HUD Chief Inattentive To Crisis, Critics Say

HUD Secretary Alphonso Jackson, left, with President Bush and Treasury Secretary Henry M. Paulson. Zealous about Bush's goal of increasing homeownership, Jackson encouraged policies that threatened to worsen the mortgage crisis, housing experts said. He is also under investigation for alleged cronyism. (By Ron Edmonds -- Associated Press)

Nordquist said committing fraud in FHA loans is "infinitely more difficult" than in private mortgages and that FHA reform efforts included several steps to manage risks. For example, she said, Jackson objected to waiving required audits for new FHA lenders. In an interview, Montgomery said, "It is beyond outrageous for anyone to suggest we would do anything to put FHA at unnecessary risk."

Members of Congress who oversee HUD said Jackson's emphasis on pushing homeownership -- without many brakes -- ignored the root of the mortgage crisis.

"Homeownership appears to be a bigger priority in the administration than affordability and foreclosure," Sen. Christopher S. Bond (R-Mo.) told Jackson at a recent hearing. He added: "I'll tell you quite frankly, I think the emphasis on homeownership helped to drive the foreclosure crisis we're now in. . . . All these wonderful ideas . . . didn't do them any good when we put them in housing they couldn't afford."

Jackson also issued a rule allowing FHA lenders more self-policing. Under the lender insurance rule that HUD implemented in 2006, lenders could endorse FHA loans without prior review and no longer had to submit loan paperwork to HUD. The agency's inspector general and the FBI objected, and HUD's office of general counsel registered concern because detecting fraud would be more difficult without lenders' paperwork.

Donohue warned the Senate that the rule "permits those with the potential to perpetrate fraud upon the insurance fund" to keep the evidence of a crime.

Nordquist defended the change as removing "mountains of paperwork that increasingly became unmanageable."

Inside HUD, numerous staffers said, Jackson made clear that he believed overregulating and investigating mortgage lenders could harm the president's homeownership goals.

On Jan. 4, 2006, the U.S. attorney in Detroit announced what was then the largest mortgage fraud case ever filed. Based on a HUD audit, law enforcement officers found a pattern of falsified mortgage documents by ABN Amro, one of the largest FHA-approved mortgage lenders. The company agreed to pay $41 million in a civil settlement.

Jackson and Montgomery, according to three current and former government officials familiar with the matter, reacted coolly to the historic settlement. Both complained to their staffs that punishing FHA lenders could backfire if they wanted those lenders' help in increasing homeownership.

But Nordquist said Jackson and Montgomery completely supported the settlement. Montgomery said he remembers only debating concerns with staff members about how strongly HUD should criticize the alleged fraud. The lender, he said, fully investigated the matter when alerted to a probe and self-reported the bulk of the case.

Enforcement seemed to be a low priority for HUD in both staffing and budget, according to agency observers. David Berenbaum, executive vice president at the National Community Reinvestment Coalition, an association working to prevent foreclosures and abusive lending, said HUD is supposed to be the government's lead enforcer of fair-lending laws. The laws prohibit financial discrimination and exploitation of minority borrowers, who took out a disproportionate share of the subprime loans. Berenbaum said HUD largely paid nonprofits to monitor compliance with fair-lending laws.

Nordquist said HUD opened a fair-lending division last summer, hiring a senior economist and advertising to hire five staffers, to help focus on those problems.