QUAKE LOANS QUESTIONED; AUDIT FINDS CITY HOUSING OFFICIALS LAX IN HANDLING OF $330 MILLION.

Byline: Patrick McGreevy Daily News Staff Writer

A city audit released Friday concludes that the Los Angeles Housing Department failed to properly oversee a $330 million residential loan program for earthquake repairs.

In several cases, housing officials failed to adequately scrutinize loan applicants and properties to make sure earthquake repair loans were justified, according to the audit done for City Controller Rick Tuttle by the accounting firm of Thompson, Cobb, Bazilio and Associates.

``For the most part, we found that loan underwriting decisions were made without sufficient information,'' the audit said.

In addition, the audit found that at least $848,000 given by the city to contractors to pay prevailing wages to construction workers was not passed on to the workers - and that the total amount workers were shortchanged may total $10 million.

The audit holds no particular official responsible.

But in a letter by Tuttle to the City Council accompanying the audit, the controller said the problems involving the federal loan program have ``resulted in the controller's office becoming increasingly concerned about the management structure and performance at the LAHD.''

Housing Department General Manager Gary Squier said his office, in processing loans to 1,526 residential buildings, did the best it could do to expedite reconstruction after the 1994 Northridge Earthquake.

``We had thousands and thousands of units in neighborhood after neighborhood after neighborhood that had to be revived quickly to get ahead of the disaster,'' Squier said.

The release of the audit - which looked at 48 loans - comes one week after the Daily News reported that federal investigators were looking into allegations of fraud in the loan program and the possibility that some city workers may have improperly handled loans.

Squier said Friday that the FBI and the inspector general for the Housing and Urban Development Department are looking at 10 projects, some of them in the San Fernando Valley, that received about $10 million in loans to see whether the money was properly spent.

HUD spokeswoman Wendy Gruel issued a statement Friday confirming that her office has been in contact with the controller ``on the allegations of fraudulent use of earthquake relief funds.''

Gruel said the HUD inspector general will determine whether there is sufficient evidence of fraud to refer the case for prosecution.

Squier and Deputy City Attorney Julie Downey confirmed Friday that one of the projects being looked at by federal investigators is at 13343 Vanowen St. in Van Nuys.

The controller's audit said that the 22-unit Van Nuys apartment building was provided with a $442,000 loan by the Housing Department, but an inspection as part of the audit found the complex ``does not appear to have suffered any major damage or to have had any major restoration or renovation.''

The audit said ``most'' of the items in the cost estimate are for ``wear and tear cosmetic rehab'' work.

``Thus, the property inspection report concludes that the amount of the loan does not appear to be commensurate with the amount of work performed,'' the audit said.

The audit identifies the project owner as a limited partnership. City and state records indicate the partners are Tristan Cannon of Valencia and Michael Lederer, a Valley resident.

Cannon said he was aware that questions were raised by the audit, but he denied that earthquake loan money was misspent. ``I understand there are some questions,'' he said. ``But there is nothing wrong.''

Asked if he spent the $442,000 loan on legitimate earthquake repairs, Cannon said, ``Of course we did.'' Cannon said involvement by federal investigators is ``news to me.''

Squier said investors in the Van Nuys building also obtained $5.5 million in earthquake repair loans for eight other apartment buildings in the San Fernando Valley, which are also being looked at by Squier's office, the FBI and the HUD inspector general.

Squier cautioned that he has not seen evidence of wrongdoing on the other projects but the investigation is continuing.

The audit said other apartment building owners appeared to have used loan money to do additional upgrades such as new landscaping, improving lighting fixtures, upgrading home appliances and installing new security gates and alarms. However, the audit said loan rules allow enhancements that make the property more viable and the improvements appeared ``reasonable.''

Deputy Controller Jim Armstrong said the audit identifies significant weaknesses in the Housing Department's oversight of earthquake loans but stopped short of alleging that city employees engaged in criminal activity to assist in fraud.

``It (audit) raised some question about how they handled the program,'' Armstrong said. ``You are never quite sure whether it's a question of competence or whether it's intentional and that's why we've left these things for law enforcement people to look into.''

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Photo: The owners of the building at 13343 Vanowen St. in Van Nuys are under federal investigation for an earthquake repair loan.

Hans Gutknecht/Daily News