By Catherine Austin Fitts
June 2003


In the summer of 2000, a member of the staff for the Chairman of the Senate appropriation subcommittee (with jurisdiction over HUD and its FHA mortgage insurance and Ginnie Mae mortgage securities programs) confided to me that they believed that HUD was being run as "a criminal enterprise." I responded that I "did not disagree."

Reaching that conclusion was a long time coming. It took many years of experience implementing practical and sound reforms to the FHA mortgage system, only to have the system reject any and all efforts to have it become anything other than an integral part of a significant mortgage bubble and a pork and slush fund operation. Because FHA and its securitizing agency, Ginnie Mae, as a practical matter are run by the US Treasury, the Department of Justice, the NY Fed (as depository for the federal government and manager of the Exchange Stabilization Fund) and a group of defense contractors and JP Morgan-Chase, the implications regarding the integrity of the US financial system are profound.

The following list describes some of my representative experiences working with FHA, the lead US mortgage insurance agency and regulator, as Assistant Secretary-FHA Commissioner in the first Bush Administration, as the President of Hamilton Securities Group, the lead financial advisor FHA during the Clinton Administration, and then as a litigant with the US Department of Housing & Urban Development and their informant, Ervin & Associates, during the Clinton Administration and the second Bush Administration.

These experiences illuminate the extraordinary efforts that I and many fine, hardworking government officials, congressional staff, private contractors, members of the press and constituents expended trying to ensure that HUD and its significant securities operations were managed according to the law and traditional principles of fiduciary obligation. They document the manner in which we were frustrated time and time again. In combination, it is clear that the inability of the government to work efficiently or lawfully is not the a result of inefficient government employees, misunderstandings or incompetence. Very powerful forces are at work to ensure that government does not work and appears incompetent.

These experiences informed the development of the solari investment model which can emerge a healthy financial system out of our current mess. My desire to develop the solari investment model is what attracted me to working with the rich pricing data and prototyping flow at FHA.

As described in more detail at, the goal of the solari investment model is to turn our current negative return on investment economy to a positive return on investment economy (that is, what some call a sustainable economy).

My experience describes the resistance of our current financial system -- one vested in fiat currency, the absence of place based transparency and government disclosure and a debt based financial system where access and management of equity is much more centralized that is commonly understood.

My experience raises questions about the integrity of the currently outstanding mortgage debt issued by Ginnie Mae (HUD) and the mortgage GSEs, Freddie Mac, Fannie Mae and the Office of Finance at the Federal Home Loan Bank Board. These questions include whether a meaningful principal amount of US mortgage securities which are collateralized by FHA or other federal credit insured mortgages (VA, Farmers Home, etc) have been issued fraudulently, either with intentionally inflated appraisals, churning of contrived defaults, or with falsified collateral. Such fraud would have occurred with the direct or indirect complicity of the US Treasury and the NY Fed, as depository for the federal government and manager of the Exchange Stabilization Fund.

In the past, HUD has often taken the position that contracts fraudulently issued by HUD officials and employees are not valid and binding. In fact, HUD has a consistent pattern of abrogating contracts for political convenience on the ruse that HUD is not accountable when HUD does something that HUD later determines is "wrong." Given that FHA single family mortgage insurance is a self supporting fund -- the Mutual Mortgage Insurance Fund -- without the benefit of the full faith of the federal government, the financial soundness of the MMI Fund and the rights of the existing premium holders could in fact dictate potential failure to perform or the possibility of abrogation on existing mortgage insurance contracts. Whether or not, or how, such failures or abrogation might impact Ginnie Mae's full faith and credit is an additional question.

In addition, there is a significant possibility that the combined policies of US banking, corporate and governmental leadership to reduce citizens income and assets (See "Dillon, Read & Co. Inc. and the Aristocracy of Stock Profits" and "The Story of Edgewood Technology Services") and to increase consumer, government and mortgage debt, have resulted in a growing volume of foreclosures, deficiency judgments and debt actions by the federal government that have profound implications for the personal freedoms of the American people. That is, the cost of the current mortgage bubble may be far greater than is commonly realized.


Federal Housing Administration (FHA) at HUD


Growing Up, West Philadelphia, 1950-67


Affordable Housing

Soprano Family Fraud

The war on poverty was sold as helping low and moderate-income people.

Fitts' parents after WWII buy a small row house at 48th and Larchwood in West Philadelphia, using VA mortgage insurance.

In the late 50's/early 60's, four homebuilder rehabs at 48th & Osage default immediately after rehab and remain boarded up for many years. Along with the advent of significant narcotics trafficking in the area, the value of Fitts' parents and neighbors homes and businesses are significantly harmed, wiping out and capping many families' savings.

Despite the presence of families in the neighborhood who would like to buy a home and could service the mortgage and maintenance, the four homes stay boarded up for years. The neighborhood is harvested by organized crime/HUD fraud, systematic car theft, narcotics trafficking, a house of prostitution that operates with police protection, etc. This inspires Fitts to conclude that the people destroying the neighborhood are making much less on HUD fraud than the people in the neighborhood are losing. As a result she determines to find a way to reverse the process and try to find the solari model.

In retrospect, the war on poverty, like the war on drugs, had nothing to do with helping anyone in need and everything to do with organized crime harvesting places and building centralized control, including consolidating local small business and banking into large corporations and banks.


For more on West Philadelphia, see "The Myth of the Rule of Law" & "Narco Dollars for Beginners"


Assistant Secretary of Housing-FHA Commissioner

Bush I Administration
1989 - 1990

FHA = $320 Billion Mortgage Insurance

& Transparency

Absence of
Disclosure & Transparency

Fitts has accountants moved to FHA after being told they report to another Assistant Secretary of HUD and that she is not allowed to speak with them. She discovers that FHA is losing $11MM a day in the MMI single-family fund. As a result, with the help of GAO, she persuades OMB to allow accrual accounting for FHA insurance programs, including legal requirement for annual actuarial analysis and audited financial statements. She significantly increases budget and staff resources to support transparency and sound financial management including LAN network with e-mail and computers to all employees

OMB becomes so enthusiastic about the reforms they implement them government wide.

After Fitts fired, effort does not result in strong financial operation and transparency despite the authority and resources provided.

Indication is that increased involvement of accounting and systems contractors has increased potential for financial fraud, including through the computer systems.

Fitts institutes internal place based cash flow reports: over 100% of losses in single-family fund turn out to be Iran Contra areas: Texas and Colorado Regions. Total losses for Texas region (includes Arkansas, Oklahoma & Louisiana) for the prior year were over $2 billion, with both single-family fraud and multifamily coinsurance fraud contributing.

Fitts told that the place based cash flow reports were cancelled the day after she was fired.

Fitts later learned that Texas Regional Deputy Administrator had suspended the Arkansas Development Finance Agency during the Iran Contra period and was targeted by the Clinton Administration as result. ADFA was alleged to have been involved in over issuance of mortgage securities, questionable offshore insurance investments such as Coral Reinsurance, and money laundering of the state portion of profits from Mena, Arkansas. The ADFA allegations inform the same patterns alleged in the state and local housing finance agencies that are key players in the HUD system.

Fitts promotes transparency and competition throughout FHA programs

Iran Contra cover up done by Kemp, Keating, Delli Bovi etc. promoting scandal and clean up targeting at the little guys or occasional scapegoating, such as the "Robin HUD" scandal in the single family foreclosure portfolio or contriving the default of almost the entire coinsurance portfolio despite estimates that it would significantly increase FHA Fund losses.

New Mortgage Insurance:

Actuarially Sound & Good for Existing Homeowner Values,
1989 - 1990

Actuarially Unsound & Harmful to Existing Homeowner Values

Actuarial analysis and requirement for audited financial statements and reporting instituted by Fitts in single family leads to MMI Fund premium and terms and conditions recommendations that result in more financially responsible lending practices much more supportive of homeowners equity in a place.

OMB leads effort to institute "credit reform" that requires federal credit such as FHA to appropriate loan loss reserves for new mortgage insurance originated. This is based on the theory that this will stop Iran Contra type abuses in the future. Fitts is extremely supportive of OMB efforts.

After Fitts is fired, final revised credit terms on FHA driven by budget gimmicks to generate budget surplus to fund government wide programs.


The team forgets that assumptions and books can be cooked. Credit reform fails to prevent the mortgage bubble in the 1990's.

Fitts tries steadily to build support for place based underwriting in single-family mortgage programs.

Efforts for regional (place based) underwriting are regularly rejected. Given that more than 100% of Fund losses are in two regions marked by significant fraud, raising national premiums and holding to national underwriting standards ensures that fraud can continue while budget gimmicks generate "surplus" to fund other programs.

Restricted, then shut down multifamily coinsurance program. Started during the Reagan Administration, coinsurance has generated $9 billion portfolio of multifamily insurance originated by private mortgage brokers authorized to act in the place of FHA.

Political interference in coinsurance portfolio particularly corrupt both in individual cases (DRG, Puller) and program; Fitts later learns this portfolio alleged to involve much Oliver North/NSC fraud.

Ervin & Associates, who later brings litigation to drive numerous government officials and Fitts company out of HUD, hired to service the defaulted Coinsurance Portfolio. Ervin is brought into FHA by Ronnie Rosenfeld, the Deputy Assistant Secretary of Single Family, now President of Ginnie Mae.

Effort to include low income housing tax credits in mortgage underwriting and allocation issues

Subsequent experience indicates that low-income housing tax credits (managed by US Treasury) are bad policy when viewed in terms of optimizing government investment by place and filled with pork and waste.

During the first meeting to organize the actuarial analysis for the FHA General Fund, Fitts discovers that there is no record or database of all outstanding General Fund insurance, including no reliable records of the amount of FHA insurance outstanding. Her insistence that this will be created is met with significant resistance without a logical explanation.

Fitts is fired shortly thereafter. One question is whether conforming the outstanding multifamily mortgage insurance and making it transparent and subject to proper disclosure is not politically feasible - including for reasons of criminal legal liabilities.

Price Waterhouse, chosen to be the first FHA auditor and to do the actuarial studies, is resistant to the idea of a complete and reliable multifamily database and reporting, later turns out to be particularly good at "cooking the books."



Lowering Inventory of
Defaulted Mortgages & Foreclosed Properties/Increasing
Recovery Rates & Mitigating Harm to Local Homeowners,
1989 - 1990

Growing Inventory of
Defaulted Mortgages & Foreclosed Properties/Unnecessarily High Recovery Rates & Harm to Local Homeowners

Aggressive actions to lower the foreclosed REO single family portfolio from 50,000 properties to significantly less

After Fitts fired, inventory still much higher than need be. RTC begins loan sales. Although RTC loan sales begin to generate higher recovery rates than foreclosure methods, HUD makes no effort to look at loan sales until office of multifamily issues an RFP for both single family and multifamily in 1992/3.

Efforts to understand churning of single family FHA mortgages in Philadelphia, Chicago, Los Angeles, New Orleans, Washington, Baltimore, Texas, Denver, etc.

Efforts are frustrated by lack of data and reticent of field staff and leadership to discuss what is happening and why.

This pattern is later described in Soprano TV show and in Community Wizard maps.

Recommended multiple actions to reduce losses from defaulted coinsurance portfolio

Significant amount of coinsurance portfolio is defaulted into HUD under highly political circumstances. (See Kemp Tapes.) Ervin hired to manage resulting large defaulted coinsurance multifamily mortgage portfolio.

Regulation & Management
1989 - 1990

Poor Regulation & Management

Fitts refuses order by Kemp to award project based subsidy illegally to NY project later identified as sponsored by Andrew Cuomo, son of the governor of NY and later Secretary of HUD.

Much more direct political control and deal action in FHA alleged after Fitts is fired.

Fitts lobbies for place based waivers that will allow far more optimization of federal government money and regulation within a place

No White House or HUD interest in expanding this prior Administration effort

Numerous actions to decentralize decision making to field offices and local government

Push is for centralization and pro-centralization policies accelerate after Fitts is fired. When Jim Rouse asks Secretary and his staff why they are pushing greater centralization as he thought that the Republican philosophy is decentralization, Tom Humbert answers, "because we're here now."

Fitts supports optimization of HUD money in a neighborhood - moving Hope VI money from public housing to FHA single family defaulted portfolio

Little interest. HUD continues to finance public housing rehab and new construction at an all in cost of $150,000-250,000 per unit when single family foreclosed properties are churned by speculators nearby and could make for housing at a cost of $25,000-100,000 per unit. This raises the question why such a significant portion of the single-family portfolio in certain neighborhoods is reserved for churning and speculation.

Fitts reports full personal financials and goes through full FBI check and Senate confirmation - HUD officials leak financial to press.

The behavior of the leadership is not appropriate for the professional management of a significant portfolio of financial assets and liabilities. Kemp and his key staff regularly smear Fitts, including Kemp telling Fitts that he would never come to her house because her house was bigger than his house and he would find it castrating; and later ordering her to lengthen her skirts. Harry Clark, who has worked for Kemp on his campaign, calls Fitts saying that the White House wants to know if Kemp has been behaving in strange or irrational ways (Fitts interprets Clarks question to mean whether or not Kemp is manic and the White House is trying to determine whether or not he needs to hospitalized). In a later manic-type episode at a regional directors meeting at HUD, Kemp states that he does not have to obey the law that he answers to a "higher moral authority."

Ultimately, this leads Fitts to conclude that highly political and financially inexperienced leadership leaves the US Treasury, DOJ and the lead contractors such as Lockheed Martin and JP Morgan-Chase to run the real operations unencumbered by HUD.

Fitts is assigned to help with HUD responsibilities on RTC Oversight Board to coordinate HUD disposition with government liquidation of S&L and bank portfolio or mortgages, securities and properties.

The fact patterns indicate that these portfolios involve significant fraud and the resolution and disposition strategies are quite supportive of destroying the histories and files that might illuminate fraud or result in seizing back stolen monies or successful prosecutions.


For a near complete version of Fitts' experience in the Bush I Administration, audio chronological description (approximately 6-8 hours) recorded in 1998/99 is available in the Black Ops Radio archives at

Lead Financial Advisor to FHA

Clinton Administration: 1993-1997

Litigation with HUD, Clinton and Bush II: 1995-2003

FHA = Est. $400-500+ Billion

Disclosure & Transparency

Absence of
Disclosure & Transparency

1994 - 1997

Fitts promotes maximum disclosure of HUD portfolio and HUD defaulted portfolios in HUD loan sales and use of internet and the web to make data accessible.

Fitts assigns significant staff to collecting HUD data. These groups experience high turnover, resulting in data collection being lead by very senior people and requiring Fitts to write complaints to HUD regarding double bind --- HUD is stopping the data collection that HUD is ordering and paying Hamilton to do.


HUD contractors are extremely difficult to deal with on effort to find and make data accessible, including Lockheed, EDS and contractors on single-family portfolio. Lockheed and the HUD staff are particularly sensitive about TRACS, the tenant database system. E&Y does the place based data warehouse, which becomes quite controversial.

Fitts promotes design books for all large transactions and successfully lobbies for them to be made internet accessible

HUD resists doing design books, and then resists putting them on line. After loan sales are cancelled, they are moved offline. Solari later reposts one on line.

1991 1997

Fitts develops the "dream machine" at Hamilton Securities - many tools and databases that increasingly make the HUD portfolios and operations accessible to the HUD officials and marketplace. A new suite of tools based on HUD loan sales pricing information prepares for launch in combination with potential trading and principal operations.


Hamilton discovers that HMDA data is purposefully being made obtuse in presentation and granular place based data is inaccessible.

Publishing single-family data is highly controversial but no one can say exactly why.

HUD orders all HUD data cleansed from Hamilton computers and returned to HUD in 1997, in connecting with firing Hamilton.

Combination of Ervin and HUD supporting actions cause all development to stop and tools to be made practically inaccessible for development.

1995 -1997

Fitts develops Community Wizard and prepares to make it web accessible. In combination with a suite of portfolio strategy tools, the Hamilton databases and tools are designed to conform mortgage securities to property-by-property and homeowner-by-homeowner data that is publicly available, or to HUD for FHA portfolio strategy on HUD data that is not publicly available.

The combination of tools is designed to identify reengineering opportunities to create equity value.

A beta version of Community Wizard is distributed gratis to HUD HQ & field offices. The response is significant - accolades from Congressional staff as well.

HUD Secretary Cuomo sends staff over to Hamilton to explore HUD's purchase of Community Wizard. The team from HUD includes Dick Burke.


After AIG mysteriously declines to provide defense per E&O policy, Former General Counsel of CIA, Judge Stanley Sporkin orders Hamilton files and backup tapes under court control; Hamilton's offices seized and HUD investigator tries to take the position that Fitts is not allowed to have a copy of digital memory of the company, including databases and tools. Government investigators insist on supervising the scrubbing of data from computers and laptops sold at auction.

Burke is later reported to Fitts by HUD financial staff as the contract manager for Lockheed's contract with HUD. Allegations grow regarding kickbacks on the Lockheed contract. Retired field staff later describes Burke as a "company man."

HUD's place based software CD for public sales, HUD 2020, leaves critical data out. Allegations grow that the data effort is being used to help with redistricting along with the census efforts that grow increasingly controversial. DynCorp is involved with Voting Act issues through the J-Con contract at DOJ also rumored to be part of DynCorp's PROMIS responsibilities at DOJ.

1994 - 1997

Fitts supports officials helping to publish first audited financial statements and to improve the financial reporting and operations


Private NY mortgage banker meets with Fitts after first audited financial statements are published. He insists that his business has been tracking total outstanding FHA mortgage insurance and that it is many multiples of what FHA/HUD is saying in their Price Waterhouse audited financials.

After honest FHA Comptrollers are pushed out and Hamilton/Fitts fired, HUD is missing $17 billion in fiscal 1998, $59 billion in fiscal 1999 and refuses to publish audited financial statements and declines to publish undocumentable adjustments in fiscal 2000.

1996 - 1997

Fitts promotes budget tool that documents budget assumptions; declines to provide Hamilton support and name to budgets done that ignore the impact of welfare reform on HUD section 8 and other FHA and HUD programs; Community Wizard indicates that the HHS population in key urban areas in HUD buildings is quite high. This means that HUD and HHS are making contradictory policies and budget decisions for people who are one and the same - living in the same building. For example, while HHS is canceling welfare, HUD buildings have rules that tenants are not allowed to have home businesses. HHS tells HUD they estimate that they have $6 billion of data servicing needs as a result of welfare reform yet the Administration is not comfortable with the ETS model of creating data servicing businesses in neighborhoods that are expected to reduce subsidy flows.


Chief of Staff to Senator Kit Bond, then Chairman of the Senate subcommittee in charge of HUD appropriations tells Fitts in 2000 that HUD is being run as a "criminal enterprise". One of Fitts Senator's Thompson reports on government accounting systems and financial reporting. The 11 agencies not in compliance with laws include HUD and represent approximately 85% of the federal budget- HUD and DOD are missing $3.3 trillion in recent audits. HUD is has $59 billion in undocumentable adjustments in fiscal 1999 and refuses to produce audited financial statements for FY 1999. In fiscal 2000, HUD declines to disclose undocumentable adjustments. Over the period, the appropriations committees and Fitts' congressional delegation support significant appropriation increases for HUD.

AMS is the company that installs, owns and operates HUDCAPS, the system credited with missing $59 billion at HUD in fiscal 1999. As of the time that HUD reports undocumentable adjustments of $59 billion, they have paid AMS $206MM. As opposed to their treatment of Hamilton (who a year prior to having its contract terminated for convenience, had reported a potential opportunity cost of $3.8 MM on a two sales that had successfully generated hundreds of millions in savings in a performance that had been considered quite excellent for government savings), HUD does not fire AMS and does not seize any payments owed to AMS or ask for AMS to take responsibility for any missing money. The Acting CFO charged with cleaning up the undocumentable adjustments is targeted by the HUD IG.

The AMS Chairman, Charles Rossotti becomes the IRS Commissioner and is provided a waiver to permit him to continue to retain ownership of a sizeable amount of AMS stock. Hence, the value of his stock is increased as AMS is not fired by HUD or continues its IRS contracts. IRS manages manages many of the most critical financial databases in government, including those used for money laundering enforcement.

1995 - 1997

Fitts promotes honest internal reporting of facts regarding contract renewals for Section 8 HUD subsidy and the impact on the multifamily portfolio


Harvard Endowment interests (NHP, Rod Heller) lead switch in policies from those that resolve issues in a manner that optimize positive return on investment for governments, communities and pension funds to more special interest pork. Heller takes position that government has promised business and profits and that impact on taxpayers and communities is not relevant. The current FHA Commissioner, the current head of LISC and numerous members of the Administration get and return to jobs at Harvard; Harvard Endowment rises from $4 billion to $19 billion during the Administration. Despite extraordinary costs to taxpayers and citizens of Harvard behavior as investor, advisor and/or government contractor in HUD, Russia, Enron, Harvard Endowment profits are fully tax exempt as an "educational institute."

Rod Heller is adamant with Fitts that the government owes him and other private companies like his a guaranteed return irregardless of performance or financial merits, but can not articulate why this is so.

1995 - 1997

Fitts promotes policies related to government info sovereignty re: federal credit program software and data.


Administration supports policies that support the consolidating of software into the private companies and government contractors involved with PROMIS; Alltel reports that it is software is used to service a majority of the outstanding US mortgages; allegations of use of PROMIS to compromise HUD systems and centralize mortgage data and other consumer financial data grow; great controversy develops around FHA/HUD's involvement in software scoring systems for underwriting new originations.

1996 - 1997

Hamilton hires lobbyist and lobbies Congress to pass legislation requiring place based financial disclosure by federal agencies.


Effort is put on hold when Hamilton fired in 1997 and physical harassment and surveillance and smear campaign of Fitts worsens.

New Mortgage Insurance:

Sound & Good
for Existing Homeowner Values

Unsound & Harmful
to Existing Homeowner Values

1994 - 1997

Increased recovery rate from HUD loan sales lowers cost of new mortgage insurance origination under credit reform and generates new budget authority to fund government programs and reduce deficit


Cooked books: OMB and appropriations committees use recovery rates assuming loan sales after canceling loan sales

1995 - 1997

Fitts promotes new place based underwriting for multifamily that will integrate equity model promoting things like neighborhood networks and efforts that are successful in moving people to employment.


HUD moves forward with a place-based effort to include neighborhood networks and other economic development efforts, which lower risk, increase collateral values and help communities. The head of multifamily originations, however, is forced out of HUD by the risks created by HUD IG investigation targeting and the Ervin-type environment.

1994 - 1997

Fitts tries to persuade the FHA comptrollers and business planning teams to avoid policies that support debt bubbles - they are in violation of the laws on FHA financial management, decrease homeowners equity and will increase debt burdens of average Americans and poor neighborhoods when information technology and NAFTA etc are highly deflationary for these groups.


FHA leads a significant federal credit bubble in coordination with US Treasury and Freddie Mac, Fannie Mae & Federal Home Loan Bank Board; bubble begins after honest FHA comptroller retires as a result of significant doubts as to the intention of the Administration and again after Hamilton is fired and second FHA comptroller leaves.

In 1995, business planning effort, Fitts points out to FHA comptroller and commissioner office staff that the new origination projections for FHA combined with the low income targets issued by FHA for Freddie and Fannie are significantly greater than the demand for target populations. A review of the FHA origination projects inspires one working group comment that to meet the targets, the exploding prison population would have to refinance several times a year from prison to meet the targets. Hamilton is told to have nothing to do with single-family origination or single-family foreclosure and disposition policies.

Portfolio strategy efforts for the FHA Comptrollers office in 1995 indicate that the Price Waterhouse actuarial studies are based on assumptions that Hamilton believes are not appropriate. The question arises where the actuarial study is using questionable assumptions to help cook reserve calculations and the books.

Significant increased volume is made possible by "cooked books" at OMB and appropriation committees after cancellation of loan sales-- by assuming high recovery rates generated by loan sales for purposes of new loan loss reserves appropriated under credit reform law, when in fact HUD has reverted entirely to traditional methods of resolution after cancellation of sales in fall of 1997.

Significant increased volume is made possible by Secretary Cuomo's reengineering initiatives. Consolidation of origination into a few offices with significant turnover of field and staff personnel along with significant increasing in contracting destroys significant institutional memory. A review of HQ and field personnel in charge of budgets and financial operations in FY 2001 can identify no FHA government employees who understand the financial operations.

In a 2003 deposition for Ervin & Associates, Susan Gaffney, HUD IG through 2002 concurs that the loan sales were initiated in part in response to her and Price Waterhouse's listing of the large defaulted mortgage portfolio as the #1 material weakness. She also states that she does not know what the recovery rates on the portfolio were before, during or after the loan sales. Her tone implies that she does not understand why anyone would expect her to know the recovery rates or that they are relevant. This means that HUD is losing billions each year and the HUD IG did not notice or care.

Lowering Inventory of
Defaulted Mortgages & Foreclosed Properties/Increasing Recovery Rates & Mitigating Harm to Local Homeowners

Growing Inventory of
Defaulted Mortgages & Foreclosed Properties/Unnecessarily High Recovery Rates & Harm to Local Homeowners

1993 - 1997

Fitts leads Hamilton design effort that results in highly successful loan sales programs. Recovery rates go from 35% to 70-90%; generates $2.2 billion savings documented by HUD & OMB and audited by GAO. Audits indicate homeowners and communities are better off with more timely resolutions.

HUD IG staff predicts a winning bid of $350MM on the first large multifamily loan sale which is valued at $296MM in the hands of the government. They are stunned by the $710MM combination of winning bids.



































HUD insists that Hamilton help with analysis and policy development for "M2M" - initiative to deal with significant expiring Section 8 subsidy contracts on multifamily properties, approximately 80% of which are also carrying multifamily mortgage insurance


The pricing on the partially assisted trust, closed in 1996, indicates that HUD and communities can do much better than it is doing currently and starts development of the place based trust concept. The initial negotiated state housing finance agency transactions in 1996-7 also indicate the opportunities to move to place based resolutions. Such transactions would illuminate the opportunities of ending the single family churning in low-income areas as well as the expensive multifamily assisted and public housing and welfare subsidies.

The initial high volume of expiring contracts are in New York and LA and bring up significant tax shelter issues in those areas.





Most members of industry assume that HUD cannot do loan sales - then are shocked by the pricing and results after the SE sale.

Ervin & Associates lobbies aggressively to be assigned due diligence duties, when that fails then teams up with Merrill, Cargill as well as Mellon Mortgage as a bidder, due diligence provider, or contractor all of which prove unsuccessful and lobbies other Wall Street firms to market proprietary HUD data.

The strongest resistance to increasing recovery rates is in single family. Deputy Coonts says that it is more important to have a large inventory of foreclosed single-family properties so that HUD can be a "full service real estate operations." HUD issues

$900 MM in contracts to single family servicers to manage the growing portfolio of single family foreclosures in 1998. The HUD IG and Ervin are silent on the higher transaction costs and lower recovery rates of these single-family operations.

From 1995-97, HUD consistently refuses to allow individual bids on single-family loan sales, a suggestion made by Jim McTague of Barons in 1995. McTague indicates that allowing individual homeowners and other nearby to bid for one mortgage will engender tremendous press interest and he will write about it. Fitts, eager to build a competitive retail market for the single-family sales, persists in trying to persuade HUD to not individual bids to $1MM or more. The Deputy Comptroller, Chris Peterson, is adamant that HUD cannot bring in servicers to close this and the logistics are too much trouble. This opposition never makes sense given the political and financial advantages of allowing one on one bids from individuals and homeowners.

HUD General Counsel and HUD IG enforcement teams complain to HUD loan sales team that they can get more money in their offices from civil money penalties if loans are not sold and argue for holding loans out of sale even though the cost to the FHA fund and to nearby homeowners and real estate is much greater; When Hamilton contract cancelled, the HUD IG gets a special appropriation from Senate Appropriations in the same amount as the remaining contract authority for Hamilton contract for Operation Safe Home - bringing the War on Drugs and increased civil money penalties deeply into HUD. Neighborhoods not working are better for DOJ and HUD enforcement business - particularly when it dovetails with private gentrification and the housing and mortgage bubble.

Optimization model significantly shifts yields in the marketplace in a manner that is less than popular with big bidders as well, inspiring Michael Eisenson at Harvard Endowment to tell Catherine Austin Fitts

"F'k you" when expressing his opinion about the optimization technology. (See Edgewood Technology Services)

HUD cancels loan sales on a pretext in 1997 that they cannot do loan sales without Hamilton who has been fired for convenience. This is not true. In 1995, Hamilton enlisted help of HUD IG office to ensure that multiple contractors were hired by FHA. Subsequently, Hamilton helped HUD bring in a series of qualified contractors and had turned over all design books and relevant tools and databases to HUD so that HUD as self sufficient without Hamilton. HUD then returns to using low recovery methods of resolution throughout the defaulted mortgage portfolio.

M2M policies through the appropriation committees in the summer of 1996 result in significant traditional resolutions. AEW (with multiple relationships with Harvard and a lead equity manager investor in AIMCO, now owner of NHP) is hired to process workouts. The lead customer for workouts is AIMCO. Former NHP staff working inside of HUD feed significant inside information throughout the process to NHP and their consultants. Chairman of NHP is alleged to brag that he had the DAS for multifamily fired. One of his partners explains to Fitts that their efforts to have Hamilton fired have failed and as a result "the big boys have gotten together and you are going to jail." The implication is that government officials at HUD must do whatever those who make money on their programs tell them or else they will be fired, framed or killed.

Portfolio strategy analysis of the single-family portfolio by Hamilton immediately prior to being fired showed some unusual "hot spots." This included a $2 billion defaulted mortgage and property inventory in San Bernardino. This is the district of Congressman Lewis, the Chairman of the House Appropriation subcommittee with jurisdiction over HUD. Lewis and his lead staff, Valerie Baldwin, have been reported as very supportive of Ervin. Lewis is subsequently promoted to chair of the Defense appropriation subcommittee. In 1997, a special assistant to the Chairman of Freddie Mac reports to Fitts that they have an unusually large defaulted portfolio in San Bernardino.

HUD IG efforts to assess Bruce Rozet's multifamily portfolio civil money penalties inspires one Washington investigative reporter to comment that the system in the HUD IG office was that Hamilton made money for the taxpayer and lost money for the HUD IG, hence the IG shut them down and targeted them for a criminal investigation; Rozet lost money for the taxpayer, hence they were left to operate and were targeted for a civil investigation that made money for the IG; Ervin lost money for the taxpayer and helped the IG make money, hence Ervin was rewarded. The implications were that the HUD IG running programs (Operation Safe Home) and competing with the program area for revenues indicated significant internal control failures.

HUD IG on multiple occasions tries hard to persuade Congressional staff and reporters that the $2.2 billion savings is phony. HUD IG buries their own audit, which is extremely positive on loan sale program and runs lead auditor out of government; then tries to frame Hamilton by falsifying evidence during office seizure. Property manager provides affidavit re efforts to falsify evidence, which is dismissed by court trustee as "standard operating procedure." Dick Ravitch, close friend and colleague of Bob Rubin, Secretary of the Treasury, and Michael Steinhardt, funder of the DLC, shows up at E2 board meeting in 1997 claiming that the $2.2 billion of savings is phony - and Catherine Austin Fitts takes personal responsibility for the accuracy of the numbers in the face of Ravitch efforts to sabotage.

The cost of these policies to HUD/FHA and homeowners both is in the billions annually. The opportunities for "Tony Soprano" type fraud are significant. The need for far more HUD contracts to handle the portfolio is also large.

Reports from DOJ and HUD indicate that enforcement cash flows are much higher as a result of large defaulted mortgage and foreclosure portfolios This includes debt collection, civil money penalties and asset forfeiture revenues to US attorneys offices, local sheriffs and their informants, court system. DynCorp who runs major IT systems for DOJ and HUD and is said to help manage the PROMIS system for DOJ is the lead DOJ asset forfeiture fund contractor on a $60MM a year contract DynCorp's lead investor and Chairman is Harvard backed Pug Winokur, who is also an investor and board member on Harvard's HUD companies NHP/WMF lead by Rod Heller.

DynCorp, with Pug as investor and now Chairman of the Compensation Committee, experiences litigation regarding sex slavery by DynCorp personnel in partnership with the mafia in Easter Europe which does not interfere with DynCorp's operation of key enforcement IT systems at HUD, DOJ, SEC and for State Department worldwide. DynCorp is not fired or asked for money back as a result of this performance. Apparently, sex slave trafficking and pedophilia by government contractors are not as egregious as Hamilton's supposed $3.8MM error.

A comparison of asset forfeiture fund contracting economics and loan sales contracting economics are instructive. DynCorp is paid $60MM a year to do the knowledge management for a disposition operation that generates $450MM in 1996. Hamilton is paid $10MM a year to do the knowledge management for a disposition operation that generates $3 BB a year plus portfolio strategy on $500 BB.

1995 - 1997

Fitts persuades FHA to migrate to place based mortgage and asset disposition; first place based surveys, then small place based bid pieces on the regular auctions; finally place based trusts are scheduled with contractor teams in 1997, after the partially assisted trust in 1996 proves that HUD can achieve superior results with a competively bid trust structure and that structure can manage


Loan sales cancelled in 1997, including all place based trusts - all place based trust contractors specifically targeted by Ervin and/or HUD IG.

1995 - 1997

Successful application of optimization technology and open competition to HUD loan sales results in dramatic illumination of the impact of competition on HUD performance. Traditional HUD players such as Ervin and NHP (Harvard) lose on the bids by a lot to a variety of new small and large bidders.


Concern over the widening spread between the government and traditional players performance with large financial institutions, including Goldman, BlackRock and GE raises numerous questions about why such an extraordinary difference in cost of capital. Numerous possibilities, such as pension fund management and large financial institution access to equity markets capital and "hot money", include covert methods. Based on research subsequent to the cancellation of the program - including the extraordinary efforts of the Gold-Anti-Trust Action Committee -- this includes whether or not NY Fed members are bidding with large volumes of funds being laundered in from the NSC governed privatization in Russia, other IMF & Ex-Im activities or are bidding with the support of the NY Fed and US Treasury as part of an Exchange Stabilization slush fund operation. Rumors abound that some bidders were using PROMIS software to access deposit information in the FHLB board of Atlanta or by hacking loan sale team computers.

The extraordinary pricing performance of the Wall Street players does raise questions. This includes whether or not the winning teams were bidding to control mortgage files on fraudulently issued mortgages in neighborhoods with patterns of high defaults.

Meantime, there are numerous complaints from Wall Street regarding the optimization model and the fierceness of the competition that it engenders. It is reported to Fitts by FHA staff that Oscar Wyatt, Chairman of Coastal Energy, who claims to be the owner of a Texas mortgage company, complains to the White House that Hamilton should be fired because Fitts is a woman. Wyatt's son is working as a consultant for NHP, Harvard's HUD company.

1994 - 1997

Given the growing success of Fitts' effort to help HUD improve recovery rates on defaulted mortgages, Fitts tries to generate interest in understanding what can lower default rates (default rates being a key assumption other than recovery rates and premium price in the cost of mortgage insurance originations) and for HUD to take those actions that will lower defaults - particularly steps to ensure that people have the skills they need to be economically and financially productive and secure. Fitts promotes the same message to Farmers Home, Congress, and OMB and throughout the HUD and community development constituencies.


Administration and Congress lower the cost of new mortgage insurance by cooking assumptions and books, thus removing incentives to lower real default rates. This permits "bubble economics" which results in large increases in cheap mortgage credit with little or no real attention to job training, jobs and small business growth. Rather, it subsidizes corporations grabbing market share away from small business as NAFTA permits the corporations to move the jobs abroad. As a result, the debt bubble helps liquefy citizen assets to subsidize their every day expenses. Welfare reform leads to much more gentrification, homelessness, and economic dislocation than necessary. Critical to the "debt up, income down" policy, the Administration promotes significant growth in prison construction, privatization and growth. Significant flow of stock market and tax shelter capital into prison investment is supported by new laws to ensure significant growth of prison population from non-violent crimes, including War on Drugs. This includes large increases in the female prison population that are supportive of a self-supporting business model with corporate outsourcing for work such as data servicing.

A large predatory lender imitative is launched by Comptroller of the Currency Jerry Hawke, Secretary Cuomo and Fed Chair Alan Greenspan that fails to mention or address the fact that the Administrations "income down, debt up" mortgage bubble policies constitute the most significant predatory lending effort in the history of the US.


Midnight special transfer of single family foreclosed portfolio in NY right before Cuomo leaves office to run for Democratic nomination for NY governor causes significant rumors about transfer of properties at below market from the FHA single family foreclosed inventory.


Navigate the Housing Bubble

America's Black Budget and the Manipulation of Mortgage and Financial Markets

Selected Articles:

Dillon, Read & Co. Inc. and the Aristocracy of Stock Profits

The Story of Edgewood Technology Services - or How I Lost $100Million
Discovering Who Makes Money Making Sure the Solari Index Does Not Go Up - Part One, Two & Three, 1999

The Myth of the Rule of Law: The Destruction of Hamilton Securities,
November 2001

Links re: Missing Money

Missing Money - Articles and Documents

Real Deal: Saving Tennessee, June 2002
There is $3.3 Trillion Missing From HUD & DOD in FY 1998-FY2001


For Information and Articles on the Solari Investment Model & Catherine Austin Fitts: