A recent report discussed concerns with direct distribution of funds to homeowners as opposed to utilizing escrow accounts.

Groups warn of fraud with housing aid plan

A block of consumer advocates, mortgage companies and community groups are warning that plans to hand out up to $150,000 apiece in housing aid to Gulf Coast hurricane victims could open the door to fraud.

The concern stems from nearly $7 billion in federal grants that would help tens of thousands of people in Louisiana and Mississippi rebuild damaged and destroyed homes. Both states have decided to give the grants directly to homeowners and bypass mortgage companies that typically dole out such money.

"There is a much higher risk of fraud and mismanagement, and the danger that these funds will not be used to rebuild the stricken neighborhoods," Thomas Schatz of Citizens Against Government Waste recently wrote to U.S. Department of Housing and Urban Development Secretary Alphonso Jackson.

More than a dozen other relief organizations, including Catholic Charities USA and the Center for Responsible Lending, wrote similar letters to Jackson.

Mississippi already has 16,500 applications and will begin handing out the money later this month to those who lived outside flood plains and had no flood insurance when Hurricanes Katrina and Rita hit last fall.

Grants and insurance payments are usually held in escrow by lenders who then pay contractors directly. Mortgage bankers and consumer groups say that arrangement protects homeowners from getting duped by scam artists posing as contractors.

HUD spokesman Brian Sullivan referred questions about the issue to the states.

Scott Hamilton of the Mississippi Development Authority, which is handling that state's $3.4 billion share of grants, says plenty of safeguards are in place.

He says applicants' homes will have to be inspected by the state, contractors will be required to comply with all building codes and homeowners will go through a "closing process" during which the money they receive will be placed in a bank account. "It's a very thorough process," he says.

Applicants also will be told that "Uncle Sam is watching" and they'll be prosecuted if they use the money inappropriately, Hamilton says. "We'll make a very strong push to make people understand what the consequences are."

Hamilton says one reason the state opted for a "compensation plan instead of an escrow plan" is that some residents have told the development authority that they're afraid to rebuild in the same area that flooded.

With a compensation plan, those people will be able to use their money to buy new homes further inland.

The money is set to be given out just weeks after government investigators reported that mistakes and fraudulent disaster-relief claims cost the Federal Emergency Management Agency up to $1.4 billion in the six months after Katrina hit southeast Louisiana on Aug. 29, 2005.

To view the online article, please click on the following link.

Hurricane Katrina Federal Grant Programs