Housing chief ignored looming crisis

WASHINGTON — In late 2006, as economists warned of an imminent housing-market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."

He pushed for legislation that would make it easier for federally backed lenders to make loans to risky borrowers. He issued a rule that was criticized by law enforcement because it could increase the difficulty of detecting and proving mortgage fraud.

As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to friends and political allies. But critics say an equally significant legacy of his four years as the top housing officer was gross inattention to the looming housing crisis.

They contend that Jackson ignored warnings from within his agency, the Department of Housing and Urban Development, whose inspector general told Congress that some of the secretary's efforts were "ill-advised policy" and likely to put more families at risk.

During Jackson's tenure, foreclosures for loans insured by HUD's Federal Housing Administration (FHA) have risen and default rates have hit a record high.

All the while, Jackson enjoyed a chef and a full-time security detail. His office launched a new $7 million auditorium and cafeteria at HUD headquarters, money that some within the agency believed should have been directed toward housing for the poor. His office solicited an emergency bid to obtain portraits of Jackson and four other HUD officials at a cost of $100,000.

Jackson, who declined to be interviewed, will be remembered as a Cabinet secretary so committed to President Bush's goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis, according to interviews with more than 30 current and former HUD officials and housing experts, and a review of documents and audits.

In speeches, he urged loosening some rules to spur more home buying and borrowing. "I'm convinced this spring we will see the market again begin to soar," Jackson said in a June 2007 speech. He also told the audience that he had no specific laws to recommend to prevent a repeat of the lending abuses that caused the mortgage crisis.

HUD spokeswoman D.J. Nordquist defended Jackson's record. "Secretary Jackson is a big believer in the U.S. housing market and won't apologize for saying so," she said in a written response to questions. She said Jackson hoped that FHA loans could provide a safe alternative for borrowers about to default on private subprime loans.

Jackson joined HUD as a deputy secretary in 2001. He and Bush had been friends since their days as neighbors in Dallas. When Secretary Mel Martinez stepped down to run for the Senate in 2004, Bush promoted Jackson.

A lead smelter's son and the youngest of 12 children, Jackson, 62, has said he "never imagined" he would serve in the Cabinet. He and his wife became ubiquitous on Washington's social circuit, making a 2005 list of the "100 most invited" people.

He made a show of having a cook on HUD's staff, visitors said, a perk normally associated with Cabinet members who have international travel schedules. Nordquist said the cook is an assistant who helps with receptions and banquets and performs other tasks.

Cabinet members are entitled to security, but some have eschewed the expense. Jackson sought a full-time detail.

He launched the renovation of a larger HUD auditorium and cafeteria to replace what his spokeswoman said was a "deplorable" 40-year-old facility. The oil portraits were commissioned in an emergency contract last fall so that they would be ready for a scheduled opening, later postponed.

"How can you spend that much money on building a shrine to yourself?" asked Peter Sepp, of the National Taxpayers Union, a fiscally conservative watchdog group.

In the policy arena, Jackson made known his loyalty to Bush and his determination to increase the number of U.S. homeowners by at least 5 million. Loans by FHA-approved lenders accounted for less than 10 percent of the overall market in the past five years, but its loan programs were supposed to be targeted to low- and moderate-income individuals, many of them first-time buyers.

In 2006, Jackson proposed plans to modernize the FHA lending process. Backed by the White House, his proposal would allow FHA lenders to offer loans with no down payment, eliminating the long-standing 3 percent minimum. Lenders could increase the size of the loan to cover the median home price in high-cost areas. High-risk borrowers could qualify by agreeing to pay higher premiums.

Jackson said the goals were to encourage first-time homebuyers and to help the FHA compete with the booming subprime market. But Inspector General Kenneth Donohue chided Jackson and FHA Commissioner Brian Montgomery, a former White House political aide with no previous housing experience.

Testifying on Capitol Hill in March 2007, Donohue agreed that the FHA needed changes to help working families, but not to mimic subprime lenders. He said some of the changes would help lenders reach high-end buyers.

He also expressed concern that Jackson's proposals would do nothing to detect abuse and fraud. At the time, the FHA monitored 6 to 7 percent of the loans in its portfolio.

Nordquist said committing fraud in FHA loans is "infinitely more difficult" than in private mortgages and that FHA reform efforts took several steps to manage risks.

Yet, Jackson issued a rule allowing FHA lenders more self-policing. Under the lender-insurance rule that HUD implemented in 2006, lenders could endorse FHA loans without prior review and no longer had to submit paperwork. The agency's inspector general and the FBI objected, and HUD's office of general counsel registered concern because detecting fraud would be more difficult without lenders' paperwork.

Nordquist defended the change as removing "mountains of paperwork that increasingly became unmanageable." Inside HUD, numerous staffers said, Jackson made clear that he believed overregulating and investigating mortgage lenders could harm Bush's homeownership goals.

On Jan. 4, 2006, the U.S. attorney in Detroit announced what was then the largest mortgage-fraud case ever filed. Based on a HUD audit, law-enforcement officers found a pattern of falsified mortgage documents by ABN Amro, one of the largest FHA-approved mortgage lenders. The company agreed to pay $41 million in a civil settlement.

Jackson and Montgomery, according to three current and former government officials familiar with the matter, reacted coolly to the historic settlement. Both complained to their staffs that punishing FHA lenders could backfire if they wanted those lenders' help in increasing homeownership.

Nordquist said Jackson and Montgomery completely supported the settlement.

HUD has a standing agreement to refer cases to its inspector general when it suspects mortgage fraud. But an audit by that office of one sample of recent records found that HUD did not refer more than two-thirds of the potentially fraudulent FHA mortgage loans it identified.

Jackson had insisted he would stay in office until the end of Bush's term. But last month, several Democratic senators who hold HUD's purse strings called for his resignation. A federal grand jury is investigating whether he lied to Congress about his involvement in contracts and whether he steered millions of dollars in government work at the Virgin Islands and New Orleans housing authorities to friends.

Sen. Patty Murray, D-Wash., head of the Senate Appropriations subcommittee that oversees HUD, said March 21 that Jackson had become unfit to lead the agency.

"We are in the midst of a national housing crisis," she said. "The allegations of cronyism and favoritism against Secretary Jackson are a worsening distraction at HUD at a time when we must have a credible housing secretary that is beyond suspicion."

Washington Post researcher Julie Tate contributed to this report.