The Justice Department is investigating allegations of fraud, conflict of interest and conspiracy in the awarding of federal grants to build housing for the elderly and handicapped, a House subcommittee chairman said yesterday.

Rep. Don Bonker (D-Wash.), who heads the House Aging subcommittee on housing, said the probe is based on a sealed summary of allegations provided to the FBI by the General Accounting Office.

John H. Luke of the GAO told the panel that the Housing and Urban Development Department violated its own rules against allowing ties between corporate developers and the nonprofit sponsors of housing for the elderly.

The way HUD awarded the "Section 202" housing grants made it appear "that projects were selected for reasons other than merit," Luke said.

By using a discretionary fund to finance projects that were poorly rated by local HUD offices, Luke said, the agency created "the appearance of favoritism and exertion of influence" in the $600 million program. He also said that HUD regional officials failed to document why they "substantially altered" the scores of numerous applicants, although they were acting within their authority in doing so.

HUD approved three discretionary grants last year for the nonprofit Salem Lutheran Foundation of Columbus, although several other area applications had higher ratings.

Luke said HUD was told that both the foundation and its developer, Columbus-based Homewood Corp., were controlled by Homewood Chairman George A. Skestos. Luke said HUD decided that this was not a violation of rules against conflict of interest. Skestos has said he was not warned of any potential violations.

Another Homewood application was funded last year after the Chicago regional office raised its score. Luke said the scoring changes for Ohio were made by Bill Antonoplos, an aide to the Chicago regional chief who works in HUD's Columbus office. Luke said that Antonoplos knows Skestos and had "visited Homewood officials" during the application period.

Antonoplos told a reporter that he was only one of six officials who worked on the applications, that his relationship with Skestos is mainly professional and that he does not recall visiting Homewood officials. He said that there is "tremendous political pressure" on the program and that "people who aren't selected go absolutely wild."

HUD Undersecretary Philip Abrams told Bonker he could not respond to questions about Homewood, although he awarded the discretionary grants. "I don't recall specific information about specific projects out of hundreds that were considered," he said.

"You've got to document and at least halfway defend how you make decisions over there," Bonker responded.

Abrams maintained that HUD had made the program more "flexible" so that senior officials could consider such factors as cost containment and minority participation. "We believe our selection process is working well," he said.

Vera Saunders, an elderly activist in Ohio, said a state housing official who is a former Homewood employe had told her that her group could get a Section 202 grant if it hired Homewood.

The GAO's Luke also questioned why HUD gave a $2.1 million grant to Calvary Pentecostal Church of Youngstown, although local HUD officials had warned that it had a negative cash flow of $285,000.

Luke said the church, which he did not cite by name, had been subject to mortgage foreclosures, had not paid property taxes on several parcels of land and had owed substantial employment taxes to the Internal Revenue Service. He said HUD has ignored these findings.