Thankless Task

Article excerpt

Catherine Austin Fitts and her company saved taxpayers billions of dollars by creating a program to help HUD sell its defaulted loans. Her reward? After four years of government probes that found nothing, she's ruined and still hounded by HUD's OIG.

Her name is Catherine Austin Fitts, and she's nearly broke. Though battered and down on her luck, she's still upbeat, smiling and optimistic. The truth, she says, will set her free. At least she hopes so. But for more than four years those hopes have gone aglimmering as she has sought to return to her career in the arcane world of federal defaulted-mortgages, where she specialized in asset sales.

The Fitts story, and the ways in which it has touched dozens of her former employees and colleagues, is as strange a tale as A Clockwork Orange, in which up is down, white is black and the world has gone to hell in a handbasket. Once more we hear echoes of former Labor secretary Ray Donovan's question to the press as he left a federal court after being exonerated on corruption charges: "Where do I go to get back my reputation?"

Once more that question has gone unanswered as Fitts has waged a one-woman struggle to set the record straight and get at the truth about the battering she has taken at the hands of the Department of Housing and Urban Development (HUD). For Fitts is a savvy businesswoman who once worked at and then with HUD to clean up corruption and make programs there work better.

Then there's John Ervin. He was a successful contractor for HUD, servicing defaulted government-backed loans. He was prosperous and on top of the world until setting out on a crusade against alleged corruption involving his competitor -- a highly touted and seemingly successful loan-sales program run for HUD by Fitts' company, Hamilton Securities Group. Then, he believes, politics kicked in, and a conspiracy took over to hide the truth.

Both players in this five-year struggle to get at the facts as they see them are convinced they have stepped on some big toes and threatened some very powerful, if yet unseen, forces. But there's one thing both agree on: The most successful sales program of defaulted loans underwritten by HUD was suspended for three years, and American taxpayers have, as a result, lost billions of dollars on bad loans.

Fitts, a one-time multimillionaire, has had to liquidate her company, sell virtually all her assets and now is uncertain about her financial future. Born and raised in Philadelphia, she was graduated from the University of Pennsylvania in 1974 and the Wharton School in 1978. She then joined Dillon, Read & Co. Inc., ultimately becoming a managing director of the powerful Wall Street investment bank. She resigned to join the Bush administration in 1989 as an assistant secretary at HUD and as federal housing commissioner.

In 1990, Fitts left HUD, declining an offer from the White House to become a member of the Federal Reserve Board. Instead she started Hamilton, a Washington-based investment bank focusing on financial software and database development. Money to start the company came from her 401(k) retirement plan and savings account, the sale of her house and investments by employees.

By 1993, Hamilton had been awarded an open-bid contract to serve as a financial adviser for HUD to market billions of dollars in federally held defaulted mortgages on single-family and multifamily properties. Improving on models developed by the Resolution Trust Corp. in the aftermath of the savings-and-loan debacle, Hamilton and HUD came up with a program tailor-made to sell HUD's defaulted loans on the open market. Between 1995 and 1997, HUD sold nearly $10 billion in such loans and increased its recovery rate from 35 cents on the dollar to between 70 and 90 cents. The Office of Management and Budget (OMB) and the General Accounting Office (GAO) estimated the government's administrative savings alone exceeded $2 billion. …