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HUD backs millions in loans on projects worth a fraction of the debt

By   /   February 3, 2016  /   News  /   No Comments

Photo of HUD records obtained under FOIA

UNDERWRITING WOES: HUD backed a $47 million loan for an upscale construction project in upstate New York that defaulted. The completed property is worth less than $15 million.

In July 2009, a developer secured a $46.5 million loan — with federal backing — for an upstate New York retirement complex that included a clubhouse with a pool and fitness center, a chipping green and restaurant with a wildlife observation deck.

The 26-acre, 185-unit project in Lloyd, N.Y., would attract “upscale” active retirees who could pay monthly rents of more than $2,000 but wanted a carefree lifestyle and high-end amenities, the proposal records obtained under the Freedom of Information Act show.

But the project was quickly mired in problems. The feds indicted the builders and developer for a kickback scheme, the developer filed personal bankruptcy and defaulted on the government-backed loan, leaving the Department of Housing and Urban Development on the hook for more than $47.3 million including fees and interest in 2012, bankruptcy records, a federal indictment and a HUD database show.

In the prosecutor’s news release, the HUD inspector general’s Special Agent in Charge, Christina Scaringi, blasted the builders and developers who are alleged to have stolen $865,000 in federal money by making fraudulent and misleading representations.

“These defendants were entrusted to use federally insured funds to provide decent affordable housing for our senior citizens,” she was quoted in the release. “Instead, as alleged, they lied to the lender and siphoned project funds to satisfy their greed. The HUD OIG will not tolerate this behavior and is committed to rooting out those who choose to engage in these outrageous acts.”

But there was no mention of HUD’s culpability in backing a loan that its own economist questioned and that ended up being three times what the completed project is worth.

“As currently structured, this proposal involves a significant underwriting risk,” HUD economist William Coyner wrote the multifamily housing division director Teresa Bainton a month before the project was finalized. “The Ulster County economy is weakening.” Coyner, who in the memo recommended a smaller project and/or lower rents, did not return a call seeking comment.

Photo Courtesy of HUD website

HUD DEFAULT: HUD multi-family project director Teresa Bainton was sent a memo questioning the Vineyard Commons project’s viability.

HUD contends it modified the project to reduce risk after Coyner’s memo.

“As is standard practice for approving an FHA loan application, HUD completed all due diligence for Vineyard Commons, including a review of the submitted market study,” regional spokesman Charles McNally wrote in an email. “HUD’s analysis of the market study concluded that the proposed rents were at levels too high to achieve full occupancy in the local housing market, and in response to this concern, the deal was restructured at lower rents prior to closing. Vineyard Commons’ default stems not from insufficient due diligence by HUD, but from the criminal fraudulence of its owners, for which they were indicted in 2015.”

After the default, HUD auctioned off the note on the property on Aug. 15, 2012, to True North Management Group for $18.6 million, McNally wrote. The county and Lloyd city assessor’s offices contend the project’s current market value is $14.7 million, interviews and county records show.

IN OTHER NEWS: Federal SBA guarantees go to Lamborghini dealers, vineyards.

And Vineyard Commons is just one example of HUD-backed projects that defaulted, leaving the government on the hook for more than $1 billion since 2010, the database shows. Of the top 10 defaults, only one is worth more than the government guaranteed, raising significant questions about the underwriting of these loans.

“So many bad choices for expenditures can be prevented by listening to those who blow the whistle near the beginning of the project,” National Taxpayers Union president Pete Sepp said after Watchdog.org provided him details of the upstate New York complex and other deals. “When it comes to spending money on a program, the government should aim for the most modest expenditure and caution.”

Photo Courtesy of NTU

TAX FIGHTER: National Taxpayers Union president Pete Sepp questioned why HUD was involved in market-rate projects that benefit wealthy developers.

It’s not clear how much taxpayers were hurt, as HUD contends the Federal Housing Authority program mostly survives on participant fees. FHA did receive a $1.7 billion taxpayer bailout in 2013, but HUD spokesman Brian Sullivan said that was for the single-family program, which is a separate fund from the FHA multi-family program, and the multi-family program actually makes a profit

Sullivan also noted the FHA currently has a default rate of less than 1 percent.

But taxpayers are on the hook for staffing the program, which Sepp called “unnecessary,” adding the government should not pick winners and losers in a market economy.

“Bad policy is the root of problem here,” he said.

Sullivan didn’t specify the costs of staffing FHA, but overall, HUD will spend more than $12 billion this year on housing programs.

An Inconsistent Policy

The HUD database shows projects in Florida, Ohio and Chicago that HUD plowed millions of dollars into are now worth a fraction of the loans guaranteed by HUD.

In 2012, developers of the Preserve at Alafia defaulted on a $49.6 million loan, requiring HUD to step in and pay it off, the HUD default database shows. Assessor records show the project is currently worth $30.1 million.

In Chicago, Somerset Apartments received a $26.2 million loan guarantee that defaulted in 2010, the database shows. Currently, the Cook County assessor’s office values the property at less than $13 million. Records also show the owners since 2009 have protested the assessed value of the property five times, getting it knocked down from a high of about $36 million in 2009.

Two developments in southern Florida received loan guarantees of about $25 million each that defaulted. Since the defaults in 2012, Lauderhill’s The Lenox on the Lake project is worth about $8 million less than HUD plowed into it and the Panama City’s Waterstone at Jenks Avenue Apartment complex is worth about $5 million less, the HUD database and county records show.

In Columbus Ohio, Marble Cliff Commons received a $29.7 million loan guarantee that defaulted in 2010. Five years later, after property values rebounded, the project is still worth only $24.5 million, according to the county.

In Washington, D.C., a $43.5 million loan guarantee defaulted in 2010, but three years later assessment records show the property sold for only $36 million and the owners repeatedly tried to reduce the value since 2005.

The defaulted projects are under new ownerships and not run by the developers who didn’t pay the loans.

A project in North Carolina was the only one of those reviewed by Watchdog whose value increased above the defaulted loan amount. HUD guaranteed a loan to the Manor Six Forks in Raleigh, which resulted in a $37.1 million default in 2011, the database shows. And in 2014, the appraiser valued the property at $48.2 million, up from $32.5 million, according to the assessor’s office. State law requires the assessor to reappraise property only once every eight years.

Assessors in Detroit did not return repeated calls and emails seeking information on those projects.

HUD usually sells its debt for pennies on the dollar, allowing knowledgeable business people to make a quick profit that the feds likely could have obtained. At the Apollo Village in Colorado Springs, Colo., HUD sold the note on the $9.5 million loan guarantee for $5 million in 2012 and the buyer foreclosed six months later receiving $6.2 million from another company. That buyer sold the property for $8.9 million in 2013.

Sullivan, who initially promised to provide a representative but then sent a statement, disputed that looking at assessed values is valid method to determine the value of the projects.

“The market does not view tax assessments as a true determination of real value and an assessed value is not a replacement for an appraised value,” he wrote. “Based upon market forces, a property’s appraised value will fluctuate over time.”

But county assessors of properties Watchdog.org reviewed confirmed their figures are current market values. And without assessments, it is nearly impossible to determine how well HUD does in picking loans to back because HUD refused to provide basic information in most cases.

The HUD office in upstate New York was the only one that provided extensive documentation of its default, while most of the other HUD divisions said they either didn’t have appraisals or denied access to the records.

“(Y)our request is denied as we have no documents responsive to your request,” wrote Thomacina Brown, Miami FOIA liaison without explaining why HUD would have no documents on recent projects that lost millions.

Matthew Stewart, FOIA liaison in the HUD Jacksonville, Fla., office said the records of defaults as recent as the $49.6 million, 2012 Tampa Bay area loss, were destroyed.

“(F)ederal records retention regulations only require HUD to keep records for as long as we have an interest (i.e. FHA insurance) in the property,” he wrote.

And even when HUD has the records, it didn’t want to give them up. Watchdog.org previously wrote about the Apollo Village developer receiving a $9.5 million guarantee months after the owner protested the property value of the development, saying it was worth less than $4 million. Watchdog.org wanted to see the appraisal and any discussion of the loan process to determine if there had been internal warnings like the one delivered on the upstate New York HUD guarantee.

RELATED: HUD backs loan even after owner asks county to cut value.

After months of back and forth, including a HUD letter to the developer who defaulted asking if he wanted the appraisal released, HUD withheld the appraisal and any discussion records. Staff cited FOIA exemptions for trade information and deliberative process.

“If shared, it could diminish their competitive advantage in the future,” Denise Hernandez, FOIA liaison in the Denver office wrote.

Sepp scoffed at the response and said FOIA is a federal law and all regions should apply it uniformly.

“That’s an inconsistent policy and improvements to FOIA have been sorely needed for some time,” he added.

Sullivan conceded there are questions about why one region would withhold records another provided, but could not provide an explanation.

While HUD officials maintain the FHA losses were a result of the post-2008 housing crisis and mostly from single-family defaults, the $1 billion in multi-family defaults clearly could have helped reduce the burden if HUD hadn’t entered into those projects, Sepp said.

Sepp also questioned why HUD is involved in backing projects for market-rate and even upscale housing, as it appears only to benefit and protect a business person looking to make a profit. Robert Abbasi, a managing partner of the company that renovated the Apollo Village apartments, told Watchdog.org that HUD-guaranteed loans are beneficial because the lender and federal government have no recourse against the developer’s other assets.

Sullivan contends any questions about why HUD backs market-rate projects are better directed to Congress because lawmakers wrote the law requiring HUD to back the loans.

Up to Congress

Back in Ulster County, the U.S. attorney for Southern District of New York indicted Vineyard Commons developer Michael Barnett and two contractors for a scheme in which Barnett allegedly asked the contractors to inflate costs on the project and pay him kickbacks to insure they received future work, the May 2015 superseding indictment says.

Barnett pleaded guilty Jan. 19 to conspiring to defraud a lender and making false statements, and faces five years in prison, fines, and $1.3 million in restitution.

Barnett’s attorney did not return a call seeking comment.

In 2014, Barnett and his wife received bankruptcy protection, claiming they had less than $10 million in assets but as much as $50 million in liabilities. They told the judge their monthly expenses totaled more than $15,000, including a $6,300 mortgage, $900 a month for food and more than $1,100 to lease two BMWs, bankruptcy records show.

Watchdog.org reached OIG supervisor Scaringi in her office, and despite her news release about Barnett’s actions she appeared to know little about the project. She wasn’t aware it was an upscale rather than“affordable housing” project, and said she hadn’t heard of warnings from the HUD economist.

“The problem responding at all to an ongoing investigation is it could impact the prosecution,” she told Watchdog.org.

She asked for a copy of the Coyner memo and seemed interested in the pattern of defaults and loans valued considerably higher than the final value of the property. Then she emailed a week later saying she had no comment on the memo or whether OIG should investigate, and would be unavailable for the next two weeks.

Developers on the various projects with large defaults either had phone numbers that were no longer working or didn’t respond to a call seeking comment.

Sepp said clearly HUD should have known better than to back the Vineyard Commons and other deals, saying Congress should prevent HUD from getting into questionable commercial property deals.

“It is up to Congress to investigative and actually clarify what should be allowed,” he said. “Many HUD officials say it is perfectly within their prerogative to engage in these activities and if that’s the prerogative, it should be changed.”


Arthur was formerly the bureau chief for Colorado Watchdog.