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NEW YORK (Reuters) - A U.S. housing regulator has been investigating the activities of a small California not-for-profit that bought hundreds of foreclosed homes through a federally backed program intended to help local communities hurt by the housing bust, according to government documents reviewed by Reuters.
The U.S. Department of Housing and Urban Development's Office of the Inspector General late last year began probing San Diego-based Heartland Coalition's participation in the "First Look" program in Las Vegas and other U.S. cities, according to a redacted investigation report and a letter from the regulator in response to a Freedom of Information Act request.
The Inspector General's spokeswoman, Marta Rivera Metelko, declined to say whether the investigation is still active. Reuters could not determine the specific focus of the probe.
According to the documents and a review of local property records in Las Vegas, the charity flipped a significant number of the homes to investors, generating millions of dollars in profits for those financing Heartland's activities with relatively short-term loans.
The First Look program, set up in the aftermath of the financial crisis, helps nonprofits and local communities buy foreclosed homes from U.S. banks at a discount, with the expectation that they would then renovate them and first try to sell the houses to low- and moderate-income families or to investors who would rent to such families. It is unclear whether Heartland initially tried to sell the properties it had acquired to such families before going to investors.
The goal of the program is to promote neighborhood stabilization and does not prohibit the reselling of properties to investors.
Still, Heartland, according to one real estate investor that bought several homes from the charity, did not ask what the buyers intended do with the homes.
There is no indication that Heartland violated any laws or regulations.
The probe started after Heartland was suspended in August 2012 by the program's administrator, the nonprofit National Community Stabilization Trust (NCST), according to the documents. The NCST said it suspended Heartland for spending too little on renovations and for not allowing local families enough time to buy the homes, especially in Las Vegas. The Inspector General's office declined in May to provide Reuters with a copy of the suspension order because an investigation was ongoing.
Heartland founder Mark Hanson, 69, a retired school administrator with a Ph.D. in education from Claremont Graduate University, said he was not aware of the investigation and that his group's suspension, which is still in place, was unwarranted.
In a statement, HUD Secretary Shaun Donovan said, "It is our understanding that where buyer inconsistencies have arisen in conjunction with First Look property transfers, NCST has acted responsibly to resolve issues."
A former NCST employee, who declined to be identified, told Reuters that while First Look always permitted the resale of homes to investors who would rent them out, the main goal of the program was to get bank-owned homes resold to buyers who intended to live in them.
Hanson, who formed Heartland in 1997 to primarily help poor families in the San Diego area, said he isn't concerned about who bought the homes the nonprofit acquired in Las Vegas and other cities as long as it helped stabilize neighborhoods.
"Selling homes to low-income (families) was never our mission," Hanson said. "Our mission was to create jobs," by hiring workers to renovate homes.
Gabe Del Rio, chief operating office for Community Housing Works, another San Diego not-for-profit that has relied mainly on bank loans to buy dozens of homes through the First Look program, said his group long has emphasized reselling homes to families as opposed to potential landlords.
Heartland, which was one of some 350 nonprofits participating in the program, bought more than 475 bank-owned homes through First Look and 714 foreclosed homes in total since 2010, according to property research firm RealtyTrac.
For graphic: link.reuters.com/dar64v
The NCST declined to provide a list of the participating nonprofits. Some participants that Reuters independently identified, and the former NCST employee, said most groups bought only about a couple of dozen homes on average.
NCST President Craig Nickerson said Heartland was suspended after the NCST investigated complaints from local real estate representatives in Las Vegas about the nonprofit early last year. He declined to provide a copy of the suspension order.
He added that any problems with Heartland were isolated, noting that about 14,000 homes have been sold to participating nonprofits and community groups under the program and that 91 percent of those homes have been resold to people who planned to live in them.
"The Trust has confidence that the vast majority of nonprofits conduct their activities consistent with their stated missions," Nickerson said.
Heartland, which historically has taken in less than half-a-million dollars in annual charitable contributions, borrowed millions of dollars from private financiers between October 2011 and August 2012 to buy more than 247 bank-owned homes and condominiums under First Look in Las Vegas alone, according to a review of the group's financial documents and website.
About 35 percent of those homes were then resold to hedge funds, local investors and out-of-town buyers, living as far away as Belgium, Canada and Hawaii, according to Heartland's property transactions and interviews with more than a dozen people familiar with the group and the First Look program.
It is not clear how many of the homes sold to investors were rented out to low and moderate income residents in Las Vegas. The Reuters analysis did not look at homes purchased by Heartland in Phoenix and California.
In some cases, the nonprofit did not ask what the buyer intended to do with the homes sold in Las Vegas. For example, Anthony Hynes, whose Newport Beach, California investment fund bought seven single-family homes and condominiums from Heartland, said he did not know his firm was purchasing properties from a nonprofit, nor did anyone ask whether his firm would rent the houses to poor families.
The buying and selling of Las Vegas homes last year produced gross profits of between $5.8 million and $11 million for Heartland and its investors, the analysis shows based on an the average resale price for foreclosed homes in Las Vegas. Several of the more than half-dozen private financiers that funded Heartland's purchases said the loans, which were often for less than a year, generated attractive returns of between 8 percent to 10 percent.
In a 2012 financial filing sent recently to the Internal Revenue Service, Heartland said its own net proceeds from home sales were $3.18 million. That is more than eight times its 2011 net proceeds of $383,122.
Hanson said that up until 2011 he had no salary from Heartland apart from a $10,000 stipend in 2004 to assist survivors of California wildfires. In 2012 he received compensation of $50,850, up from $37,500 in 2011.
Reporting By Matthew Goldstein and Emily Flitter; Editing by Martin Howell and Tim Dobbyn