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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
                   THE SECTION 203(K) HOUSING PROGRAM

=======================================================================

                             FIELD HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 10, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-44

                          U.S. GOVERNMENT PRINTING OFFICE
 75-454 PS                       WASHINGTON : 2001
__________________________________________________________________

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Texas                 JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
                                 ------                                

              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman        LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              KEN BENTSEN, Texas
ROBERT W. NEY, Texas                 JAY INSLEE, Washington
CHRISTOPHER COX, California          JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia                WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 10, 2001...........................................     1
Appendix:
    September 10, 2001...........................................    41

                               WITNESSES
                       Monday, September 10, 2001

Browne, Glorie, Section 203(k) building tenant...................    22
Czerwinski, Stanely J., Director, Physical Infrastructure Issues, 
  General Accounting Office......................................     8
Foncette, Wilma, Section 203(k) loan applicant...................    21
Groves, Robert C., Assistant Inspector General for Investigation, 
  HUD Office of Inspector General................................    10
Medina, Ruben, Chief Executive Oficer, Promesa Systems, Inc......    27
Perine, Jerilyn, Commissioner, New York Department of Housing 
  Preservation and Development...................................    33
Phillips, Karen A., President and Chief Executive Officer, 
  Abyssinian Development Corporation.............................    29
Renwick, Mr. and Mrs. Brett, Section 203(k) loan applicants......    19
Tom, Lydia, Senior Program Director, The Enterprise Foundation...    31
Weicher, Hon. John C., Assistant Secretary for Housing/Federal 
  Housing Commissioner, HUD......................................     6

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    42
    Gutierrez, Hon. Luis V.......................................    44
    Browne, Glorie...............................................    79
    Czerwinski, Stanely J........................................    52
    Foncette, Wilma..............................................    73
    Groves, Robert C.............................................    58
    Medina, Ruben................................................    81
    Perine, Jerilyn..............................................    94
    Phillips, Karen A............................................    86
    Renwick, Mr. Brett and Mrs. Marla............................    69
    Tom, Lydia...................................................    90
    Weicher, Hon. John C.........................................    45

                             FIELD HEARING
                   THE SECTION 203(K) HOUSING PROGRAM

                              ----------                              

                       MONDAY, SEPTEMBER 10, 2001

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                           Committee on Financial Services,
                                                       New York, NY
    The subcommittee met, pursuant to call, at 10:00 a.m., at 
the Adam Clayton Powell Office Building, 163 West 125th Street, 
New York, NY, Hon. Sue W. Kelly, [chairwoman of the 
subcommittee], presiding.
    Present: Chairwoman Kelly; Representatives Grucci, Rangel, 
and Israel.
    Chairwoman Kelly. Good morning. This hearing of the House 
Financial Services Subcommittee on Oversight and Investigations 
will come to order. I want to thank all the Members of Congress 
who are present today. Without objection, all Members will 
participate fully in the hearing, their statements and 
questions will be made part of the official hearing record. 
Specifically, I want to thank my friend and House colleague 
Charlie Rangel for his assistance in planning this hearing and 
for securing this room for our use.
    I also want to take a moment to express my gratitude to 
Secretary Martinez for making the resolution of the problems in 
the Section 203(k) program one of his highest priorities.
    I would like to inform Members and witnesses that it is my 
intention to limit statements and questions to 5 minutes each. 
We have plenty of time to hear all viewpoints, but we need to 
maintain the decorum that is required of all Congressional 
hearings. So please, please, do not applaud or comment loudly 
for a particular witness.
    The Section 203(k) program was intended to strengthen 
communities and improve available housing. Unfortunately, fraud 
perpetrated under this program has had a devastating impact on 
families and neighborhoods in New York.
    The focus of this hearing will be to find out why this was 
allowed to happen and how to prevent it from ever happening 
again. The question that remains unanswered, and which I hope 
we can answer during this hearing is, where were senior HUD 
officials when all this fraud was taking place? According to 
reports issued as early as July, 1996, the HUD Inspector 
General and the General Accounting Office found that fraud in 
the Section 203(k) program was harming individual homeowners, 
renters and communities and placing taxpayer dollars at risk.
    In July of 1996, and again in February of 1997, the HUD 
Inspector General's office said, and I quote: ``The Section 
203(k) program is highly vulnerable to waste, fraud and abuse 
by investors and non-profit borrowers.'' Four months later, in 
June of 1997, then-Secretary Cuomo instituted his 20-20 
Management Reform Plan, a plan which raised red flags with 
Federal investigators concerned with HUD's oversight ability.
    Four months after that, in September, 1997, the HUD 
Inspector General issued its Semi-annual Report to Congress 
expressing concern over the fast pace with which then-Secretary 
Cuomo's reforms were being implemented. Secretary Cuomo's 
plans, Federal investigators said, put in jeopardy HUD's 
ability to effectively oversee its own programs, and indeed, 
starting in late 1997 and into 1998, HUD's single family 
program was at its most vulnerable point, according to Federal 
investigators.
    In 1999, after this scam had become full blown, the GAO 
said HUD officials still had done little to address the 
problems identified by its Inspector General and others. The 
warnings were there. Time after time, Federal investigators 
warned of abuse. Here they are, all of these reports warned of 
problems in the Section 203(k) program and yet they were 
ignored. Where was HUD?
    Then-Secretary Cuomo knew this problem existed, yet allowed 
it to balloon into a $130 million defrauding of the American 
taxpayer. Because of this scam, dozens of coconspirators, 
crooked investors, phony non-profits, willing appraisers and 
greedy attorneys have already been arrested and there is more 
to come.
    These felons falsely inflated the prices of these 
properties, lied to obtain HUD insured loans they needed to buy 
and rehabilitate the properties, pocketed the money, defaulted 
on the loans and every single one of us who pays taxes is now 
stuck with this bill. Again, where were senior HUD officials 
when taxpayer dollars were being stolen?
    A large part of Secretary Cuomo's plan involved shifting 
resources, a full 10 percent of the staff resources went to his 
Community Builders Program, a program which served no oversight 
function whatsoever, but rather a public relations function. In 
fact, the HUD Inspector General testifying before a Senate 
panel last year, said that the majority of Community Builders 
said they spent more than half their time on public relations 
activities.
    The Inspector General continues: ``HUD redirected a 
significant amount of resources to outreach and customer 
relations activities at a time when additional resources were 
needed for operational activities.''
    Now, hundreds of New York families are at risk, risk of 
losing their homes. Other families have been deprived of an 
opportunity to purchase a home and renters have had to live in 
buildings that are falling apart. Where was HUD while residents 
of this community were being preyed upon and denied quality 
housing? Hundreds of millions of dollars in federally-insured 
loans have been lost while criminals lined their pockets with 
taxpayer money.
    How could this frenzy of corruption have been missed by 
Secretary Cuomo and senior HUD official management in light of 
repeated warnings by Federal investigators? Last year, the HUD 
Inspector General's Office testified before the Senate that, 
quote: ``the large number of staff devoted to public relations 
took away staff resources from important oversight functions.''
    Sadly, this program is a casualty of Secretary Cuomo's 
obsession with spin and public relations, rather than sound 
public policy.
    In closing, let me cite one last Inspector General's report 
that addresses this issue. A 1999 HUD Inspector General's 
report stated that Secretary Cuomo's reform efforts had, and I 
quote: ``a criminalizing effect on many of HUD's ongoing 
operations.''
    Clearly, the Section 203(k) program was one of the programs 
hardest hit by a disturbing pattern of mismanagement and 
neglect over the past several years at HUD.
    I look forward to the testimony from these witnesses today, 
and I turn now to my colleague, Congressman Charlie Rangel for 
his opening statement. Congressman Rangel.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 42 in the appendix.]
    Mr. Rangel. Thank you so much, Madam Chairwoman. On August 
the 28th, I received an invitation from you inviting me to 
participate in this hearing and to request my support in making 
certain that it took place and, of course, even before that I 
indicated my willingness to do this.
    It is my understanding at that time, and it remains my 
intent, not only to see what went wrong, but to see what went 
wrong for the purpose of seeing that it does not reoccur, and 
also to make certain that my community and those communities 
that have been adversely affected as a result of the fraudulent 
and criminal behavior of certain people, most of whom I hope 
are arrested by now, that they are made harmless.
    That's why I'm a little surprised that for over a dozen 
times you mentioned the name of the former Secretary of HUD, 
whom I'm certain you're aware of, is a candidate for the 
Governorship of the State of New York.
    Nowhere in your letter do you mention, Mrs. Secretary, and 
I see a lot of emphasis that's been made on the C, and I assume 
that means political appointees of the Secretary of HUD. I want 
to assure you that my community sincerely wants to help you, 
the witnesses, but more importantly, that those people would 
like to see a revitalization of our community with the support 
of HUD, and I don't intend to get involved in allowing my 
political observation of this Administration to interfere with 
this hearing as relates to making my community whole, and I'm 
prepared to accept the fact that your concerns about the 
previous Administration was the only reason why you saw fit to 
mention the name of the former Secretary a dozen times and I 
thank you for not mentioning the President, who was Bill 
Clinton, who is not a candidate for public office.
    Whatever the purpose, I'm prepared to admit that Andrew 
Cuomo's name was mentioned so often this morning only for the 
purposes of identification and for those of you who may not 
have known that the Secretary was Secretary Andrew Cuomo, a 
candidate for Governor of the State of New York.
    Having said that, I do want to thank the witnesses who have 
been heard, who have come here, the public servants who have no 
political axe to grind, that we rely on, no matter who is 
elected, to make certain we will correct the wrongs and move 
forward, and who I'm confident that at the end of the day 
you'll have some wonderful suggestions.
    As Tip O'Neill--you'll pardon the expression, once said, 
``all politics is local.'' I'd like to pay tribute to my City 
Councilman Bill Perkins, who was merely responding to an 
eviction notice by one of his constituents, but, because he 
just didn't accept the fact that their furniture and worldly 
belongings were placed on the street, because he didn't accept 
the fact that the landlord was an unknown corporation, because 
he didn't accept the fact that he found out that similar people 
were situated that were not in his Councilmanic District, and 
because he did take it to the New York County District 
Attorney's office for further investigation, I just want to 
publicly thank him for bringing this to our Government's 
attention.
    I think to a large extent that's the reason why we held 
this hearing.
    [Applause.]
    Chairwoman Kelly. I cautioned this audience before. This is 
a regular Congressional hearing and we will have to have no 
comment and no sound, please, from the audience during this 
hearing. We have witnesses here and we are on a time-line. We 
need to hear our witnesses. I'm sorry, Congressman Rangel, that 
you were interrupted.
    Mr. Rangel. Well, thank you, and I'm anxious to hear from 
the witnesses and I'd like to hear what positives come out of 
the hearing this morning.
    Chairwoman Kelly. Thank you. I think Congressman Rangel 
touched on an important point. This hearing is about people in 
the State of New York having a decent place to live and the 
loss of taxpayer money, and whenever anyone charges this is 
politics, they're trying to avoid the facts. The fact is that 
they are doing a great disservice to the people in New York who 
have been hurt by the ignoring of this program.
    Incidentally, this did happen on President Clinton's watch, 
but he was not at HUD. Secretary Cuomo was at HUD.
    Mr. Rangel. Let me take this opportunity to thank our 
current President George Bush for straightening out the problem 
and bringing it to a positive conclusion.
    Chairwoman Kelly. We're going to get it concluded today.
    Turning right now to a Congressman who has joined us, 
Congressman Felix Grucci. Congressman Grucci, do you have an 
opening statement?
    Mr. Grucci. Yes, I do. Thank you for hosting this hearing, 
Congressman Rangel. It is great to be in your District and 
great to be amongst you all today. Some of you may be wondering 
why a Congressman from the First Congressional District, which 
is Eastern Long Island, is attending this meeting. The answer 
is easily identified in the fact that the fraud in this system 
isn't unique in this particular area, it seems to have been 
running rampant and seems to have been out of control.
    In my area there is a faith-based organization that has 
been victimized by unscrupulous commercial bankers, a home 
mortgage banking corporation to take on 132 homes, a small 
faith-based organization, spreading everywhere from my District 
out on the east end of Long Island into Queens and possibly as 
far north and west as where we are sitting here today. The 
system is broken and it needs to be overhauled and it needs to 
be fixed, because the purpose here is to insure that the 
quality of life continues to improve for the American citizen, 
and so that everyone has the opportunity to achieve the dream 
of homeownership and decent living conditions and a place they 
can raise their family in comfort and knowing that the house 
they live in isn't about to fall apart or they're about to be 
evicted or the program that they're in is not really doing the 
job it's supposed to do. This Oversight Subcommittee and this 
hearing today hopefully will get at the root of this problem, 
will fix it and will continue to be able to provide the 
American dream to so many people, where that American dream may 
be outside of their reach without programs like this.
    So I thank you, Chairwoman, for putting this hearing 
together; Congressman Rangel, thank you for hosting this in 
your District today, and I look forward to the testimony from 
the witnesses, and I think it might get a little hot before the 
day is over with.
    Chairwoman Kelly. Thank you very much, Mr. Grucci.
    If there are no more opening statements, we are going to 
begin with our first panel. The first panel will focus on the 
action, or lack of action, by past HUD management during the 
1997-2000 time period with respect to the Section 203(k) 
scandal. For our first panel, we're grateful that the Honorable 
John C. Weicher, Assistant Secretary and Federal Housing 
Commissioner could join us today. Assistant Secretary Weicher 
has the responsibility for running the Section 203(k) program 
at HUD. He has devoted his career to housing and urban issues 
and has served at HUD in three previous Administrations.
    Next to him, we have Mr. Stanley Czerwinski, the Director 
for Physical Infrastructure Issues at the General Accounting 
Office, which is the official and nonpartisan investigative arm 
of the Congress. Mr. Czerwinski is the GAO expert on housing 
issues. After that, we will hear from Mr. Robert C. Groves, the 
Assistant Inspector General for Investigation from the HUD 
Office of Inspector General, which is the office that audits 
HUD programs and conducts criminal investigations. As the top 
cop for the Inspector General, Mr. Groves has led the 
investigation's fraud program.
    You are all aware that this subcommittee is holding an 
investigative hearing. When doing so, the Chair may decide to 
take testimony under oath. Do any of you have any objection to 
testifying under oath?
    Panel. No objection.
    Chairwoman Kelly. Then I advise you under the rules of the 
House and the rules of the Committee, you are entitled to be 
advised by counsel. Do any of you desire to be advised by 
counsel during your testimony?
    Panel. No.
    Chairwoman Kelly. In that case, please rise and raise your 
hands, I'll swear you in.
    [Witnesses sworn.]
    Chairwoman Kelly. Thank you very much. Each of you is now 
under oath, and without objection, the written statements will 
be made part of the record. You will each now be recognized for 
a 5-minute summary of your testimony and let us begin with 
Assistant Secretary Weicher.

  STATEMENT OF HON. JOHN C. WEICHER, ASSISTANT SECRETARY FOR 
           HOUSING/FEDERAL HOUSING COMMISSIONER, HUD

    Mr. Weicher. Thank you, Chairwoman Kelly and thank you for 
holding this important hearing. I'm honored to be here today on 
behalf of Secretary Martinez to describe present efforts to 
address the problems in HUD's Section 203(k) program here in 
New York, problems that were caused by fraud and abuse during 
1998 and 1999.
    With me this morning are Sean Cassidy, General Deputy 
Assistant Secretary for Housing; Mary Ann Wilson, the 
Secretary's representative in our New York office; Frederick 
Douglas, Deputy Assistant Secretary for Single Family Housing; 
Joseph McCloskey, Director of the Office of Single Family Asset 
Management and Ingram Lloyd, Director of our Philadelphia Home 
Ownership Center. All of these HUD staff members have worked 
long and hard on these problems.
    We are here to discuss a major abuse of a HUD program. The 
Department has engaged in an intense effort to understand how 
the program abuse occurred, how to deal with it and how to 
prevent it in the future, here and elsewhere. I will discuss 
each of those subjects this morning and just summarize my 
testimony.
    In the Section 203(k) program, the FHA insures mortgages 
that finance both the purchase of the home and repair of the 
property after purchase. The lender is required to approve 
drawdowns from a repair escrow and ensure the adequacy of the 
repairs themselves. Over the last 7 years, FHA has insured 
about 80,000 of these mortgages.
    The Section 203(k) program is a single family home mortgage 
program, but it is possible to obtain FHA insurance with 
properties for up to four units and for larger properties being 
converted to no more than four units. Most of the New York 
properties are in these last two categories, and that is 
unusual. Nationally, 80 percent of the Section 203(k) loans are 
one-family houses.
    The Section 203(k) program is inherently more risky than 
FHA's standard home mortgage insurance because of the repair 
component. FHA has a 14 percent default rate on Section 203(k) 
loans, compared to 2 percent on our basic Section 203(b) home 
mortgage insurance program.
    Briefly, here is what happened in New York: During 1998 and 
1999, FHA insured mortgages on 720 properties in and around the 
city that were sold to non-profit organizations. Of these, 545 
are located in Brooklyn or Harlem and another 85 are in Queens 
or the Bronx. Under Section 203(k), the nonprofits made a 
commitment to rehabilitate the properties and resell them, but 
in fact, the actual transaction was conducted by companies with 
ties to loan officers, investors who were barred from the 
program. Escrowed monies to be used for rehab were then 
funneled to developers who actually did little or no work. 
Kickbacks were paid to the various parties involved in the 
fraud. Lenders failed to perform their legal duties to ensure 
the repairs were completed and escrow funds were handled in an 
irresponsible manner. Some were in collusion with investors.
    These loans are the subject of ongoing investigation by the 
Department of Justice, by local authorities and by HUD's own 
Office of the Inspector General. I understand that 33 
individuals have been indicted to date. We are supporting these 
investigations and we have also proceeded with administrative 
actions as well. We have taken action against 113 organizations 
and individuals, and we have levied civil money penalties of 
over $1 million. I have listed these in my full statement and 
they take up over a page.
    We expect to pay more than $130 million for insurance 
claims on these properties. That does not include the cost of 
property rehabilitation. Our initial estimate for the rehab is 
$80 million. Most important, several hundred households are 
living in appalling conditions and the buildings are a blight 
on the neighborhoods.
    Last week, I came here with Mr. Cassidy, Ms. Wilson, and 
Mr. Lloyd. We looked at 42 of these properties, here in Harlem, 
within a few blocks of this building, and also in Brooklyn in 
Bedford Stuyvesant and Bushwick. The property of one of the 
witnesses in the second panel, Ms. Browne, was one of the 
properties we looked at. We saw vacant lots, burned-out 
buildings, buildings with missing staircases, and buildings 
with broken windows. Many were boarded up, and about half were 
occupied. Nearly all need significant rehab work before they 
can provide decent housing.
    Upon his appointment, Secretary Martinez created a HUD team 
to address this fraud. On May 11, the Secretary announced a 
preliminary plan with several components: To protect all 
current legal residents and offer them affordable leases; to 
bring the property up to minimum property standards, free of 
health and safety problems, and supplied with adequate heating, 
plumbing, electricity, and other basic utilities; to pay the 
cost of rehabbing the properties; to bear the cost of any 
temporary relocation made necessary by the rehab work; and to 
allow for disposition of the properties to both for-profit and 
non-profit purchasers.
    The Secretary also invited the city's Department of Housing 
Preservation and Development--HPD--to assist in developing a 
more detailed solution, and in response, HPD has offered to 
assume a primary role in overseeing the rehab and disposition 
of the properties. HPD will draw on its extensive experience in 
rehabbing similar properties in New York, in many cases, 
properties on the same block. The Department welcomes this 
proposal. It is now under active consideration by program staff 
and the Office of General Counsel, and I want to thank 
Commissioner Jerilyn Perine from HPD for her strong commitment 
to solving the problems with which we are all now confronted. 
When we looked at these properties earlier last week, 
Commissioner Perine joined us, and we had a very useful 
discussion.
    In the interim, the Department is employing two property 
management firms to maintain these properties and make sure the 
residents have basic utilities. We are hampered by the fact 
that HUD currently owns only 156 of the properties. Another 460 
are in default, but the sponsors remain the legal owners, even 
though they are now excluded from doing new business with HUD. 
The owners are not being very cooperative as we head into the 
fall and winter, so the Department has instructed the mortgage 
companies that currently service these loans to reestablish 
utilities if the utilities are cut off in these buildings, and 
HUD will reimburse the servicers for this expense, something we 
normally do.
    In addition, the Department is carefully analyzing the 
Section 203(k) program activity around the country. Our best 
evidence is that the fraud here is unique. In the period since 
this scam started, the cumulative claim rate on Section 203(k) 
claim loans to nonprofits is 14 percent in New York City 
compared to 5 percent for the rest of the country.
    The program has now been changed in several important ways 
to forestall this type of fraud elsewhere. In my statement, I 
have listed several actions that HUD took last year. This year, 
Secretary Martinez has instructed us to rigorously review 
program operations and the program control structure. One 
proposed regulation is currently finishing the 15-day 
Congressional review period. We are prepared to develop further 
regulations as necessary. We will also work with the city, with 
community groups, with non-profit and for-profit entities and 
the unfortunate residents of these properties. The Secretary's 
first concern is to see that the people living in the 
properties are decently housed and do not suffer from fraud 
that occurred around them.
    Finally, we will continue to hold lenders and other 
participants accountable for fraud and failure to comply with 
the requirements of the program. Thank you, Chairwoman Kelly. I 
will be glad to answer questions.
    [The prepared statement of Hon. John C. Weicher can be 
found on page 45 in the appendix.]
    Chairwoman Kelly. Thank you, Mr. Weicher.
    We now turn to Mr. Czerwinski.

    STATEMENT OF STANLEY J. CZERWINSKI, DIRECTOR, PHYSICAL 
        INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE

    Mr. Czerwinski. Madam Chairwoman, Congressmen, we're happy 
to testify today on the Section 203(k) program, but my 
objective today is to provide you with a road map of things we 
think the agency can do to help improve the program. Before I 
start I'd like to introduce the two people who did most of the 
work. Paul Schmidt, who is our Assistant Director for all 
single family housing, and next to him is Rick Smith, our lead 
investigator for the Section 203(k) review.
    Chairwoman Kelly. We welcome them.
    Mr. Czerwinski. I'd like to start by saying that Section 
203(k) is a worthwhile program. Used correctly--and that's the 
key word, correctly--Section 203(k) can rehabilitate 
properties, can revitalize neighborhoods and provide 
homeownership opportunities where you otherwise would not have 
them, but as Mr. Weicher noted, Section 203(k) is inherently 
complicated and risky. This is due to features both unique to 
Section 203(k), as well as all of FHA. With Section 203(k), the 
unique feature is, again, as Mr. Weicher noted, that you're 
combining the financing for the purchase and the rehabilitation 
into a single mortgage. However, Section 203(k) is built on 
also a structure that has basic risk and that is FHA insures 
100 percent of all the mortgages.
    Today, with that backdrop, what I'd like to do is briefly 
describe Section 203(k). Walk you through some things that we 
think are particular points within that area and give 
suggestions to how to fix it.
    Section 203(k) was established in 1978, but it really 
didn't become significant in size until 1994, and again, as Mr. 
Weicher noted, what we're talking about is a single mortgage 
that covers both the purchase and rehabilitation of properties 
with a 100 percent Federal guarantee. Because of the 100 
percent Federal guarantee, it's important to hold accountable 
all the players involved, and in the case of Section 203(k), 
because it is more complicated, you have more players to hold 
accountable. In the case of FHA, the two major players to hold 
accountable are the lenders who underwrite the loans and the 
appraisers who turn in the values.
    We've done reviews of FHA in general and lenders, 
appraisers and found significant problems; lenders making loans 
to unqualified borrowers, appraisers valuing properties far 
above their level. The fix to this is three-fold. You need to 
approve only lenders who will do a good job, even if you have a 
tight approval process. Constant monitoring has to take place, 
again, because the liability is on the Federal Government, not 
the lenders or the appraisers. Finally, when you do find 
inaccuracies, it's important to take action, enforcement action 
against them.
    As I mentioned, Section 203(k) becomes particularly 
troublesome, because the lender is financing not only the 
purchase, but the promise to rehab and the appraiser is not 
just appraising the value of the property as is, but some 
estimate of what it's going to be like when its fixed.
    So our recommendation to HUD is they need to pay close 
attention in approving, monitoring and enforcing the actions of 
lenders and appraisers and they need to pay special attention 
to this in the Section 203(k) program, and this is the litany 
you will hear from us; approving, monitoring, enforcing.
    In addition, there are two other pain points within Section 
203(k) and we found these to be very problematic in the past. 
The first is participation of consultants, the second is the 
participation of non-profits. Consultants are there because the 
program is complicated. They're there ostensibly to help the 
borrower, help the borrower plan, help the borrower oversee the 
property rehabilitation. They can also approve the drawdown of 
payments when work is complete. As the picture on your right 
shows, that's not always the case.
    This is a property that our team visited in Chicago. In 
this property, the borrower received $60,000 to fix up that 
property. That's a picture of a fixed up property. The 
consultant approved all drawdowns of the $60,000, and that 
borrower was left with things like exposed wiring, unframed 
doorways, unfinished plastering, gaping holes in walls and 
ceilings. She was faced with that as a single person to pay for 
on her own, because the consultant said that work was complete. 
That is the problem.
    Another area of problems, and we talked a little bit about 
this, is the participation of non-profits. Non-profits 
typically get involved in Section 203(k), fix up properties, 
revitalize the neighborhood, provide homeownership 
opportunities and affordable rental housing where there would 
be none. But the problem is non-profits typically nationwide 
have caused twice as many claims as the next nearest group of 
borrowers. This typically arises for a couple of reasons. One, 
the non-profit may lack experience, they get in over their 
heads or, two, and this is what you see in Harlem, they've been 
co-opted by lenders, contractors, consultants, speculators.
    To improve the performance of both consultants and non-
profits, we have recommended that HUD strengthen the criteria 
for admittance into the program be recertified periodically, 
periodically review the performance to make sure they're 
performing in a way that's acceptable. HUD has begun acting on 
the recommendations to be put in place. However, it's just 
beginning, and because of the inherent risk involved in Section 
203(k), no matter how much we put in place, it's going to 
require stringent oversight and vigilance if we're going to see 
this program work.
    That concludes my statement. I'll be happy to answer any 
questions you have.
    [The prepared statement of Stanley J. Czerwinski can be 
found on page 52 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Czerwinski.
    Now we turn to you, Mr. Groves.

STATEMENT OF ROBERT C. GROVES, ASSISTANT INSPECTOR GENERAL FOR 
         INVESTIGATION, HUD OFFICE OF INSPECTOR GENERAL

    Mr. Groves. Thank you, Chairwoman Kelly, other subcommittee 
Members. With me today I have Ruth Mitsma, she's the Special 
Agent in Charge of Auditing in the New York/New Jersey 
District, and Stan McCloud is the Audit Director of the Finance 
Committee.
    I appreciate the opportunity to appear today to discuss our 
investigation of the Section 203(k) frauds in Harlem. I have 
submitted my written testimony for the record and I'd like to 
focus on the few key points of that testimony. The Section 
203(k) program allows a borrower or a not-for-profit 
organization to get a mortgage to cover the current price of 
the property in need of repair, as well as the estimated cost 
to rehabilitate it. Investors are not permitted to participate 
in the program. HUD must assure that the total costs are 
reasonable for the market area.
    The program generally requires the rehabilitation portion 
of the loan to be escrowed by the lender and drawn down as the 
work is completed over a 6-month rehab period. HUD approved 
direct endorsement lenders generally to perform this task for 
FHA during the underwriting process. Obviously, such loans 
present a greater risk to HUD because of the inherent 
uncertainties of rehabilitation work.
    When the Section 203(k) frauds in Harlem occurred, HUD's 
oversight was extremely limited, and HUD employees were 
extremely and severely distracted. HUD was undergoing a major 
reorganization under former Secretary Cuomo's 20-20 reform 
plan, where the push quickly downsized HUD. About 1,000 mostly 
senior level staff took the buyout at the end of 1997. Those 
leaving with buyouts were primarily housing program employees. 
Additionally, many positions in the department were being 
abolished as employees were being forced to apply for new 
positions in the new HUD. The focus of many employees at this 
time was survival, finding a job outside of HUD or a position 
within the reorganized department.
    By early 1998, HUD's single family staff had been cut 
almost in half, and all of the remaining positions were moved 
to a consolidated homeownership center in Philadelphia.
    Against this backdrop, the Section 203(k) program was 
growing. Our investigations found numerous abuses of the 
Section 203(k) program. Hundreds of properties were affected by 
this scandal. Millions of dollars in FHA loans are virtually 
worthless and neighborhoods remain blighted. Among the abuses 
we found, ineligible investors used not-for-profit 
organizations as fronts to buy properties at inflated values. 
Appraisal companies used unrealistic properties as comparables 
in determining realistic property values and lender employees 
helped to falsify the credit worthiness of certain not-for-
profit buyers and then helped in altering the rehabilitation 
work sheets so that FHA loans could be insured.
    Please direct your attention to the chart that illustrates 
just one fraud enterprise involving 270 loans originated by 
officers and employees of Mortgage Lending of America. This 
involved collusion of lender employees, multiple investors, 
real estate attorneys, lenders and 13 separate not-for-profit 
organizations. Of the 270 originated loans, 267 are in default 
with a potential loss to HUD of $77.8 million.
    My written testimony, for the record, indicates the 
magnitude of the losses and the nature of the fraud 
conspiracies, but today I'd like to give an illustration of 
what happened in the cases of just two Harlem properties.
    The first property is 157 East 121st Street. This picture 
was taken in the fall of 1998. An investor purchased that 
abandoned building on December 18th for $60,000. Five days 
later, title to this property was transferred to a not-for-
profit for $225,000 on a HUD-secured FHA 203(k) mortgage of 
$355,700. At that time, the $225,000 in loan proceeds were 
divided among the conspirators. The remaining $130,700 was 
escrowed to pay rehabilitation costs. This property went into 
default in less than one year.
    The next picture was taken 2 weeks ago. Since it appears 
that no rehabilitation work was performed on this property, 
HUD's insurance loss will be substantial.
    The second property I'm going to talk about is 316 West 
113th Street. This picture was taken in the summer of 1998. An 
investor purchased this lot with foundation on July 1, 1998 for 
$35,000. Six days later, title to this property was transferred 
to a not-for-profit for $160,000 on a secured FHA 203(k) 
mortgage of $327,400. At that time, $160,000 in loan proceeds 
were divided among the conspirators. The remaining $167,400 was 
escrowed, to pay rehabilitation costs. This property quickly 
went into default.
    The next picture was taken 2 weeks ago. Since it appears 
that no rehabilitation work was performed at all on this 
property, HUD's insurance loss will be substantial, and, by the 
way, Mortgage Lending of America is out of business, and any 
hopes of recovering any of the escrowed funds either on these 
properties is doubtful.
    There seems to be a feeding frenzy of the various criminal 
groups that profit from the vulnerabilities of the Section 
203(k) program. Often members of the enterprise replicated the 
frauds with new conspirators. Often members of the enterprise, 
not only HUD, but poor neighborhoods targeted for improvement 
were victimized.
    There are hundreds of properties in the New York area like 
the two I've shown you. Our office is working very closely with 
the United States Attorney's Office, the Manhattan District 
Attorney's office and others to investigate, indict and convict 
those parties that were involved in these schemes to defraud 
HUD. In this investigation I have described to you there have 
been 33 arrests and 19 of those individuals have entered guilty 
pleas. Until everything is settled, taxpayers will lose tens of 
millions of dollars.
    In this instance, the American people were committed to 
investing hundreds of millions in poor neighborhoods to make 
them decent, good places to live. In Harlem, religious not-for-
profit and other not-for-profit organizations working in 
partnership with criminals aggressively pilfered nearly the 
entire investment that had been set aside to help vulnerable 
and disadvantaged elements of our society.
    HUD's poor management allowed this slow moving theft of 
huge proportions to be undetected until it was too late.
    That concludes my testimony and I'd be pleased to answer 
any questions.
    [The prepared statement of Robert C. Groves can be found on 
page 58 in the appendix.]
    Chairwoman Kelly. I thank you very much, Mr. Groves. I have 
a few questions for this panel and then I'll turn to the other 
Congressmen.
    Mr. Groves, is it your assessment that then Secretary 
Cuomo's rush to implement that 20-20 Management Plan you 
described, despite repeated warnings, apparently, to slow down, 
had an impact on the Section 203(k) fraud that was going on?
    Mr. Groves. Absolutely. All the monitoring of that program 
became negligible.
    Chairwoman Kelly. It now appears that during a time when 
additional resources were needed for HUD to oversee its 
programs, Secretary Cuomo shifted 10 percent of the staff 
resources to his community builders program. Was this drain on 
resources a contributing factor to the lack of oversight of HUD 
programs?
    Mr. Groves. Yes, ma'am, it was.
    Chairwoman Kelly. Do you want to elaborate on that a little 
bit?
    Mr. Groves. Basically we had almost a thousand people in 
the single family program whose jobs were eliminated. That 
1,000 people represented the oversight in most of the single 
family program including the Section 203(k) program. In New 
York, 21 people that were located right here in New York City, 
those positions were eliminated and they went to Philadelphia. 
It's very difficult to monitor a program from Philadelphia when 
you don't know what the properties are and what the addresses 
represent.
    Chairwoman Kelly. Mr. Czerwinski in a June, 1999 GAO 
report, the 1997 anticipated losses for the Section 203(k) 
program were projected to be about $11 million. As a result of 
hasty reforms and resources being diverted to public relations 
efforts in this figure, this figure ballooned to $130 million 
in 2001. If a HUD senior management had heeded the IG's 
recommendations with regard to problems with the Section 
203(k), couldn't the cost to taxpayers be significantly 
reduced?
    Mr. Czerwinski. Yes, Madam Chairwoman, the IG had definite 
recommendations and following them would have cut back on 
losses.
    Chairwoman Kelly. In listening to you I find it interesting 
that a Cuomo spokesman had stated that the GAO found HUD one of 
the best-run agencies of the Clinton Administration. Do you 
agree with that claim?
    Mr. Rangel. I don't think you really want to go there.
    Chairwoman Kelly. Answer the question, please, Mr. 
Czerwinski.
    Mr. Czerwinski. I think I have advice of counsel. But in 
all seriousness, I wish it were so that HUD were one of the 
best run agencies. HUD has made progress, primarily in the area 
of its reorganization and the area of accountability. However, 
they need the resources to proceed to the next step, they need 
the resources to have the right number of people with the right 
skills in the right places. Information, the information 
systems to help these people do their jobs, and of course with 
the cutback in staffing, HUD has relied more on contractors. 
They need to have greater oversight of contractors to reach 
that level that we'd like to see them at.
    Chairwoman Kelly. Mr. Czerwinski, you thought I would let 
you get by with that question. I'm going to ask you again. Do 
you think, do you agree with the claim that the GAO found HUD 
was one of the best run agencies in the Clinton Administration?
    Mr. Czerwinski. We have not issued a report that said HUD 
was one of the best run agencies in the Clinton Administration.
    Chairwoman Kelly. You have not issued that kind of report?
    Mr. Czerwinski. We did not issue that report.
    Chairwoman Kelly. That's all I wanted to find out, because 
I've heard that.
    Secretary Weicher, has HUD taken the necessary steps to 
diminish HUD's focus on media relations and insure that 
adequate certified oversight staff are in place to properly now 
review the Section 203(k) loans?
    Mr. Weicher. Well, Chairwoman Kelly, the Department is 
completing the process that we call the Resource Estimation and 
Allocation Process to determine where our staff should be 
employed physically and also programmatically, and this 
includes not only the Community Builders that you mentioned 
before, but every other part of the Department. I am myself a 
member of the task force that is working on this. Our effort is 
chaired by the Deputy Secretary of HUD. We expect to be making 
recommendations to the Secretary by the end of this month.
    This is a major effort by the Department to consider how 
our resources should be allocated so that we are able to do the 
job as well as we can with the resources we have.
    With respect to specific activities, we have increased the 
number of lender monitors that we have from 23 a couple of 
years ago, to 140 today. We have put contracts in place to 
analyze what kind of appraisals we are getting on the Section 
203(k) program to do desktop reviews of the loans as they are 
originated. In Mr. Czerwinski's testimony, he listed four 
recommendations that GAO had made and said that we implemented 
three of them and are in the process of implementing a fourth. 
On that fourth one, we have selected a contractor, and we 
expect to have that contract signed before the end of the 
fiscal year.
    Chairwoman Kelly. Could you just tell me a little bit more 
about what you're doing about the problems created by the 
community builders program and how you're going to improve the 
oversight of housing? These people need some assurance.
    Mr. Weicher. What we do with the Community Builders is part 
of this process that I mentioned. We are revisiting the entire 
management and staffing of the Department. I would like to be 
specific, Chairwoman Kelly, but I really cannot, because we are 
in the middle of making recommendations to the Secretary. The 
Department will speak with his voice on the subject when it 
speaks, and that will not be very far from now. But I cannot do 
it today.
    Chairwoman Kelly. I appreciate that. Thank you, Mr. 
Weicher. I have no more questions at this point.
    We'll turn now to Mr. Rangel.
    Mr. Rangel. Thank you so much, Madam Chairwoman. Let me 
thank this panel for the positive testimony that you've given, 
and I'm encouraged by the fact that it's our responsibility as 
public servants to find out what went wrong, what we've got to 
do to correct it and how we can move forward. I'm certain that 
we just don't have enough time to share with the General Office 
of Accounting all of the things that the Clinton Administration 
is proud of, but I think you would agree with me that that time 
has come and gone and now we have to move forward.
    I would want to make it clear that the not-for-profits and 
the church groups that were involved in this, do you know 
whether any of them were in the Harlem community, among those 
that were indicted, those that were investigated? If so, I 
would want them named, because the testimony was rather broad 
in terms of who was victimized, but a little less specific in 
terms of the conspirators.
    Mr. Groves. You'd like to know the names of the 13--I can 
talk about the case we have here.
    Mr. Rangel. I'm talking about the names of not-for-profit 
community-based organizations that were involved as 
conspirators. Do you have any from the Harlem community?
    Mr. Groves. No, sir, there were none from Harlem.
    Mr. Rangel. Well, I wish that had been stressed, because to 
us in Harlem, it's very, very important that no matter where 
wrongdoing is, that we identify it, and since we have been the 
victims, we want to join with you in seeking out how we can be 
more cooperative involving the conspirators.
    Mr. Weicher, you have a long reputation of doing good work 
for our Government. I want to thank you for the cooperation 
that your office has given not only to our community people, 
but more specifically, to those at HPD, and Fannie Mae and all 
of the agencies.
    Do you think, we should list the names of the criminal 
people who give Government a bad name, we don't see it listed 
in the newspapers. Could you provide the names of all of the 
people that were involved in this scam, and what percentage of 
them do you think, roughly, have been indicted? Do we still 
have a lot of people out there?
    Mr. Groves. In this particular scam, none have been 
indicted. There have been 33 arrests and are charged, not 
through indictment, through criminal complaint. 19 of those 
have pled guilty and are cooperating in an ongoing 
investigation. Because it is still ongoing, I'm not at liberty 
to name all of the individuals at this time.
    Mr. Rangel. But those who are arrested, that's hardly a 
private thing?
    Mr. Groves. I don't have those who were arrested, the list 
of that for you.
    Mr. Rangel. You can get that, can't you?
    Mr. Groves. We did have press releases in the New York area 
that had them.
    Mr. Rangel. But you could provide that to me of the names 
of the people that were involved that caused this damage to 
this good program.
    Mr. Groves. Yes.
    Mr. Rangel. Now, in your IG report, I assume that you had 
an opportunity before you reached your conclusion to talk with 
some of these senior HUD officials that the Chairlady refers to 
so often, have you not?
    Mr. Groves. We have ongoing discussions with the current 
Administration.
    Mr. Rangel. Not the current, we all have that, we're very 
pleased with it, but the Chairlady seems to be concerned with 
the past Cuomo senior HUD officials, the past Clinton-Gore 
officials. I want to know whether or not you, since you gave 
the report, had the chance to talk with any of these high-
ranking HUD officials?
    Mr. Groves. Personally, I have not. However, we have had a 
number of audits which cover these areas. We've had exit 
conferences with those individuals, so there have been 
discussions between the IG and HUD staff.
    Mr. Rangel. Guess what, I haven't had any discussions with 
them, either, but you and I would be better informed, I would 
think, if both you and I had had discussions with them or, in 
the alternative, wouldn't you agree, that had these high 
ranking HUD political officials been invited to attend the 
meeting, we might have a clearer view as to what occurred, so 
that we could avoid those pitfalls, wouldn't you agree, Mr. 
Groves?
    Mr. Groves. Communication is best.
    Mr. Rangel. That's a yes.
    Chairwoman Kelly. If the gentleman would yield?
    Mr. Rangel. Be glad to.
    Chairwoman Kelly. I think it's important that we hear from 
witnesses who can correct a problem, rather than just going 
through something that occurred in the past.
    Mr. Rangel. Well, I guess that ends the Cuomo inquiries. I 
want to thank the Chair and withdraw my question. Thank you all 
very much. I'm finished, thank you.
    Chairwoman Kelly. Thank you.
    We turn now to Congressman Grucci.
    Mr. Grucci. Thank you, Madam Chairwoman. Sitting here 
listening to what's been transpiring and seeing those pictures 
and seeing it firsthand in the community where I live, a range 
of emotions goes through you. I'm appalled that something like 
this could happen. I'm angry that this has happened, that we've 
wasted millions and millions of taxpayers' dollars on a program 
that was designed to give people a quality of life, to improve 
their quality of life and we've watched that money be 
squandered.
    My question really isn't in the past, it's more now toward 
the future. You know, I come from a small town, about 450,000 
people, small compared certainly to here in New York City. I 
was a supervisor of that town and I was responsible for 
spending and investing the taxpayers' money, and we did a lot 
of things where we used taxpayers' money to acquire real estate 
and to improve the quality of life for people, but before we 
did that, we got a number of appraisals and did background 
checks on them to see if they were truly legit. We didn't take 
a desk audit, we did field audits. We've looked at the past 
properties they appraised, we saw if their numbers were 
accurate. We looked at the lenders, we made sure the lenders 
have the capability, the background, the ability to do the job 
they were being asked to do on behalf of the taxpayers, to be a 
partner with the taxpayers.
    I'm gathering that there isn't any of that that takes place 
and once the barn door is open and the horse has left, it's 
very hard to bring it back in again. What I want to know is 
what are we doing to insure that these unscrupulous type of 
mortgage brokers and appraisers and lenders aren't out there 
going to continue to prey upon the innocent taxpayers, because 
we're back, we're fixing what was done in the past. I want to 
know what kind of policies we're going to be putting in place 
from this day forward so that this doesn't happen again. We 
can't fix the inequities of the past, we can't fix whether or 
not an Administration was right or wrong in their approach to 
it, but what we can fix is where we going.
    Let me start I guess with, I'm sorry, I'm terrible with the 
pronunciation of names.
    Mr. Czerwinski. Then it must be me.
    Mr. Grucci. Czerwinski, yes. Probably the most difficult 
names I have to pronounce are Italian names and you would think 
that an Italian should be able to pronounce Italian names.
    But that being said, what do you do before we give away the 
taxpayers' money like this?
    Mr. Czerwinski. First of all, the comment you made, I 
couldn't have written them better for you. The key is approving 
people who will do a good job. You look at the players involved 
where the risk is greatest; lenders, appraisers, consultants, 
non-profits. You try to only let the good ones in the door. 
Then once they're there, you have monitoring of them, because 
there are incentives, even good ones can go bad or make 
mistakes. When you do find a problem, you have to act on it, 
otherwise, you have no teeth.
    The key to Section 203(k) is you can't look at everybody 
indiscriminately, you have to target, and this is where HUD has 
a real challenge facing it. It needs to have the information 
that helps it target and that's really requiring the 
information systems to be upgraded so they can find out which 
lenders, which appraisers, what's the profile of the problems. 
Then, of course, you have to have the staff, the skill to deal 
with them and that's a real issue to be found.
    Mr. Grucci. Excuse me for interrupting you, but what 
policies were in place to try and prevent this, and what do you 
see needs to be fixed in order to fix the problem going 
forward?
    Mr. Czerwinski. HUD had policies to approve, monitor and to 
enforce. It was a matter of implementing the policies, the will 
to do it, the ability to do it, the resources to do it, and 
that's where we see it needs to be fixed. There has to be the 
commitment to spend the time and money there, and have the 
people who can do this work. Two or three key loans are hard to 
judge, so you want to have people with skills to go back and 
check the appraiser's work, who understand the lending 
underwriting capabilities, for example. You have to have 
information they can do that with.
    Of course with the downsizing of HUD, they rely more and 
more on contractors, you need an oversight infrastructure for 
your contractors to make sure they're doing it.
    Mr. Grucci. Let me ask you a question: I want to 
participate in the program and I bring you an appraisal. What 
do you do with that appraisal?
    Mr. Czerwinski. First of all, you don't go to HUD, you go 
to a lender that's approved to make Section 203(k) loans.
    Mr. Grucci. Approved by?
    Mr. Czerwinski. HUD.
    Mr. Grucci. How does HUD approve them?
    Mr. Czerwinski. Mr. Weicher can answer that question better 
than I could.
    Mr. Grucci. Let me stop you and ask Mr. Weicher.
    Mr. Weicher. We do several things, Mr. Grucci. We approve 
lenders based on their record in other programs. Section 203(k) 
is a very small program. It is 1 percent of our business 
annually. There are a fairly small number of lenders who 
actually do FHA Section 203(k) loans, because they are, as we 
have all been saying, complicated and risky.
    Mr. Grucci. How do you qualify to be a lender?
    Mr. Weicher. You qualify to be an FHA approved lender in 
general, based on your net worth, your having a business plan, 
and your understanding of FHA's requirements. We have 11,000 
mortgagees, 11,000 lenders approved to do business with us 
nationally. We monitor the lenders; we monitor the loans 
closely, by lender. If we have a fraud problem, we are going to 
see it within a year of the origination of loans.
    Mr. Grucci. Are your lenders recognized lending 
institutions?
    Mr. Weicher. Oh, yes, we have nearly every commercial bank, 
every community bank in the country, and mortgage bankers. They 
are recognized organizations.
    Mr. Grucci. Then not a consortium of wealthy individuals 
who come together and qualify to be a lender?
    Mr. Weicher. I think they would have to first qualify to be 
a bank before they qualify to be a lender or a mortgage banker. 
It would be possible for a wealthy individual to establish an 
entity which would qualify, but you would have to establish the 
entity. We do not have--we would not have--a millionaire who is 
an individual in our programs.
    Mr. Grucci. My time is expiring.
    Chairwoman Kelly. Your time is expired.
    Mr. Grucci. It has expired. It's never good to have your 
time expire. I'm going to follow up with written questions, 
because there's a lot more I need answers to.
    Madam Chairwoman.
    Chairwoman Kelly. Thank you very much. I will note that 
obviously, we three are very interested, and some of us may 
have additional questions for this panel and for other panels, 
and you may wish to submit them in writing. So without 
objection, the hearing record will remain open for 30 days for 
Members to submit written questions to these witnesses and to 
place their responses in the record.
    The first panel is excused with our great good thanks. We 
appreciate your testimony and thank you very much.
    Mr. Rangel. Let me join in thanking them and assure you 
that I look forward to working with you to get some positive 
solutions to this very serious problem. Thank you all very 
much.
    Chairwoman Kelly. Will people who are having conversations 
either please leave the room or stop the conversations.
    I want to thank the new people that are coming in front of 
me. The second panel, we're glad to have you here. You are 
interesting people we want to hear from. As I understand it, 
you've all been victims.
    Before us, we have Mr. Brett and Mrs. Marla Renwick. Miss 
Wilma Foncette. And Ms. Glorie Browne. All four of you, as I 
understand it, you're area residents or would like to be 
residents in this area, and you were affected by the fraud and 
mismanagement in the Section 203(k) program that has affected 
Harlem so badly. The Renwicks and Miss Foncette tried to 
purchase homes in Harlem, while Ms. Browne was a tenant in a 
Harlem brownstone that was victim to a phony transaction.
    You're all witnesses to this hearing, and when doing so, 
the Chairwoman may decide to take the testimony under oath. Do 
any of you have any objections to that?
    Panel. No.
    Chairwoman Kelly. All right, I now will advise you, the 
Chair advises you, that under the rules of the House and the 
rules of the Committee, you are entitled to be advised by 
counsel. Do any of you desire to be advised by counsel during 
your testimony today?
    Panel. No.
    Chairwoman Kelly. Thank you. In that case, will you all 
please rise and raise your right hand?
    [Witnesses sworn.]
    Chairwoman Kelly. Thank you very much. All of you are now 
under oath. Without objection, your written statements will be 
made part of the record. You each will now be recognized to 
give a 5-minute summary of your testimony. Prior to my saying 
that, my beginning the testimony, I want to simply say that 
this subcommittee will be following up and will talk to former 
Cuomo HUD staff and will ask them to explain Secretary Cuomo's 
decisionmaking process.
    We will also allow people if they have been victimized by 
the Section 203(k) program, we will accept written testimony 
from anyone who feels they would like to write to this 
Committee. So you have 30 days in which to get that done.
    We will begin with you, Mr. Renwick.
    Mr. Rangel. May I also welcome the witnesses? Since you're 
from my community, I think I have a unique responsibility to 
make certain that our job is not just to find out what went 
wrong, but to try to make you whole in what you've done, 
because you have decided to invest and to live in a community 
that's given a lot of hope. And if we can identify any 
wrongdoers that have shattered that hope, our job is to restore 
that hope and to make you whole and do all we can, not just to 
find out what went wrong, but what we can do to make things 
right.
    So while the Chairlady may be spending a lot of her time 
dealing with former HUD officials, I'll be spending most of my 
time dealing with current HUD officials to see how we can make 
you whole. It takes a lot of courage to come out publicly to 
state your personal setbacks, but I want you to know that 
whether Republican or Democrats, we have a responsibility to 
help you, and I thank you for taking this time out to help 
yourselves and other people by sharing your experiences with 
us. Thank you so much.
    Chairwoman Kelly. I thank you, Congressman Rangel, and I 
also want to point out we're having a hearing to try to correct 
this situation. We don't want people to be victims of this 
program.
    Let's begin with you, Mr. Renwick.

 STATEMENT OF MR. AND MRS. BRETT RENWICK, SECTION 203(K) LOAN 
                           APPLICANTS

    Mr. Renwick. Members of the subcommittee, good morning. 
This is my wife, Marla. Thank you for this opportunity to 
chronicle our experience with HUD's Section 203(k) of the 
National Housing Act, while attempting to purchase a brownstone 
in the Mount Morris section of Harlem.
    After looking for a brownstone for 13 months, our agent at 
the Charles Greenthal agency told us of a brownstone at 148 
West 121st Street that was available. We placed a bid and it 
was accepted. After signing a contract, our lawyer conducted a 
title serve via the Liberty Title Agency and once the title was 
proven clean, instructed us to have our architect begin work on 
the plans for our new home.
    Weeks later, our lawyer in the course of a routine 
conversation with the seller's attorney, was told that certain 
previous owners of this property were in the process of being 
indicted and that there was additional debt. My lawyer reviewed 
the title search she conducted and found no mention of this. 
She informed us that in the instance of an unrecorded event 
having taken place, it was referred to as a ``cloud on the 
title.'' Despite my urging, she told us to wait and did not 
arrange for closing in spite of the title insurance she had 
attained.
    Over ensuing months the fact came into view. On October 28, 
1999, Thomas Star sold this brownstone to Beulah Church of God 
in Christ Jesus Incorporated in Brooklyn and allegedly made 
some sort of financial arrangement with their title company 
representative to not register the sale of this property. This 
meant that although Beulah, who used Section 203(k) to purchase 
this and 25 other brownstones, had paid for this property, it 
would not appear on the City Register as it was supposed to 5 
days later. Soon after this, Mr. Star sold the same property to 
a not-for-profit for $10,000. Mr. Johnson, as the head of this 
not-for-profit called Shelter House Corporation agreed to sell 
the property to my wife and I.
    The current name of the title company in question is 
Stewart Title. My lawyer obtained a letter from Stewart Title 
to the seller's attorney dated September 14 stating that, and I 
quote: ``Our agent neglected to record the deed,'' and that 
they would rectify this problem.
    They did, and provided the title, thereby making Beulah 
owner of record. My wife and I had the down payment returned to 
us, but already spent $15,000 in architectural, legal and other 
fees and still owe our architect $3,500 for services rendered. 
Nearly 7 months later, my wife and I were tired of trying to 
deal with Stewart Title, the seller's attorney--the seller had 
disappeared--and HUD. HUD took no responsibility for the 
program which bears its name and told us they would do nothing.
    Soon after this we met with Darren Walker, the COO of the 
Abyssinian Development Corporation, who had been asked by the 
departing head of HUD, Andrew Cuomo, to help clean up the mess 
in Harlem. Darren assured us that HUD, who now referred to my 
wife and I as ``the New York Times people,'' because we had 
been featured in an article, wanted to make good and get us the 
property. After spending hours upon hours with HUD 
representatives in both New York and DC offices repeating the 
same information over and over again, nothing happened. HUD 
dismissed Abyssinian and I was instructed to keep in touch with 
Peter Spina of HUD in the New York City office.
    Months passed and my bimonthly calls ended the same each 
time. HUD was aware of our predicament, and wanted to help, but 
could do nothing although they promised us the house. Finally, 
after hearing this too many times, I wrote the secretary of 
HUD, Mel Martinez, a detailed letter asking for a date for 
HUD's intervention and a date when my wife and I could purchase 
this property.
    His response came in the form of a generic letter from 
Ingram Lloyd, Director of HUD Homeownership Center in 
Philadelphia, who had no knowledge of our case. In addition, I 
received a phone call from Ms. Ford who insisted that HUD was a 
third party with absolutely no ability to influence the outcome 
of any property deemed contested. She also stated that HUD 
would make no promises to us and that she would respond to my 
letter in kind, which never happened.
    It is our contention that had HUD held tighter reigns over 
this program there would be some sort of apparatus in place to 
identify, label and administrate Section 203(k) properties once 
they had been sold. Our experience in dealing with HUD is that 
of a disinterested bureaucratic organization that refuses to 
take responsibility for a program it has written the rules for. 
Had HUD done its job, someone from the agency would have seen 
that Beulah had not renovated the property. That never 
happened. Approved HUD lenders like Brucha Mortgage Bankers 
Corporation, the mortgage lender Beulah secured the funding 
from, and M&T Mortgage Company, who facilitated the transaction 
under HUD's own rules should never have released the $401,375 
to Beulah prior to work on the property commencing. Beulah is 
in default of its obligation, among other defaults, and failure 
to make monthly payments on or after December 1, 1999.
    Our proposed remedies are as follows: A HUD representative 
should be compelled to attend every property closing where the 
seller is securing a HUD-backed loan of any type. This 
representative should also be required to do followup, which 
involves making sure the sale is recorded correctly and a sales 
freeze is imposed on the property, avoiding any flipping by the 
owner for a period of at least one year.
    Since HUD refuses to sell properties directly to well-
meaning individuals like my wife and myself, choosing to sell 
properties to anyone off the street willing to purchase several 
buildings and calling themselves either a developer or not-for-
profit, the onus should be on the agency to check the 
credibility of each potential buyer thoroughly and document the 
construction process.
    At this point in time, every city agency works against, not 
for, prospective home buyers like my wife and myself. The 
building department holds up purchases with ridiculous 
paperwork like changing the certificate of occupancy from a SRO 
to a four-family, having to obtain a certificate of 
nonharassment, and ADA compliance in regard to owners building 
disabled access and bathrooms for able-bodied owner's units. In 
spite of everything, my wife and I still want to purchase, 
renovate and live in that brownstone on 121st Street.
    In closing, I'd like to thank the subcommittee for the 
opportunity to tell the story that has caused my wife and I an 
enormous amount of emotion grief and financial expense, but 
wonder what any of you will do in our behalf.
    Thank you.
    [The prepared statement of Brett Renwick can be found on 
page 69 in the appendix.]
    Chairwoman Kelly. Thank you, very much. Mr. Renwick.
    Now we go to Miss Wilma Foncette. Will you please pull the 
microphone before you and tell us your story.

 STATEMENT OF MS. WILMA FONCETTE, SECTION 203(K) LOAN APPLICANT

    Ms. Foncette. Well, I bid on this house on 118th Street, I 
don't remember what date. And it was, the agency came and took 
us around the real estate, we had a lawyer. Everything went 
smooth, until the day that we were closing. We went to the 
table, everything was transferred, everything, just waiting for 
the OK, when all of a sudden, we were told to get out of the 
building and the two men were arrested. They gave us the money 
back, but it was months afterwards we got the money back. But 
we would still like to live in the building, if it is 
available, we would like to have it.
    [The prepared statement of Ms. Wilma Foncette can be found 
on page 73 in the appendix.]
    Chairwoman Kelly. Is that the end of your statement?
    Ms. Foncette. Short and sweet.
    Mr. Grucci. That's a rarity.
    Chairwoman Kelly. That's great. I thank you very much. If I 
understood you correctly, that the men came and arrested the 
sellers' lawyer and----
    Ms. Foncette. Himself.
    Chairwoman Kelly. The both of them, while you were in the 
process of closing.
    Ms. Foncette. Yes, while we were in the process.
    Chairwoman Kelly. Thank you. Thank you very much.
    Next we go to Ms. Glorie Browne.

 STATEMENT OF MS. GLORIE BROWNE, SECTION 203(K) BUILDING TENANT

    Ms. Browne. Good morning, Members of the subcommittee, 
invited guests, tenants of the Section 203(k) buildings and 
others. Thank you for providing me with the opportunity to 
address you this morning. My name is Glorie Browne, I live at 
74 West 131st Street here in Harlem. My building is a 
brownstone rooming house with 13 single room occupancy units, 
very typical of the vast majority of the Harlem buildings in 
the Section 203(k) program. I have lived there for about 10 
years.
    I am here in solidarity with all of my fellow Section 
203(k) neighbors. I am also a tenant in a Section 203(k) 
building who has suffered through the injustice of a housing 
scandal that had nothing to do with housing. It had to do with 
unscrupulous landlords and money hungry non-profits that saw 
opportunities for quick money in buying our buildings, then 
abandoning them and allowing them to rot.
    They defrauded a Federal loan program and they also 
committed fraud against unsuspecting tenants like me. Not only 
did their crimes leave us without responsible landlords, it 
also left us with no heat and hot water last winter, leaky 
ceilings, damaged walls, broken boilers, shaky building 
infrastructures and no hope. Up to 2 years after the news of 
this scandal broke, some tenants are still without basic 
services.
    About 200 brownstones in Harlem are caught up in this mess. 
About 160 of those buildings, about 85 percent, are SRO rooming 
houses that should never have been in the program to begin 
with. Around 65 of those buildings are currently occupied by as 
many as 600 tenants. My story is similar to many Section 203(k) 
tenants stories. My building has never been a palace, but my 
neighbors and I call it home.
    After the so-called non-profit Beulah Church of God bought 
the building in 1999, my neighbors and I found ourselves 
without heat and other basic services. In fact, the first act 
of the new owners was to shut down the boiler in the middle of 
winter. When we finally went to court to force Beulah to 
maintain the building, no one from the landlord showed up and 
the court order we got ordering the landlord to make repairs 
was never complied with. For over a year there was no garbage 
pickup, no repairs made to the very leaky skylight or the 
broken pipes or the uneven front steps. The gas and electricity 
were shut off at least once and the water was shut off a few 
times, forcing my neighbors and me to wash with bottled water.
    An inspection last year found 94 violations of the city's 
housing maintenance code in the public areas alone.
    The landlords that committed these crimes are using HUD 
loan monies, money that was supposed to go into rehabilitating 
buildings. Instead, the money disappeared along with the 
landlords. Now, as the scandal continues to unravel, we tenants 
are bearing this huge burden. HUD has finally agreed to take 
responsibility for maintaining many of the occupied buildings 
in the program, while others, like mine, have gone to court to 
get an administrator appointed by the city to run the 
buildings.
    What we are most worried about now is the threat that the 
new owners, whether they are private owner-occupiers, not-for-
profit groups or entrepreneurs looking for properties to flip, 
may try to displace the existing tenants from our buildings or 
to raise rents beyond what we can afford.
    But my intention today is not to tell the story of 
hopelessness, no. I'm here as a representative of Section 
203(k) tenants with a strong message of hope and self 
determination. We are survivors. We're long-standing Harlem 
tenants ready to reclaim our homes and our community. We're 
speaking out for the preservation of affordable housing in 
Harlem. We're standing up for preservation of our homes and we 
demand to be included in any discussions about their future. We 
demand full repairs and services in our buildings now. We want 
legally-enforced assurances from HUD, the city's Department of 
Housing Preservation and Development and other appropriate 
parties that no tenant will be displaced when the buildings are 
finally disposed of. We want guarantees of affordable rents and 
we want substantial opportunities to explore the possibility of 
bringing some of our buildings under tenant ownership and/or 
control through mutual housing associations, limited equity co-
ops or other mechanisms for tenant involvement.
    Our demands are not unique. They are demands of many low-
income tenants in the city. I am here as a spokesperson for the 
Section 203(k) tenants and we say we'll do everything we must 
in order to save our homes. We are here to stay.
    Thank you, and God bless you all.
    [The prepared statement of Ms. Glorie Browne can be found 
on page 79 in the appendix.]
    Chairwoman Kelly. That was eloquent testimony, and Miss 
Browne, you brought something out that I think is very 
important, that you're here representing a group of people. 
Just for the record, I would like to know how many people in 
this room, if you would be good enough, the witnesses can stay 
seated, how many people in this room have been victimized by 
the Section 203(k) program. Would you stand for me, please?
    All right, thank you very much. I appreciate that. There 
were several people in the back that I saw that I know were 
also victimized. We want you to stay in Harlem, it's a 
beautiful place to live, we'll do what we can to help you.
    In some of the reports the committee examined, we read of 
all these faulty repairs that were made to the Section 203(k) 
properties that were dangerous to the tenants. Are you 
familiar, Miss Browne, with any instances of repairs leaving 
exposed wires or faulty plumbing?
    Ms. Browne. Not in the building that I live in.
    Chairwoman Kelly. Are you aware of others?
    Ms. Browne. Yes.
    Chairwoman Kelly. Are you aware of anyone who has ever been 
physically injured living in one of these Section 203(k) 
buildings?
    Ms. Browne. Not to my knowledge, but I would say there 
could have been injuries to someone, because the building 
didn't have lighting in the hallway. When they had their lights 
cut off for 8 days, any could have been injured. We didn't have 
water, running water.
    Chairwoman Kelly. You didn't have water in your building 
either?
    Ms. Browne. A couple of times they had to cut it off.
    Chairwoman Kelly. How long did you have to go without heat?
    Ms. Browne. In 1999, that winter, starting from the like 
November until the winter ended, we didn't have heat and hot 
water.
    Chairwoman Kelly. You mentioned you're aware of tenants who 
didn't have heat and hot water in your building?
    Ms. Browne. Not my building, other buildings.
    Chairwoman Kelly. That you're aware of, there are still 
people without heat or hot water living in these Section 203(k) 
buildings?
    Ms. Browne. Yes.
    Chairwoman Kelly. If the landlord didn't show up, how do 
they pay the rent?
    Ms. Browne. They do what we did, put it into an SRO 
account, that's what we did. But HUD came in.
    Chairwoman Kelly. So HUD came in recently and have been 
working with you to correct the problem?
    Ms. Browne. What we did, meeting with SRO Law Association 
in Harlem, having tenant meetings, being aware of these other 
buildings and conditions they live in. We also visited a few 
buildings to see the conditions.
    Chairwoman Kelly. Have you ever seen a representative of 
your current landlord or have you ever seen your current 
landlord?
    Ms. Browne. Right now, the one that I have? We have a 78 
administrator, I've seen him.
    Chairwoman Kelly. You have what?
    Ms. Browne. A 78 administrator. I've seen him.
    Chairwoman Kelly. But that's not the person who let it go 
back. You have a 78 administrator, did you ever see your 
landlord?
    Ms. Browne. The person who represented the Beulah Church of 
God and Christ came once. But then we didn't see him.
    Chairwoman Kelly. He came once and you then didn't see him 
again.
    Ms. Browne. When you call his office you get a machine and 
he never returns the calls.
    Chairwoman Kelly. I thank you very much. I have no more 
questions of this panel.
    Mr. Rangel. I can't thank you enough, because you have, you 
didn't have to come to Harlem, you didn't have to stay in 
Harlem, and if we can't protect those that anchor their hopes 
and dreams in our community, then it makes it even more 
difficult for those that come to communities that are less 
fortunate than we are. As a result of this fraud that has 
happened, we will be working closely with the Abyssinian 
Development Corporation and the West Side Employees to put 
together a legislative team of our City Council officials, but 
also the District Attorney's office, the Attorney General, this 
won't be of much help to you, but your testimony means that we 
have to make certain this doesn't happen again.
    What we're doing that relates directly to what you want is 
joining with HPD to make certain that we get the money that's 
necessary to avoid these properties just going off to 
speculators and having the Federal Government just put them in 
default. And so I hope that you work very closely with my 
office to see that in some way, through you, we'll be able to 
say that we put this program on the right tracks and I'm 
certain in working with Congresswoman Sue Kelly that if we can 
make certain that in New York State we got it back on track, we 
can avoid this same type of thing happening in other states and 
other communities, so I can't thank you enough.
    I regret what has happened, but I thank you for having the 
courage to come forward and testify with such eloquent 
testimony. Thank you.
    Chairwoman Kelly. Thank you.
    Mr. Grucci.
    Mr. Grucci. I don't have any questions of this panel. I 
think they've been victimized and certainly it's a 
demonstration of a failed program, a failed policy and a lack 
of oversight and it goes back to my questions earlier of the 
first panel. We want to make sure that this doesn't happen 
again.
    I thank you, too, for making a commitment to your 
community. The Congressman said it very eloquently, that it is 
important that people want to make a commitment to a community, 
because that's what a community is really about, it's about 
people coming together and improving the quality of life. And 
Government ought to help that to happen, not hurt it, or be an 
obstacle in its way. I feel compelled to apologize for a system 
that has failed you, and to that extent we recognize that it 
needs to be fixed. It is indeed, broken. Thank you for being 
here this morning.
    Chairwoman Kelly. I want to add my thanks. Mr. Grucci is a 
Member of my subcommittee. You can be assured that the two of 
us will work with Charlie, since he represents this area, to 
make sure that we get this system fixed, and I really 
appreciate your coming forward.
    We hope, too, that you will be able soon to be able to get 
through this system what you needed and be able to live here 
comfortably in Harlem. So thank you very much. I want to remind 
you that some Members will perhaps have written questions. I 
will hold the hearing record open for 30 days, so there may be 
written questions. That being said, we thank you very much, and 
we will excuse you.
    Thank you.
    I'd like to have the third panel take their places.
    Chairwoman Kelly. Will people take their conversations 
outside, please, so we can convene this panel.
    I'd like to begin the introductions by welcoming some 
community leaders who have witnessed problems with the Section 
203(k) program in their neighborhoods and they're promoting 
proposals to redirect and reorganize the program. So we welcome 
today, Mr. Ruben Medina, a former Vice President of PaineWebber 
who has had great success as a hospital and health facility 
consultant and executive. He now leads Promesa's efforts to 
assist the minority and poor in the Bronx in a variety of ways, 
such as owning, rehabilitating and managing housing.
    Next we will hear from Ms. Karen Phillips, Cofounding 
President and Chief Executive Officer of Abyssinian Development 
Corporation, one of the not-for-profit corporations that's most 
active in the Harlem Renaissance and in an effort to change the 
direction of the FHA Section 203(k) program here in Harlem. Ms. 
Phillips has guided the agency in developing hundreds of units 
of housing and fostering business development here in Harlem.
    Third we'll hear from Ms. Lydia Tom, Senior Program 
Director of New York City for Housing and Finance for the 
Enterprise Foundation, which works nationwide to build 
affordable housing, and became the first non-profit 
organization to build 100,000 homes for low-income families. 
For the last 7 years she has been providing assistance to 
community non-profits and entrepreneurs by guiding them through 
the specifics of financing, city regulations and Federal 
funding.
    We'll then hear from Jerilyn Perine, Commissioner for New 
York City Housing Preservation and Development. It's the 
largest municipal housing agency in the United States. Ms. 
Perine has been involved in urban planning and housing issues 
during her entire career. She is a long-time senior official at 
NYHPD and also has been also very active in seeking a consensus 
solution to the riptide caused by the Section 203(k) scandal.
    You are all aware that the subcommittee is holding an 
investigative hearing and when doing so, the Chair may decide 
to take testimony under oath. Do any of you have any objection 
to testifying under oath?
    Panel. No.
    Chairwoman Kelly. I then will advise you that each of you 
under the rules of the House and the rules of the Committee, 
you are entitled to be advised by counsel. Do any of you desire 
to be advised by counsel during your testimony today?
    Panel. No.
    Chairwoman Kelly. In that case, if you all please rise and 
raise your right hands, I'll swear you all in.
    [Witness sworn.]
    Chairwoman Kelly. Thank you very much, you are now under 
oath. Without objection, your written statements will be made 
part of the record. You will each now be recognized to give a 
5-minute summary of your testimony and we'll begin with you, 
Mr. Medina.
    Mr. Rangel. Madam Chairwoman, might I greet the people? 
Because this panel really is a part of the solution and we'll 
find out what went wrong and we'll have to get it on track.
    I want to thank you for what you have done, but also to 
tell you you have partners with us and the City Council and the 
State Legislature and certainly with myself and Mrs. Kelly in 
the Congress. It seems to me what we have to do is not only to 
avoid this happening, but to make the victims whole. We need 
about $160 million. I understand that HPD is negotiating, I 
hope in a positive way, with HUD. What is just as important, is 
that HPD not be a substitute for the community, but be partners 
with the community and collectively we work together, the same 
thing would apply to Mr. Medina. So our Councilman Bill 
Perkins, local officials are partners with you, so you don't 
have the whole burden of removing this terrible tragedy from 
our community, but we'll be doing it together and we'll be 
partners with you.
    Thank you so much for the opportunity.
    Chairwoman Kelly. Thank you very much.
    Mr. Grucci, would you like to say anything at this time?
    Mr. Grucci. No, I'll reserve my comments for later.
    Chairwoman Kelly. Thank you, then let's begin with you, Mr. 
Medina.

  STATEMENT OF RUBEN MEDINA, CHIEF EXECUTIVE OFFICER, PROMESA 
                         SYSTEMS, INC.

    Mr. Medina. Thank you very much, Madam Chairwoman, and 
Congressman Rangel and Congressman Grucci.
    Promesa Systems is a Community Development Corporation 
serving clients in the areas of health, housing, education and 
economic development, and in that regard, through concessions 
with HUD, it came to Promesa's attention that a significant 
number of buildings, primarily located in Harlem and Brooklyn 
under the Section 203(k) program were actually SROs--single 
resident occupancy buildings. Promesa was also told that under 
the guidelines established by the Section 203(k) program, these 
buildings never should have qualified and could never actually 
be operated under the Section 203(k) program.
    Finally, Promesa was informed that the SROs had residents 
that could never qualify, really, as homeowners, and added a 
significant number of social health issues that needed to be 
addressed; potential substance abuse, mental health conditions 
and conditions of substantial concern to its population.
    Promesa would like to explore the use of HUD's existing SRO 
stock in the Section 203(k) program to address the needs of the 
existing population and perhaps better utilize potential 
capacity for additional population. Specifically, Promesa 
proposes to take the housing stock that fits in the SRO 
category of and geographically convoluted villages of these 
types of units. These villages would then have a number of 
community-based organizations and development corporations 
organized into a form of joint venture which would promote 
renovation, property management, mental health, physical health 
along with any other social services and issues necessary to 
support residents. The form of joint venture could provide the 
basis for stabilization and protection of the resident 
population of the SROs.
    In order to guarantee logistical flexibility reflection and 
diversification of risk, Promesa proposes conversion converting 
these villages into formal corporations consisting of 15 to 20 
buildings, such that the joint venture can use the inherent 
value of the properties to provide the basis for 
recapitalization and renovation. Recognizing that on average 
the structures are half occupied, critical mass is needed if 
repairs and renovations are to be made to the units in a timely 
manner. Although it is our understanding that very few tenants 
have accepted the offer to relocate permanently, chances are 
good they would relocate temporarily if they knew they could 
come back to their place of living after the renovation.
    Also Promesa has not had the opportunity to evaluate the 
buildings, it is its expectation that some percentage of the 
individual units can be renovated and marketed at or close to 
market rates. Use of the combination of grants, tax exempt 
financing, investment tax credits can offset the cost of 
renovating the building and units. The combination of the above 
subsidization, along with mentioned rental income, can create a 
viable approach for the villages. Clearly the current value of 
many of these properties will not be close to the actual 
investment made under the Section 203(k) program. Further 
future cash flow is based upon existing population, it most 
likely cannot support the initial value plus the probable cost 
of renovations. Further, to place constraints on investors 
regarding the need to protect existing residents would lower 
the prospective value even more so.
    Chances are good then that vending out the properties will 
not result in the recoupment of much if any at all of the 
initial investment made by the initial investors and guaranteed 
by HUD.
    While the financial investment made by banks and guaranteed 
by HUD may never be recouped, perhaps some minor partial 
compensation can be accomplished over time through future cash 
flow as a result of the combination of future rental income and 
service. Another approach might be to charge a flexible 
transaction fee as parts of the right to manage these buildings 
after transfer. These approaches could be acceptable to both 
organizations involved in the community development and 
delivery of services to the population as well as to the 
residents and the investors. In this manner, the residents of 
SROs are not packed off into the night because of 
gentrification of all of a sudden accessible real estate, nor 
are they victims of benign neglect or are called and obstacle 
to the stabilization and strengthening of the community.
    Further, HUD has comfort in that the joint venture is not 
made up of a single organization that may have good intentions 
and resources but can veer off the path, but rather a formal 
conglomeration of organizations that participate in the 
decision of the operations. By giving the residents 
representation themselves on the governance body, one is 
assured of the buy-in by the residents. HUD has had some 
positive experiences with this at Diego Beekman Houses in the 
Bronx.
    Based on earlier testimony, it appears that HPD has, in 
fact, certain working relationships with HUD in terms of 
Section 203(k) programming. We are very much in support of that 
considering they do have specifically for SROs a supportive 
housing unit structure. So with that, I'd like to conclude my 
testimony and thank you very much for the opportunity.
    [The prepared statement of Ruben Medina can be found on 
page 81 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Medina.
    Next we turn to Ms. Philips.

 STATEMENT OF KAREN A. PHILLIPS, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, ABYSSINIAN DEVELOPMENT CORPORATION

    Ms. Phillips. Thank you very much, Chairwoman Kelly, for 
bringing this subcommittee hearing to the Village of Harlem. It 
underscores this condition. We thank Congressman Rangel for 
being here today and Mr. Grucci for joining us.
    I would like to summarize some of the comments in my 
written testimony, basically outlining the history of the 
program and its impact on our community, but as president and 
CEO of Abyssinian Development Corporation, I do want to let you 
know that the potential for this program and the way that we 
distribute or deal with the problems has a direct impact on the 
investment that has been made in this community by Abyssinian 
Development Corporation and a number of community based-
organizations that have been working for the past 15 years with 
a lot of Federal support and thank you all for the low-income 
tax credit that has been used extensively in this neighborhood 
to help stabilize the neighborhood so these homeownership 
opportunities could occur.
    However, the success of the non-profit organizations in 
this neighborhood, and particularly those that are faith based, 
are part of what was the attraction to this neighborhood to 
bring in the unscrupulous real estate professionals to prey on 
this neighborhood and the important part of this is, as I heard 
the HUD officials' testimony, they all talked about the non-
profits who perpetuated this, or who were unknowing suspects to 
this fraud. The kind of scar that it leaves on the name and the 
character of the non-profits in this community is still very 
much present, because when you say faith-based non-profits, we 
have the Harlem Congregation for Community Improvement working 
with us, several other churches and institutions, but we are 
now blamed for something that was really brought to this 
neighborhood because of our success.
    The other particularly troubling part of this is the effect 
that the Section 203(k) capital had on the real estate market 
in this community. We and other non-profit organizations as 
well as private developers have done other homeownership 
projects and we have just a history of some that we've been 
involved in in marketing the City Homes Program, which was a 
City of New York program working with the Enterprise Program 
and CPC. In 1994, we sold four-story brownstones very similar 
to the ones that have been talked about here today, for an 
average price for a three-family home of $115,000. Two years 
later, we did a second phase of that program where the average 
home price was $230,000, on some of the same blocks where these 
houses are located.
    Then working with HPDs' Home Works Program, ADC as 
developer, participated in a program with 33 brownstones, half 
of whom had been sold already, all of whom had been sold and 
half had been completed, but those average prices are around 
$375,000. Those prices were set at 1998 at the same time the 
fraud was being perpetuated where people were coming in and 
driving up the prices of a vacant building so that the 
effective costs, as I heard one of the HUD representatives say, 
so when the non-profit paid, the building was flipped, so the 
non-profit paid $220,000, and then the resulting loan, which 
also would be guaranteed through the Section 203(k) program, 
was another $300,000, so immediately, the value of that house 
was considerably higher than what we knew the market to be.
    This not only put the price of those homes outside of the 
people in the community, but the real plan for these non-
profits were to have these as rental units. So what they were 
doing was replacing the whole absentee landlord structure that 
we came in to kind of heal in our work over the last 15 years. 
We had downtown real estate interests who saw this activity 
which was fraudulent in the real estate recordings, and then 
immediately started coming up to address and try to get other 
private brownstones and I think there was an article in 
November of 1999 when they realized that the products that they 
were looking at were not here for them to sell to their 
downtown clients who had said look, if I can get a home in 
Harlem for what I pay for rental, I'll come up and do it, but, 
because of the Section 203(k) program and these number of 
buildings, that was a false signal to the real estate market, 
and those prices now can never really be fixed.
    It has also contributed to a considerable panic about 
gentrification in this neighborhood.
    Moving on, I'd like to say that after finding out about the 
problems that had occurred with the Section 203(k) program, 
Abyssinian Development Corporation was approached in, I 
believe, late November-December of 2000 to see if we would 
assist in trying to remedy the situation that had been caused. 
Joining with the Community Preservation Corporation, the 
Enterprise Foundation and the East Brooklyn Congregations, we 
formed what was called the New York Group and did a memorandum 
of understanding with the U.S. Department of Housing and Urban 
Development, to try to formulate a plan which would emphasize 
the tenants were to initially have affordable homeownership as 
one and particularly to insure that the people who were living 
in these buildings would not be dislocated from the community. 
That plan subsequently, the new Administration did not 
continue, but we still stand ready in trying to negotiate and 
help HUD to figure out a way to remedy this situation.
    Abyssinian Development Corporation and the New York Group 
really served to coordinate other non-profits and some of those 
that we had been meeting with regularly in formulating this 
plan and to working on some of the problems that we knew were 
inherent in the occupied buildings were the Harlem Congregation 
for Community Improvement, Hope Community, Manhattan Valley 
Management and Development Corporation, West Side Group 
Assistance, Harlem Community Center, West Side Center for 
Senior and Progressive Housing, Progressive Maintenance and 
other groups we knew could be added to provide the kind of 
input on a local level.
    Chairwoman Kelly. Ms. Phillips, I'm sorry to interrupt you, 
but you're well over the time slot and if you could summarize, 
I'd greatly appreciate it.
    Ms. Phillips. Basically, what we're here to say is we 
support the involvement of New York City HPD in this process 
and we through our work in the neighborhood know that funds 
would have to be made available for them to be affordable 
housing and we think the majority of the housing should be 
given to the people in the community as a priority and strong 
efforts to have these existing not-for-profits to participate 
in the process of redeveloping them. And not to have them bid 
out to the highest bidder.
    Thank you very much.
    [The prepared statement of Karen A. Philips can be found on 
page 86 in the appendix.]
    Chairwoman Kelly. We thank you.
    Next we have you, Ms. Tom.

STATEMENT OF LYDIA TOM, SENIOR PROGRAM DIRECTOR, THE ENTERPRISE 
                           FOUNDATION

    Ms. Tom. Thank you, Chairwoman Kelly, Congressman Rangel, 
Mr. Israel and Mr. Grucci. Thank you for inviting me to 
testify.
    The Enterprise Foundation is a national intermediary, which 
has been working to improve living conditions in low-income 
communities from the time it was founded by visionary real 
estate developer Jim Rouse in 1982. The Enterprise Foundation 
operates from the conviction that developing quality affordable 
housing is an essential first step in a holistic approach to 
fighting poverty.
    Since opening a New York office in 1986, Enterprise 
Foundation has developed over 11,000 affordable apartments in 
more than 850 formerly abandoned buildings throughout the 
Greater metropolitan area. This has resulted in improved living 
conditions for more than 33,000 people including 13,000 
children.
    The Enterprise Foundation's work in New York City is done 
in collaboration with over 80 legitimate non-profits, 
community-based organizations whose leaders have identified 
their own neighborhoods' most pressing needs and develop 
workable strategies for solving their own problems. In addition 
to our work developing affordable rental housing with our 
community partners, we also have created opportunities for 
homeownership for low- and moderate-income families with our 
visionary CityHome program. Working in collaboration with the 
New York City Department of Housing Preservation and 
Development, the Community Preservation Corporation, and a 
number of community-based non-profits, we've recovered nearly 
500 dilapidated properties to the housing market and low-income 
communities in Harlem, Brooklyn and the Bronx. Our current 
involvement in low-income homeownership opportunities includes 
a significant commitment of over $2.2 million in short-term 
low-interest loans to community-based organizations in 
collaboration with HPD's Neighborhood Homes Program.
    Because the Enterprise Foundation only became involved with 
the New York City Section 203(k) program after the fraudulent 
activity had been detected, we cannot comment on that part of 
the program.
    The Enterprise Foundation was approached by HUD in December 
of last year to help develop a workable solution to the 
emerging Section 203(k) Program. From our first discussions 
with HUD, Enterprise raised the importance of working with 
members of affected communities in moving forward. We also 
strongly recommended that HUD develop a programmatic approach 
to rehabilitating the properties in question and returning them 
to the housing market.
    A significant number of affected properties are occupied by 
existing tenants. Some are single room occupancies, legal and 
illegal. Efforts to properly manage these homes and ensure 
affordability and non-displacement without appropriate 
relocation need to be made for these residents who are victims 
of the Section 203(k) problem.
    Because of our experience with CityHomes and other 
renovation programs, including occupied rehabilitation, we 
clearly stated to HUD there exists a number of viable models 
for working with legitimate non-profits to renovate these 
properties and market them as homeownership and/or rental 
opportunities for low- and moderate-income people. From the 
beginning of our involvement, we urged HUD to see the damage 
left by Section 203(k) problem as an opportunity to invest in 
the communities where the properties are located by creating 
homeownership opportunities. Such opportunities could only 
reinforce the investment that HUD has already made in these 
same communities.
    Regardless of how HUD wants to proceed, two points remain 
irrefutable: That further investment would be needed to bring 
the homes in question up to habitability, that the longer the 
damaged portfolio remained dormant, the more damage would be 
done to the investments made to date. It was our recommendation 
that HUD subsidize all further renovations needed to make the 
properties habitable, no matter how significant, in order to 
keep the buildings' eventual sales prices affordable to local 
residents.
    The Enterprise Foundation, CPC and Abyssinian Development 
Corporation urged HUD to put processes in place to evaluate 
potential contractors, lenders and prospective buyers and the 
original Memorandum of Understanding written by Secretary Cuomo 
detailed specific roles and responsibilities for each 
organization participating in the solution to this very serious 
problem. We have shared these same views with the new team at 
HUD with whom we have worked constructively, including 
Secretary Martinez and senior HUD officials.
    It is Enterprise Foundation's firm conviction that the only 
viable solution to the Section 203(k) problem involves a 
holistic and programmatic approach that will impact the long-
range fiscal health of the communities involved by continuing 
to develop opportunities for low- and middle-income 
homeownership, as well as affordable housing. We further 
believe that it's HUD responsibility to designate every 
property and in the portfolio as a low- or middle-income 
homeownership opportunity. The Section 203(k) program has been 
designed as a flexible mortgage product to acquire and 
rehabilitate foreclosed properties for affordable housing. To 
that end, we find the $80 million currently budgeted by HUD for 
the rehabilitation is woefully inadequate to the task.
    New York City's Department of HPD, the most sophisticated 
municipal housing agency in the country, with the most 
experience in rehabilitating and disposing of distressed 
properties, estimates that it will take $160 million to 
redevelop the portfolio. We strongly urge HUD to invest in the 
continued stabilization of these communities by appropriating 
sufficient funds to maintain the integrity of its previous 
investment. Because of HPD's vast experience and their current 
investment in these neighborhoods, we also recommend that HUD 
work closely with HPD to rehabilitate these properties. Most 
importantly, we urge HUD to recognize the tremendous expertise 
of legitimate community-based non-profits such as Abyssinian 
Development Corporation and East Brooklyn Churches as critical 
partners in carrying out such a program.
    Harlem and Brooklyn's low-income neighborhoods have come a 
long way in recent years. Their progress has transformed the 
lives of thousands of working New Yorkers and benefited the 
entire city, but their success is fragile. For progress to 
continue, the residents, community groups and private and 
sector partners that have made it possible must have confidence 
that their efforts and their hopes for further revitalization 
will not be eroded by bad practices reminiscent of the unhappy 
past. Property flipping and rampant real estate speculation 
could douse the flames of Harlem and Brooklyn's continuing 
redevelopment. Fixing the Section 203(k) problem in the manner 
we described will help assure it does not happen and make a 
positive result to a negative situation.
    Thank you for the opportunity to testify.
    [The prepared statement of Lydia Tom can be found on page 
90 in the appendix.]
    Chairwoman Kelly. Thank you very much Ms. Tom.
    Next we go to Ms. Perine.

STATEMENT OF JERILYN PERINE, COMMISSIONER, NEW YORK DEPARTMENT 
            OF HOUSING PRESERVATION AND DEVELOPMENT

    Ms. Perine. Thank you. I'd like to start by giving you a 
brief overview of our agency's functions, because I think it is 
relevant to the recommendations I will make in my testimony. 
We're a unique housing agency because we carry out the 
planning, development and enforcement functions related to 
housing and community development. Over 68,000 units have been 
renovated or newly constructed through our program since 1994. 
In addition, we place a great emphasis on housing preservation 
through below market loans to owners in need of rehabilitation 
financing, direct financing and education to owners to help 
them become better managers. We operate the most extensive 
housing enforcement system in the country, handling over 
300,000 calls a year mostly from tenants and conducting over 
200,000 inspections from tenants which resulted last year in 
322,000 housing code violations being in place. In addition, 
since 1994 we've been aggressively returning to private 
ownership the stock of dilapidated housing that came into city 
ownership because of tax delinquency located primarily in 
Harlem, the South Bronx and central Brooklyn. These buildings 
provided housing for some of our poorest families, but were 
typically in the worst condition.
    Since 1994, over 22,000 units in 1500 buildings have been 
returned to responsible private ownership, with funds 
sufficient to provide for extensive renovation and with 
operating or rental subsidies sufficient to insure that 
existing tenants would not be displaced, rents would remain 
affordable and the buildings would be financially viable in the 
future. Where feasible, we have turned vacant buildings into 
opportunities for homeownership for working families. We have 
relied on local entrepreneurs and with extensive experience in 
property management, and neighborhood-based not-for-profit 
development organizations with proven track records.
    We have been involved in this kind of work since 1978 and 
have amassed an impressive track record from a once high of 
89,000 units of abandoned tax foreclosed units in city 
ownership to today there are approximately 13,000 units left in 
city ownership and they are all funded over the next few years 
for rehabilitation and sale.
    Despite our agency's extensive involvement in housing 
issues in the city, we played no role in the Section 203(k) 
program and were unaware of the lending activity that was 
occurring. We became aware of this issue, as others locally 
did, when tenant evictions and inappropriately high sales 
prices became to light in some Harlem sales properties and I 
have to acknowledge Councilman Bill Perkins from this community 
whose original work helped to bring some of this to our 
attention.
    Twenty-nine organizations participated in the Section 
203(k) program in New York City, borrowing funds for 593 
properties. Only 2 of those not-for-profit organizations were 
experienced not-for-profit housing developers and managers that 
we have worked with over the last two decades involving only 17 
of the 593 properties. The remaining 27 organizations played no 
role in any of our programs over the last three decades and had 
no track record in housing development that we were aware of. 
So the core problem with the program, I believe, was a simple 
one. No local involvement, and that lack of local involvement 
allowed organizations with no experience to participate in a 
program which sought to carry out an important but complex 
task; the renovation and return to responsible ownership of 
troubled housing, often occupied with vulnerable tenants.
    At best, these organizations, had no capacity or skills to 
carry out the program. At worst, they were involved in a 
corrupt scam to defraud the Federal Government. The results on 
the streets of our city are sadly the same. Nearly 600 
properties, nearly one-half occupied with tenants, have been 
left without clear management to handle day-to-day maintenance 
and operation without rehabilitation and an uncertain future. 
Of the 593 properties, the vast majority, 346, are located in 
Brooklyn, primarily in Bushwick and Bedford Stuyvesant. Another 
190 are located in Manhattan, primarily Harlem. 40 are in 
Queens, including some in the Rockaways, which are little more 
than summer bungalows and the remaining 17 are in the Bronx.
    We have inspected every one of these properties with our 
staff. 285 are vacant, 290 are occupied and 18 are vacant lots. 
Following inspections of all of these buildings, only 59 were 
rated to be in good condition. The rest were found to be in 
fair or poor condition. Since January 1, 1998, our Housing Code 
inspectors have placed over 18,900 Housing Code violations of 
these properties alone. We have expended over a million dollars 
from the city's funds in emergency repairs which our inspectors 
discovered and the owners failed to correct. Thirteen of these 
buildings have conditions that are so bad that either the 
tenants themselves or our attorneys have gone to Court to seek 
a receiver to insure that the rent roll is spent on providing 
essential services and repairs. In addition, these buildings 
are now threatening the significant investment that we have 
already made on many of the blocks where they are located.
    Since early this year, we have been working very closely 
with HUD officials, both in the New York office as well as in 
Washington to address these issues. We've crafted protocols so 
that emergency repairs can be addressed expeditiously. We've 
exchanged information regarding inspections and foreclosure 
actions so that we can coordinate our efforts and we've worked 
to craft a solution that hopefully will result in the 
renovation of these properties and their return to private 
responsible ownership. For our part, we have indicated that we 
are willing to take on the responsibility of structuring 
financing which leverages private capital and insures 
affordability for existing tenants, review the design and scope 
of work for the property's renovation, identify competent 
developers, both for-profit and not-for-profit, and insure that 
the work is carried out properly.
    In return, we have requested that HUD provide sufficient 
capital to carry out this work without any administrative fees 
to our agency, as are customary in HUD programs.
    In short, we are suggesting that both agencies do what they 
do best, and work together to attain the desired results.
    October 1st signals the beginning of our official heat 
season. As of that date, owners of rental property in New York 
City must maintain adequate heat as the temperature outside 
begins to drop. It marks our busiest period in enforcement and 
last winter the Section 203(k) buildings represented a special 
challenge to us. We are precipitously close to the beginning of 
a new heat season and hope that these properties will have a 
more certain future this winter than they did last winter.
    Chairwoman Kelly. Ms. Perine, I'm sorry to interrupt you, 
but you've gone well over your time. Can you summarize for us 
please?
    Ms. Perine. I want to say we worked very closely with HUD, 
we had Commissioner Weicher spend an entire day with us touring 
the properties. I think where we're at in our negotiations are 
working through the technical issues that have been raised by 
HUD's counsel. It's not in the substantive part of the 
proposal, so I have every hope that we're going to be able to 
conclude negotiations quickly.
    [The prepared statement of Jerilyn Perine can be found on 
page 94 in the appendix.]
    Chairwoman Kelly. That's a nice, hopeful note for us to end 
the testimony on. That's great. I thank you all very much for 
being here and for being willing to share your knowledge. I 
have a couple of questions.
    Miss Phillips, you stated in your written testimony that 
the impact of the crisis on housing is potentially the most 
destructive force in the stability of this community since 
crack cocaine. I pulled that out of your testimony.
    Ms. Phillips. Yes.
    Chairwoman Kelly. Is that overstating the problem or has 
the crisis really harmed families in the community?
    Ms. Phillips. What it's done is made these properties and 
other properties surrounding it, unaffordable to people in the 
neighborhood. I think the destruction to the buildings where 
work has been done, we've already seen that, and thanks to some 
of the efforts that we did early on in the beginning of the 
year, we had some of these buildings sealed up, but what we 
found was that the vacant, half constructed buildings were 
becoming a haven for squatters to come in, potential for fires 
and destruction to adjacent properties as well as people living 
in conditions that are very, very bad.
    The thing is, I have this great investment, I have one 
buyer that bought a house. On one side it was a vacant, half 
finished Section 203(k) building that people were going in and 
out while the construction was completing, the other side were 
people who were SRO tenants who were without services. So they 
were just about to close on a $375,000 house, and they had a 
commitment to the neighborhood. It also means that if the 
program had gone forth, even, successfully, these non-profits 
wanted to make four rental units. That was one person who came 
to us and tried to buy these at a reduced price, said to us, 
we're going to do four rental units in here and we're going to 
put people in from downtown, make lots of money and that will 
help fund our non-profit.
    The other way he said if we can't do this with a downtown 
rate, we'll put in a special program, which could have been 
drug treatment facilities, halfway houses and the things that 
would destabilize areas that were just on the brink of people 
coming together; new homeowners, people who moved in tax credit 
buildings who were working to rebuild their communities, so 
that's the destructive force I'm describing. So we need to have 
a way to address these conditions immediately. Thank you.
    Chairwoman Kelly. Thank you. I have one more question, Miss 
Phillips. It's directed to your testimony again. I want to know 
what impact the Section 203(k) scandal has had on organizations 
like yours in your efforts to rebuild the community beyond 
just, if you can elaborate a little bit, beyond driving up 
prices. Has it had an effect on your organization?
    Ms. Phillips. First of all, like I said, when I first heard 
about it, it was a reporter calling me to say we have these 
churches buying up properties, so they assumed because we had 
been involved in it, that we knew something about it. I 
basically brushed it off, because it wasn't in the target area 
where we were, but the underlying mistrust of non-profits in 
general. I know we heard testimony here that the guidelines for 
non-profits particularly participating in this program needs to 
be strengthened, but I think our HPD and others can say the 
non-profit working with intermediaries, private developers and 
the private sector in New York City has been responsible with 
stabilizing the neighborhood, so that these options would even 
be possible.
    So it really is, and that's one of the reasons why we feel 
that the existing local non-profits in the area be a part of 
either helping to renovate these buildings and being able to 
market them to people in the neighborhood, to help rebuild the 
credibility of the neighborhood, to help us get the people who 
now feel that we're now responsible for the gentrification 
that's pushing them out to say there is another opportunity for 
you to buy and live and help us rebuild this neighborhood, 
because they're a very important component of it, so if by this 
fraud being perpetuated, we're now cut out of helping to bring 
these projects back, that will limit the amount of future 
growth that we can have as non-profits in terms of being a part 
of this economic revitalization.
    Chairwoman Kelly. Thank you very much.
    I'm going to introduce the gentleman who just came in, Mr. 
Steve Israel, Congressman from Long Island, New York. Steve, 
we're glad to have you join us. I turn now to my friend Charlie 
Rangel.
    Mr. Rangel. Thank you, Madam Chairwoman.
    Commissioner, let me congratulate you for the aggressive 
way you pursued the solution to this problem and ask you 
whether or not the people at this table are included in the 
proposal that you have before HUD which we support?
    Ms. Perine. There's no individual organization that's part 
of this proposal. All we have said to HUD is that we don't need 
to reinvent the wheel. We already know how to include a vast 
array of both not-for-profits and for-profit local developers. 
We would qualify people through requests for qualifications or 
requests for proposals and people who had already qualified 
through our existing programs would qualify as they do now. So 
we made no individual commitment to individual organizations, 
and presented to HUD instead a framework which is the same 
framework as we do our other programs, which is the way 
Abyssinian works with us and HomeWorks and other programs 
involving city-owned property.
    We would certainly expect Abyssinian and other like 
organizations to participate in those programs. So we see using 
the same exact framework, we're not trying to make an initial 
agreement with individual organizations.
    Mr. Rangel. Now, you were saying we hope that negotiations 
with HUD might soon be completed. Does the term limits facing 
the present administration in the city adversely affect the 
program going into place if you do reach agreement before the 
end of the year?
    Ms. Perine. I don't think so. Again, because that's why I 
mentioned, we've been doing this work since 1978, and our 
agency has a long programmatic history doing exactly the same 
kind of work. It's not, we're not running boutique programs. 
We're not making up things as an individual fly by-night 
solution. We have programs that have extended themselves 
through many different Mayors, many different Commissioners.
    Mr. Rangel. That's what I thought. You do have continuity 
there.
    Ms. Perine. Absolutely.
    Mr. Rangel. The last question is, are the witnesses at the 
table satisfied that they would be included in the process, 
assuming we get it funded, to make certain that the communities 
involving, in the return of these properties to the 
communities. Are you satisfied that that will take place?
    Mr. Medina. I would think that is, as the Commissioner has 
indicated with respect to an RFP or RFQ process, we are 
satisfied there would be a broad range of representation for 
community based organizations.
    Mr. Rangel. Ms. Phillips.
    Ms. Phillips. Well, as she mentioned that it would be the 
same programs that we have now, but if a part of that RFP would 
give special points for people or groups, organizations who had 
experience with the local market, be it Brooklyn or Manhattan, 
and experience track record in that area, particularly those 
buildings that are now inhabited with SRO, that people who have 
been working with those tenants be given stronger consideration 
or extra points for that work, I think would be important.
    Mr. Rangel. In communities that are coming back.
    Ms. Phillips. Yes.
    Mr. Rangel. Ms. Tom.
    Ms. Tom. We have said all along that we think what is 
needed to correct the problem is additional resources and it is 
less important as to whether Enterprise is involved. It does 
need to include the community-based non-profits and we think 
HPD has a solid track record, but we think there are resources 
that need to be committed. I heard $160 million dollars and 
that's what would be needed.
    Mr. Rangel. That's what you need Congressional support for, 
and we will be fighting for that money. Thank you.
    Chairwoman Kelly. I thank you.
    Let's go to Mr. Grucci.
    Mr. Grucci. Commissioner, just one question. The program 
has been explained here today as having failed some years ago, 
I believe my notes indicated it was 1998-1999, where the fraud 
really started to perpetuate. Did you start to see that here in 
the city around that time or did it take awhile for it to hit 
before you started to see the real results of that fraud, and 
what steps did the city take to identify to HUD these problems 
and did HUD respond?
    Ms. Perine. Well, unfortunately, we didn't see it until 
quite recently. As I said, we had no information about these 
lending practices and really began to see it tangentially in 
different ways.
    One that, we carry out appraisal of all the property that 
we sell through our programs and our appraisers very recently 
over this last winter began to see sales prices that just 
didn't represent comparables in their view. They actually 
didn't use those appraisals in their own comparables.
    The other thing that began to happen over the winter was 
the issues related to tenant eviction, so those are the two 
things, that didn't really come to our agency's attention, I 
would say, until late in November, late in December.
    Mr. Grucci. If I may interrupt for a moment, my time may 
run out on me, I want to get another question in. Not knowing 
how the system works in your department, when you saw the 
inspectors, or did you see the inspectors that was referenced 
by HUD being eliminated or removed from the community here, did 
that raise a red flag in your mind and if it did, what steps 
were taken to voice that to HUD?
    Ms. Perine. What inspectors are you talking about?
    Mr. Grucci. If I remember the earlier testimony, there were 
people that were shifted and moved to make sure the program was 
running properly and adequately, they were moved to 
Philadelphia. I may not be correct, but I thought I heard that 
earlier.
    Ms. Perine. We were not aware of that. We had no contact.
    Mr. Grucci. You had no interaction with those folks?
    Ms. Perine. We had no interaction whatsoever.
    Chairwoman Kelly. Mr. Israel, do you have any questions?
    Mr. Israel. I have one brief question. I'm not a Member of 
this subcommittee and I appreciate the courtesy. I am a Member 
of the Housing subcommittee and I know that on both 
subcommittees on both sides of the aisle we recognize our 
obligation is to protect those innocent victims of the Section 
203(k) scam, to punish and pursue those who eluded the program, 
and to stand up for the best interests of tenants.
    I'd like to focus for a moment on one question and ask Ms. 
Phillips and Ms. Tom to follow up on Mr. Rangel's question 
regarding community-based input. The agreement that was 
consummated in January requires that Section 203(k) properties 
be sold either directly to Harlem based community groups or to 
their partners for use in the creation of affordable housing 
opportunities or sold to responsible home buyers who are 
screened and counseled by Harlem-based groups.
    I'd like to know whether you've received assurances from 
FHA that that provision of the January agreement will be 
strictly enforced and abided by. Ms. Phillips?
    Ms. Phillips. When we met with HUD and Mr. Martinez, there 
were no parts of the original agreement that were to be still 
in effect, basically. We offered to him that the affordability 
of the property, meaning that ther had to be investment from 
HUD and that we would continue as a group in representing a 
large group of not-for-profits, that it was not just only the 
groups that were taking the leadership on this, but a 
coordinated effort by other non-profits, that we would still 
stand ready to be a part of the development and sale.
    Unofficially, my organization just from people hearing 
about it in the news media, set up a system to take down the 
names of people who were interested in purchasing those houses 
and particularly people from the community, but we have over 
600 names, and they're still coming. There are people who are 
interested in, who live in the community who want to take 
advantage of or to be homeowners in the community, and so, and 
a lot of whom fit into this, the categories that we explained, 
which we were saying 150 percent of median to be the 
affordability level, to insure that these houses that have 
pushed the real estate market up would be then targeted to that 
population of moderate, working class people who now live in 
the community primarily.
    Mr. Israel. Ms. Tom.
    Ms. Tom. Enterprise has always been willing and able to 
step up and be helpful to resolve the issues here and to work 
with HPD and non-profits. I'm not aware that we have received 
assurances from HUD that they are committed to working in 
partnership with the community-based organizations or with 
Enterprise. I think we're open to hearing it and presenting our 
proposals, but I don't believe we've heard any assurances from 
HUD that that definitely is part of their proposal.
    Mr. Israel. Thank you, Madam Chairwoman.
    Chairwoman Kelly. Thank you very much. I want to say again 
to this panel that there are some Members who may have 
additional questions. I will hold the hearing open for 30 days. 
They would be written questions with written answers, and I 
want to thank you all for being extremely careful and 
thoughtful about your testimony. It was interesting reading. 
You have given us a lot to think about, and I think you've 
given us, as you said, Ms. Perine, some hope that we're going 
to be able to get something done and rectify the situation so 
people can live here in harmony.
    So I want to do a couple of other things, then excuse this 
panel. We had in the room with us listening to all of us, the 
City Councilman from this area, Mr. Perkins, are you here? I 
just wanted to acknowledge your presence and thank you so much 
for your gracious hospitality in letting us come here. We're 
glad to have you here as a member of the City Council 
listening. You've been here all morning with us and I 
appreciate the fact that you're so concerned about the people 
that you represent so thank you.
    Mr. Perkins. Thank you for your acknowledgment and your 
presence and I'm optimistic that this testimony will result in 
some community friendly decisions to develop housing for the 
people that have been so victimized. Thank you.
    Chairwoman Kelly. I thank you.
    We also have a man who is a former Congressman who has 
joined us this morning, Mr. Garcia, Bob Garcia, and we thank 
you very much for being concerned enough to sit in with us all 
morning here. Ms. Perine, I want to come back and thank you for 
working so carefully with HUD, because I think it's that work 
that will ultimately help us do something that's concrete to 
help the victims of this scamming that's been going on. With 
that, I want to thank Mr. Rangel and his staff for their very 
gracious hospitality and, Mr. Israel, I'm glad you were here to 
join us and, Mr. Grucci, I'm glad you were here. Your presence 
added a lot. I thank you for your assistance in making the 
hearing possible.
    Mr. Rangel. Madam Chairwoman, before we close, if this 
panel can assure me that before the day is over you will get 
together so we can regroup at some time to see how we can be 
helpful with your petition with HUD and how we can make certain 
that we do have a broad program that would involve the 
community, because I'd just hate to see you leave without us 
being assured that we would be working together. Thank you.
    Chairwoman Kelly. And also I want to let you know that it's 
my intention to either speak with or write a letter to Mr. 
Martinez detailing some of the solutions that have been talked 
about here today, so again, I thank you very much, and with 
that, we adjourn.
    [Whereupon, at 12:40 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           September 10, 2001

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