The U.S. government is in the midst of a huge and risky social and economic experiment, and it’s happening in the most unlikely of places: Andrew Cuomo’s Department of Housing and Urban Development (HUD).
Virtually unnoticed, HUD is dumping billions of dollars worth of real estate onto the private markets–and many billions more are set to come.
The effort is somewhat controversial because HUD’s customers are typically less wealthy and HUD has been turning increasingly to Wall Street to do the deals–probably the largest block of government real estate transactions since the demise of the Resolution Trust Corp.
Already a few specialists in sub-prime real estate have made some serious money by flipping these trades and are looking for more. At least one financial adviser on major facets of HUD’s reorganization effort is under criminal investigation.
The probe may answer the still open question of whether HUD’s efforts have lit the way to a new style of efficient entrepreneurial housing for the poor, or a less satisfying Russian-style privatization–where connected insiders reap benefits and the poor and capitalists without clout are cast aside.
Senate hearings by the Senate Banking Panel’s Housing Subcommittee, chaired by Sen. Connie Mack (R-Fla.), may shed some light on selected aspects of the plan.
On paper, the experiment sounds reasonable. After years of fruitless attempts to abolish the agency, HUD is quietly melting away on its own.
Department-wide staff is being cut to 7,500 from 10,500 now. The FHA’s single-family arm currently employs 2,700 HUD staff; by the end of 1999, the level will be 759.
Gradually, HUD is shifting responsibilities for underwriting and servicing loans and disposing of properties from HUD staff to lenders and contractors. It mirrors many of the changes that have taken place in the commercial sector. But HUD is different because it operates social welfare programs for people who don’t have access to regular commercial housing or lenders.
The experiment falls into three stages, the first of which has already largely been accomplished:
– Part one: sell off HUD’s backlog of non-performing single-family and multifamily loans, about $11 billion in all. Loans worth about $8 billion already have been sold in auctions that had to be halted last October because of problems with the financial adviser who now is being investigated for interest conflicts. Repackaging the loans has already been a highly successful business for groups such as PNC Bank Corp’s BlackRock Inc. unit, and Ocwen Financial Corp. Units of Goldman Sachs & Co. also have been successful.
– Part two: consolidate future defaulted loans with FHA backing–about 55,000 properties a year with unpaid mortgage balances upwards of $2.5 billion–into a package that could be sold in bulk to one or a few private institutions. These private middlemen would then maintain and market the properties and pocket any profits.
– Part three: hire outside contractors to negotiate deals with owners of subsidized housing–an enormous portfolio of about $25 billion in properties. The goal would be to chop subsidies to bring HUD-paid rents back into line with the market.
Presumably the marked-down mortgages would then be sold to non-profit organizations at a minimal price with possible Wall Street refinancing. Again, firms like Goldman and Blackrock/Ocwen could play a role.
All told, about $50 billion worth of mortgages and properties will eventually hit the private markets. There is no real debate about whether it should be done.
At a recent hearing before the House Subcommittee on Housing, HUD Inspector General Susan Gaffney said the agency’s staff has been cut back to a point where the department no longer had a choice. The question, she said, boiled down to making sure that HUD doesn’t get “ripped off to a fare-thee-well.”
There is some opposition.
Recently a group backed by the Poverty Law Center got an order from a Chicago federal court compelling HUD to negotiate with defaulted borrowers before foreclosing. Such a requirement throws a wrench into any privatization effort.
Another obstacle is a little known government contractor named John Ervin who has a major lawsuit against HUD since it forced him out of business under disputed circumstances two years ago.
What HUD calls a reinvention of HUD’s real estate operations, Ervin derides as an orgy of interest conflicts and backroom deals.
Ervin’s version is reinforced by the fact that one financial adviser has already been fired under a cloud of alleged interest conflicts and another temporarily laid off after disclosures about its huge contributions to President Clinton’s 1996 election campaign became public.
The HUD Inspector General and the U.S. Attorney’s office have been investigating Ervin’s allegations for two years and still haven’t passed judgment.
Recently, HUD lawyers have said they still deny Ervin’s allegations, but that “information has been developed in the pending criminal investigation which has not been made available to the federal defendants. If and when such information becomes available the federal defendants’ answers to the allegations may be subject to appropriate amendment.”
