By Jena Ardell
By Jon Campbell
By Alan Scherstuhl
By Tessa Stuart
By Roy Edroso
By Jon Campbell
By Albert Samaha
By Zachary D. Roberts
The Harlem-Brooklyn scheme may be the cleverest example of the fraud she warned about because, according to prosecutors, officials of nonprofit organizations were recruited to serve as fronts for a small group of lawyers, investors, a mortgage lender, and an appraiser. Within their tight circle, they "created their own market," as one prosecutor terms it, and fleeced HUD out of federally insured loans for far more than the properties were actually worth.
Because practically no rehab work was done, the loans defaulted. Now the government is stuck with the buildings.
The GAO report on the 203(k) program backs up what Gaffney, Hawthorne, and housing activists have been saying about HUD's failure to spot fraud.
Hawthorne played a role in that report. He says he took GAO official Stanley J. Czerwinski on a tour of homes screwed up by 203(k) schemers in Jersey. But the scariest part of Czerwinski's critical report is that there are 2900 lending institutions around the country that have been certified as "direct endorsers" like Mortgage Lending of America and that HUD is doing a poor job of supervising them.
In December 1999, federal prosecutors announced criminal charges against 39 California mortgage lenders and others in a $110 million fraudulent-loan case. Now comes the New York case, in which just one mortgage company was allegedly at the center of a $70 million scandal.
The 203(k) program, heavily promoted by the FHA and its parent, HUD, has exploded in use in the past few years. Many more scandals may be bubbling under the surface, Hawthorne warns.
Bill de Blasio, who was HUD Secretary Cuomo's New York-New Jersey representative until late 1999, acknowledges that the agency has a long history of failing to grapple with corruption.
"HUD needed law-enforcement pressure decades ago," says de Blasio, who left HUD to run Hillary Rodham Clinton's Senate campaign. "Before we came in, there was mismanagement for 10 to 20 years."
The Czerwinski report indicates that the corruption continues. The GAO prober criticizes HUD officials for not looking for fraud in the right places. Czerwinski writes that HUD workers met their quotas in 1999 for the number of lenders they reviewed but didn't review enough of the lenders that HUD itself had determined to be "high-risk."
No wonder it took outsiders to uncover the scandal. "Community groups often know before the government knows," says de Blasio.