­– see the post prior ­– and which is liable to be dismissed as rather benign, the ramifications of HUD’s disastrous policies are still with us and they’re not likely to go away.  You’re looking here, some might say, at one of the major causes of the housing bubble, the subsequent meltdown of our mortgage-related institutions, and present efforts by the Federal Government at bailout, Fannie Mae and Freddy Mac included.  Kudos to Ms Fitts for exposing the climate of corruption at the highest levels of government.  But then again, she bore the full brunt of HUD’s wrath as it retaliated against her and Hamilton Securities with a bogus lawsuit which nearly broke her back; she had to speak out in order to exonerate herself.

II

Typically, HUD offers low-cost loans to allow low-income participants or nonprofit groups to buy and renovate a house.  When a lender it insures forecloses, it occasionally takes possession of the property. Such properties are then generally sold off to the highest bidder through the HUD auction process.  Buyers of HUD homes as their primary residences who make a full-price offer to HUD using FHA-insured mortgage financing receive seller concessions from HUD enabling them to use only $100 down payment (see link below).

That’s the way it is supposed to work.  In reality, “the program . . . encourages risky property deals, land sale and refinance schemes, overstated property appraisals, and phony or excessive fees."  Coupled with cronyism, below-market sales, and chronic accounting problems, defaults and foreclosures are the rule.  As a result, the agency is faced with the problem of constant recycling of default-prone mortgages and creating a market for such mortgages, which suits the speculators just fine but in the final analysis is a money-losing proposition.

Consider.

Shortly after arriving at HUD in April 1989 [as head of operations of the FHA program], I began to learn about the FHA coinsurance program.  Since 1984, HUD/FHA had allowed private mortgage bankers to issue federal credit to guarantee multi-family apartment projects.  After issuing $9 billion in mortgage guarantees, HUD/FHA was to lose something approaching 50% of the value of the portfolio – a level of losses hard to explain with mortal logic.  When my staff approached me with a proposal to bail out a mortgage company so they could continue to lose money for us, I asked why we should spend money to lose more money in a way that would harm communities.  After a long silence during which 30 staff members intently studied their feet, one brave soul explained to me that the mortgage bank was owned and run by a major Republican donor.  Shocked, I said. “I am a major Republican donor,” and pointing to my presidential cufflinks that were adorning my French cuffs, “I got a pair of cuff links.  You get cuff links.  You don’t get $400 million of federal credit to throw down the drain.”  My staff looked at me like I was so naive and clueless that there was no point in trying to communicate with me – better to let me learn the hard way.  Within minutes, a screaming Jack Kemp, furious that I had not provided illegal subsidy to keep the mortgage banking company going (despite his orders to stop anything corrupt or illegal), called me on the carpet.

So writes Ms Fitts in her memoirs, recounting her early experiences at HUD.  On another occasion, she recalls,

when I suggested to the head of HUD’s Hope VI public housing construction program during the Clinton Administration that she could spend $50,000 per home to rehab single family homes owned by FHA rather than spending $250,000 to create one new public housing apartment in the same community, she got frustrated and said “How would we generate fees for our friends?”

That was in the 90s.  Compared to present-day operations resulting from a decade-long overinflated market and the aftermath, the losses are staggering.  Yet everyone accepts it as cost of “doing business.”  The show must go on.

III

Shortly after she had left HUD, Ms Fitts started an investment bank and financial software firm, Washington-based Hamilton Securities Group.  In her own words,

one of The Hamilton Securities Group’s goals was to map out how the flows of money worked in the U.S. and create software tools that would make this information accessible to communities.  We believed that the way to re-engineer government was for citizens to have access to the information about the sources and uses of taxes and government spending and financing in their communities, and to participate in the process of making sure that these investments were managed to restore our neighborhoods to a “Popsicle Index” of 100%.  Transparency is essential for private markets to work and for government investment to be economically productive, accountable to those who fund it and managed according to the laws that are supposed to govern such investment.  Otherwise, we will veer toward subsidizing private interests that are powerful politically or forceful, as opposed to those that are productive.

[Note:  “The Popsicle Index” is Ms Fitts’ rule of thumb for the health of a community:  “the percentage of people in a [neighborhood] who believe a child can leave their home and go to the nearest place to buy a popsicle or snack and come home alone safely.”  One of the anomalies she had noticed was that the spectacular rise of the Dow Jones index, for example, or any other market indicator you can think of, did not correspond to a similar rise of “the Popsicle Index.”  As a matter of fact, precisely the opposite relationship seemed to obtain:  as the Dow Jones rose, the health of local communities tended to plummet.]

Oddly enough, she was successful at first.  In relatively short time, Hamilton had won a contract “to serve as the lead financial advisor to the Federal Housing Administration (FHA) at HUD . . . for $10 billion of mortgage sale auctions.  In her own words,

using online design books and our own analytic software tools as well bidding technologies from Bell Laboratories we adapted for financial applications, we were able to significantly increase HUD’s recovery performance on defaulted mortgages, generating $2.2 billion in savings for the FHA Mutual Mortgage Insurance and General Insurance Funds. 

Likewise with Hamilton’s success as a start-up:

While we plowed all of our profits back into the expenses of building databases and software tools and into banking a community-based data servicing company, we were still profitable, generating $16 million in fee revenues and $2.3 million of net income in 1995.

It wasn’t going to last.  Obviously, she was bucking a trend.  “While the loan sales were a great success for taxpayers, homeowners and communities [not to mention HUD’s own internal operations in minimizing its losses],” she recollects later, “it turned out that they were a significant threat to the traditional interests that fed at the trough of HUD programs, contracts and related FHA mortgage and Ginnie Mae, Fannie Mae and Freddie Mac mortgage security operations.” 

It just so happened, the analysis continues, that

our efforts at the Hamilton . . . to help HUD achieve maximum return on the sale of its defaulted mortgage assets coincided with a widespread process of “privatization” in which assets were, in fact, being transferred out of governments worldwide at significantly below market value in a manner providing extraordinary windfall profits, capital gains and financial equity to private corporations and investors.  In addition, government functions were being outsourced at prices way above what should have been market price or governments costs – again stripping governmental and community resources in a manner that subsidized private interests.  The financial equity gained by private interests was often the result of financial, human, environmental and living equity stripped and stolen from communities – often without communities being able to understand what had happened or to clearly identify their loss.

One of the consequences was to steadily increase the political power of companies and investors who were increasingly dependent on lucrative backdoor subsidies – thus lowering overall social and economic productivity.  Hence, the doubling of FHA’s mortgage recovery rates from 35% to 70-90% ran counter to global trends and ruffled feathers.  FHA, with Hamilton’s help, was requiring investors like Harvard Endowment to pay full price for assets while it appeared that they and investors like them were engineering progressively deeper and deeper windfall discount prices as part of government privatization programs elsewhere in the U.S. and globally. 

IV

The final draw was Community Wizard – “a software tool designed [by Hamilton] to facilitate community Internet access to all public data and some private data on local resource use, including federal tax, expenditures and credit data.”  

The initial response to the tool [Ms Fitts recalls] from Congress, HUD and our technology networks was astonishing.  People were ecstatic to realize that they did not have to continue to live and work in the dark financially.  It was a relatively easy thing for new software tools to help people learn about the flow of money and resources in their community.  Additional software tool development also resulted in numerous tools to analyze subsidized housing in a place-based context, including detailed pricing tools that combined significant databases on government rules and regulations with municipal and stock market financing of homebuilding and home ownership.  Such tools would allow people to take a positive and proactive role in insuring that government resources were well used . . . .  ¹

There was only one problem.  If communities had easy access to this data, the pro-centralization team of Washing-ton and Wall Street would be in trouble.  Everything from HUD real estate companies to private prisons would be shown to make no economic sense – other than to generate private profits and capital gains for insiders.  [Likewise with] billions of government contracts, subsidies and financing . . . .  Indeed, communities were better off without many of these activities and funding.  Through our software, private citizens would see the cost of decades of accumulated “fees for our friends.”

In a nutshell, there was simply too much money to be made from the status quo and since Hamilton posed a threat, it had to be shut-down.  It’s all on the pages of Catherine Austin Fitts’ memoirs so there is no need to rehash it.  Needless to say, it was a disgrace.

V

So there we go again!  Another example of private interests influencing public policy.  And the scary part is – it’s all being done in the name of some high-sounding political idea like “gentrification” or “affordable housing.”  We can’t take things at face-value anymore because they’re certain to be stood on their head.      

 

Notes:

¹  A case in point was a meeting I had with a former partner of Dillon Read who I had hoped to recruit to Hamilton in 1996.  He came to our offices and during my presentation of our plans for community venture, told me that the situation was hopeless and that our tools would make no difference.  I powered up Community Wizard and our software tools on the monitors and asked him where he lived.  He said “Bronxville, New York.”  I had one of my team print out from our databases a list of federal expenditures in his neighborhood.  When he saw the first item, he exploded with rage, “$4 million last year for flood insurance?  That is ridiculous.  That is corrupt!”  $4 million for flood insurance sounded pretty innocent to me and I said, “why is that corrupt?”  He said, “Bronxville is on a hill.  I have lived in Bronxville for many years and I have never seen or heard of a flood.”  It is typical that someone with years of experience in a place can spot potential waste and reengineering opportunities much faster when presented with detailed government financial information than someone who does not know the place.

As the former Dillon Read partner started to read through the details of the annual expenditures, he became more and more upset.  The next day we were scheduled to speak by conference call after he returned to New York.  I called and called at the appointed time but the line was busy.  When I finally got through, he said he had been on the line with the Deputy Mayor of Bronxville for hours going through the data we had provided him.  He said, “All this corruption is going to stop.”  I said, “I thought you said it was hopeless.”  And then he said something to the effect of “that was until I got the numbers for my neighborhood.”  He understood that the corruption is funded one neighborhood at a time.  If each neighborhood cuts off or reengineers the flow of wasteful or corrupt government funds, the situation can transform in a significant way, nationally and globally.  You have to cut off the money to the bad guys at the root (my italics).   And he had realized how much money per person was being wasted when he saw the waste on a human scale where he could both see how the resources could be properly used and could do something about it.

 

Links:

http://www.hud.gov/library/bookshelf12/hudmission.cfm

http://en.wikipedia.org/wiki/United_States_Department_of_Housing_and_Urban_Development

http://www.dunwalke.com/

 

 

Comments

[Roger Nowosielski]

Could you elaborate? I'd be interested to hear your view.

[verzekeren]

It is a nice blog. However i think this report carries lot of confussion.

[Roger Nowosielski]

Well, thank you Lauri. I don't think that software is any longer available as it was confiscated in the course of the lawsuit against Hamilton Securities. I think your best bet would be to contact Ms Fitts as her website, http://solari.com/ Good luck!

[Lauri Beamish]

This is so informative. Thank you very much. I would love to be able to look at the software for my own neighborhood. And now they look for HUD to be the cure to the economic disease when it comes to housing. Scary.

[Roger Nowosielski]

This is mind-blowing, Kurt. Perhaps you should post your comment on Ms Fitts' Solari website. I had picked up on it only in passing - as an example of government corruption at work. But she was an insider once and much more thoroughly familiar with the ins and outs of that agency. Besides, her website commands a far greater popularity and attention.

If you won't do it, I will, with your permission of course.

Roger Nowosielski

[Kurt]

"she bore the full brunt of HUD’s wrath as it retaliated against her and Hamilton Securities with a bogus lawsuit which nearly broke her back; she had to speak out in order to exonerate herself." That is how they operate:

http://theeprovocateur.blogspot.com/2008/12/shakedown-hud-and-its-cronies.html

And read what employees say:

http://www.govexec.com/dailyfed/1208/120908m1.htm

and more from employees include ex:

http://www.observer.com/2008/real-estate/shaun-donovan-obamas-hud-pick-his-own-words#comment-1165887

"HUD FHEO was designed to enforce housing discrimination, but in recent years under the Bush and Assistant FHEO Secretary Kim Kendrick's administration has turned FHEO into a advocacy agency and police state. The employees are intimidated and threatened to go after Respondent and "make their life miserable" even if they are innocent of discrimination. As a former FHEO employee who was fired for doing his job and questioning the "investigate until no end" mentality of the this hostile regime. Investigators were told that the more you dig (i.e., harass and intimidate) the Respondent, the more "Cause" cases HUD will have or the more money you would squeeze out of the Respondents. Some call it extortion and HUD calls it conciliation."