By Carol D. Leonnig
Washington Post Staff Writer
Sunday, April 13, 2008
In late 2006, as economists warned of an imminent housing market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."
He pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down. He issued a rule that was criticized by law enforcement authorities because it could increase the difficulty of detecting and proving mortgage fraud.
As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to his friends and political allies. But critics say an equally significant legacy of his four years as the nation's top housing officer was gross inattention to the looming housing crisis.
They contend that Jackson ignored warnings from within his agency, the Department of Housing and Urban Development, whose inspector general told Congress that some of the secretary's efforts were "ill-advised policy" and likely to put more families at risk of losing their homes.
During Jackson's years on the job, foreclosures for loans insured by HUD's Federal Housing Administration (FHA) have risen and default rates have hit a record high.
All the while, Jackson enjoyed a chef and a full-time security detail that trailed him to Washington social events. His office launched a new $7 million auditorium and cafeteria at HUD's headquarters, money that some within the agency believed should have been directed toward housing for the poor. His office solicited an emergency bid to obtain oil portraits of Jackson and four other HUD secretaries at a cost to taxpayers of $100,000.
Jackson, who declined to be interviewed, will be remembered as a Cabinet secretary so committed to carrying out President Bush's goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis, according to interviews with more than 30 current and former HUD officials and housing experts, and a review of numerous HUD documents and audits.
In speeches, he urged loosening some rules to spur more home buying and borrowing. "I'm convinced this spring we will see the market again begin to soar," Jackson said in a June 2007 speech at the National Press Club to kick off what HUD dubbed "National Homeownership Month." He also told the audience that he had no specific laws to recommend to prevent a repeat of the lending abuses that caused the mortgage crisis.
"When Congress calls up and asks us, we'll give them advice," he said. "You have 534 massive egos up there, so unless they ask you, you don't volunteer anything."
HUD spokesperson D.J. Nordquist defended Jackson's record in pushing for more flexibility in government-backed loans. "Secretary Jackson is a big believer in the U.S. housing market and won't apologize for saying so," Nordquist said in a written response to questions. She said Jackson hoped that FHA loans could provide a safe alternative for borrowers about to default on subprime loans from the private sector.
A former director of three housing authorities, Jackson came to HUD as a deputy secretary in 2001. He and Bush had been friends since their days as neighbors in Dallas. When Secretary Mel Martinez stepped down to run for the Senate in 2004, Bush promoted Jackson.
A lead smelter's son and the youngest of 12 children, Jackson, 62, has said he "never imagined" he would one day serve in the Cabinet. From his 10th-floor office, he seemed to revel in the entree his new job offered to Washington's elite, according to current and former associates.
At shrimp-cocktail buffets and receiving lines, Jackson and his wife became ubiquitous, making a 2005 list of the "100 most invited" people on Washington's social circuit.
Jackson made a show of having a cook on HUD's staff, visitors said, a perk normally associated with Cabinet members who have international travel schedules. Nordquist said the cook is an assistant who helps with receptions and banquets, and also answers phones and helps with attendance reports.
Though all Cabinet members are entitled to security, some have eschewed the expense. Jackson sought a full-time detail.
He launched the renovation of a larger HUD auditorium and cafeteria to replace what his spokesperson said was a "deplorable" 40-year-old facility. The oil portraits were commissioned by Jackson's office in an emergency contract last fall so that they would be ready in time for a scheduled opening, which was later postponed. Nordquist said HUD is updating the portraits of agency secretaries as part of the American tradition of "commemorating the contributions of our public servants."
"How can you spend that much money on building a shrine to yourself?" asked Peter Sepp, vice president of the National Taxpayers Union, a fiscally conservative watchdog group. Sepp said that "99 percent of Americans would probably not agree with that kind of extravagance."
Cabinet members historically have enjoyed perks, but their spending of taxpayer funds is limited to "legally authorized purposes." The Office of Management and Budget says those can vary from agency to agency.
In the policy arena, Jackson quickly made known his loyalty to Bush and his determination to help increase the number of U.S. homeowners by at least 5 million. Loans by FHA-approved lenders accounted for less than 10 percent of the overall market in the past five years, but its loan programs were supposed to be targeted to low- and moderate-income individuals, many of them first-time buyers.
In 2006, Jackson proposed plans to modernize the FHA lending process. Backed by the White House, his proposal would allow FHA lenders to offer loans with no down payment, eliminating the long-standing 3 percent minimum. Lenders also could increase the size of the loan to cover the median home price in high-cost areas. High-risk borrowers could qualify by agreeing to pay higher premiums.
Jackson said the goals were to encourage first-time home buyers and to help the FHA compete with the booming subprime market. In an online White House forum in 2007, he said the FHA "is undergoing a historic transformation to give homebuyers who do not qualify for prime financing a better alternative to high-cost, high-risk loan products."
But Inspector General Kenneth Donohue chided Jackson and FHA Commissioner Brian Montgomery, a former White House political aide with no previous housing experience. Testifying on Capitol Hill in March 2007, Donohue agreed that the FHA needed changes to help working families, but not to mimic subprime lenders. He said some of the changes could distract the FHA from its affordable-housing mission while helping government-backed lenders reach high-end buyers.
He also expressed concern that Jackson's proposals would do nothing to detect abuse and fraud. At the time, the FHA monitored 6 to 7 percent of the loans in its portfolio.
"Aggressive oversight and enforcement is crucial to prevent a recurrence of what we are witnessing in the subprime market today and the savings and loan industry in years past," Donohue said.
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.
HUD has a standing agreement to refer cases to its inspector general when it suspects mortgage fraud. But an audit by that office of one sample of recent records found that HUD did not refer more than two-thirds of the potentially fraudulent FHA mortgage loans it identified.
"If all of the regulators, including HUD, had looked specifically at mortgage fraud, looking at fair lending and fair housing in a more proactive way, the crisis might have not been as bad," Berenbaum said.
Jackson had insisted he would stay in office until the end of Bush's term. But last month, several Democratic senators who hold HUD's purse strings called for his resignation. He had refused to answer their questions about allegations that he was engaged in political favoritism and cronyism. A federal grand jury is investigating whether Jackson lied to Congress about his involvement in contracts and whether he steered millions of dollars in government work at the Virgin Islands and New Orleans housing authorities to his friends.
Sen. Patty Murray (D-Wash.), head of the Senate Appropriations subcommittee that oversees HUD, said March 21 that Jackson had become unfit to lead the agency.
"We are in the midst of a national housing crisis," she said. "The allegations of cronyism and favoritism against Secretary Jackson are a worsening distraction at HUD at a time when we must have a credible housing secretary that is beyond suspicion."
Staff researcher Julie Tate contributed to this report.