[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE SECTION 203(K) HOUSING PROGRAM
=======================================================================
FIELD HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 10, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-44
U.S. GOVERNMENT PRINTING OFFICE
75-454 PS WASHINGTON : 2001
__________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
------
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAY INSLEE, Washington
CHRISTOPHER COX, California JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
September 10, 2001........................................... 1
Appendix:
September 10, 2001........................................... 41
WITNESSES
Monday, September 10, 2001
Browne, Glorie, Section 203(k) building tenant................... 22
Czerwinski, Stanely J., Director, Physical Infrastructure Issues,
General Accounting Office...................................... 8
Foncette, Wilma, Section 203(k) loan applicant................... 21
Groves, Robert C., Assistant Inspector General for Investigation,
HUD Office of Inspector General................................ 10
Medina, Ruben, Chief Executive Oficer, Promesa Systems, Inc...... 27
Perine, Jerilyn, Commissioner, New York Department of Housing
Preservation and Development................................... 33
Phillips, Karen A., President and Chief Executive Officer,
Abyssinian Development Corporation............................. 29
Renwick, Mr. and Mrs. Brett, Section 203(k) loan applicants...... 19
Tom, Lydia, Senior Program Director, The Enterprise Foundation... 31
Weicher, Hon. John C., Assistant Secretary for Housing/Federal
Housing Commissioner, HUD...................................... 6
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 42
Gutierrez, Hon. Luis V....................................... 44
Browne, Glorie............................................... 79
Czerwinski, Stanely J........................................ 52
Foncette, Wilma.............................................. 73
Groves, Robert C............................................. 58
Medina, Ruben................................................ 81
Perine, Jerilyn.............................................. 94
Phillips, Karen A............................................ 86
Renwick, Mr. Brett and Mrs. Marla............................ 69
Tom, Lydia................................................... 90
Weicher, Hon. John C......................................... 45
FIELD HEARING
THE SECTION 203(K) HOUSING PROGRAM
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MONDAY, SEPTEMBER 10, 2001
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
New York, NY
The subcommittee met, pursuant to call, at 10:00 a.m., at
the Adam Clayton Powell Office Building, 163 West 125th Street,
New York, NY, Hon. Sue W. Kelly, [chairwoman of the
subcommittee], presiding.
Present: Chairwoman Kelly; Representatives Grucci, Rangel,
and Israel.
Chairwoman Kelly. Good morning. This hearing of the House
Financial Services Subcommittee on Oversight and Investigations
will come to order. I want to thank all the Members of Congress
who are present today. Without objection, all Members will
participate fully in the hearing, their statements and
questions will be made part of the official hearing record.
Specifically, I want to thank my friend and House colleague
Charlie Rangel for his assistance in planning this hearing and
for securing this room for our use.
I also want to take a moment to express my gratitude to
Secretary Martinez for making the resolution of the problems in
the Section 203(k) program one of his highest priorities.
I would like to inform Members and witnesses that it is my
intention to limit statements and questions to 5 minutes each.
We have plenty of time to hear all viewpoints, but we need to
maintain the decorum that is required of all Congressional
hearings. So please, please, do not applaud or comment loudly
for a particular witness.
The Section 203(k) program was intended to strengthen
communities and improve available housing. Unfortunately, fraud
perpetrated under this program has had a devastating impact on
families and neighborhoods in New York.
The focus of this hearing will be to find out why this was
allowed to happen and how to prevent it from ever happening
again. The question that remains unanswered, and which I hope
we can answer during this hearing is, where were senior HUD
officials when all this fraud was taking place? According to
reports issued as early as July, 1996, the HUD Inspector
General and the General Accounting Office found that fraud in
the Section 203(k) program was harming individual homeowners,
renters and communities and placing taxpayer dollars at risk.
In July of 1996, and again in February of 1997, the HUD
Inspector General's office said, and I quote: ``The Section
203(k) program is highly vulnerable to waste, fraud and abuse
by investors and non-profit borrowers.'' Four months later, in
June of 1997, then-Secretary Cuomo instituted his 20-20
Management Reform Plan, a plan which raised red flags with
Federal investigators concerned with HUD's oversight ability.
Four months after that, in September, 1997, the HUD
Inspector General issued its Semi-annual Report to Congress
expressing concern over the fast pace with which then-Secretary
Cuomo's reforms were being implemented. Secretary Cuomo's
plans, Federal investigators said, put in jeopardy HUD's
ability to effectively oversee its own programs, and indeed,
starting in late 1997 and into 1998, HUD's single family
program was at its most vulnerable point, according to Federal
investigators.
In 1999, after this scam had become full blown, the GAO
said HUD officials still had done little to address the
problems identified by its Inspector General and others. The
warnings were there. Time after time, Federal investigators
warned of abuse. Here they are, all of these reports warned of
problems in the Section 203(k) program and yet they were
ignored. Where was HUD?
Then-Secretary Cuomo knew this problem existed, yet allowed
it to balloon into a $130 million defrauding of the American
taxpayer. Because of this scam, dozens of coconspirators,
crooked investors, phony non-profits, willing appraisers and
greedy attorneys have already been arrested and there is more
to come.
These felons falsely inflated the prices of these
properties, lied to obtain HUD insured loans they needed to buy
and rehabilitate the properties, pocketed the money, defaulted
on the loans and every single one of us who pays taxes is now
stuck with this bill. Again, where were senior HUD officials
when taxpayer dollars were being stolen?
A large part of Secretary Cuomo's plan involved shifting
resources, a full 10 percent of the staff resources went to his
Community Builders Program, a program which served no oversight
function whatsoever, but rather a public relations function. In
fact, the HUD Inspector General testifying before a Senate
panel last year, said that the majority of Community Builders
said they spent more than half their time on public relations
activities.
The Inspector General continues: ``HUD redirected a
significant amount of resources to outreach and customer
relations activities at a time when additional resources were
needed for operational activities.''
Now, hundreds of New York families are at risk, risk of
losing their homes. Other families have been deprived of an
opportunity to purchase a home and renters have had to live in
buildings that are falling apart. Where was HUD while residents
of this community were being preyed upon and denied quality
housing? Hundreds of millions of dollars in federally-insured
loans have been lost while criminals lined their pockets with
taxpayer money.
How could this frenzy of corruption have been missed by
Secretary Cuomo and senior HUD official management in light of
repeated warnings by Federal investigators? Last year, the HUD
Inspector General's Office testified before the Senate that,
quote: ``the large number of staff devoted to public relations
took away staff resources from important oversight functions.''
Sadly, this program is a casualty of Secretary Cuomo's
obsession with spin and public relations, rather than sound
public policy.
In closing, let me cite one last Inspector General's report
that addresses this issue. A 1999 HUD Inspector General's
report stated that Secretary Cuomo's reform efforts had, and I
quote: ``a criminalizing effect on many of HUD's ongoing
operations.''
Clearly, the Section 203(k) program was one of the programs
hardest hit by a disturbing pattern of mismanagement and
neglect over the past several years at HUD.
I look forward to the testimony from these witnesses today,
and I turn now to my colleague, Congressman Charlie Rangel for
his opening statement. Congressman Rangel.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 42 in the appendix.]
Mr. Rangel. Thank you so much, Madam Chairwoman. On August
the 28th, I received an invitation from you inviting me to
participate in this hearing and to request my support in making
certain that it took place and, of course, even before that I
indicated my willingness to do this.
It is my understanding at that time, and it remains my
intent, not only to see what went wrong, but to see what went
wrong for the purpose of seeing that it does not reoccur, and
also to make certain that my community and those communities
that have been adversely affected as a result of the fraudulent
and criminal behavior of certain people, most of whom I hope
are arrested by now, that they are made harmless.
That's why I'm a little surprised that for over a dozen
times you mentioned the name of the former Secretary of HUD,
whom I'm certain you're aware of, is a candidate for the
Governorship of the State of New York.
Nowhere in your letter do you mention, Mrs. Secretary, and
I see a lot of emphasis that's been made on the C, and I assume
that means political appointees of the Secretary of HUD. I want
to assure you that my community sincerely wants to help you,
the witnesses, but more importantly, that those people would
like to see a revitalization of our community with the support
of HUD, and I don't intend to get involved in allowing my
political observation of this Administration to interfere with
this hearing as relates to making my community whole, and I'm
prepared to accept the fact that your concerns about the
previous Administration was the only reason why you saw fit to
mention the name of the former Secretary a dozen times and I
thank you for not mentioning the President, who was Bill
Clinton, who is not a candidate for public office.
Whatever the purpose, I'm prepared to admit that Andrew
Cuomo's name was mentioned so often this morning only for the
purposes of identification and for those of you who may not
have known that the Secretary was Secretary Andrew Cuomo, a
candidate for Governor of the State of New York.
Having said that, I do want to thank the witnesses who have
been heard, who have come here, the public servants who have no
political axe to grind, that we rely on, no matter who is
elected, to make certain we will correct the wrongs and move
forward, and who I'm confident that at the end of the day
you'll have some wonderful suggestions.
As Tip O'Neill--you'll pardon the expression, once said,
``all politics is local.'' I'd like to pay tribute to my City
Councilman Bill Perkins, who was merely responding to an
eviction notice by one of his constituents, but, because he
just didn't accept the fact that their furniture and worldly
belongings were placed on the street, because he didn't accept
the fact that the landlord was an unknown corporation, because
he didn't accept the fact that he found out that similar people
were situated that were not in his Councilmanic District, and
because he did take it to the New York County District
Attorney's office for further investigation, I just want to
publicly thank him for bringing this to our Government's
attention.
I think to a large extent that's the reason why we held
this hearing.
[Applause.]
Chairwoman Kelly. I cautioned this audience before. This is
a regular Congressional hearing and we will have to have no
comment and no sound, please, from the audience during this
hearing. We have witnesses here and we are on a time-line. We
need to hear our witnesses. I'm sorry, Congressman Rangel, that
you were interrupted.
Mr. Rangel. Well, thank you, and I'm anxious to hear from
the witnesses and I'd like to hear what positives come out of
the hearing this morning.
Chairwoman Kelly. Thank you. I think Congressman Rangel
touched on an important point. This hearing is about people in
the State of New York having a decent place to live and the
loss of taxpayer money, and whenever anyone charges this is
politics, they're trying to avoid the facts. The fact is that
they are doing a great disservice to the people in New York who
have been hurt by the ignoring of this program.
Incidentally, this did happen on President Clinton's watch,
but he was not at HUD. Secretary Cuomo was at HUD.
Mr. Rangel. Let me take this opportunity to thank our
current President George Bush for straightening out the problem
and bringing it to a positive conclusion.
Chairwoman Kelly. We're going to get it concluded today.
Turning right now to a Congressman who has joined us,
Congressman Felix Grucci. Congressman Grucci, do you have an
opening statement?
Mr. Grucci. Yes, I do. Thank you for hosting this hearing,
Congressman Rangel. It is great to be in your District and
great to be amongst you all today. Some of you may be wondering
why a Congressman from the First Congressional District, which
is Eastern Long Island, is attending this meeting. The answer
is easily identified in the fact that the fraud in this system
isn't unique in this particular area, it seems to have been
running rampant and seems to have been out of control.
In my area there is a faith-based organization that has
been victimized by unscrupulous commercial bankers, a home
mortgage banking corporation to take on 132 homes, a small
faith-based organization, spreading everywhere from my District
out on the east end of Long Island into Queens and possibly as
far north and west as where we are sitting here today. The
system is broken and it needs to be overhauled and it needs to
be fixed, because the purpose here is to insure that the
quality of life continues to improve for the American citizen,
and so that everyone has the opportunity to achieve the dream
of homeownership and decent living conditions and a place they
can raise their family in comfort and knowing that the house
they live in isn't about to fall apart or they're about to be
evicted or the program that they're in is not really doing the
job it's supposed to do. This Oversight Subcommittee and this
hearing today hopefully will get at the root of this problem,
will fix it and will continue to be able to provide the
American dream to so many people, where that American dream may
be outside of their reach without programs like this.
So I thank you, Chairwoman, for putting this hearing
together; Congressman Rangel, thank you for hosting this in
your District today, and I look forward to the testimony from
the witnesses, and I think it might get a little hot before the
day is over with.
Chairwoman Kelly. Thank you very much, Mr. Grucci.
If there are no more opening statements, we are going to
begin with our first panel. The first panel will focus on the
action, or lack of action, by past HUD management during the
1997-2000 time period with respect to the Section 203(k)
scandal. For our first panel, we're grateful that the Honorable
John C. Weicher, Assistant Secretary and Federal Housing
Commissioner could join us today. Assistant Secretary Weicher
has the responsibility for running the Section 203(k) program
at HUD. He has devoted his career to housing and urban issues
and has served at HUD in three previous Administrations.
Next to him, we have Mr. Stanley Czerwinski, the Director
for Physical Infrastructure Issues at the General Accounting
Office, which is the official and nonpartisan investigative arm
of the Congress. Mr. Czerwinski is the GAO expert on housing
issues. After that, we will hear from Mr. Robert C. Groves, the
Assistant Inspector General for Investigation from the HUD
Office of Inspector General, which is the office that audits
HUD programs and conducts criminal investigations. As the top
cop for the Inspector General, Mr. Groves has led the
investigation's fraud program.
You are all aware that this subcommittee is holding an
investigative hearing. When doing so, the Chair may decide to
take testimony under oath. Do any of you have any objection to
testifying under oath?
Panel. No objection.
Chairwoman Kelly. Then I advise you under the rules of the
House and the rules of the Committee, you are entitled to be
advised by counsel. Do any of you desire to be advised by
counsel during your testimony?
Panel. No.
Chairwoman Kelly. In that case, please rise and raise your
hands, I'll swear you in.
[Witnesses sworn.]
Chairwoman Kelly. Thank you very much. Each of you is now
under oath, and without objection, the written statements will
be made part of the record. You will each now be recognized for
a 5-minute summary of your testimony and let us begin with
Assistant Secretary Weicher.
STATEMENT OF HON. JOHN C. WEICHER, ASSISTANT SECRETARY FOR
HOUSING/FEDERAL HOUSING COMMISSIONER, HUD
Mr. Weicher. Thank you, Chairwoman Kelly and thank you for
holding this important hearing. I'm honored to be here today on
behalf of Secretary Martinez to describe present efforts to
address the problems in HUD's Section 203(k) program here in
New York, problems that were caused by fraud and abuse during
1998 and 1999.
With me this morning are Sean Cassidy, General Deputy
Assistant Secretary for Housing; Mary Ann Wilson, the
Secretary's representative in our New York office; Frederick
Douglas, Deputy Assistant Secretary for Single Family Housing;
Joseph McCloskey, Director of the Office of Single Family Asset
Management and Ingram Lloyd, Director of our Philadelphia Home
Ownership Center. All of these HUD staff members have worked
long and hard on these problems.
We are here to discuss a major abuse of a HUD program. The
Department has engaged in an intense effort to understand how
the program abuse occurred, how to deal with it and how to
prevent it in the future, here and elsewhere. I will discuss
each of those subjects this morning and just summarize my
testimony.
In the Section 203(k) program, the FHA insures mortgages
that finance both the purchase of the home and repair of the
property after purchase. The lender is required to approve
drawdowns from a repair escrow and ensure the adequacy of the
repairs themselves. Over the last 7 years, FHA has insured
about 80,000 of these mortgages.
The Section 203(k) program is a single family home mortgage
program, but it is possible to obtain FHA insurance with
properties for up to four units and for larger properties being
converted to no more than four units. Most of the New York
properties are in these last two categories, and that is
unusual. Nationally, 80 percent of the Section 203(k) loans are
one-family houses.
The Section 203(k) program is inherently more risky than
FHA's standard home mortgage insurance because of the repair
component. FHA has a 14 percent default rate on Section 203(k)
loans, compared to 2 percent on our basic Section 203(b) home
mortgage insurance program.
Briefly, here is what happened in New York: During 1998 and
1999, FHA insured mortgages on 720 properties in and around the
city that were sold to non-profit organizations. Of these, 545
are located in Brooklyn or Harlem and another 85 are in Queens
or the Bronx. Under Section 203(k), the nonprofits made a
commitment to rehabilitate the properties and resell them, but
in fact, the actual transaction was conducted by companies with
ties to loan officers, investors who were barred from the
program. Escrowed monies to be used for rehab were then
funneled to developers who actually did little or no work.
Kickbacks were paid to the various parties involved in the
fraud. Lenders failed to perform their legal duties to ensure
the repairs were completed and escrow funds were handled in an
irresponsible manner. Some were in collusion with investors.
These loans are the subject of ongoing investigation by the
Department of Justice, by local authorities and by HUD's own
Office of the Inspector General. I understand that 33
individuals have been indicted to date. We are supporting these
investigations and we have also proceeded with administrative
actions as well. We have taken action against 113 organizations
and individuals, and we have levied civil money penalties of
over $1 million. I have listed these in my full statement and
they take up over a page.
We expect to pay more than $130 million for insurance
claims on these properties. That does not include the cost of
property rehabilitation. Our initial estimate for the rehab is
$80 million. Most important, several hundred households are
living in appalling conditions and the buildings are a blight
on the neighborhoods.
Last week, I came here with Mr. Cassidy, Ms. Wilson, and
Mr. Lloyd. We looked at 42 of these properties, here in Harlem,
within a few blocks of this building, and also in Brooklyn in
Bedford Stuyvesant and Bushwick. The property of one of the
witnesses in the second panel, Ms. Browne, was one of the
properties we looked at. We saw vacant lots, burned-out
buildings, buildings with missing staircases, and buildings
with broken windows. Many were boarded up, and about half were
occupied. Nearly all need significant rehab work before they
can provide decent housing.
Upon his appointment, Secretary Martinez created a HUD team
to address this fraud. On May 11, the Secretary announced a
preliminary plan with several components: To protect all
current legal residents and offer them affordable leases; to
bring the property up to minimum property standards, free of
health and safety problems, and supplied with adequate heating,
plumbing, electricity, and other basic utilities; to pay the
cost of rehabbing the properties; to bear the cost of any
temporary relocation made necessary by the rehab work; and to
allow for disposition of the properties to both for-profit and
non-profit purchasers.
The Secretary also invited the city's Department of Housing
Preservation and Development--HPD--to assist in developing a
more detailed solution, and in response, HPD has offered to
assume a primary role in overseeing the rehab and disposition
of the properties. HPD will draw on its extensive experience in
rehabbing similar properties in New York, in many cases,
properties on the same block. The Department welcomes this
proposal. It is now under active consideration by program staff
and the Office of General Counsel, and I want to thank
Commissioner Jerilyn Perine from HPD for her strong commitment
to solving the problems with which we are all now confronted.
When we looked at these properties earlier last week,
Commissioner Perine joined us, and we had a very useful
discussion.
In the interim, the Department is employing two property
management firms to maintain these properties and make sure the
residents have basic utilities. We are hampered by the fact
that HUD currently owns only 156 of the properties. Another 460
are in default, but the sponsors remain the legal owners, even
though they are now excluded from doing new business with HUD.
The owners are not being very cooperative as we head into the
fall and winter, so the Department has instructed the mortgage
companies that currently service these loans to reestablish
utilities if the utilities are cut off in these buildings, and
HUD will reimburse the servicers for this expense, something we
normally do.
In addition, the Department is carefully analyzing the
Section 203(k) program activity around the country. Our best
evidence is that the fraud here is unique. In the period since
this scam started, the cumulative claim rate on Section 203(k)
claim loans to nonprofits is 14 percent in New York City
compared to 5 percent for the rest of the country.
The program has now been changed in several important ways
to forestall this type of fraud elsewhere. In my statement, I
have listed several actions that HUD took last year. This year,
Secretary Martinez has instructed us to rigorously review
program operations and the program control structure. One
proposed regulation is currently finishing the 15-day
Congressional review period. We are prepared to develop further
regulations as necessary. We will also work with the city, with
community groups, with non-profit and for-profit entities and
the unfortunate residents of these properties. The Secretary's
first concern is to see that the people living in the
properties are decently housed and do not suffer from fraud
that occurred around them.
Finally, we will continue to hold lenders and other
participants accountable for fraud and failure to comply with
the requirements of the program. Thank you, Chairwoman Kelly. I
will be glad to answer questions.
[The prepared statement of Hon. John C. Weicher can be
found on page 45 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Weicher.
We now turn to Mr. Czerwinski.
STATEMENT OF STANLEY J. CZERWINSKI, DIRECTOR, PHYSICAL
INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE
Mr. Czerwinski. Madam Chairwoman, Congressmen, we're happy
to testify today on the Section 203(k) program, but my
objective today is to provide you with a road map of things we
think the agency can do to help improve the program. Before I
start I'd like to introduce the two people who did most of the
work. Paul Schmidt, who is our Assistant Director for all
single family housing, and next to him is Rick Smith, our lead
investigator for the Section 203(k) review.
Chairwoman Kelly. We welcome them.
Mr. Czerwinski. I'd like to start by saying that Section
203(k) is a worthwhile program. Used correctly--and that's the
key word, correctly--Section 203(k) can rehabilitate
properties, can revitalize neighborhoods and provide
homeownership opportunities where you otherwise would not have
them, but as Mr. Weicher noted, Section 203(k) is inherently
complicated and risky. This is due to features both unique to
Section 203(k), as well as all of FHA. With Section 203(k), the
unique feature is, again, as Mr. Weicher noted, that you're
combining the financing for the purchase and the rehabilitation
into a single mortgage. However, Section 203(k) is built on
also a structure that has basic risk and that is FHA insures
100 percent of all the mortgages.
Today, with that backdrop, what I'd like to do is briefly
describe Section 203(k). Walk you through some things that we
think are particular points within that area and give
suggestions to how to fix it.
Section 203(k) was established in 1978, but it really
didn't become significant in size until 1994, and again, as Mr.
Weicher noted, what we're talking about is a single mortgage
that covers both the purchase and rehabilitation of properties
with a 100 percent Federal guarantee. Because of the 100
percent Federal guarantee, it's important to hold accountable
all the players involved, and in the case of Section 203(k),
because it is more complicated, you have more players to hold
accountable. In the case of FHA, the two major players to hold
accountable are the lenders who underwrite the loans and the
appraisers who turn in the values.
We've done reviews of FHA in general and lenders,
appraisers and found significant problems; lenders making loans
to unqualified borrowers, appraisers valuing properties far
above their level. The fix to this is three-fold. You need to
approve only lenders who will do a good job, even if you have a
tight approval process. Constant monitoring has to take place,
again, because the liability is on the Federal Government, not
the lenders or the appraisers. Finally, when you do find
inaccuracies, it's important to take action, enforcement action
against them.
As I mentioned, Section 203(k) becomes particularly
troublesome, because the lender is financing not only the
purchase, but the promise to rehab and the appraiser is not
just appraising the value of the property as is, but some
estimate of what it's going to be like when its fixed.
So our recommendation to HUD is they need to pay close
attention in approving, monitoring and enforcing the actions of
lenders and appraisers and they need to pay special attention
to this in the Section 203(k) program, and this is the litany
you will hear from us; approving, monitoring, enforcing.
In addition, there are two other pain points within Section
203(k) and we found these to be very problematic in the past.
The first is participation of consultants, the second is the
participation of non-profits. Consultants are there because the
program is complicated. They're there ostensibly to help the
borrower, help the borrower plan, help the borrower oversee the
property rehabilitation. They can also approve the drawdown of
payments when work is complete. As the picture on your right
shows, that's not always the case.
This is a property that our team visited in Chicago. In
this property, the borrower received $60,000 to fix up that
property. That's a picture of a fixed up property. The
consultant approved all drawdowns of the $60,000, and that
borrower was left with things like exposed wiring, unframed
doorways, unfinished plastering, gaping holes in walls and
ceilings. She was faced with that as a single person to pay for
on her own, because the consultant said that work was complete.
That is the problem.
Another area of problems, and we talked a little bit about
this, is the participation of non-profits. Non-profits
typically get involved in Section 203(k), fix up properties,
revitalize the neighborhood, provide homeownership
opportunities and affordable rental housing where there would
be none. But the problem is non-profits typically nationwide
have caused twice as many claims as the next nearest group of
borrowers. This typically arises for a couple of reasons. One,
the non-profit may lack experience, they get in over their
heads or, two, and this is what you see in Harlem, they've been
co-opted by lenders, contractors, consultants, speculators.
To improve the performance of both consultants and non-
profits, we have recommended that HUD strengthen the criteria
for admittance into the program be recertified periodically,
periodically review the performance to make sure they're
performing in a way that's acceptable. HUD has begun acting on
the recommendations to be put in place. However, it's just
beginning, and because of the inherent risk involved in Section
203(k), no matter how much we put in place, it's going to
require stringent oversight and vigilance if we're going to see
this program work.
That concludes my statement. I'll be happy to answer any
questions you have.
[The prepared statement of Stanley J. Czerwinski can be
found on page 52 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Czerwinski.
Now we turn to you, Mr. Groves.
STATEMENT OF ROBERT C. GROVES, ASSISTANT INSPECTOR GENERAL FOR
INVESTIGATION, HUD OFFICE OF INSPECTOR GENERAL
Mr. Groves. Thank you, Chairwoman Kelly, other subcommittee
Members. With me today I have Ruth Mitsma, she's the Special
Agent in Charge of Auditing in the New York/New Jersey
District, and Stan McCloud is the Audit Director of the Finance
Committee.
I appreciate the opportunity to appear today to discuss our
investigation of the Section 203(k) frauds in Harlem. I have
submitted my written testimony for the record and I'd like to
focus on the few key points of that testimony. The Section
203(k) program allows a borrower or a not-for-profit
organization to get a mortgage to cover the current price of
the property in need of repair, as well as the estimated cost
to rehabilitate it. Investors are not permitted to participate
in the program. HUD must assure that the total costs are
reasonable for the market area.
The program generally requires the rehabilitation portion
of the loan to be escrowed by the lender and drawn down as the
work is completed over a 6-month rehab period. HUD approved
direct endorsement lenders generally to perform this task for
FHA during the underwriting process. Obviously, such loans
present a greater risk to HUD because of the inherent
uncertainties of rehabilitation work.
When the Section 203(k) frauds in Harlem occurred, HUD's
oversight was extremely limited, and HUD employees were
extremely and severely distracted. HUD was undergoing a major
reorganization under former Secretary Cuomo's 20-20 reform
plan, where the push quickly downsized HUD. About 1,000 mostly
senior level staff took the buyout at the end of 1997. Those
leaving with buyouts were primarily housing program employees.
Additionally, many positions in the department were being
abolished as employees were being forced to apply for new
positions in the new HUD. The focus of many employees at this
time was survival, finding a job outside of HUD or a position
within the reorganized department.
By early 1998, HUD's single family staff had been cut
almost in half, and all of the remaining positions were moved
to a consolidated homeownership center in Philadelphia.
Against this backdrop, the Section 203(k) program was
growing. Our investigations found numerous abuses of the
Section 203(k) program. Hundreds of properties were affected by
this scandal. Millions of dollars in FHA loans are virtually
worthless and neighborhoods remain blighted. Among the abuses
we found, ineligible investors used not-for-profit
organizations as fronts to buy properties at inflated values.
Appraisal companies used unrealistic properties as comparables
in determining realistic property values and lender employees
helped to falsify the credit worthiness of certain not-for-
profit buyers and then helped in altering the rehabilitation
work sheets so that FHA loans could be insured.
Please direct your attention to the chart that illustrates
just one fraud enterprise involving 270 loans originated by
officers and employees of Mortgage Lending of America. This
involved collusion of lender employees, multiple investors,
real estate attorneys, lenders and 13 separate not-for-profit
organizations. Of the 270 originated loans, 267 are in default
with a potential loss to HUD of $77.8 million.
My written testimony, for the record, indicates the
magnitude of the losses and the nature of the fraud
conspiracies, but today I'd like to give an illustration of
what happened in the cases of just two Harlem properties.
The first property is 157 East 121st Street. This picture
was taken in the fall of 1998. An investor purchased that
abandoned building on December 18th for $60,000. Five days
later, title to this property was transferred to a not-for-
profit for $225,000 on a HUD-secured FHA 203(k) mortgage of
$355,700. At that time, the $225,000 in loan proceeds were
divided among the conspirators. The remaining $130,700 was
escrowed to pay rehabilitation costs. This property went into
default in less than one year.
The next picture was taken 2 weeks ago. Since it appears
that no rehabilitation work was performed on this property,
HUD's insurance loss will be substantial.
The second property I'm going to talk about is 316 West
113th Street. This picture was taken in the summer of 1998. An
investor purchased this lot with foundation on July 1, 1998 for
$35,000. Six days later, title to this property was transferred
to a not-for-profit for $160,000 on a secured FHA 203(k)
mortgage of $327,400. At that time, $160,000 in loan proceeds
were divided among the conspirators. The remaining $167,400 was
escrowed, to pay rehabilitation costs. This property quickly
went into default.
The next picture was taken 2 weeks ago. Since it appears
that no rehabilitation work was performed at all on this
property, HUD's insurance loss will be substantial, and, by the
way, Mortgage Lending of America is out of business, and any
hopes of recovering any of the escrowed funds either on these
properties is doubtful.
There seems to be a feeding frenzy of the various criminal
groups that profit from the vulnerabilities of the Section
203(k) program. Often members of the enterprise replicated the
frauds with new conspirators. Often members of the enterprise,
not only HUD, but poor neighborhoods targeted for improvement
were victimized.
There are hundreds of properties in the New York area like
the two I've shown you. Our office is working very closely with
the United States Attorney's Office, the Manhattan District
Attorney's office and others to investigate, indict and convict
those parties that were involved in these schemes to defraud
HUD. In this investigation I have described to you there have
been 33 arrests and 19 of those individuals have entered guilty
pleas. Until everything is settled, taxpayers will lose tens of
millions of dollars.
In this instance, the American people were committed to
investing hundreds of millions in poor neighborhoods to make
them decent, good places to live. In Harlem, religious not-for-
profit and other not-for-profit organizations working in
partnership with criminals aggressively pilfered nearly the
entire investment that had been set aside to help vulnerable
and disadvantaged elements of our society.
HUD's poor management allowed this slow moving theft of
huge proportions to be undetected until it was too late.
That concludes my testimony and I'd be pleased to answer
any questions.
[The prepared statement of Robert C. Groves can be found on
page 58 in the appendix.]
Chairwoman Kelly. I thank you very much, Mr. Groves. I have
a few questions for this panel and then I'll turn to the other
Congressmen.
Mr. Groves, is it your assessment that then Secretary
Cuomo's rush to implement that 20-20 Management Plan you
described, despite repeated warnings, apparently, to slow down,
had an impact on the Section 203(k) fraud that was going on?
Mr. Groves. Absolutely. All the monitoring of that program
became negligible.
Chairwoman Kelly. It now appears that during a time when
additional resources were needed for HUD to oversee its
programs, Secretary Cuomo shifted 10 percent of the staff
resources to his community builders program. Was this drain on
resources a contributing factor to the lack of oversight of HUD
programs?
Mr. Groves. Yes, ma'am, it was.
Chairwoman Kelly. Do you want to elaborate on that a little
bit?
Mr. Groves. Basically we had almost a thousand people in
the single family program whose jobs were eliminated. That
1,000 people represented the oversight in most of the single
family program including the Section 203(k) program. In New
York, 21 people that were located right here in New York City,
those positions were eliminated and they went to Philadelphia.
It's very difficult to monitor a program from Philadelphia when
you don't know what the properties are and what the addresses
represent.
Chairwoman Kelly. Mr. Czerwinski in a June, 1999 GAO
report, the 1997 anticipated losses for the Section 203(k)
program were projected to be about $11 million. As a result of
hasty reforms and resources being diverted to public relations
efforts in this figure, this figure ballooned to $130 million
in 2001. If a HUD senior management had heeded the IG's
recommendations with regard to problems with the Section
203(k), couldn't the cost to taxpayers be significantly
reduced?
Mr. Czerwinski. Yes, Madam Chairwoman, the IG had definite
recommendations and following them would have cut back on
losses.
Chairwoman Kelly. In listening to you I find it interesting
that a Cuomo spokesman had stated that the GAO found HUD one of
the best-run agencies of the Clinton Administration. Do you
agree with that claim?
Mr. Rangel. I don't think you really want to go there.
Chairwoman Kelly. Answer the question, please, Mr.
Czerwinski.
Mr. Czerwinski. I think I have advice of counsel. But in
all seriousness, I wish it were so that HUD were one of the
best run agencies. HUD has made progress, primarily in the area
of its reorganization and the area of accountability. However,
they need the resources to proceed to the next step, they need
the resources to have the right number of people with the right
skills in the right places. Information, the information
systems to help these people do their jobs, and of course with
the cutback in staffing, HUD has relied more on contractors.
They need to have greater oversight of contractors to reach
that level that we'd like to see them at.
Chairwoman Kelly. Mr. Czerwinski, you thought I would let
you get by with that question. I'm going to ask you again. Do
you think, do you agree with the claim that the GAO found HUD
was one of the best run agencies in the Clinton Administration?
Mr. Czerwinski. We have not issued a report that said HUD
was one of the best run agencies in the Clinton Administration.
Chairwoman Kelly. You have not issued that kind of report?
Mr. Czerwinski. We did not issue that report.
Chairwoman Kelly. That's all I wanted to find out, because
I've heard that.
Secretary Weicher, has HUD taken the necessary steps to
diminish HUD's focus on media relations and insure that
adequate certified oversight staff are in place to properly now
review the Section 203(k) loans?
Mr. Weicher. Well, Chairwoman Kelly, the Department is
completing the process that we call the Resource Estimation and
Allocation Process to determine where our staff should be
employed physically and also programmatically, and this
includes not only the Community Builders that you mentioned
before, but every other part of the Department. I am myself a
member of the task force that is working on this. Our effort is
chaired by the Deputy Secretary of HUD. We expect to be making
recommendations to the Secretary by the end of this month.
This is a major effort by the Department to consider how
our resources should be allocated so that we are able to do the
job as well as we can with the resources we have.
With respect to specific activities, we have increased the
number of lender monitors that we have from 23 a couple of
years ago, to 140 today. We have put contracts in place to
analyze what kind of appraisals we are getting on the Section
203(k) program to do desktop reviews of the loans as they are
originated. In Mr. Czerwinski's testimony, he listed four
recommendations that GAO had made and said that we implemented
three of them and are in the process of implementing a fourth.
On that fourth one, we have selected a contractor, and we
expect to have that contract signed before the end of the
fiscal year.
Chairwoman Kelly. Could you just tell me a little bit more
about what you're doing about the problems created by the
community builders program and how you're going to improve the
oversight of housing? These people need some assurance.
Mr. Weicher. What we do with the Community Builders is part
of this process that I mentioned. We are revisiting the entire
management and staffing of the Department. I would like to be
specific, Chairwoman Kelly, but I really cannot, because we are
in the middle of making recommendations to the Secretary. The
Department will speak with his voice on the subject when it
speaks, and that will not be very far from now. But I cannot do
it today.
Chairwoman Kelly. I appreciate that. Thank you, Mr.
Weicher. I have no more questions at this point.
We'll turn now to Mr. Rangel.
Mr. Rangel. Thank you so much, Madam Chairwoman. Let me
thank this panel for the positive testimony that you've given,
and I'm encouraged by the fact that it's our responsibility as
public servants to find out what went wrong, what we've got to
do to correct it and how we can move forward. I'm certain that
we just don't have enough time to share with the General Office
of Accounting all of the things that the Clinton Administration
is proud of, but I think you would agree with me that that time
has come and gone and now we have to move forward.
I would want to make it clear that the not-for-profits and
the church groups that were involved in this, do you know
whether any of them were in the Harlem community, among those
that were indicted, those that were investigated? If so, I
would want them named, because the testimony was rather broad
in terms of who was victimized, but a little less specific in
terms of the conspirators.
Mr. Groves. You'd like to know the names of the 13--I can
talk about the case we have here.
Mr. Rangel. I'm talking about the names of not-for-profit
community-based organizations that were involved as
conspirators. Do you have any from the Harlem community?
Mr. Groves. No, sir, there were none from Harlem.
Mr. Rangel. Well, I wish that had been stressed, because to
us in Harlem, it's very, very important that no matter where
wrongdoing is, that we identify it, and since we have been the
victims, we want to join with you in seeking out how we can be
more cooperative involving the conspirators.
Mr. Weicher, you have a long reputation of doing good work
for our Government. I want to thank you for the cooperation
that your office has given not only to our community people,
but more specifically, to those at HPD, and Fannie Mae and all
of the agencies.
Do you think, we should list the names of the criminal
people who give Government a bad name, we don't see it listed
in the newspapers. Could you provide the names of all of the
people that were involved in this scam, and what percentage of
them do you think, roughly, have been indicted? Do we still
have a lot of people out there?
Mr. Groves. In this particular scam, none have been
indicted. There have been 33 arrests and are charged, not
through indictment, through criminal complaint. 19 of those
have pled guilty and are cooperating in an ongoing
investigation. Because it is still ongoing, I'm not at liberty
to name all of the individuals at this time.
Mr. Rangel. But those who are arrested, that's hardly a
private thing?
Mr. Groves. I don't have those who were arrested, the list
of that for you.
Mr. Rangel. You can get that, can't you?
Mr. Groves. We did have press releases in the New York area
that had them.
Mr. Rangel. But you could provide that to me of the names
of the people that were involved that caused this damage to
this good program.
Mr. Groves. Yes.
Mr. Rangel. Now, in your IG report, I assume that you had
an opportunity before you reached your conclusion to talk with
some of these senior HUD officials that the Chairlady refers to
so often, have you not?
Mr. Groves. We have ongoing discussions with the current
Administration.
Mr. Rangel. Not the current, we all have that, we're very
pleased with it, but the Chairlady seems to be concerned with
the past Cuomo senior HUD officials, the past Clinton-Gore
officials. I want to know whether or not you, since you gave
the report, had the chance to talk with any of these high-
ranking HUD officials?
Mr. Groves. Personally, I have not. However, we have had a
number of audits which cover these areas. We've had exit
conferences with those individuals, so there have been
discussions between the IG and HUD staff.
Mr. Rangel. Guess what, I haven't had any discussions with
them, either, but you and I would be better informed, I would
think, if both you and I had had discussions with them or, in
the alternative, wouldn't you agree, that had these high
ranking HUD political officials been invited to attend the
meeting, we might have a clearer view as to what occurred, so
that we could avoid those pitfalls, wouldn't you agree, Mr.
Groves?
Mr. Groves. Communication is best.
Mr. Rangel. That's a yes.
Chairwoman Kelly. If the gentleman would yield?
Mr. Rangel. Be glad to.
Chairwoman Kelly. I think it's important that we hear from
witnesses who can correct a problem, rather than just going
through something that occurred in the past.
Mr. Rangel. Well, I guess that ends the Cuomo inquiries. I
want to thank the Chair and withdraw my question. Thank you all
very much. I'm finished, thank you.
Chairwoman Kelly. Thank you.
We turn now to Congressman Grucci.
Mr. Grucci. Thank you, Madam Chairwoman. Sitting here
listening to what's been transpiring and seeing those pictures
and seeing it firsthand in the community where I live, a range
of emotions goes through you. I'm appalled that something like
this could happen. I'm angry that this has happened, that we've
wasted millions and millions of taxpayers' dollars on a program
that was designed to give people a quality of life, to improve
their quality of life and we've watched that money be
squandered.
My question really isn't in the past, it's more now toward
the future. You know, I come from a small town, about 450,000
people, small compared certainly to here in New York City. I
was a supervisor of that town and I was responsible for
spending and investing the taxpayers' money, and we did a lot
of things where we used taxpayers' money to acquire real estate
and to improve the quality of life for people, but before we
did that, we got a number of appraisals and did background
checks on them to see if they were truly legit. We didn't take
a desk audit, we did field audits. We've looked at the past
properties they appraised, we saw if their numbers were
accurate. We looked at the lenders, we made sure the lenders
have the capability, the background, the ability to do the job
they were being asked to do on behalf of the taxpayers, to be a
partner with the taxpayers.
I'm gathering that there isn't any of that that takes place
and once the barn door is open and the horse has left, it's
very hard to bring it back in again. What I want to know is
what are we doing to insure that these unscrupulous type of
mortgage brokers and appraisers and lenders aren't out there
going to continue to prey upon the innocent taxpayers, because
we're back, we're fixing what was done in the past. I want to
know what kind of policies we're going to be putting in place
from this day forward so that this doesn't happen again. We
can't fix the inequities of the past, we can't fix whether or
not an Administration was right or wrong in their approach to
it, but what we can fix is where we going.
Let me start I guess with, I'm sorry, I'm terrible with the
pronunciation of names.
Mr. Czerwinski. Then it must be me.
Mr. Grucci. Czerwinski, yes. Probably the most difficult
names I have to pronounce are Italian names and you would think
that an Italian should be able to pronounce Italian names.
But that being said, what do you do before we give away the
taxpayers' money like this?
Mr. Czerwinski. First of all, the comment you made, I
couldn't have written them better for you. The key is approving
people who will do a good job. You look at the players involved
where the risk is greatest; lenders, appraisers, consultants,
non-profits. You try to only let the good ones in the door.
Then once they're there, you have monitoring of them, because
there are incentives, even good ones can go bad or make
mistakes. When you do find a problem, you have to act on it,
otherwise, you have no teeth.
The key to Section 203(k) is you can't look at everybody
indiscriminately, you have to target, and this is where HUD has
a real challenge facing it. It needs to have the information
that helps it target and that's really requiring the
information systems to be upgraded so they can find out which
lenders, which appraisers, what's the profile of the problems.
Then, of course, you have to have the staff, the skill to deal
with them and that's a real issue to be found.
Mr. Grucci. Excuse me for interrupting you, but what
policies were in place to try and prevent this, and what do you
see needs to be fixed in order to fix the problem going
forward?
Mr. Czerwinski. HUD had policies to approve, monitor and to
enforce. It was a matter of implementing the policies, the will
to do it, the ability to do it, the resources to do it, and
that's where we see it needs to be fixed. There has to be the
commitment to spend the time and money there, and have the
people who can do this work. Two or three key loans are hard to
judge, so you want to have people with skills to go back and
check the appraiser's work, who understand the lending
underwriting capabilities, for example. You have to have
information they can do that with.
Of course with the downsizing of HUD, they rely more and
more on contractors, you need an oversight infrastructure for
your contractors to make sure they're doing it.
Mr. Grucci. Let me ask you a question: I want to
participate in the program and I bring you an appraisal. What
do you do with that appraisal?
Mr. Czerwinski. First of all, you don't go to HUD, you go
to a lender that's approved to make Section 203(k) loans.
Mr. Grucci. Approved by?
Mr. Czerwinski. HUD.
Mr. Grucci. How does HUD approve them?
Mr. Czerwinski. Mr. Weicher can answer that question better
than I could.
Mr. Grucci. Let me stop you and ask Mr. Weicher.
Mr. Weicher. We do several things, Mr. Grucci. We approve
lenders based on their record in other programs. Section 203(k)
is a very small program. It is 1 percent of our business
annually. There are a fairly small number of lenders who
actually do FHA Section 203(k) loans, because they are, as we
have all been saying, complicated and risky.
Mr. Grucci. How do you qualify to be a lender?
Mr. Weicher. You qualify to be an FHA approved lender in
general, based on your net worth, your having a business plan,
and your understanding of FHA's requirements. We have 11,000
mortgagees, 11,000 lenders approved to do business with us
nationally. We monitor the lenders; we monitor the loans
closely, by lender. If we have a fraud problem, we are going to
see it within a year of the origination of loans.
Mr. Grucci. Are your lenders recognized lending
institutions?
Mr. Weicher. Oh, yes, we have nearly every commercial bank,
every community bank in the country, and mortgage bankers. They
are recognized organizations.
Mr. Grucci. Then not a consortium of wealthy individuals
who come together and qualify to be a lender?
Mr. Weicher. I think they would have to first qualify to be
a bank before they qualify to be a lender or a mortgage banker.
It would be possible for a wealthy individual to establish an
entity which would qualify, but you would have to establish the
entity. We do not have--we would not have--a millionaire who is
an individual in our programs.
Mr. Grucci. My time is expiring.
Chairwoman Kelly. Your time is expired.
Mr. Grucci. It has expired. It's never good to have your
time expire. I'm going to follow up with written questions,
because there's a lot more I need answers to.
Madam Chairwoman.
Chairwoman Kelly. Thank you very much. I will note that
obviously, we three are very interested, and some of us may
have additional questions for this panel and for other panels,
and you may wish to submit them in writing. So without
objection, the hearing record will remain open for 30 days for
Members to submit written questions to these witnesses and to
place their responses in the record.
The first panel is excused with our great good thanks. We
appreciate your testimony and thank you very much.
Mr. Rangel. Let me join in thanking them and assure you
that I look forward to working with you to get some positive
solutions to this very serious problem. Thank you all very
much.
Chairwoman Kelly. Will people who are having conversations
either please leave the room or stop the conversations.
I want to thank the new people that are coming in front of
me. The second panel, we're glad to have you here. You are
interesting people we want to hear from. As I understand it,
you've all been victims.
Before us, we have Mr. Brett and Mrs. Marla Renwick. Miss
Wilma Foncette. And Ms. Glorie Browne. All four of you, as I
understand it, you're area residents or would like to be
residents in this area, and you were affected by the fraud and
mismanagement in the Section 203(k) program that has affected
Harlem so badly. The Renwicks and Miss Foncette tried to
purchase homes in Harlem, while Ms. Browne was a tenant in a
Harlem brownstone that was victim to a phony transaction.
You're all witnesses to this hearing, and when doing so,
the Chairwoman may decide to take the testimony under oath. Do
any of you have any objections to that?
Panel. No.
Chairwoman Kelly. All right, I now will advise you, the
Chair advises you, that under the rules of the House and the
rules of the Committee, you are entitled to be advised by
counsel. Do any of you desire to be advised by counsel during
your testimony today?
Panel. No.
Chairwoman Kelly. Thank you. In that case, will you all
please rise and raise your right hand?
[Witnesses sworn.]
Chairwoman Kelly. Thank you very much. All of you are now
under oath. Without objection, your written statements will be
made part of the record. You each will now be recognized to
give a 5-minute summary of your testimony. Prior to my saying
that, my beginning the testimony, I want to simply say that
this subcommittee will be following up and will talk to former
Cuomo HUD staff and will ask them to explain Secretary Cuomo's
decisionmaking process.
We will also allow people if they have been victimized by
the Section 203(k) program, we will accept written testimony
from anyone who feels they would like to write to this
Committee. So you have 30 days in which to get that done.
We will begin with you, Mr. Renwick.
Mr. Rangel. May I also welcome the witnesses? Since you're
from my community, I think I have a unique responsibility to
make certain that our job is not just to find out what went
wrong, but to try to make you whole in what you've done,
because you have decided to invest and to live in a community
that's given a lot of hope. And if we can identify any
wrongdoers that have shattered that hope, our job is to restore
that hope and to make you whole and do all we can, not just to
find out what went wrong, but what we can do to make things
right.
So while the Chairlady may be spending a lot of her time
dealing with former HUD officials, I'll be spending most of my
time dealing with current HUD officials to see how we can make
you whole. It takes a lot of courage to come out publicly to
state your personal setbacks, but I want you to know that
whether Republican or Democrats, we have a responsibility to
help you, and I thank you for taking this time out to help
yourselves and other people by sharing your experiences with
us. Thank you so much.
Chairwoman Kelly. I thank you, Congressman Rangel, and I
also want to point out we're having a hearing to try to correct
this situation. We don't want people to be victims of this
program.
Let's begin with you, Mr. Renwick.
STATEMENT OF MR. AND MRS. BRETT RENWICK, SECTION 203(K) LOAN
APPLICANTS
Mr. Renwick. Members of the subcommittee, good morning.
This is my wife, Marla. Thank you for this opportunity to
chronicle our experience with HUD's Section 203(k) of the
National Housing Act, while attempting to purchase a brownstone
in the Mount Morris section of Harlem.
After looking for a brownstone for 13 months, our agent at
the Charles Greenthal agency told us of a brownstone at 148
West 121st Street that was available. We placed a bid and it
was accepted. After signing a contract, our lawyer conducted a
title serve via the Liberty Title Agency and once the title was
proven clean, instructed us to have our architect begin work on
the plans for our new home.
Weeks later, our lawyer in the course of a routine
conversation with the seller's attorney, was told that certain
previous owners of this property were in the process of being
indicted and that there was additional debt. My lawyer reviewed
the title search she conducted and found no mention of this.
She informed us that in the instance of an unrecorded event
having taken place, it was referred to as a ``cloud on the
title.'' Despite my urging, she told us to wait and did not
arrange for closing in spite of the title insurance she had
attained.
Over ensuing months the fact came into view. On October 28,
1999, Thomas Star sold this brownstone to Beulah Church of God
in Christ Jesus Incorporated in Brooklyn and allegedly made
some sort of financial arrangement with their title company
representative to not register the sale of this property. This
meant that although Beulah, who used Section 203(k) to purchase
this and 25 other brownstones, had paid for this property, it
would not appear on the City Register as it was supposed to 5
days later. Soon after this, Mr. Star sold the same property to
a not-for-profit for $10,000. Mr. Johnson, as the head of this
not-for-profit called Shelter House Corporation agreed to sell
the property to my wife and I.
The current name of the title company in question is
Stewart Title. My lawyer obtained a letter from Stewart Title
to the seller's attorney dated September 14 stating that, and I
quote: ``Our agent neglected to record the deed,'' and that
they would rectify this problem.
They did, and provided the title, thereby making Beulah
owner of record. My wife and I had the down payment returned to
us, but already spent $15,000 in architectural, legal and other
fees and still owe our architect $3,500 for services rendered.
Nearly 7 months later, my wife and I were tired of trying to
deal with Stewart Title, the seller's attorney--the seller had
disappeared--and HUD. HUD took no responsibility for the
program which bears its name and told us they would do nothing.
Soon after this we met with Darren Walker, the COO of the
Abyssinian Development Corporation, who had been asked by the
departing head of HUD, Andrew Cuomo, to help clean up the mess
in Harlem. Darren assured us that HUD, who now referred to my
wife and I as ``the New York Times people,'' because we had
been featured in an article, wanted to make good and get us the
property. After spending hours upon hours with HUD
representatives in both New York and DC offices repeating the
same information over and over again, nothing happened. HUD
dismissed Abyssinian and I was instructed to keep in touch with
Peter Spina of HUD in the New York City office.
Months passed and my bimonthly calls ended the same each
time. HUD was aware of our predicament, and wanted to help, but
could do nothing although they promised us the house. Finally,
after hearing this too many times, I wrote the secretary of
HUD, Mel Martinez, a detailed letter asking for a date for
HUD's intervention and a date when my wife and I could purchase
this property.
His response came in the form of a generic letter from
Ingram Lloyd, Director of HUD Homeownership Center in
Philadelphia, who had no knowledge of our case. In addition, I
received a phone call from Ms. Ford who insisted that HUD was a
third party with absolutely no ability to influence the outcome
of any property deemed contested. She also stated that HUD
would make no promises to us and that she would respond to my
letter in kind, which never happened.
It is our contention that had HUD held tighter reigns over
this program there would be some sort of apparatus in place to
identify, label and administrate Section 203(k) properties once
they had been sold. Our experience in dealing with HUD is that
of a disinterested bureaucratic organization that refuses to
take responsibility for a program it has written the rules for.
Had HUD done its job, someone from the agency would have seen
that Beulah had not renovated the property. That never
happened. Approved HUD lenders like Brucha Mortgage Bankers
Corporation, the mortgage lender Beulah secured the funding
from, and M&T Mortgage Company, who facilitated the transaction
under HUD's own rules should never have released the $401,375
to Beulah prior to work on the property commencing. Beulah is
in default of its obligation, among other defaults, and failure
to make monthly payments on or after December 1, 1999.
Our proposed remedies are as follows: A HUD representative
should be compelled to attend every property closing where the
seller is securing a HUD-backed loan of any type. This
representative should also be required to do followup, which
involves making sure the sale is recorded correctly and a sales
freeze is imposed on the property, avoiding any flipping by the
owner for a period of at least one year.
Since HUD refuses to sell properties directly to well-
meaning individuals like my wife and myself, choosing to sell
properties to anyone off the street willing to purchase several
buildings and calling themselves either a developer or not-for-
profit, the onus should be on the agency to check the
credibility of each potential buyer thoroughly and document the
construction process.
At this point in time, every city agency works against, not
for, prospective home buyers like my wife and myself. The
building department holds up purchases with ridiculous
paperwork like changing the certificate of occupancy from a SRO
to a four-family, having to obtain a certificate of
nonharassment, and ADA compliance in regard to owners building
disabled access and bathrooms for able-bodied owner's units. In
spite of everything, my wife and I still want to purchase,
renovate and live in that brownstone on 121st Street.
In closing, I'd like to thank the subcommittee for the
opportunity to tell the story that has caused my wife and I an
enormous amount of emotion grief and financial expense, but
wonder what any of you will do in our behalf.
Thank you.
[The prepared statement of Brett Renwick can be found on
page 69 in the appendix.]
Chairwoman Kelly. Thank you, very much. Mr. Renwick.
Now we go to Miss Wilma Foncette. Will you please pull the
microphone before you and tell us your story.
STATEMENT OF MS. WILMA FONCETTE, SECTION 203(K) LOAN APPLICANT
Ms. Foncette. Well, I bid on this house on 118th Street, I
don't remember what date. And it was, the agency came and took
us around the real estate, we had a lawyer. Everything went
smooth, until the day that we were closing. We went to the
table, everything was transferred, everything, just waiting for
the OK, when all of a sudden, we were told to get out of the
building and the two men were arrested. They gave us the money
back, but it was months afterwards we got the money back. But
we would still like to live in the building, if it is
available, we would like to have it.
[The prepared statement of Ms. Wilma Foncette can be found
on page 73 in the appendix.]
Chairwoman Kelly. Is that the end of your statement?
Ms. Foncette. Short and sweet.
Mr. Grucci. That's a rarity.
Chairwoman Kelly. That's great. I thank you very much. If I
understood you correctly, that the men came and arrested the
sellers' lawyer and----
Ms. Foncette. Himself.
Chairwoman Kelly. The both of them, while you were in the
process of closing.
Ms. Foncette. Yes, while we were in the process.
Chairwoman Kelly. Thank you. Thank you very much.
Next we go to Ms. Glorie Browne.
STATEMENT OF MS. GLORIE BROWNE, SECTION 203(K) BUILDING TENANT
Ms. Browne. Good morning, Members of the subcommittee,
invited guests, tenants of the Section 203(k) buildings and
others. Thank you for providing me with the opportunity to
address you this morning. My name is Glorie Browne, I live at
74 West 131st Street here in Harlem. My building is a
brownstone rooming house with 13 single room occupancy units,
very typical of the vast majority of the Harlem buildings in
the Section 203(k) program. I have lived there for about 10
years.
I am here in solidarity with all of my fellow Section
203(k) neighbors. I am also a tenant in a Section 203(k)
building who has suffered through the injustice of a housing
scandal that had nothing to do with housing. It had to do with
unscrupulous landlords and money hungry non-profits that saw
opportunities for quick money in buying our buildings, then
abandoning them and allowing them to rot.
They defrauded a Federal loan program and they also
committed fraud against unsuspecting tenants like me. Not only
did their crimes leave us without responsible landlords, it
also left us with no heat and hot water last winter, leaky
ceilings, damaged walls, broken boilers, shaky building
infrastructures and no hope. Up to 2 years after the news of
this scandal broke, some tenants are still without basic
services.
About 200 brownstones in Harlem are caught up in this mess.
About 160 of those buildings, about 85 percent, are SRO rooming
houses that should never have been in the program to begin
with. Around 65 of those buildings are currently occupied by as
many as 600 tenants. My story is similar to many Section 203(k)
tenants stories. My building has never been a palace, but my
neighbors and I call it home.
After the so-called non-profit Beulah Church of God bought
the building in 1999, my neighbors and I found ourselves
without heat and other basic services. In fact, the first act
of the new owners was to shut down the boiler in the middle of
winter. When we finally went to court to force Beulah to
maintain the building, no one from the landlord showed up and
the court order we got ordering the landlord to make repairs
was never complied with. For over a year there was no garbage
pickup, no repairs made to the very leaky skylight or the
broken pipes or the uneven front steps. The gas and electricity
were shut off at least once and the water was shut off a few
times, forcing my neighbors and me to wash with bottled water.
An inspection last year found 94 violations of the city's
housing maintenance code in the public areas alone.
The landlords that committed these crimes are using HUD
loan monies, money that was supposed to go into rehabilitating
buildings. Instead, the money disappeared along with the
landlords. Now, as the scandal continues to unravel, we tenants
are bearing this huge burden. HUD has finally agreed to take
responsibility for maintaining many of the occupied buildings
in the program, while others, like mine, have gone to court to
get an administrator appointed by the city to run the
buildings.
What we are most worried about now is the threat that the
new owners, whether they are private owner-occupiers, not-for-
profit groups or entrepreneurs looking for properties to flip,
may try to displace the existing tenants from our buildings or
to raise rents beyond what we can afford.
But my intention today is not to tell the story of
hopelessness, no. I'm here as a representative of Section
203(k) tenants with a strong message of hope and self
determination. We are survivors. We're long-standing Harlem
tenants ready to reclaim our homes and our community. We're
speaking out for the preservation of affordable housing in
Harlem. We're standing up for preservation of our homes and we
demand to be included in any discussions about their future. We
demand full repairs and services in our buildings now. We want
legally-enforced assurances from HUD, the city's Department of
Housing Preservation and Development and other appropriate
parties that no tenant will be displaced when the buildings are
finally disposed of. We want guarantees of affordable rents and
we want substantial opportunities to explore the possibility of
bringing some of our buildings under tenant ownership and/or
control through mutual housing associations, limited equity co-
ops or other mechanisms for tenant involvement.
Our demands are not unique. They are demands of many low-
income tenants in the city. I am here as a spokesperson for the
Section 203(k) tenants and we say we'll do everything we must
in order to save our homes. We are here to stay.
Thank you, and God bless you all.
[The prepared statement of Ms. Glorie Browne can be found
on page 79 in the appendix.]
Chairwoman Kelly. That was eloquent testimony, and Miss
Browne, you brought something out that I think is very
important, that you're here representing a group of people.
Just for the record, I would like to know how many people in
this room, if you would be good enough, the witnesses can stay
seated, how many people in this room have been victimized by
the Section 203(k) program. Would you stand for me, please?
All right, thank you very much. I appreciate that. There
were several people in the back that I saw that I know were
also victimized. We want you to stay in Harlem, it's a
beautiful place to live, we'll do what we can to help you.
In some of the reports the committee examined, we read of
all these faulty repairs that were made to the Section 203(k)
properties that were dangerous to the tenants. Are you
familiar, Miss Browne, with any instances of repairs leaving
exposed wires or faulty plumbing?
Ms. Browne. Not in the building that I live in.
Chairwoman Kelly. Are you aware of others?
Ms. Browne. Yes.
Chairwoman Kelly. Are you aware of anyone who has ever been
physically injured living in one of these Section 203(k)
buildings?
Ms. Browne. Not to my knowledge, but I would say there
could have been injuries to someone, because the building
didn't have lighting in the hallway. When they had their lights
cut off for 8 days, any could have been injured. We didn't have
water, running water.
Chairwoman Kelly. You didn't have water in your building
either?
Ms. Browne. A couple of times they had to cut it off.
Chairwoman Kelly. How long did you have to go without heat?
Ms. Browne. In 1999, that winter, starting from the like
November until the winter ended, we didn't have heat and hot
water.
Chairwoman Kelly. You mentioned you're aware of tenants who
didn't have heat and hot water in your building?
Ms. Browne. Not my building, other buildings.
Chairwoman Kelly. That you're aware of, there are still
people without heat or hot water living in these Section 203(k)
buildings?
Ms. Browne. Yes.
Chairwoman Kelly. If the landlord didn't show up, how do
they pay the rent?
Ms. Browne. They do what we did, put it into an SRO
account, that's what we did. But HUD came in.
Chairwoman Kelly. So HUD came in recently and have been
working with you to correct the problem?
Ms. Browne. What we did, meeting with SRO Law Association
in Harlem, having tenant meetings, being aware of these other
buildings and conditions they live in. We also visited a few
buildings to see the conditions.
Chairwoman Kelly. Have you ever seen a representative of
your current landlord or have you ever seen your current
landlord?
Ms. Browne. Right now, the one that I have? We have a 78
administrator, I've seen him.
Chairwoman Kelly. You have what?
Ms. Browne. A 78 administrator. I've seen him.
Chairwoman Kelly. But that's not the person who let it go
back. You have a 78 administrator, did you ever see your
landlord?
Ms. Browne. The person who represented the Beulah Church of
God and Christ came once. But then we didn't see him.
Chairwoman Kelly. He came once and you then didn't see him
again.
Ms. Browne. When you call his office you get a machine and
he never returns the calls.
Chairwoman Kelly. I thank you very much. I have no more
questions of this panel.
Mr. Rangel. I can't thank you enough, because you have, you
didn't have to come to Harlem, you didn't have to stay in
Harlem, and if we can't protect those that anchor their hopes
and dreams in our community, then it makes it even more
difficult for those that come to communities that are less
fortunate than we are. As a result of this fraud that has
happened, we will be working closely with the Abyssinian
Development Corporation and the West Side Employees to put
together a legislative team of our City Council officials, but
also the District Attorney's office, the Attorney General, this
won't be of much help to you, but your testimony means that we
have to make certain this doesn't happen again.
What we're doing that relates directly to what you want is
joining with HPD to make certain that we get the money that's
necessary to avoid these properties just going off to
speculators and having the Federal Government just put them in
default. And so I hope that you work very closely with my
office to see that in some way, through you, we'll be able to
say that we put this program on the right tracks and I'm
certain in working with Congresswoman Sue Kelly that if we can
make certain that in New York State we got it back on track, we
can avoid this same type of thing happening in other states and
other communities, so I can't thank you enough.
I regret what has happened, but I thank you for having the
courage to come forward and testify with such eloquent
testimony. Thank you.
Chairwoman Kelly. Thank you.
Mr. Grucci.
Mr. Grucci. I don't have any questions of this panel. I
think they've been victimized and certainly it's a
demonstration of a failed program, a failed policy and a lack
of oversight and it goes back to my questions earlier of the
first panel. We want to make sure that this doesn't happen
again.
I thank you, too, for making a commitment to your
community. The Congressman said it very eloquently, that it is
important that people want to make a commitment to a community,
because that's what a community is really about, it's about
people coming together and improving the quality of life. And
Government ought to help that to happen, not hurt it, or be an
obstacle in its way. I feel compelled to apologize for a system
that has failed you, and to that extent we recognize that it
needs to be fixed. It is indeed, broken. Thank you for being
here this morning.
Chairwoman Kelly. I want to add my thanks. Mr. Grucci is a
Member of my subcommittee. You can be assured that the two of
us will work with Charlie, since he represents this area, to
make sure that we get this system fixed, and I really
appreciate your coming forward.
We hope, too, that you will be able soon to be able to get
through this system what you needed and be able to live here
comfortably in Harlem. So thank you very much. I want to remind
you that some Members will perhaps have written questions. I
will hold the hearing record open for 30 days, so there may be
written questions. That being said, we thank you very much, and
we will excuse you.
Thank you.
I'd like to have the third panel take their places.
Chairwoman Kelly. Will people take their conversations
outside, please, so we can convene this panel.
I'd like to begin the introductions by welcoming some
community leaders who have witnessed problems with the Section
203(k) program in their neighborhoods and they're promoting
proposals to redirect and reorganize the program. So we welcome
today, Mr. Ruben Medina, a former Vice President of PaineWebber
who has had great success as a hospital and health facility
consultant and executive. He now leads Promesa's efforts to
assist the minority and poor in the Bronx in a variety of ways,
such as owning, rehabilitating and managing housing.
Next we will hear from Ms. Karen Phillips, Cofounding
President and Chief Executive Officer of Abyssinian Development
Corporation, one of the not-for-profit corporations that's most
active in the Harlem Renaissance and in an effort to change the
direction of the FHA Section 203(k) program here in Harlem. Ms.
Phillips has guided the agency in developing hundreds of units
of housing and fostering business development here in Harlem.
Third we'll hear from Ms. Lydia Tom, Senior Program
Director of New York City for Housing and Finance for the
Enterprise Foundation, which works nationwide to build
affordable housing, and became the first non-profit
organization to build 100,000 homes for low-income families.
For the last 7 years she has been providing assistance to
community non-profits and entrepreneurs by guiding them through
the specifics of financing, city regulations and Federal
funding.
We'll then hear from Jerilyn Perine, Commissioner for New
York City Housing Preservation and Development. It's the
largest municipal housing agency in the United States. Ms.
Perine has been involved in urban planning and housing issues
during her entire career. She is a long-time senior official at
NYHPD and also has been also very active in seeking a consensus
solution to the riptide caused by the Section 203(k) scandal.
You are all aware that the subcommittee is holding an
investigative hearing and when doing so, the Chair may decide
to take testimony under oath. Do any of you have any objection
to testifying under oath?
Panel. No.
Chairwoman Kelly. I then will advise you that each of you
under the rules of the House and the rules of the Committee,
you are entitled to be advised by counsel. Do any of you desire
to be advised by counsel during your testimony today?
Panel. No.
Chairwoman Kelly. In that case, if you all please rise and
raise your right hands, I'll swear you all in.
[Witness sworn.]
Chairwoman Kelly. Thank you very much, you are now under
oath. Without objection, your written statements will be made
part of the record. You will each now be recognized to give a
5-minute summary of your testimony and we'll begin with you,
Mr. Medina.
Mr. Rangel. Madam Chairwoman, might I greet the people?
Because this panel really is a part of the solution and we'll
find out what went wrong and we'll have to get it on track.
I want to thank you for what you have done, but also to
tell you you have partners with us and the City Council and the
State Legislature and certainly with myself and Mrs. Kelly in
the Congress. It seems to me what we have to do is not only to
avoid this happening, but to make the victims whole. We need
about $160 million. I understand that HPD is negotiating, I
hope in a positive way, with HUD. What is just as important, is
that HPD not be a substitute for the community, but be partners
with the community and collectively we work together, the same
thing would apply to Mr. Medina. So our Councilman Bill
Perkins, local officials are partners with you, so you don't
have the whole burden of removing this terrible tragedy from
our community, but we'll be doing it together and we'll be
partners with you.
Thank you so much for the opportunity.
Chairwoman Kelly. Thank you very much.
Mr. Grucci, would you like to say anything at this time?
Mr. Grucci. No, I'll reserve my comments for later.
Chairwoman Kelly. Thank you, then let's begin with you, Mr.
Medina.
STATEMENT OF RUBEN MEDINA, CHIEF EXECUTIVE OFFICER, PROMESA
SYSTEMS, INC.
Mr. Medina. Thank you very much, Madam Chairwoman, and
Congressman Rangel and Congressman Grucci.
Promesa Systems is a Community Development Corporation
serving clients in the areas of health, housing, education and
economic development, and in that regard, through concessions
with HUD, it came to Promesa's attention that a significant
number of buildings, primarily located in Harlem and Brooklyn
under the Section 203(k) program were actually SROs--single
resident occupancy buildings. Promesa was also told that under
the guidelines established by the Section 203(k) program, these
buildings never should have qualified and could never actually
be operated under the Section 203(k) program.
Finally, Promesa was informed that the SROs had residents
that could never qualify, really, as homeowners, and added a
significant number of social health issues that needed to be
addressed; potential substance abuse, mental health conditions
and conditions of substantial concern to its population.
Promesa would like to explore the use of HUD's existing SRO
stock in the Section 203(k) program to address the needs of the
existing population and perhaps better utilize potential
capacity for additional population. Specifically, Promesa
proposes to take the housing stock that fits in the SRO
category of and geographically convoluted villages of these
types of units. These villages would then have a number of
community-based organizations and development corporations
organized into a form of joint venture which would promote
renovation, property management, mental health, physical health
along with any other social services and issues necessary to
support residents. The form of joint venture could provide the
basis for stabilization and protection of the resident
population of the SROs.
In order to guarantee logistical flexibility reflection and
diversification of risk, Promesa proposes conversion converting
these villages into formal corporations consisting of 15 to 20
buildings, such that the joint venture can use the inherent
value of the properties to provide the basis for
recapitalization and renovation. Recognizing that on average
the structures are half occupied, critical mass is needed if
repairs and renovations are to be made to the units in a timely
manner. Although it is our understanding that very few tenants
have accepted the offer to relocate permanently, chances are
good they would relocate temporarily if they knew they could
come back to their place of living after the renovation.
Also Promesa has not had the opportunity to evaluate the
buildings, it is its expectation that some percentage of the
individual units can be renovated and marketed at or close to
market rates. Use of the combination of grants, tax exempt
financing, investment tax credits can offset the cost of
renovating the building and units. The combination of the above
subsidization, along with mentioned rental income, can create a
viable approach for the villages. Clearly the current value of
many of these properties will not be close to the actual
investment made under the Section 203(k) program. Further
future cash flow is based upon existing population, it most
likely cannot support the initial value plus the probable cost
of renovations. Further, to place constraints on investors
regarding the need to protect existing residents would lower
the prospective value even more so.
Chances are good then that vending out the properties will
not result in the recoupment of much if any at all of the
initial investment made by the initial investors and guaranteed
by HUD.
While the financial investment made by banks and guaranteed
by HUD may never be recouped, perhaps some minor partial
compensation can be accomplished over time through future cash
flow as a result of the combination of future rental income and
service. Another approach might be to charge a flexible
transaction fee as parts of the right to manage these buildings
after transfer. These approaches could be acceptable to both
organizations involved in the community development and
delivery of services to the population as well as to the
residents and the investors. In this manner, the residents of
SROs are not packed off into the night because of
gentrification of all of a sudden accessible real estate, nor
are they victims of benign neglect or are called and obstacle
to the stabilization and strengthening of the community.
Further, HUD has comfort in that the joint venture is not
made up of a single organization that may have good intentions
and resources but can veer off the path, but rather a formal
conglomeration of organizations that participate in the
decision of the operations. By giving the residents
representation themselves on the governance body, one is
assured of the buy-in by the residents. HUD has had some
positive experiences with this at Diego Beekman Houses in the
Bronx.
Based on earlier testimony, it appears that HPD has, in
fact, certain working relationships with HUD in terms of
Section 203(k) programming. We are very much in support of that
considering they do have specifically for SROs a supportive
housing unit structure. So with that, I'd like to conclude my
testimony and thank you very much for the opportunity.
[The prepared statement of Ruben Medina can be found on
page 81 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Medina.
Next we turn to Ms. Philips.
STATEMENT OF KAREN A. PHILLIPS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ABYSSINIAN DEVELOPMENT CORPORATION
Ms. Phillips. Thank you very much, Chairwoman Kelly, for
bringing this subcommittee hearing to the Village of Harlem. It
underscores this condition. We thank Congressman Rangel for
being here today and Mr. Grucci for joining us.
I would like to summarize some of the comments in my
written testimony, basically outlining the history of the
program and its impact on our community, but as president and
CEO of Abyssinian Development Corporation, I do want to let you
know that the potential for this program and the way that we
distribute or deal with the problems has a direct impact on the
investment that has been made in this community by Abyssinian
Development Corporation and a number of community based-
organizations that have been working for the past 15 years with
a lot of Federal support and thank you all for the low-income
tax credit that has been used extensively in this neighborhood
to help stabilize the neighborhood so these homeownership
opportunities could occur.
However, the success of the non-profit organizations in
this neighborhood, and particularly those that are faith based,
are part of what was the attraction to this neighborhood to
bring in the unscrupulous real estate professionals to prey on
this neighborhood and the important part of this is, as I heard
the HUD officials' testimony, they all talked about the non-
profits who perpetuated this, or who were unknowing suspects to
this fraud. The kind of scar that it leaves on the name and the
character of the non-profits in this community is still very
much present, because when you say faith-based non-profits, we
have the Harlem Congregation for Community Improvement working
with us, several other churches and institutions, but we are
now blamed for something that was really brought to this
neighborhood because of our success.
The other particularly troubling part of this is the effect
that the Section 203(k) capital had on the real estate market
in this community. We and other non-profit organizations as
well as private developers have done other homeownership
projects and we have just a history of some that we've been
involved in in marketing the City Homes Program, which was a
City of New York program working with the Enterprise Program
and CPC. In 1994, we sold four-story brownstones very similar
to the ones that have been talked about here today, for an
average price for a three-family home of $115,000. Two years
later, we did a second phase of that program where the average
home price was $230,000, on some of the same blocks where these
houses are located.
Then working with HPDs' Home Works Program, ADC as
developer, participated in a program with 33 brownstones, half
of whom had been sold already, all of whom had been sold and
half had been completed, but those average prices are around
$375,000. Those prices were set at 1998 at the same time the
fraud was being perpetuated where people were coming in and
driving up the prices of a vacant building so that the
effective costs, as I heard one of the HUD representatives say,
so when the non-profit paid, the building was flipped, so the
non-profit paid $220,000, and then the resulting loan, which
also would be guaranteed through the Section 203(k) program,
was another $300,000, so immediately, the value of that house
was considerably higher than what we knew the market to be.
This not only put the price of those homes outside of the
people in the community, but the real plan for these non-
profits were to have these as rental units. So what they were
doing was replacing the whole absentee landlord structure that
we came in to kind of heal in our work over the last 15 years.
We had downtown real estate interests who saw this activity
which was fraudulent in the real estate recordings, and then
immediately started coming up to address and try to get other
private brownstones and I think there was an article in
November of 1999 when they realized that the products that they
were looking at were not here for them to sell to their
downtown clients who had said look, if I can get a home in
Harlem for what I pay for rental, I'll come up and do it, but,
because of the Section 203(k) program and these number of
buildings, that was a false signal to the real estate market,
and those prices now can never really be fixed.
It has also contributed to a considerable panic about
gentrification in this neighborhood.
Moving on, I'd like to say that after finding out about the
problems that had occurred with the Section 203(k) program,
Abyssinian Development Corporation was approached in, I
believe, late November-December of 2000 to see if we would
assist in trying to remedy the situation that had been caused.
Joining with the Community Preservation Corporation, the
Enterprise Foundation and the East Brooklyn Congregations, we
formed what was called the New York Group and did a memorandum
of understanding with the U.S. Department of Housing and Urban
Development, to try to formulate a plan which would emphasize
the tenants were to initially have affordable homeownership as
one and particularly to insure that the people who were living
in these buildings would not be dislocated from the community.
That plan subsequently, the new Administration did not
continue, but we still stand ready in trying to negotiate and
help HUD to figure out a way to remedy this situation.
Abyssinian Development Corporation and the New York Group
really served to coordinate other non-profits and some of those
that we had been meeting with regularly in formulating this
plan and to working on some of the problems that we knew were
inherent in the occupied buildings were the Harlem Congregation
for Community Improvement, Hope Community, Manhattan Valley
Management and Development Corporation, West Side Group
Assistance, Harlem Community Center, West Side Center for
Senior and Progressive Housing, Progressive Maintenance and
other groups we knew could be added to provide the kind of
input on a local level.
Chairwoman Kelly. Ms. Phillips, I'm sorry to interrupt you,
but you're well over the time slot and if you could summarize,
I'd greatly appreciate it.
Ms. Phillips. Basically, what we're here to say is we
support the involvement of New York City HPD in this process
and we through our work in the neighborhood know that funds
would have to be made available for them to be affordable
housing and we think the majority of the housing should be
given to the people in the community as a priority and strong
efforts to have these existing not-for-profits to participate
in the process of redeveloping them. And not to have them bid
out to the highest bidder.
Thank you very much.
[The prepared statement of Karen A. Philips can be found on
page 86 in the appendix.]
Chairwoman Kelly. We thank you.
Next we have you, Ms. Tom.
STATEMENT OF LYDIA TOM, SENIOR PROGRAM DIRECTOR, THE ENTERPRISE
FOUNDATION
Ms. Tom. Thank you, Chairwoman Kelly, Congressman Rangel,
Mr. Israel and Mr. Grucci. Thank you for inviting me to
testify.
The Enterprise Foundation is a national intermediary, which
has been working to improve living conditions in low-income
communities from the time it was founded by visionary real
estate developer Jim Rouse in 1982. The Enterprise Foundation
operates from the conviction that developing quality affordable
housing is an essential first step in a holistic approach to
fighting poverty.
Since opening a New York office in 1986, Enterprise
Foundation has developed over 11,000 affordable apartments in
more than 850 formerly abandoned buildings throughout the
Greater metropolitan area. This has resulted in improved living
conditions for more than 33,000 people including 13,000
children.
The Enterprise Foundation's work in New York City is done
in collaboration with over 80 legitimate non-profits,
community-based organizations whose leaders have identified
their own neighborhoods' most pressing needs and develop
workable strategies for solving their own problems. In addition
to our work developing affordable rental housing with our
community partners, we also have created opportunities for
homeownership for low- and moderate-income families with our
visionary CityHome program. Working in collaboration with the
New York City Department of Housing Preservation and
Development, the Community Preservation Corporation, and a
number of community-based non-profits, we've recovered nearly
500 dilapidated properties to the housing market and low-income
communities in Harlem, Brooklyn and the Bronx. Our current
involvement in low-income homeownership opportunities includes
a significant commitment of over $2.2 million in short-term
low-interest loans to community-based organizations in
collaboration with HPD's Neighborhood Homes Program.
Because the Enterprise Foundation only became involved with
the New York City Section 203(k) program after the fraudulent
activity had been detected, we cannot comment on that part of
the program.
The Enterprise Foundation was approached by HUD in December
of last year to help develop a workable solution to the
emerging Section 203(k) Program. From our first discussions
with HUD, Enterprise raised the importance of working with
members of affected communities in moving forward. We also
strongly recommended that HUD develop a programmatic approach
to rehabilitating the properties in question and returning them
to the housing market.
A significant number of affected properties are occupied by
existing tenants. Some are single room occupancies, legal and
illegal. Efforts to properly manage these homes and ensure
affordability and non-displacement without appropriate
relocation need to be made for these residents who are victims
of the Section 203(k) problem.
Because of our experience with CityHomes and other
renovation programs, including occupied rehabilitation, we
clearly stated to HUD there exists a number of viable models
for working with legitimate non-profits to renovate these
properties and market them as homeownership and/or rental
opportunities for low- and moderate-income people. From the
beginning of our involvement, we urged HUD to see the damage
left by Section 203(k) problem as an opportunity to invest in
the communities where the properties are located by creating
homeownership opportunities. Such opportunities could only
reinforce the investment that HUD has already made in these
same communities.
Regardless of how HUD wants to proceed, two points remain
irrefutable: That further investment would be needed to bring
the homes in question up to habitability, that the longer the
damaged portfolio remained dormant, the more damage would be
done to the investments made to date. It was our recommendation
that HUD subsidize all further renovations needed to make the
properties habitable, no matter how significant, in order to
keep the buildings' eventual sales prices affordable to local
residents.
The Enterprise Foundation, CPC and Abyssinian Development
Corporation urged HUD to put processes in place to evaluate
potential contractors, lenders and prospective buyers and the
original Memorandum of Understanding written by Secretary Cuomo
detailed specific roles and responsibilities for each
organization participating in the solution to this very serious
problem. We have shared these same views with the new team at
HUD with whom we have worked constructively, including
Secretary Martinez and senior HUD officials.
It is Enterprise Foundation's firm conviction that the only
viable solution to the Section 203(k) problem involves a
holistic and programmatic approach that will impact the long-
range fiscal health of the communities involved by continuing
to develop opportunities for low- and middle-income
homeownership, as well as affordable housing. We further
believe that it's HUD responsibility to designate every
property and in the portfolio as a low- or middle-income
homeownership opportunity. The Section 203(k) program has been
designed as a flexible mortgage product to acquire and
rehabilitate foreclosed properties for affordable housing. To
that end, we find the $80 million currently budgeted by HUD for
the rehabilitation is woefully inadequate to the task.
New York City's Department of HPD, the most sophisticated
municipal housing agency in the country, with the most
experience in rehabilitating and disposing of distressed
properties, estimates that it will take $160 million to
redevelop the portfolio. We strongly urge HUD to invest in the
continued stabilization of these communities by appropriating
sufficient funds to maintain the integrity of its previous
investment. Because of HPD's vast experience and their current
investment in these neighborhoods, we also recommend that HUD
work closely with HPD to rehabilitate these properties. Most
importantly, we urge HUD to recognize the tremendous expertise
of legitimate community-based non-profits such as Abyssinian
Development Corporation and East Brooklyn Churches as critical
partners in carrying out such a program.
Harlem and Brooklyn's low-income neighborhoods have come a
long way in recent years. Their progress has transformed the
lives of thousands of working New Yorkers and benefited the
entire city, but their success is fragile. For progress to
continue, the residents, community groups and private and
sector partners that have made it possible must have confidence
that their efforts and their hopes for further revitalization
will not be eroded by bad practices reminiscent of the unhappy
past. Property flipping and rampant real estate speculation
could douse the flames of Harlem and Brooklyn's continuing
redevelopment. Fixing the Section 203(k) problem in the manner
we described will help assure it does not happen and make a
positive result to a negative situation.
Thank you for the opportunity to testify.
[The prepared statement of Lydia Tom can be found on page
90 in the appendix.]
Chairwoman Kelly. Thank you very much Ms. Tom.
Next we go to Ms. Perine.
STATEMENT OF JERILYN PERINE, COMMISSIONER, NEW YORK DEPARTMENT
OF HOUSING PRESERVATION AND DEVELOPMENT
Ms. Perine. Thank you. I'd like to start by giving you a
brief overview of our agency's functions, because I think it is
relevant to the recommendations I will make in my testimony.
We're a unique housing agency because we carry out the
planning, development and enforcement functions related to
housing and community development. Over 68,000 units have been
renovated or newly constructed through our program since 1994.
In addition, we place a great emphasis on housing preservation
through below market loans to owners in need of rehabilitation
financing, direct financing and education to owners to help
them become better managers. We operate the most extensive
housing enforcement system in the country, handling over
300,000 calls a year mostly from tenants and conducting over
200,000 inspections from tenants which resulted last year in
322,000 housing code violations being in place. In addition,
since 1994 we've been aggressively returning to private
ownership the stock of dilapidated housing that came into city
ownership because of tax delinquency located primarily in
Harlem, the South Bronx and central Brooklyn. These buildings
provided housing for some of our poorest families, but were
typically in the worst condition.
Since 1994, over 22,000 units in 1500 buildings have been
returned to responsible private ownership, with funds
sufficient to provide for extensive renovation and with
operating or rental subsidies sufficient to insure that
existing tenants would not be displaced, rents would remain
affordable and the buildings would be financially viable in the
future. Where feasible, we have turned vacant buildings into
opportunities for homeownership for working families. We have
relied on local entrepreneurs and with extensive experience in
property management, and neighborhood-based not-for-profit
development organizations with proven track records.
We have been involved in this kind of work since 1978 and
have amassed an impressive track record from a once high of
89,000 units of abandoned tax foreclosed units in city
ownership to today there are approximately 13,000 units left in
city ownership and they are all funded over the next few years
for rehabilitation and sale.
Despite our agency's extensive involvement in housing
issues in the city, we played no role in the Section 203(k)
program and were unaware of the lending activity that was
occurring. We became aware of this issue, as others locally
did, when tenant evictions and inappropriately high sales
prices became to light in some Harlem sales properties and I
have to acknowledge Councilman Bill Perkins from this community
whose original work helped to bring some of this to our
attention.
Twenty-nine organizations participated in the Section
203(k) program in New York City, borrowing funds for 593
properties. Only 2 of those not-for-profit organizations were
experienced not-for-profit housing developers and managers that
we have worked with over the last two decades involving only 17
of the 593 properties. The remaining 27 organizations played no
role in any of our programs over the last three decades and had
no track record in housing development that we were aware of.
So the core problem with the program, I believe, was a simple
one. No local involvement, and that lack of local involvement
allowed organizations with no experience to participate in a
program which sought to carry out an important but complex
task; the renovation and return to responsible ownership of
troubled housing, often occupied with vulnerable tenants.
At best, these organizations, had no capacity or skills to
carry out the program. At worst, they were involved in a
corrupt scam to defraud the Federal Government. The results on
the streets of our city are sadly the same. Nearly 600
properties, nearly one-half occupied with tenants, have been
left without clear management to handle day-to-day maintenance
and operation without rehabilitation and an uncertain future.
Of the 593 properties, the vast majority, 346, are located in
Brooklyn, primarily in Bushwick and Bedford Stuyvesant. Another
190 are located in Manhattan, primarily Harlem. 40 are in
Queens, including some in the Rockaways, which are little more
than summer bungalows and the remaining 17 are in the Bronx.
We have inspected every one of these properties with our
staff. 285 are vacant, 290 are occupied and 18 are vacant lots.
Following inspections of all of these buildings, only 59 were
rated to be in good condition. The rest were found to be in
fair or poor condition. Since January 1, 1998, our Housing Code
inspectors have placed over 18,900 Housing Code violations of
these properties alone. We have expended over a million dollars
from the city's funds in emergency repairs which our inspectors
discovered and the owners failed to correct. Thirteen of these
buildings have conditions that are so bad that either the
tenants themselves or our attorneys have gone to Court to seek
a receiver to insure that the rent roll is spent on providing
essential services and repairs. In addition, these buildings
are now threatening the significant investment that we have
already made on many of the blocks where they are located.
Since early this year, we have been working very closely
with HUD officials, both in the New York office as well as in
Washington to address these issues. We've crafted protocols so
that emergency repairs can be addressed expeditiously. We've
exchanged information regarding inspections and foreclosure
actions so that we can coordinate our efforts and we've worked
to craft a solution that hopefully will result in the
renovation of these properties and their return to private
responsible ownership. For our part, we have indicated that we
are willing to take on the responsibility of structuring
financing which leverages private capital and insures
affordability for existing tenants, review the design and scope
of work for the property's renovation, identify competent
developers, both for-profit and not-for-profit, and insure that
the work is carried out properly.
In return, we have requested that HUD provide sufficient
capital to carry out this work without any administrative fees
to our agency, as are customary in HUD programs.
In short, we are suggesting that both agencies do what they
do best, and work together to attain the desired results.
October 1st signals the beginning of our official heat
season. As of that date, owners of rental property in New York
City must maintain adequate heat as the temperature outside
begins to drop. It marks our busiest period in enforcement and
last winter the Section 203(k) buildings represented a special
challenge to us. We are precipitously close to the beginning of
a new heat season and hope that these properties will have a
more certain future this winter than they did last winter.
Chairwoman Kelly. Ms. Perine, I'm sorry to interrupt you,
but you've gone well over your time. Can you summarize for us
please?
Ms. Perine. I want to say we worked very closely with HUD,
we had Commissioner Weicher spend an entire day with us touring
the properties. I think where we're at in our negotiations are
working through the technical issues that have been raised by
HUD's counsel. It's not in the substantive part of the
proposal, so I have every hope that we're going to be able to
conclude negotiations quickly.
[The prepared statement of Jerilyn Perine can be found on
page 94 in the appendix.]
Chairwoman Kelly. That's a nice, hopeful note for us to end
the testimony on. That's great. I thank you all very much for
being here and for being willing to share your knowledge. I
have a couple of questions.
Miss Phillips, you stated in your written testimony that
the impact of the crisis on housing is potentially the most
destructive force in the stability of this community since
crack cocaine. I pulled that out of your testimony.
Ms. Phillips. Yes.
Chairwoman Kelly. Is that overstating the problem or has
the crisis really harmed families in the community?
Ms. Phillips. What it's done is made these properties and
other properties surrounding it, unaffordable to people in the
neighborhood. I think the destruction to the buildings where
work has been done, we've already seen that, and thanks to some
of the efforts that we did early on in the beginning of the
year, we had some of these buildings sealed up, but what we
found was that the vacant, half constructed buildings were
becoming a haven for squatters to come in, potential for fires
and destruction to adjacent properties as well as people living
in conditions that are very, very bad.
The thing is, I have this great investment, I have one
buyer that bought a house. On one side it was a vacant, half
finished Section 203(k) building that people were going in and
out while the construction was completing, the other side were
people who were SRO tenants who were without services. So they
were just about to close on a $375,000 house, and they had a
commitment to the neighborhood. It also means that if the
program had gone forth, even, successfully, these non-profits
wanted to make four rental units. That was one person who came
to us and tried to buy these at a reduced price, said to us,
we're going to do four rental units in here and we're going to
put people in from downtown, make lots of money and that will
help fund our non-profit.
The other way he said if we can't do this with a downtown
rate, we'll put in a special program, which could have been
drug treatment facilities, halfway houses and the things that
would destabilize areas that were just on the brink of people
coming together; new homeowners, people who moved in tax credit
buildings who were working to rebuild their communities, so
that's the destructive force I'm describing. So we need to have
a way to address these conditions immediately. Thank you.
Chairwoman Kelly. Thank you. I have one more question, Miss
Phillips. It's directed to your testimony again. I want to know
what impact the Section 203(k) scandal has had on organizations
like yours in your efforts to rebuild the community beyond
just, if you can elaborate a little bit, beyond driving up
prices. Has it had an effect on your organization?
Ms. Phillips. First of all, like I said, when I first heard
about it, it was a reporter calling me to say we have these
churches buying up properties, so they assumed because we had
been involved in it, that we knew something about it. I
basically brushed it off, because it wasn't in the target area
where we were, but the underlying mistrust of non-profits in
general. I know we heard testimony here that the guidelines for
non-profits particularly participating in this program needs to
be strengthened, but I think our HPD and others can say the
non-profit working with intermediaries, private developers and
the private sector in New York City has been responsible with
stabilizing the neighborhood, so that these options would even
be possible.
So it really is, and that's one of the reasons why we feel
that the existing local non-profits in the area be a part of
either helping to renovate these buildings and being able to
market them to people in the neighborhood, to help rebuild the
credibility of the neighborhood, to help us get the people who
now feel that we're now responsible for the gentrification
that's pushing them out to say there is another opportunity for
you to buy and live and help us rebuild this neighborhood,
because they're a very important component of it, so if by this
fraud being perpetuated, we're now cut out of helping to bring
these projects back, that will limit the amount of future
growth that we can have as non-profits in terms of being a part
of this economic revitalization.
Chairwoman Kelly. Thank you very much.
I'm going to introduce the gentleman who just came in, Mr.
Steve Israel, Congressman from Long Island, New York. Steve,
we're glad to have you join us. I turn now to my friend Charlie
Rangel.
Mr. Rangel. Thank you, Madam Chairwoman.
Commissioner, let me congratulate you for the aggressive
way you pursued the solution to this problem and ask you
whether or not the people at this table are included in the
proposal that you have before HUD which we support?
Ms. Perine. There's no individual organization that's part
of this proposal. All we have said to HUD is that we don't need
to reinvent the wheel. We already know how to include a vast
array of both not-for-profits and for-profit local developers.
We would qualify people through requests for qualifications or
requests for proposals and people who had already qualified
through our existing programs would qualify as they do now. So
we made no individual commitment to individual organizations,
and presented to HUD instead a framework which is the same
framework as we do our other programs, which is the way
Abyssinian works with us and HomeWorks and other programs
involving city-owned property.
We would certainly expect Abyssinian and other like
organizations to participate in those programs. So we see using
the same exact framework, we're not trying to make an initial
agreement with individual organizations.
Mr. Rangel. Now, you were saying we hope that negotiations
with HUD might soon be completed. Does the term limits facing
the present administration in the city adversely affect the
program going into place if you do reach agreement before the
end of the year?
Ms. Perine. I don't think so. Again, because that's why I
mentioned, we've been doing this work since 1978, and our
agency has a long programmatic history doing exactly the same
kind of work. It's not, we're not running boutique programs.
We're not making up things as an individual fly by-night
solution. We have programs that have extended themselves
through many different Mayors, many different Commissioners.
Mr. Rangel. That's what I thought. You do have continuity
there.
Ms. Perine. Absolutely.
Mr. Rangel. The last question is, are the witnesses at the
table satisfied that they would be included in the process,
assuming we get it funded, to make certain that the communities
involving, in the return of these properties to the
communities. Are you satisfied that that will take place?
Mr. Medina. I would think that is, as the Commissioner has
indicated with respect to an RFP or RFQ process, we are
satisfied there would be a broad range of representation for
community based organizations.
Mr. Rangel. Ms. Phillips.
Ms. Phillips. Well, as she mentioned that it would be the
same programs that we have now, but if a part of that RFP would
give special points for people or groups, organizations who had
experience with the local market, be it Brooklyn or Manhattan,
and experience track record in that area, particularly those
buildings that are now inhabited with SRO, that people who have
been working with those tenants be given stronger consideration
or extra points for that work, I think would be important.
Mr. Rangel. In communities that are coming back.
Ms. Phillips. Yes.
Mr. Rangel. Ms. Tom.
Ms. Tom. We have said all along that we think what is
needed to correct the problem is additional resources and it is
less important as to whether Enterprise is involved. It does
need to include the community-based non-profits and we think
HPD has a solid track record, but we think there are resources
that need to be committed. I heard $160 million dollars and
that's what would be needed.
Mr. Rangel. That's what you need Congressional support for,
and we will be fighting for that money. Thank you.
Chairwoman Kelly. I thank you.
Let's go to Mr. Grucci.
Mr. Grucci. Commissioner, just one question. The program
has been explained here today as having failed some years ago,
I believe my notes indicated it was 1998-1999, where the fraud
really started to perpetuate. Did you start to see that here in
the city around that time or did it take awhile for it to hit
before you started to see the real results of that fraud, and
what steps did the city take to identify to HUD these problems
and did HUD respond?
Ms. Perine. Well, unfortunately, we didn't see it until
quite recently. As I said, we had no information about these
lending practices and really began to see it tangentially in
different ways.
One that, we carry out appraisal of all the property that
we sell through our programs and our appraisers very recently
over this last winter began to see sales prices that just
didn't represent comparables in their view. They actually
didn't use those appraisals in their own comparables.
The other thing that began to happen over the winter was
the issues related to tenant eviction, so those are the two
things, that didn't really come to our agency's attention, I
would say, until late in November, late in December.
Mr. Grucci. If I may interrupt for a moment, my time may
run out on me, I want to get another question in. Not knowing
how the system works in your department, when you saw the
inspectors, or did you see the inspectors that was referenced
by HUD being eliminated or removed from the community here, did
that raise a red flag in your mind and if it did, what steps
were taken to voice that to HUD?
Ms. Perine. What inspectors are you talking about?
Mr. Grucci. If I remember the earlier testimony, there were
people that were shifted and moved to make sure the program was
running properly and adequately, they were moved to
Philadelphia. I may not be correct, but I thought I heard that
earlier.
Ms. Perine. We were not aware of that. We had no contact.
Mr. Grucci. You had no interaction with those folks?
Ms. Perine. We had no interaction whatsoever.
Chairwoman Kelly. Mr. Israel, do you have any questions?
Mr. Israel. I have one brief question. I'm not a Member of
this subcommittee and I appreciate the courtesy. I am a Member
of the Housing subcommittee and I know that on both
subcommittees on both sides of the aisle we recognize our
obligation is to protect those innocent victims of the Section
203(k) scam, to punish and pursue those who eluded the program,
and to stand up for the best interests of tenants.
I'd like to focus for a moment on one question and ask Ms.
Phillips and Ms. Tom to follow up on Mr. Rangel's question
regarding community-based input. The agreement that was
consummated in January requires that Section 203(k) properties
be sold either directly to Harlem based community groups or to
their partners for use in the creation of affordable housing
opportunities or sold to responsible home buyers who are
screened and counseled by Harlem-based groups.
I'd like to know whether you've received assurances from
FHA that that provision of the January agreement will be
strictly enforced and abided by. Ms. Phillips?
Ms. Phillips. When we met with HUD and Mr. Martinez, there
were no parts of the original agreement that were to be still
in effect, basically. We offered to him that the affordability
of the property, meaning that ther had to be investment from
HUD and that we would continue as a group in representing a
large group of not-for-profits, that it was not just only the
groups that were taking the leadership on this, but a
coordinated effort by other non-profits, that we would still
stand ready to be a part of the development and sale.
Unofficially, my organization just from people hearing
about it in the news media, set up a system to take down the
names of people who were interested in purchasing those houses
and particularly people from the community, but we have over
600 names, and they're still coming. There are people who are
interested in, who live in the community who want to take
advantage of or to be homeowners in the community, and so, and
a lot of whom fit into this, the categories that we explained,
which we were saying 150 percent of median to be the
affordability level, to insure that these houses that have
pushed the real estate market up would be then targeted to that
population of moderate, working class people who now live in
the community primarily.
Mr. Israel. Ms. Tom.
Ms. Tom. Enterprise has always been willing and able to
step up and be helpful to resolve the issues here and to work
with HPD and non-profits. I'm not aware that we have received
assurances from HUD that they are committed to working in
partnership with the community-based organizations or with
Enterprise. I think we're open to hearing it and presenting our
proposals, but I don't believe we've heard any assurances from
HUD that that definitely is part of their proposal.
Mr. Israel. Thank you, Madam Chairwoman.
Chairwoman Kelly. Thank you very much. I want to say again
to this panel that there are some Members who may have
additional questions. I will hold the hearing open for 30 days.
They would be written questions with written answers, and I
want to thank you all for being extremely careful and
thoughtful about your testimony. It was interesting reading.
You have given us a lot to think about, and I think you've
given us, as you said, Ms. Perine, some hope that we're going
to be able to get something done and rectify the situation so
people can live here in harmony.
So I want to do a couple of other things, then excuse this
panel. We had in the room with us listening to all of us, the
City Councilman from this area, Mr. Perkins, are you here? I
just wanted to acknowledge your presence and thank you so much
for your gracious hospitality in letting us come here. We're
glad to have you here as a member of the City Council
listening. You've been here all morning with us and I
appreciate the fact that you're so concerned about the people
that you represent so thank you.
Mr. Perkins. Thank you for your acknowledgment and your
presence and I'm optimistic that this testimony will result in
some community friendly decisions to develop housing for the
people that have been so victimized. Thank you.
Chairwoman Kelly. I thank you.
We also have a man who is a former Congressman who has
joined us this morning, Mr. Garcia, Bob Garcia, and we thank
you very much for being concerned enough to sit in with us all
morning here. Ms. Perine, I want to come back and thank you for
working so carefully with HUD, because I think it's that work
that will ultimately help us do something that's concrete to
help the victims of this scamming that's been going on. With
that, I want to thank Mr. Rangel and his staff for their very
gracious hospitality and, Mr. Israel, I'm glad you were here to
join us and, Mr. Grucci, I'm glad you were here. Your presence
added a lot. I thank you for your assistance in making the
hearing possible.
Mr. Rangel. Madam Chairwoman, before we close, if this
panel can assure me that before the day is over you will get
together so we can regroup at some time to see how we can be
helpful with your petition with HUD and how we can make certain
that we do have a broad program that would involve the
community, because I'd just hate to see you leave without us
being assured that we would be working together. Thank you.
Chairwoman Kelly. And also I want to let you know that it's
my intention to either speak with or write a letter to Mr.
Martinez detailing some of the solutions that have been talked
about here today, so again, I thank you very much, and with
that, we adjourn.
[Whereupon, at 12:40 p.m., the hearing was adjourned.]
A P P E N D I X
September 10, 2001
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