Fees for Our Friends: The Scandal that Taints Andrew Cuomo
By Lucy Komisar
Aug 22, 2006 [Part 1]
As Secretary of HUD, Andrew Cuomo reversed the policy of selling defaulted mortgages so that families could keep their homes. Instead, he chose to foreclose on mortgages, which meant that families lost their homes and insiders cleaned up on fire-sale priced properties. The US Treasury also lost billions.
On September 12th, a primary will choose the Democratic candidate for New York Attorney General. The front runner is Andrew Cuomo. 
Cuomo seeks to succeed Eliot Spitzer, who made a national reputation by targeting corrupt Wall Street and corporate officials. Spitzer has been publicly denounced by his targets, including former AIG chairman Maurice “Hank” Greenberg, accused of cookingthe books to present afraudulent picture of his company’s financial position.
In December, Cuomo’s father, former Governor Mario Cuomo, announced he was helping to launch a public relations campaign on Greenberg’s behalf.
Would Attorney General Andrew Cuomo go after Greenberg or other high-profile miscreants? A look at his tenure as Bill Clinton’s Secretary of Housing and Urban Development raises serious doubts.
When Cuomo became HUD Secretary in 1997, he axed a federal program that had saved the U.S. $2.2 billion between 1994 and 1997 and reinstituted a system that lost the government money while earning billions for favored friends. He fired a former HUD official whose company designed the program.
That wasn’t the only money big money lost. When Cuomo was secretary, HUD reported that $59 billion was missing! It couldn’t say where they money went, because it failed to produce audited financial statements.
The Department of Housing and Urban Development is renowned for corruption. Historically, fraud has been so pervasive and blatant that the Sopranos episode on it was disturbingly realistic.
Season 4, Episode 46: Senator Zellman, Maurice Tiffen and Tony meet at a Russian Bath House and hatch the latest investment scheme to defraud New Jersey HUD (this is a federal sponsored program, not New Jersey, Housing and Urban Development). All Maurice’s minority organization has to do is take ownership and mortgages on dilapidated properties and the NJHUD will assume the lending risks involved. In the end, everybody will leave with a piece of the pie.
Jack Blum, 
a Washington lawyer, in the mid-1970s was the chief investigator for Senator Frank Church’s subcommittee on multinational corporations. He exposed the Lockheed bribery scandal and other examples of corporate corruption. Later, he headed Senator John Kerry’s investigations into Iran Contra drug connections and the corrupt bank, BCCI. Blum says, “I know about HUD since the 1970s — the fake mortgages. It’s been going on forever. She [the former HUD official] doesn’t understand that what she got caught up in is part of a pattern.”
This story starts in 1989 with Catherine Austin Fitts, then a savvy Wall Street investment banker. 
Fitts, who everyone called “Austin,” had an establishment pedigree. She was graduated from the Wharton School of Business at the University of Pennsylvania in 1978. She was a partner at Dillon Read, the white shoe investment firm headed by Nicholas Brady, where she made a name for herself when she recapitalized the New York City subway and bus systems and arranged funding for the City University of New York. A February 23, 1987 Business Week article called her the “Wonder Woman of Muni Bonds.” She was a high-profile, successful, Wall Street Republican who knew a lot about financial management.
Fitts got the chance to join the new George H.W. Bush administration as Assistant Secretary of Housing. She recalls, “When I told Nick Brady [who’d become Bush’s Treasury Secretary] that I was going to work at HUD, he said, “You can’t go to HUD — HUD is a sewer.”
Catherine Austin Fitts is sworn by Jack Kemp to be his Assistant Secretary. 
She discovered Brady was right. Working for HUD Secretary Jack Kemp, she saw him run the agency to generate fees for friends.
One of them was Andrew Cuomo. Fitts says that in 1989, Kemp ordered her to allocate “Section 8” rental subsidies without a competitive process. These were subsidies that went directly to builder/landlords for apartments they would rent at below market rates. She says that when she refused to award subsidies illegally, they were surreptitiously approved by staff while she was out of town. She got them stopped by appealing to the HUD General Counsel. One of Fitts’s deputies told her later that the illegal payments were for Cuomo’s Housing
Fitts had been appointed to run HUD’s Federal Housing Administration (FHA), which insures mortgages so that homebuyers can borrow at reduced rates. Or so that landlords can offer below-market rents for tenants.
In 1989, HUD had $320 billion in mortgage insurance outstanding and was originating $50 to $100 billion of new mortgage insurance a year. Its largest fund provided mortgage insurance for single family homes. It also provided mortgage insurance for apartment buildings, hospitals, and nursing homes.
If the borrowers defaulted on FHA insured mortgages, the government would take over the loans. HUD could foreclose and sell the properties on the market or it could hire contractors to collect rent and manage the properties.
Dealing with billions of dollars in defaulted mortgages, Fitts discovered that the big-time beneficiaries of the HUD system were political friends. Sometimes, insiders kept their properties even though they did not pay their mortgage debts. Or defaulted mortgages and foreclosed homes were sold to favored investors at below market prices. Or friends got big contracts to manage large inventories of defaulted properties. These scams lost taxpayers billions of dollars every year, skimming off monies that were supposed to be returned as refunds to homeowners with FHA mortgages or to support government programs for affordable housing.
But the system was designed to hide such dodgy operations. When Fitts arrived at HUD, she discovered the books were a mess. She ordered an accounting of FHA finances, including of HUD mortgages and properties in each city. She discovered that, “The data base would show you had a building on a property. You’d go to that place and get off the plane and there was nothing there. We also had neighborhoods where you had significant default patterns that didn’t make any sense — properties that defaulted one, two, three times in a year. You’re losing huge amounts of money and neighborhoods were being harmed and it didn’t make any sense.”
She persuaded Secretary Kemp and the Office of Management and Budget of the need for audited financial statements. She helped design and draft the HUD Reform Act of 1989, which required the agency to publish annual audits. It was the basis of a later law requiring all federal agencies to do the same. Greer confirmed that, adding, “What I liked most about Fitts when she was at HUD as Assistant Secretary and later as a contractor was the fact that she was a stickler for accountability and financial integrity. She did much to improve that at HUD.”
Fitts had many run-ins with Kemp 
over what she came to see as fees for friends. In one case, she said, Kemp wanted to provide financial relief to Puller Mortgage, an
A Kemp spokesman declined to comment. Chris Greer said, “Puller Mortgage was a very bad lender costing HUD millions of dollars over the years. HUD did provide such relief on several occasions. Puller was subject to many audits and investigations, and Fitts was involved in discontinuing that relief and getting him debarred. Puller definitely had Republican connections.”
Fitts repeatedly opposed political favors, and in August 1990, after 18 months, Kemp fired her.
When Fitts left HUD, she started the Hamilton Securities Group, Inc.,
a
She was still highly thought of in top official circles. Bush’s Treasury Secretary Nick Brady asked her to serve as a Governor of the Federal Reserve, but she declined. John Sununu, Bush White House Chief of Staff, had her appointed to the board of Sallie Mae, the government-sponsored corporation that helps provide financing for student loans. Harry Albright, selected by New York District Attorney Robert Morgenthau to resolve the failure of
Then Fitts got another chance at HUD reform. After Bill Clinton became President,
By the time the
When FHA took back defaulted single-family mortgages, in most cases it foreclosed, took physical possession of the properties and sold them. Until the sale, it would hire a contractor to manage the properties.
Reviewing information on HUD mortgage portfolios,
She also suspected money laundering. She said, “We found one HUD-owned multi-family mortgage in 1994 that had been in default for 11 years, with no debt service payments, and yet the property had a cash flow.” She explained, “HUD was intentionally not collecting payments in situations where there was sufficient cash flow to do so. Why? On several occasions, I had owners tell me that they had been promised various things outside of their contracts. Then they would freeze and not explain. These side deals seemed to have more weight than the actual contracts.”
Fitts said, “I believe that one of the reasons that some people in the business wanted to continue the practice of foreclosing on defaulted mortgages rather than selling them is that on foreclosure, the mortgage is extinguished. If a fraudulent mortgage is sold, the buyer acquires evidence of the fraud.”
Traditional beneficiaries of the existing system included big time developers and property management companies such as the Harvard Endowment-owned National Housing Partnership (
Fitts wanted to break up the monopoly system that allowed a select group to make money at taxpayers’ expense. She wanted to broaden participation in mortgage auctions to enable local interests that might know and care about their own towns and neighborhoods to acquire properties at fair market prices.
She wanted to stop insider deals. She said, “I’ll never forget meeting with owners of apartment properties with mortgages that had been acquired by HUD, mostly because they were in default. When we explained we planned to sell their mortgages at competitively bid sealed auctions, they went wild. They said, ‘But we have a deal.’ When I would say, ‘Can you be more specific?’ they would shut up and walk away. Everything was run according to deals, and we weren’t allowed to know what they were. A couple of people came to me and swore that 100, 200, 300 properties were transferred secretly to this or that guy as part of a political deal. That would help explain the low recovery rates.”
that optimized the sale of defaulted FHA mortgages, making it much easier for a more diverse pool of bidders to participate. It did this with its own analytic software tools and with optimization bidding software which it contracted from AT&T’s Bell Labs (now Lucent Technologies). The bids were put into a computer model which figured all possible combinations and calculations and then picked the bids that made the most money for the FHA. The new bidding system, which included online access to portfolio and bidding information, meant that HUD attracted new investors interested in buying defaulted mortgages and therefore got higher recoveries on those mortgages. Fitts said, “The big, medium guys and little guys had never competed so directly before in the distressed mortgage markets. It drove the competition off the charts. You couldn’t out-game it.”
Fitts explained, “If you’re a securities firm, you want to buy a lot at once, say $300 million worth to sell in the mortgage-backed securities market. If you’re a mortgage firm, you may want to buy one by one, but of a certain size. If you’re a small real estate firm, you’re happy to buy one. If you’re a large real estate firm, you may want all of HUD’s mortgages on certain types of properties in several places.”
Fitts said, “By running the inside baseball game, HUD had been losing a huge amount. This was a wakeup call to guys at HUD that when you have transparency and competition you could significantly improve recovery rates.” It meant that Congress could appropriate less money to fund new mortgage insurance.
In a series of sales run by
The higher recovery rates would also affect homebuyers positively. Fitts explained, “If you charge mortgage insurance premiums and make a profit in the single-family fund, you are supposed to refund that back to the people financing the homes. If you have a mutual mortgage insurance fund and run it at a lower-than-optimal recovery rate, it is a way of cheating the largely non-defaulting single-family borrowers, as a group, out of their premium refunds to support lower premiums for the high-risk multi-family borrowers, whose mortgages had higher default rates. HUD is charging more money than necessary for the single-family premiums. They skim off the premium profits and transfer it to their pals in the housing sector. This hurts millions of Americans using FHA mortgage insurance to finance their homes.”
“While the loan sales were a great success for taxpayers, homeowners and communities,” she noted, “it turned out that they were a significant threat to the traditional interests that fed at the trough of HUD programs, contracts and mortgage operations.” HUD officials and investors realized that the loan sale program was going to be a success and lead to changes in control over the multi-family mortgage portfolio, transferring it into the hands of high bidders rather than the good ole boys who had had so much influence over HUD for years.
Fitts explained, “You had a variety of parties making money on HUD’s holding onto large portfolios of defaulted loans. And we were now requiring investors like Harvard Endowment to pay full price for the mortgages on their own assets. That meant they had to finance the projects at 70 to 90 percent rather than 35 percent of the old debt. That affected the insider developers and property management companies.”
In January and April of 1996, still under Cisneros, a new HUD contract was awarded to
That year, Cindy Ecker at the HUD Denver IG [Inspector General] office began an audit of the loan sales program. After she collected the data, she told loan sales managers that they had done a terrific job and that she was going to write a glowing report. Fitts expected the audit to be issued in August or September. But it didn’t appear. Fitts later found out that Ecker had refused to change her favorable audit and, at the request of the IG, to be critical of the loan sales program.
Michael Stegman worked as head of the HUD Office of Policy Development and Research and then was acting Chief of Staff at the end of the Cisneros term and beginning of Cuomo’s tenure. He is now Director, Center for Community Capitalism, at the
But policies that benefited homeowners and taxpayers didn’t seem to be HUD’s priority. Fitts recalled, “In 1995, we were finding many places where the costs of rehabbing the property underlying defaulted single-family mortgages held by HUD was significantly cheaper than building new public housing or continuing to renew project-based assistance on private apartment buildings.” She went to see an official of the Hope VI new public housing program, which is very expensive on a per-unit basis. Fitts pointed out that HUD could spend $50,000 per unit to rehab single family-homes owned by the FHA rather than spending $150,000-250,000 including HUD overhead to create new public housing in the same community. Fitts said that the official replied, “But how would we generate fees for our friends?”
PROTECTING FEES FOR FRIENDS
Andrew Cuomo had been appointed HUD Assistant Secretary of Community Development (CDP) under Cisneros. In 1996, Inspector General audit chief Chris Greer was in a meeting with Cuomo and HUD IG Susan Gaffney. Cuomo told them that he was planning to get rid of Fitts and Hamilton Securities.
Andrew Cuomo, at the time
Greer recalled, “It had to do with some audits we were doing. There were proposals that would affect a bunch of folks in
Mark to market means assigning a value based on the current market price. Fitts explained, “Mark to market aimed to deal with a huge problem that was starting to rear its ugly head in the mid-90s when the bad decisions of the previous 30 years caught up with HUD. It had issued 30-or 40-year mortgage insurance to finance multi-family properties for low-income tenants. It had also issued Section 8 rent subsidy contracts that were project-based [awarded to the owner, not the tenant] to support the same projects. The amount needed pay interest on the debt had climbed above the rents collected by the projects, so in many cases HUD subsidies had increased the Section 8 rents to above-market rates in order to support the HUD-insured debt. Then in the mid-90s, the Section 8 rent contracts expired. HUD renewed the contracts on a year-to-year basis and sometimes issued tenant-based, as opposed to project-based vouchers.”
She noted, “Tenant-based vouchers were unpopular with project owners, because tenants could go to other projects and take the subsidies with them.
Fitts explained the tax issue: “Many of the multi-family mortgages were on apartment buildings that had been financed as tax shelters. Since HUD programs gave rent subsidies to developers rather than tenants, the developers could use HUD mortgages to finance the buildings based on the value created by the subsidies. The tax shelter partnerships used to finance the properties were able to get tax write-offs on the full value of the properties — including that portion of the value created from the subsidy and financed with the HUD mortgages. If the partnership defaulted on the mortgage, HUD might tear up or reduce the mortgage owed, but then investors would be forced to recognize the debt forgiveness as income.” And they would have to pay more taxes.
She said, “Cuomo wanted either to give the defaulting owners more subsidies or reengineer their mortgages, or both, in such a way that bolstered the value of the buildings and let investors keep healthy tax deductions. In other words, he wanted either to pay higher than market rents in the form of Section 8 subsidies, or insure higher than market debt, all at the expense of the taxpayers, in order to avoid the tax consequences to the owner of financing the projects at market rates. Instead of saying what’s best for the community and taxpayers, to produce affordable housing at the lowest cost to taxpayers, he said, ‘How can we generate fees for our friends.’ There was a tax shelter refinancing pork fest.”
Greer pointed out, “If there had been ‘mark to market,’ it would treat the HUD Section 8 program like private mortgages in private industry and market them at their true values. You wouldn’t have inflated subsidies, and you would have had more subsidies to give more people. Or you would save tremendous amounts of money that could be used for other purposes. Billions of dollars.
He added, “Cuomo clearly had no use for Austin Fitts. The fights with Fitts were political. Everything Cuomo did was political; he was a totally political animal. He ran the CDP [Community Development Program] block grant in HUD for a long time and fixed the system so awards would be made to places he wanted them made to for political reasons, primarily in New York, because he had his eyes on going back and running for governor.”
Greer was a civil service employee and couldn’t be fired, but when a buyout was offered in 1997, he quit the agency in disgust.
Cuomo was asked for an interview about his role in the events described here, but repeated requests to his press secretary were unavailing.
In October 1997, Cuomo fired
The reason for the firing given to
Cuomo decided that
Cuomo cancelled the Hamilton/AT&T optimized auctions of FHA mortgages. His reason, ironically, was that HUD could not do the loan sales without
Cuomo reinstated the old HUD cash-cow-for-political-friends system.
Fitts said, “Cuomo took the profits from the loan sales and used them to justify huge new [mortgage insurance] originations, creating a huge housing bubble with the elimination of down payments, encouraging people who could not afford houses to buy them. Defaults went up.” And now instead of working out the defaulted single-family mortgages, he was foreclosing. There was a spike in families losing their homes and investments. But contractors and people handling property management and disposition made money. And there was sharply reduced recovery for the government.
She thought, “Maybe they want to keep doing property disposition, because when you sell the mortgage, the buyer gets the file and sees what goes on. If you foreclose, the mortgage can be torn up and disappear. If there was fraud on the mortgage, you don’t want the file transferred or sold.”
Fitts had been suspicious that mortgage securities were being issued for phantom properties, or at least in amounts in excess of underlying collateral. She explained that an informant had told her, “They take 20 houses in a neighborhood and issue ten mortgages on each house, then they issue mortgage-backed securities with 200 mortgages. They churn defaults, one of the mortgages on each house, to generate the money to pay for debt service for mortgages on 200 houses. You have all these collateralized mortgages outstanding, paying debt service not with legitimate property cash flows but with FHA insurance proceeds. You default the mortgage, the lender makes an insurance claim against FHA, and that gives you cash. You turn the mortgage into the FHA and it gives you cash and you use that to pay the debt service on the pool.” It was a Ponzi scheme.
Two independent investigations a few years later provided more detail about HUD corruption under Cuomo. The General Accounting Office (GAO), the investigative arm of Congress, now called the Government Accountability Office, and a hearing of the Senate Governmental Affairs Investigative Subcommittee, in 2000 found that the Department was allowing lenders in the federally-insured mortgage business to engage in fraud and “flipping” that left homebuyers with crumbling houses and unaffordable mortgage payments. The fraudsters would buy property, often in poor neighborhoods, make cosmetic repairs and get puffed up property appraisals based in part on falsified documents attesting that homes had been renovated. They would sell them at high prices, with inflated mortgages, to unsuspecting buyers who trusted the appraisals. The owners of the houses quickly discovered their state, but often couldn’t afford to repair their homes, or pay the mortgages, so the mortgages were foreclosed, generating fees for property managers. And “flipped” again. It was the fraud dramatized by the Sopranos.
The hearing found that HUD exercised lax oversight over lenders. “This hearing is about government letting people down,” Sen. Richard Durbin, an Illinois Democrat. He said HUD had been “failing to keep an eye on these lenders.” Cuomo rejected the blame.
CUOMO’S HUD SUDDENLY CAN’T FIND BILLIONS
But that wasn’t the only Cuomo scandal. In fiscal year 1998, HUD had “undocumentable adjustments” of $17 billion: that is, $17 billion could not be accounted for. In fiscal 1999, HUD announced that it required $59 billion of “undocumentable adjustments” to balance the books and that it would not provide audited financial statements as required by law. It had lost track of $59 billion! Cuomo did not order the HUD IG to investigate the reason for the missing billions or to try to get the money back. In the following fiscal year, HUD declined to disclose the amount of the new “undocumentable adjustments.”
The contractor blamed for losing track of the money was a financial software company named American Management Systems, Inc.
whom then-Treasury Secretary Robert Rubin had named in 1998 to serve as Commissioner of the Internal Revenue Service. Rossotti got a special waiver to keep his
Cuomo resigned as HUD Secretary in 2001 when George W. Bush took office. Throughout Cuomo’s tenure, HUD’s Single-Family Mortgage Insurance Program remained on the annual General Accounting Office (GAO) list of federal programs vulnerable to waste, fraud, abuse and mismanagement.
* * * *
Postscript
In September 2004, Assistant FBI Director Chris Swecker warned of an epidemic of mortgage industry fraud that could become “the next S&L crisis.” Under Reagan deregulation in the 1980s, fraud by savings and loans — including one whose board included Neil Bush, the then Vice-President’s son — cost taxpayers $132 billion.
MAKING FEES FOR HIMSELF
When Cuomo fired 
became one of Cuomo’s major fundraisers in his unsuccessful run for the 2002 Democratic nomination for
9 Responses to “Fees for Our Friends: The Scandal that Taints Andrew Cuomo”
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About this Story
- By Lucy Komisar
- Posted Tuesday, August 22, 2006
- Open for comments
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August 24th, 2006 at 12:34 pm
I have been working as an organizer in HUD buildings since 1996. Your article is a great reminder of how little things change.
Chris Greer was one of the best people to ever come out of HUD. I would very much like to get in touch with him. If you are liberty to share his contact information, it would be greatly appreciated.
August 25th, 2006 at 12:11 am
Wow, what a thorough and well written article on HUD’s dysfunctionality.
Cuomo CANNOT become attorney general.
August 26th, 2006 at 12:39 pm
[…] Fees for Our Friends: the Scandal that Taints Andrew Cuomo By Lucy Komisar - The Komisar Scoop (Aug 22, 2006) […]
August 30th, 2006 at 9:48 am
I’ve been aware of Catherine Austin Fitts’ story for some time now. Thank you for writing a concise and thorough synapsis of the frauds and gubmint’ work.
September 1st, 2006 at 10:59 am
I would suggest advertising this article on the NY political blogs:
http://blogs.nydailynews.com/dailypolitics
http://blogs.timesunion.com/capitol
http://thepoliticker.observer.com
http://empirezone.blogs.nytimes.com
September 10th, 2006 at 11:23 am
Hi Lucy I read your article. Thank you. This information is too important not to get out. Banks have abused SBA also. I am not a writer. Just a former business owner. Things were so out of hand by 2000 and no one was looking that I could find. I read OIG reports of the same tactics being used on disaster loans, Small Business Administration loans, now on student loans. In 2003 I found a lot more information on the internet than I can find now. I read report after report of the large banks giving false information on audits.
Wells Fargo created a lot of false documents in my SBA loan file, misreported funds, and gave false information to SBA. I was buried by Wells Fargo when I refused to give my signature to them on a waiver for anything they had done wrong. All of the pieces started fitting into place once I was able to start searching. Wells had 33% of the retirement fund in Martin Marietta stock. Martin Marietta tried to but the use of my name wanting me as a partner but control of my mine. I had no clue that at that time Wells Fargo had filed a false UCC filing claiming the mine property at the onset of my SBA loan.
In 2002 Wells Fargo literally took any viable means of support from my husband and myself when I refused to sign their waiver. It takes days to write down all that transpired. We spent the next few years learning how to defend oneself legally. It simply can’t be done by a person when they have no financial means and no legal background. In my loan file at SBA I found a document that read “ROBEX INC” on one line, then “GOURMET GRINDER INC” on another line where my business name belonged.
Banks get people to sign off so these matters will not get looked into. The banks then collect from the federal government. The people have to pay the fraud of these banks twice. Once in their property. Then in larger tax bites. The majority of people out there are simply trying to feed and house their families each day.
In all my frustration I kept a watch on blogs or forums over the last few years. They disappear into cyber space and these people who have been cheated their voices are lost.
I started writing a blog last week. It was stopped cold before the week was out. My home email rodni@grm.net
April 27th, 2007 at 3:38 am
Excellent article! I applaud you for helping to spread the truth about Catherine’s goodness, talents & innocence - as well as the government corruption! We need more writers like you, who have no fear of writing the truth.
June 16th, 2008 at 8:36 pm
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June 23rd, 2008 at 11:56 pm
Wow, thanks for a brilliantly, and in depth article. I felt like a load had been lifted the first evening I heard “Austin” on the Dennis Bernsteir, Flashpoints show recently, and continue to be amazed. How lucky we are to have such a resource. Been thinking for some time, that although activism in all the fronts today is necessary, she nailed the cornerstone so well, that unless we change the financial system, the political system, democrat or republican will go on ad infinitum. So many crooked people inside, so few ethical, honest, and with credibility, who actually stay strong after what she went through, to go on sharing.
I already have some money local, and have to check out other accounts to see if I need to move them, peanuts in terms of amounts, but I am taking her advice whenever possible. Unfortunately, I really have not say in my retirement PERS, as we have no right of management of funds, and I know from several articles, that they have made some “mistakes”, perhaps they are part of the problem, as are JP Morgan, etal., as well.
Thanks again for your effort in publicizing this wonderful article. My biggest sorrow to date is that this information has come to me so late in the game, but better late than never, and I have retirement to look forward to in 1.5 years, and will be doing as many seminars with Catherine Austin Fitts audios as I can possible afford.