In January 1995, shortly after Bob Lanier was sworn in as mayor of Houston for the second time, another anointment of some significance took place in an office a few miles from downtown: Michael Stevens, a wealthy real estate developer, was chosen president of the Houston Housing Finance Corporation.
HHFC is a public nonprofit created under state law to issue bonds to finance mortgage loans for low- and moderate-income families. Despite its mission, HHFC rarely intersected with city housing officials. Other than holding title to "urban homesteads" purchased by the city with federal money, the agency, whose board of directors is appointed by City Council, had operated in obscurity since its formation in 1979.
That changed when, early in his second term, Lanier named Stevens his Special Assistant to the Mayor for Housing and Inner-City Revitalization. Though the position paid just $1 a year, it transformed Stevens into the second most influential person in city government. Until Lanier left office in January 1998, tens of millions of tax dollars were "coordinated" by Stevens, who was charged with, among other things, turning the city's affordable-housing program into a national model.
Until a few weeks ago, most people wouldn't argue with Stevens's effort toward that end. With Lanier's support and a seemingly endless stream of city and federal grants, loans and subsidies, Stevens started a program called Homes for Houston in January 1996. According to city officials, the initiative has been a rousing success, providing additional affordable housing each year to some 5,000 low-to-moderate-income families. (Some housing advocates dispute that number.)
But a recent audit by investigators from the U.S. Department of Housing and Urban Development (HUD) found that Homes for Houston is tainted by inept management and conflicts of interest that resulted in the waste and possible misuse of more than $800,000 in federal mortgage-assistance funds.
In its most disturbing finding, the audit says that city housing director Margie Bingham, who also sits on HHFC's board of directors, helped negotiate a subcontract on behalf of the agency against the advice of city attorneys, who had warned on two separate occasions that Stevens planned to "assign away ... essentially all of [HHFC's] duties" to the nonprofit Housing Opportunities of Houston, another city contractor.
Moreover, Bingham later changed the terms of the city contract, without City Council approval, to incorporate an apparently improper fee arrangement with HHFC, auditors say. As a result, auditors discovered that the city was double-billed for about $218,960 in administrative costs. According to the auditors' report, another $203,000 is "unsupported," meaning Bingham's department paid that amount to HHFC without properly verifying that any work had been performed.
None of this, the auditors say, would have happened "if the City had taken its own legal counsel's advice...." Auditors also cited a conflict of interest between HHFC and Bingham, who, auditors say, exercised "questionable" behavior by voting with other HHFC board members to subcontract the agency's work to Housing Opportunities of Houston.
"Since the city was apparently unable to maintain its objectivity due to the conflicting interests," the audit report states, "improper contracting occurred."
Auditors found other problems with the city program as well. For instance, the report cites numerous instances where the city provided mortgage assistance to home buyers "who have sufficient funds to purchase their own homes and are not in need of government assistance." In one extreme case, a family with more than $75,000 in the bank received a $10,000 subsidy for down payment and closing costs.
Pending final HUD approval, auditors have recommended the city repay $347,000 spent in violation of federal guidelines. That figure could more than double, unless the city is able to provide sufficient documentation to justify an additional $457,000 in administrative fees and home-buyer subsidies.
City housing officials sharply dispute the audit report and are asking HUD for a "file-by-file review" of the problem cases. Bingham was unavailable for comment. Mike Loftin, an assistant director of housing, says the city broke no federal or local regulations and that auditors failed to take into consideration the success of the home-buyers assistance program.
Loftin also says HUD, and "to some extent the city legal department," does not understand the "long-standing relationship" between city housing officials and HHFC, particularly since the home-buyers assistance program was begun in 1994.
"The point people get hung up on is that the nature of services being provided by HHFC and Housing Opportunities is almost identical," Loftin says. "But that's an oversimplification, one of many oversimplifications and generalizations in the audit that we just have a real problem with."
There is, however, one sentence in the audit report that Loftin doesn't bother trying to defend: HUD's characterization of Michael Stevens as "the unofficial supervisor" of the city housing department.
"I have no comment on that," he says.In fact, the HUD audit only reinforces the extent to which Stevens exercised control over the city's housing policy. As Lanier's urban-revitalization czar, Stevens appeared in public often, speaking passionately about publicly funded projects such as the renovation of the Rice Hotel into loft-style apartments and the massive makeover of the Midtown area.
While those projects garnered attention, Stevens was every bit as instrumental in reshaping the way the city doles out housing assistance, in particular about $10 million in so-called HOME grants the city receives from HUD every year.
In December 1995 City Council awarded a contract to Housing Opportunities of Houston to process applications from eligible home buyers for down payment and closing-cost assistance. A month later, the city awarded a $3.15-million contract to HHFC to provide an identical service to home buyers in certain geographic areas of the city. Under that contract, HHFC was allowed up to $300,000 for administrative expenses, which would be reimbursed with federal funds by the city. HUD guidelines require that city housing contractors submit a cost-allocation plan that documents projected costs. HHFC, however, never submitted such a plan, and city housing officials never asked for one.
Apparently there was a good reason: HHFC was incurring little, if any, administrative costs. On March 7, 1996, city attorneys told housing officials in a letter that HHFC had "assigned away" all its duties under the city contract, except one: to "promote" Homes for Houston.
"If HHFC is unwilling or unable to perform its duties," the legal department wrote, then the city should "terminate the contract with HHFC for nonperformance." Less than a month later, on April 1, 1996, a second letter from the legal department again advised housing officials that HHFC was "in contravention" of its contract with the city.
At this point, say HUD auditors, Bingham, Stevens and the rest of HHFC's board of directors fashioned a subcontract, "without city legal counsel's knowledge," that assigned the bulk of the duties -- counseling home buyers, receiving and processing applications, determining eligibility and securing a mortgage lender -- to Housing Opportunities of Houston, a nonprofit formed in 1990 to help bring together lower-income home buyers and mortgage lenders.
HUD criticized Bingham for allowing the subcontract, even after she was informed by the city legal department that the arrangement would not be in the best interests of her employer, the City of Houston.
"Since the city's own legal department objected to the subcontracting of HHFC's duties," the auditors reported, "we maintain that the services were improperly contracted out and the contracts with HHFC were unnecessary."
Auditors also determined that Bingham made "substantial revisions" to the contract that appear to favor HHFC without City Council approval. First, Bingham eliminated HHFC's requirement that it limit its assistance to the purchase of homes in certain geographic areas of the city. The city housing director also appeased Stevens by eliminating the need for HHFC to document its costs. Instead, HHFC was paid a flat fee of $630 for each loan processed. HHFC would then pay Housing Opportunities, which did the actual processing, $272 per loan.
Through last August the city had paid HHFC more than $422,000. But, auditors say, nearly $219,000 of that total is ineligible duplicate payments for services the city had already paid Housing Opportunities of Houston to carry out. HUD was unable to determine whether the remaining $203,000 was proper, because HHFC was not required to document its expenses prior to being reimbursed by the city.
"Because HHFC was reimbursed on a flat-fee basis, the city cannot support the administrative fees paid to HHFC," the audit states. "To be eligible, costs must be documented and conform to federal cost principles."
Loftin says there was no duplication of effort, and that, in fact, HHFC was instrumental in making the home-buyers assistance program a success by "coordinating" a massive effort to educate and provide counseling for low-income home buyers.
"There was a need to pull together a master education coordination process," Loftin says. "That means a hot line, getting people's name on a list, getting them through X-number of hours of orientation. We needed to make sure there was an organized way to get people from the start to the finish, so you have some efficiency in the matter."
But, according to the audit report, the city's home-buyers assistance program was far from efficient. For example, out of 105 cases examined by HUD auditors, nine that received a total of $67,600 were found to be ineligible for federal assistance. Auditors have recommended the city repay that amount to HUD.
Another 46 files --nearly half of those examined by auditors --lacked enough information to determine if the home buyers met federal eligibility requirements. Unless city officials can produce more information on those cases, they will be required to repay another $254,000 to HUD.
The audit report comes one year after the city reimbursed HUD for roughly $1 million in Community Development Block Grant funds following the review of a contract to rehabilitate two southwest Houston apartment complexes. In that case, auditors say city officials did not monitor the contractor, longtime Lanier friend Wayne Duddlsten, to ensure compliance with federal guidelines.
While HHFC has helped bankroll a number of major redevelopment projects, most notably the purchase and renovation of the Rice Hotel, the agency's commitment to providing housing for those who need it is spotty. For example, Stevens and Lanier justified the use of $5 million in federal housing funds on the Rice Hotel by promising that 20 percent of the new units would be set aside for lower-income families. However, the only units that qualify as "affordable" are efficiency and studio apartments that cannot accommodate more than one person.
HHFC also bankrolled the $10-million failure by Houston Renaissance to redevelop the Fourth Ward. Nearly half of those funds have gone to consultants, including some Renaissance board members, with HHFC's approval. The agency finally pulled the plug on the project late last year, before Renaissance built a single house. HHFC now owns more than one million square feet of Fourth Ward land, which it will have to sell to recoup its losses.
Local housing advocates were distressed to learn of the latest HUD audit, which in their view underscores how, for years now, city housing policy has been mostly talk, but little substance.
"We don't have nearly enough money going toward real housing for real low- and moderate-income people," says David Kahne, a Houston lawyer who specializes in affordable-housing issues. "This report should be the basis for improving housing policy here, for providing meaningful oversight, not programs that are run out of back rooms.
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