Fraud found in FHA loans to renovate houses Crooked practices called widespread in HUD audit


FEDERAL AUDITORS have found widespread "waste, fraud and abuse" by investors in one of the Clinton administration's fastest-growing home fix-up loan programs, and have asked the administration to undertake immediate reforms to prevent "substantial losses" to the government and consumers.

The program called "203(k)" features down payments as low as 3 percent to 5 percent, and generous maximum loan amounts based on the estimated market value of the home after the renovation is completed.

Virtually moribund on the books of the Federal Housing Administration (FHA) during the 1980s, the program has been promoted aggressively under the Clinton administration. After a streamlining of program rules by the new administration in 1993 -- opening participation to investors and nonprofit groups -- the program jumped to 8,500 loans in 1995, and a projected 15,000 nationwide in fiscal 1996.

But according to a yearlong investigation by the Department of Housing and Urban Development (HUD) inspector general's office, the 203(k) program as currently administered is "highly vulnerable" to "risky property deals, land sale schemes, overstated property appraisals, and phony or excessive fees" as well as shoddy or nonexistent rehab work.

The program seems to be viewed by some lenders, investors and nonprofits as "merely a means to turn a quick profit," according to Kathryn Kuhl-Inclan, a district HUD inspector general whose staff examined 203(k) files and rehab work in eight states in different parts of the country covering mid-1993 through mid-1996. The states were California, Virginia, Florida, Massachusetts, Illinois, Georgia, Texas and North Carolina.

"Our results show that extensive program abuse is occurring around the country by lenders, investors and nonprofits," she said.

Auditors documented cases where investors fraudulently inflated land prices through sham sales and deed-flips to boost the amount of the FHA 203(k) mortgage money they could pocket at closing.

In one case, according to a summary report to FHA by Kuhl-Inclan, an investor falsified loan settlement statements to indicate a cost of $123,000 apiece for 27 properties purchased in Georgia. But investigators found that the investor had in fact paid only $80,893 per property, and walked away with a quick, illegal $1.14 million profit.

In a similar case in Florida, a nonprofit group bought 52 homes for fix-up for $1.25 million from a seller who had purchased the same homes the same day for just $715,000. The seller netted a one-day profit of more than $500,000.

Key to the abuse here, said the inspector general's report, was inside dealing: The president of the nonprofit group borrowing the money also served as the closing agent for the loans.

When investigators visited properties supposedly rehabilitated with federally backed loan money, they sometimes found little if any actual work performed.

An Illinois lender certified to the FHA that all renovation work was completed on 43 houses, thereby triggering release of all funds. Visits revealed, however, that on 12 homes, virtually no rehab had been done, while on the rest, "substantial portions of the scheduled work had not been performed."

Pub Date: 10/20/96

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