A federal judge in Chicago has found the Department of Housing and Urban Development, HUD Secretary Samuel R. Pierce Jr. and several other department officials in contempt of court, accusing them of having "ignored, evaded, or purported to misunderstand" court orders to assist certain low-income homeowners facing foreclosure.

"HUD has been deliberately and grossly recalcitrant in carrying out its mission . . . ," wrote an obviously outraged U.S. District Judge Hubert L. Will in a 103-page opinion handed down March 22. He accused the department of "a shameless attempt to get around" a 1979 consent decree, and of "a bad-faith effort to deprive HUD-insured homeowners of the benefits which Congress intended these low-income families to have."

Will termed his civil contempt citation "one last effort . . . to induce HUD to protect rather than derogate the rights of" participants in federal mortgage insurance programs.

"The only remaining sanction," he wrote, "is criminal contempt."

The case, which has been before the courts since 1973, involves HUD's mortgage assignment program. This is a program that allows homeowners who default on HUD-insured mortgages to ask the department to take over their loans and work out a payment plan, thus avoiding foreclosure.

The plaintiffs, a group of borrowers, had originally charged in a national class action that the department had used illegal criteria to decide when a loan will be accepted into the assignment program. A settlement was reached in 1976, but in 1979 and again in 1983 and 1984, the borrowers complained -- and Judge Will agreed -- that the department was not living up to its obligations under terms imposed by the court.

On two occasions, HUD appeals to the Seventh U.S. Circuit Court of Appeals were rejected.

To clear itself of the contempt citation, the department must reprocess some 32,000 applications for inclusion in the assignment program. HUD must also offer to give anyone found to have been improperly rejected his house back, if it is available, plus whatever assistance he should have received in the first place.

Qualified applicants whose original house is no longer available "must be conveyed a comparable property at fair market value, either under terms and conditions not less favorable than those of the former mortgage . . . or at the prevailing FHA rate, whichever is lower," Will said.

If neither of these conditions can be met, he added, "HUD will be required to pay each such [homeowner] compensatory money damages." The judge said he would hold a hearing "shortly" to determine how much money would be proper.

The department had argued that for various reasons, including sovereign immunity, it could not be ordered to pay money damages. Will disagreed, saying, "HUD obviously cannot violate a consent decree to which it is a party and then contend that the court is without power to grant the relief necessary to remedy the damages caused by its contemptuous conduct."

Finally, Will said he would issue an order to one retired and two current HUD officials to show cause why they should not be held personally in contempt. The current officials are Richard Buchheit, director of the single-family mortgage division in the department's Office of Single Family Housing, and Sally McCormack, chief of the insurance servicing branch of the single-family mortgage division. The retired official is Philip Forest.

Will found the department in contempt for adopting the "two-month rule," which made it more difficult for applicants to qualify for the assignment plan.

"In 1979, HUD was enjoined, prospectively, from eviscerating the basic rights of mortgagors borrowers under the mortgage assignment program. Adoption of the two-month rule clearly curtailed such basic rights, in violation of the consent decree," the judge wrote.

The rule was important because the law specifies that to be eligible for the program a borrower must show, among other things, that the default was due to circumstances beyond his control. And in determining this, only circumstances occurring before the default may be considered.

HUD's rule had the effect in many cases of setting the default "at a time earlier than is proper," thus excluding from consideration the circumstances that otherwise would have met the test.

As evidence of bad faith, Will noted not only the terms of the consent decree, but also a 1981 case -- not appealed by HUD -- in which a federal court in Georgia specifically forbade the department from using the rule.

First, Will pointed to memoranda, introduced in court, in which field offices in Florida asked for guidance and were told to use the two-month rule.

After the Georgia case, the Atlanta office was told "that it was proper to use the two-month rule . . . but that the rule should not be mentioned in the preliminary rejection letter because HUD lost the . . . case for this language," Will said.

In its defense against the contempt citation, the department sought to reopen the question of the validity of the two-month rule. Will refused to allow relitigation of the point, writing: "The attempt to do so is another example of HUD's continuing efforts to prejudice the mortgagors they are supposed to be assisting."