Unfinished Business

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Michael Fox is a lucky man. A mortgage lender at the center of the 203(k) real estate scam, Fox pleaded guilty last March to falsifying business documents. As 2003 came to a close, though, he had yet to be sentenced. On October 30, his hearing was delayed for a second time, and Fox walked out of the Manhattan state courthouse unshackled, his lawyer at his side.

In fact, despite a flurry of arrests, no one involved in bilking the U.S. Department of Housing and Urban Development (HUD) out of an estimated $130 million appears to have served any jail time. Many of the U.S. Attorney’s files on the scandal were reportedly lost in the World Trade Center attacks.

Meanwhile, some of the tenants involved say their situation has hardly improved. They still complain of poor maintenance, rent increases and landlord harassment. Although HUD has acquired 345 of the 514 tainted properties, it has conveyed only 49 to the city’s housing department for renovation.

Another 160 remain in limbo–and they may not remain there for long. As both Harlem and Bushwick gentrify, private investors have shown interest in the properties, and nearly 40 have already been sold without HUD’s involvement, leaving tenants vulnerable yet again.

In the scam, first exposed by City Limits, crooked realtors bought small buildings, overappraised them and quickly “flipped” the properties at inflated prices to nonprofits eligible for special loans from HUD. The federal agency’s 203(k) program helped those groups buy and renovate small, run-down buildings. But many of the nonprofits staggered under their mortgage payments, leaving the properties in shambles.

“We’ve had two management companies–neither of them took care of the building,” says Ali Kharve, a tenant at 352 East 116th Street, one of approximately 175 Harlem properties caught up in the scandal. She and her neighbors were left with rickety stairs, leaky ceilings, and no heat for months at a time. For the past year, Kharve adds, they’ve had no management at all.

In 2001, flooded with stories like these, HUD came up with a plan: Rather than wash its hands of the troubled properties, it would work with the city’s Department of Housing Preservation & Development (HPD) to rehab them. Once banks foreclosed on the properties, HUD would pay off their mortgages and transfer them to HPD, which would sell them to qualified developers.

But times have changed. With market prices on the remaining properties now catching up to the rigged mortgage values, real estate investors are starting to sniff around. In October, a property owned by St. Stephen’s Baptist Church was purchased by Erlan Holding Company for $585,000. Another, 783 St. Nicholas Avenue, is being purchased by developer Jerry Migdol, who hopes to turn it into condominiums.

This new trend alarms activists like 203(k) tenant-turned-organizer James Lewis, who helped found of Harlem Operation Take Back, a project of the West Side SRO Law Project. While Lewis was glad to see neglected properties get attention, he now worries about losing them to high-end developers.

For one thing, he says, it deprives tenants of a role in deciding who should run their buildings. A number of 203(k) buildings have been successfully transformed, with tenants’ input, into resident-owned cooperatives and other permanently affordable housing. It also increases the risk of eviction: Residents can easily be booted for renovations, Lewis explains, or if the new owners decide to move in themselves.

Seven more Harlem properties owned by St. Stephen’s, at least half of which are occupied, were slated to be auctioned off on December 16. But the auction never happened. In a surprise move just days before, St. Stephen’s created new holding companies for each of the seven properties, then declared bankruptcy on each one.

“Fuck ’em,” says St. Stephen’s property manager Michael Blanchard, a burly man with no shortage of gold jewelry. He blames tenant activists like Lewis and his colleague Terry Poe for encouraging tenants to withhold rent he needs to make repairs. His partner, Burt Pugach, says he turned to HUD for rehab money, but to no avail. “It’s an embarrassment,” he says. “They just want it to go away.”

Tenants have little sympathy for the duo, and say that HUD, whose lax oversight enabled the scandal, should not let groups like St. Stephen’s delay foreclosure. One HUD official vowed that the agency will recapture all the buildings–but couldn’t say when.

Kharve just hopes it happens before any more properties go to auction. If HUD took title, “we’d feel more secure,” she says. “Something good needs to come of this.”

Additional reporting by Adam Hutton.