WASHINGTON -- After what its own auditors call years of neglectful management, the Department of Housing and Urban Development expects to lose as much as $11.9 billion as hundreds of apartment building owners default on their government-insured mortgages.
Most of the losses, which are expected to occur in the next few years, would be borne by taxpayers through congressional appropriations. The troubled loans represent more than a quarter of the $43 billion in mortgages insured by the department under programs to encourage the construction of apartment buildings.
The losses could eventually bring hundreds of thousands of apartments under the ownership of the housing agency, which has a track record of allowing problem projects to deteriorate into slums. The buildings in question range from luxury apartments to tenements and are found all over the country, though the troubled real estate is concentrated in New England and Texas.
Under the loan programs, the government sought to increase the nation's housing supply by encouraging banks to make loans on projects they might otherwise pass up. Most of the loans were reviewed in advance by HUD, which promised to repay lenders in full if the developers defaulted on their mortgages. In reviewing the loans, HUD was supposed to deny insurance on those deemed exceedingly risky.
Henry G. Cisneros, the housing secretary, acknowledged "the potential for massive losses" and in a written statement on Friday called the forecast "the single largest problem I have inherited" in a department rife with management problems. He pledged aggressive actions to mitigate the losses, including moving more quickly to resell buildings acquired through loan defaults.
Housing officials have known for years that they faced significant losses in the insurance program. But the extent of the problem became clear only in April after a study by Coopers & Lybrand, an accounting firm, indicated that the amount of bad loans was more than double the department's earlier estimates.
A copy of the confidential report was obtained by the New York Times.
Much of the projected loss stems from the general downturn in the real estate market, which has also brought large losses to private lenders.
But reports by the agency's inspector general have also emphasized neglectful management by HUD, which may have added billions to the bailout's costs. There is no way to determine how much of the loss could have been averted through more vigilant oversight.
The $11.9 billion projection is the department's best guess, under current economic forecasts, of the amount the government will lose by paying off the failed loans. Actual losses could be greater or lower, depending on the health of the economy, the steps Congress takes and the success of the department's management strategy. If the forecast holds, the cost to the taxpayers would be several times that of the losses that occurred under the HUD scandals of the late 1980s.
'Spend dime to save dollar'
Mr. Cisneros said he had been "working daily" with the White House to draft a bill that would give the department greater flexibility in managing and selling distressed properties. Part of that strategy involves seeking additional money to renovate and sell the properties.
That notion has drawn early approval from Sen. John Kerry, a Massachusetts Democrat, who said last week, "This a question of whether we're willing to spend a dime to save a dollar."
Mr. Kerry is a member of the Senate subcommittee on housing and urban affairs, which is holding a hearing on the issue.
A small portion of the $11.9 billion would be covered by the insurance premiums paid by building owners. But the majority would come from congressional appropriations, increasing the deficit. The new costs, which would be allocated to the department's annual budget, could squeeze the amount left over for housing assistance for the poor.
As of 1991, HUD estimated that it was likely to lose $5.5 billion, with the bulk, $3.6 billion, coming from a troubled program from the Ronald Reagan era. That program, called co-insurance, gave lenders handsome fees for issuing loans without HUD's advance approval, but it left the government with most of the risk.
But the Coopers & Lybrand audit found HUD's other programs in far deeper trouble than the agency had previously understood. It prompted HUD to raise its 1992 estimate of what would be lost under other programs to $7.8 billion from $1.5 billion. As a result, the co-insurance program now accounts for only about 30 percent of the $11.9 billion that the department expects to lose.
Obstruction of justice