Delay, waste and corruption are nothing new to subsidized housing programs. An expose of the U.S. Department of Housing and Urban Development’s HOME Investment Partnerships Program published in the May 14-17 Washington Post has reinforced the longstanding view of agency critics that too much money is going to line the pockets of developers who either are shady or in over their heads. The year-long investigation, which examined a database of more than 5,000 projects, characterized the program as “a dysfunctional system that delivers billions of dollars to local housing agencies with few rules, safeguards or even a reliable way to track projects.” HUD Secretary Shaun Donovan, for one, takes strong issue with this conclusion. Yet a recent House Financial Services Committee hearing suggests much of the Post’s account rings true.
Congress created HOME in 1990 as Title II of the Cranston-Gonzalez National Affordable Housing Act to serve as a block grant program, allowing state and local governments to tailor HUD low-income housing funds to their own situations. It was a trying time for the Department of Housing and Urban Development, by now headed by Secretary Jack Kemp. The previous year the department had been rocked by revelations of massive fraud and lax bookkeeping. In one highly publicized instance, a Maryland-based private escrow agent, Marilyn Harrell, aka “Robin HUD,” embezzled $5.7 million from the sale of HUD-owned houses over a four-year period and gave most of the money to charity; she eventually received a 46-month prison sentence. HUD Senior Analyst Irving Welfeld characterized the situation at the time in his book, HUD Scandals: Howling Headlines and Silent Fiascoes: “When competition was removed from the market, it was placed in the halls of HUD. The story behind the headlines is that HUD, when it acts in the housing area, is involved in a negative-sum game.”
Congressional Democrats, itching to restore allegedly deep cuts in the housing budget made during the Reagan era, saw the scandals as an opportunity. Working with Republicans, natural supporters of the block grant approach to aid programs, they created the HOME Investment Partnerships Program, a centerpiece of a massive housing bill sponsored by Sen. Alan Cranston, D-Calif., and Rep. Henry Gonzalez, D-Tex. HOME would give states and localities wide latitude to develop housing within four areas of project eligibility: 1) home purchase or rehabilitation financing assistance; 2) building or rehabilitation of housing for rent or ownership; 3) site acquisition or improvement; and 4) nonprofit Community Housing Development Organizations (CHDOs). Each state is eligible for annual grant of at least $3 million and each eligible locality can receive a minimum of $500,000, provided they put up 25 cents in matching funds for each federal dollar. At least 15 percent of a jurisdiction’s funds must be earmarked for CHDOs. Annual appropriations are allocated by formula, with 40 percent going to the states and 60 percent going to localities.
HOME has provided a cumulative $32 billion in funding to nearly 650 cities, counties and states, and in recent years has received roughly $2 billion annually from HUD. But has all this money led to intended outcomes? According to Washington Post reporter Debbie Cenziper, it hasn’t come close. Cenziper, assisted by Post staffers, analyzed a nationwide database of 5,100 active HOME construction and renovation projects that had received at least $50,000 in HUD funding. The study was a massive undertaking. To trace project life spans, the researchers pored through reams of property records, contracts, deeds, mortgages, loan agreements, bankruptcy filings, tax reports, Census data, HUD records and court cases. They also interviewed developers, landlords and displaced tenants. The study, in other words, was not a case of cherry-picking a handful of failed projects in order to “prove” a preordained conclusion.
It would be hard to deny that HOME is a troubled program. About 700 projects, accounting for a combined $400 million in HUD subsidies, the Post found, have been idle for years, sometimes for a decade or more. In many cases, they are community eyesores. Plots of land awaiting construction remain vacant and often weed-strewn; houses awaiting renovation remain boarded and deteriorating. Project sponsors often lack the experience, financing or both to move forward, a problem exacerbated by the onset of the current housing downturn. In Prince George’s County, Maryland, for example, Kairos Development Corp. received $750,000 in HOME funding in 2005 to build dozens of homes, yet to date has not developed a single one. And in Beaumont, Texas, Statewide Consolidated Community Development Corp. drew $467,000 from HUD to produce 18 dwelling units, but have yet to produce any, a consequence of construction delays and questionable expenses. Overall, in 55 cases nationwide a developer received HOME funds to build on vacant lots but had yet to put up any dwellings. “Development is hard for developers,” explains Annemarie Maiorano, a HUD official in Wake County, N.C. “It’s complex. It’s risky. Then there are these mom and pops who don’t know things…(W)e’re asking them to try to do something that they have no experience in.”
Some program participants are making a bundle of money in spite of all this. The problem is that they aren’t necessarily builders or residents. Case in point: In Washington, D.C.’s Anacostia neighborhood, the East of the River Community Development Corporation borrowed $3.5 million in federal funds from the City Council to pay for the renovation of three badly decaying apartment complexes containing nearly 100 dwelling units; the nonprofit corporation already had borrowed $8 million to buy the properties. Yet not long after, East of the River declared bankruptcy and closed shop. Unfortunately, the group had established a partnership with several local speculators, including three convicted in a ‘straw-buyer’ scam back in the Eighties that cost HUD millions of dollars and saw the conviction of 30 persons. The trio – Steven Madeoy, Jack Spicer and Marvin Gitelson – acquired properties with the intent of selling them at a quick profit. Flipping homes can be especially profitable when buyers collude with appraisers who deliberately inflate property values.
The study’s revelations prompted HUD Secretary Shaun Donovan to write a lengthy rebuttal, which the Washington Post published as an opinion article on June 10. The secretary noted that HOME has produced more than a million affordable homes. What’s more, Donovan stated, the program has attracted, or “leveraged,” nearly four dollars of private and other public investment for each HUD dollar spent. He accused the Post of selective use of data:
In all…less than 4 percent of the projects in The Post’s sample of more than 5,000 HOME projects are currently delayed or canceled. That’s far fewer than the nearly 1 in 7 that The Post reported were significantly delayed – and it tells me that HOME’s success rate during the recession far outpaced the private market’s. What’s more, The Post gave the impression that when there were delays, federal money was wasted. In fact, when there are delays, money can be moved to other viable projects or must be returned if it not used within five years.
Donovan added that his department has taken steps to improve HOME operations, such as automatically cancelling projects that fail to get underway and strengthening the in-house monitoring system. HUD, moreover, is proposing rules to toughen standards for developers and lenders so that fewer projects run into trouble.
Yet Congress isn’t so convinced that HUD has a grip on the situation. Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Minority Member Richard Shelby, R-Ala., announced on May 16 their intent to launch a probe into the HOME program. “We are deeply concerned by these reports, particularly at a time when so many Americans are in need of affordable housing,” they wrote in a joint statement. Three key House members, each a committee or subcommittee chairman – Reps. Spencer Bachus, R-Ala., Randy Neugebauer, R-Tex., and Judy Biggert, R-Ill. – sent a letter to HUD the next day demanding detailed information about delayed projects and agency oversight. Neugebauer and Biggert subsequently sent a letter to HUD on June 8 requesting detailed information on project budgets, construction schedules, completion dates and photos of construction sites for every major project funded before 2007. That represents more than a thousand projects.
Part of the problem is the fact that HOME, as noted earlier, is a block grant program. And the main idea behind federal block grants is to give state and local grantees maximum leeway in project promotion, approval and oversight. HUD’s role is generally limited to how quickly money is spent, not how quickly construction proceeds. Rep. Neugebauer takes a dim view of this. “It’s like saying, ‘Yeah, I know I wrote the check, but I don’t know whether I received the goods that I purchased…[HUD] doesn’t have a process in place that actually tracks the project and the objective. They seem to know that they sent money to Texas or Alabama or New York, but past that, I’m not sure that they know much more.'” HUD spokesman Neill Coleman responded: “We’ve received the letter and will be responding to the Committee to help members more fully appreciate the value of the HOME program and just how wrong The Washington Post got this story.”
The action on Capitol Hill already has begun. The House Committee on Financial Services, chaired by Rep. Bachus, convened a hearing on June 3 to provide an assessment of program strengths and shortcomings. Two witnesses, both from HUD, testified: 1) Assistant Secretary for Community Planning and Development Mercedes Marquez; and 2) Assistant Inspector General James Heist. Marquez described HOME as “an anchor of our nation’s affordable housing finance system.” Echoing Secretary Donovan, she noted that of the 700 delayed projects identified by the Washington Post, more than half were complete and the other half were experiencing recession-induced delays. Heist’s testimony was more revealing. As a HUD internal affairs cop, his job is to identify and rectify program weaknesses, and where necessary, investigate criminal activity. While characterizing HOME as “an important program,” he stated:
In our external audits of HOME funds over the past five years, we cited a total of $179 million in questioned costs and $58 million associated with recommendations that funds be put to better use. HUD agreed with $221 million of those combined costs; disagreed with $14 million of those costs; recovered or realized savings of $93 million of those costs; and resolved another $66 million by subsequently obtaining documentation from the grantee to support eligibility of previously unsupported costs or determining that cost savings were not realized.
HUD’s lack of quality control explained a sizable portion of the problems. Heist elaborated:
Through our annual audits of HUD’s Financial Statements, we have found that the Department did not ensure that adequate application controls for IDIS (Integrated Disbursement and Information System) were properly placed and operating effectively. HUD OIG (Office of Inspector General) noted the following deficiencies: 1) incompatible functions such as system administration and security administration were not adequately separated; and 2) there was no formal user recertification process to ensure that the overall security of the system remained within the control of HUD staff…In sum, we believe that HUD’s information systems used to administer the HOME program are incapable of producing complete and reconcilable audit trails throughout the entire grant life cycle and are unable to produce reports which would facilitate time identification of fraud, waste and abuse in the programs. Additionally, we have concerns about HUD’s methods for assessing compliance with commitment and expenditure deadline recapture requirements and HUD’s methodology for addressing non-compliant grantees.
Chairman Bachus assured all present that he did not seek to end the HOME program and that he did not want the hearing to be interpreted as denying the program’s benefits. He did cite in his opening statement, however, three necessary steps for improvement: “first, that the contracts require repayment for failed projects or misspent funds; second, that those who defraud the government are pursued vigorously; and third, that eligibility requirements for developers are tightened.”
HOME undoubtedly has done good. Yet all federal programs can make this claim. The larger issue, one that apparently eludes HUD, Congress and the Washington Post, is whether HOME’s objectives could be accomplished without subsidies. To say that HOME has “created” more than a million affordable homes is like saying that a particular government employment program has “created” more than a million entry-level jobs. More to the point, without HOME the housing would have been built – likely in different communities and for different types of buyers and renters, but it would have been built all the same. Filtering, the process by which the existing housing stock becomes available to households of progressively lower income and asset levels as (usually more expensive) production triggers vacancies, for decades has been a salient feature of local housing markets. By its very nature, any program that places or keeps people in dwellings they can’t afford runs counter to the logic of filtering, that is to say, to the market itself. Taxpayers once again are finding out that there are few things in this world quite as expensive as affordable housing.