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Heavenly HUDbuckle
November 17, 2004: During the last few months of the presidential race all eyes were on the party cake. But other goodies were being served in the United States of Real Estate. On September 20th an AP story titled "FBI: Mortgage Fraud is Rampant in the U.S." was carried by the national and international press. On October 7th, Chris Swecker, Assistant Director of the Criminal Investigation Division of the FBI, expanded on the subject before Congress. Telling the House Financial Services Subcommittee on Housing and Community Opportunity: "If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and threaten the stock market."

Assistant Director Swecker also described how the FBI Mortgage Fraud Program was being ramped up. Until recently mortgage fraud investigations by the FBI were handled by 2 different sections of the agency: "... mortgage fraud that impacted government programs (i.e. HUD) was managed by the Integrity in Government Section. Mortgage Fraud affecting financial institutions was managed by the Financial Crimes Section." Both sections have now been consolidated into the Financial Crimes Section. Plus, the FBI has adopted a strategy "to focus on insiders harming the industry in order to disrupt and dismantle entire criminal enterprises". The definition of insiders being "appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and processors, settlement/title company employees, mortgage brokers, loan originators and other mortgage professionals engaged in the mortgage industry."

At the same congressional hearing, John C. Weicher, Assistant Secretary, Housing/Federal Housing Commissioner at the U.S. Department of Housing and Urban Development (HUD) testified that "the costs resulting from a small number of disreputable individuals are born in part by homebuyers and mortgage lenders, as well as by taxpayers." Weicher stressed that HUD is combating the disreputable individuals, as is its sub agency, the Federal Housing Administration (FHA). The FHA is the largest mortgage insurer in the world; one of its major missions is providing mortgage insurance for homebuyers who might not otherwise qualify for loans.

The Baker Boys

Several weeks later, on October 25th, a press release was issued by the Appraisal Management Company (AMCO) an "independent valuations solutions company" based in Cleveland, Ohio. Former U.S. Housing Secretaries Jack Kemp (R.) and Andrew Cuomo (D.) had joined the Advisory Board of AMCO! Jack Kemp headed HUD under Bush I: Andrew Cuomo under Clinton. Both would now assist AMCO in creating "leading-edge appraisal products and services, ensuring the most accurate, cost efficient and compliant appraisals for homebuyers currently on the market."

According to the press release, Kemp and Cuomo announced their AMCO sign-on to reporters at a Mortgage Bankers of America Conference. Both men praised current Housing Secretary Alphonso Jackson for recent efforts to prevent appraisal fraud in mortgage loans insured by the FHA. Kemp opined: "Secretary Jackson is headed in the right direction. The question of how to insure compliance and accuracy while maintaining industry profitability has plagued the residential housing industry".

Which might translate: Disentangling inflated appraisal values from the housing market without reducing profits is a tough chaw. Neither I nor my colleague Andrew Cuomo, in our long years at HUD and when we were responsible for the FHA, were able to do so. None the less, we feel qualified to give the new guy a clap on the back.

The two ex-HUD heads, along with former FHA Commissioner William Apgar (another AMCO board member) also gave reporters a six point national housing agenda "meant for the next administration". The plan expanded upon work done by Henry Cisneros (also a former U.S. Housing Secretary) and Harvard University, where William Apgar serves as an in-house housing expert. The Kemp/Cuomo/Apgar agenda calls for more state and local urban planning "incentivised"* by HUD funding. No big surprise there. The plan's position re Government Sponsored Enterprises (GSEs) is a tad more intriguing.

GSEs are not actual government agencies-- but are granted special advantages by government. Mortgage marketeers Fannie Mae and Freddie Mac are the 2 largest GSEs. Between them, Fannie and Freddie purchase, retain or guarantee roughly 3/4 of the U.S. mortgage market. Fannie and Freddie don't originate loans: they buy them in bulk from banks, then bundle them to be sold on Wall Street as mortgage backed securities. Which enables banks to make more mortgage loans, since they don't have to wait for earlier ones to be paid off. Both Fannie Mae and Freddie Mac have serious credibility problems with their accounting: both have been caught juggling their books to spread profits more evenly from quarter to quarter. Many believe the privileged, grey area status of the GSEs has produced overly powerful institutions not subject to sufficient oversight. And has led investors to believe taxpayers will bail out Fannie and Freddie should major problems develop.

Calls for reform of Freddie and Fannie are coming from many quarters and range from recommendations of a different form of oversight (at present an agency within HUD is responsible) to completely severing the relationship between the GSEs and government. The Kemp/Cuomo/Apgar plan however, warns that the "quasi-public-private" status of the GSEs "must be preserved": its concept of reform is essentially one of HUD related expansion. A review to determine the GSEs "maximum contribution" to affordable housing is recommended-- though of course, that potential maximum contribution by the GSEs musn't "endanger their financial integrity".

Kemp/Cuomo/Apgar also sternly intone that "the need for affordable housing is at an all time high". Yet HUD has been working on the problem of affordable housing for decades. Including lengthy stretches under the leadership of Kemp, Cuomo and Cisneros. If the need for affordable housing is now "at an all time high" what the heck has HUD been doing? And is it possible that some HUD solutions are part of the problem?

But back to that 6 point plan.

Aspects of it show Reagan era influence. With neo-con faith in quasi-public-private partnerings and targeted tax breaks. Kemp/Cuomo/Apgar urge HUD to continue to incentivize private sector growth and job creation in blighted urban areas via the Enterprise Zone Program and its spin-off, the Empowerment Zone Program. Both tax credit programs have indeed done a lot of incentivizin'. More solid suburbs sign up for urban tax breaks every day. Proving the inexorable law of the targeted tax break: if you grant it, they will come. Dressed as poor people. In New York (the home state of Jack Kemp and Andrew Cuomo) charges of cronyism, insufficient job creation and poor cost effectiveness within the EZ programs have received much publicity. But little action. Meanwhile, NYS homeowners pick up the tax slack.

But if urban tax breaks go to suburban enterprises, it fits the part of the Kemp/Cuomo/Apgar plan that says suburban and rural areas shouldn't be excluded from HUD's "Continuum of Care". From the heart of the city to the heart of the forest-- HUD will be there! Perhaps the "U" in HUD should cease to stand for "Urban". In favor of "Universal".

Though their party affiliation differs, ex HUD heads Kemp and Cuomo are the Romulus and Remus of agency over-reach. Mission creeps par excellence. Inflated by hubris, they stand atop a mental mountain of public money, moving imaginary populations around like game pieces. With grand plans for incentivizing more and more people into doing what they, Kemp and Cuomo, think best. Despite the growth in mortgage fraud (a sizable amount of which is connected to HUD programs and home financing practices advocated by both Kemp and Cuomo) the continuing decline of many American cities, a string of major public corruption cases involving taxpayer supported redevelopment, the formation of an urban underclass that comes close to being a caste, and the fact that after decades of HUD attention "the need for affordable housing is at an all time high" Kemp and Cuomo call for more of the same. Neither will ever look for the cause of negative social effects in their own cherished brand of grand plans.

The Kemp/Cuomo/Apgar housing agenda presented at the Mortgage Bankers of America Conference does address mortgage fraud. In its own words "mortgage fraud and appraisal fraud exist throughout the homebuying market". The answer is "federal legislation". Including the establishment of "federal violations for corrupt lenders and appraisers".

Mortgage fraud should be taken more seriously. The reasons for doing so, as laid out by FBI Assistant Director Chris Swecker, are compelling. Similar warnings from other people have been coming down the pike for years. For example, by 2000 the Association of Appraiser Regulatory Officials (AARO) was hearing increasing complaints from appraisers about sellers and lenders pressuring them to "make the numbers fit". There was even speculation that the mortgage appetite of Fannie Mae and Freddie Mac, was causing lenders to become careless. Appraisers were also concerned that should the poop hit the fan, they'd be the easiest targets for blame. Around the same time, then Hud Inspector General Susan Gaffney was warning that HUD's mission had expanded far beyond its original one and oversight for fraud in its housing programs was becoming difficult.

So bring on tougher legal times for our rampant mortgage crooks. But when crime is facilitated by the policies and wishful thinking of grand planners, not every bit of blame can be laid at the door of those who realize the possibilities.

Carola Von Hoffmannstahl-Solomonoff

"Do the Hucklebuck/ Do the Hucklebuck/ If you don't know how to do it
man you're out of luck!"

The Hucklebuck, Chubby Checker, 1960, Written by Alfred & Gibson

*Though "incentive" appears in standard dictionaries, "incentivized" or "incentivize" do not. However, both do appear in the Podley and Stuckes 2004 edition of Guide to Bureaucratizing the English Language.

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Copyright (c) 2004 by Carola Von Hoffmannstahl-Solomonoff. This material may be freely distributed subject to the terms and conditions set forth in the Open Publication License. This license relieves the author of any liability or implication of warranty, grants others permission to use the Content in whole or in part, and insures that the original author will be properly credited when Content is used. It also grants others permission to modify and redistribute the Content if they clearly mark what changes have been made, when they were made, and who made them. Finally, the license insures that if someone else bases a work on this Content, that the resultant work will be made available under the Open Publication License as well.

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